Commissioner of Internal Revenue

Vs
SM Prime Holdings, Inc and
First Asia Realty Development Corporation

DECISION

DEL CASTILLO, J.:

When the intent of the law is not apparent as worded, or when the application of the law would lead to absurdity
or injustice, legislative history is all important. In such cases, courts may take judicial notice of the origin and history of the
law,[1] the deliberations during the enactment,[2] as well as prior laws on the same subject matter[3] to ascertain the true
intent or spirit of the law.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court, in relation to Republic Act (RA) No.
9282, seeks to set aside the April 30, 2008 Decision[5] and the June 24, 2008 Resolution[6]of the Court of Tax Appeals
[4]

(CTA).
Factual Antecedents

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

CTA Case No. 7079

On September 26, 2003, the Bureau of Internal Revenue (BIR) sent SM Prime a Preliminary Assessment Notice
(PAN) for value added tax (VAT) deficiency on cinema ticket sales in the amount of P119,276,047.40 for taxable year
2000.[8] In response, SM Prime filed a letter-protest dated December 15, 2003.[9]
On December 12, 2003, the BIR sent SM Prime a Formal Letter of Demand for the alleged VAT deficiency,
which the latter protested in a letter dated January 14, 2004.[10]

On September 6, 2004, the BIR denied the protest filed by SM Prime and ordered it to pay the VAT deficiency
for taxable year 2000 in the amount of P124,035,874.12.[11]

On October 15, 2004, SM Prime filed a Petition for Review before the CTA docketed as CTA Case No. 7079.[12]

CTA Case No. 7085

On May 15, 2002, the BIR sent First Asia a PAN for VAT deficiency on

1
cinema ticket sales for taxable year 1999 in the total amount of P35,823,680.93.[13] First Asia protested the PAN in a
letter dated July 9, 2002.[14]

Subsequently, the BIR issued a Formal Letter of Demand for the alleged VAT deficiency which was protested by
First Asia in a letter dated December 12, 2002.[15]

On September 6, 2004, the BIR rendered a Decision denying the protest and ordering First Asia to pay the
amount of P35,823,680.93 for VAT deficiency for taxable year 1999.[16]

Accordingly, on October 20, 2004, First Asia filed a Petition for Review before the CTA, docketed as CTA Case
No. 7085.[17]

CTA Case No. 7111

On April 16, 2004, the BIR sent a PAN to First Asia for VAT deficiency on cinema ticket sales for taxable year
2000 in the amount of P35,840,895.78. First Asia protested the PAN through a letter dated April 22, 2004.[18]

Thereafter, the BIR issued a Formal Letter of Demand for alleged VAT deficiency.[19] First Asia protested the
same in a letter dated July 9, 2004.[20]

On October 5, 2004, the BIR denied the protest and ordered First Asia to pay the VAT deficiency in the amount
of P35,840,895.78 for taxable year 2000.[21]

This prompted First Asia to file a Petition for Review before the CTA on December 16, 2004. The case was
docketed as CTA Case No. 7111.[22]

CTA Case No. 7272

Re: Assessment Notice No. 008-02

A PAN for VAT deficiency on cinema ticket sales for the taxable year 2002 in the total amount of P32,802,912.21
was issued against First Asia by the BIR. In response, First Asia filed a protest-letter dated November 11, 2004. The BIR
then sent a Formal Letter of Demand, which was protested by First Asia on December 14, 2004.[23]

Re: Assessment Notice No. 003-03

A PAN for VAT deficiency on cinema ticket sales in the total amount of P28,196,376.46 for the taxable year 2003
was issued by the BIR against First Asia. In a letter dated September 23, 2004, First Asia protested the PAN. A Formal

2
Letter of Demand was thereafter issued by the BIR to First Asia, which the latter protested through a letter
dated November 11, 2004. [24]

On May 11, 2005, the BIR rendered a Decision denying the protests. It ordered First Asia to pay the amounts
of P33,610,202.91 and P28,590,826.50 for VAT deficiency for taxable years 2002 and 2003, respectively.[25]

Thus, on June 22, 2005, First Asia filed a Petition for Review before the CTA, docketed as CTA Case No.
7272.[26]

Consolidated Petitions

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

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

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

Ruling of the CTA First Division

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

3
houses, cannot be given force and effect because it failed to comply with the procedural due process for tax issuances
under RMC No. 20-86.[31] Thus, it disposed of the case as follows:

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

SO ORDERED.[32]

Aggrieved, the CIR moved for reconsideration which was denied by the First Division in its Resolution
dated December 14, 2006.[33]

Ruling of the CTA En Banc

Thus, the CIR appealed to the CTA En Banc.[34] The case was docketed as CTA EB No. 244.[35] The CTA En
Banc however denied[36] the Petition for Review and dismissed[37] as well petitioners Motion for Reconsideration.
The CTA En Banc held that Section 108 of the NIRC actually sets forth an exhaustive enumeration of what
services are intended to be subject to VAT. And since the showing or exhibition of motion pictures, films or movies by
cinema operators or proprietors is not among the enumerated activities contemplated in the phrase sale or exchange of
services, then gross receipts derived by cinema/ theater operators or proprietors from admission tickets in showing
motion pictures, film or movie are not subject to VAT. It reiterated that the exhibition or showing of motion pictures, films,
or movies is instead subject to amusement tax under the LGC of 1991. As regards the validity of RMC No. 28-2001, the
CTA En Banc agreed with its First Division that the same cannot be given force and effect for failure to comply with
RMC No. 20-86.

Issue

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

(1) In not finding/holding that the gross receipts derived by operators/proprietors of

cinema houses from admission tickets [are] subject to the 10% VAT because:

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

TO THE PAYING PUBLIC IS A SALE OF SERVICE;

(b) UNLESS EXEMPTED BY LAW, ALL SALES OF SERVICES ARE

EXPRESSLY SUBJECT TO VAT UNDER SECTION 108 OF THE NIRC OF 1997;

(c) SECTION 108 OF THE NIRC OF 1997 IS A CLEAR PROVISION OF LAW

AND THE APPLICATION OF RULES OF STATUTORY CONSTRUCTION AND
EXTRINSIC AIDS IS UNWARRANTED;

4
 (d) GRANTING WITHOUT CONCEDING THAT RULES OF CONSTRUCTION
ARE APPLICABLE HEREIN, STILL THE HONORABLE COURT ERRONEOUSLY
APPLIED THE SAME AND PROMULGATED DANGEROUS PRECEDENTS;

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

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

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

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

108 OF THE NIRC.

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

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

(4) In invalidating Revenue Memorandum Circular (RMC) No. 28-2001.[38]

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

Petitioners Arguments

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

Respondents Arguments

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

Our Ruling

5
 The petition is bereft of merit.

The enumeration of services subject to VAT under Section 108 of the

NIRC is not exhaustive

Section 108 of the NIRC of the 1997 reads:

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

(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent
to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or
lease of properties.
The phrase sale or exchange of services means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or rendered
by construction and service contractors; stock, real estate, commercial, customs and immigration
brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of
cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for
others; proprietors, operators or keepers of hotels, motels, rest houses, pension houses, inns, resorts;
proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including
clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport of
goods or cargoes, including persons who transport goods or cargoes for hire and other domestic
common carriers by land, air and water relative to their transport of goods or cargoes; services of
franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise
grantees except those under Section 119 of this Code; services of banks, non-bank financial
intermediaries and finance companies; and non-life insurance companies (except their crop insurances),
including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether
or not the performance thereof calls for the exercise or use of the physical or mental faculties. The
phrase sale or exchange of services shall likewise include:

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

xxxx

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

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

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

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

6
 Exhibition in Blacks Law Dictionary is defined as To show or display. x x x To produce anything in public
so that it may be taken into possession (6th ed., p. 573). While the word lease is defined as a contract by
which one owning such property grants to another the right to possess, use and enjoy it on specified
period of time in exchange for periodic payment of a stipulated price, referred to as rent (Blacks Law
Dictionary, 6th ed., p. 889). x x x[40]

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

The legislature never intended operators

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

Under the NIRC of 1939,[41] the national government imposed amusement tax on proprietors, lessees, or
operators of theaters, cinematographs, concert halls, circuses, boxing exhibitions, and other places of amusement,
including cockpits, race tracks, and cabaret.[42] In the case of theaters or cinematographs, the taxes were first deducted,
withheld, and paid by the proprietors, lessees, or operators of such theaters or cinematographs before the gross receipts
were divided between the proprietors, lessees, or operators of the theaters or cinematographs and the distributors of the
cinematographic films. Section 11[43] of the Local Tax Code,[44] however, amended this provision by transferring the
power to impose amusement tax[45] on admission from theaters, cinematographs, concert halls, circuses and other
places of amusements exclusively to the local government. Thus, when the NIRC of 1977[46] was enacted, the national
government imposed amusement tax only on proprietors, lessees or operators of cabarets, day and night clubs, Jai-Alai
and race tracks.[47]

On January 1, 1988, the VAT Law[48] was promulgated. It amended certain provisions of the NIRC of 1977 by
imposing a multi-stage VAT to replace the tax on original and subsequent sales tax and percentage tax on certain
services. It imposed VAT on sales of services under Section 102 thereof, which provides:

SECTION 102. Value-added tax on sale of services. (a) Rate and base of tax. There shall be
levied, assessed and collected, a value-added tax equivalent to 10% percent of gross receipts derived
by any person engaged in the sale of services. The phrase sale of services means the performance of
all kinds of services for others for a fee, remuneration or consideration, including those performed or
rendered by construction and service contractors; stock, real estate, commercial, customs and
immigration brokers; lessors of personal property; lessors or distributors of cinematographic
films; persons engaged in milling, processing, manufacturing or repacking goods for others; and similar
services regardless of whether or not the performance thereof calls for the exercise or use of the
physical or mental faculties: Provided That the following services performed in the Philippines by VAT-
registered persons shall be subject to 0%:

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

xxxx

Gross receipts means the total amount of money or its equivalent representing the contract
price, compensation or service fee, including the amount charged for materials supplied with the services
and deposits or advance payments actually or constructively received during the taxable quarter for the
service performed or to be performed for another person, excluding value-added tax.
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 (b) Determination of the tax. (1) Tax billed as a separate item in the invoice. If the tax is billed as
a separate item in the invoice, the tax shall be based on the gross receipts, excluding the tax.

(2) Tax not billed separately or is billed erroneously in the invoice. If the tax is not billed
separately or is billed erroneously in the invoice, the tax shall be determined by multiplying the gross
receipts (including the amount intended to cover the tax or the tax billed erroneously) by 1/11. (Emphasis
supplied)
Persons subject to amusement tax under the NIRC of 1977, as amended, however, were exempted from the coverage
of VAT.[49]

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

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

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

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

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

On October 10, 1991, the LGC of 1991 was passed into law. The local government retained the power to
impose amusement tax on proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia,
and other places of amusement at a rate of not more than thirty percent (30%) of the gross receipts from admission fees
under Section 140 thereof.[50] In the case of theaters or cinemas, the tax shall first be deducted and withheld by their
proprietors, lessees, or operators and paid to the local government before the gross receipts are divided between said
proprietors, lessees, or operators and the distributors of the cinematographic films. However, the provision in the Local
Tax Code expressly excluding the national government from collecting tax from the proprietors, lessees, or operators of
theaters, cinematographs, concert halls, circuses and other places of amusements was no longer included.
8
 In 1994, RA 7716 restructured the VAT system by widening its tax base and enhancing its administration. Three
years later, RA 7716 was amended by RA 8241. Shortly thereafter, the NIRC of 1997[51] was signed into law. Several
amendments[52] were made to expand the coverage of VAT. However, none pertain to cinema/theater operators or
proprietors. At present, only lessors or distributors of cinematographic films are subject to VAT. While persons subject to
amusement tax[53] under the NIRC of 1997 are exempt from the coverage of VAT.[54]
Based on the foregoing, the following facts can be established:

(1) Historically, the activity of showing motion pictures, films or movies by cinema/theater
operators or proprietors has always been considered as a form of entertainment subject to
amusement tax.

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

(3) When the Local Tax Code was enacted, amusement tax on admission tickets from
theaters, cinematographs, concert halls, circuses and other places of amusements were
transferred to the local government.

(4) Under the NIRC of 1977, the national government imposed amusement tax only on
proprietors, lessees or operators of cabarets, day and night clubs, Jai-Alai and race tracks.

(5) The VAT law was enacted to replace the tax on original and subsequent sales tax and
percentage tax on certain services.
(6) When the VAT law was implemented, it exempted persons subject to amusement tax
under the NIRC from the coverage of VAT.

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

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

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

These reveal the legislative intent not to impose VAT on persons already covered by the amusement tax. This
holds true even in the case of cinema/theater operators taxed under the LGC of 1991 precisely because the VAT law
was intended to replace the percentage tax on certain services. The mere fact that they are taxed by the local
government unit and not by the national government is immaterial. The Local Tax Code, in transferring the power to tax

9
gross receipts derived by cinema/theater operators or proprietor from admission tickets to the local government, did not
intend to treat cinema/theater houses as a separate class.No distinction must, therefore, be made between the places of
amusement taxed by the national government and those taxed by the local government.
To hold otherwise would impose an unreasonable burden on cinema/theater houses operators or proprietors,
who would be paying an additional 10%[55] VAT on top of the 30% amusement tax imposed by Section 140 of the LGC
of 1991, or a total of 40% tax. Such imposition would result in injustice, as persons taxed under the NIRC of 1997 would
be in a better position than those taxed under the LGC of 1991. We need not belabor that a literal application of a law
must be rejected if it will operate unjustly or lead to absurd results.[56] Thus, we are convinced that the legislature never
intended to include cinema/theater operators or proprietors in the coverage of VAT.

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

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

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

Petitioner, in issuing the assessment notices for deficiency VAT against respondents, ratiocinated that:

Basically, it was acknowledged that a cinema/theater operator was then subject to amusement
tax under Section 260 of Commonwealth Act No. 466, otherwise known as the National Internal
Revenue Code of 1939, computed on the amount paid for admission. With the enactment of the Local
Tax Code under Presidential Decree (PD) No. 231, dated June 28, 1973, the power of imposing taxes
on gross receipts from admission of persons to cinema/theater and other places of amusement had,
thereafter, been transferred to the provincial government, to the exclusion of the national or municipal
government (Sections 11 & 13, Local Tax Code). However, the said provision containing the exclusive
power of the provincial government to impose amusement tax, had also been repealed and/or deleted
by Republic Act (RA) No. 7160, otherwise known as the Local Government Code of 1991, enacted into
law on October 10, 1991. Accordingly, the enactment of RA No. 7160, thus, eliminating the statutory
prohibition on the national government to impose business tax on gross receipts from
admission of persons to places of amusement, led the way to the valid imposition of the VAT
pursuant to Section 102 (now Section 108) of the old Tax Code, as amended by the Expanded
VAT Law (RA No. 7716) and which was implemented beginning January 1, 1996.[58] (Emphasis
supplied)

We disagree.

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT on the gross
receipts of cinema/theater operators or proprietors derived from admission tickets. The removal of the prohibition under
the Local Tax Code did not grant nor restore to the national government the power to impose amusement tax on

10
cinema/theater operators or proprietors. Neither did it expand the coverage of VAT. Since the imposition of a tax is a
burden on the taxpayer, it cannot be presumed nor can it be extended by implication. A law will not be construed as
imposing a tax unless it does so clearly, expressly, and unambiguously.[59] As it is, the power to impose amusement tax
on cinema/theater operators or proprietors remains with the local government.

Revenue Memorandum Circular No. 28-2001 is invalid

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

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

Rule on tax exemption does not apply

Moreover, contrary to the view of petitioner, respondents need not prove their entitlement to an exemption from
the coverage of VAT. The rule that tax exemptions should be construed strictly against the taxpayer presupposes that
the taxpayer is clearly subject to the tax being levied against him.[61] The reason is obvious: it is both illogical and
impractical to determine who are exempted without first determining who are covered by the provision.[62] Thus, unless a
statute imposes a tax clearly, expressly and unambiguously, what applies is the equally well-settled rule that the
imposition of a tax cannot be presumed.[63] In fact, in case of doubt, tax laws must be construed strictly against the
government and in favor of the taxpayer.[64]

WHEREFORE, the Petition is hereby DENIED. The assailed April 30, 2008 Decision of the Court of Tax
Appeals En Banc holding that gross receipts derived by respondents from admission tickets in showing motion
pictures, films or movies are not subject to value-added tax under Section 108 of the National Internal Revenue Code of
1997, as amended, and its June 24, 2008 Resolution denying the motion for reconsideration are AFFIRMED. SO
ORDERED.

DIGEST:

COMMISSIONER OF INTERNAL REVENUE vs. SM PRIME HOLDINGS, INC. - Value Added Tax on
Cinemas

FACTS: NO FACTS GIVEN (READ FULL CASE)

11
ISSUE:

Are the gross receipts derived by operators or proprietors of cinema/theater houses from admission tickets
subject to VAT?

HELD:

NO. While (1) the enumeration under Section 108 on the VAT-taxable services is not exhaustive and (2) the
said list includes “the lease of motion picture films, films, tapes and discs”, the said activity however is not the
same as showing or exhibition of motion pictures or films. Thus, since the showing or exhibition of motion
pictures or films is not in the enumeration, the CIR must show that it falls under the phrase “similar services”.

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT on the
gross receipts of cinema/theater operators or proprietors derived from admission tickets. The removal of the
prohibition (on the national government to tax certain activities) under the Local Tax Code did not grant nor
restore to the national government the power to impose amusement tax on cinema/theater operators or
proprietors. Neither did it expand the coverage of VAT.

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

AURORA MA. F. TIMBOL,
Vs
THE SECRETARY OF FINANCE
and THE COMMISSIONER OF Promulgated:
INTERNAL REVENUE,
Respondents. July 19, 2011

ABAD, J.:

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

The Facts and the Case

Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for declaratory
relief[1] assailing the validity of the impending imposition of value-added tax (VAT) by the Bureau of Internal
Revenue (BIR) on the collections of tollway operators.

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

12
she served as Assistant Secretary of the Department of Trade and Industry and consultant of the Toll
Regulatory Board (TRB) in the past administration.

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

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

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

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

The government also argues that petitioners have no right to invoke the non-impairment of contracts
clause since they clearly have no personal interest in existing toll operating agreements (TOAs) between the
government and tollway operators. At any rate, the non-impairment clause cannot limit the States sovereign
taxing power which is generally read into contracts.
Finally, the government contends that the non-inclusion of VAT in the parametric formula for computing toll
rates cannot exempt tollway operators from VAT. In any event, it cannot be claimed that the rights of tollway
operators to a reasonable rate of return will be impaired by the VAT since this is imposed on top of the toll
rate. Further, the imposition of VAT on toll fees would have very minimal effect on motorists using the tollways.

In their reply[6] to the governments comment, petitioners point out that tollway operators cannot be
regarded as franchise grantees under the NIRC since they do not hold legislative franchises.Further, the BIR

13
intends to collect the VAT by rounding off the toll rate and putting any excess collection in an escrow
account. But this would be illegal since only the Congress can modify VAT rates and authorize its
disbursement. Finally, BIR Revenue Memorandum Circular 63-2010 (BIR RMC 63-2010), which directs toll
companies to record an accumulated input VAT of zero balance in their books as of August 16, 2010,
contravenes Section 111 of the NIRC which grants entities that first become liable to VAT a transitional input
tax credit of 2% on beginning inventory. For this reason, the VAT on toll fees cannot be implemented.
The Issues Presented

The case presents two procedural issues:

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

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

The case also presents two substantive issues:

1. Whether or not the government is unlawfully expanding VAT coverage by including tollway operators
and tollway operations in the terms franchise grantees and sale of services under Section 108 of the Code;
and

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

The Courts Rulings

A. On the Procedural Issues:

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

But there are precedents for treating a petition for declaratory relief as one for prohibition if the case has far-
reaching implications and raises questions that need to be resolved for the public good.[8]The Court has also
held that a petition for prohibition is a proper remedy to prohibit or nullify acts of executive officials that amount
to usurpation of legislative authority.[9]
14
 Here, the imposition of VAT on toll fees has far-reaching implications. Its imposition would impact, not
only on the more than half a million motorists who use the tollways everyday, but more so on the governments
effort to raise revenue for funding various projects and for reducing budgetary deficits.

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

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

B. On the Substantive Issues:

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

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

It is plain from the above that the law imposes VAT on all kinds of services rendered in
the Philippines for a fee, including those specified in the list. The enumeration of affected services is not
15
exclusive.[11] By qualifying services with the words all kinds, Congress has given the term services an all-
encompassing meaning. The listing of specific services are intended to illustrate how pervasive and broad is
the VATs reach rather than establish concrete limits to its application. Thus, every activity that can be imagined
as a form of service rendered for a fee should be deemed included unless some provision of law especially
excludes it.

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

When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latters use of the tollway
facilities over which the operator enjoys private proprietary rights[12] that its contract and the law recognize. In
this sense, the tollway operator is no different from the following service providers under Section 108 who allow
others to use their properties or facilities for a fee:

1. Lessors of property, whether personal or real;

2. Warehousing service operators;
3. Lessors or distributors of cinematographic films;
4. Proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns,
resorts;
5. Lending investors (for use of money);
6. Transportation contractors on their transport of goods or cargoes, including persons
who transport goods or cargoes for hire and other domestic common carriers by land relative to
their transport of goods or cargoes; and
7. Common carriers by air and sea relative to their transport of passengers, goods or
cargoes from one place in the Philippines to another place in the Philippines.

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

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

16
 Tollway operators are franchise grantees and they do not belong to exceptions (the low-income radio
and/or television broadcasting companies with gross annual incomes of less than P10 million and gas and
water utilities) that Section 119[13] spares from the payment of VAT. The word franchise broadly covers
government grants of a special right to do an act or series of acts of public concern.[14]

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

Tollway operators are, owing to the nature and object of their business, franchise grantees. The
construction, operation, and maintenance of toll facilities on public improvements are activities of public
consequence that necessarily require a special grant of authority from the state. Indeed, Congress granted
special franchise for the operation of tollways to the Philippine National Construction Company, the former
tollway concessionaire for the North and South Luzon Expressways. Apart from Congress, tollway franchises
may also be granted by the TRB, pursuant to the exercise of its delegated powers under P.D. 1112. [17] The
franchise in this case is evidenced by a Toll Operation Certificate.[18]

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

Nor can petitioners cite as binding on the Court statements made by certain lawmakers in the course of
congressional deliberations of the would-be law. As the Court said in South African Airways v. Commissioner
of Internal Revenue,[20] statements made by individual members of Congress in the consideration of a bill do
not necessarily reflect the sense of that body and are, consequently, not controlling in the interpretation of
law. The congressional will is ultimately determined by the language of the law that the lawmakers voted
on. Consequently, the meaning and intention of the law must first be sought in the words of the statute itself,

17
read and considered in their natural, ordinary, commonly accepted and most obvious significations, according
to good and approved usage and without resorting to forced or subtle construction.

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

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

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

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

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

Petitioners assume that what the Court said above, equating terminal fees to a users tax must also
pertain to tollway fees. But the main issue in the MIAA case was whether or not Paraaque Citycould sell airport
lands and buildings under MIAA administration at public auction to satisfy unpaid real estate taxes. Since local
governments have no power to tax the national government, the Court held that the City could not proceed with
the auction sale. MIAA forms part of the national government although not integrated in the department
framework.[24] Thus, its airport lands and buildings are properties of public dominion beyond the commerce of
man under Article 420(1)[25] of the Civil Code and could not be sold at public auction.

As can be seen, the discussion in the MIAA case on toll roads and toll fees was made, not to establish
a rule that tollway fees are users tax, but to make the point that airport lands and buildings are properties of
18
public dominion and that the collection of terminal fees for their use does not make them private
properties. Tollway fees are not taxes. Indeed, they are not assessed and collected by the BIR and do not go
to the general coffers of the government.
It would of course be another matter if Congress enacts a law imposing a users tax, collectible from
motorists, for the construction and maintenance of certain roadways. The tax in such a case goes directly to
the government for the replenishment of resources it spends for the roadways. This is not the case here. What
the government seeks to tax here are fees collected from tollways that are constructed, maintained, and
operated by private tollway operators at their own expense under the build, operate, and transfer scheme that
the government has adopted for expressways.[26] Except for a fraction given to the government, the toll fees
essentially end up as earnings of the tollway operators.

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

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

Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer bears its
burden since the amount of VAT paid by the former is added to the selling price. Once shifted, the VAT ceases
to be a tax[30] and simply becomes part of the cost that the buyer must pay in order to purchase the good,
property or service.

Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the tollway
operator. Under Section 105 of the Code, [31] VAT is imposed on any person who, in the course of trade or
business, sells or renders services for a fee. In other words, the seller of services, who in this case is the
tollway operator, is the person liable for VAT. The latter merely shifts the burden of VAT to the tollway user as
part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were deemed as a
users tax. VAT is assessed against the tollway operators gross receipts and not necessarily on the toll fees.
Although the tollway operator may shift the VAT burden to the tollway user, it will not make the latter directly

19
liable for the VAT. The shifted VAT burden simply becomes part of the toll fees that one has to pay in order to
use the tollways.[32]

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

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

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

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

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

20
 For the same reason, the Court cannot prematurely declare as illegal, BIR RMC 63-2010 which directs
toll companies to record an accumulated input VAT of zero balance in their books as of August 16, 2010, the
date when the VAT imposition was supposed to take effect. The issuance allegedly violates Section
111(A)[36] of the Code which grants first time VAT payers a transitional input VAT of 2% on beginning inventory.

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

Conclusion

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

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

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

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

21
 WHEREFORE, the Court DENIES respondents Secretary of Finance and Commissioner of Internal
Revenues motion for reconsideration of its August 24, 2010 resolution, DISMISSES the petitioners Renato V.
Diaz and Aurora Ma. F. Timbols petition for lack of merit, and SETS ASIDE the Courts temporary restraining
order dated August 13, 2010. SO ORDERED.

DIGEST:

inShare

DIAZ VS. SECRETARY OF FINANCE- Value Added Tax (VAT)

May toll fees collected by tollway operators be subject to VAT?

YES.

(1) VAT is imposed on “all kinds of services” and tollway operators who are engaged in constructing,
maintaining, and operating expressways are no different from lessors of property, transportation contractors,
etc.

(2) Not only do they fall under the broad term under (1) but also come under those described as “all other
franchise grantees” which is not confined only to legislative franchise grantees since the law does not
distinguish. They are also not a franchise grantee under Section 119 which would have made them subject to
percentage tax and not VAT.

(3) Neither are the services part of the enumeration under Section 109 on VAT-exempt transactions.

(4) The toll fee is not a user’s tax and thus it is permissible to impose a VAT on the said fee. The MIAA case
does not apply and the Court emphasized that toll fees are not taxes since they are not assessed by the BIR
and do not go the general coffers of the government. Toll fees are collected by private operators as
reimbursement for their costs and expenses with a view to a profit while taxes are imposed by the government
as an attribute of its sovereignty. Even if the toll fees were treated as user’s tax, the VAT can not be deemed
as a ‘tax on tax’ since the VAT is imposed on the tollway operator and the fact that it might pass-on the same
to the tollway user, it will not make the latter directly liable for VAT since the shifted VAT simply becomes part
of the cost to use the tollways.

(5) The assertion that the VAT imposed is not administratively feasible given the manner by which the BIR
intends to implement the VAT (i.e., rounding off the toll rates and putting any excess collection in an escrow
account) is not enough to invalidate the law. Non-observance of the canon of administrative feasibility will not
render a tax imposition invalid “except to the extent that specific constitutional or statutory limitations are
impaired”.
22
4. VAT EXEMPT TRANSACTIONS

TAMBUNTING PAWNSHOP, INC., Petitioner,

vs COMMISSIONER OF INTERNAL REVENUE, Respondent.

Petitioner protested the assessment.1[2] As the protest merited no response, it filed a Petition for
Review2[3] with the Court of Tax Appeals (CTA) pursuant to Section 228 of the National Internal Revenue
Code,3[4] raising the following arguments:

A. Pawnshops are not subject to Value Added Tax pursuant to

Section 108 of the National Internal Revenue Code.4[5]

B. Petitioner properly withheld and remitted to the respondent the

correct amount of expanded withholding tax for taxable year 1999.5[6]

C. Petitioner has already paid the assessed amount of P14,398.38

[sic], representing deficiency withholding tax on compensation, thus,
assessment on withholding on compensation must be cancelled.6[7]

23
 D. Petitioners pawn tickets are not subject to documentary stamp tax
pursuant to existing laws and jurisprudence.7[8] (emphasis and underscoring
in the original)

The First Division of the CTA ruled that petitioner is liable for VAT and documentary stamp tax but not
for withholding tax on compensation and expanded withholding tax.8[9] Thus it disposed:

WHEREFORE, premises considered, the Petition for Review is PARTIALLY GRANTED.

Respondents assessments for deficiency Expanded Withholding Tax and Withholding Tax on
Compensation for the taxable year 1999, in the amounts of Twenty One Thousand Seven
Hundred Twenty Three and 75/100 Pesos (P21,723.75) and Sixty Seven Thousand Two
Hundred One and 55/100 Pesos (P67,201.55), respectively, are hereby CANCELLED and SET
ASIDE. However, the assessments for deficiency Value-Added Tax and Documentary Stamp
Tax are hereby AFFIRMED.

Accordingly, petitioner is ORDERED TO PAY the respondent the amount of Three

Million Fifty Five Thousand Five Hundred Sixty Four and 34/100 Pesos (P3,055,564.34) and
Four Hundred Six Thousand Ninety Two and 500/100 Pesos (P406,092.50) representing
deficiency Value-Added Tax and Documentary Stamp Tax, respectively, for the taxable year
1999, plus 20% delinquency interest from February 18, 2003 up to the time such amount is fully
paid pursuant to Section 249 (c) of the 1997 NIRC.

SO ORDERED.9[10] (emphasis in the original; underscoring supplied)

Petitioners Motion for Partial Reconsideration10[11] having been denied,11[12] it filed a Petition for
Review12[13] before the CTA En Banc which dismissed13[14] it as it did petitioners Motion for
Reconsideration.14[15]

24
 Hence, the present Petition for Review on Certiorari.15[16]

To petitioner, a pawnshop is not enumerated as one of those engaged in sale or exchange of

services16[17] in Section 108 of the National Internal Revenue Code.17[18] Citing Commissioner of Internal
Revenue v. Michel J. Lhuillier Pawnshops, Inc.,18[19] it contends that the nature of the business of pawnshops
does not fall under service as defined under the Legal Thesaurus of William C. Burton, viz:

accommodate, administer to, advance, afford, aid, assist, attend, be of use, care for, come to
the aid of, commodere, comply, confer a benefit, contribute to, cooperate, deservire, discharge
ones duty, do a service, do ones bidding, fill an office, forward, furnish aid, furnish assistance,
give help, lend, aid, minister to, promote, render help, servire, submit, succor, supply aid, take
care of, tend, wait on, work for.19[20]

25
 The petition is in part meritorious.

On the issue of whether pawnshops are liable to pay VAT, the Court, in First Planters Pawnshop, Inc. v.
Commissioner of Internal Revenue,20[21] held:

In fine, prior to the [passage of the] EVAT Law [in 1994], pawnshops were treated as
lending investors subject to lending investor's tax. Subsequently, with the Court's ruling in
Lhuillier, pawnshops were then treated as VAT-able enterprises under the general classification
of "sale or exchange of services" under Section 108 (A) of the Tax Code of 1997, as amended.
R.A. No. 9238 [which was passed in 2004] finally classified pawnshops as Other Non-bank
Financial Intermediaries.

The Court finds that pawnshops should have been treated as non-bank financial
intermediaries from the very beginning, subject to the appropriate taxes provided by law, thus

Under the National Internal Revenue Code of 1977, pawnshops should have
been levied the 5% percentage tax on gross receipts imposed on bank and non-bank financial
intermediaries under Section 119 (now Section 121 of the Tax Code of 1997);

With the imposition of the VAT under R.A. No. 7716 or the EVAT Law,
pawnshops should have been subjected to the 10% VAT imposed on banks and non-bank
financial intermediaries and financial institutions under Section 102 of the Tax Code of 1977
(now Section 108 of the Tax Code of 1997);

This was restated by R.A. No. 8241, 24 which amended R.A. No. 7716, although
the levy, collection and assessment of the 10% VAT on services rendered by banks, non-bank
financial intermediaries, finance companies, and other financial intermediaries not performing
quasi-banking functions, were made effective January 1, 1998;

R.A. No. 8424 or the Tax Reform Act of 1997 26 likewise imposed a 10% VAT
under Section 108 but the levy, collection and assessment thereof were again deferred until
December 31, 1999;

The levy, collection and assessment of the 10% VAT was further deferred by
R.A. No. 8761 until December 31, 2000, and by R.A. No. 9010, until December 31, 2002;

With no further deferments given by law, the levy, collection and assessment of
the 10% VAT on banks, non-bank financial intermediaries, finance companies, and other
financial intermediaries not performing quasi-banking functions were finally made effective
beginning January 1, 2003;

Finally, with the enactment of R.A. No. 9238 in 2004, the services of banks, non-
bank financial intermediaries, finance companies, and other financial intermediaries not

26
 performing quasi-banking functions were specifically exempted from VAT, 28 and the 0% to 5%
percentage tax on gross receipts on other non-bank financial intermediaries was reimposed
under Section 122 of the Tax Code of 1997.

At the time of the disputed assessment, that is, for the year 2000, pawnshops were not
subject to 10% VAT under the general provision on "sale or exchange of services" as defined
under Section 108 (A) of the Tax Code of 1997, which states: "'sale or exchange of services'
means the performance of all kinds of services in the Philippines for others for a fee,
remuneration or consideration . . . ." Instead, due to the specific nature of its business,
pawnshops were then subject to 10% VAT under the category of non-bank financial
intermediaries[.]

Coming now to the issue at hand Since petitioner is a non-bank financial intermediary, it
is subject to 10% VAT for the tax years 1996 to 2002; however, with the levy, assessment and
collection of VAT from non-bank financial intermediaries being specifically deferred by law, then
petitioner is not liable for VAT during these tax years. But with the full implementation of the
VAT system on non-bank financial intermediaries starting January 1, 2003, petitioner is liable for
10% VAT for said tax year. And beginning 2004 up to the present, by virtue of R.A. No. 9238,
petitioner is no longer liable for VAT but it is subject to percentage tax on gross receipts from
0% to 5%, as the case may be. (emphasis and underscoring supplied)

In light of the foregoing ruling, since the imposition of VAT on pawnshops, which are non-bank financial
intermediaries, was deferred for the tax years 1996 to 2002, petitioner is not liable for VAT for the tax year
1999.

In dodging liability for documentary stamp tax on its pawn tickets, petitioner argues that such tickets are
neither securities nor printed evidence of indebtedness.21[22] The argument fails.

Section 195 of the National Internal Revenue Code provides:

Section 195. On every mortgage or pledge of lands, estate or property, real or personal,
heritable or movable, whatsoever, where the same shall be made as a security for the payment
of any definite and certain sum of money lent at the time or previously due and owing or
forborne to be paid, being payable, and on any conveyance of land, estate, or property
whatsoever, in trust or to be sold, or otherwise converted into money which shall be and

27
 intended only as security, either by express stipulation or otherwise, there shall be collected a
documentary stamp tax x x x. (underscoring supplied)

Construing this provision vis a vis pawn tickets, the Court held in Michel J. Lhuillier Pawnshop, Inc. v.
Commissioner of Internal Revenue:

x x x A D[ocumentary] S[tamp] T[ax] is an excise tax on the exercise of a right or

privilege to transfer obligations, rights or properties incident thereto. x x x

xxxx

Pledge is among the privileges, the exercise of which is subject to DST. A pledge may
be defined as an accessory, real and unilateral contract by virtue of which the debtor or a third
person delivers to the creditor or to a third person movable property as security for the
performance of the principal obligation, upon the fulfillment of which the thing pledged, with all
its accessions and accessories, shall be returned to the debtor or to the third person. This is
essentially the business of pawnshops which are defined under Section 3 of Presidential Decree
No. 114, or the Pawnshop Regulation Act, as persons or entities engaged in lending money on
personal property delivered as security for loans.

xxxx

Section 3 of the Pawnshop Regulation Act defines a pawn ticket as follows:

Pawn ticket is the pawnbrokers receipt for a pawn. It is neither a security
nor a printed evidence of indebtedness.

True, the law does not consider said ticket as an evidence of security or indebtedness.
However, for purposes of taxation, the same pawn ticket is proof of an exercise of a taxable
privilege of concluding a contract of pledge. There is therefore no basis in petitioners assertion
that a DST is literally a tax on a document and that no tax may be imposed on a pawn
ticket.22[23] (emphasis and underscoring supplied)

With respect to petitioners argument against liability for surcharges and interest that it was in good faith
in not paying documentary stamp taxes, it having relied on the rulings of respondent CIR and the CTA that
pawn tickets are not subject to documentary stamp taxes23[24] the Court finds the same meritorious.

28
 It is settled that good faith and honest belief that one is not subject to tax on the basis of previous
interpretations of government agencies tasked to implement the tax law are sufficient justification to delete the
imposition of surcharges and interest.24[25]

WHEREFORE, the petition is IN PART GRANTED. The May 24, 2007 Decision of the Court of Tax
Appeals is AFFIRMED with the MODIFICATION that the assessment deficiency value-added taxes for the
taxable year 1999 and for surcharges and delinquency interest on deficient Value-Added Tax and
Documentary Income Tax are SET ASIDE. SO ORDERED

DIGEST:

TAMBUNTING PAWNSHOP, INC. v. COMMISSIONER OF INTERNAL REVENUE. G.R. No. 179085. January
21, 2010

FACTS:

Petitioner was issued an assessment for deficiency VAT for the taxable year of 1999. Petitioner, after his
protest with the CIR merited no response, it filed a Petition for Review with the CTA raising that pawnshops are
not subject to VAT under the NIRC and that pawn tickers are not subject to documentary stamp tax.

The CTA ruled that petitioner is liable for the deficiency VAT and the documentary stamp tax.

The petitioner argues that a pawnshop is not enumerated as one of those engaged in sale or exchange of
services in Section 108 of the National Internal Revenue Code and citing the case of Commissioner of Internal
Revenue v. Michel J. Lhuillier Pawnshops, Inc. as basis.

ISSUE: Whether petitioner is liable for the deficiency VAT.

Whether the petitioner is liable for the documentary stamp tax.

RULING:

YES. The Court cited the case of First Planters Pawnshop, Inc. v. Commissioner of Internal Revenue. In the
foregoing case, since the imposition of VAT on pawnshops, which are non-bank financial intermediaries, was
deferred for the tax years 1996 to 2002, petitioner is not liable for VAT for the tax year 1999.

29
NO. Sections 195 of the NIRC provides that on the pledge of personal property, there shall be collected a
documentary stamp tax. The Court held in Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal
Revenue that the documentary stamp tax is an excise tax on the exercise of a right or privilege and that pledge
is among the privileges, the exercise of which is subject to documentary stamp taxes. For purposes of taxation,
pawn tickets are proof of an exercise of a taxable privilege of concluding a contract of pledge.

G.R. No. 168129 April 24, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
PHILIPPINE HEALTH CARE PROVIDERS, INC., Respondent.

DECISION

SANDOVAL-GUTIERREZ, J.:

For our resolution is the instant Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil
Procedure, as amended, seeking to reverse the Decision1 dated February 18, 2005 and Resolution dated May
9, 2005 of the Court of Appeals (Fifteenth Division) in CA-G.R. SP No. 76449.

The factual antecedents of this case, as culled from the records, are:

The Philippine Health Care Providers, Inc., herein respondent, is a corporation organized and existing under
the laws of the Republic of the Philippines. Pursuant to its Articles of Incorporation,2 its primary purpose is "To
establish, maintain, conduct and operate a prepaid group practice health care delivery system or a health
maintenance organization to take care of the sick and disabled persons enrolled in the health care plan and to
provide for the administrative, legal, and financial responsibilities of the organization."1^vvphi1.net

On July 25, 1987, President Corazon C. Aquino issued Executive Order (E.O.) No. 273, amending the National
Internal Revenue Code of 1977 (Presidential Decree No. 1158) by imposing Value-Added Tax (VAT) on the
sale of goods and services. This E.O. took effect on January 1, 1988.

Before the effectivity of E.O. No. 273, or on December 10, 1987, respondent wrote the Commissioner of
Internal Revenue (CIR), petitioner, inquiring whether the services it provides to the participants in its health
care program are exempt from the payment of the VAT.

On June 8, 1988, petitioner CIR, through the VAT Review Committee of the Bureau of Internal Revenue (BIR),
issued VAT Ruling No. 231-88 stating that respondent, as a provider of medical services, is exempt from the
VAT coverage. This Ruling was subsequently confirmed by Regional Director Osmundo G. Umali of Revenue
Region No. 8 in a letter dated April 22, 1994.

Meanwhile, on January 1, 1996, Republic Act (R.A.) No. 7716 (Expanded VAT or E-VAT Law) took effect,
amending further the National Internal Revenue Code of 1977. Then on January 1, 1998, R.A. No. 8424
(National Internal Revenue Code of 1997) became effective. This new Tax Code substantially adopted and
reproduced the provisions of E.O. No. 273 on VAT and R.A. No. 7716 on E-VAT.

In the interim, on October 1, 1999, the BIR sent respondent a Preliminary Assessment Notice for deficiency in
its payment of the VAT and documentary stamp taxes (DST) for taxable years 1996 and 1997.

On October 20, 1999, respondent filed a protest with the BIR.

30
On January 27, 2000, petitioner CIR sent respondent a letter demanding payment of "deficiency VAT" in the
amount of ₱100,505,030.26 and DST in the amount of ₱124,196,610.92, or a total of ₱224,702,641.18 for
taxable years 1996 and 1997. Attached to the demand letter were four (4) assessment notices.

On February 23, 2000, respondent filed another protest questioning the assessment notices.

Petitioner CIR did not take any action on respondent's protests. Hence, on September 21, 2000, respondent
filed with the Court of Tax Appeals (CTA) a petition for review, docketed as CTA Case No. 6166.

On April 5, 2002, the CTA rendered its Decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Petitioner is
hereby ORDERED TO PAY the deficiency VAT amounting to ₱22,054,831.75 inclusive of 25% surcharge plus
20% interest from January 20, 1997 until fully paid for the 1996 VAT deficiency and ₱31,094,163.87 inclusive
of 25% surcharge plus 20% interest from January 20, 1998 until paid for the 1997 VAT deficiency.1awphi1.nét
Accordingly, VAT Ruling No. 231-88 is declared void and without force and effect. The 1996 and 1997
deficiency DST assessment against petitioner is hereby CANCELLED AND SET ASIDE. Respondent is
ORDERED to DESIST from collecting the said DST deficiency tax.

SO ORDERED.

Respondent filed a motion for partial reconsideration of the above judgment concerning its liability to pay the
deficiency VAT.

In its Resolution3 dated March 23, 2003, the CTA granted respondent's motion, thus:

WHEREFORE, in view of the foregoing, the instant Motion for Partial Reconsideration is GRANTED.
Accordingly, the VAT assessment issued by herein respondent against petitioner for the taxable years 1996
and 1997 is hereby WITHDRAWN and SET ASIDE.

SO ORDERED.

The CTA held:

Moreover, this court adheres to its conclusion that petitioner is a service contractor subject to VAT since it
does not actually render medical service but merely acts as a conduit between the members and petitioner's
accredited and recognized hospitals and clinics.

However, after a careful review of the facts of the case as well as the Law and jurisprudence applicable, this
court resolves to grant petitioner's "Motion for Partial Reconsideration." We are in accord with the view of
petitioner that it is entitled to the benefit of non-retroactivity of rulings guaranteed under Section 246 of the Tax
Code, in the absence of showing of bad faith on its part. Section 246 of the Tax Code provides:

Sec. 246. Non-Retroactivity of Rulings. - Any revocation, modification or reversal of any of the rules and
regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars
promulgated by the Commissioner shall not be given retroactive application if the revocation, modification or
reversal will be prejudicial to the taxpayers, x x x.

Clearly, undue prejudice will be caused to petitioner if the revocation of VAT Ruling No. 231-88 will be
retroactively applied to its case. VAT Ruling No. 231-88 issued by no less than the respondent itself has
confirmed petitioner's entitlement to VAT exemption under Section 103 of the Tax Code. In saying so,
respondent has actually broadened the scope of "medical services" to include the case of the petitioner. This
VAT ruling was even confirmed subsequently by Regional Director Ormundo G. Umali in his letter dated April
31
22, 1994 (Exhibit M). Exhibit P, which served as basis for the issuance of the said VAT ruling in favor of the
petitioner sufficiently described the business of petitioner and there is no way BIR could be misled by the said
representation as to the real nature of petitioner's business. Such being the case, this court is convinced that
petitioner's reliance on the said ruling is premised on good faith. The facts of the case do not show that
petitioner deliberately committed mistakes or omitted material facts when it obtained the said ruling from the
Bureau of Internal Revenue. Thus, in the absence of such proof, this court upholds the application of Section
246 of the Tax Code. Consequently, the pronouncement made by the BIR in VAT Ruling No. 231-88 as to the
VAT exemption of petitioner should be upheld.

Petitioner seasonably filed with the Court of Appeals a petition for review, docketed as CA-G.R. SP No. 76449.

In its Decision dated February 18, 2005, the Court of Appeals affirmed the CTA Resolution.

Petitioner CIR filed a motion for reconsideration, but it was denied by the appellate court in its Resolution4
dated May 9, 2005.

Hence, the instant petition for review on certiorari raising these two issues: (1) whether respondent's services
are subject to VAT; and (2) whether VAT Ruling No. 231-88 exempting respondent from payment of VAT has
retroactive application.

On the first issue, respondent is contesting petitioner's assessment of its VAT liabilities for taxable years 1996
and 1997.

Section 1025 of the National Internal Revenue Code of 1977, as amended by E.O. No. 273 (VAT Law) and
R.A. No. 7716 (E-VAT Law), provides:

SEC. 102. Value-added tax on sale of services and use or lease of properties. - (a) Rate and base of tax. -
There shall be levied, assessed and collected, a value-added tax equivalent to 10% of gross receipts derived
from the sale or exchange of services, including the use or lease of properties.

The phrase "sale or exchange of service" means the performance of all kinds of services in the Philippines for
a fee, remuneration or consideration, including those performed or rendered by construction and service
contractors x x x.

Section 1036 of the same Code specifies the exempt transactions from the provision of Section 102, thus:

SEC. 103. Exempt Transactions. - The following shall be exempt from the value-added tax:

xxx

(l) Medical, dental, hospital and veterinary services except those rendered by professionals

xxx

The import of the above provision is plain. It requires no interpretation. It contemplates the exemption from
VAT of taxpayers engaged in the performance of medical, dental, hospital, and veterinary services. In
Commissioner of International Revenue v. Seagate Technology (Philippines),7 we defined an exempt
transaction as one involving goods or services which, by their nature, are specifically listed in and expressly
exempted from the VAT, under the Tax Code, without regard to the tax status of the party in the transaction. In
Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.) Inc.,8 we reiterated this definition.

In its letter to the BIR requesting confirmation of its VAT-exempt status, respondent described its services as
follows:
32
Under the prepaid group practice health care delivery system adopted by Health Care, individuals enrolled in
Health Care's health care program are entitled to preventive, diagnostic, and corrective medical services to be
dispensed by Health Care's duly licensed physicians, specialists, and other professional technical staff
participating in said group practice health care delivery system established and operated by Health Care. Such
medical services will be dispensed in a hospital or clinic owned, operated, or accredited by Health Care. To be
entitled to receive such medical services from Health Care, an individual must enroll in Health Care's health
care program and pay an annual fee. Enrollment in Health Care's health care program is on a year-to-year
basis and enrollees are issued identification cards.

From the foregoing, the CTA made the following conclusions:

a) Respondent "is not actually rendering medical service but merely acting as a conduit between
the members and their accredited and recognized hospitals and clinics."

b) It merely "provides and arranges for the provision of pre-need health care services to its
members for a fixed prepaid fee for a specified period of time."

c) It then "contracts the services of physicians, medical and dental practitioners, clinics and
hospitals to perform such services to its enrolled members;" and

d) Respondent "also enters into contract with clinics, hospitals, medical professionals and then
negotiates with them regarding payment schemes, financing and other procedures in the
delivery of health services."

We note that these factual findings of the CTA were neither modified nor reversed by the Court of Appeals. It is
a doctrine that findings of fact of the CTA, a special court exercising particular expertise on the subject of tax,
are generally regarded as final, binding, and conclusive upon this Court, more so where these do not conflict
with the findings of the Court of Appeals.9 Perforce, as respondent does not actually provide medical
and/or hospital services, as provided under Section 103 on exempt transactions, but merely arranges
for the same, its services are not VAT-exempt.

Relative to the second issue, Section 246 of the 1997 Tax Code, as amended, provides that rulings, circulars,
rules and regulations promulgated by the Commissioner of Internal Revenue have no retroactive application if
to apply them would prejudice the taxpayer. The exceptions to this rule are: (1) where the taxpayer deliberately
misstates or omits material facts from his return or in any document required of him by the Bureau of Internal
Revenue; (2) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different
from the facts on which the ruling is based, or (3) where the taxpayer acted in bad faith.

We must now determine whether VAT Ruling No. 231-88 exempting respondent from paying its VAT liabilities
has retroactive application.

In its Resolution dated March 23, 2003, the CTA found that there is no showing that respondent "deliberately
committed mistakes or omitted material facts" when it obtained VAT Ruling No. 231-88 from the BIR. The CTA
held that respondent's letter which served as the basis for the VAT ruling "sufficiently described" its business
and "there is no way the BIR could be misled by the said representation as to the real nature" of said business.

In sustaining the CTA, the Court of Appeals found that "the failure of respondent to refer to itself as a health
maintenance organization is not an indication of bad faith or a deliberate attempt to make false
representations." As "the term health maintenance organization did not as yet have any particular significance
for tax purposes," respondent's failure "to include a term that has yet to acquire its present definition and
significance cannot be equated with bad faith."

33
We agree with both the Tax Court and the Court of Appeals that respondent acted in good faith. In Civil
Service Commission v. Maala,10 we described good faith as "that state of mind denoting honesty of intention
and freedom from knowledge of circumstances which ought to put the holder upon inquiry; an honest intention
to abstain from taking any unconscientious advantage of another, even through technicalities of law, together
with absence of all information, notice, or benefit or belief of facts which render transaction unconscientious."

According to the Court of Appeals, respondent's failure to describe itself as a "health maintenance
organization," which is subject to VAT, is not tantamount to bad faith. We note that the term "health
maintenance organization" was first recorded in the Philippine statute books only upon the passage of "The
National Health Insurance Act of 1995" (Republic Act No. 7875). Section 4 (o) (3) thereof defines a health
maintenance organization as "an entity that provides, offers, or arranges for coverage of designated health
services needed by plan members for a fixed prepaid premium." Under this law, a health maintenance
organization is one of the classes of a "health care provider."

It is thus apparent that when VAT Ruling No. 231-88 was issued in respondent's favor, the term "health
maintenance organization" was yet unknown or had no significance for taxation purposes. Respondent,
therefore, believed in good faith that it was VAT exempt for the taxable years 1996 and 1997 on the basis of
VAT Ruling No. 231-88.

In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals,11 this Court held that under Section 246 of the 1997
Tax Code, the Commissioner of Internal Revenue is precluded from adopting a position contrary to one
previously taken where injustice would result to the taxpayer. Hence, where an assessment for deficiency
withholding income taxes was made, three years after a new BIR Circular reversed a previous one upon which
the taxpayer had relied upon, such an assessment was prejudicial to the taxpayer. To rule otherwise, opined
the Court, would be contrary to the tenets of good faith, equity, and fair play.

This Court has consistently reaffirmed its ruling in ABS-CBN Broadcasting Corp. in the later cases of
Commissioner of Internal Revenue v. Borroughs, Ltd.,12 Commissioner of Internal Revenue v. Mega Gen.
Mdsg. Corp.13 Commissioner of Internal Revenue v. Telefunken Semiconductor (Phils.) Inc.,14 and
Commissioner of Internal Revenue v. Court of Appeals.15 The rule is that the BIR rulings have no retroactive
effect where a grossly unfair deal would result to the prejudice of the taxpayer, as in this case.

More recently, in Commissioner of Internal Revenue v. Benguet Corporation,16 wherein the taxpayer was
entitled to tax refunds or credits based on the BIR's own issuances but later was suddenly saddled with
deficiency taxes due to its subsequent ruling changing the category of the taxpayer's transactions for the
purpose of paying its VAT, this Court ruled that applying such ruling retroactively would be prejudicial to the
taxpayer.

WHEREFORE, we DENY the petition and AFFIRM the assailed Decision and Resolution of the Court of
Appeals in CA-G.R. SP No. 76449. No costs. SO ORDERED.

DIGEST:

FACTS:

On 1987, CIR issued VAT Ruling No. 231-88 stating that Philhealth, as a provider of medical services, is
exempt from the VAT coverage. When RA 8424 or the new Tax Code was implemented it adopted the
provisions of VAT and E-VAT. On 1999, the BIR sent Philhealth an assessment notice for deficiency VAT and
documentary stamp taxes for taxable years 1996 and 1997. After CIR did not act on it, Philhealth filed a
petition for review with the CTA. The CTA withdrew the VAT assessment. The CIR then filed an appeal with
the CA which was denied.
ISSUES:
34
 1. Whether Philhealth is subject to VAT.
2. Whether VAT Ruling No. 231-88 exempting Philhealth from payment of VAT has retroactive application.

RULING:

YES. Section 103 of the NIRC exempts taxpayers engaged in the performance of medical, dental, hospital,
and veterinary services from VAT. But, in Philhealth's letter requesting of its VAT-exempt status, it was held
that it showed Philhealth provides medical service only between their members and their accredited hospitals,
that it only provides for the provision of pre-need health care services, it contracts the services of medical
practitioners and establishments for their members in the delivery of health services.
Thus, Philhealth does not fall under the exemptions provided in Section 103, but merely arranges for such,
making Philhealth not VAT-exempt. YES. Generally, the NIRC has no retroactive application except when:

1. where the taxpayer deliberately misstates or omits material facts from his return or in any document
required of him by the Bureau of Internal Revenue;
2. where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from
the facts on which the ruling is based, or
3. where the taxpayer acted in bad faith.

The Court held that Philhealth acted in good faith. The term health maintenance organization was first
recorded in the Philippine statute books in 1995. It is apparent that when VAT Ruling No. 231-88 was issued
in Philhealth's favor, the term health maintenance organization was unknown and had no significance for
taxation purposes. Philhealth, therefore, believed in good faith that it was VAT exempt for the taxable years
1996 and 1997 on the basis of VAT Ruling No. 231-88. The rule is that the BIR rulings have no retroactive
effect where a grossly unfair deal would result to the prejudice of the taxpayer.

4. VAT ZERO-RATED TRANSACTIONS

American Express International vs CIR 2002 (PDF)

G.R. No. 164365 June 8, 2007

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
PLACER DOME TECHNICAL SERVICES (PHILS.), INC., respondent.

DECISION

TINGA, J.:

Two years ago, the Court in Commissioner of Internal Revenue v. American Express International, Inc.
(Philippine Branch)1 definitively ruled that under the National Internal Revenue Code of 1986, as amended,2
"services performed by VAT-registered persons in the Philippines (other than the processing, manufacturing or
repacking of goods for persons doing business outside the Philippines), when paid in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the [Bangko Sentral ng Pilipinas],
are zero-rated."3 The grant of the present petition entails the extreme step of rejecting American Express as
precedent, a recourse which the Court is unwilling to take.

35
The facts, as culled from the recital in the assailed Decision4 dated 30 June 2004 of the Court of Appeals,
follow.

On 24 March 1996, at the San Antonio Mines in Marinduque owned by Marcopper Mining Corporation
(Marcopper), mine tailings from the Taipan Pit started to escape through the Makulapnit Tunnel and Boac
Rivers, causing the cessation of mining and milling operations, and causing potential environmental damage to
the rivers and the immediate area. To contain the damage and prevent the further spread of the tailing leak,
Placer Dome, Inc. (PDI), the owner of 39.9% of Marcopper, undertook to perform the clean-up and
rehabilitation of the Makalupnit and Boac Rivers, through a subsidiary. To accomplish this, PDI engaged Placer
Dome Technical Services Limited (PDTSL), a non-resident foreign corporation with office in Canada, to carry
out the project. In turn, PDTSL engaged the services of Placer Dome Technical Services (Philippines), Inc.
(respondent), a domestic corporation and registered Value-Added Tax (VAT) entity, to implement the project in
the Philippines.

PDTSL and respondent thus entered into an Implementation Agreement signed on 15 November 1996. Due to
the urgency and potentially significant damage to the environment, respondent had agreed to immediately
implement the project, and the Implementation Agreement stipulated that all implementation services rendered
by respondent even prior to the agreement’s signing shall be deemed to have been provided pursuant to the
said Agreement. The Agreement further stipulated that PDTSL was to pay respondent "an amount of money, in
U.S. funds, equal to all Costs incurred for Implementation Services performed under the Agreement,"5 as well
as "a fee agreed to one percent (1%) of such Costs."6

In August of 1998, respondent amended its quarterly VAT returns for the last two quarters of 1996, and for the
four quarters of 1997. In the amended returns, respondent declared a total input VAT payment of
P43,015,461.98 for the said quarters, and P42,837,933.60 as its total excess input VAT for the same period.
Then on 11 September 1998, respondent filed an administrative claim for the refund of its reported total input
VAT payments in relation to the project it had contracted from PDTSL, amounting to P43,015,461.98. In
support of this claim for refund, respondent argued that the revenues it derived from services rendered to
PDTSL, pursuant to the Agreement, qualified as zero-rated sales under Section 102(b)(2) of the then Tax
Code, since it was paid in foreign currency inwardly remitted to the Philippines. When the Commissioner of
Internal Revenue (CIR) did not act on this claim, respondent duly filed a Petition for Review with the Court of
Tax Appeals (CTA), praying for the refund of its total reported excess input VAT totaling P42,837,933.60. In its
Answer to the Petition, the CIR merely invoked the presumption that taxes are collected in accordance with
law, and that claims for refund of taxes are construed strictly against claimants, as the same was in the nature
of an exemption from taxation.7

In its Decision dated 19 March 2002,8 the CTA supported respondent’s legal position that its sale of services to
PDTSL constituted a zero-rated transaction under the Tax Code, as these services were paid for in acceptable
foreign currency which had been inwardly remitted to the Philippines in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP). At the same time, the CTA pointed out that of the
US$27,544,707.00 paid by PDTSL to respondent, only US$14,750,473.00 was inwardly remitted and
accounted for in accordance with the BSP.9 The CTA also noted that not all the reported total input VAT
payments of respondent were properly supported by VAT invoices and/or official receipts,10 and that not all of
the allowable input VAT of the respondent could be directly attributed to its zero-rated sales.11 In the end, the
CTA found that only the resulting input VAT of P17,178,373.12 could be refunded the respondent.12

The CIR filed a Motion for Reconsideration where he invoked Section 4.102-2(b)(2) of Revenue Regulation No.
5-96,13 and especially VAT Ruling No. 040-98 dated 23 November 1998, which had interpreted the aforecited
provision.

The CTA remained unpersuaded despite the cited issuances. In fact, the CTA Resolution14 dated 20 June
2002, denying the CIR’s motion for reconsideration, noted that petitioner’s argument was not novel as it had
debunked the same when first raised before it, referring to its decision dated 19 April 2002 in CTA Case No.
6099, American Express International, Inc. – Philippine Branch v. Commissioner of Internal Revenue.15 The
36
CTA reiterated its pronouncement in said case, thus: "x x x it is very clear that VAT Ruling No. 040-98 not only
expands the language of Section (108)(B)(2) but also of Revenue Regulation No. 5-96 which interprets the
said statute. The same cannot be countenanced. It is a settled rule of legal hermeneutics that the implementing
rules and regulations cannot amend the act of Congress x x x for administrative rules and regulations are
intended to carry out, not supplant or modify, the law."16

The rulings of the CTA were elevated by petitioner to the Court of Appeals on Petition for Review. In a
Decision17 dated 30 June 2004, the appellate court affirmed the CTA rulings. As a consequence, the present
petition is now before us.

Our evaluation of the petition must begin with the statutory scope of the "services performed in the Philippines
by VAT-registered persons,"18 referred to in the law applicable at the time of the subject incidents, the National
Internal Revenue Code of 1986, as amended19 (1986 NIRC). Section 102(b) of the 1986 NIRC reads:

Section 102. Value-Added Tax on Sale of Services and Use or Lease of Properties.

(a) x x x

(b) Transactions Subject to Zero Percent (0%) Rate. ─ The following services performed in the
Philippines by VAT-registered persons shall be subject to zero percent (0%) rate:

(1) Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP);

(2) Services other than those mentioned in the preceding subparagraph, the consideration for
which is paid for in acceptable foreign currency and accounted for in accordance with the rules
and regulations of the [BSP].

x x x 20

It is Section 102(b)(2) which finds special relevance to this case. As explicitly provided in the law, a zero-rated
VAT transaction includes services by VAT-registered persons other than processing, manufacturing or
repacking goods for other persons doing business outside the Philippines, which goods are subsequently
exported, the consideration for which is paid in foreign currency and accounted for in accordance with the rules
and regulations of the BSP.

Still, this provision was interpreted by the Bureau of Internal Revenue through Revenue Regulation No. 5-96,
Section 4.102-2(b)(2) of which states:

Section 4.102(b)(2)- Services other than processing, manufacturing or repacking for other persons
doing business outside the Philippines for goods which are subsequently exported, as well as services
by a resident to a non-resident foreign client such as project studies, information services, engineering
and architectural designs and other similar services, the consideration for which is paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP.

Although there is nothing in Section 4.102-2(b)(2) that is expressly fatal to respondent’s claim, VAT Ruling No.
040-98 interpreted the provision in such fashion. The relevant portion of the ruling reads:

The sales of services subject to zero percent (0%) VAT under Section 108(B)(2), of the Tax Code of
1997, are limited to such sales which are destined for consumption outside of the Philippines in that
such services are tacked-in as part of the cost of goods exported. The zero-rating also extends to
37
 project studies, information services, engineering and architectural designs and other similar services
sold by a resident of the Philippines to a non-resident foreign client because these services are likewise
destined to be consumed abroad. The phrase ‘project studies, information services, engineering and
architectural designs and other similar services’ does not include services rendered by travel agents to
foreign tourists in the Philippines following the doctrine of ejusdem generis, since such services by
travel agents are not of the same class or of the same nature as those enumerated under the aforesaid
section.

Considering that the services by your client to foreign tourists are basically and substantially rendered
within the Philippines, it follows that the onus of taxation of the revenue arising therefrom, for VAT
purposes, is also within the Philippines. For this reason, it is our considered opinion that the tour
package services of your client to foreign tourists in the Philippines cannot legally qualify for zero-rated
(0%) VAT but rather subject to the regular VAT rate of 10%.

Petitioner argues that following Section 4.102-2(b)(2) of Revenue Regulation No. 5-96, there are only two
categories of services that are subject to zero percent VAT, namely: services other than processing,
manufacturing or repacking for other persons doing business outside the Philippines for goods which are
subsequently exported; and services by a resident to a non-resident foreign client, such as project studies,
information services, engineering and architectural designs and other similar services. 21 Petitioner explains that
the services rendered by respondent were not for goods which were subsequently exported. Likewise, it is
argued that the services rendered by respondent were not similar to "project studies, information services,
engineering and architectural designs" which were destined to be consumed abroad by non-resident foreign
clients.

These views, petitioner points out, were reiterated in VAT Ruling No. 040-98. It is clear from that issuance that
the location or "destination" where the services were destined for consumption was determinative of whether
the zero-rating availed when such services were sold by a resident of the Philippines to a non-resident foreign
client. VAT Ruling No. 040-98 expresses that the zero-rating may apply only when the services are destined
for consumption abroad. This view aligns with the theoretical principle that the VAT is ultimately levied on
consumption.22 If the service were destined for consumption in the Philippines, the service provider would have
the faculty to pass on its VAT liability to the end-user, thus avoiding having to shoulder the tax itself.

Unfortunately for petitioner, his arguments are no longer fresh. The Court spurned them in Commissioner of
Internal Revenue v. American Express.23

American Express involved transactions invoked as "zero-rated" by a "VAT-registered person that facilitates
the collection and payment of receivables belonging to its non-resident foreign client, for which it gets paid in
acceptable foreign currency inwardly remitted and accounted for in conformity with BSP rules and
regulations."24 The CIR in that case relied extensively on the same VAT Ruling No. 040-98 now cited before
us. However, the Court would conclude in American Express that the opinion therein that the service must be
destined for consumption outside of the Philippines was "clearly ultra vires and invalid."25

The discussion of the issues in American Express was comprehensive enough as to address each issue now
presently raised before us.

American Express explained the nature of VAT imposed on services in this manner:

The VAT is a tax on consumption "expressed as a percentage of the value added to goods or services"
purchased by the producer or taxpayer. As an indirect tax on services, its main object is the transaction
itself or, more concretely, the performance of all kinds of services conducted in the course of trade or
business in the Philippines. These services must be regularly conducted in this country; undertaken in
"pursuit of a commercial or an economic activity;" for a valuable consideration; and not exempt under
the Tax Code, other special laws, or any international agreement.26

38
Yet even as services may be subject to VAT, our tax laws extend the benefit of zero-rating the VAT due on
certain services. The aforementioned Section 102(b) of the 1986 NIRC activates such zero-rating on two
categories of transactions: (1) Processing, manufacturing or repacking goods for other persons doing business
outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the BSP; and (2) services
other than those mentioned in the preceding subparagraph, the consideration for which is paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. 27

Obviously, it is the second category that begs for further explication, owing to its apparently broad scope,
covering as it does "services other than those mentioned in the preceding subparagraph." Yet, as found by the
Court in American Express, such broad scope did not mean that Section 102(b) is vague, thus:

The law is very clear. Under the last paragraph [of Section 102(b)], services performed by VAT-
registered persons in the Philippines (other than the processing, manufacturing or repacking of goods
for persons doing business outside the Philippines), when paid in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP, are zero-rated.28

Since Section 102(b) is, in fact, "very clear," the Court declared that any resort to statutory construction or
interpretation was unnecessary.

As mentioned at the outset, Section 102(b)(2) of the Tax Code is very clear. Therefore, no statutory
construction or interpretation is needed. Neither can conditions or limitations be introduced where none
is provided for. Rewriting the law is a forbidden ground that only Congress may tread upon.

The Court may not construe a statute that is free from doubt. "[W]here the law speaks in clear and
categorical language, there is no room for interpretation. There is only room for application." The Court
has no choice but to "see to it that its mandate is obeyed."29

It was from the awareness that Section 102(b) is free from ambiguity in providing so broad an extension of the
zero-rated benefit on VAT-registered persons performing services that the Court in American Express
proceeded to consider the same Section 4.102-2(b)(2) of Revenue Regulation No. 5-96 now cited by petitioner.
The Court in American Express explained that Revenue Regulation No. 5-96 had amended Revenue
Regulation No. 7-95, Section 4.102-2 of which had retained the broad language of Section 102(b) in defining
"transactions subject to zero-rate," adding only, by way of specific example, the phrase "those [services]
rendered by hotels and other service establishments."30 However, the amendatory Revenue Regulation No. 5-
96 opted for a more specific approach, providing, by way of example, an enumeration of those services
contemplated as zero-rated.31 In the present case, it is because of such enumeration that petitioner now
argues that "respondent’s services likewise do not fall under the second category mentioned in Section 4.102-
2(b)(2) [as amended by Revenue Regulation No. 5-96], because they are not similar to ‘project studies,
information services, engineering and architectural designs’ which are destined to be consumed abroad by
non-resident foreign clients."32

However, the Court in American Express clearly rebuffed a similar contention.

Aside from the already scopious coverage of services in Section 4.102-2(b)(2) of RR 7-95, the
amendment introduced by RR 5-96 further enumerates specific services entitled to zero rating.
Although superfluous, these sample services are meant to be merely illustrative. In this provision, the
use of the term "as well as" is not restrictive. As a prepositional phrase with an adverbial
relation to some other word, it simply means "in addition to, besides, also or too."

Neither the law nor any of the implementing revenue regulations aforequoted categorically
defines or limits the services that may be sold or exchanged for a fee, remuneration or

39
 consideration. Rather, both merely enumerate the items of service that fall under the term "sale or
exchange of services."

xxxx

The canon of statutory construction known as ejusdem generis or "of the same kind or specie" does not
apply to Section 4.102-2(b)(2) of RR 7-95 as amended by RR 5-96.

First, although the regulatory provision contains an enumeration of particular or specific words,
followed by the general phrase "and other similar services," such words do not constitute a
readily discernible class and are patently not of the same kind. Project studies involve investments
or marketing; information services focus on data technology; engineering and architectural designs
require creativity. Aside from calling for the exercise or use of mental faculties or perhaps producing
written technical outputs, no common denominator to the exclusion of all others characterizes these
three services. Nothing sets them apart from other and similar general services that may involve
advertising, computers, consultancy, health care, management, messengerial work — to name only a
few.

Second, there is the regulatory intent to give the general phrase "and other similar services" a broader
meaning. Clearly, the preceding phrase "as well as" is not meant to limit the effect of "and other
similar services."

Third, and most important, the statutory provision upon which this regulation is based is by
itself not restrictive. The scope of the word "services" in Section 102(b)(2) of the [1986 NIRC] is
broad; it is not susceptible of narrow interpretation. (Emphasis supplied)33

The Court in American Express recognized the existence of the contrary holding in VAT Ruling No. 040-98,
now relied upon by petitioner especially as he states that the zero-rating applied only when the services are
destined for consumption abroad. American Express minced no words in criticizing said ruling.

VAT Ruling No. 040-98 relied upon by petitioner is a less general interpretation at the administrative
level, rendered by the BIR commissioner upon request of a taxpayer to clarify certain provisions of the
VAT law. As correctly held by the CA, when this ruling states that the service must be "destined
for consumption outside of the Philippines" in order to qualify for zero rating, it contravenes
both the law and the regulations issued pursuant to it. This portion of VAT Ruling No. 040-98 is
clearly ultra vires and invalid.

Although "[i]t is widely accepted that the interpretation placed upon a statute by the executive
officers, whose duty is to enforce it, is entitled to great respect by the courts," this
interpretation is not conclusive and will have to be "ignored if judicially found to be erroneous"
and "clearly absurd x x x or improper." An administrative issuance that overrides the law it
merely seeks to interpret, instead of remaining consistent and in harmony with it, will not be
countenanced by this Court.(Emphasis supplied)34

Petitioner presently invokes the "destination principle," citing that [r]espondent’s services, while rendered to a
non-resident foreign corporation, are not destined to be consumed abroad. Hence, the onus of taxation of the
revenue arising therefrom, for VAT purposes, is also within the Philippines. Yet the Court in American Express
debunked this argument when it rebutted the theoretical underpinnings of VAT Ruling No. 040-98, particularly
its reliance on the "destination principle" in taxation:

As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional
reach of the tax. Goods and services are taxed only in the country where they are consumed. Thus,
exports are zero-rated, while imports are taxed.

40
Confusion in zero rating arises because petitioner equates the performance of a particular type
of service with the consumption of its output abroad. In the present case, the facilitation of the
collection of receivables is different from the utilization or consumption of the outcome of such service.
While the facilitation is done in the Philippines, the consumption is not. Respondent renders assistance
to its foreign clients — the ROCs outside the country — by receiving the bills of service establishments
located here in the country and forwarding them to the ROCs abroad. The consumption
contemplated by law, contrary to petitioner's administrative interpretation, does not imply that
the service be done abroad in order to be zero-rated.

Consumption is "the use of a thing in a way that thereby exhausts it." Applied to services, the
term means the performance or "successful completion of a contractual duty, usually resulting
in the performer's release from any past or future liability x x x" The services rendered by
respondent are performed or successfully completed upon its sending to its foreign client the drafts and
bills it has gathered from service establishments here. Its services, having been performed in the
Philippines, are therefore also consumed in the Philippines.

Unlike goods, services cannot be physically used in or bound for a specific place when their
destination is determined. Instead, there can only be a "predetermined end of a course" when
determining the service "location or position x x x for legal purposes." Respondent's facilitation
service has no physical existence, yet takes place upon rendition, and therefore upon consumption, in
the Philippines. Under the destination principle, as petitioner asserts, such service is subject to VAT at
the rate of 10 percent.

xxxx

However, the law clearly provides for an exception to the destination principle; that is, for a zero
percent VAT rate for services that are performed in the Philippines, "paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the [BSP]."
Thus, for the supply of service to be zero-rated as an exception, the law merely requires that first, the
service be performed in the Philippines; second, the service fall under any of the categories in Section
102(b) of the Tax Code; and, third, it be paid in acceptable foreign currency accounted for in
accordance with BSP rules and regulations. (Emphasis supplied)35

xxxx

Again, contrary to petitioner's stand, for the cost of respondent's service to be zero-rated, it need
not be tacked in as part of the cost of goods exported. The law neither imposes such
requirement nor associates services with exported goods. It simply states that the services
performed by VAT-registered persons in the Philippines — services other than the processing,
manufacturing or repacking of goods for persons doing business outside this country — if paid
in acceptable foreign currency and accounted for in accordance with the rules and regulations
of the BSP, are zero-rated. The service rendered by respondent is clearly different from the
product that arises from the rendition of such service. The activity that creates the income must not
be confused with the main business in the course of which that income is realized. (Emphasis
supplied)36

xxxx

The law neither makes a qualification nor adds a condition in determining the tax situs of a zero-rated
service. Under this criterion, the place where the service is rendered determines the jurisdiction to
impose the VAT. Performed in the Philippines, such service is necessarily subject to its
jurisdiction, for the State necessarily has to have "a substantial connection" to it, in order to

41
 enforce a zero rate. The place of payment is immaterial; much less is the place where the output
of the service will be further or ultimately used.37

Finally, the Court in American Express found support from the legislative record that revealed that consumption
abroad is not a pertinent factor to imbue the zero-rating on services by VAT-registered persons performed in
the Philippines.

Interpellations on the subject in the halls of the Senate also reveal a clear intent on the part of the
legislators not to impose the condition of being "consumed abroad" in order for services performed in
the Philippines by a VAT-registered person to be zero-rated. We quote the relevant portions of the
proceedings:

"Senator Maceda: Going back to Section 102 just for the moment. Will the Gentleman kindly
explain to me — I am referring to the lower part of the first paragraph with the 'Provided'.
Section 102. 'Provided that the following services performed in the Philippines by VAT
registered persons shall be subject to zero percent.' There are three here. What is the
difference between the three here which is subject to zero percent and Section 103 which is
exempt transactions, to being with?

"Senator Herrera: Mr. President, in the case of processing and manufacturing or repacking
goods for persons doing business outside the Philippines which are subsequently exported, and
where the services are paid for in acceptable foreign currencies inwardly remitted, this is
considered as subject to 0%. But if these conditions are not complied with, they are subject to
the VAT.

"In the case of No. 2, again, as the Gentleman pointed out, these three are zero-rated and the
other one that he indicated are exempted from the very beginning. These three enumerations
under Section 102 are zero-rated provided that these conditions indicated in these three
paragraphs are also complied with. If they are not complied with, then they are not entitled to
the zero ratings. Just like in the export of minerals, if these are not exported, then they cannot
qualify under this provision of zero rating.

"Senator Maceda: Mr. President, just one small item so we can leave this. Under the proviso, it
is required that the following services be performed in the Philippines.

"Under No. 2, services other than those mentioned above includes, let us say, manufacturing
computers and computer chips or repacking goods for persons doing business outside the
Philippines. Meaning to say, we ship the goods to them in Chicago or Washington and they
send the payment inwardly to the Philippines in foreign currency, and that is, of course, zero-
rated.

"Now, when we say 'services other than those mentioned in the preceding subsection[,'] may I
have some examples of these?

"Senator Herrera: Which portion is the Gentleman referring to?

"Senator Maceda: I am referring to the second paragraph, in the same Section 102. The first
paragraph is when one manufactures or packages something here and he sends it abroad and
they pay him, that is covered. That is clear to me. The second paragraph says 'Services other
than those mentioned in the preceding subparagraph, the consideration of which is paid for in
acceptable foreign currency. . . .'

42
 "One example I could immediately think of—I do not know why this comes to my mind tonight—
is for tourism or escort services. For example, the services of the tour operator or tour escort—
just a good name for all kinds of activities—is made here at the Midtown Ramada Hotel or at the
Philippine Plaza, but the payment is made from outside and remitted into the country.

"Senator Herrera: What is important here is that these services are paid in acceptable foreign
currency remitted inwardly to the Philippines.

"Senator Maceda: Yes, Mr. President. Like those Japanese tours which include $50 for the
services of a woman or a tourist guide, it is zero-rated when it is remitted here.

"Senator Herrera: I guess it can be interpreted that way, although this tourist guide should also
be considered as among the professionals. If they earn more than P200,000, they should be
covered.

xxxx

Senator Maceda: So, the services by Filipino citizens outside the Philippines are subject to VAT,
and I am talking of all services. Do big contractual engineers in Saudi Arabia pay VAT?

"Senator Herrera: This provision applies to a VAT-registered person. When he performs

services in the Philippines, that is zero-rated.

"Senator Maceda: That is right."38

It is indubitable that petitioner’s arguments cannot withstand the Court’s ruling in American Express, a
precedent warranting stare decisis application and one which, in any event, we are disinclined to revisit at this
juncture. WHEREFORE, the petition is DENIED. No pronouncement as to costs. SO ORDERED.

DIGEST:

DOCTRINE:

The law neither makes a qualification nor adds a condition in determining the tax situs of a zero-rated service.
Under this criterion, the place where the service is rendered determines the jurisdiction to impose the VAT.

FACTS:

Sometime in 1996, at the San Antonio Mines in Marinduque owned by Marcopper Mining Corporation
(Marcopper), mine tailings from the Taipan Pit started to escape through the Makulapnit Tunnel and Boac
Rivers, causing the cessation of mining and milling operations, and causing potential environmental damage to
the rivers and the immediate area. To contain the damage and prevent the further spread of the tailing leak,
Placer Dome, Inc. (PDI), the owner of 39.9% of Marcopper, undertook to perform the clean-up and
rehabilitation of the Makalupnit and Boac Rivers, through a subsidiary. To accomplish this, PDI engaged Placer
Dome Technical Services Limited (PDTSL), a non-resident foreign corporation with office in Canada, to carry
out the project. In turn, PDTSL engaged the services of Placer Dome Technical Services (Philippines), Inc.
(respondent), a domestic corporation and registered Value-Added Tax (VAT) entity, to implement the project in
the Philippines.

43
PDTSL and respondent entered into an Implementation Agreement. The Agreement further stipulated that
PDTSL was to pay respondent an amount of money, in U.S. funds, equal to all Costs incurred for
Implementation Services performed under the Agreement,[5] as well as a fee agreed to one percent (1%) of
such Costs.

Later, respondent amended its quarterly VAT returns. In the amended returns, respondent declared a total
input VAT payment of P43,015,461.98 for the said quarters, and P42,837,933.60 as its total excess input VAT
for the same period. Then respondent filed an administrative claim for the refund of its reported total input VAT
payments in relation to the project it had contracted from PDTSL, amounting to P43,015,461.98. In support of
this claim for refund, respondent argued that the revenues it derived from services rendered to PDTSL,
pursuant to the Agreement, qualified as zero-rated sales under Section 102(b)(2) of the then Tax Code,
since it was paid in foreign currency inwardly remitted to the Philippines.

CIR did not act on this claim. Thus, respondent filed a Petition for Review with the Court of Tax Appeals (CTA),
praying for the refund of its total reported excess input VAT totaling P42,837,933.60.

ISSUE:

Whether respondent Placer is entitled to the refund as the revenues qualified as zero rated sales.

HELD: YES.

Section 102(b) Transactions Subject to Zero Percent (0%) Rate- The following services performed in the
Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: (1) Processing,
manufacturing or repacking goods for other persons doing business outside the Philippines which goods are
subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);(2) Services other than
those mentioned in the preceding subparagraph, the consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the [BSP].

It is Section 102(b)(2) which finds special relevance to this case. The VAT is a TAX on consumption
“expressed as a percentage of the value added to goods or services” purchased by the producer or taxpayer.
As an indirect tax on services, its main object is the transaction itself or, more concretely, the performance of
all kinds of services conducted in the course of trade or business in the Philippines. These services must be
regularly conducted in this country; undertaken in “pursuit of a commercial or an economic activity;” for a
valuable consideration; and not exempt under the Tax Code, other special laws, or any international
agreement. Yet even as services may be subject to VAT, our tax laws extend the benefit of zero-rating the VAT
due on certain services. Under the last paragraph of Scetion 102 (b), services performed by VAT-registered
persons in the Philippines, when paid in acceptable foreign currency and accounted for in accordance with the
rules and regulations of the BSP, are ZERO-RATED.

44
Petitioner invokes the “destination principle,” citing that respondent’s while rendered to a non-resident foreign
corporation, are not destined to be consumed abroad. Hence, the onus of taxation of the revenue arising
therefrom, for VAT purposes, is also within the Philippines. The Court in American Express debunked this
argument. As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional
reach of the tax. Goods and services are taxed only in the country where they are consumed. Thus, exports
are zero-rated, while imports are taxed. Thus, exports are zero-rated while imports are taxed.

Confusion in zero rating arises because petitioner equates the performance of a particular type of service with
the consumption of its output abroad. In the present case, the facilitation of the collection of receivables is
different from the utilization or consumption of the outcome of such service. While the facilitation is done in the
Philippines, the consumption is not. Respondent renders assistance to its foreign clients the ROCs outside the
country by receiving the bills of service establishments located here in the country and forwarding them to the
ROCs abroad. The consumption contemplated by law, contrary to petitioner's administrative interpretation,
does not imply that the service be done abroad in order to be zero-rated.

Consumption is "the use of a thing in a way that thereby exhausts it." Applied to services, the term means the
performance or "successful completion of a contractual duty, usually resulting in the performer's release from
any past or future liability x x x" The services rendered by respondent are performed or successfully completed
upon its sending to its foreign client the drafts and bills it has gathered from service establishments here. Its
services, having been performed in the Philippines, are therefore also consumed in the Philippines.

Unlike goods, services cannot be physically used in or bound for a specific place when their destination is
determined. Instead, there can only be a "predetermined end of a course" when determining the service
"location or position x x x for legal purposes." Respondent's facilitation service has no physical existence, yet
takes place upon rendition, and therefore upon consumption, in the Philippines. Under the destination principle,
as petitioner asserts, such service is subject to VAT at the rate of 10 percent.

However, the law clearly provides for an exception to the destination principle; that is, for a zero percent VAT
rate for services that are performed in the Philippines, "paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the [BSP]." Thus, for the supply of service to be zero-rated
as an exception, the law merely requires that first, the service be performed in the Philippines; second, the
service fall under any of the categories in Section 102(b) of the Tax Code; and, third, it be paid in acceptable
foreign currency accounted for in accordance with BSP rules and regulations.

The law neither makes a qualification nor adds a condition in determining the tax situs of a zero-rated service.
Under this criterion, the place where the service is rendered determines the jurisdiction to impose the
VAT. Performed in the Philippines, such service is necessarily subject to its jurisdiction, for the State
necessarily has to have "a substantial connection" to it, in order to enforce a zero rate. The place of
payment is immaterial; much less is the place where the output of the service will be further or
ultimately used.

45
G.R. No. 153205 January 22, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR MINDANAO, INC., Respondent.

DECISION

CARPIO, J.:

The Case

This petition for review1 seeks to set aside the 16 April 2002 Decision2 of the Court of Appeals in CA-G.R. SP
No. 66341 affirming the 8 August 2001 Decision3 of the Court of Tax Appeals (CTA). The CTA ordered the
Commissioner of Internal Revenue (petitioner) to issue a tax credit certificate for P6,994,659.67 in favor of
Burmeister and Wain Scandinavian Contractor Mindanao, Inc. (respondent).

The Antecedents

The CTA summarized the facts, which the Court of Appeals adopted, as follows:

[Respondent] is a domestic corporation duly organized and existing under and by virtue of the laws of the
Philippines with principal address located at Daruma Building, Jose P. Laurel Avenue, Lanang, Davao City.

It is represented that a foreign consortium composed of Burmeister and Wain Scandinavian Contractor A/S
(BWSC-Denmark), Mitsui Engineering and Shipbuilding, Ltd., and Mitsui and Co., Ltd. entered into a contract
with the National Power Corporation (NAPOCOR) for the operation and maintenance of [NAPOCOR’s] two
power barges. The Consortium appointed BWSC-Denmark as its coordination manager.

BWSC-Denmark established [respondent] which subcontracted the actual operation and maintenance of
NAPOCOR’s two power barges as well as the performance of other duties and acts which necessarily have to
be done in the Philippines.

NAPOCOR paid capacity and energy fees to the Consortium in a mixture of currencies (Mark, Yen, and Peso).
The freely convertible non-Peso component is deposited directly to the Consortium’s bank accounts in
Denmark and Japan, while the Peso-denominated component is deposited in a separate and special
designated bank account in the Philippines. On the other hand, the Consortium pays [respondent] in foreign
currency inwardly remitted to the Philippines through the banking system.

In order to ascertain the tax implications of the above transactions, [respondent] sought a ruling from the BIR
which responded with BIR Ruling No. 023-95 dated February 14, 1995, declaring therein that if [respondent]
chooses to register as a VAT person and the consideration for its services is paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas,
the aforesaid services shall be subject to VAT at zero-rate.

[Respondent] chose to register as a VAT taxpayer. On May 26, 1995, the Certificate of Registration bearing
RDO Control No. 95-113-007556 was issued in favor of [respondent] by the Revenue District Office No. 113 of
Davao City.

For the year 1996, [respondent] seasonably filed its quarterly Value-Added Tax Returns reflecting, among
others, a total zero-rated sales of P147,317,189.62 with VAT input taxes of P3,361,174.14, detailed as follows:
46
 Qtr. Exh. Date Filed Zero-Rated Sales VAT Input Tax

1st E 04-18-96 P 33,019,651.07 P608,953.48

2nd F 07-16-96 37,108,863.33 756,802.66
3rd G 10-14-96 34,196,372.35 930,279.14
4th H 01-20-97 42,992,302.87 1,065,138.86

Totals P147,317,189.62 P3,361,174.14

On December 29, 1997, [respondent] availed of the Voluntary Assessment Program (VAP) of the BIR. It
allegedly misinterpreted Revenue Regulations No. 5-96 dated February 20, 1996 to be applicable to its case.
Revenue Regulations No. 5-96 provides in part thus:

SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-95 are hereby amended to read as
follows:

Section 4.102-2(b)(2) – "Services other than processing, manufacturing or repacking for other persons doing
business outside the Philippines for goods which are subsequently exported, as well as services by a resident
to a non-resident foreign client such as project studies, information services, engineering and architectural
designs and other similar services, the consideration for which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP."

x x x x x x x x x x.

In [conformity] with the aforecited Revenue Regulations, [respondent] subjected its sale of services to the
Consortium to the 10% VAT in the total amount of P103,558,338.11 representing April to December 1996
sales since said Revenue Regulations No. 5-96 became effective only on April 1996. The sum of
P43,893,951.07, representing January to March 1996 sales was subjected to zero rate. Consequently,
[respondent] filed its 1996 amended VAT return consolidating therein the VAT output and input taxes for the
four calendar quarters of 1996. It paid the amount of P6,994,659.67 through BIR’s collecting agent, PCIBank,
as its output tax liability for the year 1996, computed as follows:

Amount subject to 10% VAT P103,558,338.11

Multiply by 10%

VAT Output Tax P 10,355,833.81

Less: 1996 Input VAT P 3,361,174.14

VAT Output Tax Payable P 6,994,659.67

On January 7,1999, [respondent] was able to secure VAT Ruling No. 003-99 from the VAT Review Committee
which reconfirmed BIR Ruling No. 023-95 "insofar as it held that the services being rendered by BWSCMI is
subject to VAT at zero percent (0%)."

47
On the strength of the aforementioned rulings, [respondent] on April 22,1999, filed a claim for the issuance of a
tax credit certificate with Revenue District No. 113 of the BIR. [Respondent] believed that it erroneously paid
the output VAT for 1996 due to its availment of the Voluntary Assessment Program (VAP) of the BIR. 4

On 27 December 1999, respondent filed a petition for review with the CTA in order to toll the running of the
two-year prescriptive period under the Tax Code.

The Ruling of the Court of Tax Appeals

In its 8 August 2001 Decision, the CTA ordered petitioner to issue a tax credit certificate for P6,994,659.67 in
favor of respondent. The CTA’s ruling stated:

[Respondent’s] sale of services to the Consortium [was] paid for in acceptable foreign currency inwardly
remitted to the Philippines and accounted for in accordance with the rules and regulations of Bangko Sentral
ng Pilipinas. These were established by various BPI Credit Memos showing remittances in Danish Kroner
(DKK) and US dollars (US$) as payments for the specific invoices billed by [respondent] to the consortium.
These remittances were further certified by the Branch Manager x x x of BPI-Davao Lanang Branch to
represent payments for sub-contract fees that came from Den Danske Aktieselskab Bank-Denmark for the
account of [respondent]. Clearly, [respondent’s] sale of services to the Consortium is subject to VAT at 0%
pursuant to Section 108(B)(2) of the Tax Code.

xxxx

The zero-rating of [respondent’s] sale of services to the Consortium was even confirmed by the [petitioner] in
BIR Ruling No. 023-95 dated February 15, 1995, and later by VAT Ruling No. 003-99 dated January 7,1999, x
x x.

Since it is apparent that the payments for the services rendered by [respondent] were indeed subject to VAT at
zero percent, it follows that it mistakenly availed of the Voluntary Assessment Program by paying output tax for
its sale of services. x x x

x x x Considering the principle of solutio indebiti which requires the return of what has been delivered by
mistake, the [petitioner] is obligated to issue the tax credit certificate prayed for by [respondent]. x x x5

Petitioner filed a petition for review with the Court of Appeals, which dismissed the petition for lack of merit and
affirmed the CTA decision.6

Hence, this petition.

The Court of Appeals’ Ruling

In affirming the CTA, the Court of Appeals rejected petitioner’s view that since respondent’s services are not
destined for consumption abroad, they are not of the same nature as project studies, information services,
engineering and architectural designs, and other similar services mentioned in Section 4.102-2(b)(2) of
Revenue Regulations No. 5-967 as subject to 0% VAT. Thus, according to petitioner, respondent’s services
cannot legally qualify for 0% VAT but are subject to the regular 10% VAT. 8

The Court of Appeals found untenable petitioner’s contention that under VAT Ruling No. 040-98, respondent’s
services should be destined for consumption abroad to enjoy zero-rating. Contrary to petitioner’s interpretation,
there are two kinds of transactions or services subject to zero percent VAT under VAT Ruling No. 040-98.
These are (a) services other than repacking goods for other persons doing business outside the Philippines
which goods are subsequently exported; and (b) services by a resident to a non-resident foreign client, such as
project studies, information services, engineering and architectural designs and other similar services, the
48
consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the
rules and regulations of the Bangko Sentral ng Pilipinas (BSP).9

The Court of Appeals stated that "only the first classification is required by the provision to be consumed
abroad in order to be taxed at zero rate. In x x x the absence of such express or implied stipulation in the
statute, the second classification need not be consumed abroad."10

The Court of Appeals further held that assuming petitioner’s interpretation of Section 4.102-2(b)(2) of Revenue
Regulations No. 5-96 is correct, such administrative provision is void being an amendment to the Tax Code.
Petitioner went beyond merely providing the implementing details by adding another requirement to zero-
rating. "This is indicated by the additional phrase ‘as well as services by a resident to a non-resident foreign
client, such as project studies, information services and engineering and architectural designs and other similar
services.’ In effect, this phrase adds not just one but two requisites: (a) services must be rendered by a
resident to a non-resident; and (b) these must be in the nature of project studies, information services, etc."11

The Court of Appeals explained that under Section 108(b)(2) of the Tax Code,12 for services which were
performed in the Philippines to enjoy zero-rating, these must comply only with two requisites, to wit: (1)
payment in acceptable foreign currency and (2) accounted for in accordance with the rules of the BSP. Section
108(b)(2) of the Tax Code does not provide that services must be "destined for consumption abroad" in order
to be VAT zero-rated.13

The Court of Appeals disagreed with petitioner’s argument that our VAT law generally follows the destination
principle (i.e., exports exempt, imports taxable).14 The Court of Appeals stated that "if indeed the ‘destination
principle’ underlies and is the basis of the VAT laws, then petitioner’s proper remedy would be to recommend
an amendment of Section 108(b)(2) to Congress. Without such amendment, however, petitioner should apply
the terms of the basic law. Petitioner could not resort to administrative legislation, as what [he] had done in this
case."15

The Issue

The lone issue for resolution is whether respondent is entitled to the refund of P6,994,659.67 as erroneously
paid output VAT for the year 1996.16

The Ruling of the Court

We deny the petition.

At the outset, the Court declares that the denial of the instant petition is not on the ground that respondent’s
services are subject to 0% VAT. Rather, it is based on the non-retroactivity of the prejudicial revocation of BIR
Ruling No. 023-9517 and VAT Ruling No. 003-99,18 which held that respondent’s services are subject to 0%
VAT and which respondent invoked in applying for refund of the output VAT.

Section 102(b) of the Tax Code,19 the applicable provision in 1996 when respondent rendered the services and
paid the VAT in question, enumerates which services are zero-rated, thus:

(b) Transactions subject to zero-rate. ― The following services performed in the Philippines by VAT-registered
persons shall be subject to 0%:

(1) Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP);

49
 (2) Services other than those mentioned in the preceding sub-paragraph, the consideration for
which is paid for in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);

(3) Services rendered to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services to
zero rate;

(4) Services rendered to vessels engaged exclusively in international shipping; and

(5) Services performed by subcontractors and/or contractors in processing, converting, or

manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total
annual production. (Emphasis supplied)

In insisting that its services should be zero-rated, respondent claims that it complied with the requirements of
the Tax Code for zero rating under the second paragraph of Section 102(b). Respondent asserts that (1) the
payment of its service fees was in acceptable foreign currency, (2) there was inward remittance of the foreign
currency into the Philippines, and (3) accounting of such remittance was in accordance with BSP rules.
Moreover, respondent contends that its services which "constitute the actual operation and management of
two (2) power barges in Mindanao" are not "even remotely similar to project studies, information services and
engineering and architectural designs under Section 4.102-2(b)(2) of Revenue Regulations No. 5-96." As such,
respondent’s services need not be "destined to be consumed abroad in order to be VAT zero-rated."

Respondent is mistaken.

The Tax Code not only requires that the services be other than "processing, manufacturing or repacking of
goods" and that payment for such services be in acceptable foreign currency accounted for in accordance with
BSP rules. Another essential condition for qualification to zero-rating under Section 102(b)(2) is that the
recipient of such services is doing business outside the Philippines. While this requirement is not expressly
stated in the second paragraph of Section 102(b), this is clearly provided in the first paragraph of Section
102(b) where the listed services must be "for other persons doing business outside the Philippines." The
phrase "for other persons doing business outside the Philippines" not only refers to the services enumerated in
the first paragraph of Section 102(b), but also pertains to the general term "services" appearing in the second
paragraph of Section 102(b). In short, services other than processing, manufacturing, or repacking of goods
must likewise be performed for persons doing business outside the Philippines.

This can only be the logical interpretation of Section 102(b)(2). If the provider and recipient of the "other
services" are both doing business in the Philippines, the payment of foreign currency is irrelevant. Otherwise,
those subject to the regular VAT under Section 102(a) can avoid paying the VAT by simply stipulating payment
in foreign currency inwardly remitted by the recipient of services. To interpret Section 102(b)(2) to apply to a
payer-recipient of services doing business in the Philippines is to make the payment of the regular VAT under
Section 102(a) dependent on the generosity of the taxpayer. The provider of services can choose to pay the
regular VAT or avoid it by stipulating payment in foreign currency inwardly remitted by the payer-recipient.
Such interpretation removes Section 102(a) as a tax measure in the Tax Code, an interpretation this Court
cannot sanction. A tax is a mandatory exaction, not a voluntary contribution.

When Section 102(b)(2) stipulates payment in "acceptable foreign currency" under BSP rules, the law clearly
envisions the payer-recipient of services to be doing business outside the Philippines. Only those not doing
business in the Philippines can be required under BSP rules20 to pay in acceptable foreign currency for their
purchase of goods or services from the Philippines. In a domestic transaction, where the provider and recipient
of services are both doing business in the Philippines, the BSP cannot require any party to make payment in
foreign currency.

50
Services covered by Section 102(b) (1) and (2) are in the nature of export sales since the payer-recipient of
services is doing business outside the Philippines. Under BSP rules,21 the proceeds of export sales must be
reported to the Bangko Sentral ng Pilipinas. Thus, there is reason to require the provider of services under
Section 102(b) (1) and (2) to account for the foreign currency proceeds to the BSP. The same rationale does
not apply if the provider and recipient of the services are both doing business in the Philippines since their
transaction is not in the nature of an export sale even if payment is denominated in foreign currency.

Further, when the provider and recipient of services are both doing business in the Philippines, their
transaction falls squarely under Section 102(a) governing domestic sale or exchange of services. Indeed, this
is a purely local sale or exchange of services subject to the regular VAT, unless of course the transaction falls
under the other provisions of Section 102(b).

Thus, when Section 102(b)(2) speaks of "[s]ervices other than those mentioned in the preceding
subparagraph," the legislative intent is that only the services are different between subparagraphs 1 and 2.
The requirements for zero-rating, including the essential condition that the recipient of services is doing
business outside the Philippines, remain the same under both subparagraphs.

Significantly, the amended Section 108(b)22 [previously Section 102(b)] of the present Tax Code clarifies this
legislative intent. Expressly included among the transactions subject to 0% VAT are "[s]ervices other than
those mentioned in the [first] paragraph [of Section 108(b)] rendered to a person engaged in business
conducted outside the Philippines or to a nonresident person not engaged in business who is outside the
Philippines when the services are performed, the consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the BSP."

In this case, the payer-recipient of respondent’s services is the Consortium which is a joint-venture doing
business in the Philippines. While the Consortium’s principal members are non-resident foreign corporations,
the Consortium itself is doing business in the Philippines. This is shown clearly in BIR Ruling No. 023-95 which
states that the contract between the Consortium and NAPOCOR is for a 15-year term, thus:

This refers to your letter dated January 14, 1994 requesting for a clarification of the tax implications of a
contract between a consortium composed of Burmeister & Wain Scandinavian Contractor A/S ("BWSC"),
Mitsui Engineering & Shipbuilding, Ltd. (MES), and Mitsui & Co., Ltd. ("MITSUI"), all referred to hereinafter as
the "Consortium", and the National Power Corporation ("NAPOCOR") for the operation and maintenance of
two 100-Megawatt power barges ("Power Barges") acquired by NAPOCOR for a 15-year term.23
(Emphasis supplied)

Considering this length of time, the Consortium’s operation and maintenance of NAPOCOR’s power barges
cannot be classified as a single or isolated transaction. The Consortium does not fall under Section 102(b)(2)
which requires that the recipient of the services must be a person doing business outside the Philippines.
Therefore, respondent’s services to the Consortium, not being supplied to a person doing business outside the
Philippines, cannot legally qualify for 0% VAT.

Respondent, as subcontractor of the Consortium, operates and maintains NAPOCOR’s power barges in the
Philippines. NAPOCOR pays the Consortium, through its non-resident partners, partly in foreign currency
outwardly remitted. In turn, the Consortium pays respondent also in foreign currency inwardly remitted and
accounted for in accordance with BSP rules. This payment scheme does not entitle respondent to 0% VAT. As
the Court held in Commissioner of Internal Revenue v. American Express International, Inc. (Philippine
Branch),24 the place of payment is immaterial, much less is the place where the output of the service is
ultimately used. An essential condition for entitlement to 0% VAT under Section 102(b)(1) and (2) is that the
recipient of the services is a person doing business outside the Philippines. In this case, the recipient of the
services is the Consortium, which is doing business not outside, but within the Philippines because it has a 15-
year contract to operate and maintain NAPOCOR’s two 100-megawatt power barges in Mindanao.

51
The Court recognizes the rule that the VAT system generally follows the "destination principle" (exports are
zero-rated whereas imports are taxed). However, as the Court stated in American Express, there is an
exception to this rule.25 This exception refers to the 0% VAT on services enumerated in Section 102 and
performed in the Philippines. For services covered by Section 102(b)(1) and (2), the recipient of the services
must be a person doing business outside the Philippines. Thus, to be exempt from the destination principle
under Section 102(b)(1) and (2), the services must be (a) performed in the Philippines; (b) for a person doing
business outside the Philippines; and (c) paid in acceptable foreign currency accounted for in accordance with
BSP rules.

Respondent’s reliance on the ruling in American Express26 is misplaced. That case involved a recipient of
services, specifically American Express International, Inc. (Hongkong Branch), doing business outside the
Philippines. There, the Court stated:

Respondent [American Express International, Inc. (Philippine Branch)] is a VAT-registered person that
facilitates the collection and payment of receivables belonging to its non-resident foreign client [American
Express International, Inc. (Hongkong Branch)], for which it gets paid in acceptable foreign currency inwardly
remitted and accounted for in accordance with BSP rules and regulations. x x x x27 (Emphasis supplied)

In contrast, this case involves a recipient of services – the Consortium – which is doing business in the
Philippines. Hence, American Express’ services were subject to 0% VAT, while respondent’s services should
be subject to 10% VAT.

Nevertheless, in seeking a refund of its excess output tax, respondent relied on VAT Ruling No. 003-99,28
which reconfirmed BIR Ruling No. 023-9529 "insofar as it held that the services being rendered by BWSCMI is
subject to VAT at zero percent (0%)." Respondent’s reliance on these BIR rulings binds petitioner.

Petitioner’s filing of his Answer before the CTA challenging respondent’s claim for refund effectively serves as
a revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95. However, such revocation cannot be given
retroactive effect since it will prejudice respondent. Changing respondent’s status will deprive respondent of a
refund of a substantial amount representing excess output tax.30 Section 246 of the Tax Code provides that
any revocation of a ruling by the Commissioner of Internal Revenue shall not be given retroactive application if
the revocation will prejudice the taxpayer. Further, there is no showing of the existence of any of the
exceptions enumerated in Section 246 of the Tax Code for the retroactive application of such revocation.

However, upon the filing of petitioner’s Answer dated 2 March 2000 before the CTA contesting respondent’s
claim for refund, respondent’s services shall be subject to the regular 10% VAT.31 Such filing is deemed a
revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95.

WHEREFORE, the Court DENIES the petition. SO ORDERED.

DIGEST:

FACTS:

A foreign consortium, parent company of Burmeister, entered into an O&M contract with NPC. The foreign
entity then subcontracted the actual O&M to Burmeister. NPC paid the foreign consortium a mixture of
currencies while the consortium, in turn, paid Burmeister foreign currency inwardly remitted into the
Philippines. BIR did not want to grant refund since the services are “not destined for consumption abroad” (or
the destination principle).

ISSUE:

Are the receipts of Burmeister entitled to VAT zero-rated status?

52
HELD:

PARTIALLY. Respondent is entitled to the refund prayed for BUT ONLY for the period covered prior to the
filing of CIR’s Answer in the CTA.

The claim has no merit since the consortium, which was the recipient of services rendered by Burmeister, was
deemed doing business within the Philippines since its 15-year O&M with NPC can not be interpreted as an
isolated transaction.

In addition, the services referring to ‘processing, manufacturing, repacking’ and ‘services other than those in
(1)’ of Sec. 102 both require (i) payment in foreign currency; (ii) inward remittance; (iii) accounted for by the
BSP; AND (iv) that the service recipient is doing business outside the Philippines. The Court ruled that if this is
not the case, taxpayers can circumvent just by stipulating payment in foreign currency.

The refund was partially allowed since Burmeister secured a ruling from the BIR allowing zero-rating of its
sales to foreign consortium. However, the ruling is only valid until the time that CIR filed its Answer in the CTA
which is deemed revocation of the previously-issued ruling. The Court said the revocation can not retroact
since none of the instances in Section 246 (bad faith, omission of facts, etc.) are present.

G.R. No. 190102 July 11, 2012

ACCENTURE, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

SERENO, J.:

This is a Petition filed under Rule 45 of the 1997 Rules of Civil Procedure, praying for the reversal of the
Decision of the Court of Tax Appeals En Banc (CTA En Banc ) dated 22 September 2009 and its subsequent
Resolution dated 23 October 2009.1

Accenture, Inc. (Accenture) is a corporation engaged in the business of providing management consulting,
business strategies development, and selling and/or licensing of software.2 It is duly registered with the Bureau
of Internal Revenue (BIR) as a Value Added Tax (VAT) taxpayer or enterprise in accordance with Section 236
of the National Internal Revenue Code (Tax Code).3

On 9 August 2002, Accenture filed its Monthly VAT Return for the period 1 July 2002 to 31 August 2002 (1st
period). Its Quarterly VAT Return for the fourth quarter of 2002, which covers the 1st period, was filed on 17
September 2002; and an Amended Quarterly VAT Return, on 21 June 2004.4 The following are reflected in
Accenture’s VAT Return for the fourth quarter of 2002:5

1âwphi1
Purchases Amount Input VAT

53
 Domestic Purchases- Capital Goods ₱12,312,722.00 ₱1,231,272.20
Domestic Purchases- Goods other than capital Goods ₱64,789,507.90 ₱6,478,950.79
Domestic Purchases- Services ₱16,455,868.10 ₱1,645,586.81
Total Input Tax ₱9,355,809.80

Zero-rated Sales ₱316,113,513.34

Total Sales ₱335,640,544.74

Accenture filed its Monthly VAT Return for the month of September 2002 on 24 October 2002; and that for
October 2002, on 12 November 2002. These returns were amended on 9 January 2003. Accenture’s Quarterly
VAT Return for the first quarter of 2003, which included the period 1 September 2002 to 30 November 2002
(2nd period), was filed on 17 December 2002; and the Amended Quarterly VAT Return, on 18 June 2004. The
latter contains the following information:6

Purchases Amount Input VAT

Domestic Purchases- Capital Goods ₱80,765,294.10 ₱8,076,529.41
Domestic Purchases- Goods other than capital Goods ₱132,820,541.70 ₱13,282,054.17
Domestic Purchases-Services ₱63,238,758.00 ₱6,323,875.80
Total Input Tax ₱27,682,459.38

Zero-rated Sales ₱545,686,639.18

Total Sales ₱ ₱572,880,982.68

The monthly and quarterly VAT returns of Accenture show that, notwithstanding its application of the input VAT
credits earned from its zero-rated transactions against its output VAT liabilities, it still had excess or unutilized
input VAT credits. These VAT credits are in the amounts of P9,355,809.80 for the 1st period and
P27,682,459.38 for the 2nd period, or a total of P37,038,269.18.7

Out of the P37,038,269.18, only P35,178,844.21 pertained to the allocated input VAT on Accenture’s
"domestic purchases of taxable goods which cannot be directly attributed to its zero-rated sale of services."8
This allocated input VAT was broken down to P8,811,301.66 for the 1st period and P26,367,542.55 for the 2nd
period.9

The excess input VAT was not applied to any output VAT that Accenture was liable for in the same quarter
when the amount was earned—or to any of the succeeding quarters. Instead, it was carried forward to
petitioner’s 2nd Quarterly VAT Return for 2003.10

Thus, on 1 July 2004, Accenture filed with the Department of Finance (DoF) an administrative claim for the
refund or the issuance of a Tax Credit Certificate (TCC). The DoF did not act on the claim of Accenture.
Hence, on 31 August 2004, the latter filed a Petition for Review with the First Division of the Court of Tax
Appeals (Division), praying for the issuance of a TCC in its favor in the amount of P35,178,844.21.

The Commissioner of Internal Revenue (CIR), in its Answer,11 argued thus:

1. The sale by Accenture of goods and services to its clients are not zero-rated transactions.
54
 2. Claims for refund are construed strictly against the claimant, and Accenture has failed to prove that it
is entitled to a refund, because its claim has not been fully substantiated or documented.

In a 13 November 2008 Decision,12 the Division denied the Petition of Accenture for failing to prove that the
latter’s sale of services to the alleged foreign clients qualified for zero percent VAT.13

In resolving the sole issue of whether or not Accenture was entitled to a refund or an issuance of a TCC in the
amount of P35,178,844.21,14 the Division ruled that Accenture had failed to present evidence to prove that the
foreign clients to which the former rendered services did business outside the Philippines.15 Ruling that
Accenture’s services would qualify for zero-rating under the 1997 National Internal Revenue Code of the
Philippines (Tax Code) only if the recipient of the services was doing business outside of the Philippines,16 the
Division cited Commissioner of Internal Revenue v. Burmeister and Wain Scandinavian Contractor Mindanao,
Inc. (Burmeister)17 as basis.

Accenture appealed the Division’s Decision through a Motion for Reconsideration (MR).18 In its MR, it argued
that the reliance of the Division on Burmeister was misplaced19 for the following reasons:

1. The issue involved in Burmeister was the entitlement of the applicant to a refund, given that the
recipient of its service was doing business in the Philippines; it was not an issue of failure of the
applicant to present evidence to prove the fact that the recipient of its services was a foreign
corporation doing business outside the Philippines.20

2. Burmeister emphasized that, to qualify for zero-rating, the recipient of the services should be doing
business outside the Philippines, and Accenture had successfully established that.21

3. Having been promulgated on 22 January 2007 or after Accenture filed its Petition with the Division,
Burmeister cannot be made to apply to this case.22

Accenture also cited Commissioner of Internal Revenue v. American Express (Amex)23 in support of its
position. The MR was denied by the Division in its 12 March 2009 Resolution.24

Accenture appealed to the CTA En Banc. There it argued that prior to the amendment introduced by Republic
Act No. (R.A.) 9337, 25 there was no requirement that the services must be rendered to a person engaged in
business conducted outside the Philippines to qualify for zero-rating. The CTA En Banc agreed that because
the case pertained to the third and the fourth quarters of taxable year 2002, the applicable law was the 1997
Tax Code, and not R.A. 9337.26 Still, it ruled that even though the provision used in Burmeister was Section
102(b)(2) of the earlier 1977 Tax Code, the pronouncement therein requiring recipients of services to be
engaged in business outside the Philippines to qualify for zero-rating was applicable to the case at bar,
because Section 108(B)(2) of the 1997 Tax Code was a mere reenactment of Section 102(b)(2) of the 1977
Tax Code.

The CTA En Banc concluded that Accenture failed to discharge the burden of proving the latter’s allegation
that its clients were foreign-based.27

Resolute, Accenture filed a Petition for Review with the CTA En Banc, but the latter affirmed the Division’s
Decision and Resolution.28 A subsequent MR was also denied in a Resolution dated 23 October 2009.

Hence, the present Petition for Review29 under Rule 45.

In a Joint Stipulation of Facts and Issues, the parties and the Division have agreed to submit the following
issues for resolution:

55
 1. Whether or not Petitioner’s sales of goods and services are zero-rated for VAT purposes under
Section 108(B)(2)(3) of the 1997 Tax Code.

2. Whether or not petitioner’s claim for refund/tax credit in the amount of P35,178,884.21 represents
unutilized input VAT paid on its domestic purchases of goods and services for the period commencing
from 1 July 2002 until 30 November 2002.

3. Whether or not Petitioner has carried over to the succeeding taxable quarter(s) or year(s) the alleged
unutilized input VAT paid on its domestic purchases of goods and services for the period commencing
from 1 July 2002 until 30 November 2002, and applied the same fully to its output VAT liability for the
said period.

4. Whether or not Petitioner is entitled to the refund of the amount of P35,178,884.21, representing the
unutilized input VAT on domestic purchases of goods and services for the period commencing from 1
July 2002 until 30 November 2002, from its sales of services to various foreign clients.

5. Whether or not Petitioner’s claim for refund/tax credit in the amount of P35,178,884.21, as alleged
unutilized input VAT on domestic purchases of goods and services for the period covering 1 July 2002
until 30 November 2002 are duly substantiated by proper documents.30

For consideration in the present Petition are the following issues:

1. Should the recipient of the services be "doing business outside the Philippines" for the transaction to
be zero-rated under Section 108(B)(2) of the 1997 Tax Code?

2. Has Accenture successfully proven that its clients are entities doing business outside the
Philippines?

Recipient of services must be doing business outside the Philippines for the transactions to qualify as zero-
rated.

Accenture anchors its refund claim on Section 112(A) of the 1997 Tax Code, which allows the refund of
unutilized input VAT earned from zero-rated or effectively zero-rated sales. The provision reads:

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 of 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. Section 108(B) referred to in the foregoing provision was first seen when Presidential
Decree No. (P.D.) 199431 amended Title IV of P.D. 1158,32 which is also known as the National Internal
Revenue Code of 1977. Several Decisions have referred to this as the 1986 Tax Code, even though it merely
amended Title IV of the 1977 Tax Code.

56
Two years thereafter, or on 1 January 1988, Executive Order No. (E.O.) 27333 further amended provisions of
Title IV. E.O. 273 by transferring the old Title IV provisions to Title VI and filling in the former title with new
provisions that imposed a VAT.

The VAT system introduced in E.O. 273 was restructured through Republic Act No. (R.A.) 7716.34 This law,
which was approved on 5 May 1994, widened the tax base. Section 3 thereof reads:

SECTION 3. Section 102 of the National Internal Revenue Code, as amended, is hereby further amended to
read as follows:

"SEC. 102. Value-added tax on sale of services and use or lease of properties. x x x

xxx xxx xxx

"(b) Transactions subject to zero-rate. — The following services performed in the Philippines by VAT-
registered persons shall be subject to 0%:

"(1) Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP).

"(2) Services other than those mentioned in the preceding sub-paragraph, the consideration for which is
paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations
of the Bangko Sentral ng Pilipinas (BSP)."

Essentially, Section 102(b) of the 1977 Tax Code—as amended by P.D. 1994, E.O. 273, and R.A. 7716—
provides that if the consideration for the services provided by a VAT-registered person is in a foreign currency,
then this transaction shall be subjected to zero percent rate.

The 1997 Tax Code reproduced Section 102(b) of the 1977 Tax Code in its Section 108(B), to wit:

(B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the Philippines by
VAT- registered persons shall be subject to zero percent (0%) rate.

(1) Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP);

(2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid
for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP); x x x.

On 1 November 2005, Section 6 of R.A. 9337, which amended the foregoing provision, became effective. It
reads:

SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows:

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

Properties. -

57
(B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the Philippines by
VAT-registered persons shall be subject to zero percent (0%) rate:

(1) Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP);

"(2) Services other than those mentioned in the preceding paragraph rendered to a person engaged in
business conducted outside the Philippines or to a nonresident person not engaged in business who is
outside the Philippines when the services are performed, the consideration for which is paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP); x x x." (Emphasis supplied)

The meat of Accenture’s argument is that nowhere does Section 108(B) of the 1997 Tax Code state that
services, to be zero-rated, should be rendered to clients doing business outside the Philippines, the
requirement introduced by R.A. 9337.35 Required by Section 108(B), prior to the amendment, is that the
consideration for the services rendered be in foreign currency and in accordance with the rules of the Bangko
Sentral ng Pilipinas (BSP). Since Accenture has complied with all the conditions imposed in Section 108(B), it
is entitled to the refund prayed for.

In support of its claim, Accenture cites Amex, in which this Court supposedly ruled that Section 108(B) reveals
a clear intent on the part of the legislators not to impose the condition of being "consumed abroad" in order for
the services performed in the Philippines to be zero-rated.36

The Division ruled that this Court, in Amex and Burmeister, did not declare that the requirement—that the client
must be doing business outside the Philippines—can be disregarded, because this requirement is expressly
provided in Article 108(2) of the Tax Code.37

Accenture questions the Division’s application to this case of the pronouncements made in Burmeister.
According to petitioner, the provision applied to the present case was Section 102(b) of the 1977 Tax Code,
and not Section 108(B) of the 1997 Tax Code, which was the law effective when the subject transactions were
entered into and a refund was applied for.

In refuting Accenture’s theory, the CTA En Banc ruled that since Section 108(B) of the 1997 Tax Code was a
mere reproduction of Section 102(b) of the 1977 Tax Code, this Court’s interpretation of the latter may be used
in interpreting the former, viz:

In the Burmeister case, the Supreme Court harmonized both Sections 102(b)(1) and 102(b)(2) of the 1977 Tax
Code, as amended, pertaining to zero-rated transactions. A parallel approach should be accorded to the
renumbered provisions of Sections 108(B)(2) and 108(B)(1) of the 1997 NIRC. This means that Section
108(B)(2) must be read in conjunction with Section 108(B)(1). Section 108(B)(2) requires as follows: a)
services other than processing, manufacturing or repacking rendered by VAT registered persons in the
Philippines; and b) the transaction paid for in acceptable foreign currency duly accounted for in accordance
with BSP rules and regulations. The same provision made reference to Section 108(B)(1) further imposing the
requisite c) that the recipient of services must be performing business outside of Philippines. Otherwise, if both
the provider and recipient of service are doing business in the Philippines, the sale transaction is subject to
regular VAT as explained in the Burmeister case x x x.

xxx xxx xxx

Clearly, the Supreme Court’s pronouncements in the Burmeister case requiring that the recipient of the
services must be doing business outside the Philippines as mandated by law govern the instant case.38

58
Assuming that the foregoing is true, Accenture still argues that the tax appeals courts cannot be allowed to
apply to Burmeister this Court’s interpretation of Section 102(b) of the 1977 Tax Code, because the Petition of
Accenture had already been filed before the case was even promulgated on 22 January 2007,39 to wit:

x x x. While the Burmeister case forms part of the legal system and assumes the same authority as the statute
itself, however, the same cannot be applied retroactively against the Petitioner because to do so will be
prejudicial to the latter.40

The CTA en banc is of the opinion that Accenture cannot invoke the non-retroactivity of the rulings of the
Supreme Court, whose interpretation of the law is part of that law as of the date of its enactment.41

We rule that the recipient of the service must be doing business outside the Philippines for the transaction to
qualify for zero-rating under Section 108(B) of the Tax Code.

This Court upholds the position of the CTA en banc that, because Section 108(B) of the 1997 Tax Code is a
verbatim copy of Section 102(b) of the 1977 Tax Code, any interpretation of the latter holds true for the former.

Moreover, even though Accenture’s Petition was filed before Burmeister was promulgated, the
pronouncements made in that case may be applied to the present one without violating the rule against
retroactive application. When this Court decides a case, it does not pass a new law, but merely interprets a
preexisting one.42 When this Court interpreted Section 102(b) of the 1977 Tax Code in Burmeister, this
interpretation became part of the law from the moment it became effective. It is elementary that the
interpretation of a law by this Court constitutes part of that law from the date it was originally passed, since this
Court's construction merely establishes the contemporaneous legislative intent that the interpreted law carried
into effect.43

Accenture questions the CTA’s application of Burmeister, because the provision interpreted therein was
Section 102(b) of the 1977 Tax Code. In support of its position that Section 108 of the 1997 Tax Code does not
require that the services be rendered to an entity doing business outside the Philippines, Accenture invokes
this Court’s pronouncements in Amex. However, a reading of that case will readily reveal that the provision
applied was Section 102(b) of the 1977 Tax Code, and not Section 108 of the 1997 Tax Code. As previously
mentioned, an interpretation of Section 102(b) of the 1977 Tax Code is an interpretation of Section 108 of the
1997 Tax Code, the latter being a mere reproduction of the former.

This Court further finds that Accenture’s reliance on Amex is misplaced.

We ruled in Amex that Section 102 of the 1977 Tax Code does not require that the services be consumed
abroad to be zero-rated. However, nowhere in that case did this Court discuss the necessary qualification of
the recipient of the service, as this matter was never put in question. In fact, the recipient of the service in
Amex is a nonresident foreign client.

The aforementioned case explains how the credit card system works. The issuance of a credit card allows the
holder thereof to obtain, on credit, goods and services from certain establishments. As proof that this credit is
extended by the establishment, a credit card draft is issued. Thereafter, the company issuing the credit card
will pay for the purchases of the credit card holders by redeeming the drafts. The obligation to collect from the
card holders and to bear the loss—in case they do not pay—rests on the issuer of the credit card.

The service provided by respondent in Amex consisted of gathering the bills and credit card drafts from
establishments located in the Philippines and forwarding them to its parent company's regional operating
centers outside the country. It facilitated in the Philippines the collection and payment of receivables belonging
to its Hong Kong-based foreign client.

59
The Court explained how the services rendered in Amex were considered to have been performed and
consumed in the Philippines, to wit:

Consumption is "the use of a thing in a way that thereby exhausts it." Applied to services, the term means the
performance or "successful completion of a contractual duty, usually resulting in the performer’s release from
any past or future liability x x x." The services rendered by respondent are performed or successfully
completed upon its sending to its foreign client the drafts and bills it has gathered from service establishments
here. Its services, having been performed in the Philippines, are therefore also consumed in the Philippines.44

The effect of the place of consumption on the zero-rating of the transaction was not the issue in
Burmeister.1âwphi1 Instead, this Court addressed the squarely raised issue of whether the recipient of
services should be doing business outside the Philippines for the transaction to qualify for zero-rating. We
ruled that it should. Thus, another essential condition for qualification for zero-rating under Section 102(b)(2) of
the 1977 Tax Code is that the recipient of the business be doing that business outside the Philippines. In
clarifying that there is no conflict between this pronouncement and that laid down in Amex, we ruled thus:

x x x. As the Court held in Commissioner of Internal Revenue v. American Express International, Inc.
(Philippine Branch), the place of payment is immaterial, much less is the place where the output of the service
is ultimately used. An essential condition for entitlement to 0% VAT under Section 102 (b) (1) and (2) is that the
recipient of the services is a person doing business outside the Philippines. In this case, the recipient of the
services is the Consortium, which is doing business not outside, but within the Philippines because it has a 15-
year contract to operate and maintain NAPOCOR’s two 100-megawatt power barges in Mindanao. (Emphasis
in the original)45

In Amex we ruled that the place of performance and/or consumption of the service is immaterial. In Burmeister,
the Court found that, although the place of the consumption of the service does not affect the entitlement of a
transaction to zero-rating, the place where the recipient conducts its business does.

Amex does not conflict with Burmeister. In fact, to fully understand how Section 102(b)(2) of the 1977 Tax
Code—and consequently Section 108(B)(2) of the 1997 Tax Code—was intended to operate, the two
aforementioned cases should be taken together. The zero-rating of the services performed by respondent in
Amex was affirmed by the Court, because although the services rendered were both performed and consumed
in the Philippines, the recipient of the service was still an entity doing business outside the Philippines as
required in Burmeister.

That the recipient of the service should be doing business outside the Philippines to qualify for zero-rating is
the only logical interpretation of Section 102(b)(2) of the 1977 Tax Code, as we explained in Burmeister:

This can only be the logical interpretation of Section 102 (b) (2). If the provider and recipient of the "other
services" are both doing business in the Philippines, the payment of foreign currency is irrelevant. Otherwise,
those subject to the regular VAT under Section 102 (a) can avoid paying the VAT by simply stipulating
payment in foreign currency inwardly remitted by the recipient of services. To interpret Section 102 (b) (2) to
apply to a payer-recipient of services doing business in the Philippines is to make the payment of the regular
VAT under Section 102 (a) dependent on the generosity of the taxpayer. The provider of services can choose
to pay the regular VAT or avoid it by stipulating payment in foreign currency inwardly remitted by the payer-
recipient. Such interpretation removes Section 102 (a) as a tax measure in the Tax Code, an interpretation this
Court cannot sanction. A tax is a mandatory exaction, not a voluntary contribution.

xxx xxx xxx

Further, when the provider and recipient of services are both doing business in the Philippines, their
transaction falls squarely under Section 102 (a) governing domestic sale or exchange of services. Indeed, this

60
is a purely local sale or exchange of services subject to the regular VAT, unless of course the transaction falls
under the other provisions of Section 102 (b).

Thus, when Section 102 (b) (2) speaks of "services other than those mentioned in the preceding
subparagraph," the legislative intent is that only the services are different between subparagraphs 1 and 2. The
requirements for zero-rating, including the essential condition that the recipient of services is doing business
outside the Philippines, remain the same under both subparagraphs. (Emphasis in the original)46

Lastly, it is worth mentioning that prior to the promulgation of Burmeister, Congress had already clarified the
intent behind Sections 102(b)(2) of the 1977 Tax Code and 108(B)(2) of the 1997 Tax Code amending the
earlier provision. R.A. 9337 added the following phrase: "rendered to a person engaged in business conducted
outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines
when the services are performed."

Accenture has failed to establish that the recipients of its services do business outside the Philippines.

Accenture argues that based on the documentary evidence it presented,47 it was able to establish the
following circumstances:

1. The records of the Securities and Exchange Commission (SEC) show that Accenture’s clients have
not established any branch office in which to do business in the Philippines.

2. For these services, Accenture bills another corporation, Accenture Participations B.V. (APB), which
is likewise a foreign corporation with no "presence in the Philippines."

3. Only those not doing business in the Philippines can be required under BSP rules to pay in
acceptable currency for their purchase of goods and services from the Philippines. Thus, in a domestic
transaction, where the provider and recipient of services are both doing business in the Philippines, the
BSP cannot require any party to make payment in foreign currency.48

Accenture claims that these documentary pieces of evidence are supported by the Report of Emmanuel
Mendoza, the Court-commissioned Independent Certified Public Accountant. He ascertained that Accenture’s
gross billings pertaining to zero-rated sales were all supported by zero-rated Official Receipts and Billing
Statements. These documents show that these zero-rated sales were paid in foreign exchange currency and
duly accounted for in the rules and regulations of the BSP.49

In the CTA’s opinion, however, the documents presented by Accenture merely substantiate the existence of
the sales, receipt of foreign currency payments, and inward remittance of the proceeds of these sales duly
accounted for in accordance with BSP rules. Petitioner presented no evidence whatsoever that these clients
were doing business outside the Philippines.50

Accenture insists, however, that it was able to establish that it had rendered services to foreign corporations
doing business outside the Philippines, unlike in Burmeister, which allegedly involved a foreign corporation
doing business in the Philippines.51

We deny Accenture’s Petition for a tax refund.

The evidence presented by Accenture may have established that its clients are foreign.1âwphi1 This fact does
not automatically mean, however, that these clients were doing business outside the Philippines. After all, the
Tax Code itself has provisions for a foreign corporation engaged in business within the Philippines and vice
versa, to wit:

SEC. 22. Definitions - When used in this Title:

61
 xxx xxx xxx

(H) The term "resident foreign corporation" applies to a foreign corporation engaged in trade or
business within the Philippines.

(I) The term ‘nonresident foreign corporation’ applies to a foreign corporation not engaged in trade or
business within the Philippines. (Emphasis in the original)

Consequently, to come within the purview of Section 108(B)(2), it is not enough that the recipient of the service
be proven to be a foreign corporation; rather, it must be specifically proven to be a nonresident foreign
corporation.

There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. We ruled
thus in Commissioner of Internal Revenue v. British Overseas Airways Corporation:52

x x x. There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business.
Each case must be judged in the light of its peculiar environmental circumstances. The term implies a
continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts
or works or the exercise of some of the functions normally incident to, and in progressive prosecution of
commercial gain or for the purpose and object of the business organization. "In order that a foreign corporation
may be regarded as doing business within a State, there must be continuity of conduct and intention to
establish a continuous business, such as the appointment of a local agent, and not one of a temporary
character."53

A taxpayer claiming a tax credit or refund has the burden of proof to establish the factual basis of that
claim.1âwphi1 Tax refunds, like tax exemptions, are construed strictly against the taxpayer.54

Accenture failed to discharge this burden. It alleged and presented evidence to prove only that its clients were
foreign entities. However, as found by both the CTA Division and the CTA En Banc, no evidence was
presented by Accenture to prove the fact that the foreign clients to whom petitioner rendered its services were
clients doing business outside the Philippines.

As ruled by the CTA En Banc, the Official Receipts, Intercompany Payment Requests, Billing Statements,
Memo Invoices-Receivable, Memo Invoices-Payable, and Bank Statements presented by Accenture merely
substantiated the existence of sales, receipt of foreign currency payments, and inward remittance of the
proceeds of such sales duly accounted for in accordance with BSP rules, all of these were devoid of any
evidence that the clients were doing business outside of the Philippines.55

WHEREFORE, the instant Petition is DENIED. The 22 September 2009 Decision and the 23 October 2009
Resolution of the Court of Tax Appeals En Banc in C.T.A. EB No. 477, dismissing the Petition for the refund of
the excess or unutilized input VAT credits of Accenture, Inc., are AFFIRMED. SO ORDERED.

DIGEST:

VAT – Qualification for Zero-rated sale

ACCENTURE, INC. vs. COMMISSIONER OF INTERNAL REVENUE G.R. No. 190102 July 11,
2012

Facts: Petitioner Accenture, a VAT registered entity, is a corporation engaged in the business of providing
management consulting, business strategies development, and selling and/or licensing of software. The
monthly and quarterly VAT returns of Accenture show that, notwithstanding its application of the input VAT
62
credits earned from its zero-rated transactions against its output VAT liabilities, it still had excess or unutilized
input VAT credits in the amount of P37,038,269.18. Thus, Accenture filed with the Department of Finance
(DoF) an administrative claim for the refund or the issuance of a Tax Credit Certificate (TCC). When the DoF
did not act on the claim, Accenture filed a Petition for Review with CTA praying for the issuance of a TCC in its
favour.

The CIR answered that the sale by Accenture of goods and services to its clients are not zero-rated
transactions and that Accenture has failed to prove that it is entitled to a refund, because its claim has not been
fully substantiated or documented. Ruling that Accenture’s services would qualify for zero-rating under the
1997 National Internal Revenue Code of the Philippines (Tax Code) only if the recipient of the services was
doing business outside of the Philippines, the Division of the CTA ruled that since Accenture had failed to
present evidence to prove that the foreign clients to which the former rendered services did business outside
the Philippines, it was not entitled to refund.

On appeal before the CTA en banc, Accenture argued that because the case pertained to the third and
the fourth quarters of taxable year 2002, the applicable law was the 1997 Tax Code, and not R.A. 9337 and
that prior to the amendment introduced by (R.A.) 9337, there was no requirement that the services must be
rendered to a person engaged in business conducted outside the Philippines to qualify for zero-rating.
Nevertheless, the CTA en banc affirmed the decision of the division. Hence this present petition for review
before the SC.

Issues:

1. Should the recipient of the services be "doing business outside the Philippines" for the transaction to be
zero-rated under Section 108(B)(2) of the 1997 Tax Code?

2. Has Accenture successfully proven that its clients are entities doing business outside the Philippines?

3. Is Accenture entitled to tax refund?

Held:

1. Recipient of services must be doing business outside the Philippines for the transactions to qualify as zero-
rated.

Accenture anchors its refund claim on Section 112(A) of the 1997 Tax Code, which allows the refund of
unutilized input VAT earned from zero-rated or effectively zero-rated sales. The provision reads:

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 of 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. Section 108(B) referred to in the foregoing provision was first seen when Presidential
Decree No. (P.D.) 199431 amended Title IV of P.D. 1158 which is also known as the National Internal
Revenue Code of 1977. Several Decisions have referred to this as the 1986 Tax Code, even though it merely
amended Title IV of the 1977 Tax Code.

63
Two years thereafter, or on 1 January 1988, Executive Order No. (E.O.) 27333 further amended provisions of
Title IV. E.O. 273 by transferring the old Title IV provisions to Title VI and filling in the former title with new
provisions that imposed a VAT.

The VAT system introduced in E.O. 273 was restructured through Republic Act No. (R.A.) 7716. This law,
which was approved on 5 May 1994, widened the tax base. Section 3 thereof reads:

SECTION 3. Section 102 of the National Internal Revenue Code, as amended, is hereby further amended to
read as follows:

"SEC. 102. Value-added tax on sale of services and use or lease of properties. x x x

xxx xxx xxx

"(b) Transactions subject to zero-rate. — The following services performed in the Philippines by VAT-
registered persons shall be subject to 0%:

"(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines
which goods are subsequently exported, where the services are paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP).

"(2) Services other than those mentioned in the preceding sub-paragraph, the consideration for which is paid
for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP)."

Essentially, Section 102(b) of the 1977 Tax Code—as amended by P.D. 1994, E.O. 273, and R.A. 7716—
provides that if the consideration for the services provided by a VAT-registered person is in a foreign currency,
then this transaction shall be subjected to zero percent rate.

The 1997 Tax Code reproduced Section 102(b) of the 1977 Tax Code in its Section 108(B), to wit:

(B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the Philippines by
VAT- registered persons shall be subject to zero percent (0%) rate.

(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines
which goods are subsequently exported, where the services are paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

(2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP); x x x.

On 1 November 2005, Section 6 of R.A. 9337, which amended the foregoing provision, became effective. It
reads:

SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows:

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

Properties. -

(B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the Philippines by
VAT-registered persons shall be subject to zero percent (0%) rate:

64
(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines
which goods are subsequently exported, where the services are paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

"(2) Services other than those mentioned in the preceding paragraph rendered to a person engaged in
business conducted outside the Philippines or to a nonresident person not engaged in business who is outside
the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP); x x x." (Emphasis supplied)

We rule that the recipient of the service must be doing business outside the Philippines for the transaction to
qualify for zero-rating under Section 108(B) of the Tax Code.

This Court upholds the position of the CTA en banc that, because Section 108(B) of the 1997 Tax Code is a
verbatim copy of Section 102(b) of the 1977 Tax Code, any interpretation of the latter holds true for the former.

Moreover, even though Accenture’s Petition was filed before Burmeister was promulgated, the
pronouncements made in that case may be applied to the present one without violating the rule against
retroactive application. When this Court decides a case, it does not pass a new law, but merely interprets a
preexisting one. When this Court interpreted Section 102(b) of the 1977 Tax Code in Burmeister, this
interpretation became part of the law from the moment it became effective. It is elementary that the
interpretation of a law by this Court constitutes part of that law from the date it was originally passed, since this
Court's construction merely establishes the contemporaneous legislative intent that the interpreted law carried
into effect.

That the recipient of the service should be doing business outside the Philippines to qualify for zero-rating is
the only logical interpretation of Section 102(b)(2) of the 1977 Tax Code, as we explained in Burmeister:

This can only be the logical interpretation of Section 102 (b) (2). If the provider and recipient of the "other
services" are both doing business in the Philippines, the payment of foreign currency is irrelevant. Otherwise,
those subject to the regular VAT under Section 102 (a) can avoid paying the VAT by simply stipulating
payment in foreign currency inwardly remitted by the recipient of services. To interpret Section 102 (b) (2) to
apply to a payer-recipient of services doing business in the Philippines is to make the payment of the regular
VAT under Section 102 (a) dependent on the generosity of the taxpayer. The provider of services can choose
to pay the regular VAT or avoid it by stipulating payment in foreign currency inwardly remitted by the payer-
recipient. Such interpretation removes Section 102 (a) as a tax measure in the Tax Code, an interpretation this
Court cannot sanction. A tax is a mandatory exaction, not a voluntary contribution.

xxx xxx xxx

Further, when the provider and recipient of services are both doing business in the Philippines, their
transaction falls squarely under Section 102 (a) governing domestic sale or exchange of services. Indeed, this
is a purely local sale or exchange of services subject to the regular VAT, unless of course the transaction falls
under the other provisions of Section 102 (b).

Thus, when Section 102 (b) (2) speaks of "services other than those mentioned in the preceding
subparagraph," the legislative intent is that only the services are different between subparagraphs 1 and 2. The
requirements for zero-rating, including the essential condition that the recipient of services is doing business
outside the Philippines, remain the same under both subparagraphs.

Lastly, it is worth mentioning that prior to the promulgation of Burmeister, Congress had already clarified the
intent behind Sections 102(b)(2) of the 1977 Tax Code and 108(B)(2) of the 1997 Tax Code amending the
earlier provision. R.A. 9337 added the following phrase: "rendered to a person engaged in business conducted

65
outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines
when the services are performed."

2. Accenture has failed to establish that the recipients of its services do business outside the Philippines.

In the CTA’s opinion, however, the documents presented by Accenture merely substantiate the existence of
the sales, receipt of foreign currency payments, and inward remittance of the proceeds of these sales duly
accounted for in accordance with BSP rules. Petitioner presented no evidence whatsoever that these clients
were doing business outside the Philippines.

Accenture insists, however, that it was able to establish that it had rendered services to foreign corporations
doing business outside the Philippines, unlike in Burmeister, which allegedly involved a foreign corporation
doing business in the Philippines.51

3. We deny Accenture’s Petition for a tax refund.

The evidence presented by Accenture may have established that its clients are foreign.1âwphi1 This fact does
not automatically mean, however, that these clients were doing business outside the Philippines. After all, the
Tax Code itself has provisions for a foreign corporation engaged in business within the Philippines and vice
versa, to wit:

SEC. 22. Definitions - When used in this Title:

xxx xxx xxx

(H) The term "resident foreign corporation" applies to a foreign corporation engaged in trade or business within
the Philippines.

(I) The term ‘nonresident foreign corporation’ applies to a foreign corporation not engaged in trade or business
within the Philippines. (Emphasis in the original)

Consequently, to come within the purview of Section 108(B)(2), it is not enough that the recipient of the service
be proven to be a foreign corporation; rather, it must be specifically proven to be a nonresident foreign
corporation.

There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. We ruled
thus in Commissioner of Internal Revenue v. British Overseas Airways Corporation:52

x x x. There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business.
Each case must be judged in the light of its peculiar environmental circumstances. The term implies a
continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts
or works or the exercise of some of the functions normally incident to, and in progressive prosecution of
commercial gain or for the purpose and object of the business organization. "In order that a foreign corporation
may be regarded as doing business within a State, there must be continuity of conduct and intention to
establish a continuous business, such as the appointment of a local agent, and not one of a temporary
character."53

A taxpayer claiming a tax credit or refund has the burden of proof to establish the factual basis of that
claim.1âwphi1 Tax refunds, like tax exemptions, are construed strictly against the taxpayer.54

Accenture failed to discharge this burden. It alleged and presented evidence to prove only that its clients were
foreign entities. However, as found by both the CTA Division and the CTA En Banc, no evidence was
presented by Accenture to prove the fact that the foreign clients to whom petitioner rendered its services were
clients doing business outside the Philippines.

66
G.R. No. 149671 July 21, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
SEKISUI JUSHI PHILIPPINES, INC., respondent.

DECISION

PANGANIBAN, C.J.:

Business enterprises registered with the Philippine Export Zone Authority (PEZA) may choose between two
fiscal incentive schemes: (1) to pay a five percent preferential tax rate on its gross income and thus be exempt
from all other taxes; or (b) to enjoy an income tax holiday, in which case it is not exempt from applicable
national revenue taxes including the value-added tax (VAT). The present respondent, which availed itself of the
second tax incentive scheme, has proven that all its transactions were export sales. Hence, they should be
VAT zero-rated.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, challenging the August 16, 2001
Decision2 of the Court of Appeals (CA) in CA-GR SP No. 64679. The assailed Decision upheld the April 26,
2001 Decision3 of the Court of Tax Appeals (CTA) in CTA Case No. 5751. The CA Decision disposed as
follows:

"WHEREFORE, premises considered, the present petition for review is hereby DENIED DUE COURSE
and accordingly DISMISSED for lack of merit. The Decision dated April 26, 2001 of the Court of Tax
Appeals in CTA Case No. 5751 is hereby AFFIRMED and UPHELD."4

On the other hand, the dispositive portion of the CTA Decision reads:

"WHEREFORE, the instant Petition for Review is PARTIALLY GRANTED. [Petitioner] is hereby
ordered to refund or to issue a Tax Credit Certificate in favor of the [Respondent] in the amount of
P4,377,102.26 representing excess input taxes paid for the period covering January 1 to June 30,
1997."5

The Facts

The uncontested6 facts are narrated by the CA as follows:

"Respondent is a domestic corporation duly organized and existing under and by virtue of the laws of
the Philippines with principal office located at the Special Export Processing Zone, Laguna Technopark,
Biñan, Laguna. It is principally engaged in the business of manufacturing, importing, exporting, buying,
selling, or otherwise dealing in, at wholesale such goods as strapping bands and other packaging
materials and goods of similar nature, and any and all equipment, materials, supplies used or employed
in or related to the manufacture of such finished products.

67
 "Having registered with the Bureau of Internal Revenue (BIR) as a value-added tax (VAT) taxpayer,
respondent filed its quarterly returns with the BIR, for the period January 1 to June 30, 1997, reflecting
therein input taxes in the amount of P4,631,132.70 paid by it in connection with its domestic purchase
of capital goods and services. Said input taxes remained unutilized since respondent has not engaged
in any business activity or transaction for which it may be liable for output tax and for which said input
taxes may be credited.

"On November 11, 1998, respondent filed with the One-Stop-Shop Inter-Agency Tax Credit and Duty
Drawback Center of the Department of Finance (CENTER-DOF) two (2) separate applications for tax
credit/refund of VAT input taxes paid for the period January 1 to March 31, 1997 and April 1 to June 30,
1997, respectively. There being no action on its application for tax credit/refund under Section 112 (B)
of the 1997 National Internal Revenue Code (Tax Code), as amended, private respondent filed, within
the two (2)-year prescriptive period under Section 229 of said Code, a petition for review with the Court
of Tax Appeals on March 26, 1999.

"Petitioner filed its Answer to the petition asseverating that: (1) said claim for tax credit/refund is subject
to administrative routinary investigation by the BIR; (2) respondent miserably failed to show that the
amount claimed as VAT input taxes were erroneously collected or that the same were properly
documented; (3) taxes due and collected are presumed to have been made in accordance with law,
hence, not refundable; (4) the burden of proof is on the taxpayer to establish his right to a refund in an
action for tax refund. Failure to discharge such duty is fatal to his action; (5) respondent should show
that it complied with the provisions of Section 204 in relation to Section 229 of the 1997 Tax Code; and
(6) claims for refund are strictly construed against the taxpayer as it partakes of the nature of a tax
exemption. Hence, petitioner prayed for the denial of respondent’s petition."7

Ruling of the Court of Tax Appeals

The CTA ruled that respondent was entitled to the refund. While the company was registered with the PEZA as
an ecozone and was, as such, exempt from income tax, it availed itself of the fiscal incentive under Executive
Order No. 226. It thereby subjected itself to other internal revenue taxes like the VAT.8 The CTA then found
that only input taxes amounting to P4,377,102.26 were duly substantiated by invoices and Official Receipts,9
while those amounting to P254,313.43 had not been sufficiently proven and were thus disallowed.10

Ruling of the Court of Appeals

The Court of Appeals upheld the Decision of the CTA. According to the CA, respondent had complied with the
procedural and substantive requirements for a claim by 1) submitting receipts, invoices, and supporting papers
as evidence; 2) paying the subject input taxes on capital goods; 3) not applying the input taxes against any
output tax liability; and 4) filing the claim within the two-year prescriptive period under Section 229 of the 1997
Tax Code.11

Hence, this Petition.12

The Issue

Petitioner raises this sole issue for our consideration:

"Whether or not respondent is entitled to the refund or issuance of tax credit certificate in the amount of
P4,377,102.26 as alleged unutilized input taxes paid on domestic purchase of capital goods and
services for the period covering January 1 to June 30, 1997."13

The Court’s Ruling

68
The Petition has no merit.

Sole Issue:
Entitlement to Refund

To support the issue raised, petitioner advances the following arguments:

"I. The Court of Appeals erred in not holding that respondent being registered with the Philippine
Economic Zone Authority (PEZA) as an [e]cozone [e]xport [e]nterprise, its business is not subject to
VAT pursuant to Section 24 of Republic Act No. 7916 in relation to Section 103 (now Sec. 109) of the
Tax Code, as amended by R.A. 7716.

"II. The Court of Appeals erred in not holding that since respondent is EXEMPT from Value-Added Tax
(VAT), the capital goods and services it purchased are considered not used in VAT taxable business,
hence, is not allowed any tax credit/refund on VAT input tax previously paid on such capital goods
pursuant to Section 4.106-1 of Revenue Regulations No. 7-95, and of input taxes paid on services
pursuant to Section 4.103-1 of the same regulations.

"III. The Court of Appeals erred in not holding that tax refunds being in the nature of tax exemptions are
construed strictissimi juris against claimants."14

These issues have previously been addressed by this Court in Commissioner of Internal Revenue v. Toshiba
Information Equipment (Phils.),15 Commissioner of Internal Revenue v. Cebu Toyo Corporation,16 and
Commissioner of Internal Revenue v. Seagate Technology (Philippines).17

An entity registered with the PEZA as an ecozone18 may be covered by the VAT system. Section 23 of
Republic Act 7916, as amended, gives a PEZA-registered enterprise the option to choose between two fiscal
incentives: a) a five percent preferential tax rate on its gross income under the said law; or b) an income tax
holiday provided under Executive Order No. 226 or the Omnibus Investment Code of 1987, as amended. If the
entity avails itself of the five percent preferential tax rate under the first scheme, it is exempt from all taxes,
including the VAT;19 under the second, it is exempt from income taxes for a number of years, 20 but not from
other national internal revenue taxes like the VAT.21

The CA and CTA found that respondent had availed itself of the fiscal incentive of an income tax holiday under
Executive Order No. 226. This Court respects that factual finding. Absent a sufficient showing of error, findings
of the CTA as affirmed by the CA are deemed conclusive.22 Moreover, a perusal of the pleadings and
supporting documents before us indicates that when it registered as a VAT-entity -- a fact admitted by the
parties -- respondent intended to avail itself of the income tax holiday.23 Verily, being a question of fact, the
type of fiscal incentive chosen cannot be a subject of this Petition, which should raise only questions of law.

By availing itself of the income tax holiday, respondent became subject to the VAT. It correctly registered as a
VAT taxpayer, because its transactions were not VAT-exempt.

Notably, while an ecozone is geographically within the Philippines, it is deemed a separate customs territory24
and is regarded in law as foreign soil.25 Sales by suppliers from outside the borders of the ecozone to this
separate customs territory are deemed as exports26 and treated as export sales.27 These sales are zero-rated
or subject to a tax rate of zero percent.28

Notwithstanding the fact that its purchases should have been zero-rated, respondent was able to prove that it
had paid input taxes in the amount of P4,377,102.26. The CTA found, and the CA affirmed, that this amount
was substantially supported by invoices and Official Receipts;29 and petitioner has not challenged the
computation. Accordingly, this Court upholds the findings of the CTA and the CA.

69
On the other hand, since 100 percent of the products of respondent are exported,30 all its transactions are
deemed export sales and are thus VAT zero-rated. It has been shown that respondent has no output tax with
which it could offset its paid input tax.31 Since the subject input tax it paid for its domestic purchases of capital
goods and services remained unutilized, it can claim a refund for the input VAT previously charged by its
suppliers.32 The amount of P4,377,102.26 is excess input taxes that justify a refund.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. No costs, as petitioner is a
government agency. SO ORDERED.

DIGEST:

CIR v Sekisui Jushi

Facts

1. Sekisui is a domestic corporation duly organized under the Philippine laws. It has an office located in a
Special Export Processing Zone in Binan, Laguna.
2. It is engaged in the business of manufacturing, importing, exporting, buying, selling or dealing in
wholesale of goods such as strapping bands and other packaging materials and goods of similar
nature, and any and all equipment, materials, supplies used or employed in or related to the
manufacture of the finished products.
3. It is also registered as a VAT taxpayer and paid input taxes for January 1 to June 30 1997.
4. Respondent, however, filed 2 applications for tax credit/refund with Center-DOF for the input taxes it
has paid claiming that it should be VAT zero-rated.
5. No action was made by the BIR. This prompted the respondent to file an action with the CTA within the
2 year prescriptive period.
6. CIR prayed for the denial of the petition and claims that tax credit/refund is subject to routinary
investigation; that the collection was made in accordance with the law and that respondent failed to
show that the same was erroneously collected.
7. CTA rendered that Sekisui is entitled for refund being registered with PEZA ecozone and claims were
duly substantiated by invoices and official receipts.
8. CA affirmed the decision.
Issue

Whether or not Sekisui is entitled to the tax credit/refund.

Held

Yes. Respondent is entitled to refund. As decided in the case CIR v Toshiba, an entity registered with the
PEZA as an ecozone may be covered by the VAT system, which may choose between 2 fiscal incentive
schemes;

1. To pay 5% preferential tax rate on its gross income and thus be exempt from all other taxes including
VAT
2. To enjoy an income tax holiday which means income tax exempt but is not exempt from applicable
national revenue taxes including VAT

It is found by the lower courts that respondent had availed an income tax holiday. By availing this, the
respondent became subject to VAT. However, because it is located in an ecozone, which is geographically
within the Philippines but deemed separate territory the sales made are deemed as export sales. These sales
are zero-rated.

70
Furthermore, it has been shown that respondent has no output tax, which could offset the input tax since all its
transactions are deemed export sales and are zero-rated . Therefore the input tax remained unutilized allowing
respond to claim refund for the input tax previously charged by its suppliers.

G.R. No. 153866 February 11, 2005

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
SEAGATE TECHNOLOGY (PHILIPPINES), respondent.

DECISION

PANGANIBAN, J.:

Business companies registered in and operating from the Special Economic Zone in Naga, Cebu -- like herein
respondent -- are entities exempt from all internal revenue taxes and the implementing rules relevant thereto,
including the value-added taxes or VAT. Although export sales are not deemed exempt transactions, they are
nonetheless zero-rated. Hence, in the present case, the distinction between exempt entities and exempt
transactions has little significance, because the net result is that the taxpayer is not liable for the VAT.
Respondent, a VAT-registered enterprise, has complied with all requisites for claiming a tax refund of or credit
for the input VAT it paid on capital goods it purchased. Thus, the Court of Tax Appeals and the Court of
Appeals did not err in ruling that it is entitled to such refund or credit.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to set aside the May 27, 2002
Decision2 of the Court of Appeals (CA) in CA-GR SP No. 66093. The decretal portion of the Decision reads as
follows:

"WHEREFORE, foregoing premises considered, the petition for review is DENIED for lack of merit."3

The Facts

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

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

1. [Respondent] is a resident foreign corporation duly registered with the Securities and Exchange Commission
to do business in the Philippines, with principal office address at the new Cebu Township One, Special
Economic Zone, Barangay Cantao-an, Naga, Cebu;

2. [Petitioner] is sued in his official capacity, having been duly appointed and empowered to perform the duties
of his office, including, among others, the duty to act and approve claims for refund or tax credit;

3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and has been issued PEZA
Certificate No. 97-044 pursuant to Presidential Decree No. 66, as amended, to engage in the manufacture of
recording components primarily used in computers for export. Such registration was made on 6 June 1997;

4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT Registration Certification
No. 97-083-000600-V issued on 2 April 1997;
71
5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by [respondent];

6. An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with supporting
documents (inclusive of the P12,267,981.04 VAT input taxes subject of this Petition for Review), was filed on 4
October 1999 with Revenue District Office No. 83, Talisay Cebu;

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

"The administrative claim for refund by the [respondent] on October 4, 1999 was not acted upon by the
[petitioner] prompting the [respondent] to elevate the case to [the CTA] on July 21, 2000 by way of Petition for
Review in order to toll the running of the two-year prescriptive period.

"For his part, [petitioner] x x x raised the following Special and Affirmative Defenses, to wit:

1. [Respondent’s] alleged claim for tax refund/credit is subject to administrative routinary

investigation/examination by [petitioner’s] Bureau;

2. Since ‘taxes are presumed to have been collected in accordance with laws and regulations,’ the
[respondent] has the burden of proof that the taxes sought to be refunded were erroneously or illegally
collected x x x;

3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court ruled that:

"A claimant has the burden of proof to establish the factual basis of his or her claim for tax credit/refund."

4. Claims for tax refund/tax credit are construed in ‘strictissimi juris’ against the taxpayer. This is due to the fact
that claims for refund/credit [partake of] the nature of an exemption from tax. Thus, it is incumbent upon the
[respondent] to prove that it is indeed entitled to the refund/credit sought. Failure on the part of the
[respondent] to prove the same is fatal to its claim for tax credit. He who claims exemption must be able to
justify his claim by the clearest grant of organic or statutory law. An exemption from the common burden
cannot be permitted to exist upon vague implications;

5. Granting, without admitting, that [respondent] is a Philippine Economic Zone Authority (PEZA) registered
Ecozone Enterprise, then its business is not subject to VAT pursuant to Section 24 of Republic Act No. ([RA])
7916 in relation to Section 103 of the Tax Code, as amended. As [respondent’s] business is not subject to
VAT, the capital goods and services it alleged to have purchased are considered not used in VAT taxable
business. As such, [respondent] is not entitled to refund of input taxes on such capital goods pursuant to
Section 4.106.1 of Revenue Regulations No. ([RR])7-95, and of input taxes on services pursuant to Section
4.103 of said regulations.

6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229 of the 1997 Tax Code
on filing of a written claim for refund within two (2) years from the date of payment of tax.’

"On July 19, 2001, the Tax Court rendered a decision granting the claim for refund."4

Ruling of the Court of Appeals

The CA affirmed the Decision of the CTA granting the claim for refund or issuance of a tax credit certificate
(TCC) in favor of respondent in the reduced amount of P12,122,922.66. This sum represented the unutilized
but substantiated input VAT paid on capital goods purchased for the period covering April 1, 1998 to June 30,
1999.

72
The appellate court reasoned that respondent had availed itself only of the fiscal incentives under Executive
Order No. (EO) 226 (otherwise known as the Omnibus Investment Code of 1987), not of those under both
Presidential Decree No. (PD) 66, as amended, and Section 24 of RA 7916. Respondent was, therefore,
considered exempt only from the payment of income tax when it opted for the income tax holiday in lieu of the
5 percent preferential tax on gross income earned. As a VAT-registered entity, though, it was still subject to the
payment of other national internal revenue taxes, like the VAT.

Moreover, the CA held that neither Section 109 of the Tax Code nor Sections 4.106-1 and 4.103-1 of RR 7-95
were applicable. Having paid the input VAT on the capital goods it purchased, respondent correctly filed the
administrative and judicial claims for its refund within the two-year prescriptive period. Such payments were --
to the extent of the refundable value -- duly supported by VAT invoices or official receipts, and were not yet
offset against any output VAT liability.

Hence this Petition.5

Sole Issue

Petitioner submits this sole issue for our consideration:

"Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate in the amount of
P12,122,922.66 representing alleged unutilized input VAT paid on capital goods purchased for the period April
1, 1998 to June 30, 1999."6

The Court’s Ruling

The Petition is unmeritorious.

Sole Issue:

Entitlement of a VAT-Registered PEZA Enterprise to a Refund of or Credit for Input VAT

No doubt, as a PEZA-registered enterprise within a special economic zone,7 respondent is entitled to the fiscal
incentives and benefits8 provided for in either PD 669 or EO 226.10 It shall, moreover, enjoy all privileges,
benefits, advantages or exemptions under both Republic Act Nos. (RA) 722711 and 7844.12

Preferential Tax Treatment Under Special Laws

If it avails itself of PD 66, notwithstanding the provisions of other laws to the contrary, respondent shall not be
subject to internal revenue laws and regulations for raw materials, supplies, articles, equipment, machineries,
spare parts and wares, except those prohibited by law, brought into the zone to be stored, broken up,
repacked, assembled, installed, sorted, cleaned, graded or otherwise processed, manipulated, manufactured,
mixed or used directly or indirectly in such activities.13 Even so, respondent would enjoy a net-operating loss
carry over; accelerated depreciation; foreign exchange and financial assistance; and exemption from export
taxes, local taxes and licenses.14

Comparatively, the same exemption from internal revenue laws and regulations applies if EO 22615 is chosen.
Under this law, respondent shall further be entitled to an income tax holiday; additional deduction for labor
expense; simplification of customs procedure; unrestricted use of consigned equipment; access to a bonded
manufacturing warehouse system; privileges for foreign nationals employed; tax credits on domestic capital
equipment, as well as for taxes and duties on raw materials; and exemption from contractors’ taxes, wharfage
dues, taxes and duties on imported capital equipment and spare parts, export taxes, duties, imposts and
fees,16 local taxes and licenses, and real property taxes.17

73
A privilege available to respondent under the provision in RA 7227 on tax and duty-free importation of raw
materials, capital and equipment18 -- is, ipso facto, also accorded to the zone19 under RA 7916. Furthermore,
the latter law -- notwithstanding other existing laws, rules and regulations to the contrary -- extends20 to that
zone the provision stating that no local or national taxes shall be imposed therein.21 No exchange control
policy shall be applied; and free markets for foreign exchange, gold, securities and future shall be allowed and
maintained.22 Banking and finance shall also be liberalized under minimum Bangko Sentral regulation with the
establishment of foreign currency depository units of local commercial banks and offshore banking units of
foreign banks.23

In the same vein, respondent benefits under RA 7844 from negotiable tax credits24 for locally-produced
materials used as inputs. Aside from the other incentives possibly already granted to it by the Board of
Investments, it also enjoys preferential credit facilities25 and exemption from PD 1853.26

From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax treatment.27 It is not
subject to internal revenue laws and regulations and is even entitled to tax credits. The VAT on capital goods is
an internal revenue tax from which petitioner as an entity is exempt. Although the transactions involving such
tax are not exempt, petitioner as a VAT-registered person,28 however, is entitled to their credits.

Nature of the VAT and the Tax Credit Method

Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent levied on every
importation of goods, whether or not in the course of trade or business, or imposed on each sale, barter,
exchange or lease of goods or properties or on each rendition of services in the course of trade or business29
as they pass along the production and distribution chain, the tax being limited only to the value added30 to
such goods, properties or services by the seller, transferor or lessor.31 It is an indirect tax that may be shifted
or passed on to the buyer, transferee or lessee of the goods, properties or services.32 As such, it should be
understood not in the context of the person or entity that is primarily, directly and legally liable for its payment,
but in terms of its nature as a tax on consumption.33 In either case, though, the same conclusion is arrived at.

The law34 that originally imposed the VAT in the country, as well as the subsequent amendments of that law,
has been drawn from the tax credit method.35 Such method adopted the mechanics and self-enforcement
features of the VAT as first implemented and practiced in Europe and subsequently adopted in New Zealand
and Canada.36 Under the present method that relies on invoices, an entity can credit against or subtract from
the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports.37

If at the end of a taxable quarter the output taxes38 charged by a seller39 are equal to the input taxes40
passed on by the suppliers, no payment is required. It is when the output taxes exceed the input taxes that the
excess has to be paid.41 If, however, the input taxes exceed the output taxes, the excess shall be carried over
to the succeeding quarter or quarters.42 Should the input taxes result from zero-rated or effectively zero-rated
transactions or from the acquisition of capital goods,43 any excess over the output taxes shall instead be
refunded44 to the taxpayer or credited45 against other internal revenue taxes.46

Zero-Rated and Effectively Zero-Rated Transactions

Although both are taxable and similar in effect, zero-rated transactions differ from effectively zero-rated
transactions as to their source.

Zero-rated transactions generally refer to the export sale of goods and supply of services.47 The tax rate is set
at zero.48 When applied to the tax base, such rate obviously results in no tax chargeable against the
purchaser. The seller of such transactions charges no output tax,49 but can claim a refund of or a tax credit
certificate for the VAT previously charged by suppliers.

74
Effectively zero-rated transactions, however, refer to the sale of goods50 or supply of services51 to persons or
entities whose exemption under special laws or international agreements to which the Philippines is a signatory
effectively subjects such transactions to a zero rate.52 Again, as applied to the tax base, such rate does not
yield any tax chargeable against the purchaser. The seller who charges zero output tax on such transactions
can also claim a refund of or a tax credit certificate for the VAT previously charged by suppliers.

Zero Rating and Exemption

In terms of the VAT computation, zero rating and exemption are the same, but the extent of relief that results
from either one of them is not.

Applying the destination principle53 to the exportation of goods, automatic zero rating54 is primarily intended
to be enjoyed by the seller who is directly and legally liable for the VAT, making such seller internationally
competitive by allowing the refund or credit of input taxes that are attributable to export sales.55 Effective zero
rating, on the contrary, is intended to benefit the purchaser who, not being directly and legally liable for the
payment of the VAT, will ultimately bear the burden of the tax shifted by the suppliers.

In both instances of zero rating, there is total relief for the purchaser from the burden of the tax.56 But in an
exemption there is only partial relief,57 because the purchaser is not allowed any tax refund of or credit for
input taxes paid.58

Exempt Transaction >and Exempt Party

The object of exemption from the VAT may either be the transaction itself or any of the parties to the
transaction.59

An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically
listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status -- VAT-
exempt or not -- of the party to the transaction.60 Indeed, such transaction is not subject to the VAT, but the
seller is not allowed any tax refund of or credit for any input taxes paid.

An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a
special law or an international agreement to which the Philippines is a signatory, and by virtue of which its
taxable transactions become exempt from the VAT.61 Such party is also not subject to the VAT, but may be
allowed a tax refund of or credit for input taxes paid, depending on its registration as a VAT or non-VAT
taxpayer.

As mentioned earlier, the VAT is a tax on consumption, the amount of which may be shifted or passed on by
the seller to the purchaser of the goods, properties or services.62 While the liability is imposed on one person,
the burden may be passed on to another. Therefore, if a special law merely exempts a party as a seller from its
direct liability for payment of the VAT, but does not relieve the same party as a purchaser from its indirect
burden of the VAT shifted to it by its VAT-registered suppliers, the purchase transaction is not exempt.
Applying this principle to the case at bar, the purchase transactions entered into by respondent are not VAT-
exempt.

Special laws may certainly exempt transactions from the VAT.63 However, the Tax Code provides that those
falling under PD 66 are not. PD 66 is the precursor of RA 7916 -- the special law under which respondent was
registered. The purchase transactions it entered into are, therefore, not VAT-exempt. These are subject to the
VAT; respondent is required to register.

Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 10 percent,64
depending again on the application of the destination principle.65

75
If respondent enters into such sales transactions with a purchaser -- usually in a foreign country -- for use or
consumption outside the Philippines, these shall be subject to 0 percent.66 If entered into with a purchaser for
use or consumption in the Philippines, then these shall be subject to 10 percent,67 unless the purchaser is
exempt from the indirect burden of the VAT, in which case it shall also be zero-rated.

Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero. Its exemption
under both PD 66 and RA 7916 effectively subjects such transactions to a zero rate,68 because the ecozone
within which it is registered is managed and operated by the PEZA as a separate customs territory.69 This
means that in such zone is created the legal fiction of foreign territory.70 Under the cross-border principle71 of
the VAT system being enforced by the Bureau of Internal Revenue (BIR),72 no VAT shall be imposed to form
part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. If
exports of goods and services from the Philippines to a foreign country are free of the VAT,73 then the same
rule holds for such exports from the national territory -- except specifically declared areas -- to an ecozone.

Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are considered
exports to a foreign country; conversely, sales by a PEZA-registered entity to a VAT-registered person in the
customs territory are deemed imports from a foreign country.74 An ecozone -- indubitably a geographical
territory of the Philippines -- is, however, regarded in law as foreign soil.75 This legal fiction is necessary to
give meaningful effect to the policies of the special law creating the zone.76 If respondent is located in an
export processing zone77 within that ecozone, sales to the export processing zone, even without being
actually exported, shall in fact be viewed as constructively exported under EO 226.78 Considered as export
sales,79 such purchase transactions by respondent would indeed be subject to a zero rate.80

Tax Exemptions Broad and Express

Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal revenue
laws and regulations.

This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a tax on
consumption, for which the direct liability is imposed on one person but the indirect burden is passed on to
another. Respondent, as an exempt entity, can neither be directly charged for the VAT on its sales nor
indirectly made to bear, as added cost to such sales, the equivalent VAT on its purchases. Ubi lex non
distinguit, nec nos distinguere debemus. Where the law does not distinguish, we ought not to distinguish.

Moreover, the exemption is both express and pervasive for the following reasons:

First, RA 7916 states that "no taxes, local and national, shall be imposed on business establishments
operating within the ecozone."81 Since this law does not exclude the VAT from the prohibition, it is deemed
included. Exceptio firmat regulam in casibus non exceptis. An exception confirms the rule in cases not
excepted; that is, a thing not being excepted must be regarded as coming within the purview of the general
rule.

Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be passed on
and, therefore, indirectly imposed on the same entity -- a patent circumvention of the law. That no VAT shall be
imposed directly upon business establishments operating within the ecozone under RA 7916 also means that
no VAT may be passed on and imposed indirectly. Quando aliquid prohibetur ex directo prohibetur et per
obliquum. When anything is prohibited directly, it is also prohibited indirectly.

Second, when RA 8748 was enacted to amend RA 7916, the same prohibition applied, except for real property
taxes that presently are imposed on land owned by developers.82 This similar and repeated prohibition is an
unambiguous ratification of the law’s intent in not imposing local or national taxes on business enterprises
within the ecozone.

76
Third, foreign and domestic merchandise, raw materials, equipment and the like "shall not be subject to x x x
internal revenue laws and regulations" under PD 6683 -- the original charter of PEZA (then EPZA) that was
later amended by RA 7916.84 No provisions in the latter law modify such exemption.

Although this exemption puts the government at an initial disadvantage, the reduced tax collection ultimately
redounds to the benefit of the national economy by enticing more business investments and creating more
employment opportunities.85

Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise -- except those prohibited
by law -- "shall not be subject to x x x internal revenue laws and regulations x x x"86 if brought to the ecozone’s
restricted area87 for manufacturing by registered export enterprises,88 of which respondent is one. These
rules also apply to all enterprises registered with the EPZA prior to the effectivity of such rules.89

Fifth, export processing zone enterprises registered90 with the Board of Investments (BOI) under EO 226
patently enjoy exemption from national internal revenue taxes on imported capital equipment reasonably
needed and exclusively used for the manufacture of their products;91 on required supplies and spare part for
consigned equipment;92 and on foreign and domestic merchandise, raw materials, equipment and the like --
except those prohibited by law -- brought into the zone for manufacturing.93 In addition, they are given credits
for the value of the national internal revenue taxes imposed on domestic capital equipment also reasonably
needed and exclusively used for the manufacture of their products,94 as well as for the value of such taxes
imposed on domestic raw materials and supplies that are used in the manufacture of their export products and
that form part thereof.95

Sixth, the exemption from local and national taxes granted under RA 722796 are ipso facto accorded to
ecozones.97 In case of doubt, conflicts with respect to such tax exemption privilege shall be resolved in favor
of the ecozone.98

And seventh, the tax credits under RA 7844 -- given for imported raw materials primarily used in the production
of export goods,99 and for locally produced raw materials, capital equipment and spare parts used by
exporters of non-traditional products100 -- shall also be continuously enjoyed by similar exporters within the
ecozone.101 Indeed, the latter exporters are likewise entitled to such tax exemptions and credits.

Tax Refund as Tax Exemption

To be sure, statutes that grant tax exemptions are construed strictissimi juris102 against the taxpayer103 and
liberally in favor of the taxing authority.104

Tax refunds are in the nature of such exemptions.105 Accordingly, the claimants of those refunds bear the
burden of proving the factual basis of their claims;106 and of showing, by words too plain to be mistaken, that
the legislature intended to exempt them.107 In the present case, all the cited legal provisions are teeming with
life with respect to the grant of tax exemptions too vivid to pass unnoticed. In addition, respondent easily meets
the challenge.

Respondent, which as an entity is exempt, is different from its transactions which are not exempt. The end
result, however, is that it is not subject to the VAT. The non-taxability of transactions that are otherwise taxable
is merely a necessary incident to the tax exemption conferred by law upon it as an entity, not upon the
transactions themselves.108 Nonetheless, its exemption as an entity and the non-exemption of its transactions
lead to the same result for the following considerations:

First, the contemporaneous construction of our tax laws by BIR authorities who are called upon to execute or
administer such laws109 will have to be adopted. Their prior tax issuances have held inconsistent positions
brought about by their probable failure to comprehend and fully appreciate the nature of the VAT as a tax on
consumption and the application of the destination principle.110 Revenue Memorandum Circular No. (RMC)

77
74-99, however, now clearly and correctly provides that any VAT-registered supplier’s sale of goods, property
or services from the customs territory to any registered enterprise operating in the ecozone -- regardless of the
class or type of the latter’s PEZA registration -- is legally entitled to a zero rate.111

Second, the policies of the law should prevail. Ratio legis est anima. The reason for the law is its very soul.

In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as the establishment of export
processing zones, seeks "to encourage and promote foreign commerce as a means of x x x strengthening our
export trade and foreign exchange position, of hastening industrialization, of reducing domestic unemployment,
and of accelerating the development of the country."112

RA 7916, as amended by RA 8748, declared that by creating the PEZA and integrating the special economic
zones, "the government shall actively encourage, promote, induce and accelerate a sound and balanced
industrial, economic and social development of the country x x x through the establishment, among others, of
special economic zones x x x that shall effectively attract legitimate and productive foreign investments."113

Under EO 226, the "State shall encourage x x x foreign investments in industry x x x which shall x x x meet the
tests of international competitiveness[,] accelerate development of less developed regions of the country[,] and
result in increased volume and value of exports for the economy."114 Fiscal incentives that are cost-efficient
and simple to administer shall be devised and extended to significant projects "to compensate for market
imperfections, to reward performance contributing to economic development,"115 and "to stimulate the
establishment and assist initial operations of the enterprise."116

Wisely accorded to ecozones created under RA 7916117 was the government’s policy -- spelled out earlier in
RA 7227 -- of converting into alternative productive uses118 the former military reservations and their
extensions,119 as well as of providing them incentives120 to enhance the benefits that would be derived from
them121 in promoting economic and social development.122

Finally, under RA 7844, the State declares the need "to evolve export development into a national effort"123 in
order to win international markets. By providing many export and tax incentives,124 the State is able to drive
home the point that exporting is indeed "the key to national survival and the means through which the
economic goals of increased employment and enhanced incomes can most expeditiously be achieved."125

The Tax Code itself seeks to "promote sustainable economic growth x x x; x x x increase economic activity;
and x x x create a robust environment for business to enable firms to compete better in the regional as well as
the global market."126 After all, international competitiveness requires economic and tax incentives to lower
the cost of goods produced for export. State actions that affect global competition need to be specific and
selective in the pricing of particular goods or services.127

All these statutory policies are congruent to the constitutional mandates of providing incentives to needed
investments,128 as well as of promoting the preferential use of domestic materials and locally produced goods
and adopting measures to help make these competitive.129 Tax credits for domestic inputs strengthen
backward linkages. Rightly so, "the rule of law and the existence of credible and efficient public institutions are
essential prerequisites for sustainable economic development."130

VAT Registration, Not Application for Effective Zero Rating, Indispensable to VAT Refund

Registration is an indispensable requirement under our VAT law.131 Petitioner alleges that respondent did
register for VAT purposes with the appropriate Revenue District Office. However, it is now too late in the day
for petitioner to challenge the VAT-registered status of respondent, given the latter’s prior representation
before the lower courts and the mode of appeal taken by petitioner before this Court.

78
The PEZA law, which carried over the provisions of the EPZA law, is clear in exempting from internal revenue
laws and regulations the equipment -- including capital goods -- that registered enterprises will use, directly or
indirectly, in manufacturing.132 EO 226 even reiterates this privilege among the incentives it gives to such
enterprises.133 Petitioner merely asserts that by virtue of the PEZA registration alone of respondent, the latter
is not subject to the VAT. Consequently, the capital goods and services respondent has purchased are not
considered used in the VAT business, and no VAT refund or credit is due.134 This is a non sequitur. By the
VAT’s very nature as a tax on consumption, the capital goods and services respondent has purchased are
subject to the VAT, although at zero rate. Registration does not determine taxability under the VAT law.

Moreover, the facts have already been determined by the lower courts. Having failed to present evidence to
support its contentions against the income tax holiday privilege of respondent,135 petitioner is deemed to have
conceded. It is a cardinal rule that "issues and arguments not adequately and seriously brought below cannot
be raised for the first time on appeal."136 This is a "matter of procedure"137 and a "question of fairness."138
Failure to assert "within a reasonable time warrants a presumption that the party entitled to assert it either has
abandoned or declined to assert it."139

The BIR regulations additionally requiring an approved prior application for effective zero rating140 cannot
prevail over the clear VAT nature of respondent’s transactions. The scope of such regulations is not "within the
statutory authority x x x granted by the legislature.141

First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the former cannot purport to
do any more than interpret the latter.142 The courts will not countenance one that overrides the statute it seeks
to apply and implement.143

Other than the general registration of a taxpayer the VAT status of which is aptly determined, no provision
under our VAT law requires an additional application to be made for such taxpayer’s transactions to be
considered effectively zero-rated. An effectively zero-rated transaction does not and cannot become exempt
simply because an application therefor was not made or, if made, was denied. To allow the additional
requirement is to give unfettered discretion to those officials or agents who, without fluid consideration, are
bent on denying a valid application. Moreover, the State can never be estopped by the omissions, mistakes or
errors of its officials or agents.144

Second, grantia argumenti that such an application is required by law, there is still the presumption of regularity
in the performance of official duty.145 Respondent’s registration carries with it the presumption that, in the
absence of contradictory evidence, an application for effective zero rating was also filed and approval thereof
given. Besides, it is also presumed that the law has been obeyed146 by both the administrative officials and
the applicant.

Third, even though such an application was not made, all the special laws we have tackled exempt respondent
not only from internal revenue laws but also from the regulations issued pursuant thereto. Leniency in the
implementation of the VAT in ecozones is an imperative, precisely to spur economic growth in the country and
attain global competitiveness as envisioned in those laws.

A VAT-registered status, as well as compliance with the invoicing requirements,147 is sufficient for the
effective zero rating of the transactions of a taxpayer. The nature of its business and transactions can easily be
perused from, as already clearly indicated in, its VAT registration papers and photocopied documents attached
thereto. Hence, its transactions cannot be exempted by its mere failure to apply for their effective zero rating.
Otherwise, their VAT exemption would be determined, not by their nature, but by the taxpayer’s negligence -- a
result not at all contemplated. Administrative convenience cannot thwart legislative mandate.

Tax Refund or Credit in Order

79
Having determined that respondent’s purchase transactions are subject to a zero VAT rate, the tax refund or
credit is in order.

As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal incentives in EO 226
over those in RA 7916 and PD 66. It opted for the income tax holiday regime instead of the 5 percent
preferential tax regime.

The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA law,148 for EO
226149 also has provisions to contend with. These two regimes are in fact incompatible and cannot be availed
of simultaneously by the same entity. While EO 226 merely exempts it from income taxes, the PEZA law
exempts it from all taxes.

Therefore, respondent can be considered exempt, not from the VAT, but only from the payment of income tax
for a certain number of years, depending on its registration as a pioneer or a non-pioneer enterprise. Besides,
the remittance of the aforesaid 5 percent of gross income earned in lieu of local and national taxes imposable
upon business establishments within the ecozone cannot outrightly determine a VAT exemption. Being subject
to VAT, payments erroneously collected thereon may then be refunded or credited.

Even if it is argued that respondent is subject to the 5 percent preferential tax regime in RA 7916, Section 24
thereof does not preclude the VAT. One can, therefore, counterargue that such provision merely exempts
respondent from taxes imposed on business. To repeat, the VAT is a tax imposed on consumption, not on
business. Although respondent as an entity is exempt, the transactions it enters into are not necessarily so.
The VAT payments made in excess of the zero rate that is imposable may certainly be refunded or credited.

Compliance with All Requisites for VAT Refund or Credit

As further enunciated by the Tax Court, respondent complied with all the requisites for claiming a VAT refund
or credit.150

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

Second, the input taxes paid on the capital goods of respondent are duly supported by VAT invoices and have
not been offset against any output taxes. Although enterprises registered with the BOI after December 31,
1994 would no longer enjoy the tax credit incentives on domestic capital equipment -- as provided for under
Article 39(d), Title III, Book I of EO 226152 -- starting January 1, 1996, respondent would still have the same
benefit under a general and express exemption contained in both Article 77(1), Book VI of EO 226; and
Section 12, paragraph 2 (c) of RA 7227, extended to the ecozones by RA 7916.

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

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

xxxxxxxxx

"MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an environment
conducive for investors, the bill offers incentives such as the exemption from local and national taxes, x x x tax
credits for locally sourced inputs x x x."153
80
And third, no question as to either the filing of such claims within the prescriptive period or the validity of the
VAT returns has been raised. Even if such a question were raised, the tax exemption under all the special laws
cited above is broad enough to cover even the enforcement of internal revenue laws, including prescription.154

Summary

To summarize, special laws expressly grant preferential tax treatment to business establishments registered
and operating within an ecozone, which by law is considered as a separate customs territory. As such,
respondent is exempt from all internal revenue taxes, including the VAT, and regulations pertaining thereto. It
has opted for the income tax holiday regime, instead of the 5 percent preferential tax regime. As a matter of
law and procedure, its registration status entitling it to such tax holiday can no longer be questioned. Its sales
transactions intended for export may not be exempt, but like its purchase transactions, they are zero-rated. No
prior application for the effective zero rating of its transactions is necessary. Being VAT-registered and having
satisfactorily complied with all the requisites for claiming a tax refund of or credit for the input VAT paid on
capital goods purchased, respondent is entitled to such VAT refund or credit.

WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No pronouncement as to costs. SO
ORDERED.

DIGEST:

FACTS:
Respondent is a resident foreign corporation duly registered with the Securities and Exchange Commission to
do business in the Philippines and is registered with the Philippine Export Zone Authority (PEZA). The
respondent is Value Added Tax-registered entity and filed for the VAT returns. An administrative claim for
refund of VAT input taxes in the amount of P28,369,226.38 with supporting documents (inclusive of
the P12,267,981.04 VAT input taxes subject of this Petition for Review), was filed on 4 October 1999 and no
final action has been received by the respondent from the petitioner on the claim for VAT refund. Hence,
petitioner is sued in his official capacity. The Tax Court rendered a decision granting the claim for refund and
CTA affirmed the decision. Hence, the present petition for certiorari.

ISSUE:
Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate in the amount of
P12,122,922.66 representing alleged unutilized input VAT paid on capital goods purchased for the period April
1, 1998 to June 30, 1999

HELD:
The Petition is unmeritorious. As a PEZA-registered enterprise within a special economic zone, respondent is
entitled to the fiscal incentives and benefit provided for in either PD 66 or EO 226. It shall, moreover, enjoy all
privileges, benefits, advantages or exemptions under both Republic Act Nos. (RA) 7227 and 7844. Respondent
as an entity is exempt from internal revenue laws and regulations. This exemption covers both direct and
indirect taxes, stemming from the very nature of the VAT as a tax on consumption, for which the
direct liability is imposed on one person but the indirect burden is passed on to another. Respondent, as an
exempt entity, can neither be directly charged for the VAT on its sales nor indirectly made to bear, as added
cost to such sales, the equivalent VAT on its purchases. The exemption is both express and pervasive, among
other reasons, since RA 7916 states that “no taxes, local and national, shall be imposed on business
establishments operating within the ecozone”. Even though the VAT is not imposed on the entity but on the
transaction, it may still be passed on and, therefore, indirectly imposed on the same entity -- a patent
circumvention of the law. That no VAT shall be imposed directly upon business establishments operating
within the ecozone under RA 7916 also means that no VAT may be passed on and imposed indirectly. Quando
aliquid prohibetur ex directo prohibetur et per obliquum. When anything is prohibited directly, it is also
prohibited indirectly. Special laws expressly grant preferential tax treatment to business establishments
registered and operating within an ecozone, which by law is considered as a separate customs territory. As

81
such, respondent is exempt from all internal revenue taxes, including the VAT, and regulations pertaining
thereto. Thus, the petition is denied and the decision of lower courts affirmed.

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. TOSHIBA INFORMATION EQUIPMENT

(PHILS.), INC., respondent.

DECISION

CHICO-NAZARIO, J.:

In this Petition for Review under Rule 45 of the Rules of Court, petitioner Commissioner of Internal Revenue
(CIR) prays for the reversal of the decision of the Court of Appeals in CA-G.R. SP No. 59106,[1] affirming the
order of the Court of Tax Appeals (CTA) in CTA Case No. 5593,[2] which ordered said petitioner CIR to refund
or, in the alternative, to issue a tax credit certificate to respondent Toshiba Information Equipment (Phils.), Inc.
(Toshiba), in the amount of P16,188,045.44, representing unutilized input value-added tax (VAT) payments for
the first and second quarters of 1996.

There is hardly any dispute as to the facts giving rise to the present Petition.

Respondent Toshiba was organized and established as a domestic corporation, duly-registered with the
Securities and Exchange Commission on 07 July 1995,[3] with the primary purpose of engaging in the
business of manufacturing and exporting of electrical and mechanical machinery, equipment, systems,
accessories, parts, components, materials and goods of all kinds, including, without limitation, to those relating
to office automation and information technology, and all types of computer hardware and software, such as
HDD, CD-ROM and personal computer printed circuit boards.[4]

On 27 September 1995, respondent Toshiba also registered with the Philippine Economic Zone Authority
(PEZA) as an ECOZONE Export Enterprise, with principal office in Laguna Technopark, Bian, Laguna.[5]
Finally, on 29 December 1995, it registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer and
a withholding agent.[6]

Respondent Toshiba filed its VAT returns for the first and second quarters of taxable year 1996, reporting input
VAT in the amount of P13,118,542.00[7] and P5,128,761.94,[8] respectively, or a total of P18,247,303.94. It
alleged that the said input VAT was from its purchases of capital goods and services which remained unutilized
since it had not yet engaged in any business activity or transaction for which it may be liable for any output
VAT.[9] Consequently, on 27 March 1998, respondent Toshiba filed with the One-Stop Shop Inter-Agency Tax
Credit and Duty Drawback Center of the Department of Finance (DOF) applications for tax credit/refund of its
unutilized input VAT for 01 January to 31 March 1996 in the amount of P14,176,601.28,[10] and for 01 April to
30 June 1996 in the amount of P5,161,820.79,[11] for a total of P19,338,422.07. To toll the running of the two-
year prescriptive period for judicially claiming a tax credit/refund, respondent Toshiba, on 31 March 1998, filed
with the CTA a Petition for Review. It would subsequently file an Amended Petition for Review on 10
November 1998 so as to conform to the evidence presented before the CTA during the hearings.

In his Answer to the Amended Petition for Review before the CTA, petitioner CIR raised several Special and
Affirmative Defenses, to wit

5. Assuming without admitting that petitioner filed a claim for refund/tax credit, the same is subject to
investigation by the Bureau of Internal Revenue.

6. Taxes are presumed to have been collected in accordance with law. Hence, petitioner must prove that
the taxes sought to be refunded were erroneously or illegally collected.
82
 7. Petitioner must prove the allegations supporting its entitlement to a refund.

8. Petitioner must show that it has complied with the provisions of Sections 204(c) and 229 of the 1997
Tax Code on the filing of a written claim for refund within two (2) years from the date of payment of
the tax.

9. Claims for refund of taxes are construed strictly against claimants, the same being in the nature of an
exemption from taxation.[12]

After evaluating the evidence submitted by respondent Toshiba,[13] the CTA, in its Decision dated 10 March
2000, ordered petitioner CIR to refund, or in the alternative, to issue a tax credit certificate to respondent
Toshiba in the amount of P16,188,045.44.[14]

In a Resolution, dated 24 May 2000, the CTA denied petitioner CIRs Motion for Reconsideration for lack of
merit.[15]

The Court of Appeals, in its Decision dated 27 September 2001, dismissed petitioner CIRs Petition for Review
and affirmed the CTA Decision dated 10 March 2000.

Comes now petitioner CIR before this Court assailing the above-mentioned Decision of the Court of Appeals
based on the following grounds

1. The Court of Appeals erred in holding that petitioners failure to raise in the Tax Court the arguments
relied upon by him in the petition, is fatal to his cause.

2. The Court of Appeals erred in not holding that respondent being registered with the Philippine
Economic Zone Authority (PEZA) as an Ecozone Export Enterprise, its business is not subject to VAT
pursuant to Section 24 of Republic Act No. 7916 in relation to Section 103 (now 109) of the Tax
Code.

3. The Court of Appeals erred in not holding that since respondents business is not subject to VAT, the
capital goods and services it purchased are considered not used in VAT taxable business, and,
therefore, it is not entitled to refund of input taxes on such capital goods pursuant to Section 4.106-1
of Revenue Regulations No. 7-95 and of input taxes on services pursuant to Section 4.103-1 of said
Regulations.

4. The Court of Appeals erred in holding that respondent is entitled to a refund or tax credit of input taxes
it paid on zero-rated transactions.[16]

Ultimately, however, the issue still to be resolved herein shall be whether respondent Toshiba is entitled to the
tax credit/refund of its input VAT on its purchases of capital goods and services, to which this Court answers in
the affirmative.

An ECOZONE enterprise is a VAT-exempt entity. Sales of goods, properties, and services by persons from the
Customs Territory to ECOZONE enterprises shall be subject to VAT at zero percent (0%).

Respondent Toshiba bases its claim for tax credit/refund on Section 106(b) of the Tax Code of 1977, as
amended, which reads:

SEC. 106. Refunds or tax credits of creditable input tax.

83
(b) Capital goods. A VAT-registered person may apply for the issuance of a tax credit certificate or refund of
input taxes paid on capital goods imported or locally purchased, to the extent that such input taxes have not
been applied against output taxes. The application may be made only within two (2) years after the close of the
taxable quarter when the importation or purchase was made.[17]

Petitioner CIR, on the other hand, opposes such claim on account of Section 4.106-1(b) of Revenue
Regulations (RR) No. 7-95, otherwise known as the VAT Regulations, as amended, which provides as follows

Sec. 4.106-1. Refunds or tax credits of input tax.

...

(b) Capital Goods. -- Only a VAT-registered person may apply for issuance of a tax credit certificate or refund
of input taxes paid on capital goods imported or locally purchased. The refund shall be allowed to the extent
that such input taxes have not been applied against output taxes. The application should be made within two
(2) years after the close of the taxable quarter when the importation or purchase was made.

Refund of input taxes on capital goods shall be allowed only to the extent that such capital goods are used in
VAT taxable business. If it is also used in exempt operations, the input tax refundable shall only be the ratable
portion corresponding to the taxable operations.

Capital goods or properties refer to goods or properties with estimated useful life greater than one year and
which are treated as depreciable assets under Section 29(f), used directly or indirectly in the production or sale
of taxable goods or services. (Underscoring ours.)

Petitioner CIR argues that although respondent Toshiba may be a VAT-registered taxpayer, it is not engaged
in a VAT-taxable business. According to petitioner CIR, respondent Toshiba is actually VAT-exempt, invoking
the following provision of the Tax Code of 1977, as amended

SEC. 103. Exempt transactions. The following shall be exempt from value-added tax.

(q) Transactions which are exempt under special laws, except those granted under Presidential Decree No. 66,
529, 972, 1491, and 1590, and non-electric cooperatives under Republic Act No. 6938, or international
agreements to which the Philippines is a signatory.[18]

Since respondent Toshiba is a PEZA-registered enterprise, it is subject to the five percent (5%) preferential tax
rate imposed under Chapter III, Section 24 of Republic Act No. 7916, otherwise known as The Special
Economic Zone Act of 1995, as amended. According to the said section, [e]xcept for real property taxes on
land owned by developers, no taxes, local and national, shall be imposed on business establishments
operating within the ECOZONE. In lieu thereof, five percent (5%) of the gross income earned by all business
enterprises within the ECOZONE shall be paid The five percent (5%) preferential tax rate imposed on the
gross income of a PEZA-registered enterprise shall be in lieu of all national taxes, including VAT. Thus,
petitioner CIR contends that respondent Toshiba is VAT-exempt by virtue of a special law, Rep. Act No. 7916,
as amended.

It would seem that petitioner CIR failed to differentiate between VAT-exempt transactions from VAT-exempt
entities. In the case of Commissioner of Internal Revenue v. Seagate Technology (Philippines),[19] this Court
already made such distinction

An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically
listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status VAT-
exempt or not of the party to the transaction

84
An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a
special law or an international agreement to which the Philippines is a signatory, and by virtue of which its
taxable transactions become exempt from VAT

Section 103(q) of the Tax Code of 1977, as amended, relied upon by petitioner CIR, relates to VAT-exempt
transactions. These are transactions exempted from VAT by special laws or international agreements to which
the Philippines is a signatory. Since such transactions are not subject to VAT, the sellers cannot pass on any
output VAT to the purchasers of goods, properties, or services, and they may not claim tax credit/refund of the
input VAT they had paid thereon.

Section 103(q) of the Tax Code of 1977, as amended, cannot apply to transactions of respondent Toshiba
because although the said section recognizes that transactions covered by special laws may be exempt from
VAT, the very same section provides that those falling under Presidential Decree No. 66 are not. Presidential
Decree No. 66, creating the Export Processing Zone Authority (EPZA), is the precursor of Rep. Act No. 7916,
as amended,[20] under which the EPZA evolved into the PEZA. Consequently, the exception of Presidential
Decree No. 66 from Section 103(q) of the Tax Code of 1977, as amended, extends likewise to Rep. Act No.
7916, as amended.

This Court agrees, however, that PEZA-registered enterprises, which would necessarily be located within
ECOZONES, are VAT-exempt entities, not because of Section 24 of Rep. Act No. 7916, as amended, which
imposes the five percent (5%) preferential tax rate on gross income of PEZA-registered enterprises, in lieu of
all taxes; but, rather, because of Section 8 of the same statute which establishes the fiction that ECOZONES
are foreign territory.

It is important to note herein that respondent Toshiba is located within an ECOZONE. An ECOZONE or a
Special Economic Zone has been described as

. . . [S]elected areas with highly developed or which have the potential to be developed into agro-industrial,
industrial, tourist, recreational, commercial, banking, investment and financial centers whose metes and
bounds are fixed or delimited by Presidential Proclamations. An ECOZONE may contain any or all of the
following: industrial estates (IEs), export processing zones (EPZs), free trade zones and tourist/recreational
centers.[21]

The national territory of the Philippines outside of the proclaimed borders of the ECOZONE shall be referred to
as the Customs Territory.[22]

Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall manage and operate the
ECOZONES as a separate customs territory;[23] thus, creating the fiction that the ECOZONE is a foreign
territory.[24] As a result, sales made by a supplier in the Customs Territory to a purchaser in the ECOZONE
shall be treated as an exportation from the Customs Territory. Conversely, sales made by a supplier from the
ECOZONE to a purchaser in the Customs Territory shall be considered as an importation into the Customs
Territory.

Given the preceding discussion, what would be the VAT implication of sales made by a supplier from the
Customs Territory to an ECOZONE enterprise?

The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT shall be
imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing
authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of
VAT; while, those destined for use or consumption within the Philippines shall be imposed with ten percent
(10%) VAT.[25]

85
Applying said doctrine to the sale of goods, properties, and services to and from the ECOZONES,[26] the BIR
issued Revenue Memorandum Circular (RMC) No. 74-99, on 15 October 1999. Of particular interest to the
present Petition is Section 3 thereof, which reads

SECTION 3. Tax Treatment Of Sales Made By a VAT Registered Supplier from The Customs Territory,
To a PEZA Registered Enterprise.

(1) If the Buyer is a PEZA registered enterprise which is subject to the 5% special tax regime, in lieu of all
taxes, except real property tax, pursuant to R.A. No. 7916, as amended:

(a) Sale of goods (i.e., merchandise). This shall be treated as indirect export hence, considered subject to
zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916, in relation to
ART. 77(2) of the Omnibus Investments Code.

(b) Sale of service. This shall be treated subject to zero percent (0%) VAT under the cross border doctrine
of the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998.

(2) If Buyer is a PEZA registered enterprise which is not embraced by the 5% special tax regime, hence,
subject to taxes under the NIRC, e.g., Service Establishments which are subject to taxes under the NIRC
rather than the 5% special tax regime:

(a) Sale of goods (i.e., merchandise). This shall be treated as indirect export hence, considered subject to
zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916 in relation to
ART. 77(2) of the Omnibus Investments Code.

(b) Sale of Service. This shall be treated subject to zero percent (0%) VAT under the cross border doctrine of
the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998.

(3) In the final analysis, any sale of goods, property or services made by a VAT registered supplier from the
Customs Territory to any registered enterprise operating in the ecozone, regardless of the class or type of the
latters PEZA registration, is actually qualified and thus legally entitled to the zero percent (0%) VAT.
Accordingly, all sales of goods or property to such enterprise made by a VAT registered supplier from the
Customs Territory shall be treated subject to 0% VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC, in relation to
ART. 77(2) of the Omnibus Investments Code, while all sales of services to the said enterprises, made by VAT
registered suppliers from the Customs Territory, shall be treated effectively subject to the 0% VAT, pursuant to
Section 108(B)(3), NIRC, in relation to the provisions of R.A. No. 7916 and the Cross Border Doctrine of the
VAT system.

This Circular shall serve as a sufficient basis to entitle such supplier of goods, property or services to the
benefit of the zero percent (0%) VAT for sales made to the aforementioned ECOZONE enterprises and shall
serve as sufficient compliance to the requirement for prior approval of zero-rating imposed by Revenue
Regulations No. 7-95 effective as of the date of the issuance of this Circular.

Indubitably, no output VAT may be passed on to an ECOZONE enterprise since it is a VAT-exempt entity. The
VAT treatment of sales to it, however, varies depending on whether the supplier from the Customs Territory is
VAT-registered or not.

Sales of goods, properties and services by a VAT-registered supplier from the Customs Territory to an
ECOZONE enterprise shall be treated as export sales. If such sales are made by a VAT-registered supplier,
they shall be subject to VAT at zero percent (0%). In zero-rated transactions, the VAT-registered supplier shall
not pass on any output VAT to the ECOZONE enterprise, and at the same time, shall be entitled to claim tax
credit/refund of its input VAT attributable to such sales. Zero-rating of export sales primarily intends to benefit

86
the exporter (i.e., the supplier from the Customs Territory), who is directly and legally liable for the VAT,
making it internationally competitive by allowing it to credit/refund the input VAT attributable to its export sales.

Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or unregistered supplier would only be
exempt from VAT and the supplier shall not be able to claim credit/refund of its input VAT.

Even conceding, however, that respondent Toshiba, as a PEZA-registered enterprise, is a VAT-exempt entity
that could not have engaged in a VAT-taxable business, this Court still believes, given the particular
circumstances of the present case, that it is entitled to a credit/refund of its input VAT.

II

Prior to RMC No. 74-99, however, PEZA-registered enterprises availing of the income tax holiday under
Executive Order No. 226, as amended, were deemed subject to VAT.

In his Petition, petitioner CIR opposed the grant of tax credit/refund to respondent Toshiba, reasoning thus

In the first place, respondent could not have paid input taxes on its purchases of goods and services from VAT-
registered suppliers because such purchases being zero-rated, that is, no output tax was paid by the suppliers,
no input tax was shifted or passed on to respondent. The VAT is an indirect tax and the amount of tax may be
shifted or passed on to the buyer, transferee or lessee of the goods, properties or services (Section 105, 1997
Tax Code).

Secondly, Section 4.100-2 of Revenue Regulations No. 7-95 provides:

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

From the foregoing, the VAT-registered person who can avail as tax credit or refund of the input tax on his
purchases of goods, services or properties is the seller whose sale is zero-rated. Applying the foregoing
provision to the case at bench, the VAT-registered supplier, whose sale of goods and services to respondent is
zero-rated, can avail as tax credit or refund the input taxes on its (supplier) own purchases of goods and
services related to its zero-rated sale of goods and services to respondent. On the other hand, respondent, as
the buyer in such zero-rated sale of goods and services, could not have paid input taxes for which it can claim
as tax credit or refund.[27]

Before anything else, this Court wishes to point out that petitioner CIR is working on the erroneous premise
that respondent Toshiba is claiming tax credit or refund of input VAT based on Section 4.100-2,[28] in relation
to Section 4.106-1(a),[29] of RR No. 7-95, as amended, which allows the tax credit/refund of input VAT on
zero-rated sales of goods, properties or services. Instead, respondent Toshiba is basing its claim for tax credit
or refund on Sec. 4.106-1(b) of the same regulations, which allows a VAT-registered person to apply for tax
credit/refund of the input VAT on its capital goods. While in the former, the seller of the goods, properties or
services is the one entitled to the tax credit/refund; in the latter, it is the purchaser of the capital goods.

Nevertheless, regardless of his mistake as to the basis for respondent Toshibas application for tax
credit/refund, petitioner CIR validly raised the question of whether any output VAT was actually passed on to
respondent Toshiba which it could claim as input VAT subject to credit/refund. If the VAT-registered supplier
from the Customs Territory did not charge any output VAT to respondent Toshiba believing that it is exempt
from VAT or it is subject to zero-rated VAT, then respondent Toshiba did not pay any input VAT on its
purchase of capital goods and it could not claim any tax credit/refund thereof.

87
The rule that any sale by a VAT-registered supplier from the Customs Territory to a PEZA-registered enterprise
shall be considered an export sale and subject to zero percent (0%) VAT was clearly established only on 15
October 1999, upon the issuance of RMC No. 74-99. Prior to the said date, however, whether or not a PEZA-
registered enterprise was VAT-exempt depended on the type of fiscal incentives availed of by the said
enterprise. This old rule on VAT-exemption or liability of PEZA-registered enterprises, followed by the BIR, also
recognized and affirmed by the CTA, the Court of Appeals, and even this Court,[30] cannot be lightly
disregarded considering the great number of PEZA-registered enterprises which did rely on it to determine its
tax liabilities, as well as, its privileges.

According to the old rule, Section 23 of Rep. Act No. 7916, as amended, gives the PEZA-registered enterprise
the option to choose between two sets of fiscal incentives: (a) The five percent (5%) preferential tax rate on its
gross income under Rep. Act No. 7916, as amended; and (b) the income tax holiday provided under Executive
Order No. 226, otherwise known as the Omnibus Investment Code of 1987, as amended.[31]

The five percent (5%) preferential tax rate on gross income under Rep. Act No. 7916, as amended, is in lieu of
all taxes. Except for real property taxes, no other national or local tax may be imposed on a PEZA-registered
enterprise availing of this particular fiscal incentive, not even an indirect tax like VAT.

Alternatively, Book VI of Exec. Order No. 226, as amended, grants income tax holiday to registered pioneer
and non-pioneer enterprises for six-year and four-year periods, respectively.[32] Those availing of this
incentive are exempt only from income tax, but shall be subject to all other taxes, including the ten percent
(10%) VAT.

This old rule clearly did not take into consideration the Cross Border Doctrine essential to the VAT system or
the fiction of the ECOZONE as a foreign territory. It relied totally on the choice of fiscal incentives of the PEZA-
registered enterprise. Again, for emphasis, the old VAT rule for PEZA-registered enterprises was based on
their choice of fiscal incentives: (1) If the PEZA-registered enterprise chose the five percent (5%) preferential
tax on its gross income, in lieu of all taxes, as provided by Rep. Act No. 7916, as amended, then it would be
VAT-exempt; (2) If the PEZA-registered enterprise availed of the income tax holiday under Exec. Order No.
226, as amended, it shall be subject to VAT at ten percent (10%). Such distinction was abolished by RMC No.
74-99, which categorically declared that all sales of goods, properties, and services made by a VAT-registered
supplier from the Customs Territory to an ECOZONE enterprise shall be subject to VAT, at zero percent (0%)
rate, regardless of the latters type or class of PEZA registration; and, thus, affirming the nature of a PEZA-
registered or an ECOZONE enterprise as a VAT-exempt entity.

The sale of capital goods by suppliers from the Customs Territory to respondent Toshiba in the present Petition
took place during the first and second quarters of 1996, way before the issuance of RMC No. 74-99, and when
the old rule was accepted and implemented by no less than the BIR itself. Since respondent Toshiba opted to
avail itself of the income tax holiday under Exec. Order No. 226, as amended, then it was deemed subject to
the ten percent (10%) VAT. It was very likely therefore that suppliers from the Customs Territory had passed
on output VAT to respondent Toshiba, and the latter, thus, incurred input VAT. It bears emphasis that the CTA,
with the help of SGV & Co., the independent accountant it commissioned to make a report, already thoroughly
reviewed the evidence submitted by respondent Toshiba consisting of receipts, invoices, and vouchers, from
its suppliers from the Customs Territory. Accordingly, this Court gives due respect to and adopts herein the
CTAs findings that the suppliers of capital goods from the Customs Territory did pass on output VAT to
respondent Toshiba and the amount of input VAT which respondent Toshiba could claim as credit/refund.

Moreover, in another circular, Revenue Memorandum Circular (RMC) No. 42-2003, issued on 15 July 2003,
the BIR answered the following question

Q-5: Under Revenue Memorandum Circular (RMC) No. 74-99, purchases by PEZA-registered firms
automatically qualify as zero-rated without seeking prior approval from the BIR effective October
1999.

88
 1) Will the OSS-DOF Center still accept applications from PEZA-registered claimants who were
allegedly billed VAT by their suppliers before and during the effectivity of the RMC by
issuing VAT invoices/receipts?

A-5(1): If the PEZA-registered enterprise is paying the 5% preferential tax in lieu of all other taxes, the
said PEZA-registered taxpayer cannot claim TCC or refund for the VAT paid on purchases.
However, if the taxpayer is availing of the income tax holiday, it can claim VAT credit provided:

a. The taxpayer-claimant is VAT-registered;

b. Purchases are evidenced by VAT invoices or receipts, whichever is applicable, with shifted
VAT to the purchaser prior to the implementation of RMC No. 74-99; and

c. The supplier issues a sworn statement under penalties of perjury that it shifted the VAT and
declared the sales to the PEZA-registered purchaser as taxable sales in its VAT returns.

For invoices/receipts issued upon the effectivity of RMC No. 74-99, the claims for input VAT by
PEZA-registered companies, regardless of the type or class of PEZA registration, should be
denied.

Under RMC No. 42-2003, the DOF would still accept applications for tax credit/refund filed by PEZA-registered
enterprises, availing of the income tax holiday, for input VAT on their purchases made prior to RMC No. 74-99.
Acceptance of applications essentially implies processing and possible approval thereof depending on whether
the given conditions are met. Respondent Toshibas claim for tax credit/refund arose from the very same
circumstances recognized by Q-5(1) and A-5(1) of RMC No. 42-2003. It therefore seems irrational and
unreasonable for petitioner CIR to oppose respondent Toshibas application for tax credit/refund of its input
VAT, when such claim had already been determined and approved by the CTA after due hearing, and even
affirmed by the Court of Appeals; while it could accept, process, and even approve applications filed by other
similarly-situated PEZA-registered enterprises at the administrative level.

III

Findings of fact by the CTA are respected and adopted by this Court.

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

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

DIGEST:

Facts:
89
Toshiba was claiming a refund for the input tax it paid on unutilized capital goods purchased. However, the CIR
said that it cannot because the capital goods and services it purchased are considered not used in VAT taxabl
e business and therefore, it is not entitled to refund of input taxes. Toshiba, on the other hand, contended that i
t is PEZA-registered and located within the ecozone and therefore for, VAT-exempt entity.

Issue:

Whether or not Toshiba is entitled to refund for the input tax it paid on unutilized capital goods purchased consi
dering that it is registered with PEZA and located within the ecozone.

Ruling:

Yes. CIR failed to differentiate between VAT-exempt transactions from VAT-

exempt entities. An exempt transactions are transactions specifically listed in and expressly exempted from VA
T under the Tax Code without regard to the tax status, VAT-
exempt or not, of the taxpayer. An exempt party, on the other hand, is a person or entity granted VAT-
exemption under the Tax Code, special law or an international agreement to which the Philippines is a signator
y and by virtue of which its taxable transactions become exempt from VAT.

Toshiba, a PEZA-registered and located within a ecozone is a VAT-

exempt entity because of Sec 8 of Ta 7916 which establishes the fiction that ecozones are foreign territory. Th
erefore, a supplier from the custom territory cannot pass on output VAT to an ecozone enterprise, like Toshiba,
since it is exempt.

G.R. No. 151135 July 2, 2004

CONTEX CORPORATION, petitioner,

vs.
HON. COMMISSIONER OF INTERNAL REVENUE, respondent.

QUISUMBING, J.:

For review is the Decision1 dated September 3, 2001, of the Court of Appeals, in CA-G.R. SP No. 62823,
which reversed and set aside the decision2 dated October 13, 2000, of the Court of Tax Appeals (CTA). The
CTA had ordered the Commissioner of Internal Revenue (CIR) to refund the sum of P683,061.90 to petitioner
as erroneously paid input value-added tax (VAT) or in the alternative, to issue a tax credit certificate for said
amount. Petitioner also assails the appellate court’s Resolution,3 dated December 19, 2001, denying the
motion for reconsideration.

Petitioner is a domestic corporation engaged in the business of manufacturing hospital textiles and garments
and other hospital supplies for export. Petitioner’s place of business is at the Subic Bay Freeport Zone (SBFZ).
It is duly registered with the Subic Bay Metropolitan Authority (SBMA) as a Subic Bay Freeport Enterprise,
pursuant to the provisions of Republic Act No. 7227.4 As an SBMA-registered firm, petitioner is exempt from all
local and national internal revenue taxes except for the preferential tax provided for in Section 12 (c)5 of Rep.
Act No. 7227. Petitioner also registered with the Bureau of Internal Revenue (BIR) as a non-VAT taxpayer
under Certificate of Registration RDO Control No. 95-180-000133.

From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and materials necessary
in the conduct of its manufacturing business. The suppliers of these goods shifted unto petitioner the 10% VAT
90
on the purchased items, which led the petitioner to pay input taxes in the amounts of P539,411.88 and
P504,057.49 for 1997 and 1998, respectively.6

Acting on the belief that it was exempt from all national and local taxes, including VAT, pursuant to Rep. Act
No. 7227, petitioner filed two applications for tax refund or tax credit of the VAT it paid. Mr. Edilberto Carlos,
revenue district officer of BIR RDO No. 19, denied the first application letter, dated December 29, 1998.

Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax refund/credit, this time
directly with Atty. Alberto Pagabao, the regional director of BIR Revenue Region No. 4. The second letter
sought a refund or issuance of a tax credit certificate in the amount of P1,108,307.72, representing erroneously
paid input VAT for the period January 1, 1997 to November 30, 1998.

When no response was forthcoming from the BIR Regional Director, petitioner then elevated the matter to the
Court of Tax Appeals, in a petition for review docketed as CTA Case No. 5895. Petitioner stressed that Section
112(A)7 if read in relation to Section 106(A)(2)(a)8 of the National Internal Revenue Code, as amended and
Section 12(b)9 and (c) of Rep. Act No. 7227 would show that it was not liable in any way for any value-added
tax.

In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply the rule that claims for refund
are strictly construed against the taxpayer. Since petitioner failed to establish both its right to a tax refund or
tax credit and its compliance with the rules on tax refund as provided for in Sections 20410 and 22911 of the
Tax Code, its claim should be denied, according to the BIR.

On October 13, 2000, the CTA decided CTA Case No. 5895 as follows:

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

SO ORDERED.12

In granting a partial refund, the CTA ruled that petitioner misread Sections 106(A)(2)(a) and 112(A) of the Tax
Code. The tax court stressed that these provisions apply only to those entities registered as VAT taxpayers
whose sales are zero-rated. Petitioner does not fall under this category, since it is a non-VAT taxpayer as
evidenced by the Certificate of Registration RDO Control No. 95-180-000133 issued by RDO Rosemarie
Ragasa of BIR RDO No. 18 of the Subic Bay Freeport Zone and thus it is exempt from VAT, pursuant to Rep.
Act No. 7227, said the CTA.

Nonetheless, the CTA held that the petitioner is exempt from the imposition of input VAT on its purchases of
supplies and materials. It pointed out that under Section 12(c) of Rep. Act No. 7227 and the Implementing
Rules and Regulations of the Bases Conversion and Development Act of 1992, all that petitioner is required to
pay as a SBFZ-registered enterprise is a 5% preferential tax.

The CTA also disallowed all refunds of input VAT paid by the petitioner prior to June 29, 1997 for being barred
by the two-year prescriptive period under Section 229 of the Tax Code. The tax court also limited the refund
only to the input VAT paid by the petitioner on the supplies and materials directly used by the petitioner in the
manufacture of its goods. It struck down all claims for input VAT paid on maintenance, office supplies, freight
charges, and all materials and supplies shipped or delivered to the petitioner’s Makati and Pasay City offices.

Respondent CIR then filed a petition, docketed as CA-G.R. SP No. 62823, for review of the CTA decision by
the Court of Appeals. Respondent maintained that the exemption of Contex Corp. under Rep. Act No. 7227
was limited only to direct taxes and not to indirect taxes such as the input component of the VAT. The

91
Commissioner pointed out that from its very nature, the value-added tax is a burden passed on by a VAT
registered person to the end users; hence, the direct liability for the tax lies with the suppliers and not Contex.

Finding merit in the CIR’s arguments, the appellate court decided CA-G.R. SP No. 62823 in his favor, thus:

WHEREFORE, premises considered, the appealed decision is hereby REVERSED AND SET ASIDE.
Contex’s claim for refund of erroneously paid taxes is DENIED accordingly.

SO ORDERED.13

In reversing the CTA, the Court of Appeals held that the exemption from duties and taxes on the importation of
raw materials, capital, and equipment of SBFZ-registered enterprises under Rep. Act No. 7227 and its
implementing rules covers only "the VAT imposable under Section 107 of the [Tax Code], which is a direct
liability of the importer, and in no way includes the value-added tax of the seller-exporter the burden of which
was passed on to the importer as an additional costs of the goods."14 This was because the exemption
granted by Rep. Act No. 7227 relates to the act of importation and Section 10715 of the Tax Code specifically
imposes the VAT on importations. The appellate court applied the principle that tax exemptions are strictly
construed against the taxpayer. The Court of Appeals pointed out that under the implementing rules of Rep.
Act No. 7227, the exemption of SBFZ-registered enterprises from internal revenue taxes is qualified as
pertaining only to those for which they may be directly liable. It then stated that apparently, the legislative intent
behind Rep. Act No. 7227 was to grant exemptions only to direct taxes, which SBFZ-registered enterprise may
be liable for and only in connection with their importation of raw materials, capital, and equipment as well as
the sale of their goods and services.

Petitioner timely moved for reconsideration of the Court of Appeals decision, but the motion was denied.

Hence, the instant petition raising as issues for our resolution the following:

A. WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL AND NATIONAL INTERNAL REVENUE
TAXES PROVIDED IN REPUBLIC ACT NO. 7227 COVERS THE VALUE ADDED TAX PAID BY
PETITIONER, A SUBIC BAY FREEPORT ENTERPRISE ON ITS PURCHASES OF SUPPLIES AND
MATERIALS.

B. WHETHER OR NOT THE COURT OF TAX APPEALS CORRECTLY HELD THAT PETITIONER IS
ENTITLED TO A TAX CREDIT OR REFUND OF THE VAT PAID ON ITS PURCHASES OF SUPPLIES
AND RAW MATERIALS FOR THE YEARS 1997 AND 1998.16

Simply stated, we shall resolve now the issues concerning: (1) the correctness of the finding of the Court of
Appeals that the VAT exemption embodied in Rep. Act No. 7227 does not apply to petitioner as a purchaser;
and (2) the entitlement of the petitioner to a tax refund on its purchases of supplies and raw materials for 1997
and 1998.

On the first issue, petitioner argues that the appellate court’s restrictive interpretation of petitioner’s VAT
exemption as limited to those covered by Section 107 of the Tax Code is erroneous and devoid of legal basis.
It contends that the provisions of Rep. Act No. 7227 clearly and unambiguously mandate that no local and
national taxes shall be imposed upon SBFZ-registered firms and hence, said law should govern the case.
Petitioner calls our attention to regulations issued by both the SBMA and BIR clearly and categorically
providing that the tax exemption provided for by Rep. Act No. 7227 includes exemption from the imposition of
VAT on purchases of supplies and materials.

The respondent takes the diametrically opposite view that while Rep. Act No. 7227 does grant tax exemptions,
such grant is not all-encompassing but is limited only to those taxes for which a SBFZ-registered business may

92
be directly liable. Hence, SBFZ locators are not relieved from the indirect taxes that may be shifted to them by
a VAT-registered seller.

At this juncture, it must be stressed that the VAT is an indirect tax. As such, the amount of tax paid on the
goods, properties or services bought, transferred, or leased may be shifted or passed on by the seller,
transferor, or lessor to the buyer, transferee or lessee.17 Unlike a direct tax, such as the income tax, which
primarily taxes an individual’s ability to pay based on his income or net wealth, an indirect tax, such as the
VAT, is a tax on consumption of goods, services, or certain transactions involving the same. The VAT, thus,
forms a substantial portion of consumer expenditures.

Further, in indirect taxation, there is a need to distinguish between the liability for the tax and the burden of the
tax. As earlier pointed out, the amount of tax paid may be shifted or passed on by the seller to the buyer. What
is transferred in such instances is not the liability for the tax, but the tax burden. In adding or including the VAT
due to the selling price, the seller remains the person primarily and legally liable for the payment of the tax.
What is shifted only to the intermediate buyer and ultimately to the final purchaser is the burden of the tax.18
Stated differently, a seller who is directly and legally liable for payment of an indirect tax, such as the VAT on
goods or services is not necessarily the person who ultimately bears the burden of the same tax. It is the final
purchaser or consumer of such goods or services who, although not directly and legally liable for the payment
thereof, ultimately bears the burden of the tax.19

Exemptions from VAT are granted by express provision of the Tax Code or special laws. Under VAT, the
transaction can have preferential treatment in the following ways:

(a) VAT Exemption. An exemption means that the sale of goods or properties and/or services and the
use or lease of properties is not subject to VAT (output tax) and the seller is not allowed any tax credit
on VAT (input tax) previously paid.20 This is a case wherein the VAT is removed at the exempt stage
(i.e., at the point of the sale, barter or exchange of the goods or properties).

The person making the exempt sale of goods, properties or services shall not bill any output tax to his
customers because the said transaction is not subject to VAT. On the other hand, a VAT-registered
purchaser of VAT-exempt goods/properties or services which are exempt from VAT is not entitled to
any input tax on such purchase despite the issuance of a VAT invoice or receipt.21

(b) Zero-rated Sales. These are sales by VAT-registered persons which are subject to 0% rate,
meaning the tax burden is not passed on to the purchaser. A zero-rated sale by a VAT-registered
person, which is a taxable transaction for VAT purposes, shall not result in any output tax. However, the
input tax on his purchases of goods, properties or services related to such zero-rated sale shall be
available as tax credit or refund in accordance with these regulations.22

Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm. In contrast, exemption only
removes the VAT at the exempt stage, and it will actually increase, rather than reduce the total taxes paid by
the exempt firm’s business or non-retail customers. It is for this reason that a sharp distinction must be made
between zero-rating and exemption in designating a value-added tax.23

Apropos, the petitioner’s claim to VAT exemption in the instant case for its purchases of supplies and raw
materials is founded mainly on Section 12 (b) and (c) of Rep. Act No. 7227, which basically exempts them from
all national and local internal revenue taxes, including VAT and Section 4 (A)(a) of BIR Revenue Regulations
No. 1-95.24

On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is not controverted by the
respondent. In fact, petitioner is registered as a NON-VAT taxpayer per Certificate of Registration25 issued by
the BIR. As such, it is exempt from VAT on all its sales and importations of goods and services.

93
Petitioner’s claim, however, for exemption from VAT for its purchases of supplies and raw materials is
incongruous with its claim that it is VAT-Exempt, for only VAT-Registered entities can claim Input VAT
Credit/Refund.

The point of contention here is whether or not the petitioner may claim a refund on the Input VAT erroneously
passed on to it by its suppliers.

While it is true that the petitioner should not have been liable for the VAT inadvertently passed on to it by its
supplier since such is a zero-rated sale on the part of the supplier, the petitioner is not the proper party to claim
such VAT refund.

Section 4.100-2 of BIR’s Revenue Regulations 7-95, as amended, or the "Consolidated Value-Added Tax
Regulations" provide:

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

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

(a) Export Sales

"Export Sales" shall mean

...

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

...

(c) Sales to persons or entities whose exemption under special laws, e.g. R.A. No. 7227 duly registered
and accredited enterprises with Subic Bay Metropolitan Authority (SBMA) and Clark Development
Authority (CDA), R. A. No. 7916, Philippine Economic Zone Authority (PEZA), or international
agreements, e.g. Asian Development Bank (ADB), International Rice Research Institute (IRRI), etc. to
which the Philippines is a signatory effectively subject such sales to zero-rate."

Since the transaction is deemed a zero-rated sale, petitioner’s supplier may claim an Input VAT credit with no
corresponding Output VAT liability. Congruently, no Output VAT may be passed on to the petitioner.

On the second issue, it may not be amiss to re-emphasize that the petitioner is registered as a NON-VAT
taxpayer and thus, is exempt from VAT. As an exempt VAT taxpayer, it is not allowed any tax credit on VAT
(input tax) previously paid. In fine, even if we are to assume that exemption from the burden of VAT on
petitioner’s purchases did exist, petitioner is still not entitled to any tax credit or refund on the input tax
previously paid as petitioner is an exempt VAT taxpayer.

Rather, it is the petitioner’s suppliers who are the proper parties to claim the tax credit and accordingly refund
the petitioner of the VAT erroneously passed on to the latter.

94
Accordingly, we find that the Court of Appeals did not commit any reversible error of law in holding that
petitioner’s VAT exemption under Rep. Act No. 7227 is limited to the VAT on which it is directly liable as a
seller and hence, it cannot claim any refund or exemption for any input VAT it paid, if any, on its purchases of
raw materials and supplies.

WHEREFORE, the petition is DENIED for lack of merit. The Decision dated September 3, 2001, of the Court of
Appeals in CA-G.R. SP No. 62823, as well as its Resolution of December 19, 2001 are AFFIRMED. No
pronouncement as to costs.SO ORDERED.

DIGEST:

TOPIC:
VAT: INDIRECT TAX
Impact of Tax
Incidence of Tax

CASE: Contex Corporation vs. Commissioner of Internal Revenue

433 SCRA 376 | July 2, 2004

FACTS:

1. Petitioner Contex Corporation: domestic corporation engaged in the business of manufacturing

hospital textiles and garments and other hospital supplies for export
- Place of business: Subic Bay Freeport Zone (SBFZ)
- Duly registered with the Subic BayMetropolitan Authority (SBMA) as a Subic Bay Freeport
Enterprise (RA 7227)
- As an SBMA-registered firm, petitioner is exempt from all local and national internal revenue taxes
except for the preferential tax (Section 12c of RA 7227)
- Registered with the BIR as a NON-VAT TAXPAYER (Certificate of Registration RDO)

2. Jan 1, 1997 to Dec 31, 1998: petitioner purchased various supplies and materials necessary in the
conduct of its manufacturing business

3. The suppliers of these goods SHIFTED UNTO PETITIONER the 10% VAT on the purchased items,
which led the petitioner to pay input taxes (P539,411.88 and P504,057.49 for 1997 and 1998, resp.)

4. Acting on the belief that it was exempt from all national and local taxes, including VAT, petitioner filed
two applications for tax refund or tax credit of the VAT it paid

5. Revenue District Officer of BIR RDO Mr. Carlos denied the 1st application letter

6. Petitioner filed another application for tax refund/credit directly with Regional Director of BIR Region IV
Atty. Pagabao
- Sought a refund or issuance of a tax credit certificate (P1,108,307.72), representing erroneously
paid input VAT (Jan 1, 1997 to Nov 30, 1998)

7. No response from BIR Regional Director

8. Petitioner elevated the matter to CTA in a petition for review

- Section 112(A) if read in relation to Section 106(A)(2)(a) of NIRC and Section 12(b) and (c) of RA
7227 would show that it was not liable in any way for any VAT

95
 9. In opposing the claim for tax refund or tax credit, BIR asked CTA to apply the rule that claims for refund
are strictly construed against the taxpayer
- Since petitioner failed to establish both its right to a tax refund or tax credit and its compliance with
the rules on tax refund (Sections 204 and 229 of Tax Code), its claim should be denied

10. CTA: petition partially granted; respondent is hereby ordered to refund or in the alternative to issue a
tax credit certificate in favor of petitioner (P683,061.90) representing erroneously paid input VAT
- Petitioner misread Sections 106(A)(2)(a) and 112(A) of Tax Code  these provisions apply only to
those entities registered as VAT taxpayers whose sales are zero-rated
- Petitioner does not fall under this category, since it is a non-VAT taxpayer as evidenced by the
Certificate of Registration RDO
- Petitioner is exempt from the imposition of input VAT on its purchases of supplies and materials
- Petitioner is required to pay as a SBFZ-registered enterprise is a 5% preferential tax
- Disallowed all refunds of input VAT paid by petitioner prior to June 29, 1997 for being barred by the
2-yr prescriptive period (Section 229, Tax Code)
- Also limited the refund only to the input VAT paid by the petitioner on supplies and materials directly
used by the petitioner in the manufacture of goods
- Struck down all claims for charges, and all materials and supplies shipped or delivered to the
petitioner’s Makati and Pasay City offices

11. CIR filed a petition for review of the CTA decision by the CA
- The exemption of Contex Corporation under RA 7227 was limited only to DIRECT TAXES and not
to indirect taxes such as the input component of the VAT
- VAT is a burden passed on by a VAT-registered person to the end users; hence, the direct liability
for the tax lies with the suppliers and not Contex

12. CA: reversed CTA’s decision; in favor of CIR; Contex’s claim for refund of erroneously paid taxes is
denied
- The exemption from duties and taxes on the importation of raw materials, capital, and equipment of
SBFZ-registered enterprises under RA 7227 and its implementing rules covers only “the VAT
imposable under Section 107 of Tax Code, which is direct liability of the importer, and in no way
includes the VAT of the seller-exporter the burden of which was passed on to the importer as an
additional costs of the goods
- Exemption granted by RA 7227 relates to the act of importation (Section 107 specifically imposes
the VAT on importations
- Exemption of SBFZ-registered enterprises from internal revenue taxes is qualified as pertaining
only to those for which they may be directly liable (direct tax, and only in connection with their
importation of raw materials, capital, and equipment as well as the sale of their goods and services)

13. Petitioner moved for reconsideration of CA decision; denied

14. Hence, this instant petition.

ISSUES:
(1) Whether or not the VAT exemption embodied in RA 7227 applies to petitioner as a purchaser

(2) Whether or not petitioner may claim a refund on the Input VAT erroneously passed on to it by its
suppliers

HELD:
(1) YES, limited to the VAT on which it is directly liable as a seller hence, it cannot claim any
refund or exemption for any input VAT it paid, if any, on its purchases of raw materials and
supplies;

(2) NO

96
RATIO:

 VAT
- Indirect tax
- As such, the amount of tax paid on the goods, properties or services bought, transferred, or leased may
be shifted or passed on by the seller, transferor, or lessor to the buyer, transferee or lessee
- Unlike a direct tax, such as the income tax, which primarily taxes an individual’s ability to pay based on
his income or net wealth, an indirect tax, such as the VAT, is a tax on consumption of goods, services,
or certain transactions involving the same
- VAT thus forms a substantial portion of consumer expenditures

 INDIRECT TAXATION
- Liability for the tax vs. burden of the tax
- The amount of tax paid may be shifted or passed on by the seller to the buyer
- What is transferred in such instances is not the liability for the tax, but the TAX BURDEN
- In adding or including the VAT due to the selling price, the seller remains the person primarily and
legally liable for the payment of the tax. What is shifted only to the intermediate buyer and ultimately to
the final purchaser is the burden of the tax
- A seller who is directly and legally liable for payment of an indirect tax, such as the VAT on goods or
services is not necessarily the person who ultimately bears the burden of the same tax. It is the final
purchaser or consumer of such goods or services who, although not directly and legally liable for the
payment thereof, ultimately bears the burden of the tax.

 PREFERENTIAL TREATMENTS:
(a) VAT Exemption
- Sale of goods or properties and/or services and the use or lease of properties is not subject to VAT
(output tax) and the seller is not allowed any tax credit on VAT (input tax) previously paid
- VAT is removed at the exempt stage (i.e., at the point of the sale, barter or exchange of the
goods/properties)
- The person making the exempt sale of goods, properties or services shall not bill any output tax to
his customers because the said transaction is not subject to tax
- A VAT-registered purchaser of VAT-exempt goods/properties or services which are exempt from
VAT is not entitled to any input tax on such purchase despite the issuance of a VAT invoice or
receipt

(b) Zero-rated Sales

- Sales by VAT-registered persons which are subject to 0% rate (tax burden is not passed on to the
purchaser)
- A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT purposes,
shall not result to any output tax. However, the input tax on his purchases of goods, properties or
services related to such zero-rated sale shall be available as tax credit or refund in acc with these
regulations
- All VAT is removed from the zero-rated goods, activity or firm

IN THE CASE AT BAR:

(1)
 Petitioner’s claim to VAT exemption in the instant case for its purchases of supplies and raw materials is
founded mainly on Section 12(b) and (c) of RA 7227, which basically exempts them from all national and
local internal revenue taxes, including VAT and Section 4(A)(a) of BIR Revenue Regulations No. 1-95.
 Petitioner rightly claims that it is indeed VAT-exempt and this fact is not controverted by the respondent. In
fact, petitioner is registered as a NON-VAT taxpayer per Certificate of Registration issued by the BIR. As
such, it is EXEMPT from VAT on all its sales and importations of goods and services.
97
(2)

 Petitioner’s claim, however, for exemption from VAT for its purchases of supplies and raw materials is
incongruous with its claim that it is VAT-exempt, for only VAT-registered entities can claim Input VAT
Credit/Refund.
 While it is true that the petitioner should not have been liable for the VAT inadvertently passed on to it by its
supplier since such is a zero-rated sale on the part of the supplier, the petitioner is not the proper party to
claim such VAT refund.
 Since the transaction is deemed a zero-rated sale, petitioner’s supplier may claim an Input VAT credit with
no corresponding Output VAT liability. Congruently, no Output VAT may be passed on to the petitioner.
 As an exempt VAT taxpayer, it is not allowed any tax credit on VAT (input tax) previously paid.
 Rather, it is the petitioner’s suppliers who are the proper parties to claim the tax credit and accordingly
refund the petitioner of the VAT erroneously passed on to the latter.

CORAL BAY NICKEL CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE,

Respondent.

BERSAMIN, J.:

This appeal is brought by a taxpayer whose claim for the refund or credit pertaining to its alleged unutilized
input tax for the third and fourth quarters of the year 2002 amounting to P50,124,086.75 had been denied by
the Commissioner of Internal Revenue. The Court of Tax Appeals (CTA) En Banc and in Division denied its
appeal.

We sustain the denial of the appeal.

Antecedents

The petitioner, a domestic corporation engaged in the manufacture of nickel and/or cobalt mixed sulphide, is a
VAT entity registered with the Bureau of Internal Revenue (BIR). It is also registered with the Philippine
Economic Zone Authority (PEZA) as an Ecozone Export Enterprise at the Rio Tuba Export Processing Zone
under PEZA Certificate of Registration dated December 27, 2002.1chanrobleslaw

On August 5, 2003,2 the petitioner filed its Amended VAT Return declaring unutilized input tax from its
domestic purchases of capital goods, other than capital goods and services, for its third and fourth quarters of
2002 totalling P50,124,086.75. On June 14, 2004,3 it filed with Revenue District Office No. 36 in Palawan its
Application for Tax Credits/Refund (BIR Form 1914) together with supporting documents.

Due to the alleged inaction of the respondent, the petitioner elevated its claim to the CTA on July 8, 2004 by
petition for review, praying for the refund of the aforesaid input VAT (CTA Case No. 7022). 4chanrobleslaw

After trial on the merits, the CTA in Division promulgated its decision on March 10, 20085 denying the
petitioner's claim for refund on the ground that the petitioner was not entitled to the refund of alleged unutilized
input VAT following Section 106(A)(2)(a)(5) of the National Internal Revenue Code (NIRC) of 1997, as
98
amended, in relation to Article 77(2) of the Omnibus Investment Code and conformably with the Cross Border
Doctrine. In support of its ruling, the CTA in Division cited Commissioner of Internal Revenue v. Toshiba
Information Equipment (Phils) Inc. (Toshiba)6 and Revenue Memorandum Circular ("RMC") No. 42-
03.7chanrobleslaw

After the CTA in Division denied its Motion for Reconsideration8 on July 2, 2008,9 the petitioner elevated the
matter to the CTA En Banc (CTA EB Case No. 403), which also denied the petition through the assailed
decision promulgated on May 29, 2009.10chanrobleslaw

The CTA En Banc denied the petitioner's Motion for Reconsideration through the resolution dated December
10, 2009.11chanrobleslaw

Hence, this appeal, whereby the petitioner contends that Toshiba is not applicable inasmuch as the unutilized
input VAT subject of its claim w(as incurred from May 1, 2002 to December 31, 2002 as a VAT-registered
taxpayer, not as a PEZA-registered enterprise; that during the period subject of its claim, it was not yet
registered with PEZA because it was only on December 27, 2002 that its Certificate of Registration was
issued;12 that until then, it could not have refused the payment of VAT on its purchases because it could not
present any valid proof of zero-rating to its VAT-registered suppliers; and that it complied with all the
procedural and substantive requirements under the law and regulations for its entitlement to the
refund.13chanrobleslaw

Issue

Was the petitioner, an entity located within an ECOZONE, entitled to the refund of its unutilized input taxes
incurred before it became a PEZA registered entity?

Ruling of the Court

The appeal is bereft of merit.

We first explain why we have given due course to the petition for review on certiorari despite the petitioner's
premature filing of its judiqial claim in the CTA.

The petitioner filed with the BIR on June 10, 2004 its application for tax refund or credit representing the
unutilized input tax for the third and fourth quarters of 2002. Barely 28 days later, it brought its appeal in the
CTA contending that there was inaction on the part of the petitioner despite its not having waited for the lapse
of the 120-day period mandated by Section 112 (D) of the 1997 NTRC. At the time of the petitioner's appeal,
however, the applicable rule was that provided under BIR Ruling No. DA-489-03,14 issued on December 10,
2003, to wit:ChanRoblesVirtualawlibrary
It appears, therefore, that it is not necessary for the Commissioner of Internal Revenue to first act unfavorably
on the claim for refund before the Court of Tax Appeals could validly take cognizance of the case. This is so
because of the positive mandate of Section 230 of the Tax Code and also by virtue of the doctrine that the
delay of the Commissioner in rendering his decision does not extend the reglementary period prescribed by
statute.

Incidentally, the taxpayer could not be faulted for taking advantage of the full two-year period set by law for
filing his claim for refund [with the Commissioner of Internal Revenue]. Indeed, no provision in the tax code
requires that the claim for refund be fxled at the earliest instance in order to give the Commissioner an
opportunity to rule on it and the court to review the ruling of the Commissioner of Internal Revenue on appeal.
xxx
As pronounced in Silicon Philippines Inc. vs. Commissioner of Internal Revenue,15 the exception to the
mandatory and jurisdictional compliance with the 120+30 day-period is when the claim for the tax refund or
credit was filed in the period between December 10, 2003 and October 5, 2010 during which BIR Ruling No.
DA-489-03 was still in effect. Accordingly, the premature filing of the judicial claim was allowed, giving to the

99
CTA jurisdiction over the appeal.

As to the main issue, we sustain the assailed decision of the CTA En Banc.

The petitioner's insistence, that Toshiba is not applicable because Toshiba Information Equipment (Phils) Inc.,
the taxpayer involved thereat, was a PEZA-registered entity during the time subject of the claim for tax refund
or credit, is unwarranted. The most significant difference between Toshiba and this case is that Revenue
Memorandum Circular No. 74-9916 was not yet in effect at the time Toshiba Information Equipment (Phils) Inc.
brought its claim for refund. Regardless of the distinction, however, Toshiba actually discussed the VAT
implication of PEZA-registered enterprises and ECOZONE-located enterprises in its entirety, which renders
Toshiba applicable to the petitioner's case.

Prior to the effectivity of RMC 74-99, the old VAT rule for PEZA-registered enterprises was based on their
choice of fiscal incentives, namely: (1) if the PEZA-registered enterprise chose the 5% preferential tax on its
gross income in lieu of all taxes, as provided by Republic Act No. 7916, as amended, then it was VAT-exempt;
and (2) if the PEZA-registered enterprise availed itself of the income tax holiday under Executive Order No.
226, as amended, it was subject to VAT at 10%17 (now, 12%). Based on this old rule, Toshiba allowed the
claim for refund or credit on the part of Toshiba Information Equipment (Phils) Inc.

This is not true with the petitioner. With the issuance of RMC 74-99, the distinction under the old rule was
disregarded and the new circular took into consideration the two important principles of the Philippine VAT
system: the Cross Border Doctrine and the Destination Principle. Thus, Toshiba
opined:ChanRoblesVirtualawlibrary
The rule that any sale by a VAT-registered supplier from the Customs Territory to a PEZA-registered enterprise
shall be considered an export sale and subject to zero percent (0%) VAT was clearly established only on 15
October 1999, upon the issuance of RMC No. 74-99. Prior to the said date, however, whether or not a PEZA-
registered enterprise was VAT-exempt depended on the type of fiscal incentives availed of by the said
enterprise. This old rule on VAT-exemption or liability of PEZA-registered enterprises, followed by the BIR, also
recognized and affirmed by the CTA, the Court of Appeals, and even this Court, cannot be lightly disregarded
considering the great number of PEZA-registered enterprises which did rely on it to determine its tax liabilities,
as well as, its privileges.

According to the old rule, Section 23 of Rep. Act No. 7916, as amended, gives the PEZA-registered enterprise
the option to choose between two sets of fiscal incentives: (a) The five percent (5%) preferential tax rate on its
gross income under Rep. Act No. 7916, as amended; and (b) the income tax holiday provided under Executive
Order No. 226, otherwise known as the Omnibus Investment Code of 1987, as amended.

xxxx

This old rule clearly did not take into consideration the Cross Border Doctrine essential to the VAT
system or the fiction of the ECOZONE as a foreign territory. It relied totally on the choice of fiscal
incentives of the PEZA-registered enterprise. Again, for emphasis, the old VAT rule for PEZA-registered
enterprises was based on their choice of fiscal incentives: (1) If the PEZA-registered enterprise chose the five
percent (5%) preferential tax on its gross income, in lieu of all taxes, as provided by Rep. Act No. 7916, as
amended, then it would be VAT-exempt; (2) If the PEZA-registered enterprise availed of the income tax holiday
under Exec. Order No. 226, as amended, it shall be subject to VAT at ten percent (10%). Such distinction
was abolished by RMC No. 74-99, which categorically declared that all sales of goods, properties, and
services made by a VAT-registered supplier from the Customs Territory to an ECOZONE enterprise
shall be subject to VAT, at zero percent (0%) rate, regardless of the tatter's type or class of PEZA
registration; and, thus, affirming the nature of a PEZA-registered or an ECOZONE enterprise as a VAT-
exempt entity.18 (underscoring and Emphasis supplied)
Furthermore, Section 8 of Republic Act No. 7916 mandates that PEZA shall manage and operate the
ECOZONE as a separate customs territory. The provision thereby establishes the fiction that an ECOZONE is
a foreign tenitory separate and distinct from the customs territory. Accordingly, the sales made by suppliers

100
from a customs territory to a purchaser located within an ECOZONE will be considered as exportations.
Following the Philippine VAT system's adherence to the Cross Border Doctrine and Destination Principle, the
VAT implications are that "no VAT shall be imposed to form part of the cost of goods destined for consumption
outside of the territorial border of the taxing authority"19 Thus, Toshiba has discussed
that:ChanRoblesVirtualawlibrary
This Court agrees, however, that PEZA-registered enterprises, which would necessarily be located within
ECQZONES, are VAT-exempt entities, not because of Section 24 of Rep. Act No. 7916, as amended, which
imposes the five percent (5%) preferential tax rate on gross income of PEZA-registered enterprises, in lieu of
all taxes; but, rather, because of Section 8 of the same statute which establishes the fiction that
ECOZONES are foreign territory.

It is important to note herein that respondent Toshiba is located within an ECOZONE. An ECOZONE or
a Special Economic Zone has been described as —

. . . [S]elected areas with highly developed or which have the potential to be developed into agro-industrial,
industrial, tourist, recreational, commercial, banking, investment and financial centers whose metes and
bounds are fixed or delimited by Presidential Proclamations. An ECOZONE may contain any or all of the
following: industrial estates (IEs), export processing zones (EPZs), free trade zones and tourist/recreational
centers.

The national territory of the Philippines outside of the proclaimed borders of the ECOZONE shall be referred to
as the Customs Territory.

Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall manage and operate the
ECOZONES as a separate customs territory; thus, creating the fiction that the ECOZONE is a foreign
territory. As a result, sales made by a supplier in the Customs Territory to a purchaser in the
ECOZONE shall be treated as an exportation from the Customs Territory. Conversely, sales made by a
supplier from the ECOZONE to a purchaser in the Customs Territory shall be considered as an importation into
the Customs Territory.20 (underscoring and emphasis are supplied)
The petitioner's principal office was located in Barangay Rio Tuba, Bataraza, Palawan.21 Its plant site was
specifically located inside the Rio Tuba Export Processing Zone — a special economic zone (ECOZONE)
created by Proclamation No. 304, Series of 2002, in relation to Republic Act No. 7916. As such, the purchases
of goods and services by the petitioner that were destined for consumption within the ECOZONE should be
free of VAT; hence, no input VAT should then be paid on such purchases, rendering the petitioner not entitled
to claim a tax refund or credit. Verily, if the petitioner had paid the input VAT, the CTA was correct in holding
that the petitioner's proper recourse was not against the Government but against the seller who had shifted to
it the output VAT following RMC No. 42-03,22 which provides:ChanRoblesVirtualawlibrary
In case the supplier alleges that it reported such sale as a taxable sale, the substantiation of remittance of the
output taxes of the seller (input taxes of the exporter-buyer) can only be established upon the thorough audit of
the suppliers' VAT returns and corresponding books and records. It is, therefore, imperative that the
processing office recommends to the concerned BIR Office the audit of the records of the seller.

In the meantime, the claim for input tax credit by the exporter-buyer should be denied without prejudice to the
claimant's right to seek reimbursement of the VAT paid, if any, from its supplier.
We should also take into consideration the nature of VAT as an indirect tax. Although the seller is statutorily
liable for the payment of VAT, the amount of the tax is allowed to be shifted or passed on to the buyejr. 23
However, reporting and remittance of the VAT paid to the BIR remained to be the seller/supplier's obligation.
Hence, the proper party to seek the tax refund or credit should be the suppliers, not the petitioner.

In view of the foregoing considerations, the Court must uphold the rejection of the appeal of the petitioner. This
Court has repeatedly poirited out that a claim for tax refund or credit is similar to a tax exemption and should
be strictly construed against the taxpayer. The burden of proof to show that he is ultimately entitled to the grant
of such tax refund or credit rests on the taxpayer.24 Sadly, the petitioner has not discharged its burden.

101
WHEREFORE, the Court AFFIRMS the decision promulgated on May 29, 2009 in CTA EB Case No. 403; and
ORDERS the petitioner to pay the costs of suit.SO ORDERED.chanRoblesvirtualLawlibrary

DIGEST:

Title: coral bay nickel corporation vs cir

Topic: VAT

Doctrine:

 VAT is an indirect tax that may be shifted

 A company registered in the ecozone is vat exempt

Facts:

 This appeal is brought by a taxpayer whose claim for the refund or credit pertaining to its alleged
unutilized input tax for the third and fourth quarters of the year 2002 amounting to P50,124,086.75
 The petitioner, a domestic corporation engaged in the manufacture of nickel and/or cobalt mixed
sulphide, is a VAT entity registered with the Bureau of Internal Revenue (BIR). It is also registered with
the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise at the Rio Tuba
Export Processing Zone under PEZA Certificate of Registration dated December 27, 2002
 On August 5, 2003,2 the petitioner filed its Amended VAT Return declaring unutilized input tax from its
domestic purchases of capital goods
 On June 14, 2004,3 it filed with Revenue District Office No. 36 in Palawan its Application for Tax
Credits/Refund (BIR Form 1914) together with supporting documents.
 the petitioner elevated its claim to the CTA on July 8, 2004 by petition for review, praying for the refund
of the aforesaid input VAT

CTA division ruling:

 the claim for tax refund is denied

 petitioner was not entitled to the refund of alleged unutilized input VAT following Section 106(A)(2)(a)(5)
of the National Internal Revenue Code (NIRC) of 1997, as amended, in relation to Article 77(2) of the
Omnibus Investment Code and conformably with the Cross Border Doctrine.
 the CTA in Division cited Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils)
Inc. and Revenue Memorandum Circular ("RMC") No. 42-03.7chanrobleslaw

CTA en banc ruling :

 affirmed division ruling that tax refund should be denied.

The main contention of the corporation?

 petitioner contends that Toshiba is not applicable inasmuch as the unutilized input VAT subject of its
claim w(as incurred from May 1, 2002 to December 31, 2002 as a VAT-registered taxpayer, not as a
PEZA-registered enterprise; that during the period subject of its claim, it was not yet registered with
PEZA because it was only on December 27, 2002 that its Certificate of Registration was issued;12 that
until then, it could not have refused the payment of VAT on its purchases because it could not present
102
 any valid proof of zero-rating to its VAT-registered suppliers; and that it complied with all the procedural
and substantive requirements under the law and regulations for its entitlement to the refund.

Sc ruling:

 the appeal of the corporation is bereft of merit

 The petitioner's insistence, that Toshiba is not applicable because Toshiba Information Equipment
(Phils) Inc., the taxpayer involved thereat, was a PEZA-registered entity during the time subject of the
claim for tax refund or credit, is unwarranted
 The most significant difference between Toshiba and this case is that Revenue Memorandum Circular
No. 74-9916 was not yet in effect at the time Toshiba Information Equipment (Phils) Inc. brought its
claim for refund. Regardless of the distinction, however, Toshiba actually discussed the VAT implication
of PEZA-registered enterprises and ECOZONE-located enterprises in its entirety, which
renders Toshiba applicable to the petitioner's case.

What is the old VAT rule?

(1) if the PEZA-registered enterprise chose the 5% preferential tax on its gross income in lieu of all taxes, as
provided by Republic Act No. 7916, as amended, then it was VAT-exempt; and

(2) if the PEZA-registered enterprise availed itself of the income tax holiday under Executive Order No. 226, as
amended, it was subject to VAT at 10%17(now, 12%).

 Based on this old rule, Toshiba allowed the claim for refund or credit on the part of Toshiba Information
Equipment (Phils) Inc.
 With the issuance of RMC 74-99, the distinction under the old rule was disregarded and the new
circular took into consideration the two important principles of the Philippine VAT system: the
 Cross Border Doctrine
 and the Destination Principle.

RMC No. 74-99, significance?....

 The rule that any sale by a VAT-registered supplier from the Customs Territory to a PEZA-registered
enterprise shall be considered an export sale and subject to zero percent (0%) VAT was clearly
established only on 15 October 1999, upon the issuance of RMC No. 74-99
 This old rule clearly did not take into consideration the Cross Border Doctrine essential to the
VAT system or the fiction of the ECOZONE as a foreign territory.

What is the old rule again? (emphasis)

 the old VAT rule for PEZA-registered enterprises was based on their choice of fiscal incentives: (1) If
the PEZA-registered enterprise chose the five percent (5%) preferential tax on its gross income, in lieu
of all taxes, as provided by Rep. Act No. 7916, as amended, then it would be VAT-exempt; (2) If the
PEZA-registered enterprise availed of the income tax holiday under Exec. Order No. 226, as amended,
it shall be subject to VAT at ten percent (10%).
 This distinction was abolished by RM no. 74-99
 RM no. 74-99 ,categorically declared that all sales of goods, properties, and services made by a
VAT-registered supplier from the Customs Territory to an ECOZONE enterprise shall be subject
to VAT, at zero percent (0%) rate, regardless of the tatter's type or class of PEZA registration;
103
 and, thus, affirming the nature of a PEZA-registered or an ECOZONE enterprise as a VAT-
exempt entity
 fiction that an ECOZONE is a foreign tenitory separate and distinct from the customs territory
 Accordingly, the sales made by suppliers from a customs territory to a purchaser located within an
ECOZONE will be considered as exportations.
 . Following the Philippine VAT system's adherence to the Cross Border Doctrine and Destination
Principle, the VAT implications are that "no VAT shall be imposed to form part of the cost of goods
destined for consumption outside of the territorial border of the taxing authority

According to the toshiba case. Why are company’s registered in ecozone VAT exempt?

 because of Section 8 of the same statute which establishes the fiction that ECOZONES are
foreign territory.
 The petitioner's principal office was located in Barangay Rio Tuba, Bataraza, Palawan.21 Its plant site
was specifically located inside the Rio Tuba Export Processing Zone — a special economic zone
(ECOZONE) created by Proclamation No. 304, Series of 2002, in relation to Republic Act No. 7916. As
such, the purchases of goods and services by the petitioner that were destined for consumption within
the ECOZONE should be free of VAT; hence, no input VAT should then be paid on such purchases,
rendering the petitioner not entitled to claim a tax refund or credit. Verily, if the petitioner had paid the
input VAT, the CTA was correct in holding that the petitioner's proper recourse was not against the
Government but against the seller who had shifted to it the output VAT
 Vat is an indirect tax which can be shifted
 In the meantime, the claim for input tax credit by the exporter-buyer should be denied without prejudice
to the claimant's right to seek reimbursement of the VAT paid, if any, from its supplier.
 Note that the claim of tax refund is in the nature of a tax exemption. It is therefore the burden of the
claimant to prove that it is entitled to such refund.
 Petition of corporation is denied

6.INPUT VAT

G.R. No. 168056 September 1, 2005

ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S. ALCANTARA and ED
VINCENT S. ALBANO, Petitioners,
vs.
THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA; HONORABLE SECRETARY OF THE
DEPARTMENT OF FINANCE CESAR PURISIMA; and HONORABLE COMMISSIONER OF INTERNAL
REVENUE GUILLERMO PARAYNO, JR., Respondent.

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

G.R. No. 168207

104
AQUILINO Q. PIMENTEL, JR., LUISA P. EJERCITO-ESTRADA, JINGGOY E. ESTRADA, PANFILO M.
LACSON, ALFREDO S. LIM, JAMBY A.S. MADRIGAL, AND SERGIO R. OSMEÑA III, Petitioners,
vs.
EXECUTIVE SECRETARY EDUARDO R. ERMITA, CESAR V. PURISIMA, SECRETARY OF FINANCE,
GUILLERMO L. PARAYNO, JR., COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE,
Respondent.

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

G.R. No. 168461

ASSOCIATION OF PILIPINAS SHELL DEALERS, INC. represented by its President, ROSARIO ANTONIO;
PETRON DEALERS’ ASSOCIATION represented by its President, RUTH E. BARBIBI; ASSOCIATION OF
CALTEX DEALERS’ OF THE PHILIPPINES represented by its President, MERCEDITAS A. GARCIA;
ROSARIO ANTONIO doing business under the name and style of "ANB NORTH SHELL SERVICE STATION";
LOURDES MARTINEZ doing business under the name and style of "SHELL GATE – N. DOMINGO";
BETHZAIDA TAN doing business under the name and style of "ADVANCE SHELL STATION"; REYNALDO P.
MONTOYA doing business under the name and style of "NEW LAMUAN SHELL SERVICE STATION";
EFREN SOTTO doing business under the name and style of "RED FIELD SHELL SERVICE STATION";
DONICA CORPORATION represented by its President, DESI TOMACRUZ; RUTH E. MARBIBI doing business
under the name and style of "R&R PETRON STATION"; PETER M. UNGSON doing business under the name
and style of "CLASSIC STAR GASOLINE SERVICE STATION"; MARIAN SHEILA A. LEE doing business
under the name and style of "NTE GASOLINE & SERVICE STATION"; JULIAN CESAR P. POSADAS doing
business under the name and style of "STARCARGA ENTERPRISES"; ADORACION MAÑEBO doing
business under the name and style of "CMA MOTORISTS CENTER"; SUSAN M. ENTRATA doing business
under the name and style of "LEONA’S GASOLINE STATION and SERVICE CENTER"; CARMELITA
BALDONADO doing business under the name and style of "FIRST CHOICE SERVICE CENTER";
MERCEDITAS A. GARCIA doing business under the name and style of "LORPED SERVICE CENTER";
RHEAMAR A. RAMOS doing business under the name and style of "RJRAM PTT GAS STATION"; MA.
ISABEL VIOLAGO doing business under the name and style of "VIOLAGO-PTT SERVICE CENTER";
MOTORISTS’ HEART CORPORATION represented by its Vice-President for Operations, JOSELITO F.
FLORDELIZA; MOTORISTS’ HARVARD CORPORATION represented by its Vice-President for Operations,
JOSELITO F. FLORDELIZA; MOTORISTS’ HERITAGE CORPORATION represented by its Vice-President for
Operations, JOSELITO F. FLORDELIZA; PHILIPPINE STANDARD OIL CORPORATION represented by its
Vice-President for Operations, JOSELITO F. FLORDELIZA; ROMEO MANUEL doing business under the
name and style of "ROMMAN GASOLINE STATION"; ANTHONY ALBERT CRUZ III doing business under the
name and style of "TRUE SERVICE STATION", Petitioners,
vs.
CESAR V. PURISIMA, in his capacity as Secretary of the Department of Finance and GUILLERMO L.
PARAYNO, JR., in his capacity as Commissioner of Internal Revenue, Respondent.

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

G.R. No. 168463

FRANCIS JOSEPH G. ESCUDERO, VINCENT CRISOLOGO, EMMANUEL JOEL J. VILLANUEVA,

RODOLFO G. PLAZA, DARLENE ANTONINO-CUSTODIO, OSCAR G. MALAPITAN, BENJAMIN C.
AGARAO, JR. JUAN EDGARDO M. ANGARA, JUSTIN MARC SB. CHIPECO, FLORENCIO G. NOEL, MUJIV
S. HATAMAN, RENATO B. MAGTUBO, JOSEPH A. SANTIAGO, TEOFISTO DL. GUINGONA III, RUY ELIAS
C. LOPEZ, RODOLFO Q. AGBAYANI and TEODORO A. CASIÑO, Petitioners,
vs.
CESAR V. PURISIMA, in his capacity as Secretary of Finance, GUILLERMO L. PARAYNO, JR., in his
capacity as Commissioner of Internal Revenue, and EDUARDO R. ERMITA, in his capacity as Executive
Secretary, Respondent.
105
x-------------------------x

G.R. No. 168730

BATAAN GOVERNOR ENRIQUE T. GARCIA, JR. Petitioner,

vs.
HON. EDUARDO R. ERMITA, in his capacity as the Executive Secretary; HON. MARGARITO TEVES, in his
capacity as Secretary of Finance; HON. JOSE MARIO BUNAG, in his capacity as the OIC Commissioner of
the Bureau of Internal Revenue; and HON. ALEXANDER AREVALO, in his capacity as the OIC Commissioner
of the Bureau of Customs, Respondent.

DECISION

AUSTRIA-MARTINEZ, J.:

The expenses of government, having for their object the interest of all, should be borne by everyone, and the
more man enjoys the advantages of society, the more he ought to hold himself honored in contributing to those
expenses.

-Anne Robert Jacques Turgot (1727-1781)

French statesman and economist

Mounting budget deficit, revenue generation, inadequate fiscal allocation for education, increased emoluments
for health workers, and wider coverage for full value-added tax benefits … these are the reasons why Republic
Act No. 9337 (R.A. No. 9337)1 was enacted. Reasons, the wisdom of which, the Court even with its extensive
constitutional power of review, cannot probe. The petitioners in these cases, however, question not only the
wisdom of the law, but also perceived constitutional infirmities in its passage.

Every law enjoys in its favor the presumption of constitutionality. Their arguments notwithstanding, petitioners
failed to justify their call for the invalidity of the law. Hence, R.A. No. 9337 is not unconstitutional.

LEGISLATIVE HISTORY

R.A. No. 9337 is a consolidation of three legislative bills namely, House Bill Nos. 3555 and 3705, and Senate
Bill No. 1950.

House Bill No. 35552 was introduced on first reading on January 7, 2005. The House Committee on Ways and
Means approved the bill, in substitution of House Bill No. 1468, which Representative (Rep.) Eric D. Singson
introduced on August 8, 2004. The President certified the bill on January 7, 2005 for immediate enactment. On
January 27, 2005, the House of Representatives approved the bill on second and third reading.

House Bill No. 37053 on the other hand, substituted House Bill No. 3105 introduced by Rep. Salacnib F.
Baterina, and House Bill No. 3381 introduced by Rep. Jacinto V. Paras. Its "mother bill" is House Bill No. 3555.
The House Committee on Ways and Means approved the bill on February 2, 2005. The President also certified
it as urgent on February 8, 2005. The House of Representatives approved the bill on second and third reading
on February 28, 2005.

Meanwhile, the Senate Committee on Ways and Means approved Senate Bill No. 19504 on March 7, 2005, "in
substitution of Senate Bill Nos. 1337, 1838 and 1873, taking into consideration House Bill Nos. 3555 and
3705." Senator Ralph G. Recto sponsored Senate Bill No. 1337, while Senate Bill Nos. 1838 and 1873 were
both sponsored by Sens. Franklin M. Drilon, Juan M. Flavier and Francis N. Pangilinan. The President certified
the bill on March 11, 2005, and was approved by the Senate on second and third reading on April 13, 2005.
106
On the same date, April 13, 2005, the Senate agreed to the request of the House of Representatives for a
committee conference on the disagreeing provisions of the proposed bills.

Before long, the Conference Committee on the Disagreeing Provisions of House Bill No. 3555, House Bill No.
3705, and Senate Bill No. 1950, "after having met and discussed in full free and conference," recommended
the approval of its report, which the Senate did on May 10, 2005, and with the House of Representatives
agreeing thereto the next day, May 11, 2005.

On May 23, 2005, the enrolled copy of the consolidated House and Senate version was transmitted to the
President, who signed the same into law on May 24, 2005. Thus, came R.A. No. 9337.

July 1, 2005 is the effectivity date of R.A. No. 9337.5 When said date came, the Court issued a temporary
restraining order, effective immediately and continuing until further orders, enjoining respondents from
enforcing and implementing the law.

Oral arguments were held on July 14, 2005. Significantly, during the hearing, the Court speaking through Mr.
Justice Artemio V. Panganiban, voiced the rationale for its issuance of the temporary restraining order on July
1, 2005, to wit:

J. PANGANIBAN : . . . But before I go into the details of your presentation, let me just tell you a little
background. You know when the law took effect on July 1, 2005, the Court issued a TRO at about 5 o’clock in
the afternoon. But before that, there was a lot of complaints aired on television and on radio. Some people in a
gas station were complaining that the gas prices went up by 10%. Some people were complaining that their
electric bill will go up by 10%. Other times people riding in domestic air carrier were complaining that the prices
that they’ll have to pay would have to go up by 10%. While all that was being aired, per your presentation and
per our own understanding of the law, that’s not true. It’s not true that the e-vat law necessarily increased
prices by 10% uniformly isn’t it?

ATTY. BANIQUED : No, Your Honor.

J. PANGANIBAN : It is not?

ATTY. BANIQUED : It’s not, because, Your Honor, there is an Executive Order that granted the Petroleum
companies some subsidy . . . interrupted

J. PANGANIBAN : That’s correct . . .

ATTY. BANIQUED : . . . and therefore that was meant to temper the impact . . . interrupted

J. PANGANIBAN : . . . mitigating measures . . .

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : As a matter of fact a part of the mitigating measures would be the elimination of the Excise
Tax and the import duties. That is why, it is not correct to say that the VAT as to petroleum dealers increased
prices by 10%.

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : And therefore, there is no justification for increasing the retail price by 10% to cover the E-
Vat tax. If you consider the excise tax and the import duties, the Net Tax would probably be in the
neighborhood of 7%? We are not going into exact figures I am just trying to deliver a point that different

107
industries, different products, different services are hit differently. So it’s not correct to say that all prices must
go up by 10%.

ATTY. BANIQUED : You’re right, Your Honor.

J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr. Counsel, are at present imposed a
Sales Tax of 3%. When this E-Vat law took effect the Sales Tax was also removed as a mitigating measure.
So, therefore, there is no justification to increase the fares by 10% at best 7%, correct?

ATTY. BANIQUED : I guess so, Your Honor, yes.

J. PANGANIBAN : There are other products that the people were complaining on that first day, were being
increased arbitrarily by 10%. And that’s one reason among many others this Court had to issue TRO because
of the confusion in the implementation. That’s why we added as an issue in this case, even if it’s tangentially
taken up by the pleadings of the parties, the confusion in the implementation of the E-vat. Our people were
subjected to the mercy of that confusion of an across the board increase of 10%, which you yourself now admit
and I think even the Government will admit is incorrect. In some cases, it should be 3% only, in some cases it
should be 6% depending on these mitigating measures and the location and situation of each product, of each
service, of each company, isn’t it?

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : Alright. So that’s one reason why we had to issue a TRO pending the clarification of all
these and we wish the government will take time to clarify all these by means of a more detailed implementing
rules, in case the law is upheld by this Court. . . .6

The Court also directed the parties to file their respective Memoranda.

G.R. No. 168056

Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a petition for prohibition
on May 27, 2005. They question the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337, amending
Sections 106, 107 and 108, respectively, of the National Internal Revenue Code (NIRC). Section 4 imposes a
10% VAT on sale of goods and properties, Section 5 imposes a 10% VAT on importation of goods, and
Section 6 imposes a 10% VAT on sale of services and use or lease of properties. These questioned provisions
contain a uniform proviso authorizing the President, upon recommendation of the Secretary of Finance, to
raise the VAT rate to 12%, effective January 1, 2006, after any of the following conditions have been satisfied,
to wit:

. . . That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006,
raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been
satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds
two and four-fifth percent (2 4/5%); or

(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent
(1 ½%).

Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of its exclusive
authority to fix the rate of taxes under Article VI, Section 28(2) of the 1987 Philippine Constitution.

G.R. No. 168207

108
On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition for certiorari likewise assailing the
constitutionality of Sections 4, 5 and 6 of R.A. No. 9337.

Aside from questioning the so-called stand-by authority of the President to increase the VAT rate to 12%, on
the ground that it amounts to an undue delegation of legislative power, petitioners also contend that the
increase in the VAT rate to 12% contingent on any of the two conditions being satisfied violates the due
process clause embodied in Article III, Section 1 of the Constitution, as it imposes an unfair and additional tax
burden on the people, in that: (1) the 12% increase is ambiguous because it does not state if the rate would be
returned to the original 10% if the conditions are no longer satisfied; (2) the rate is unfair and unreasonable, as
the people are unsure of the applicable VAT rate from year to year; and (3) the increase in the VAT rate, which
is supposed to be an incentive to the President to raise the VAT collection to at least 2 4/5 of the GDP of the
previous year, should only be based on fiscal adequacy.

Petitioners further claim that the inclusion of a stand-by authority granted to the President by the Bicameral
Conference Committee is a violation of the "no-amendment rule" upon last reading of a bill laid down in Article
VI, Section 26(2) of the Constitution.

G.R. No. 168461

Thereafter, a petition for prohibition was filed on June 29, 2005, by the Association of Pilipinas Shell Dealers,
Inc., et al., assailing the following provisions of R.A. No. 9337:

1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the input tax on depreciable goods shall
be amortized over a 60-month period, if the acquisition, excluding the VAT components, exceeds One Million
Pesos (₱1, 000,000.00);

2) Section 8, amending Section 110 (B) of the NIRC, imposing a 70% limit on the amount of input tax to be
credited against the output tax; and

3) Section 12, amending Section 114 (c) of the NIRC, authorizing the Government or any of its political
subdivisions, instrumentalities or agencies, including GOCCs, to deduct a 5% final withholding tax on gross
payments of goods and services, which are subject to 10% VAT under Sections 106 (sale of goods and
properties) and 108 (sale of services and use or lease of properties) of the NIRC.

Petitioners contend that these provisions are unconstitutional for being arbitrary, oppressive, excessive, and
confiscatory.

Petitioners’ argument is premised on the constitutional right of non-deprivation of life, liberty or property without
due process of law under Article III, Section 1 of the Constitution. According to petitioners, the contested
sections impose limitations on the amount of input tax that may be claimed. Petitioners also argue that the
input tax partakes the nature of a property that may not be confiscated, appropriated, or limited without due
process of law. Petitioners further contend that like any other property or property right, the input tax credit may
be transferred or disposed of, and that by limiting the same, the government gets to tax a profit or value-added
even if there is no profit or value-added.

Petitioners also believe that these provisions violate the constitutional guarantee of equal protection of the law
under Article III, Section 1 of the Constitution, as the limitation on the creditable input tax if: (1) the entity has a
high ratio of input tax; or (2) invests in capital equipment; or (3) has several transactions with the government,
is not based on real and substantial differences to meet a valid classification.

Lastly, petitioners contend that the 70% limit is anything but progressive, violative of Article VI, Section 28(1) of
the Constitution, and that it is the smaller businesses with higher input tax to output tax ratio that will suffer the
consequences thereof for it wipes out whatever meager margins the petitioners make.
109
 G.R. No. 168463

Several members of the House of Representatives led by Rep. Francis Joseph G. Escudero filed this petition
for certiorari on June 30, 2005. They question the constitutionality of R.A. No. 9337 on the following grounds:

1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of legislative power, in violation of
Article VI, Section 28(2) of the Constitution;

2) The Bicameral Conference Committee acted without jurisdiction in deleting the no pass on provisions
present in Senate Bill No. 1950 and House Bill No. 3705; and

3) Insertion by the Bicameral Conference Committee of Sections 27, 28, 34, 116, 117, 119, 121, 125, 7 148,
151, 236, 237 and 288, which were present in Senate Bill No. 1950, violates Article VI, Section 24(1) of the
Constitution, which provides that all appropriation, revenue or tariff bills shall originate exclusively in the House
of Representatives

G.R. No. 168730

On the eleventh hour, Governor Enrique T. Garcia filed a petition for certiorari and prohibition on July 20, 2005,
alleging unconstitutionality of the law on the ground that the limitation on the creditable input tax in effect allows
VAT-registered establishments to retain a portion of the taxes they collect, thus violating the principle that tax
collection and revenue should be solely allocated for public purposes and expenditures. Petitioner Garcia
further claims that allowing these establishments to pass on the tax to the consumers is inequitable, in violation
of Article VI, Section 28(1) of the Constitution.

RESPONDENTS’ COMMENT

The Office of the Solicitor General (OSG) filed a Comment in behalf of respondents. Preliminarily, respondents
contend that R.A. No. 9337 enjoys the presumption of constitutionality and petitioners failed to cast doubt on its
validity.

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

630 (1994), respondents argue that the procedural issues raised by petitioners, i.e., legality of the bicameral
proceedings, exclusive origination of revenue measures and the power of the Senate concomitant thereto,
have already been settled. With regard to the issue of undue delegation of legislative power to the President,
respondents contend that the law is complete and leaves no discretion to the President but to increase the rate
to 12% once any of the two conditions provided therein arise.

Respondents also refute petitioners’ argument that the increase to 12%, as well as the 70% limitation on the
creditable input tax, the 60-month amortization on the purchase or importation of capital goods exceeding
₱1,000,000.00, and the 5% final withholding tax by government agencies, is arbitrary, oppressive, and
confiscatory, and that it violates the constitutional principle on progressive taxation, among others.

Finally, respondents manifest that R.A. No. 9337 is the anchor of the government’s fiscal reform agenda. A
reform in the value-added system of taxation is the core revenue measure that will tilt the balance towards a
sustainable macroeconomic environment necessary for economic growth.

ISSUES

The Court defined the issues, as follows:

PROCEDURAL ISSUE
110
Whether R.A. No. 9337 violates the following provisions of the Constitution:

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

SUBSTANTIVE ISSUES

1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate
the following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article VI, Section 28(2)

2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section 12
of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article III, Section 1

RULING OF THE COURT

As a prelude, the Court deems it apt to restate the general principles and concepts of value-added tax (VAT),
as the confusion and inevitably, litigation, breeds from a fallacious notion of its nature.

The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of goods or
properties and services.8 Being an indirect tax on expenditure, the seller of goods or services may pass on the
amount of tax paid to the buyer,9 with the seller acting merely as a tax collector.10 The burden of VAT is
intended to fall on the immediate buyers and ultimately, the end-consumers.

In contrast, a direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages
in, without transferring the burden to someone else.11 Examples are individual and corporate income taxes,
transfer taxes, and residence taxes.12

In the Philippines, the value-added system of sales taxation has long been in existence, albeit in a different
mode. Prior to 1978, the system was a single-stage tax computed under the "cost deduction method" and was
payable only by the original sellers. The single-stage system was subsequently modified, and a mixture of the
"cost deduction method" and "tax credit method" was used to determine the value-added tax payable.13 Under
the "tax credit method," an entity can credit against or subtract from the VAT charged on its sales or outputs
the VAT paid on its purchases, inputs and imports.14

It was only in 1987, when President Corazon C. Aquino issued Executive Order No. 273, that the VAT system
was rationalized by imposing a multi-stage tax rate of 0% or 10% on all sales using the "tax credit method."15

E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law,16 R.A. No. 8241 or the Improved VAT
Law,17 R.A. No. 8424 or the Tax Reform Act of 1997,18 and finally, the presently beleaguered R.A. No. 9337,
also referred to by respondents as the VAT Reform Act.

The Court will now discuss the issues in logical sequence.

111
 PROCEDURAL ISSUE

I.

Whether R.A. No. 9337 violates the following provisions of the Constitution:

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

A. The Bicameral Conference Committee

Petitioners Escudero, et al., and Pimentel, et al., allege that the Bicameral Conference Committee exceeded its
authority by:

1) Inserting the stand-by authority in favor of the President in Sections 4, 5, and 6 of R.A. No. 9337;

2) Deleting entirely the no pass-on provisions found in both the House and Senate bills;

3) Inserting the provision imposing a 70% limit on the amount of input tax to be credited against the output tax;
and

4) Including the amendments introduced only by Senate Bill No. 1950 regarding other kinds of taxes in addition
to the value-added tax.

Petitioners now beseech the Court to define the powers of the Bicameral Conference Committee.

It should be borne in mind that the power of internal regulation and discipline are intrinsic in any legislative
body for, as unerringly elucidated by Justice Story, "[i]f the power did not exist, it would be utterly
impracticable to transact the business of the nation, either at all, or at least with decency, deliberation,
and order."19 Thus, Article VI, Section 16 (3) of the Constitution provides that "each House may determine the
rules of its proceedings." Pursuant to this inherent constitutional power to promulgate and implement its own
rules of procedure, the respective rules of each house of Congress provided for the creation of a Bicameral
Conference Committee.

Thus, Rule XIV, Sections 88 and 89 of the Rules of House of Representatives provides as follows:

Sec. 88. Conference Committee. – In the event that the House does not agree with the Senate on the
amendment to any bill or joint resolution, the differences may be settled by the conference committees of both
chambers.

In resolving the differences with the Senate, the House panel shall, as much as possible, adhere to and
support the House Bill. If the differences with the Senate are so substantial that they materially impair the
House Bill, the panel shall report such fact to the House for the latter’s appropriate action.

Sec. 89. Conference Committee Reports. – . . . Each report shall contain a detailed, sufficiently explicit
statement of the changes in or amendments to the subject measure.

...

112
The Chairman of the House panel may be interpellated on the Conference Committee Report prior to the
voting thereon. The House shall vote on the Conference Committee Report in the same manner and procedure
as it votes on a bill on third and final reading.

Rule XII, Section 35 of the Rules of the Senate states:

Sec. 35. In the event that the Senate does not agree with the House of Representatives on the provision of any
bill or joint resolution, the differences shall be settled by a conference committee of both Houses which shall
meet within ten (10) days after their composition. The President shall designate the members of the Senate
Panel in the conference committee with the approval of the Senate.

Each Conference Committee Report shall contain a detailed and sufficiently explicit statement of the changes
in, or amendments to the subject measure, and shall be signed by a majority of the members of each House
panel, voting separately.

A comparative presentation of the conflicting House and Senate provisions and a reconciled version thereof
with the explanatory statement of the conference committee shall be attached to the report.

...

The creation of such conference committee was apparently in response to a problem, not addressed by any
constitutional provision, where the two houses of Congress find themselves in disagreement over changes or
amendments introduced by the other house in a legislative bill. Given that one of the most basic powers of the
legislative branch is to formulate and implement its own rules of proceedings and to discipline its members,
may the Court then delve into the details of how Congress complies with its internal rules or how it conducts its
business of passing legislation? Note that in the present petitions, the issue is not whether provisions of the
rules of both houses creating the bicameral conference committee are unconstitutional, but whether the
bicameral conference committee has strictly complied with the rules of both houses, thereby
remaining within the jurisdiction conferred upon it by Congress.

In the recent case of Fariñas vs. The Executive Secretary,20 the Court En Banc, unanimously reiterated and
emphasized its adherence to the "enrolled bill doctrine," thus, declining therein petitioners’ plea for the Court to
go behind the enrolled copy of the bill. Assailed in said case was Congress’s creation of two sets of bicameral
conference committees, the lack of records of said committees’ proceedings, the alleged violation of said
committees of the rules of both houses, and the disappearance or deletion of one of the provisions in the
compromise bill submitted by the bicameral conference committee. It was argued that such irregularities in the
passage of the law nullified R.A. No. 9006, or the Fair Election Act.

Striking down such argument, the Court held thus:

Under the "enrolled bill doctrine," the signing of a bill by the Speaker of the House and the Senate President
and the certification of the Secretaries of both Houses of Congress that it was passed are conclusive of its due
enactment. A review of cases reveals the Court’s consistent adherence to the rule. The Court finds no
reason to deviate from the salutary rule in this case where the irregularities alleged by the petitioners
mostly involved the internal rules of Congress, e.g., creation of the 2nd or 3rd Bicameral Conference
Committee by the House. This Court is not the proper forum for the enforcement of these internal rules
of Congress, whether House or Senate. Parliamentary rules are merely procedural and with their
observance the courts have no concern. Whatever doubts there may be as to the formal validity of
Rep. Act No. 9006 must be resolved in its favor. The Court reiterates its ruling in Arroyo vs. De Venecia,
viz.:

But the cases, both here and abroad, in varying forms of expression, all deny to the courts the power to
inquire into allegations that, in enacting a law, a House of Congress failed to comply with its own rules,

113
in the absence of showing that there was a violation of a constitutional provision or the rights of
private individuals. In Osmeña v. Pendatun, it was held: "At any rate, courts have declared that ‘the rules
adopted by deliberative bodies are subject to revocation, modification or waiver at the pleasure of the body
adopting them.’ And it has been said that "Parliamentary rules are merely procedural, and with their
observance, the courts have no concern. They may be waived or disregarded by the legislative body."
Consequently, "mere failure to conform to parliamentary usage will not invalidate the action (taken by
a deliberative body) when the requisite number of members have agreed to a particular measure."21
(Emphasis supplied)

The foregoing declaration is exactly in point with the present cases, where petitioners allege irregularities
committed by the conference committee in introducing changes or deleting provisions in the House and Senate
bills. Akin to the Fariñas case,22 the present petitions also raise an issue regarding the actions taken by the
conference committee on matters regarding Congress’ compliance with its own internal rules. As stated earlier,
one of the most basic and inherent power of the legislature is the power to formulate rules for its proceedings
and the discipline of its members. Congress is the best judge of how it should conduct its own business
expeditiously and in the most orderly manner. It is also the sole

concern of Congress to instill discipline among the members of its conference committee if it believes that said
members violated any of its rules of proceedings. Even the expanded jurisdiction of this Court cannot apply to
questions regarding only the internal operation of Congress, thus, the Court is wont to deny a review of the
internal proceedings of a co-equal branch of government.

Moreover, as far back as 1994 or more than ten years ago, in the case of Tolentino vs. Secretary of Finance,23
the Court already made the pronouncement that "[i]f a change is desired in the practice [of the Bicameral
Conference Committee] it must be sought in Congress since this question is not covered by any
constitutional provision but is only an internal rule of each house." 24 To date, Congress has not seen it fit
to make such changes adverted to by the Court. It seems, therefore, that Congress finds the practices of the
bicameral conference committee to be very useful for purposes of prompt and efficient legislative action.

Nevertheless, just to put minds at ease that no blatant irregularities tainted the proceedings of the bicameral
conference committees, the Court deems it necessary to dwell on the issue. The Court observes that there
was a necessity for a conference committee because a comparison of the provisions of House Bill Nos. 3555
and 3705 on one hand, and Senate Bill No. 1950 on the other, reveals that there were indeed disagreements.
As pointed out in the petitions, said disagreements were as follows:

House Bill No. 3555
With regard to "Stand-By Authority" in favor of President
Provides for 12% VAT on every
sale of goods or properties
(amending Sec. 106 of NIRC);
12% VAT on importation of
goods (amending Sec. 107 of
NIRC); and 12% VAT on sale of
services and use or lease of
properties (amending Sec. 108
of NIRC)
House Bill No.3705
Provides for 12% VAT in general on
sales of goods or properties and
reduced rates for sale of certain
locally manufactured goods and
petroleum products and raw
materials to be used in the
manufacture thereof (amending
Sec. 106 of NIRC); 12% VAT on
importation of goods and reduced
rates for certain imported products
including petroleum products
(amending Sec. 107 of NIRC); and
12% VAT on sale of services and
use or lease of properties and a
reduced rate for certain services
including power generation
Senate Bill No. 1950
Provides for a single rate of 10%
VAT on sale of goods or
properties (amending Sec. 106
of NIRC), 10% VAT on sale of
services including sale of
electricity by generation
companies, transmission and
distribution companies, and use
or lease of properties (amending
Sec. 108 of NIRC)

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With regard to the "no pass-on" provision
No similar provision
(amending Sec. 108 of NIRC)
Provides that the VAT imposed on
power generation and on the sale of
petroleum products shall be
absorbed by generation companies
or sellers, respectively, and shall
not be passed on to consumers
Provides that the VAT imposed
on sales of electricity by
generation companies and
services of transmission
companies and distribution
companies, as well as those of
franchise grantees of electric
utilities shall not apply to
residential

end-users. VAT shall be

Provides that the input tax
credit for capital goods on
which a VAT has been paid
shall be equally distributed over
5 years or the depreciable life
of such capital goods; the input
tax credit for goods and
services other than capital
goods shall not exceed 5% of
the total amount of such goods
and services; and for persons
engaged in retail trading of
goods, the allowable input tax
credit shall not exceed 11% of
the total amount of goods
purchased.
With regard to amendments to be made to NIRC provisions regarding income and excise
No similar provision
absorbed by generation,
transmission, and distribution
companies.
With regard to 70% limit on input tax credit
No similar provision Provides that the input tax credit
for capital goods on which a VAT
has been paid shall be equally
distributed over 5 years or the
depreciable life of such capital
goods; the input tax credit for
goods and services other than
capital goods shall not exceed
90% of the output VAT.
taxes
No similar provision Provided for amendments to
several NIRC provisions
regarding corporate income,
percentage, franchise and
excise taxes

The disagreements between the provisions in the House bills and the Senate bill were with regard to (1) what
rate of VAT is to be imposed; (2) whether only the VAT imposed on electricity generation, transmission and
distribution companies should not be passed on to consumers, as proposed in the Senate bill, or both the VAT
imposed on electricity generation, transmission and distribution companies and the VAT imposed on sale of
petroleum products should not be passed on to consumers, as proposed in the House bill; (3) in what manner
input tax credits should be limited; (4) and whether the NIRC provisions on corporate income taxes,
percentage, franchise and excise taxes should be amended.

There being differences and/or disagreements on the foregoing provisions of the House and Senate bills, the
Bicameral Conference Committee was mandated by the rules of both houses of Congress to act on the same
by settling said differences and/or disagreements. The Bicameral Conference Committee acted on the
disagreeing provisions by making the following changes:
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1. With regard to the disagreement on the rate of VAT to be imposed, it would appear from the Conference
Committee Report that the Bicameral Conference Committee tried to bridge the gap in the difference between
the 10% VAT rate proposed by the Senate, and the various rates with 12% as the highest VAT rate proposed
by the House, by striking a compromise whereby the present 10% VAT rate would be retained until certain
conditions arise, i.e., the value-added tax collection as a percentage of gross domestic product (GDP) of the
previous year exceeds 2 4/5%, or National Government deficit as a percentage of GDP of the previous year
exceeds 1½%, when the President, upon recommendation of the Secretary of Finance shall raise the rate of
VAT to 12% effective January 1, 2006.

2. With regard to the disagreement on whether only the VAT imposed on electricity generation, transmission
and distribution companies should not be passed on to consumers or whether both the VAT imposed on
electricity generation, transmission and distribution companies and the VAT imposed on sale of petroleum
products may be passed on to consumers, the Bicameral Conference Committee chose to settle such
disagreement by altogether deleting from its Report any no pass-on provision.

3. With regard to the disagreement on whether input tax credits should be limited or not, the Bicameral
Conference Committee decided to adopt the position of the House by putting a limitation on the amount of
input tax that may be credited against the output tax, although it crafted its own language as to the amount of
the limitation on input tax credits and the manner of computing the same by providing thus:

(A) Creditable Input Tax. – . . .

...

Provided, The input tax on goods purchased or imported in a calendar month for use in trade or business for
which deduction for depreciation is allowed under this Code, shall be spread evenly over the month of
acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods,
excluding the VAT component thereof, exceeds one million Pesos (₱1,000,000.00): PROVIDED, however, that
if the estimated useful life of the capital good is less than five (5) years, as used for depreciation purposes,
then the input VAT shall be spread over such shorter period: . . .

(B) Excess Output or Input Tax. – If at the end of any taxable quarter the output tax exceeds the input tax, the
excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be
carried over to the succeeding quarter or quarters: PROVIDED that the input tax inclusive of input VAT carried
over from the previous quarter that may be credited in every quarter shall not exceed seventy percent (70%) of
the output VAT: PROVIDED, HOWEVER, THAT any input tax attributable to zero-rated sales by a VAT-
registered person may at his option be refunded or credited against other internal revenue taxes, . . .

4. With regard to the amendments to other provisions of the NIRC on corporate income tax, franchise,
percentage and excise taxes, the conference committee decided to include such amendments and basically
adopted the provisions found in Senate Bill No. 1950, with some changes as to the rate of the tax to be
imposed.

Under the provisions of both the Rules of the House of Representatives and Senate Rules, the Bicameral
Conference Committee is mandated to settle the differences between the disagreeing provisions in the House
bill and the Senate bill. The term "settle" is synonymous to "reconcile" and "harmonize."25 To reconcile or
harmonize disagreeing provisions, the Bicameral Conference Committee may then (a) adopt the specific
provisions of either the House bill or Senate bill, (b) decide that neither provisions in the House bill or the
provisions in the Senate bill would

be carried into the final form of the bill, and/or (c) try to arrive at a compromise between the disagreeing
provisions.

116
In the present case, the changes introduced by the Bicameral Conference Committee on disagreeing
provisions were meant only to reconcile and harmonize the disagreeing provisions for it did not inject any idea
or intent that is wholly foreign to the subject embraced by the original provisions.

The so-called stand-by authority in favor of the President, whereby the rate of 10% VAT wanted by the Senate
is retained until such time that certain conditions arise when the 12% VAT wanted by the House shall be
imposed, appears to be a compromise to try to bridge the difference in the rate of VAT proposed by the two
houses of Congress. Nevertheless, such compromise is still totally within the subject of what rate of VAT
should be imposed on taxpayers.

The no pass-on provision was deleted altogether. In the transcripts of the proceedings of the Bicameral
Conference Committee held on May 10, 2005, Sen. Ralph Recto, Chairman of the Senate Panel, explained the
reason for deleting the no pass-on provision in this wise:

. . . the thinking was just to keep the VAT law or the VAT bill simple. And we were thinking that no sector
should be a beneficiary of legislative grace, neither should any sector be discriminated on. The VAT is an
indirect tax. It is a pass on-tax. And let’s keep it plain and simple. Let’s not confuse the bill and put a no pass-
on provision. Two-thirds of the world have a VAT system and in this two-thirds of the globe, I have yet to see a
VAT with a no pass-though provision. So, the thinking of the Senate is basically simple, let’s keep the VAT
simple.26 (Emphasis supplied)

Rep. Teodoro Locsin further made the manifestation that the no pass-on provision "never really enjoyed the
support of either House."27

With regard to the amount of input tax to be credited against output tax, the Bicameral Conference Committee
came to a compromise on the percentage rate of the limitation or cap on such input tax credit, but again, the
change introduced by the Bicameral Conference Committee was totally within the intent of both houses to put
a cap on input tax that may be

credited against the output tax. From the inception of the subject revenue bill in the House of Representatives,
one of the major objectives was to "plug a glaring loophole in the tax policy and administration by creating vital
restrictions on the claiming of input VAT tax credits . . ." and "[b]y introducing limitations on the claiming of tax
credit, we are capping a major leakage that has placed our collection efforts at an apparent disadvantage." 28

As to the amendments to NIRC provisions on taxes other than the value-added tax proposed in Senate Bill No.
1950, since said provisions were among those referred to it, the conference committee had to act on the same
and it basically adopted the version of the Senate.

Thus, all the changes or modifications made by the Bicameral Conference Committee were germane to
subjects of the provisions referred

to it for reconciliation. Such being the case, the Court does not see any grave abuse of discretion amounting to
lack or excess of jurisdiction committed by the Bicameral Conference Committee. In the earlier cases of
Philippine Judges Association vs. Prado29 and Tolentino vs. Secretary of Finance,30 the Court recognized the
long-standing legislative practice of giving said conference committee ample latitude for compromising
differences between the Senate and the House. Thus, in the Tolentino case, it was held that:

. . . it is within the power of a conference committee to include in its report an entirely new provision that is not
found either in the House bill or in the Senate bill. If the committee can propose an amendment consisting of
one or two provisions, there is no reason why it cannot propose several provisions, collectively considered as
an "amendment in the nature of a substitute," so long as such amendment is germane to the subject of the bills
before the committee. After all, its report was not final but needed the approval of both houses of Congress to

117
become valid as an act of the legislative department. The charge that in this case the Conference
Committee acted as a third legislative chamber is thus without any basis.31 (Emphasis supplied)

B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of the Constitution on the "No-Amendment Rule"

Article VI, Sec. 26 (2) of the Constitution, states:

No bill passed by either House shall become a law unless it has passed three readings on separate days, and
printed copies thereof in its final form have been distributed to its Members three days before its passage,
except when the President certifies to the necessity of its immediate enactment to meet a public calamity or
emergency. Upon the last reading of a bill, no amendment thereto shall be allowed, and the vote thereon shall
be taken immediately thereafter, and the yeas and nays entered in the Journal.

Petitioners’ argument that the practice where a bicameral conference committee is allowed to add or delete
provisions in the House bill and the Senate bill after these had passed three readings is in effect a
circumvention of the "no amendment rule" (Sec. 26 (2), Art. VI of the 1987 Constitution), fails to convince the
Court to deviate from its ruling in the Tolentino case that:

Nor is there any reason for requiring that the Committee’s Report in these cases must have undergone three
readings in each of the two houses. If that be the case, there would be no end to negotiation since each house
may seek modification of the compromise bill. . . .

Art. VI. § 26 (2) must, therefore, be construed as referring only to bills introduced for the first time in
either house of Congress, not to the conference committee report.32 (Emphasis supplied)

The Court reiterates here that the "no-amendment rule" refers only to the procedure to be followed by
each house of Congress with regard to bills initiated in each of said respective houses, before said bill
is transmitted to the other house for its concurrence or amendment. Verily, to construe said provision in a
way as to proscribe any further changes to a bill after one house has voted on it would lead to absurdity as this
would mean that the other house of Congress would be deprived of its constitutional power to amend or
introduce changes to said bill. Thus, Art. VI, Sec. 26 (2) of the Constitution cannot be taken to mean that the
introduction by the Bicameral Conference Committee of amendments and modifications to disagreeing
provisions in bills that have been acted upon by both houses of Congress is prohibited.

C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the Constitution on Exclusive Origination of
Revenue Bills

Coming to the issue of the validity of the amendments made regarding the NIRC provisions on corporate
income taxes and percentage, excise taxes. Petitioners refer to the following provisions, to wit:

Section 27 Rates of Income Tax on Domestic Corporation

28(A)(1) Tax on Resident Foreign Corporation
28(B)(1) Inter-corporate Dividends
34(B)(1) Inter-corporate Dividends
116 Tax on Persons Exempt from VAT
117 Percentage Tax on domestic carriers and keepers of Garage
119 Tax on franchises
121 Tax on banks and Non-Bank Financial Intermediaries
148 Excise Tax on manufactured oils and other fuels
151 Excise Tax on mineral products
236 Registration requirements
237 Issuance of receipts or sales or commercial invoices
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288 Disposition of Incremental Revenue

Petitioners claim that the amendments to these provisions of the NIRC did not at all originate from the House.
They aver that House Bill No. 3555 proposed amendments only regarding Sections 106, 107, 108, 110 and
114 of the NIRC, while House Bill No. 3705 proposed amendments only to Sections 106, 107,108, 109, 110
and 111 of the NIRC; thus, the other sections of the NIRC which the Senate amended but which amendments
were not found in the House bills are not intended to be amended by the House of Representatives. Hence,
they argue that since the proposed amendments did not originate from the House, such amendments are a
violation of Article VI, Section 24 of the Constitution.

The argument does not hold water.

Article VI, Section 24 of the Constitution reads:

Sec. 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local
application, and private bills shall originate exclusively in the House of Representatives but the Senate may
propose or concur with amendments.

In the present cases, petitioners admit that it was indeed House Bill Nos. 3555 and 3705 that initiated the move
for amending provisions of the NIRC dealing mainly with the value-added tax. Upon transmittal of said House
bills to the Senate, the Senate came out with Senate Bill No. 1950 proposing amendments not only to NIRC
provisions on the value-added tax but also amendments to NIRC provisions on other kinds of taxes. Is the
introduction by the Senate of provisions not dealing directly with the value- added tax, which is the only kind of
tax being amended in the House bills, still within the purview of the constitutional provision authorizing the
Senate to propose or concur with amendments to a revenue bill that originated from the House?

The foregoing question had been squarely answered in the Tolentino case, wherein the Court held, thus:

. . . To begin with, it is not the law – but the revenue bill – which is required by the Constitution to "originate
exclusively" in the House of Representatives. It is important to emphasize this, because a bill originating in the
House may undergo such extensive changes in the Senate that the result may be a rewriting of the whole. . . .
At this point, what is important to note is that, as a result of the Senate action, a distinct bill may be produced.
To insist that a revenue statute – and not only the bill which initiated the legislative process
culminating in the enactment of the law – must substantially be the same as the House bill would be to
deny the Senate’s power not only to "concur with amendments" but also to "propose amendments." It
would be to violate the coequality of legislative power of the two houses of Congress and in fact make the
House superior to the Senate.

…Given, then, the power of the Senate to propose amendments, the Senate can propose its own
version even with respect to bills which are required by the Constitution to originate in the House.

...

Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff or tax bills, bills
authorizing an increase of the public debt, private bills and bills of local application must come from the House
of Representatives on the theory that, elected as they are from the districts, the members of the House can
be expected to be more sensitive to the local needs and problems. On the other hand, the senators,
who are elected at large, are expected to approach the same problems from the national perspective.
Both views are thereby made to bear on the enactment of such laws.33 (Emphasis supplied)

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Since there is no question that the revenue bill exclusively originated in the House of Representatives, the
Senate was acting within its

constitutional power to introduce amendments to the House bill when it included provisions in Senate Bill No.
1950 amending corporate income taxes, percentage, excise and franchise taxes. Verily, Article VI, Section 24
of the Constitution does not contain any prohibition or limitation on the extent of the amendments that may be
introduced by the Senate to the House revenue bill.

Furthermore, the amendments introduced by the Senate to the NIRC provisions that had not been touched in
the House bills are still in furtherance of the intent of the House in initiating the subject revenue bills. The
Explanatory Note of House Bill No. 1468, the very first House bill introduced on the floor, which was later
substituted by House Bill No. 3555, stated:

One of the challenges faced by the present administration is the urgent and daunting task of solving the
country’s serious financial problems. To do this, government expenditures must be strictly monitored and
controlled and revenues must be significantly increased. This may be easier said than done, but our fiscal
authorities are still optimistic the government will be operating on a balanced budget by the year 2009. In fact,
several measures that will result to significant expenditure savings have been identified by the administration.
It is supported with a credible package of revenue measures that include measures to improve tax
administration and control the leakages in revenues from income taxes and the value-added tax (VAT).
(Emphasis supplied)

Rep. Eric D. Singson, in his sponsorship speech for House Bill No. 3555, declared that:

In the budget message of our President in the year 2005, she reiterated that we all acknowledged that on top
of our agenda must be the restoration of the health of our fiscal system.

In order to considerably lower the consolidated public sector deficit and eventually achieve a balanced budget
by the year 2009, we need to seize windows of opportunities which might seem poignant in the
beginning, but in the long run prove effective and beneficial to the overall status of our economy. One
such opportunity is a review of existing tax rates, evaluating the relevance given our present
conditions.34 (Emphasis supplied)

Notably therefore, the main purpose of the bills emanating from the House of Representatives is to bring in
sizeable revenues for the government

to supplement our country’s serious financial problems, and improve tax administration and control of the
leakages in revenues from income taxes and value-added taxes. As these house bills were transmitted to the
Senate, the latter, approaching the measures from the point of national perspective, can introduce
amendments within the purposes of those bills. It can provide for ways that would soften the impact of the VAT
measure on the consumer, i.e., by distributing the burden across all sectors instead of putting it entirely on the
shoulders of the consumers. The sponsorship speech of Sen. Ralph Recto on why the provisions on income
tax on corporation were included is worth quoting:

All in all, the proposal of the Senate Committee on Ways and Means will raise ₱64.3 billion in additional
revenues annually even while by mitigating prices of power, services and petroleum products.

However, not all of this will be wrung out of VAT. In fact, only ₱48.7 billion amount is from the VAT on twelve
goods and services. The rest of the tab – ₱10.5 billion- will be picked by corporations.

What we therefore prescribe is a burden sharing between corporate Philippines and the consumer. Why should
the latter bear all the pain? Why should the fiscal salvation be only on the burden of the consumer?

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The corporate world’s equity is in form of the increase in the corporate income tax from 32 to 35 percent, but
up to 2008 only. This will raise ₱10.5 billion a year. After that, the rate will slide back, not to its old rate of 32
percent, but two notches lower, to 30 percent.

Clearly, we are telling those with the capacity to pay, corporations, to bear with this emergency provision that
will be in effect for 1,200 days, while we put our fiscal house in order. This fiscal medicine will have an expiry
date.

For their assistance, a reward of tax reduction awaits them. We intend to keep the length of their sacrifice brief.
We would like to assure them that not because there is a light at the end of the tunnel, this government will
keep on making the tunnel long.

The responsibility will not rest solely on the weary shoulders of the small man. Big business will be there to
share the burden.35

As the Court has said, the Senate can propose amendments and in fact, the amendments made on provisions
in the tax on income of corporations are germane to the purpose of the house bills which is to raise revenues
for the government.

Likewise, the Court finds the sections referring to other percentage and excise taxes germane to the reforms to
the VAT system, as these sections would cushion the effects of VAT on consumers. Considering that certain
goods and services which were subject to percentage tax and excise tax would no longer be VAT-exempt, the
consumer would be burdened more as they would be paying the VAT in addition to these taxes. Thus, there is
a need to amend these sections to soften the impact of VAT. Again, in his sponsorship speech, Sen. Recto
said:

However, for power plants that run on oil, we will reduce to zero the present excise tax on bunker fuel, to
lessen the effect of a VAT on this product.

For electric utilities like Meralco, we will wipe out the franchise tax in exchange for a VAT.

And in the case of petroleum, while we will levy the VAT on oil products, so as not to destroy the VAT chain,
we will however bring down the excise tax on socially sensitive products such as diesel, bunker, fuel and
kerosene.

...

What do all these exercises point to? These are not contortions of giving to the left hand what was taken from
the right. Rather, these sprang from our concern of softening the impact of VAT, so that the people can
cushion the blow of higher prices they will have to pay as a result of VAT.36

The other sections amended by the Senate pertained to matters of tax administration which are necessary for
the implementation of the changes in the VAT system.

To reiterate, the sections introduced by the Senate are germane to the subject matter and purposes of the
house bills, which is to supplement our country’s fiscal deficit, among others. Thus, the Senate acted within its
power to propose those amendments.

SUBSTANTIVE ISSUES

I.

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Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate the
following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article VI, Section 28(2)

A. No Undue Delegation of Legislative Power

Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al., and Escudero, et al. contend in common
that Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the NIRC
giving the President the stand-by authority to raise the VAT rate from 10% to 12% when a certain condition is
met, constitutes undue delegation of the legislative power to tax.

The assailed provisions read as follows:

SEC. 4. Sec. 106 of the same Code, as amended, is hereby further amended to read as follows:

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, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross
value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or
transferor: provided, that the President, upon the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the
following conditions has been satisfied.

(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%) or

(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1 ½%).

SEC. 5. Section 107 of the same Code, as amended, is hereby further amended to read as follows:

SEC. 107. Value-Added Tax on Importation of Goods. –

(A) In General. – There shall be levied, assessed and collected on every importation of goods a value-added
tax equivalent to ten percent (10%) based on the total value used by the Bureau of Customs in determining
tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by
the importer prior to the release of such goods from customs custody: Provided, That where the customs
duties are determined on the basis of the quantity or volume of the goods, the value-added tax shall be based
on the landed cost plus excise taxes, if any: provided, further, that the President, upon the
recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-
added tax to twelve percent (12%) after any of the following conditions has been satisfied.

(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%) or

(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1 ½%).

SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows:
122
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties –

(A) Rate and Base of Tax. – There shall be levied, assessed and collected, a value-added tax equivalent to ten
percent (10%) of gross receipts derived from the sale or exchange of services: provided, that the President,
upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of
value-added tax to twelve percent (12%), after any of the following conditions has been satisfied.

(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%) or

(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1 ½%). (Emphasis supplied)

Petitioners allege that the grant of the stand-by authority to the President to increase the VAT rate is a virtual
abdication by Congress of its exclusive power to tax because such delegation is not within the purview of
Section 28 (2), Article VI of the Constitution, which provides:

The Congress may, by law, authorize the President to fix within specified limits, and may impose, tariff rates,
import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the
national development program of the government.

They argue that the VAT is a tax levied on the sale, barter or exchange of goods and properties as well as on
the sale or exchange of services, which cannot be included within the purview of tariffs under the exempted
delegation as the latter refers to customs duties, tolls or tribute payable upon merchandise to the government
and usually imposed on goods or merchandise imported or exported.

Petitioners ABAKADA GURO Party List, et al., further contend that delegating to the President the legislative
power to tax is contrary to republicanism. They insist that accountability, responsibility and transparency should
dictate the actions of Congress and they should not pass to the President the decision to impose taxes. They
also argue that the law also effectively nullified the President’s power of control, which includes the authority to
set aside and nullify the acts of her subordinates like the Secretary of Finance, by mandating the fixing of the
tax rate by the President upon the recommendation of the Secretary of Finance.

Petitioners Pimentel, et al. aver that the President has ample powers to cause, influence or create the
conditions provided by the law to bring about either or both the conditions precedent.

On the other hand, petitioners Escudero, et al. find bizarre and revolting the situation that the imposition of the
12% rate would be subject to the whim of the Secretary of Finance, an unelected bureaucrat, contrary to the
principle of no taxation without representation. They submit that the Secretary of Finance is not mandated to
give a favorable recommendation and he may not even give his recommendation. Moreover, they allege that
no guiding standards are provided in the law on what basis and as to how he will make his recommendation.
They claim, nonetheless, that any recommendation of the Secretary of Finance can easily be brushed aside by
the President since the former is a mere alter ego of the latter, such that, ultimately, it is the President who
decides whether to impose the increased tax rate or not.

A brief discourse on the principle of non-delegation of powers is instructive.

The principle of separation of powers ordains that each of the three great branches of government has
exclusive cognizance of and is supreme in matters falling within its own constitutionally allocated sphere.37 A
logical

corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as expressed in
the Latin maxim: potestas delegata non delegari potest which means "what has been delegated, cannot be
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delegated."38 This doctrine is based on the ethical principle that such as delegated power constitutes not only a
right but a duty to be performed by the delegate through the instrumentality of his own judgment and not
through the intervening mind of another.39

With respect to the Legislature, Section 1 of Article VI of the Constitution provides that "the Legislative power
shall be vested in the Congress of the Philippines which shall consist of a Senate and a House of
Representatives." The powers which Congress is prohibited from delegating are those which are strictly, or
inherently and exclusively, legislative. Purely legislative power, which can never be delegated, has been
described as the authority to make a complete law – complete as to the time when it shall take effect
and as to whom it shall be applicable – and to determine the expediency of its enactment.40 Thus, the
rule is that in order that a court may be justified in holding a statute unconstitutional as a delegation of
legislative power, it must appear that the power involved is purely legislative in nature – that is, one
appertaining exclusively to the legislative department. It is the nature of the power, and not the liability of its
use or the manner of its exercise, which determines the validity of its delegation.

Nonetheless, the general rule barring delegation of legislative powers is subject to the following recognized
limitations or exceptions:

(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the Constitution;

(2) Delegation of emergency powers to the President under Section 23 (2) of Article VI of the Constitution;

(3) Delegation to the people at large;

(4) Delegation to local governments; and

(5) Delegation to administrative bodies.

In every case of permissible delegation, there must be a showing that the delegation itself is valid. It is valid
only if the law (a) is complete in itself, setting forth therein the policy to be executed, carried out, or
implemented by the delegate;41 and (b) fixes a standard — the limits of which are sufficiently determinate and
determinable — to which the delegate must conform in the performance of his functions.42 A sufficient standard
is one which defines legislative policy, marks its limits, maps out its boundaries and specifies the public agency
to apply it. It indicates the circumstances under which the legislative command is to be effected. 43 Both tests
are intended to prevent a total transference of legislative authority to the delegate, who is not allowed to step
into the shoes of the legislature and exercise a power essentially legislative.44

In People vs. Vera,45 the Court, through eminent Justice Jose P. Laurel, expounded on the concept and extent
of delegation of power in this wise:

In testing whether a statute constitutes an undue delegation of legislative power or not, it is usual to inquire
whether the statute was complete in all its terms and provisions when it left the hands of the legislature so that
nothing was left to the judgment of any other appointee or delegate of the legislature.

...

‘The true distinction’, says Judge Ranney, ‘is between the delegation of power to make the law, which
necessarily involves a discretion as to what it shall be, and conferring an authority or discretion as to
its execution, to be exercised under and in pursuance of the law. The first cannot be done; to the latter
no valid objection can be made.’

...

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It is contended, however, that a legislative act may be made to the effect as law after it leaves the hands of the
legislature. It is true that laws may be made effective on certain contingencies, as by proclamation of the
executive or the adoption by the people of a particular community. In Wayman vs. Southard, the Supreme
Court of the United States ruled that the legislature may delegate a power not legislative which it may itself
rightfully exercise. The power to ascertain facts is such a power which may be delegated. There is
nothing essentially legislative in ascertaining the existence of facts or conditions as the basis of the
taking into effect of a law. That is a mental process common to all branches of the government.
Notwithstanding the apparent tendency, however, to relax the rule prohibiting delegation of legislative authority
on account of the complexity arising from social and economic forces at work in this modern industrial age, the
orthodox pronouncement of Judge Cooley in his work on Constitutional Limitations finds restatement in Prof.
Willoughby's treatise on the Constitution of the United States in the following language — speaking of
declaration of legislative power to administrative agencies: The principle which permits the legislature to
provide that the administrative agent may determine when the circumstances are such as require the
application of a law is defended upon the ground that at the time this authority is granted, the rule of
public policy, which is the essence of the legislative act, is determined by the legislature. In other
words, the legislature, as it is its duty to do, determines that, under given circumstances, certain
executive or administrative action is to be taken, and that, under other circumstances, different or no
action at all is to be taken. What is thus left to the administrative official is not the legislative
determination of what public policy demands, but simply the ascertainment of what the facts of the
case require to be done according to the terms of the law by which he is governed. The efficiency of an
Act as a declaration of legislative will must, of course, come from Congress, but the ascertainment of
the contingency upon which the Act shall take effect may be left to such agencies as it may designate.
The legislature, then, may provide that a law shall take effect upon the happening of future specified
contingencies leaving to some other person or body the power to determine when the specified
contingency has arisen. (Emphasis supplied).46

In Edu vs. Ericta,47 the Court reiterated:

What cannot be delegated is the authority under the Constitution to make laws and to alter and repeal them;
the test is the completeness of the statute in all its terms and provisions when it leaves the hands of the
legislature. To determine whether or not there is an undue delegation of legislative power, the inquiry must be
directed to the scope and definiteness of the measure enacted. The legislative does not abdicate its
functions when it describes what job must be done, who is to do it, and what is the scope of his
authority. For a complex economy, that may be the only way in which the legislative process can go forward.
A distinction has rightfully been made between delegation of power to make the laws which
necessarily involves a discretion as to what it shall be, which constitutionally may not be done, and
delegation of authority or discretion as to its execution to be exercised under and in pursuance of the
law, to which no valid objection can be made. The Constitution is thus not to be regarded as denying the
legislature the necessary resources of flexibility and practicability. (Emphasis supplied). 48

Clearly, the legislature may delegate to executive officers or bodies the power to determine certain facts or
conditions, or the happening of contingencies, on which the operation of a statute is, by its terms, made to
depend, but the legislature must prescribe sufficient standards, policies or limitations on their authority. 49 While
the power to tax cannot be delegated to executive agencies, details as to the enforcement and administration
of an exercise of such power may be left to them, including the power to determine the existence of facts on
which its operation depends.50

The rationale for this is that the preliminary ascertainment of facts as basis for the enactment of legislation is
not of itself a legislative function, but is simply ancillary to legislation. Thus, the duty of correlating information
and making recommendations is the kind of subsidiary activity which the legislature may perform through its
members, or which it may delegate to others to perform. Intelligent legislation on the complicated problems of
modern society is impossible in the absence of accurate information on the part of the legislators, and any
reasonable method of securing such information is proper.51 The Constitution as a continuously operative
charter of government does not require that Congress find for itself
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every fact upon which it desires to base legislative action or that it make for itself detailed determinations which
it has declared to be prerequisite to application of legislative policy to particular facts and circumstances
impossible for Congress itself properly to investigate.52

In the present case, the challenged section of R.A. No. 9337 is the common proviso in Sections 4, 5 and 6
which reads as follows:

That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006,
raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been
satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds
two and four-fifth percent (2 4/5%); or

(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent
(1 ½%).

The case before the Court is not a delegation of legislative power. It is simply a delegation of ascertainment of
facts upon which enforcement and administration of the increase rate under the law is contingent. The
legislature has made the operation of the 12% rate effective January 1, 2006, contingent upon a specified fact
or condition. It leaves the entire operation or non-operation of the 12% rate upon factual matters outside of the
control of the executive.

No discretion would be exercised by the President. Highlighting the absence of discretion is the fact that the
word shall is used in the common proviso. The use of the word shall connotes a mandatory order. Its use in a
statute denotes an imperative obligation and is inconsistent with the idea of discretion.53 Where the law is clear
and unambiguous, it must be taken to mean exactly what it says, and courts have no choice but to see to it that
the mandate is obeyed.54

Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the existence of any
of the conditions specified by Congress. This is a duty which cannot be evaded by the President. Inasmuch as
the law specifically uses the word shall, the exercise of discretion by the President does not come into play. It
is a clear directive to impose the 12% VAT rate when the specified conditions are present. The time of taking
into effect of the 12% VAT rate is based on the happening of a certain specified contingency, or upon the
ascertainment of certain facts or conditions by a person or body other than the legislature itself.

The Court finds no merit to the contention of petitioners ABAKADA GURO Party List, et al. that the law
effectively nullified the President’s power of control over the Secretary of Finance by mandating the fixing of
the tax rate by the President upon the recommendation of the Secretary of Finance. The Court cannot also
subscribe to the position of petitioners

Pimentel, et al. that the word shall should be interpreted to mean may in view of the phrase "upon the
recommendation of the Secretary of Finance." Neither does the Court find persuasive the submission of
petitioners Escudero, et al. that any recommendation by the Secretary of Finance can easily be brushed aside
by the President since the former is a mere alter ego of the latter.

When one speaks of the Secretary of Finance as the alter ego of the President, it simply means that as head of
the Department of Finance he is the assistant and agent of the Chief Executive. The multifarious executive and
administrative functions of the Chief Executive are performed by and through the executive departments, and
the acts of the secretaries of such departments, such as the Department of Finance, performed and
promulgated in the regular course of business, are, unless disapproved or reprobated by the Chief Executive,
presumptively the acts of the Chief Executive. The Secretary of Finance, as such, occupies a political position
and holds office in an advisory capacity, and, in the language of Thomas Jefferson, "should be of the

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President's bosom confidence" and, in the language of Attorney-General Cushing, is "subject to the direction of
the President."55

In the present case, in making his recommendation to the President on the existence of either of the two
conditions, the Secretary of Finance is not acting as the alter ego of the President or even her subordinate. In
such instance, he is not subject to the power of control and direction of the President. He is acting as the agent
of the legislative department, to determine and declare the event upon which its expressed will is to take
effect.56 The Secretary of Finance becomes the means or tool by which legislative policy is determined and
implemented, considering that he possesses all the facilities to gather data and information and has a much
broader perspective to properly evaluate them. His function is to gather and collate statistical data and other
pertinent information and verify if any of the two conditions laid out by Congress is present. His personality in
such instance is in reality but a projection of that of Congress. Thus, being the agent of Congress and not of
the President, the President cannot alter or modify or nullify, or set aside the findings of the Secretary of
Finance and to substitute the judgment of the former for that of the latter.

Congress simply granted the Secretary of Finance the authority to ascertain the existence of a fact, namely,
whether by December 31, 2005, the value-added tax collection as a percentage of Gross Domestic Product
(GDP) of the previous year exceeds two and four-fifth percent (24/5%) or the national government deficit as a
percentage of GDP of the previous year exceeds one and one-half percent (1½%). If either of these two
instances has occurred, the Secretary of Finance, by legislative mandate, must submit such information to the
President. Then the 12% VAT rate must be imposed by the President effective January 1, 2006. There is no
undue delegation of legislative power but only of the discretion as to the execution of a law. This is
constitutionally permissible.57 Congress does not abdicate its functions or unduly delegate power when it
describes what job must be done, who must do it, and what is the scope of his authority; in our complex
economy that is frequently the only way in which the legislative process can go forward. 58

As to the argument of petitioners ABAKADA GURO Party List, et al. that delegating to the President the
legislative power to tax is contrary to the principle of republicanism, the same deserves scant consideration.
Congress did not delegate the power to tax but the mere implementation of the law. The intent and will to
increase the VAT rate to 12% came from Congress and the task of the President is to simply execute the
legislative policy. That Congress chose to do so in such a manner is not within the province of the Court to
inquire into, its task being to interpret the law.59

The insinuation by petitioners Pimentel, et al. that the President has ample powers to cause, influence or
create the conditions to bring about either or both the conditions precedent does not deserve any merit as this
argument is highly speculative. The Court does not rule on allegations which are manifestly conjectural, as
these may not exist at all. The Court deals with facts, not fancies; on realities, not appearances. When the
Court acts on appearances instead of realities, justice and law will be short-lived.

B. The 12% Increase VAT Rate Does Not Impose an Unfair and Unnecessary Additional Tax Burden

Petitioners Pimentel, et al. argue that the 12% increase in the VAT rate imposes an unfair and additional tax
burden on the people. Petitioners also argue that the 12% increase, dependent on any of the 2 conditions set
forth in the contested provisions, is ambiguous because it does not state if the VAT rate would be returned to
the original 10% if the rates are no longer satisfied. Petitioners also argue that such rate is unfair and
unreasonable, as the people are unsure of the applicable VAT rate from year to year.

Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of the two conditions set forth
therein are satisfied, the President shall increase the VAT rate to 12%. The provisions of the law are clear. It
does not provide for a return to the 10% rate nor does it empower the President to so revert if, after the rate is
increased to 12%, the VAT collection goes below the 24/5 of the GDP of the previous year or that the national
government deficit as a percentage of GDP of the previous year does not exceed 1½%.

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Therefore, no statutory construction or interpretation is needed. Neither can conditions or limitations be
introduced where none is provided for. Rewriting the law is a forbidden ground that only Congress may tread
upon.60

Thus, in the absence of any provision providing for a return to the 10% rate, which in this case the Court finds
none, petitioners’ argument is, at best, purely speculative. There is no basis for petitioners’ fear of a fluctuating
VAT rate because the law itself does not provide that the rate should go back to 10% if the conditions provided
in Sections 4, 5 and 6 are no longer present. The rule is that where the provision of the law is clear and
unambiguous, so that there is no occasion for the court's seeking the legislative intent, the law must be taken
as it is, devoid of judicial addition or subtraction.61

Petitioners also contend that the increase in the VAT rate, which was allegedly an incentive to the President to
raise the VAT collection to at least 2 4/5 of the GDP of the previous year, should be based on fiscal adequacy.

Petitioners obviously overlooked that increase in VAT collection is not the only condition. There is another
condition, i.e., the national government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 ½%).

Respondents explained the philosophy behind these alternative conditions:

1. VAT/GDP Ratio > 2.8%

The condition set for increasing VAT rate to 12% have economic or fiscal meaning. If VAT/GDP is less than
2.8%, it means that government has weak or no capability of implementing the VAT or that VAT is not effective
in the function of the tax collection. Therefore, there is no value to increase it to 12% because such action will
also be ineffectual.

2. Nat’l Gov’t Deficit/GDP >1.5%

The condition set for increasing VAT when deficit/GDP is 1.5% or less means the fiscal condition of
government has reached a relatively sound position or is towards the direction of a balanced budget position.
Therefore, there is no need to increase the VAT rate since the fiscal house is in a relatively healthy position.
Otherwise stated, if the ratio is more than 1.5%, there is indeed a need to increase the VAT rate.62

That the first condition amounts to an incentive to the President to increase the VAT collection does not render
it unconstitutional so long as there is a public purpose for which the law was passed, which in this case, is
mainly to raise revenue. In fact, fiscal adequacy dictated the need for a raise in revenue.

The principle of fiscal adequacy as a characteristic of a sound tax system was originally stated by Adam Smith
in his Canons of Taxation (1776), as:

IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little
as possible over and above what it brings into the public treasury of the state.63

It simply means that sources of revenues must be adequate to meet government expenditures and their
variations.64

The dire need for revenue cannot be ignored. Our country is in a quagmire of financial woe. During the
Bicameral Conference Committee hearing, then Finance Secretary Purisima bluntly depicted the country’s
gloomy state of economic affairs, thus:

First, let me explain the position that the Philippines finds itself in right now. We are in a position where 90
percent of our revenue is used for debt service. So, for every peso of revenue that we currently raise, 90 goes
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to debt service. That’s interest plus amortization of our debt. So clearly, this is not a sustainable situation.
That’s the first fact.

The second fact is that our debt to GDP level is way out of line compared to other peer countries that borrow
money from that international financial markets. Our debt to GDP is approximately equal to our GDP. Again,
that shows you that this is not a sustainable situation.

The third thing that I’d like to point out is the environment that we are presently operating in is not as benign as
what it used to be the past five years.

What do I mean by that?

In the past five years, we’ve been lucky because we were operating in a period of basically global growth and
low interest rates. The past few months, we have seen an inching up, in fact, a rapid increase in the interest
rates in the leading economies of the world. And, therefore, our ability to borrow at reasonable prices is going
to be challenged. In fact, ultimately, the question is our ability to access the financial markets.

When the President made her speech in July last year, the environment was not as bad as it is now, at least
based on the forecast of most financial institutions. So, we were assuming that raising 80 billion would put us in
a position where we can then convince them to improve our ability to borrow at lower rates. But conditions
have changed on us because the interest rates have gone up. In fact, just within this room, we tried to access
the market for a billion dollars because for this year alone, the Philippines will have to borrow 4 billion dollars.
Of that amount, we have borrowed 1.5 billion. We issued last January a 25-year bond at 9.7 percent cost. We
were trying to access last week and the market was not as favorable and up to now we have not accessed and
we might pull back because the conditions are not very good.

So given this situation, we at the Department of Finance believe that we really need to front-end our deficit
reduction. Because it is deficit that is causing the increase of the debt and we are in what we call a debt spiral.
The more debt you have, the more deficit you have because interest and debt service eats and eats more of
your revenue. We need to get out of this debt spiral. And the only way, I think, we can get out of this debt spiral
is really have a front-end adjustment in our revenue base.65

The image portrayed is chilling. Congress passed the law hoping for rescue from an inevitable catastrophe.
Whether the law is indeed sufficient to answer the state’s economic dilemma is not for the Court to judge. In
the Fariñas case, the Court refused to consider the various arguments raised therein that dwelt on the wisdom
of Section 14 of R.A. No. 9006 (The Fair Election Act), pronouncing that:

. . . policy matters are not the concern of the Court. Government policy is within the exclusive dominion of the
political branches of the government. It is not for this Court to look into the wisdom or propriety of legislative
determination. Indeed, whether an enactment is wise or unwise, whether it is based on sound economic
theory, whether it is the best means to achieve the desired results, whether, in short, the legislative discretion
within its prescribed limits should be exercised in a particular manner are matters for the judgment of the
legislature, and the serious conflict of opinions does not suffice to bring them within the range of judicial
cognizance.66

In the same vein, the Court in this case will not dawdle on the purpose of Congress or the executive policy,
given that it is not for the judiciary to "pass upon questions of wisdom, justice or expediency of legislation." 67

II.

Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section 12 of
R.A. No. 9337, amending Section 114(C) of the NIRC, violate the following provisions of the Constitution:

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a. Article VI, Section 28(1), and

b. Article III, Section 1

A. Due Process and Equal Protection Clauses

Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that Section 8 of R.A. No. 9337, amending
Sections 110 (A)(2), 110 (B), and Section 12 of R.A. No. 9337, amending Section 114 (C) of the NIRC are
arbitrary, oppressive, excessive and confiscatory. Their argument is premised on the constitutional right
against deprivation of life, liberty of property without due process of law, as embodied in Article III, Section 1 of
the Constitution.

Petitioners also contend that these provisions violate the constitutional guarantee of equal protection of the
law.

The doctrine is that where the due process and equal protection clauses are invoked, considering that they are
not fixed rules but rather broad standards, there is a need for proof of such persuasive character as would lead
to such a conclusion. Absent such a showing, the presumption of validity must prevail.68

Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a limitation on the amount of input
tax that may be credited against the output tax. It states, in part: "[P]rovided, that the input tax inclusive of the
input VAT carried over from the previous quarter that may be credited in every quarter shall not exceed
seventy percent (70%) of the output VAT: …"

Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-added tax due from or paid
by a VAT-registered person on the importation of goods or local purchase of good and services, including
lease or use of property, in the course of trade or business, from a VAT-registered person, and Output Tax is
the value-added tax due on the sale or lease of taxable goods or properties or services by any person
registered or required to register under the law.

Petitioners claim that the contested sections impose limitations on the amount of input tax that may be claimed.
In effect, a portion of the input tax that has already been paid cannot now be credited against the output tax.

Petitioners’ argument is not absolute. It assumes that the input tax exceeds 70% of the output tax, and
therefore, the input tax in excess of 70% remains uncredited. However, to the extent that the input tax is less
than 70% of the output tax, then 100% of such input tax is still creditable.

More importantly, the excess input tax, if any, is retained in a business’s books of accounts and remains
creditable in the succeeding quarter/s. This is explicitly allowed by Section 110(B), which provides that "if the
input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters." In
addition, Section 112(B) allows a VAT-registered person to apply for the issuance of a tax credit certificate or
refund for any unused input taxes, to the extent that such input taxes have not been applied against the output
taxes. Such unused input tax may be used in payment of his other internal revenue taxes.

The non-application of the unutilized input tax in a given quarter is not ad infinitum, as petitioners
exaggeratedly contend. Their analysis of the effect of the 70% limitation is incomplete and one-sided. It ends at
the net effect that there will be unapplied/unutilized inputs VAT for a given quarter. It does not proceed further
to the fact that such unapplied/unutilized input tax may be credited in the subsequent periods as allowed by the
carry-over provision of Section 110(B) or that it may later on be refunded through a tax credit certificate under
Section 112(B).

Therefore, petitioners’ argument must be rejected.

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On the other hand, it appears that petitioner Garcia failed to comprehend the operation of the 70% limitation on
the input tax. According to petitioner, the limitation on the creditable input tax in effect allows VAT-registered
establishments to retain a portion of the taxes they collect, which violates the principle that tax collection and
revenue should be for public purposes and expenditures

As earlier stated, the input tax is the tax paid by a person, passed on to him by the seller, when he buys goods.
Output tax meanwhile is the tax due to the person when he sells goods. In computing the VAT payable, three
possible scenarios may arise:

First, if at the end of a taxable quarter the output taxes charged by the seller are equal to the input taxes that
he paid and passed on by the suppliers, then no payment is required;

Second, when the output taxes exceed the input taxes, the person shall be liable for the excess, which has to
be paid to the Bureau of Internal Revenue (BIR);69 and

Third, if the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or
quarters. Should the input taxes result from zero-rated or effectively zero-rated transactions, any excess over
the output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes, at
the taxpayer’s option.70

Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax. Thus, a person can credit his
input tax only up to the extent of 70% of the output tax. In layman’s term, the value-added taxes that a
person/taxpayer paid and passed on to him by a seller can only be credited up to 70% of the value-added
taxes that is due to him on a taxable transaction. There is no retention of any tax collection because the
person/taxpayer has already previously paid the input tax to a seller, and the seller will subsequently remit
such input tax to the BIR. The party directly liable for the payment of the tax is the seller. 71 What only needs to
be done is for the person/taxpayer to apply or credit these input taxes, as evidenced by receipts, against his
output taxes.

Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that the input tax partakes the nature of
a property that may not be confiscated, appropriated, or limited without due process of law.

The input tax is not a property or a property right within the constitutional purview of the due process clause. A
VAT-registered person’s entitlement to the creditable input tax is a mere statutory privilege.

The distinction between statutory privileges and vested rights must be borne in mind for persons have no
vested rights in statutory privileges. The state may change or take away rights, which were created by the law
of the state, although it may not take away property, which was vested by virtue of such rights. 72

Under the previous system of single-stage taxation, taxes paid at every level of distribution are not recoverable
from the taxes payable, although it becomes part of the cost, which is deductible from the gross revenue.
When Pres. Aquino issued E.O. No. 273 imposing a 10% multi-stage tax on all sales, it was then that the
crediting of the input tax paid on purchase or importation of goods and services by VAT-registered persons
against the output tax was introduced.73 This was adopted by the Expanded VAT Law (R.A. No. 7716),74 and
The Tax Reform Act of 1997 (R.A. No. 8424).75 The right to credit input tax as against the output tax is clearly a
privilege created by law, a privilege that also the law can remove, or in this case, limit.

Petitioners also contest as arbitrary, oppressive, excessive and confiscatory, Section 8 of R.A. No. 9337,
amending Section 110(A) of the NIRC, which provides:

SEC. 110. Tax Credits. –

(A) Creditable Input Tax. – …

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Provided, That the input tax on goods purchased or imported in a calendar month for use in trade or business
for which deduction for depreciation is allowed under this Code, shall be spread evenly over the month of
acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods,
excluding the VAT component thereof, exceeds One million pesos (₱1,000,000.00): Provided, however, That if
the estimated useful life of the capital goods is less than five (5) years, as used for depreciation purposes, then
the input VAT shall be spread over such a shorter period: Provided, finally, That in the case of purchase of
services, lease or use of properties, the input tax shall be creditable to the purchaser, lessee or license upon
payment of the compensation, rental, royalty or fee.

The foregoing section imposes a 60-month period within which to amortize the creditable input tax on purchase
or importation of capital goods with acquisition cost of ₱1 Million pesos, exclusive of the VAT component. Such
spread out only poses a delay in the crediting of the input tax. Petitioners’ argument is without basis because
the taxpayer is not permanently deprived of his privilege to credit the input tax.

It is worth mentioning that Congress admitted that the spread-out of the creditable input tax in this case
amounts to a 4-year interest-free loan to the government.76 In the same breath, Congress also justified its
move by saying that the provision was designed to raise an annual revenue of 22.6 billion.77 The legislature
also dispelled the fear that the provision will fend off foreign investments, saying that foreign investors have
other tax incentives provided by law, and citing the case of China, where despite a 17.5% non-creditable VAT,
foreign investments were not deterred.78 Again, for whatever is the purpose of the 60-month amortization, this
involves executive economic policy and legislative wisdom in which the Court cannot intervene.

With regard to the 5% creditable withholding tax imposed on payments made by the government for taxable
transactions, Section 12 of R.A. No. 9337, which amended Section 114 of the NIRC, reads:

SEC. 114. Return and Payment of Value-added Tax. –

(C) Withholding of Value-added Tax. – The Government or any of its political subdivisions, instrumentalities or
agencies, including government-owned or controlled corporations (GOCCs) shall, before making payment on
account of each purchase of goods and services which are subject to the value-added tax imposed in Sections
106 and 108 of this Code, deduct and withhold a final value-added tax at the rate of five percent (5%) of the
gross payment thereof: Provided, That the payment for lease or use of properties or property rights to
nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For purposes
of this Section, the payor or person in control of the payment shall be considered as the withholding agent.

The value-added tax withheld under this Section shall be remitted within ten (10) days following the end of the
month the withholding was made.

Section 114(C) merely provides a method of collection, or as stated by respondents, a more simplified VAT
withholding system. The government in this case is constituted as a withholding agent with respect to their
payments for goods and services.

Prior to its amendment, Section 114(C) provided for different rates of value-added taxes to be withheld -- 3%
on gross payments for purchases of goods; 6% on gross payments for services supplied by contractors other
than by public works contractors; 8.5% on gross payments for services supplied by public work contractors; or
10% on payment for the lease or use of properties or property rights to nonresident owners. Under the present
Section 114(C), these different rates, except for the 10% on lease or property rights payment to nonresidents,
were deleted, and a uniform rate of 5% is applied.

The Court observes, however, that the law the used the word final. In tax usage, final, as opposed to
creditable, means full. Thus, it is provided in Section 114(C): "final value-added tax at the rate of five percent
(5%)."

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In Revenue Regulations No. 02-98, implementing R.A. No. 8424 (The Tax Reform Act of 1997), the concept of
final withholding tax on income was explained, to wit:

SECTION 2.57. Withholding of Tax at Source

(A) Final Withholding Tax. – Under the final withholding tax system the amount of income tax withheld by the
withholding agent is constituted as full and final payment of the income tax due from the payee on the said
income. The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of
his failure to withhold the tax or in case of underwithholding, the deficiency tax shall be collected from the
payor/withholding agent. …

(B) Creditable Withholding Tax. – Under the creditable withholding tax system, taxes withheld on certain
income payments are intended to equal or at least approximate the tax due of the payee on said income. …
Taxes withheld on income payments covered by the expanded withholding tax (referred to in Sec. 2.57.2 of
these regulations) and compensation income (referred to in Sec. 2.78 also of these regulations) are creditable
in nature.

As applied to value-added tax, this means that taxable transactions with the government are subject to a 5%
rate, which constitutes as full payment of the tax payable on the transaction. This represents the net VAT
payable of the seller. The other 5% effectively accounts for the standard input VAT (deemed input VAT), in lieu
of the actual input VAT directly or attributable to the taxable transaction.79

The Court need not explore the rationale behind the provision. It is clear that Congress intended to treat
differently taxable transactions with the government.80 This is supported by the fact that under the old
provision, the 5% tax withheld by the government remains creditable against the tax liability of the seller or
contractor, to wit:

SEC. 114. Return and Payment of Value-added Tax. –

(C) Withholding of Creditable Value-added Tax. – The Government or any of its political subdivisions,
instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall, before
making payment on account of each purchase of goods from sellers and services rendered by contractors
which are subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold
the value-added tax due at the rate of three percent (3%) of the gross payment for the purchase of goods and
six percent (6%) on gross receipts for services rendered by contractors on every sale or installment payment
which shall be creditable against the value-added tax liability of the seller or contractor: Provided,
however, That in the case of government public works contractors, the withholding rate shall be eight and one-
half percent (8.5%): Provided, further, That the payment for lease or use of properties or property rights to
nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For this
purpose, the payor or person in control of the payment shall be considered as the withholding agent.

The valued-added tax withheld under this Section shall be remitted within ten (10) days following the end of the
month the withholding was made. (Emphasis supplied)

As amended, the use of the word final and the deletion of the word creditable exhibits Congress’s intention to
treat transactions with the government differently. Since it has not been shown that the class subject to the 5%
final withholding tax has been unreasonably narrowed, there is no reason to invalidate the provision.
Petitioners, as petroleum dealers, are not the only ones subjected to the 5% final withholding tax. It applies to
all those who deal with the government.

Moreover, the actual input tax is not totally lost or uncreditable, as petitioners believe. Revenue Regulations
No. 14-2005 or the Consolidated Value-Added Tax Regulations 2005 issued by the BIR, provides that should

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the actual input tax exceed 5% of gross payments, the excess may form part of the cost. Equally, should the
actual input tax be less than 5%, the difference is treated as income.81

Petitioners also argue that by imposing a limitation on the creditable input tax, the government gets to tax a
profit or value-added even if there is no profit or value-added.

Petitioners’ stance is purely hypothetical, argumentative, and again, one-sided. The Court will not engage in a
legal joust where premises are what ifs, arguments, theoretical and facts, uncertain. Any disquisition by the
Court on this point will only be, as Shakespeare describes life in Macbeth,82 "full of sound and fury, signifying
nothing."

What’s more, petitioners’ contention assumes the proposition that there is no profit or value-added. It need not
take an astute businessman to know that it is a matter of exception that a business will sell goods or services
without profit or value-added. It cannot be overstressed that a business is created precisely for profit.

The equal protection clause under the Constitution means that "no person or class of persons shall be
deprived of the same protection of laws which is enjoyed by other persons or other classes in the same place
and in like circumstances."83

The power of the State to make reasonable and natural classifications for the purposes of taxation has long
been established. Whether it relates to the subject of taxation, the kind of property, the rates to be levied, or
the amounts to be raised, the methods of assessment, valuation and collection, the State’s power is entitled to
presumption of validity. As a rule, the judiciary will not interfere with such power absent a clear showing of
unreasonableness, discrimination, or arbitrariness.84

Petitioners point out that the limitation on the creditable input tax if the entity has a high ratio of input tax, or
invests in capital equipment, or has several transactions with the government, is not based on real and
substantial differences to meet a valid classification.

The argument is pedantic, if not outright baseless. The law does not make any classification in the subject of
taxation, the kind of property, the rates to be levied or the amounts to be raised, the methods of assessment,
valuation and collection. Petitioners’ alleged distinctions are based on variables that bear different
consequences. While the implementation of the law may yield varying end results depending on one’s profit
margin and value-added, the Court cannot go beyond what the legislature has laid down and interfere with the
affairs of business.

The equal protection clause does not require the universal application of the laws on all persons or things
without distinction. This might in fact sometimes result in unequal protection. What the clause requires is
equality among equals as determined according to a valid classification. By classification is meant the grouping
of persons or things similar to each other in certain particulars and different from all others in these same
particulars.85

Petitioners brought to the Court’s attention the introduction of Senate Bill No. 2038 by Sens. S.R. Osmeña III
and Ma. Ana Consuelo A.S. – Madrigal on June 6, 2005, and House Bill No. 4493 by Rep. Eric D. Singson.
The proposed legislation seeks to amend the 70% limitation by increasing the same to 90%. This, according to
petitioners, supports their stance that the 70% limitation is arbitrary and confiscatory. On this score, suffice it to
say that these are still proposed legislations. Until Congress amends the law, and absent any unequivocal
basis for its unconstitutionality, the 70% limitation stays.

B. Uniformity and Equitability of Taxation

Article VI, Section 28(1) of the Constitution reads:

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The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of
taxation.

Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the
same rate. Different articles may be taxed at different amounts provided that the rate is uniform on the same
class everywhere with all people at all times.86

In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all goods and
services. Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the
NIRC, provide for a rate of 10% (or 12%) on sale of goods and properties, importation of goods, and sale of
services and use or lease of properties. These same sections also provide for a 0% rate on certain sales and
transaction.

Neither does the law make any distinction as to the type of industry or trade that will bear the 70% limitation on
the creditable input tax, 5-year amortization of input tax paid on purchase of capital goods or the 5% final
withholding tax by the government. It must be stressed that the rule of uniform taxation does not deprive
Congress of the power to classify subjects of taxation, and only demands uniformity within the particular
class.87

R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate of 0% or 10% (or
12%) does not apply to sales of goods or services with gross annual sales or receipts not exceeding
₱1,500,000.00.88 Also, basic marine and agricultural food products in their original state are still not subject to
the tax,89 thus ensuring that prices at the grassroots level will remain accessible. As was stated in Kapatiran ng
mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan:90

The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons engaged
in business with an aggregate gross annual sales exceeding ₱200,000.00. Small corner sari-sari stores are
consequently exempt from its application. Likewise exempt from the tax are sales of farm and marine products,
so that the costs of basic food and other necessities, spared as they are from the incidence of the VAT, are
expected to be relatively lower and within the reach of the general public.

It is admitted that R.A. No. 9337 puts a premium on businesses with low profit margins, and unduly favors
those with high profit margins. Congress was not oblivious to this. Thus, to equalize the weighty burden the law
entails, the law, under Section 116, imposed a 3% percentage tax on VAT-exempt persons under Section
109(v), i.e., transactions with gross annual sales and/or receipts not exceeding ₱1.5 Million. This acts as a
equalizer because in effect, bigger businesses that qualify for VAT coverage and VAT-exempt taxpayers stand
on equal-footing.

Moreover, Congress provided mitigating measures to cushion the impact of the imposition of the tax on those
previously exempt. Excise taxes on petroleum products91 and natural gas92 were reduced. Percentage tax on
domestic carriers was removed.93 Power producers are now exempt from paying franchise tax.94

Aside from these, Congress also increased the income tax rates of corporations, in order to distribute the
burden of taxation. Domestic, foreign, and non-resident corporations are now subject to a 35% income tax rate,
from a previous 32%.95 Intercorporate dividends of non-resident foreign corporations are still subject to 15%
final withholding tax but the tax credit allowed on the corporation’s domicile was increased to 20%.96 The
Philippine Amusement and Gaming Corporation (PAGCOR) is not exempt from income taxes anymore. 97 Even
the sale by an artist of his works or services performed for the production of such works was not spared.

All these were designed to ease, as well as spread out, the burden of taxation, which would otherwise rest
largely on the consumers. It cannot therefore be gainsaid that R.A. No. 9337 is equitable.

C. Progressivity of Taxation

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Lastly, petitioners contend that the limitation on the creditable input tax is anything but regressive. It is the
smaller business with higher input tax-output tax ratio that will suffer the consequences.

Progressive taxation is built on the principle of the taxpayer’s ability to pay. This principle was also lifted from
Adam Smith’s Canons of Taxation, and it states:

I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible,
in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy
under the protection of the state.

Taxation is progressive when its rate goes up depending on the resources of the person affected. 98

The VAT is an antithesis of progressive taxation. By its very nature, it is regressive. The principle of
progressive taxation has no relation with the VAT system inasmuch as the VAT paid by the consumer or
business for every goods bought or services enjoyed is the same regardless of income. In

other words, the VAT paid eats the same portion of an income, whether big or small. The disparity lies in the
income earned by a person or profit margin marked by a business, such that the higher the income or profit
margin, the smaller the portion of the income or profit that is eaten by VAT. A converso, the lower the income
or profit margin, the bigger the part that the VAT eats away. At the end of the day, it is really the lower income
group or businesses with low-profit margins that is always hardest hit.

Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like the VAT. What it
simply provides is that Congress shall "evolve a progressive system of taxation." The Court stated in the
Tolentino case, thus:

The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive.
What it simply provides is that Congress shall ‘evolve a progressive system of taxation.’ The constitutional
provision has been interpreted to mean simply that ‘direct taxes are . . . to be preferred [and] as much as
possible, indirect taxes should be minimized.’ (E. FERNANDO, THE CONSTITUTION OF THE PHILIPPINES
221 (Second ed. 1977)) Indeed, the mandate to Congress is not to prescribe, but to evolve, a progressive tax
system. Otherwise, sales taxes, which perhaps are the oldest form of indirect taxes, would have been
prohibited with the proclamation of Art. VIII, §17 (1) of the 1973 Constitution from which the present Art. VI, §28
(1) was taken. Sales taxes are also regressive.

Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not impossible, to
avoid them by imposing such taxes according to the taxpayers' ability to pay. In the case of the VAT, the law
minimizes the regressive effects of this imposition by providing for zero rating of certain transactions (R.A. No.
7716, §3, amending §102 (b) of the NIRC), while granting exemptions to other transactions. (R.A. No. 7716, §4
amending §103 of the NIRC)99

CONCLUSION

It has been said that taxes are the lifeblood of the government. In this case, it is just an enema, a first-aid
measure to resuscitate an economy in distress. The Court is neither blind nor is it turning a deaf ear on the
plight of the masses. But it does not have the panacea for the malady that the law seeks to remedy. As in other
cases, the Court cannot strike down a law as unconstitutional simply because of its yokes.

Let us not be overly influenced by the plea that for every wrong there is a remedy, and that the judiciary should
stand ready to afford relief. There are undoubtedly many wrongs the judicature may not correct, for instance,
those involving political questions. . . .

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Let us likewise disabuse our minds from the notion that the judiciary is the repository of remedies for all
political or social ills; We should not forget that the Constitution has judiciously allocated the powers of
government to three distinct and separate compartments; and that judicial interpretation has tended to the
preservation of the independence of the three, and a zealous regard of the prerogatives of each, knowing full
well that one is not the guardian of the others and that, for official wrong-doing, each may be brought to
account, either by impeachment, trial or by the ballot box.100

The words of the Court in Vera vs. Avelino101 holds true then, as it still holds true now. All things considered,
there is no raison d'être for the unconstitutionality of R.A. No. 9337.

WHEREFORE, Republic Act No. 9337 not being unconstitutional, the petitions in G.R. Nos. 168056, 168207,
168461, 168463, and 168730, are hereby DISMISSED.

There being no constitutional impediment to the full enforcement and implementation of R.A. No. 9337, the
temporary restraining order issued by the Court on July 1, 2005 is LIFTED upon finality of herein decision.

SO ORDERED.

DIGEST:

Facts:
ABAKADA GURO Party List, et al., filed a petition for prohibition o questioning the constitutionality of Sections
4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the National Internal
Revenue Code (NIRC).
Section 4 imposes a 10% VAT on sale of goods and properties;
Section 5 imposes a 10% VAT on importation of goods; and
Section 6 imposes a 10% VAT on sale of services and use or lease of properties;

These provisions contain a provision which authorizing the President, upon recommendation of the Secretary
of Finance, to raise the VAT rate to 12%, effective January 1, 2006, after specified conditions have been
satisfied.

Issues:
Whether or not there is a violation of Article VI, Section 24 of the Constitution.

Whether or not there is undue delegation of legislative power in violation of Article VI Sec 28(2) of the
Constitution.

Whether or not there is a violation of the due process and equal protection of the Constitution.

Ruling:
No, the revenue bill exclusively originated in the House of Representatives, the Senate was acting within its
constitutional power to introduce amendments to the House bill when it included provisions in Senate Bill No.
1950 amending corporate income taxes, percentage, and excise and franchise taxes.

No, there is no undue delegation of legislative power but only of the discretion as to the execution of a law.
This is constitutionally permissible. Congress does not abdicate its functions or unduly delegate power when it
describes what job must be done, who must do it, and what is the scope of his authority; in our complex
economy that is frequently the only way in which the legislative process can go forward. In this case, it is not a
delegation of legislative power but a delegation of ascertainment of facts upon which enforcement and
administration of the increased rate under the law is contingent.

No, the power of the State to make reasonable and natural classifications for the purposes of taxation has long
been established. Whether it relates to the subject of taxation, the kind of property, the rates to be levied, or
137
the amounts to be raised, the methods of assessment, valuation and collection, the State’s power is entitled to
presumption of validity. As a rule, the judiciary will not interfere with such power absent a clear showing of
unreasonableness, discrimination, or arbitrariness.

ABAKADA Guro Party List vs. Ermita

G.R. No. 168056 September 1, 2005

FACTS:
Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a petition for prohibition
on May 27, 2005 questioning the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337, amending Sections
106, 107 and 108, respectively, of the National Internal Revenue Code (NIRC). Section 4 imposes a 10% VAT
on sale of goods and properties, Section 5 imposes a 10% VAT on importation of goods, and Section 6
imposes a 10% VAT on sale of services and use or lease of properties. These questioned provisions contain a
uniform proviso authorizing the President, upon recommendation of the Secretary of Finance, to raise the VAT
rate to 12%, effective January 1, 2006, after specified conditions have been satisfied. Petitioners argue that the
law is unconstitutional.

ISSUES:

1. Whether or not there is a violation of Article VI, Section 24 of the Constitution.

2. Whether or not there is undue delegation of legislative power in violation of Article VI Sec 28(2) of the
Constitution.

3. Whether or not there is a violation of the due process and equal protection under Article III Sec. 1 of the
Constitution.

RULING:

1. Since there is no question that the revenue bill exclusively originated in the House of Representatives, the
Senate was acting within its constitutional power to introduce amendments to the House bill when it included
provisions in Senate Bill No. 1950 amending corporate income taxes, percentage, and excise and franchise
taxes.

2. There is no undue delegation of legislative power but only of the discretion as to the execution of a law. This
is constitutionally permissible. Congress does not abdicate its functions or unduly delegate power when it
describes what job must be done, who must do it, and what is the scope of his authority; in our complex
economy that is frequently the only way in which the legislative process can go forward.

3. The power of the State to make reasonable and natural classifications for the purposes of taxation has long
been established. Whether it relates to the subject of taxation, the kind of property, the rates to be levied, or
the amounts to be raised, the methods of assessment, valuation and collection, the State’s power is entitled to
presumption of validity. As a rule, the judiciary will not interfere with such power absent a clear showing of
unreasonableness, discrimination, or arbitrariness.

EN BANC

Agenda for October 18, 2005

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Item No. 45

G.R. No. 168056 (ABAKADA Guro Party List Officer Samson S. Alcantara, et al. vs. The Hon. Executive
Secretary Eduardo R. Ermita); G.R. No. 168207 (Aquilino Q. Pimentel, Jr., et al. vs. Executive Secretary
Eduardo R. Ermita, et al.); G.R. No. 168461 (Association of Pilipinas Shell Dealers, Inc., et al. vs. Cesar V.
Purisima, et al.); G.R. No. 168463 (Francis Joseph G. Escudero vs. Cesar V. Purisima, et al); and G.R. No.
168730 (Bataan Governor Enrique T. Garcia, Jr. vs. Hon. Eduardo R. Ermita, et al.)

RESOLUTION

For resolution are the following motions for reconsideration of the Courts Decision dated September 1, 2005
upholding the constitutionality of Republic Act No. 9337 or the VAT Reform Act[1]:

1) Motion for Reconsideration filed by petitioners in G.R. No. 168463, Escudero, et al., on the following
grounds:

A. THE DELETION OF THE NO PASS ON PROVISIONS FOR THE SALE OF PETROLEUM

PRODUCTS AND POWER GENERATION SERVICES CONSTITUTED GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION ON THE PART OF
THE BICAMERAL CONFERENCE COMMITTEE.

B. REPUBLIC ACT NO. 9337 GROSSLY VIOLATES THE CONSTITUTIONAL IMPERATIVE

ON EXCLUSIVE ORIGINATION OF REVENUE BILLS UNDER 24, ARTICLE VI, 1987
PHILIPPINE CONSTITUTION.

C. REPUBLIC ACT NO. 9337S STAND-BY AUTHORITY TO THE EXECUTIVE TO INCREASE THE
VAT RATE, ESPECIALLY ON ACCOUNT OF THE EFFECTIVE RECOMMENDATORY POWER
GRANTED TO THE SECRETARY OF FINANCE, CONSTITUTES UNDUE DELEGATION OF
LEGISLATIVE AUTHORITY.

2) Motion for Reconsideration of petitioner in G.R. No. 168730, Bataan Governor Enrique T. Garcia, Jr.,
with the argument that burdening the consumers with significantly higher prices under a VAT
regime vis--vis a 3% gross tax renders the law unconstitutional for being arbitrary, oppressive and
inequitable.

and

3) Motion for Reconsideration by petitioners Association of Pilipinas Shell Dealers, Inc. in G.R. No.
168461, on the grounds that:

I. This Honorable Court erred in upholding the constitutionality of Section 110(A)(2) and Section
110(B) of the NIRC, as amended by the EVAT Law, imposing limitations on the amount of input VAT
139
 that may be claimed as a credit against output VAT, as well as Section 114(C) of the NIRC, as
amended by the EVAT Law, requiring the government or any of its instrumentalities to withhold a 5%
final withholding VAT on their gross payments on purchases of goods and services, and finding that
the questioned provisions:

A. are not arbitrary, oppressive and consfiscatory as to amount to a deprivation of property

without due process of law in violation of Article III, Section 1 of the 1987 Philippine
Constitution;
B. do not violate the equal protection clause prescribed under Article III, Section 1 of the 1987
Philippine Constitution; and
C. apply uniformly to all those belonging to the same class and do not violate Article VI,
Section 28(1) of the 1987 Philippine Constitution.

II. This Honorable Court erred in upholding the constitutionality of Section 110(B) of the NIRC, as
amended by the EVAT Law, imposing a limitation on the amount of input VAT that may be claimed as
a credit against output VAT notwithstanding the finding that the tax is not progressive as exhorted by
Article VI, Section 28(1) of the 1987 Philippine Constitution.

Respondents filed their Consolidated Comment. Petitioner Garcia filed his Reply.

Petitioners Escudero, et al., insist that the bicameral conference committee should not even have acted on the
no pass-on provisions since there is no disagreement between House Bill Nos. 3705 and 3555 on the one
hand, and Senate Bill No. 1950 on the other, with regard to the no pass-on provision for the sale of service for
power generation because both the Senate and the House were in agreement that the VAT burden for the sale
of such service shall not be passed on to the end-consumer. As to the no pass-on provision for sale of
petroleum products, petitioners argue that the fact that the presence of such a no pass-on provision in the
House version and the absence thereof in the Senate Bill means there is no conflict because a House
provision cannot be in conflict with something that does not exist.

Such argument is flawed. Note that the rules of both houses of Congress provide that a conference committee
shall settle the differences in the respective bills of each house. Verily, the fact that a no pass-on provision is
present in one version but absent in the other, and one version intends two industries, i.e., power generation
companies and petroleum sellers, to bear the burden of the tax, while the other version intended only the
industry of power generation, transmission and distribution to be saddled with such burden, clearly shows that
there are indeed differences between the bills coming from each house, which differences should be acted
upon by the bicameral conference committee. It is incorrect to conclude that there is no clash between two
opposing forces with regard to the no pass-on provision for VAT on the sale of petroleum products merely
because such provision exists in the House version while it is absent in the Senate version. It is precisely the
absence of such provision in the Senate bill and the presence thereof in the House bills that causes the
conflict. The absence of the provision in the Senate bill shows the Senates disagreement to the intention of the
House of Representatives make the sellers of petroleum bear the burden of the VAT. Thus, there are indeed
140
two opposing forces: on one side, the House of Representatives which wants petroleum dealers to be saddled
with the burden of paying VAT and on the other, the Senate which does not see it proper to make that
particular industry bear said burden. Clearly, such conflicts and differences between the no pass-on provisions
in the Senate and House bills had to be acted upon by the bicameral conference committee as mandated by
the rules of both houses of Congress.

Moreover, the deletion of the no pass-on provision made the present VAT law more in consonance with the
very nature of VAT which, as stated in the Decision promulgated on September 1, 2005, is a tax on spending
or consumption, thus, the burden thereof is ultimately borne by the end-consumer.

Escudero, et al., then claim that there had been changes introduced in the Rules of the House of
Representatives regarding the conduct of the House panel in a bicameral conference committee, since the
time of Tolentino vs. Secretary of Finance[2] to act as safeguards against possible abuse of authority by the
House members of the bicameral conference committee. Even assuming that the rule requiring the House
panel to report back to the House if there are substantial differences in the House and Senate bills had indeed
been introduced after Tolentino, the Court stands by its ruling that the issue of whether or not the House panel
in the bicameral conference committee complied with said internal rule cannot be inquired into by the Court. To
reiterate, mere failure to conform to parliamentary usage will not invalidate the action (taken by a deliberative
body) when the requisite number of members have agreed to a particular measure.[3]

Escudero, et. al., also contend that Republic Act No. 9337 grossly violates the constitutional imperative
on exclusive origination of revenue bills under Section 24 of Article VI of the Constitution when the Senate
introduced amendments not connected with VAT.

The Court is not persuaded.

Article VI, Section 24 of the Constitution provides:

Sec. 24 All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local
application, and private bills shall originate exclusively in the House of Representatives, but the Senate may
propose or concur with amendments.

Section 24 speaks of origination of certain bills from the House of Representatives which has been
interpreted in the Tolentino case as follows:

141
 To begin with, it is not the law but the revenue bill which is required by the Constitution
to "originate exclusively" in the House of Representatives. It is important to emphasize this,
because a bill originating in the House may undergo such extensive changes in the Senate that
the result may be a rewriting of the whole At this point, what is important to note is that, as a
result of the Senate action, a distinct bill may be produced. To insist that a revenue statute and
not only the bill which initiated the legislative process culminating in the enactment of the law
must substantially be the same as the House bill would be to deny the Senate's power not only
to "concur with amendments" but also to " propose amendments." It would be to violate the
coequality of legislative power of the two houses of Congress and in fact make the House
superior to the Senate.

Given, then, the power of the Senate to propose amendments, the Senate can propose
its own version even with respect to bills which are required by the Constitution to originate in
the House.
...
Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff,
or tax bills, bills authorizing an increase of the public debt, private bills and bills of local
application must come from the House of Representatives on the theory that, elected as they
are from the districts, the members of the House can be expected to be more sensitive to the
local needs and problems. On the other hand, the senators, who are elected at large, are
expected to approach the same problems from the national perspective. Both views are thereby
made to bear on the enactment of such laws.[4]

Clearly, after the House bills as approved on third reading are duly transmitted to the Senate, the Constitution
states that the latter can propose or concur with amendments. The Court finds that the subject provisions
found in the Senate bill are within the purview of such constitutional provision as declared in the Tolentino
case.

The intent of the House of Representatives in initiating House Bill Nos. 3555 and 3705 was to solve the
countrys serious financial problems. It was stated in the respective explanatory notes that there is a need for
the government to make significant expenditure savings and a credible package of revenue measures. These
measures include improvement of tax administration and control and leakages in revenues from income taxes
and value added tax. It is also stated that one opportunity that could be beneficial to the overall status of our
economy is to review existing tax rates, evaluating the relevance given our present conditions. Thus, with
these purposes in mind and to accomplish these purposes for which the house bills were filed, i.e., to raise
revenues for the government, the Senate introduced amendments on income taxes, which as admitted by
Senator Ralph Recto, would yield about P10.5 billion a year.

Moreover, since the objective of these house bills is to raise revenues, the increase in corporate
income taxes would be a great help and would also soften the impact of VAT measure on the consumers by
distributing the burden across all sectors instead of putting it entirely on the shoulders of the consumers.

142
 As to the other National Internal Revenue Code (NIRC) provisions found in Senate Bill No. 1950, i.e.,
percentage taxes, franchise taxes, amusement and excise taxes, these provisions are needed so as to cushion
the effects of VAT on consumers. As we said in our decision, certain goods and services which were subject to
percentage tax and excise tax would no longer be VAT exempt, thus, the consumer would be burdened more
as they would be paying the VAT in addition to these taxes. Thus, there is a need to amend these sections to
soften the impact of VAT. The Court finds no reason to reverse the earlier ruling that the Senate introduced
amendments that are germane to the subject matter and purposes of the house bills.

Petitioners Escudero, et al., also reiterate that R.A. No. 9337s stand- by authority to the Executive to
increase the VAT rate, especially on account of the recommendatory power granted to the Secretary of
Finance, constitutes undue delegation of legislative power. They submit that the recommendatory power given
to the Secretary of Finance in regard to the occurrence of either of two events using the Gross Domestic
Product (GDP) as a benchmark necessarily and inherently required extended analysis and evaluation, as well
as policy making.

There is no merit in this contention. The Court reiterates that in making his recommendation to the
President on the existence of either of the two conditions, the Secretary of Finance is not acting as the alter
ego of the President or even her subordinate. He is acting as the agent of the legislative department, to
determine and declare the event upon which its expressed will is to take effect. The Secretary of Finance
becomes the means or tool by which legislative policy is determined and implemented, considering that he
possesses all the facilities to gather data and information and has a much broader perspective to properly
evaluate them. His function is to gather and collate statistical data and other pertinent information and verify if
any of the two conditions laid out by Congress is present. Congress granted the Secretary of Finance the
authority to ascertain the existence of a fact, namely, whether by December 31, 2005, the value-added tax
collection as a percentage of GDP of the previous year exceeds two and four-fifth percent (24/5%) or the
national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent
(1%). If either of these two instances has occurred, the Secretary of Finance, by legislative mandate, must
submit such information to the President. Then the 12% VAT rate must be imposed by the President effective
January 1, 2006. Congress does not abdicate its functions or unduly delegate power when it describes what
job must be done, who must do it, and what is the scope of his authority; in our complex economy that is
frequently the only way in which the legislative process can go forward. There is no undue delegation of
legislative power but only of the discretion as to the execution of a law. This is constitutionally permissible.
Congress did not delegate the power to tax but the mere implementation of the law. The intent and will to
increase the VAT rate to 12% came from Congress and the task of the President is to simply execute the
legislative policy. That Congress chose to use the GDP as a benchmark to determine economic growth is not
within the province of the Court to inquire into, its task being to interpret the law.

With regard to petitioner Garcias arguments, the Court also finds the same to be without merit. As
stated in the assailed Decision, the Court recognizes the burden that the consumers will be bearing with the
passage of R.A. No. 9337. But as was also stated by the Court, it cannot strike down the law as
unconstitutional simply because of its yokes. The legislature has spoken and the only role that the Court plays
in the picture is to determine whether the law was passed with due regard to the mandates of the Constitution.
Inasmuch as the Court finds that there are no constitutional infirmities with its passage, the validity of the law
must therefore be upheld.

143
 Finally, petitioners Association of Pilipinas Shell Dealers, Inc. reiterated their arguments in the petition,
citing this time, the dissertation of Associate Justice Dante O. Tinga in his Dissenting Opinion.

The glitch in petitioners arguments is that it presents figures based on an event that is yet to happen.
Their illustration of the possible effects of the 70% limitation, while seemingly concrete, still remains theoretical.
Theories have no place in this case as the Court must only deal with an existing case or controversy that
is appropriate or ripe for judicial determination, not one that is conjectural or merely anticipatory.[5]
The Court will not intervene absent an actual and substantial controversy admitting of specific relief through a
decree conclusive in nature, as distinguished from an opinion advising what the law would be upon a hypothetical
state of facts.[6]

The impact of the 70% limitation on the creditable input tax will ultimately depend on how one manages
and operates its business. Market forces, strategy and acumen will dictate their moves. With or without these
VAT provisions, an entrepreneur who does not have the ken to adapt to economic variables will surely perish
in the competition. The arguments posed are within the realm of business, and the solution lies also in
business.

Petitioners also reiterate their argument that the input tax is a property or a property right. In the same
breath, the Court reiterates its finding that it is not a property or a property right, and a VAT-registered persons
entitlement to the creditable input tax is a mere statutory privilege.

Petitioners also contend that even if the right to credit the input VAT is merely a statutory privilege, it
has already evolved into a vested right that the State cannot remove.

As the Court stated in its Decision, the right to credit the input tax is a mere creation of law. Prior to the
enactment of multi-stage sales taxation, the sales taxes paid at every level of distribution are not recoverable
from the taxes payable. With the advent of Executive Order No. 273 imposing a 10% multi-stage tax on all
sales, it was only then that the crediting of the input tax paid on purchase or importation of goods and services
by VAT-registered persons against the output tax was established. This continued with the Expanded VAT Law
(R.A. No. 7716), and The Tax Reform Act of 1997 (R.A. No. 8424). The right to credit input tax as against the
output tax is clearly a privilege created by law, a privilege that also the law can limit. It should be stressed that
a person has no vested right in statutory privileges.[7]

The concept of vested right is a consequence of the constitutional guaranty of due process that
expresses a present fixed interest which in right reason and natural justice is protected against arbitrary state
action; it includes not only legal or equitable title to the enforcement of a demand but also exemptions from
new obligations created after the right has become vested. Rights are considered vested when the right to
enjoyment is a present interest, absolute, unconditional, and perfect or fixed and irrefutable.[8] As adeptly
stated by Associate Justice Minita V. Chico-Nazario in her Concurring Opinion, which the Court adopts,
petitioners right to the input VAT credits has not yet vested, thus
144
 It should be remembered that prior to Rep. Act No. 9337, the petroleum dealers input
VAT credits were inexistent they were unrecognized and disallowed by law. The petroleum
dealers had no such property called input VAT credits. It is only rational, therefore, that they
cannot acquire vested rights to the use of such input VAT credits when they were never entitled
to such credits in the first place, at least, not until Rep. Act No. 9337.

My view, at this point, when Rep. Act No. 9337 has not yet even been implemented, is
that petroleum dealers right to use their input VAT as credit against their output VAT unlimitedly
has not vested, being a mere expectancy of a future benefit and being contingent on the
continuance of Section 110 of the National Internal Revenue Code of 1997, prior to its
amendment by Rep. Act No. 9337.

The elucidation of Associate Justice Artemio V. Panganiban is likewise worthy of note, to wit:

Moreover, there is no vested right in generally accepted accounting principles. These refer to
accounting concepts, measurement techniques, and standards of presentation in a companys financial
statements, and are not rooted in laws of nature, as are the laws of physical science, for these are merely
developed and continually modified by local and international regulatory accounting bodies. To state otherwise
and recognize such asset account as a vested right is to limit the taxing power of the State. Unlimited, plenary,
comprehensive and supreme, this power cannot be unduly restricted by mere creations of the State.

More importantly, the assailed provisions of R.A. No. 9337 already involve legislative policy and
wisdom. So long as there is a public end for which R.A. No. 9337 was passed, the means through which such
end shall be accomplished is for the legislature to choose so long as it is within constitutional bounds. As
stated in Carmichael vs. Southern Coal & Coke Co.:

If the question were ours to decide, we could not say that the legislature, in adopting the present
scheme rather than another, had no basis for its choice, or was arbitrary or unreasonable in its action. But, as
the state is free to distribute the burden of a tax without regard to the particular purpose for which it is to be
used, there is no warrant in the Constitution for setting the tax aside because a court thinks that it could have
distributed the burden more wisely. Those are functions reserved for the legislature.[9]

WHEREFORE, the Motions for Reconsideration are hereby DENIED WITH FINALITY. The temporary
restraining order issued by the Court is LIFTED. SO ORDERED.

DIGEST: NO DIGEST

G.R. No. 147295 February 16, 2007

145
THE COMMISIONER OF INTERNAL REVENUE, Petitioner,
vs.
ACESITE (PHILIPPINES) HOTEL CORPORATION, Respondent.

DECISION

VELASCO, JR., J.:

The Case

Before us is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, assailing the November
17, 2000 Decision2 of the Court of Appeals (CA) in CA-G.R. SP No. 56816, which affirmed the January 3, 2000
Decision3 of the Court of Tax Appeals (CTA) in CTA Case No. 5645 entitled Acesite (Philippines) Hotel
Corporation v. The Commissioner of Internal Revenue for Refund of VAT Payments.

The Facts

The facts as found by the appellate court are undisputed, thus:

Acesite is the owner and operator of the Holiday Inn Manila Pavilion Hotel along United Nations Avenue in
Manila. It leases 6,768.53 square meters of the hotel’s premises to the Philippine Amusement and Gaming
Corporation [hereafter, PAGCOR] for casino operations. It also caters food and beverages to PAGCOR’s
casino patrons through the hotel’s restaurant outlets. For the period January (sic) 96 to April 1997, Acesite
incurred VAT amounting to P30,152,892.02 from its rental income and sale of food and beverages to PAGCOR
during said period. Acesite tried to shift the said taxes to PAGCOR by incorporating it in the amount assessed
to PAGCOR but the latter refused to pay the taxes on account of its tax exempt status.1awphi1.net

Thus, PAGCOR paid the amount due to Acesite minus the P30,152,892.02 VAT while the latter paid the VAT
to the Commissioner of Internal Revenue [hereafter, CIR] as it feared the legal consequences of non-payment
of the tax. However, Acesite belatedly arrived at the conclusion that its transaction with PAGCOR was subject
to zero rate as it was rendered to a tax-exempt entity. On 21 May 1998, Acesite filed an administrative claim
for refund with the CIR but the latter failed to resolve the same. Thus on 29 May 1998, Acesite filed a petition
with the Court of Tax Appeals [hereafter, CTA] which was decided in this wise:

As earlier stated, Petitioner is subject to zero percent tax pursuant to Section 102 (b)(3) [now 106(A)(C)]
insofar as its gross income from rentals and sales to PAGCOR, a tax exempt entity by virtue of a special law.
Accordingly, the amounts of P21,413,026.78 and P8,739,865.24, representing the 10% EVAT on its sales of
food and services and gross rentals, respectively from PAGCOR shall, as a matter of course, be refunded to
the petitioner for having been inadvertently remitted to the respondent.

Thus, taking into consideration the prescribed portion of Petitioner’s claim for refund of P98,743.40, and
considering further the principle of ‘solutio indebiti’ which requires the return of what has been delivered
through mistake, Respondent must refund to the Petitioner the amount of P30,054,148.64 computed as
follows:

Total amount per claim 30,152,892.02

Less Prescribed amount (Exhs A, X, & X-20)
January 1996 P 2,199.94
February 1996 26,205.04
March 1996 70,338.42 98,743.40
146
 P30,054,148.64
vvvvvvvvvvvvvv

WHEREFORE, in view of all the foregoing, the instant Petition for Review is partially GRANTED. The
Respondent is hereby ORDERED to REFUND to the petitioner the amount of THIRTY MILLION FIFTY FOUR
THOUSAND ONE HUNDRED FORTY EIGHT PESOS AND SIXTY FOUR CENTAVOS (P30,054,148.64)
immediately.

SO ORDERED.4

The Ruling of the Court of Appeals

Upon appeal by petitioner, the CA affirmed in toto the decision of the CTA holding that PAGCOR was not only
exempt from direct taxes but was also exempt from indirect taxes like the VAT and consequently, the
transactions between respondent Acesite and PAGCOR were "effectively zero-rated" because they involved
the rendition of services to an entity exempt from indirect taxes. Thus, the CA affirmed the CTA’s determination
by ruling that respondent Acesite was entitled to a refund of PhP 30,054,148.64 from petitioner.

The Issues

Hence, we have the instant petition with the following issues: (1) whether PAGCOR’s tax exemption privilege
includes the indirect tax of VAT to entitle Acesite to zero percent (0%) VAT rate; and (2) whether the zero
percent (0%) VAT rate under then Section 102 (b)(3) of the Tax Code (now Section 108 (B)(3) of the Tax Code
of 1997) legally applies to Acesite.

The petition is devoid of merit.

In resolving the first issue on whether PAGCOR’s tax exemption privilege includes the indirect tax of VAT to
entitle Acesite to zero percent (0%) VAT rate, we answer in the affirmative. We will however discuss both
issues together.

PAGCOR is exempt from payment of indirect taxes

It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter an exemption from the payment
of taxes. Section 13 of P.D. 1869 pertinently provides:

Sec. 13. Exemptions. –

xxxx

(2) Income and other taxes. – (a) Franchise Holder: No tax of any kind or form, income or otherwise, as
well as fees, charges or levies of whatever nature, whether National or Local, shall be assessed and
collected under this Franchise from the Corporation; nor shall any form of tax or charge attach in any
way to the earnings of the Corporation, except a Franchise Tax of five (5%) percent of the gross revenue or
earnings derived by the Corporation from its operation under this Franchise. Such tax shall be due and payable
quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of
any kind, nature or description, levied, established or collected by any municipal, provincial, or national
government authority.

xxxx

147
(b) Others: The exemptions herein granted for earnings derived from the operations conducted under
the franchise specifically from the payment of any tax, income or otherwise, as well as any form of
charges, fees or levies, shall inure to the benefit of and extend to corporation(s), association(s),
agency(ies), or individual(s) with whom the Corporation or operator has any contractual relationship in
connection with the operations of the casino(s) authorized to be conducted under this Franchise and to
those receiving compensation or other remuneration from the Corporation or operator as a result of essential
facilities furnished and/or technical services rendered to the Corporation or operator. (Emphasis supplied.)

Petitioner contends that the above tax exemption refers only to PAGCOR’s direct tax liability and not to indirect
taxes, like the VAT.

We disagree.

A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes with no distinction
on whether the taxes are direct or indirect. We are one with the CA ruling that PAGCOR is also exempt from
indirect taxes, like VAT, as follows:

Under the above provision [Section 13 (2) (b) of P.D. 1869], the term "Corporation" or operator refers to
PAGCOR. Although the law does not specifically mention PAGCOR’s exemption from indirect taxes, PAGCOR
is undoubtedly exempt from such taxes because the law exempts from taxes persons or entities
contracting with PAGCOR in casino operations. Although, differently worded, the provision clearly exempts
PAGCOR from indirect taxes. In fact, it goes one step further by granting tax exempt status to persons
dealing with PAGCOR in casino operations. The unmistakable conclusion is that PAGCOR is not liable for
the P30,152,892.02 VAT and neither is Acesite as the latter is effectively subject to zero percent rate under
Sec. 108 B (3). R.A. 8424. (Emphasis supplied.)

Indeed, by extending the exemption to entities or individuals dealing with PAGCOR, the legislature clearly
granted exemption also from indirect taxes. It must be noted that the indirect tax of VAT, as in the instant case,
can be shifted or passed to the buyer, transferee, or lessee of the goods, properties, or services subject to
VAT. Thus, by extending the tax exemption to entities or individuals dealing with PAGCOR in casino
operations, it is exempting PAGCOR from being liable to indirect taxes.

The manner of charging VAT does not make PAGCOR liable to said tax

It is true that VAT can either be incorporated in the value of the goods, properties, or services sold or leased, in
which case it is computed as 1/11 of such value, or charged as an additional 10% to the value. Verily, the
seller or lessor has the option to follow either way in charging its clients and customer. In the instant case,
Acesite followed the latter method, that is, charging an additional 10% of the gross sales and rentals. Be that
as it may, the use of either method, and in particular, the first method, does not denigrate the fact that
PAGCOR is exempt from an indirect tax, like VAT.

VAT exemption extends to Acesite

Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by Acesite, the latter is not liable for
the payment of it as it is exempt in this particular transaction by operation of law to pay the indirect tax. Such
exemption falls within the former Section 102 (b) (3) of the 1977 Tax Code, as amended (now Sec. 108 [b] [3]
of R.A. 8424), which provides:

Section 102. Value-added tax on sale of services – (a) Rate and base of tax – There shall be levied, assessed
and collected, a value-added tax equivalent to 10% of gross receipts derived by any person engaged in the
sale of services x x x; Provided, that the following services performed in the Philippines by VAT-registered
persons shall be subject to 0%.

148
 xxxx

(b) Transactions subject to zero percent (0%) rated.—

xxxx

(3) Services rendered to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero (0%)
rate (emphasis supplied).

The rationale for the exemption from indirect taxes provided for in P.D. 1869 and the extension of such
exemption to entities or individuals dealing with PAGCOR in casino operations are best elucidated from the
1987 case of Commissioner of Internal Revenue v. John Gotamco & Sons, Inc.,5 where the absolute tax
exemption of the World Health Organization (WHO) upon an international agreement was upheld. We held in
said case that the exemption of contractee WHO should be implemented to mean that the entity or person
exempt is the contractor itself who constructed the building owned by contractee WHO, and such does not
violate the rule that tax exemptions are personal because the manifest intention of the agreement is to
exempt the contractor so that no contractor’s tax may be shifted to the contractee WHO. Thus, the
proviso in P.D. 1869, extending the exemption to entities or individuals dealing with PAGCOR in casino
operations, is clearly to proscribe any indirect tax, like VAT, that may be shifted to PAGCOR.

Acesite paid VAT by mistake

Considering the foregoing discussion, there are undoubtedly erroneous payments of the VAT pertaining to the
effectively zero-rate transactions between Acesite and PAGCOR. Verily, Acesite has clearly shown that it paid
the subject taxes under a mistake of fact, that is, when it was not aware that the transactions it had with
PAGCOR were zero-rated at the time it made the payments. In UST Cooperative Store v. City of Manila,6 we
explained that "there is erroneous payment of taxes when a taxpayer pays under a mistake of fact, as for the
instance in a case where he is not aware of an existing exemption in his favor at the time the payment was
made."7 Such payment is held to be not voluntary and, therefore, can be recovered or refunded.8

Moreover, it must be noted that aside from not raising the issue of Acesite’s compliance with pertinent
Revenue Regulations on exemptions during the proceedings in the CTA, it cannot be gainsaid that Acesite
should have done so as it paid the VAT under a mistake of fact. Hence, petitioner’s argument on this point is
utterly tenuous.

Solutio indebiti applies to the Government

Tax refunds are based on the principle of quasi-contract or solutio indebiti and the pertinent laws governing this
principle are found in Arts. 2142 and 2154 of the Civil Code, which provide, thus:

Art. 2142. Certain lawful, voluntary, and unilateral acts give rise to the juridical relation of quasi-contract to the
end that no one shall be unjustly enriched or benefited at the expense of another.

Art. 2154. If something is received when there is no right to demand it, and it was unduly delivered through
mistake, the obligation to return it arises.

When money is paid to another under the influence of a mistake of fact, that is to say, on the mistaken
supposition of the existence of a specific fact, where it would not have been known that the fact was otherwise,
it may be recovered. The ground upon which the right of recovery rests is that money paid through
misapprehension of facts belongs in equity and in good conscience to the person who paid it. 9

149
The Government comes within the scope of solutio indebiti principle as elucidated in Commissioner of Internal
Revenue v. Fireman’s Fund Insurance Company, where we held that: "Enshrined in the basic legal principles
is the time-honored doctrine that no person shall unjustly enrich himself at the expense of another. It goes
without saying that the Government is not exempted from the application of this doctrine."10

Action for refund strictly construed; Acesite discharged the burden of proof

Since an action for a tax refund partakes of the nature of an exemption, which cannot be allowed unless
granted in the most explicit and categorical language, it is strictly construed against the claimant who must
discharge such burden convincingly.11 In the instant case, respondent Acesite had discharged this burden as
found by the CTA and the CA. Indeed, the records show that Acesite proved its actual VAT payments subject
to refund, as attested to by an independent Certified Public Accountant who was duly commissioned by the
CTA. On the other hand, petitioner never disputed nor contested respondent’s testimonial and documentary
evidence. In fact, petitioner never presented any evidence on its behalf.

One final word. The BIR must release the refund to respondent without any unreasonable delay. Indeed, fair
dealing is expected by our taxpayers from the BIR and this duty demands that the BIR should refund without
any unreasonable delay what it has erroneously collected.12

WHEREFORE, the petition is DENIED for lack of merit and the November 17, 2000 Decision of the CA is
hereby AFFIRMED. No costs.

SO ORDERED.

DIGEST:

THE COMMISIONER OF INTERNAL REVENUE, Petitioner, 
vs.
ACESITE (PHILIPPINES) HOTEL

CORPORATION, Respondent.

FACTS:

1. Acesite is the owner and operator of the Holiday Inn Manila Pavilion Hotel. It leases 6,768.53 square meters
of the hotel’s premises to the Philippine Amusement and Gaming Corporation for casino operations and caters
food and beverages to PAGCOR’s casino patrons through the hotel’s restaurant outlets.

2.For the period January 96 to April 1997, Acesite incurred VAT amounting to P30,152,892.02 from its rental
income and sale of food and beverages to PAGCOR during said period. Acesite tried to shift the said taxes to
PAGCOR by incorporating it in the amount assessed to PAGCOR but the latter refused to pay the taxes on
account of its tax exempt status.1awphi1.net

3. PAGCOR paid the amount due to Acesite minus the P30,152,892.02 VAT while the latter paid the VAT to
the Commissioner of Internal Revenue.

4.However, Acesite belatedly arrived at the conclusion that its transaction with PAGCOR was subject to zero
rate as it was rendered to a tax-exempt entity.

5. Acesite filed an administrative claim for refund with the CIR but the latter failed to resolve the same. Acesite
filed a petition with the Court of Tax Appeals

CTA Decision: Petitioner is subject to zero percent tax insofar as its gross income from rentals and sales

150
to PAGCOR, a tax exempt entity by virtue of a special law. Accordingly, the amounts of P21,413,026.78
and P8,739,865.24, representing the 10% EVAT on its sales of food and services and gross rentals,
respectively from PAGCOR shall be refunded to the petitioner..

CA Decision: PAGCOR was not only exempt from direct taxes but was also exempt from indirect taxes
like the VAT and consequently, the transactions between respondent Acesite and PAGCOR were "effectively
zero-rated" because they involved the rendition of services to an entity exempt from indirect taxes.

ISSUE/S: (1) whether PAGCOR’s tax exemption privilege includes the indirect tax of VAT to entitle Acesite to
zero percent (0%) VAT rate; and (2) whether the zero percent (0%) VAT rate under then Section 102 (b)(3) of
the Tax Code (now Section 108 (B)(3) of the Tax Code of 1997) legally applies to Acesite.

HELD:

1. Yes. PAGCOR is exempt from payment of indirect taxes

It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter an exemption from the payment
of taxes. Section 13 of P.D. 1869 pertinently provides exemption.

Under the above provision [Section 13 (2) (b) of P.D. 1869], the term "Corporation" or operator refers to
PAGCOR. Although the law does not specifically mention PAGCOR’s exemption from indirect taxes, PAGCOR
is undoubtedly exempt from such taxes because the law exempts from taxes persons or entities
contracting with PAGCOR in casino operations. Although, differently worded, the provision clearly exempts
PAGCOR from indirect taxes. In fact, it goes one step further by granting tax exempt status to persons
dealing with PAGCOR in casino operations. The unmistakable conclusion is that PAGCOR is not liable for
the P30,152,892.02 VAT and neither is Acesite as the latter is effectively subject to zero percent rate under
Sec. 108 B (3). R.A. 8424. (Emphasis supplied.)

2. The manner of charging VAT does not make PAGCOR liable to said tax

It is true that VAT can either be incorporated in the value of the goods, properties, or services sold or leased, in
which case it is computed as 1/11 of such value, or charged as an additional 10% to the value. Verily, the
seller or lessor has the option to follow either way in charging its clients and customer. In the instant case,
Acesite followed the latter method, that is, charging an additional 10% of the gross sales and rentals. Be that
as it may, the use of either method, and in particular, the first method, does not denigrate the fact that
PAGCOR is exempt from an indirect tax, like VAT.

3. Yes. VAT exemption extends to Acesite

Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by Acesite, the latter is not liable for
the payment of it as it is exempt in this particular transaction by operation of law to pay the indirect tax. Such
exemption falls within the former Section 102 (b) (3) of the 1977 Tax Code, as amended (now Sec. 108 [b] [3]
of R.A. 8424), which provides:

Section 102. Value-added tax on sale of services – (a) Rate and base of tax – There shall be levied, assessed
and collected, a value-added tax equivalent to 10% of gross receipts derived by any person engaged in the
sale of services x x x; Provided, that the following services performed in the Philippines by VAT-registered
persons shall be subject to 0%
151
(3) Services rendered to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero (0%)
rate (emphasis supplied).

4. Acesite paid VAT by mistake

Considering the foregoing discussion, there are undoubtedly erroneous payments of the VAT pertaining to the
effectively zero-rate transactions between Acesite and PAGCOR. Verily, Acesite has clearly shown that it paid
the subject taxes under a mistake of fact, that is, when it was not aware that the transactions it had with
PAGCOR were zero-rated at the time it made the payments.

Solutio indebiti applies to the Government

Tax refunds are based on the principle of quasi-contract or solutio indebiti and the pertinent laws governing this
principle are found in Arts. 2142 and 2154 of the Civil Code. When money is paid to another under the
influence of a mistake of fact, that is to say, on the mistaken supposition of the existence of a specific fact,
where it would not have been known that the fact was otherwise, it may be recovered.

Action for refund strictly construed; Acesite discharged the burden of proof

Since an action for a tax refund partakes of the nature of an exemption, which cannot be allowed unless
granted in the most explicit and categorical language, it is strictly construed against the claimant who must
discharge such burden convincingly.11

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,

152
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
153
 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:

154
 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

155
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
156
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.

157
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

158
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:

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.

159
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).

7. WITHHOLDING, PRESUMPTIVE, TRANSITIONAL INPUT VAT

G.R. No. 175707 November 19, 2014

FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE and REVENUE DISTRICT OFFICER, REVENUE DISTRICT
NO. 44, TAGUIG and PATEROS, BUREAU OF INTERNAL REVENUE, Respondents.

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

G.R. No. 180035

FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE and REVENUE DISTRICT OFFICER, REVENUE DISTRICT
NO. 44, TAGUIG and PATEROS, BUREAU OF INTERNAL REVENUE, Respondents.

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

G.R. No. 181092

FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE and REVENUE DISTRICT OFFICER, REVENUE DISTRICT
NO. 44, TAGUIG and PATEROS, BUREAU OF INTERNAL REVENUE, Respondents.

DECISION

LEONARDO-DE CASTRO, J.:

The Court has consolidated these three petitions as they involve the same parties, similar facts and common
questions of law. This is not the first time that Fort Bonifacio Development Corporation (FBDC) has come to
this Court about these issues against the very same respondents, and the Court En Banc has resolved them in
two separate, recent cases1 that are applicable here for reasons to be discussed below.

160
G.R. No. 175707 is an appeal by certiorari pursuant to Rule 45 of the 1997 Rules of Civil Procedure from (a)
the Decision2 dated April 22, 2003 of the Court of Appeals in CA-G.R. SP No. 61516 dismissing FBDC's
Petition for Review with regard to the Decision of the Court of Ta:x Appeals (CTA) dated October 13, 2000 in
CTA Case No. 5885, and from (b) the Court of Appeals Resolution3 dated November 30, 2006 denying its
Motion for Reconsideration.

G.R. No. 180035 is likewise an appeal by certiorari pursuant to Rule 45 from (a) the Court of Appeals
Decision4 dated April 30, 2007 in CAG.R. SP No. 76540 denying FBDC’s Petition for Review with respect to
the CTA Resolution5 dated March 28, 2003 in CTA Case No. 6021, and from (b) the Court of Appeals
Resolution6 dated October 8, 2007 denying its Motion for Reconsideration.

The CTA Resolution reconsidered and reversed its earlier Decision7 dated January 30, 2002 ordering
respondents in CTA Case No. 6021 to refund or issue a tax credit certificate infavor of petitioner in the amount
of ₱77,151,020.46, representing "VAT erroneously paid by or illegally collected from petitioner for the first
quarter of 1998, and instead denied petitioner’s Claim for Refund therefor."8

G.R. No. 181092 is also an appeal by certiorari pursuant to Rule 45 from the Court of Appeals Decision9 dated
December 28, 2007 in CA-G.R. SP No. 61158 dismissing FBDC’s petition for review with respect to the CTA
Decision10 dated September 29, 2000 in CTA Case No. 5694. The aforesaid CTA Decision, which the Court of
Appeals affirmed, denied petitioner’s Claim for Refund in the amount of ₱269,340,469.45, representing "VAT
erroneously paid by or illegally collected from petitioner for the fourth quarter of 1996."11

The facts are not in dispute.

Petitioner FBDC (petitioner) is a domestic corporation duly registered and existing under Philippine laws. Its
issued and outstanding capital stock is owned in part by the Bases Conversion Development Authority, a
wholly owned government corporation created by Republic Act No. 7227 for the purpose of "accelerating the
conversion of military reservations into alternative productive uses and raising funds through the sale of
portions of said military reservationsin order to promote the economic and social development of the country in
general."12 The remaining fifty-five per cent (55%) is owned by Bonifacio Land Corporation, a consortium of
private domestic corporations.13

Respondent Commissioner of Internal Revenue is the head of the Bureau of Internal Revenue (BIR).
Respondent Revenue District Officer, Revenue District No. 44, Taguig and Pateros, BIR, is the chief of the
aforesaid District Office.

The parties entered into a Stipulation of Facts, Documents, and Issue14 before the CTA for each case. It was
established before the CTA that petitioner is engaged in the development and sale of real property. It is the
owner of, and is developing and selling, parcels of land within a "newtown" development area known as the
Fort Bonifacio Global City (the Global City), located within the former military camp known as Fort Bonifacio,
Taguig, Metro Manila.15 The National Government, by virtue of Republic Act No. 722716 and Executive Order
No. 40,17 was the one that conveyed to petitioner these parcels of land on February 8, 1995.

In May 1996, petitioner commenced developing the Global City, and since October 1996, had been selling lots
to interested buyers.18 At the time of acquisition, value-added tax (VAT) was not yet imposed on the sale of
real properties. Republic Act No. 7716(the Expanded Value-Added Tax [E-VAT] Law),19 which took effect on
January 1, 1996, restructured the VAT system by further amending pertinent provisions of the National Internal
Revenue Code (NIRC). Section 100 of the old NIRC was so amended by including "real properties" in the
definition of the term "goods or properties," thereby subjecting the sale of "real properties" to VAT. The
provision, as amended, reads:

SEC. 100. Value-Added Tax on Sale of Goods or Properties. — (a) Rate and Base of Tax. — There shall be
levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax

161
equivalent to 10% of the gross selling price or gross value in money of the goods or properties sold, bartered
or exchanged, such tax to be paid by the seller or transferor.

(1) The term "goods or properties" shall mean all tangible and intangible objects which are capable of
pecuniary estimation and shall include:

(A) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or
business[.]

While prior to Republic Act No. 7716, real estate transactions were not subject to VAT, they became subject to
VAT upon the effectivity of said law. Thus, the sale of the parcels of land by petitioner became subject to a
10% VAT, and this was later increased to 12%, pursuant to Republic Act No. 9337.20 Petitioner afterwards
becamea VAT-registered taxpayer.

On September 19, 1996, in accordance with Revenue Regulations No. 7-95 (Consolidated VAT Regulations),
petitioner submitted to respondent BIR, Revenue District No. 44, Taguig and Pateros, an inventory list of its
properties as of February 29, 1996. The total book value of petitioner’s land inventory amounted to
₱71,227,503,200.00.21

On the basis of Section 105 of the NIRC,22 petitioner claims a transitional or presumptive input tax creditof 8%
of ₱71,227,503,200.00, the total value of the real properties listed in its inventory, or a total input tax credit of
₱5,698,200,256.00.23 After the value of the real properties was reduced dueto a reconveyance by petitioner to
BCDA of a parcel of land, petitioner claims that it is entitled to input tax credit in the reduced amountof
₱4,250,475,000.48.24

What petitioner seeks to be refunded are the actual VAT payments made by it in cash, which it claims were
either erroneously paid by or illegally collected from it.25 Each Claim for Refund is based on petitioner’s
position that it is entitled to a transitional input tax credit under Section 105 of the old NIRC, which more than
offsets the aforesaid VAT payments.

G.R. No. 175707

Petitioner’s VAT returns filed with the BIR show that for the second quarter of 1997, petitioner received the
total amount of ₱5,014,755,287.40 from its sales and lease of lots, on which the output VAT payable was
₱501,475,528.74.26 The VAT returns likewise show that petitioner made cash payments totaling
₱486,355,846.78 and utilized its input tax credit of ₱15,119,681.96 on purchases of goods and services.27

On February 11, 1999, petitioner filed with the BIR a claim for refundof the amount of ₱486,355,846.78 which it
paid in cash as VAT for the second quarter of 1997.28

On May 21, 1999, petitioner filed with the CTA a petition for review29 by way of appeal, docketed as CTA
Case No. 5885, from the alleged inaction by respondents of petitioner’s claim for refund with the BIR. On
October 1, 1999, the parties submitted tothe CTA a Stipulation of Facts, Documents and Issue.30 On October
13, 2000, the CTA issued its Decision31 in CTA Case No. 5885 denying petitioner’s claim for refund for lack of
merit.

On November 23, 2000, petitioner filed with the Court of Appeals a Petition for Review of the aforesaid CTA
Decision, which was docketed as CA-G.R SP No. 61516. On April 22, 2003, the CA issued its Decision32
dismissing the Petition for Review. On November 30, 2006, the Court of Appeals issued its Resolution33
denying petitioner’s Motion for Reconsideration.

On December 21, 2006, this Petition for Review was filed.

162
Petitioner submitted its Memorandum34 on November 7, 2008 while respondents filed their "Comment"35 on
May 4, 2009.36

On December 2, 2009, petitioner submitted a Supplement37 to its Memorandum dated November 6,

2008,stating that the said case is intimately related to the cases of Fort Bonifacio Development Corporation v.
Commissioner of Internal Revenue, G.R. No. 158885, and Fort Bonifacio Development Corporation v.
Commissioner of Internal Revenue," G.R. No. 170680, which were already decided by this Court, and which
involve the same parties and similar facts and issues.38

Except for the amounts of tax refund being claimed and the periods covered for each claim, the facts in this
case and in the other two consolidated cases below are thesame. The parties entered into similar Stipulations
in the other two cases consolidated here.39

G.R. No. 180035

We quote relevant portions of the parties’ Stipulation of Facts, Documents and Issue in CTA Case No. 602140
below:

1.11. Per VAT returns filed by petitioner with the BIR, for the second quarter of 1998, petitioner derived
the total amount of ₱903,427,264.20 from its sales and lease of lots, on which the output VAT payable
to the Bureau of Internal Revenue was ₱90,342,726.42.

1.12. The VAT returns filed by petitioner likewise show that to pay said amount of ₱90,342,726.42 due
to the BIR, petitioner made cash payments totalling ₱77,151,020.46 and utilized its regular input tax
credit of ₱39,878,959.37 on purchases of goods and services.

1.13. On November 22, 1999, petitioner filed with the BIR a claim for refund of the amount of
₱77,151,020.46 which it paid as valueadded tax for the first quarter of 1998.

1.14. Earlier, on October 8, 1998 and November 17, 1998, February 11, 1999, May 11, 1999, and
September 10, 1999, based on similar grounds, petitioner filed with the BIR claims for refund of the
amounts of ₱269,340,469.45, ₱359,652,009.47, ₱486,355,846.78, ₱347,741,695.74, and
₱15,036,891.26, representing value-added taxes paid by it on proceeds derived from its sales and
lease of lots for the quarters ended December 31, 1996, March 31, 1997, June 30, 1997, September
30, 1997, and December 31, 1997, respectively. After deducting these amounts of ₱269,340,469.45,
₱359,652,009.47, ₱486,355,846.78, ₱347,741,695.74, and ₱15,036,891.26 from the total amount of
₱5,698,200,256.00 claimed by petitioner as input tax credit, the remaining input tax credit more than
sufficiently covers the amount of ₱77,151,020.46 subject of petitioner’s claim for refund of November
22, 1999.

1.15. As of the date of the Petition, no action had been taken by respondents on petitioner’s claim for
refund of November 22, 1999.41 (Emphases ours.)

The petition in G.R. No. 180035 "seeks to correct the unauthorized limitation of the term ‘real properties’ to
‘improvements thereon’ by Revenue Regulations 7-95 and the error of the Court of Tax Appeals and Court of
Appeals in sustaining the aforesaid Regulations."42 This theory of petitioner is the same for all three cases
now before us.

On March 14, 2013, petitioner filed a Motion for Consolidation43 of G.R. No. 180035 with G.R. No. 175707.

Petitioner submitted its Memorandum44 on September 15, 2009 while respondents filed theirson September
22, 2009.45

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G.R. No. 181092

The facts summarized below are found in the parties’ Stipulation of Facts, Documents and Issue in CTA Case
No. 569446:

1.09. Per VAT returns filed by petitioner with the BIR, for the fourth quarter of 1996, petitioner derived
the total amount of ₱3,498,888,713.60 from its sales and lease of lots, on which the output VAT
payableto the Bureau of Internal Revenue was₱318,080,792.14.

1.10. The VAT returns filed by petitioner likewise show that to pay said amount of ₱318,080,792.14 due
to the BIR, petitioner made cash payments totalling ₱269,340,469.45 and utilized (a) part of the total
transitional/presumptive input tax credit of ₱5,698,200,256.00 being claimed by it to the extent of
₱28,413,783.00; and (b) its regular input tax credit of ₱20,326,539.69 on purchases of goods and
services.

1.11. On October 8, 1998 petitioner filed with the BIR a claim for refund of the amounts of
₱269,340,469.45, which it paid as valueadded tax.

1.12. As of the date of the Petition, no action had been taken by respondents on petitioner’s claim for
refund.47 (Emphases ours.)

Petitioner submitted its Memorandum48 on January 18, 2010 while respondents filed theirs on October 14,
2010.49

On March 14, 2013, petitioner filed a Motion for Consolidation50 of G.R. No. 181092 with G.R. No. 175707.

On January 23, 2014, petitioner filed a Motion to Resolve51 these consolidated cases, alleging that the parties
had already filed their respective memoranda; and, more importantly, that the principal issue in these cases,
whether petitioner is entitled to the 8% transitional input tax granted in Section 105 (now Section 111[A]) of the
NIRC based on the value of its inventory of land, and as a consequence, to a refund of the amounts it paid as
VAT for the periods in question, had already been resolved by the Supreme Court En Bancin its Decision
dated April 2, 2009 in G.R. Nos. 158885 and 170680, as well as its Decision dated September 4, 2012 in G.R.
No. 173425. Petitioner further alleges that said decided cases involve the same parties, facts, and issues as
the cases now before this Court.52

THEORY OF PETITIONER

Petitioner claims that "the 10% value-added tax is based on the gross selling price or gross value in money of
the ‘goods’ sold, bartered or exchanged."53 Petitioner likewise claims thatby definition, the term "goods" was
limited to "movable, tangible objects which is appropriable or transferable" and that said term did not originally
include "real property."54 It was previously defined as follows under Revenue Regulations No. 5-87:

(p) "Goods" means any movable, tangible objects which is appropriable or transferrable. Republic Act No.
7716 (E-VAT Law, January 1, 1996) expanded the coverage of the original VAT Law (Executive Order No.
273), specifically Section 100 of the old NIRC. According to petitioner, while under Executive Order No. 273,
the term "goods" did not include real properties, Republic Act No. 7716, in amending Section 100, explicitly
included in the term "goods" "real properties held primarily for sale to customers or held for lease in the
ordinary course of trade or business." Consequently, the sale, barter, or exchange of real properties was made
subject to a VAT equivalent to 10% (later increased to 12%, pursuant to Republic Act No. 9337) of the gross
selling price of real properties.

Among the new provisions included by Executive Order No. 273 in the NIRC was the following: SEC. 105.
Transitional Input Tax Credits. — A person who becomes liable to value-added tax orany person who elects to
164
be a VAT registered person shall, subject to the filing of an inventory as prescribed by regulations, be allowed
input tax on his beginning inventory of goods, materials and supplies equivalent to 8%of the value of such
inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which
shall be creditable against the output tax.

According to petitioner, the E-VAT Law, Republic Act No. 7716, did not amend Section 105. Thus, Section 105,
as quoted above, remained effective even after the enactment of Republic Act No. 7716.

Previously, or on December 9, 1995, the Secretary of Finance and the Commissioner of Internal Revenue
issued Revenue Regulations No. 7-95, which included the following provisions: SECTION 4.100-1. Value-
added tax on sale of goods or properties. — VAT is imposed and collected on every sale, barter or exchange
or transactions "deemed sale" of taxable goods or properties at the rate of 10% of the gross selling price.

"Gross selling price" means the total amount of money or its equivalent which the purchaser pays or is
obligated to pay to the seller in consideration of the sale, barter or exchange of the goods or properties,
excluding the value-added tax. The excise tax, if any, on such goods or properties shall form part of the gross
selling price. In the case of sale, barter or exchange of real property subject to VAT, gross selling price shall
mean the consideration stated in the sales document or the zonal value whichever is higher. Provided
however, in the absence of zonal value, gross selling price refers to the market value shown in the latest
declaration or the consideration whichever is higher.

"Taxable sale" refers to the sale, barter, exchange and/or lease of goods or properties, including transactions
"deemed sale" and the performance of service for a consideration, all of which are subject to tax under
Sections 100 and 102 of the Code.

Any person otherwise required to register for VAT purposes who fails to register shall also be liable to VAT on
his sale of taxable goods or properties as defined in the preceding paragraph. The sale of goods subject to
excise tax is also subject to VAT, except manufactured petroleum products (other than lubricating oil,
processed gas, grease, wax and petrolatum).

"Goods or properties" refer to all tangible and intangible objects which are capable of pecuniary estimation and
shall include:

1. Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or
business.

xxxx

SECTION 4.104-1. Credits for input tax. —

"Input tax"means the value-added tax due from or paid by a VAT registered person on importation of goodsor
local purchases of goods or services, including lease or use of property, from another VAT-registered person in
the course ofhis trade or business. It shall also include the transitional or presumptive input tax determined in
accordance with Section 105 of the Code.

xxxx

SECTION 4.105-1. Transitional input tax on beginning inventories. — Taxpayers who became VAT-registered
persons upon effectivity of RA No. 7716 who have exceeded the minimum turnover of ₱500,000.00 or who
voluntarily register even if their turnover does not exceed ₱500,000.00 shall be entitled to a presumptive input
tax on the inventory on hand as of December 31, 1995 on the following; (a) goods purchased for sale in their
present condition; (b) materials purchased for further processing, but which have not yet undergone

165
processing; (c) goods which have been manufactured by the taxpayer; (d) goods in process and supplies, all of
which are for sale or for use in the course of the taxpayer's trade or business as a VAT-registered person.

However, in the case of real estate dealers, the basis of the presumptive input tax shall be the improvements,
such as buildings, roads, drainage systems, and other similar structures, constructed on or after effectivity of
E.O. 273 (January 1, 1988).

The transitional input tax shall be 8% of the value of the inventory or actual VAT paid, whichever is higher,
which amount may be allowed as tax credit against the output tax of the VAT-registered person.

The value allowed for income tax purposes on inventories shall be the basis for the computation of the 8%
excluding goods that are exempt from VAT under SECTION 103. Only VAT-registered persons shall be
entitled to presumptive input tax credits.

xxxx

TRANSITORY PROVISIONS

(a) Presumptive Input Tax Credits—

(i) For goods, materials or supplies not for sale but purchased for use in business in their present
condition, which are not intended for further processing and are on hand as of December 31, 1995, a
presumptive input tax equivalent to 8% of the value of the goods or properties shall be allowed.

(ii) For goods or properties purchased with the object of resale in their present condition, the same
presumptive input tax equivalent to 8% of the value of the goods unused as of December 31, 1995 shall
be allowed, which amount may also be credited against the output tax of a VAT-registered person.

(iii) For real estate dealers, the presumptive input tax of 8% of the book value of improvements
constructed on or after January 1, 1988 (the effectivityof E.O. 273) shall be allowed.

For purposes of sub-paragraph (i), (ii) and (iii) above, an inventory as of December 31, 1995 of such goods or
properties and improvements showing the quantity, description, and amount should be filed with the RDO not
later than January 31, 1996. (Emphases supplied.)

Petitioner argues that Section 4.100-1 of Revenue Regulations No. 7-95 explicitly limited the term "goods" as
regards real properties to "improvements, such as buildings, roads, drainage systems, and other similar
structures," thereby excluding the real property itself from the coverage of the term "goods" as it is used in
Section 105 of the NIRC. This has brought about, as a consequence, the issues involved in the instant case.

Petitioner claims that the "Court of Appeals erred in not holding that Revenue Regulations No. 6-97 has
effectively repealed or repudiated Revenue Regulations No. 7-95 insofar as the latter limited the
transitional/presumptive input tax credit which may be claimed under Section 105 of the NIRC to the
‘improvements’ on real properties."55 Petitioner argues that the provision in Section 4.105-1 of Revenue
Regulations No. 7-95 stating that in the case of real estate dealers, the basis of the input tax credit shall be the
improvements, has been deleted by Revenue Regulations No. 6-97, dated January 2, 1997,which amended
Revenue Regulations No. 7-95. Revenue Regulations No. 6-97 was issued to implement Republic Act No.
8241 (the law amending Republic Act No. 7716, the E-VAT Law), which took effect on January 1, 1997.
Petitioner notes that Section 4.105-1 of Revenue Regulations No. 6-97 is but a reenactment of Section 4.105-1
of Revenue Regulations No. 7-95, with the only difference being that the following paragraph in Revenue
Regulations No. 7-95 was deleted:

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However, in the case of real estate dealers, the basis of the presumptive input tax shall be the improvements,
such as buildings, roads, drainage systems, and other similar structures, constructed on or after the effectivity
of E.O. 273 (January 1, 1988).

Petitioner calls this an express repeal, and with the deletion of the above paragraph, what stands and should
be applied "is the statutory definition in Section 100 of the NIRC of the term ‘goods’ in Section 105 thereof."56

Petitioner contends that the relevant provision now states that "[t]he transitional input tax credit shall be eight
percent (8%) of the value of the beginning inventory x x x on such goods, materials and supplies." It no longer
limits the allowable transitional input tax credit to "improvements" on the real properties. The amendment
recognizes that the basis of the 8% input tax credit should not be confinedto the value of the improvements.
Petitioner further contends that the Commissioner of Internal Revenue has in fact corrected the mistake in
Revenue Regulations No. 7-95.57

Petitioner argues that Revenue Regulations No. 6-97, being beneficial to the taxpayer, should be given a
retroactive application.58 Petitioner states that the transactions involved inthese consolidated cases took place
after Revenue Regulations No. 6-97 took effect, under the provisions of which the transitional input tax credit
with regardto real properties would be based on the value of the land inventory and not limited to the value of
the improvements.

Petitioner assigns another error: the Court of Appeals erred in holding that Revenue Regulations No. 7-95 isa
valid implementation of the NIRC and in according it great respect, and should have held that the same is
invalid for being contrary to the provisions of Section 105 of the NIRC.59 Petitioner contends that Revenue
Regulations No. 7-95 is not valid for being contrary to the express provisions of Section 105 of the NIRC, and
in fact amends the same, for it limited the scope of Section 105 "to less than what the law provides."60
Petitioner elaborates:

[Revenue Regulations No. 7-95] illegally constricted the provisions of the aforesaid section. It delimited the
coverage of Section 105 and practically amended it in violation of the fundamental principle that administrative
regulations are subordinate to the law. Based on the numerous authorities cited above, Section 4.105-1 and
the Transitory Provisions of Revenue Regulations No. 7-95 are invalid and ineffective insofar as they limit the
input tax credit to 8% of the value of the "improvements" on land, for being contrary to the express provisions
of Section 105, in relation to Section 100, of the NIRC, and the Court of Appeals should have so held.61
Petitioner likewise raises the following arguments:

● The rule that the construction given by the administrative agency charged with the enforcement of the law
should be accorded great weight by the courts, does not apply here.62 ● x x x Section 4.105-1 of Revenue
Regulations No. 7-95 neither exclude[s] nor prohibit[s] that the 8% input tax credit may also [be] based on the
taxpayer’s inventory of land.63

● The issuance of Revenue Regulations No. 7-95 by the [BIR], which changed the statutory definition of
"goods" with regard to the application of Section 105 of the NIRC, and the declaration of validity of said
regulations by the Court of Appeals and Court of Tax Appeals, was in violation of the fundamental principle of
separation of powers.64

xxxx

Insofar, therefore, as Revenue Regulation[s] No. 7-95 limited the scope of the term "goods" under Section 105,
to "improvements" on real properties, contrary to the definition of "goods" in Section 100, [RR] No. 7-95
decreed "what the law shall be", now "how the law may be enforced", and is, consequently, of no effect
because it constitutes undue delegation of legislative power.

xxxx

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[T]he transgression by the BIR and the CTA and CA of the basic principle of separation of powers, including
the fundamental rule of nondelegation of legislative power, is clear.65 Furthermore, petitioner claims that:

SINCE THE PROVISIONS OF SECTION 105 OF THE [NIRC] IN RELATION TO SECTION 100
THEREOF, ARE CLEAR, THERE WAS NO BASIS AND NECESSITY FOR THE BUREAU OF
INTERNAL REVENUE AND THE COURT OF APPEALS AND THE COURT OF TAX APPEALS TO
INTERPRET AND CONSTRUE THE SAME.66

PETITIONER IS CLEARLY ENTITLED TO THE TRANSITIONAL/PRESUMPTIVE INPUT TAX CREDIT

GRANTED IN SECTION 105 OF THE NIRCAND HENCE TO A REFUND OF THE VALUE-ADDED
TAX PAID BY IT FOR THE SECOND QUARTER OF 1997.67

Petitioner insists that there was no basis and necessity for the BIR, the CTA, and the Court of Appeals to
interpret and construe Sections 100 and 105 of the NIRC because "where the law speaks in clear and
categorical language, or the terms of the statute are clear and unambiguous and free from doubt, there is no
room for interpretation or construction and no interpretation or construction is called for; there is only room for
application."68 Petitioner asserts that legislative intent is determined primarily from the language of the statute;
legislative intent has to be discovered from the four corners of the law; and thus, where no ambiguity appears,
it may be presumed conclusivelythat the clear and explicit terms of a statute express the legislative intention.69

So looking at the cases now before us, petitioner avers that the Court of Appeals, the CTA, and the BIR did not
merely interpret and construe Section 105, and that they virtually amended the said section, for it is allegedly
clear from Section 105 of the old NIRC, in relation to Section 100, that "legislative intent is to the effect that the
taxpayer is entitled to the input tax credit based on the value of the beginning inventory of land, not merely on
the improvements thereon, and irrespective of any prior payment of sales tax or VAT."70

THEORY OF RESPONDENTS

Petitioner’s claims for refund were consistently denied in the three cases now before us. Even if inone case,
G.R. No. 180035, petitioner succeeded in getting a favorable decision from the CTA, the grant of refund or tax
credit was subsequently reversed on respondents’ Motion for Reconsideration, and such denial ofpetitioner’s
claim was affirmed by the Court of Appeals. Respondents’ reasons for denying petitioner’s claims are
summarized in their Comment in G.R. No. 175707, and we quote:

REASONS WHY PETITION SHOULD BE DENIED OR DISMISSED

1. The 8% input tax credit provided for in Section 105 of the NIRC, in relation to Section 100 thereof, is
based on the value of the improvements on the land.

2. The taxpayer is entitled to the input tax credit provided for in Section 105 of the NIRC only if it has
previously paid VAT or sales taxes on its inventory of land.

3. Section 4.105-1 of Revenue Regulations No. 7-95 of the BIR is valid, effective and has the force and
effect of law, which implemented Section 105 of the NIRC.71

In respondents’ Comment72 dated November 3, 2008 in G.R. No. 180035, they averred that petitioner’s claim
for the 8% transitional/presumptive input tax is "inconsistent with the purpose and intent of the law in granting
such tax refund or tax credit."73 Respondents raise the following arguments:

1. The transitional input tax provided under Section 105 in relation to Section 100 of the Tax Code, as
amended by EO No. 273 effective January 1, 1988, is subject to certain conditions which petitioner
failed to meet.74

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 2. The claim for petitioner for transitional input tax is in the nature of a tax exemption which should be
strictly construed against it.75

3. Revenue Regulations No. 7-95 is valid and consistent with provisions of the NIRC.76 Moreover,
respondents contend that:

"[P]etitioner is not legally entitled to any transitional input tax credit, whether it be the 8% presumptive inputtax
credit or any actual input tax credit in respect of its inventory of land brought into the VAT regime beginning
January 1, 1996, in view of the following:

1. VAT free acquisition of the raw land.– petitioner purchased and acquired, from the Government, the
aforesaid raw land under a VAT free sale transaction. The Government, as a vendor, was tax-exempt and
accordingly did not pass on any VAT or sales tax as part of the price paid therefor by the petitioner.

2. No transitory input tax on inventory of land is allowed. Section 105 of the Code, as amended by Republic Act
No. 7716, and as implemented by Section 4.105-1 of Revenue Regulations No. 7-95, expressly provides that
no transitional input tax credit shall be allowed to real estate dealers in respect of their beginning inventory of
land brought into the VAT regime beginning January 1, 1996 (supra). Likewise, the Transitory Provisions [(a)
(iii)] of Revenue Regulations No. 7-95 categorically states that "for real estate dealers, the presumptive input
tax of 8% of the book value of improvements constructed on or after January 1, 1998 (effectivity of E.O. 273)
shall be allowed." For purposes of subparagraphs (i), (ii) and (iii) above, an inventory as of December 31, 1995
ofsuch goods or properties and improvements showing the quantity, description, and amount should be filed
with the RDO not later than January 31, 1996. It is admitted that petitioner filed its inventory listing of real
properties on September 19, 1996 or almost nine (9) months late in contravention [of] the requirements in
Revenue Regulations No. 7-95."77

Respondents, quoting the Civil Code,78 argue that Section 4.105-1 of Revenue Regulations No. 7-95 has the
force and effect of a law since it is not contrary to any law or the Constitution. Respondents add that "[w]hen
the administrative agency promulgates rules and regulations, it makes a new law with the force and effect of a
valid law x x x."79

ISSUES

The main issue before us now is whether or not petitioner is entitled to a refund of the amounts of: 1)
₱486,355,846.78 in G.R. No. 175707, 2) ₱77,151,020.46 for G.R. No. 180035, and 3) ₱269,340,469.45 in
G.R. No. 181092, which it paid as value-added tax, or to a tax credit for said amounts.

To resolve the issue stated above, it is also necessary to determine:

● Whether the transitional/presumptive input tax credit under Section 105 of the NIRC may be claimed only on
the "improvements" on real properties;

● Whether there must have been previous payment of sales tax or value added tax by petitioner on its land
before it may claim the input tax credit granted by Section 105 of the NIRC;

● Whether Revenue Regulations No. 7-95 is a valid implementation of Section 105 of the NIRC; and

● Whether the issuance of Revenue Regulations No. 7-95 by the BIR, and declaration of validity of
saidRegulations by the Court of Tax Appeals and the Court of Appeals, was in violation of the fundamental
principle of separation of powers.

THE RULINGS BELOW

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A. G.R. No. 175707

1. CTA Case No. 5885 Decision (October 13, 2000)

The CTA traced the history of "transitional input tax credit" from the original VAT Law of 1988 (Executive Order
No. 273) up to the Tax Reform Act of 1997 and looked into Section 105 of the Tax Code. According to the
CTA, the BIR issued Revenue Regulations No. 5-87, specifically Section 26(b),80 to implement the provisions
of Section 105. The CTA concluded from these provisions that "the purpose of granting transitional input tax
credit to be utilized as payment for output VAT is primarily to give recognition to the sales tax component of
inventories which would qualify as input tax credit had such goods been acquired during the effectivity of the
VAT Law of 1988."81 The CTA stated that the purpose of transitional input tax credit remained the same even
after the amendments introduced by the E-VAT Law.82 The CTA held that "the rationale in granting the
transitional input tax credit also serves as its condition for its availment as a benefit"83 and that "[i]nherent in
the law is the condition of prior payment of VAT or sales taxes."84 The CTA excluded petitioner from availing
of the transitional input tax credit provided by law, reasoning that "to base the 8% transitional input tax on the
book value of the land isto negate the purpose of the law in granting such benefit. It would be tantamount to
giving an undeserved bonus to real estate dealers similarly situated as petitioner which the Government cannot
afford to provide."85 Furthermore, the CTA held that respondent was correct in basing the 8% transitional input
tax credit on the value of the improvements on the land, citing Section 4.105-1 of Revenue Regulations No. 7-
95, which the CTA claims is consistent and in harmony with the law it seeks to implement. Thus, the CTA
denied petitioner’s claim for refund.86

2. CA-G.R. No. 61516 Decision (April 22, 2003)

The Court of Appeals affirmed the CTA and ruled that petitioner is not entitled to refund or tax credit in the
amount of ₱486,355,846.78 and stated that "Revenue Regulations No. 7-95 is a valid implementation of the
NIRC."87 According to the Court of Appeals:

"[P]etitioner acquired the contested property from the National Government under a VAT-free transaction. The
Government, as a vendor was outside the operation of the VATand ergo, could not possibly have passed on
any VAT or sales tax as part of the purchase price to the petitioner as vendee."88

x x x [T]he grant of transitional input tax credit indeed presupposes that the manufacturers, producers and
importers should have previously paid sales taxes on their inventories. They were given the benefit of
transitional input tax credits, precisely, to make up for the previously paid sales taxes which were now
abolished by the VAT Law. It bears stressing that the VAT Law took the place of privilege taxes, percentage
taxes and sales taxes on original or subsequent sale of articles. These taxes were substituted by the VAT at
the constant rate of 0% or 10%.89

3. CA-G.R. No. 61516 Resolution (November 30, 2006)

Upon petitioner’s Motion for Reconsideration, the Court of Appeals affirmed its decision, but we find the
following statement by the appellate court worthy of note:

We concede that the inventory restrictions under Revenue Regulation No. 7-95 limiting the coverage of the
inventory only to acquisition cost of the materials used in building "improvements" has already been deleted by
Revenue Regulation 6-97. This notwithstanding, we are poised to sustain our earlier ruling as regards the
refund presently claimed.90

B. G.R. No. 180035

1. CTA Case No. 6021 Decision (January 30, 2002)

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The CTA sustained petitioner’s position and held that respondent erred in basing the transitional input tax
credit of real estate dealers on the value of the improvements.91 The CTA ratiocinated as follows:

This Court, in upholding the position taken by the petitioner, is convinced that Section 105 of the Tax Code is
clear in itself. Explicit therefrom is the fact that a taxpayer shall be allowed a transitional/presumptive input tax
credit based on the value of its beginning inventory of goods which is defined in Section 100 as to encompass
even real property. x x x.92

The CTA went on to point out inconsistencies it had found between the transitory provisions of Revenue
Regulations No. 7-95 and the law it sought to implement, in the following manner:

Notice that letter (a)(ii) of the x x x transitory provisions93 states that goods or properties purchased with the
object of resalein their present condition comes with the corresponding 8% presumptive input tax of the value
of the goods, which amount may alsobe credited against the output tax of a VAT-registered person. It must be
remembered that Section 100 as amended by Republic Act No. 7716 extends the term "goods or properties" to
real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business.
This provision alone entitles Petitioner to the 8%presumptive input tax of the value of the land (goods or
properties) sold. However in letter (a)(iii) of the same Transitory Provisions, Respondent apparently changed
his (sic) course when it declared that real estate dealers are only entitled to the 8% of the value of the
improvements. This glaring inconsistency between the two provisions prove that Revenue Regulations No. 7-
95 was not a result of an intensive study and analysis and may have been haphazardly formulated.94

The CTA held that the implementing regulation, which provides that the 8% transitional input tax shall bebased
on the improvements only of the real properties, is neither valid nor effective.95 The CTA also sustained
petitioner’s argument that Revenue Regulations No. 7-95 provides no specific date as to when the inventory
list should be submitted. The relevant portion of the CTA decision reads:

The only requirement is that the presumptive input tax shall be supported by an inventory of goods asshown in
a detailed list to be submitted to the BIR. Moreover, the requirement of filing an inventory of goods not later
than January 31, 1996 inthe transitory provision of the same regulation refers to the recognition of presumptive
input tax on goods or properties on hand as of December 31, 1995 of taxpayers already liable to VAT as of that
date.

Clearly, Petitioner is entitled to the presumptive input tax in the amount of ₱5,698,200,256.00, computed as
follows:

Book Value of Inventory x x x ₱71,227,503,200.00

Multiply by Presumptive

Input Tax rate _____ 8%

Available Presumptive Input Tax ₱5,698,200,256.00

The failure of the Petitioner to consider the presumptive input tax in the computation of its output tax liability for
the 1st quarter of 1998 results to overpayment of the VAT for the same period.

To prove the fact of overpayment, Petitioner presented the original Monthly VAT Declaration for the month of
January 1998 showing the amount of ₱77,151,020.46 as the cash component of the value-added taxes paid
(Exhibits E-14 & E-14-A) which is the subject matter of the instant claim for refund.

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In Petitioner’s amended quarterly VAT return for the 1st quarter of 1998 (Exhibit D-1), Petitioner deducted the
amount of ₱77,151,020.46 from the total available input tax toshow that the amount being claimed would no
longer be available as input tax credit.

In conclusion, the Petitioner has satisfactorily proven its entitlement to the refund of value-added taxes paid for
the first quarter of taxable year 1998.

WHEREFORE, in view of the foregoing, the Petition for Review is GRANTED. Respondents are hereby
ORDERED to REFUND or issue a TAX CREDIT CERTIFICATE in favor of the Petitioner the total amount of
₱77,151,020.46 representing the erroneously paid value-added tax for the first quarter of 1998.96

2. CTA Case No. 6021 Resolution (March 28, 2003)

The CTA reversedits earlier ruling upon respondents’ motion for reconsideration and thus denied petitioner’s
claim for refund. The CTA reasoned and concluded as follows:

The vortex of the controversy in the instant case actually involves the question of whether or not Section 4.105-
1 of Revenue Regulations No. 7-95, issued by the Secretary of Finance upon recommendation of the
Commissioner of Internal Revenue, is valid and consistent with and not violative of Section 105 of the Tax
Code, in relation to Section 100 (a)(1)(A).

xxxx

We agree with the position taken by the respondents that Revenue Regulations No. 7-95 is not contrary to the
basic law which it seeks to implement. As clearly worded, Section 105 of the Tax Code provides that a person
who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall be
allowed 8% transitional input tax subject to the filing of an inventory as prescribed by regulations.

Section 105, which requires the filing of an inventory for the grant of the transitional input tax, is couched in a
manner where there is a need for an implementing rule or regulation tocarry its intendment. True to its
wordings, the BIR issued Revenue Regulations No. 7-95 (specifically Section 4.105-1) which succinctly
mentioned that the basis of the presumptive input tax shall be the improvements in case of real estate
dealers.97

xxxx

WHEREFORE, in view of the foregoing, the instant Motion for Reconsideration filed by respondents is hereby
GRANTED. Accordingly, petitioner’s claim for refund of the alleged overpaid Value-Added Tax in the amount of
₱77,151,020.46 covering the first quarter of 1998 is hereby DENIEDfor lack of merit.98

3. CA-G.R. SP No. 76540 Decision (April 30, 2007)

The Court of Appeals affirmed the CTA’s Resolution denying petitioner’s claim for refund, and we quote
portions of the discussion from the Court of Appeals decision below:

To Our mind, the key to resolving the jugular issue of this controversy involves a deeper analysis on how the
much-contested transitional input tax credit has been encrypted in the country’s valueadded tax (VAT) system.

xxxx

x x x [T]he Commissioner of Internal Revenue promulgated Revenue Regulations No. 7-95which laid down,
among others, the basis of the transitional input tax credit for real estate dealers:99 x x x x

172
The Regulation unmistakably allows credit for transitional input tax of any person who becomes liable to VAT
or who elects to be a VAT registered person. More particularly, real estate dealers who were beforehand not
subject to VAT are allowed a tax credit to cushion the staggering effect of the newly imposed 10% output VAT
liability under RA No. 7716.

Bearing in mind the purpose of the transitional input tax credit under the VAT system, We find it incongruous to
grant petitioner’s claim for tax refund. We take note of the fact that petitioner acquired the Global City lots from
the National Government. The transaction was not subject to any sales or business tax. Since the seller did not
pass on any tax liability to petitioner, the latter may not claim tax credit. Clearly then, petitioner cannot simply
demand that it is entitled to the transitional input tax credit.

xxxx

Another point.Section 105 of the National Internal Revenue Code, as amended by EO No. 273, explicitly
provides that the transitional input tax credit shall be based on "the beginning inventory of goods, materials and
supplies orthe actual value-added tax paid on such goods, materials and supplies, whichever is higher." Note
that the law did not simply say – the transitional input tax credit shall be 8% of the beginning inventory of
goods, materials and supplies.

Instead, lawmakers went on to say that the creditable input tax shall be whichever is higher between the value
of the inventory and the actual VAT paid. Necessarily then, a comparison of these two figures would have to be
made. This strengthens Our view that previous payment of the VAT is indispensable to determine the actual
value of the input tax creditable against the output tax. So too, this is in consonance with the present tax credit
method adopted in this jurisdiction whereby an entity can credit against or subtract from the VAT charged on its
sales or outputs the VAT paid on its purchases, inputs and imports.

We proceed to traverse another argument raised in this controversy. Petitioner insists that the term "goods"
which was one of the bases in computing the transitional inputtax credit must be construed so as to include
real properties held primarily for sale to customers. Petitioner posits that respondent Commissioner practically
rewrote the law when it issued Revenue Regulations No. 7-95 which limited the basis of the 8% transitional
input tax credit to the value of improvements alone.

Petitioner is clearly mistaken.

The term "goods" has been defined to mean any movable or tangible objects which are appreciable or
tangible. More specifically, the word "goods" is always used to designate wares, commodities, and personal
chattels; and does not include chattels real."Real property" on the other hand, refers to land, and generally
whatever is erected or growing upon or affixed to land. It is therefore quite absurd to equate "goods" as being
synonymous to "properties". The vast difference between the terms "goods" and "real properties" is so obvious
that petitioner’s assertion must be struckdown for being utterly baseless and specious.

Along this line, We uphold the validity of Revenue Regulations No. 7-95. The authority of the Secretary of
Finance, in conjunction with the Commissioner of Internal Revenue, to promulgate all needful rules and
regulations for the effective enforcement of internal revenue laws cannot be controverted. Neither can it be
disputed that such rules and regulations, as well as administrative opinions and rulings, ordinarily should
deserve weight and respect by the courts. Much more fundamental than either of the above, however, is that
all such issuances must not override, but must remain consistent and in harmony with, the law they seek to
apply and implement. Administrative rules and regulations are intended to carry out, neither to supplant nor to
modify, the law. Revenue Regulations No. 7-95 is clearly not inconsistent with the prevailing statute insofar as
the provision on transitional inputtax credit is concerned.100

4. CA-G.R. SP No. 76540 Resolution (October 8, 2007)

173
In this Resolution, the Court of Appeals denied petitioner’s Motion for Reconsideration of its Decision dated
April 30, 2007.

C. G.R. No. 181092

1. CTA Case No. 5694 Decision (September 29, 2000)

The CTA ruled that petitioner is not automatically entitled to the 8% transitional input tax allowed under Section
105 of the Tax Code based solely on its inventory of real properties, and cited the rule on uniformity in taxation
duly enshrined in the Constitution.101 According to the CTA:

As defined under the above Section 104 of the Tax Code, an "input tax" means the VAT paid by a VAT-
registered person in the course of his trade or business on importation ofgoods or services from a VAT
registered person; and that such tax shall include the transitional input tax determined in accordance with
Section 105 of the Tax Code,supra.102

Applying the rule on statutory construction that particular words, clauses and phrases should not be studied as
detached and isolated expressions, but the whole and every part of the statute must be considered in fixing the
meaning of any of its parts in order to produce a harmonious whole, the phrase "transitional input tax" found in
Section 105 should be understood to encompass goods, materials and supplies which are subject to VAT, in
line with the context of "input tax" as defined in Section 104, most especially that the latter includes, and
immediately precedes, the former under its statutory meaning. Petitioner’s contention that the 8% transitional
input tax is statutorily presumed to the extent that its real properties which have not been subjected to VAT are
entitled thereto, would directly contradict "input tax" as defined in Section 104 and would invariably cause
disharmony.103

The CTA held that the 8% transitional input tax should not be viewed as an outright grant or presumption
without need of prior taxes having been paid. Expounding on this, the CTA said: The simple instance in the
aforesaid paragraphs of requiring the tax on the materials, supplies or goods comprising the inventory to be
currently unutilized as deferred sales tax credit before the 8% presumptive input tax can be enjoyed readily
leads to the inevitable conclusion that such 8% tax cannot be just granted toany VAT liable person if he has no
priorly paid creditable sales taxes. Legislative intent thus clearly points to priorly paid taxes on goods, materials
and supplies before a VAT registered person can avail of the 8% presumptive input tax.104

Anent the applicability to petitioner’s case of the requirement under Article VI, Section 28, par. 1 of the
Constitution that the rule of taxation shall be uniform and equitable, the CTA held thus: Granting arguendo that
Petitioner is statutorily presumed to be entitled to the 8% transitional input tax as provided in Section 105, even
without having previously paid any tax on its inventory of goods, Petitioner would be placed at a more
advantageous position than a similar VAT-registered person who also becomes liable to VAT but who has
actually paid VAT on his purchases of goods, materials and supplies. This is evident from the alternative
modes of acquiring the proper amount of transitional input tax under Section 105, supra. One is by getting the
equivalent amount of 8% tax based on the beginning inventory of goods, materials and supplies and the other
is by the actual VAT paid on such goods, materials and supplies, whichever is higher.

As it is supposed to work, the transitional input tax should answer for the 10% output VAT liability thata VAT-
registered person will incur once he starts business operations. While a VAT-registered person who is allowed
a transitional input tax based on his actual payment of 10% VAT on his purchases can utilize the same to pay
for his output VAT liability, a similar VAT-registered person like herein Petitioner, when allowed the alternative
8% transitional input tax, can offset his output VAT liability equally through such 8% tax even without having
paid any previous tax. This obvious inequity that may arise could not have been the intention and purpose of
the lawmakers in granting the transitional input tax credit. x x x105

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Evidently, Petitioner is not similarly situated both as to privileges and liabilities to that of a VAT-registered
person who has paid actual 10% input VAT on his purchases of goods, materials and supplies. The latter
person will not earn anything from his transitional input tax which, to emphasize, has been paid by him
because the same will just offset his 10% output VAT liability. On the other hand, herein Petitioner will earn
gratis the amount equivalent to 10% output VAT it has passed on to buyers for the simple reason that it has
never previously paid any input tax on its goods. Its gain will be facilitated by herein claim for refund if ever
granted. This is the reason why we do not see any incongruity in Section 4.105-1 of Revenue Regulations No.
7-95 as it relates to Section 105 of the 1996 Tax Code, contrary to the contention of Petitioner. Section 4.105-1
(supra), which bases the transitional input tax credit on the value of the improvements, is consistent with the
purpose of the law x x x.106

2. CA-G.R. SP No. 61158 Decision (December 28, 2007) The Court of Appeals affirmed the CTA’s denial of
petitioner’s claim for refund and upheld the validity of the questioned Revenue Regulation issued by
respondent Commissioner ofInternal Revenue, reasoning as follows:

Sec. 105 of the NIRC, as amended, provides that the allowance for the 8% input tax on the beginning inventory
of a VAT-covered entity is "subject to the filing of an inventory as prescribed by regulations." This means that
the legislature left to the BIR the determination of what will constitute the beginning inventory ofgoods,
materials and supplies which will, in turn, serve as the basis for computing the 8% input tax.

While the power to tax cannot be delegated to executive agencies, details as to the enforcement and
administration of an exercise of such power may be left to them, including the power to determine the
existence of facts on which its operation depends x x x. Hence, there is no gainsaying that the CIR and the
Secretary of Finance, in limiting the application of the input tax of real estate dealers to improvements
constructed on or after January 1, 1988, merely exercised their delegated authority under Sec. 105, id., to
promulgate rules and regulations defining what should be included in the beginning inventory of a VAT-
registered entity.

xxxx

In the instant case, We find that, contrary to petitioner’s attacks against its validity, the limitation on the
beginning inventory of real estate dealers contained in Sec. 4.105-1 of RR No. 7-95 is reasonable and
consistent with the natureof the input VAT. x x x.

Based on the foregoing antecedents, it is clear why the second paragraph of Sec. 4.105-1 of RR No. 7-95
limits the transitional input taxes of real estate dealers to the value of improvements constructed on or after
January 1, 1988. Since the sale of the land was not subject to VAT or other sales taxes prior to the effectivity of
Rep. Act No. 7716, real estate dealers at that time had no input taxes to speak of. With this in mind, the CIR
correctly limited the application of the 8% transitional input tax to improvements on real estate dealers
constructed on or after January 1, 1988 when the VAT was initially implemented. This is, as it should be, for to
grant petitioner a refund or credit for input taxes it never paid would be tantamount to unjust enrichment.

As petitioner itself observes, the input tax credit provided for by Sec. 105 of the NIRC is a mechanism used to
grant some relief from burden some taxes. It follows, therefore, that not having been burdened by VAT or any
other sales tax on its inventory of land prior to the effectivity of Rep. Act No. 7716, petitioner is not entitled to
the relief afforded by Sec. 105, id.107

The Court of Appeals ruled that petitioner is not similarly situated as those business entities which previously
paid taxes on their inputs, and stressed that "a tax refund or credit x x x is in the nature of a tax exemption
which must be construed strictissimi juris against the taxpayer x x x."108

THIS COURT’S RULING

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As previously stated, the issues here have already been passed upon and resolved by this Court En Banc
twice, in decisions that have reached finality, and we are bound by the doctrine of stare decisis to apply those
decisions to these consolidated cases, for they involve the same facts, issues, and even parties.

Thus, we find for the petitioner.

DISCUSSION

The errors assigned by petitioner to the Court of Appeals and the arguments offered by respondents to support
the denial of petitioner’s claim for tax refund have already been dealt with thoroughly by the Court En Banc in
Fort Bonifacio Development Corporation v. Commissioner of Internal Revenue, G.R. Nos. 158885 and 170680
(Decision - April 2, 2009; Resolution - October 2, 2009); and Fort Bonifacio Development Corporation v.
Commissioner of Internal Revenue, G.R. No. 173425 (Decision - September 4, 2012; Resolution - January 22,
2013).

The Court En Bancdecided on the following issues in G.R. Nos. 158885 and 170680:

1. In determining the 10% value-added tax in Section 100 of the [Old NIRC] on the sale of real
properties by real estate dealers, is the 8% transitional input tax credit in Section 105 applied only to
the improvements on the real property or is it applied on the value of the entire real property?

2. Are Section 4.105.1 and paragraph (a)(III) of the Transitory Provisions of Revenue Regulations No.
7-95 valid in limiting the 8% transitional input tax to the improvements on the real property?

Subsequently, in G.R. No. 173425, the Court resolved issues that are identical to the ones raised here by
petitioner,109 thus:

3.05.a. Whether Revenue Regulations No. 6-97 effectively repealed or repudiated Revenue
Regulations No. 7-95 insofar as the latter limited the transitional/presumptive input tax credit which may
be claimed under Section 105 of the National Internal Revenue Code to the "improvements" on real
properties.

3.05.b. Whether Revenue Regulations No. 7-95 is a valid implementation of Section 105 of the National
Internal Revenue Code.

3.05.c. Whether the issuance of Revenue Regulations No. 7-95 by the Bureau of Internal Revenue, and
declaration of validity of said Regulations by the Court of Tax Appeals and Court of Appeals, [were] in
violation of the fundamental principle of separation of powers.

3.05.d. Whether there is basis and necessity to interpret and construe the provisions of Section 105 of
the National Internal Revenue Code.

3.05.e. Whether there must have been previous payment of business tax [sales tax or value-added
tax]110 by petitioner on its land before it may claim the input tax credit granted by Section 105 of the
National Internal Revenue Code.

3.05.f. Whether the Court of Appeals and Court of Tax Appeals merely speculated on the purpose of
the transitional/presumptive input tax provided for in Section 105 of the National Internal Revenue
Code.

3.05.g. Whether the economic and socialobjectives in the acquisition of the subject property by
petitioner from the Government should be taken into consideration.111

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The Court’s pronouncements in the decided cases regarding these issues are discussed below. The doctrine
of stare decisis et non quieta movere, which means "to abide by, or adhere to, decided cases,"112 compels us
to apply the rulings by the Court tothese consolidated cases before us. Under the doctrine of stare decisis,
"when this Court has once laid down a principle of law as applicable to a certainstate of facts, it will adhere to
that principle, and apply it to all future cases, where facts are substantially the same; regardless of whether the
parties and property are the same."113 This is to provide stability in judicial decisions, as held by the Court in a
previous case:

Stand by the decisions and disturb not what is settled. Stare decisis simply means that for the sake of
certainty, a conclusion reached in one case should be applied to those that follow if the facts are substantially
the same, even though the parties may be different. It proceeds from the first principle of justice that, absent
any powerful countervailing considerations, like cases ought to be decided alike.114

More importantly, we cannot depart from the legal precedents as laid down by the Court En Banc. It is provided
in the Constitution that "no doctrine or principle of law laid down by the court in a decision rendered en bancor
in division may be modified or reversed except by the court sitting en banc."115

What is left for this Court to do is to reiterate the rulings in the aforesaid legal precedents and apply them to
these consolidated cases.

As regards the main issue, the Court conclusively held that petitioner is entitled to the 8% transitional input tax
on its beginning inventory of land, which is granted in Section 105 (nowSection 111[A]) of the NIRC, and
granted the refund of the amounts petitioner had paid as output VAT for the different tax periods in
question.116

Whether the transitional/presumptive

input tax credit under Section 105 of the
NIRC may be claimed only on the
"improvements" on real properties.

The Court held in the earlier consolidated decision, G.R. Nos. 158885 and 170680, as follows: On its face,
there is nothing in Section 105 of the Old NIRC that prohibits the inclusion of real properties, together with the
improvements thereon, in the beginning inventory of goods, materials and supplies, based on which inventory
the transitional input tax credit is computed. It can be conceded that when it was drafted Section 105 could not
have possibly contemplated concerns specific to real properties, as real estate transactions were not originally
subject to VAT. At the same time, when transactions on real properties were finally made subject to VAT
beginning withRep. Act No. 7716, no corresponding amendment was adopted as regards Section 105 to
provide for a differentiated treatment in the application of the transitional input tax credit with respect to real
properties or real estate dealers.

It was Section 100 of the Old NIRC, as amended by Rep. Act No. 7716, which made real estate transactions
subject to VAT for the first time. Prior to the amendment, Section 100 had imposed the VAT "on every sale,
barter or exchange of goods", without however specifying the kind of properties that fall within or under the
generic class "goods" subject to the tax.

Rep. Act No. 7716, which significantly is also known as the Expanded Value-Added Tax (EVAT) law, expanded
the coverage of the VAT by amending Section 100 of the Old NIRC in several respects, some of which we will
enumerate. First, it made every sale, barter or exchange of "goods or properties" subject to VAT. Second, it
generally defined "goods or properties" as "all tangible and intangible objects which are capable of pecuniary
estimation." Third, it included a non-exclusive enumeration of various objects that fall under the class "goods or
properties" subject to VAT, including "[r]eal properties held primarily for sale to customers or held for lease in
the ordinary courseof trade or business."

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From these amendments to Section 100, is there any differentiated VAT treatment on realproperties or real
estate dealers that would justify the suggested limitations on the application of the transitional input tax on
them? We see none.

Rep. Act No. 7716 clarifies that it is the real properties "held primarily for sale to customers or held for lease in
the ordinary course of trade or business" that are subject to the VAT, and not when the real estate transactions
are engaged in by persons who do not sell or lease properties in the ordinary course of trade or business. It is
clear that those regularly engaged in the real estate business are accorded the same treatment as the
merchants of other goods or properties available in the market. In the same way that a milliner considers hats
as his goods and a rancher considers cattle as his goods, a real estate dealer holds real property, whether
ornot it contains improvements, as his goods.117 (Citations omitted, emphasis added.)

xxxx

Under Section 105, the beginning inventory of "goods" forms part of the valuation of the transitional input tax
credit. Goods, as commonly understood in the business sense, refers to the product which the VAT registered
person offers for sale to the public. With respect to real estate dealers, it is the real properties themselves
which constitute their "goods". Such real properties are the operating assets of the real estate dealer.

Section 4.100-1 of RR No. 7-95 itself includes in its enumeration of "goods or properties" such "real properties
held primarily for sale to customers or held for lease in the ordinary course of trade or business." Said
definition was taken from the very statutory language of Section 100 of the Old NIRC. By limiting the definition
of goods to "improvements" in Section 4.105-1, the BIR not only contravened the definition of "goods" as
provided in the Old NIRC, but also the definition which the same revenue regulation itself has provided.118
(Emphasis added.)

The Court then emphasized in its Resolution in G.R. No. 158885 and G.R. No. 170680 that Section 105 of the
old NIRC, on the transitional input tax credit, remained intact despite the enactment of Republic Act No. 7716.
Section 105 was amended by Republic Act No. 8424, and the provisions on the transitional input tax credit are
now embodied in Section 111(A) of the new NIRC, which reads:

Section 111. Transitional/Presumptive Input Tax Credits.—

(A) Transitional Input Tax Credits.— A person who becomes liable to value-added tax or any person who
elects to be a VAT-registered person shall, subject to the filing of an inventory according to rules and
regulations prescribed by the Secretary of [F]inance, upon recommendation of the Commissioner, be allowed
input tax on his beginning inventory of goods, materials and supplies equivalent for 8% of the value of such
inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which
shall be creditable against the output tax.119

In G.R. Nos. 158885 and 170680, the Court asked, "If the plain text of Republic Act No. 7716 fails to supply
any apparent justification for limiting the beginning inventory of real estate dealers only to the improvements on
their properties, how then were the Commissioner of Internal Revenue and the courts a quoable to justify such
a view?"120 The Court then answered this question in this manner:

IV.

The fact alone that the denial of FBDC's claims is in accord with Section 4.105-1 of RR 7-95 does not, of
course, put this inquiry to rest. If Section 4.105-1 is itself incongruent to Rep. Act No. 7716, the incongruence
cannot by itself justify the denial of the claims. We need to inquire into the rationale behind Section 4.105-1, as
well as the question whether the interpretation of the law embodied therein is validated by the law itself.

xxxx
178
It is correct, as pointed out by the CTA, that upon the shift from sales taxes to VAT in 1987 newly-VAT
registered people would have been prejudiced by the inability to credit against the output VAT their payments
by way of sales tax on their existing stocks in trade. Yet that inequity was precisely addressed by a transitory
provision in E.O. No. 273 found in Section 25 thereof. The provision authorized VAT-registered persons to
invoke a "presumptive input tax equivalent to 8% of the value of the inventory as of December 31, 1987 of
materials and supplies which are not for sale, the tax on which was not taken up or claimed as deferred sales
tax credit," and a similar presumptive input tax equivalent to 8% of the value of the inventory as of December
31, 1987 of goods for sale, the tax on which was not taken up or claimed as deferred sales tax credit.121
(Emphasis ours.)

Whether there must have been previous

payment of sales tax or value-added tax
by petitioner on its land before petitioner
may claim the input tax credit granted by
Section 105 (now Section 111[A]) of the NIRC.

The Court discussed this matter lengthily in its Decision in G.R. Nos. 158885 and 170680, and we quote:

Section 25 of E.O. No. 273 perfectly remedies the problem assumed by the CTA as the basis for the
introduction of transitional input tax credit in 1987. If the core purpose of the tax credit is only, as hinted by the
CTA, to allow for some mode of accreditation of previously-paid sales taxes, then Section 25 alone would have
sufficed. Yet E.O. No. 273 amended the Old NIRC itself by providing for the transitional input tax credit under
Section 105, thereby assuring that the tax credit would endure long after the last goods made subject to sales
tax have been consumed.

If indeed the transitional input tax credit is integrally related to previously paid sales taxes, the purported causal
link between those two would have been nonetheless extinguished long ago. Yet Congress has reenacted the
transitional input tax credit several times; that fact simply belies the absence of any relationship between such
tax credit and the long-abolished sales taxes. Obviously then, the purpose behind the transitional input tax
credit is not confined to the transition from sales tax to VAT.

x x x Section 105 states that the transitional input tax credits become available either to (1) a person who
becomes liable to VAT; or (2) any person who elects to be VAT-registered. The clear language of the law
entitles new trades or businesses to avail of the tax credit once they become VAT-registered. The transitional
input tax credit, whether under the Old NIRC or the New NIRC, may be claimed by a newly-VAT registered
person such as when a business as it commences operations.

x x x [I]t is not always true that the acquisition of such goods, materials and supplies entail the payment of
taxes on the part of the new business. In fact, this could occur as a matter of course by virtue of the operation
of various provisions of the NIRC, and not only on account of a specially legislated exemption.

xxxx

The interpretation proffered by the CTA would exclude goods and properties which are acquired through sale
not in the ordinary course of trade or business, donation or through succession, from the beginning inventory
on which the transitional input tax credit is based. This prospect all but highlights the ultimate absurdity of the
respondents' position. Again, nothing in the Old NIRC (or even the New NIRC) speaks of such a possibility or
qualifies the previous payment of VAT or any other taxes on the goods, materials and supplies as a pre-
requisite for inclusion in the beginning inventory.

It is apparent that the transitional input tax credit operates to benefit newly VAT-registered persons, whether or
not they previously paid taxes in the acquisition of their beginning inventory of goods, materials and supplies.
During that period of transition from non-VAT to VAT status, the transitional input tax credit serves to alleviate

179
the impact of the VAT on the taxpayer. At the very beginning, the VAT-registered taxpayer is obliged to remit a
significant portion of the income it derived from its sales as output VAT. The transitional input tax credit
mitigates this initial diminution of the taxpayer's income by affording the opportunity to offset the losses
incurred through the remittance of the output VAT at a stage when the person is yet unable to credit input VAT
payments.

There is another point that weighs against the CTA's interpretation. Under Section 105 of the Old NIRC, the
rate of the transitional input tax credit is "8% of the value of such inventory or the actual value-added tax paid
on such goods, materials and supplies, whichever is higher." If indeed the transitional input tax credit is
premised on the previous payment of VAT, then it does not make sense to afford the taxpayer the benefit of
such credit based on "8% of the value of such inventory" should the same prove higher than the actual VAT
paid. This intent that the CTA alluded to could have been implemented with ease had the legislature shared
such intent by providing the actual VAT paid as the sole basis for the rate of the transitional input tax credit.

The CTA harped on the circumstance that FBDC was excused from paying any tax on the purchase of its
properties from the national government, even claiming that to allow the transitional input tax credit is
"tantamount to giving an undeserved bonusto real estate dealers similarly situated as [FBDC] which the
Government cannot afford to provide." Yet the tax laws in question, and all tax laws in general, are designed to
enforce uniform tax treatment to persons or classes of persons who share minimum legislated standards. The
common standard for the application of the transitional input tax credit, as enacted by E.O. No. 273 and all
subsequent tax laws which reinforced or reintegrated the tax credit, is simply that the taxpayer in question has
become liable to VAT or has elected to be a VAT-registered person. E.O. No. 273 and the subsequent tax laws
are all decidedly neutral and accommodating in ascertaining who should be entitled to the tax credit, and it
behooves the CIR and the CTA to adopt a similarly judicious perspective.122 (Citations omitted, emphases
ours.)

The Court En Bancin its Resolution in G.R. No. 173425 likewise discussed the question of prior payment of
taxes as a prerequisite before a taxpayer could avail of the transitional input tax credit. The Court found that
petitioner is entitled to the 8% transitional input tax credit, and clearly said that the fact that petitioner acquired
the Global City property under a tax-free transaction makes no difference as prior payment of taxes is not a
prerequisite.123 We quote pertinent portions of the resolution below:

This argument has long been settled. To reiterate, prior payment of taxes is not necessary before a taxpayer
could avail of the 8% transitional input tax credit. This position is solidly supported by law and jurisprudence,
viz.:

First.Section 105 of the old National Internal Revenue Code (NIRC) clearly provides that for a taxpayer to avail
of the 8% transitional input tax credit, all that is required from the taxpayer is to file a beginning inventory with
the Bureau of Internal Revenue (BIR). It was never mentioned in Section 105 that prior payment of taxes is a
requirement. x x x.

xxxx

Second. Since the law (Section 105 of the NIRC) does not provide for prior payment of taxes, to require it now
would be tantamount to judicial legislation which, to state the obvious, is not allowed.

Third. A transitional input tax credit is not a tax refund per se but a tax credit. Logically, prior payment of taxes
is not required before a taxpayer could avail of transitional input tax credit. As we have declared in our
September 4, 2012 Decision, "[t]ax credit is not synonymous to tax refund. Tax refund is defined as the money
that a taxpayer overpaid and is thus returned by the taxing authority. Tax credit, on the other hand, is an
amount subtracted directly from one's total tax liability. It is any amount given to a taxpayer as a subsidy, a
refund, or an incentive to encourage investment."

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Fourth. The issue of whether prior payment of taxes is necessary to avail of transitional input tax credit is no
longer novel. It has long been settled by jurisprudence. x x x.

Fifth. Moreover, in Commissioner of Internal Revenue v. Central Luzon Drug Corp., this Court had already
declared that prior payment of taxes is not required in order toavail of a tax credit. x x x124 (Citations omitted,
emphases ours.)

The Court has thus categorically ruled that prior payment of taxes is not required for a taxpayer toavail of the
8% transitional input tax credit provided in Section 105 of the old NIRC and that petitioner is entitled to it,
despite the fact that petitioner acquired the Global City property under a tax-free transaction.125 The Court En
Banc held:

Contrary to the view of the CTA and the CA, there is nothing in the abovequoted provision to indicate that prior
payment of taxes is necessary for the availment of the 8% transitional input tax credit. Obviously, all that is
required is for the taxpayerto file a beginning inventory with the BIR.

To require prior payment of taxes x x x is not only tantamount to judicial legislation but would also render
nugatory the provision in Section 105 of the old NIRC that the transitional input tax credit shall be "8% of the
value of [the beginning] inventory or the actual [VAT] paid on such goods, materials and supplies, whichever is
higher" because the actual VAT (now 12%) paid on the goods, materials, and supplies would always be higher
than the 8% (now 2%) of the beginning inventory which, following the view of Justice Carpio, would have to
exclude all goods, materials, and supplies where no taxes were paid. Clearly, limiting the value of the
beginning inventory only to goods, materials, and supplies, where prior taxes were paid, was not the intention
of the law. Otherwise, it would have specifically stated that the beginning inventory excludes goods, materials,
and supplies where no taxes were paid.126

Whether Revenue Regulations No. 7-95 is

a valid implementation of Section 105 of
the NIRC.

In the April 2, 2009 Decision inG.R. Nos. 158885 and 170680, the Court struck down Section 4.105-1
ofRevenue Regulations No. 7-95 for being in conflict with the law.127 The decision reads in part as follows:

[There] is no logic that coheres with either E.O. No. 273 or Rep. Act No. 7716 which supports the restriction
imposed on realestate brokers and their ability to claim the transitional input tax credit based on the value of
their real properties. In addition, the very idea of excluding the real properties itself from the beginning
inventory simply runs counter to what the transitional input tax credit seeks to accomplish for persons engaged
in the sale of goods, whether or not such "goods" take the form of real properties or more mundane
commodities.

Under Section 105, the beginning inventory of "goods" forms part of the valuation of the transitional input tax
credit. Goods, as commonly understood in the business sense, refers to the product which the VAT registered
person offers for sale to the public. With respect to real estate dealers, it is the real properties themselves
which constitute their "goods". Such real properties are the operating assets of the real estate dealer.

Section 4.100-1 of RR No. 7-95 itself includes in its enumeration of "goods or properties" such "real properties
held primarily for sale to customers or held for lease in the ordinary course of trade or business." Said
definition was taken from the very statutory language of Section 100 of the Old NIRC. By limiting the definition
of goods to "improvements" in Section 4.105-1, the BIR not only contravened the definition of "goods" as
provided in the Old NIRC, but also the definition which the same revenue regulation itself has provided.

The Court of Tax Appeals claimed that under Section 105 of the Old NIRC the basis for the inventory of goods,
materials and supplies upon which the transitional input VAT would be based "shall be left to regulation by the

181
appropriate administrative authority". This is based on the phrase "filing of an inventory as prescribed by
regulations" found in Section 105. Nonetheless, Section 105 does include the particular properties to be
included in the inventory, namely goods, materials and supplies. It is questionable whether the CIR has the
power to actually redefine the concept of "goods", as she did when she excluded real properties from the class
of goods which real estate companies in the business of selling real properties may include in their inventory.
The authority to prescribe regulations can pertain to more technical matters, such as how to appraise the value
of the inventory or what papers need to be filed to properly itemize the contents of such inventory. But such
authority cannot go as far as to amend Section 105 itself, which the Commissioner had unfortunately
accomplished in this case.

It is of course axiomatic that a rule or regulation must bear upon, and be consistent with, the provisions of the
enabling statute if such rule or regulation is to be valid. In case of conflict between a statute and an
administrative order, the former must prevail. Indeed, the CIR has no power to limit the meaning and coverage
of the term "goods" in Section 105 of the Old NIRC absent statutory authority or basis to make and justify such
limitation. A contrary conclusion would mean the CIR could very well moot the law or arrogate legislative
authority unto himself by retaining sole discretion to provide the definition and scope of the term "goods."128
(Emphasis added.)

Furthermore, in G.R. No. 173425, the Court held:

Section 4.105-1 of RR 7-95 is

inconsistent with Section 105 of the
old NIRC

As regards Section 4.105-1 ofRR 7-95 which limited the 8% transitional input tax credit to the value of the
improvements on the land, the same contravenes the provision of Section 105 of the old NIRC, in relation to
Section 100 of the same Code, as amended by RA 7716, which defines "goods or properties," to wit:

xxxx

In fact, in our Resolution dated October 2, 2009, in the related case of Fort Bonifacio, we ruled that Section
4.105-1 of RR 7-95, insofar as it limits the transitional input tax credit to the value of the improvement of the
real properties, is a nullity. Pertinent portions of the Resolution read:

As mandated by Article 7 of the Civil Code, an administrative rule or regulation cannot contravene the law on
which it is based. RR 7-95 is inconsistent with Section 105 insofar as the definition of the term "goods" is
concerned. This is a legislative act beyond the authority of the CIR and the Secretary of Finance. The rules
and regulations that administrative agencies promulgate, which are the product of a delegated legislative
power to create new and additional legal provisions that have the effect of law, should be within the scope of
the statutory authority granted by the legislature to the objects and purposes of the law, and should not be in
contradiction to, but in conformity with, the standards prescribed by law.

To be valid, an administrative rule or regulation must conform, not contradict, the provisions of the enabling
law. An implementing rule or regulation cannot modify, expand, or subtract from the law it is intended to
implement. Any rule that is not consistent with the statute itself is null and void.

While administrative agencies, such as the Bureau of Internal Revenue, may issue regulations to implement
statutes, they are without authority to limit the scope of the statute to less than what it provides, or extend or
expand the statute beyond itsterms, or in any way modify explicit provisions of the law. Indeed, a quasi-judicial
body or an administrative agency for that matter cannot amend an act of Congress. Hence, in case of a
discrepancy between the basic law and an interpretative or administrative ruling, the basic law prevails.

182
To recapitulate, RR 7-95, insofar as it restricts the definition of "goods" as basis of transitional input tax credit
under Section 105 is a nullity.

As we see it then, the 8% transitional input tax creditshould not be limited to the value of the improvements on
the real properties but should include the value of the real properties as well.129 (Citations omitted, emphasis
ours.)

Whether the issuance of Revenue

Regulations No. 7-95 by the BIR, and
declaration of validity of said Regulations
by the CTA and the Court of Appeals,
was in violation of the fundamental
principle of separation of powers.

In the Resolution dated October 2, 2009 in G.R. Nos. 158885 and 170680 the Court denied the respondents’
Motion for Reconsideration with finality and held:

[The April 2, 2009 Decision] held that the CIR had no power to limit the meaning and coverage of the term
"goods" in Section 105 of the Old NIRC sans statutory authority or basis and justification to make such
limitation. This it did when it restrictedthe application of Section 105 in the case of real estate dealers only to
improvements on the real property belonging to their beginning inventory.

xxxx

The statutory definition of the term "goods or properties" leaves no room for doubt. It states: "Sec. 100. Value-
added tax on sale of goods or properties.— (a) Rate and base of tax. — x x x (1) The term ‘goods or
properties’ shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall
include:

(A) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or
business; x x x."

The amendatory provision of Section 105 of the NIRC, as introduced by RA 7716, states:

"Sec. 105. Transitional Input [T]ax Credits.— A person who becomes liable to value-added tax or any person
who elects to be a VAT-registered person shall, subject to the filing of an inventory as prescribed by
regulations, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent to 8%
of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies,
whichever is higher, which shall be creditable against the output tax."

The term "goods or properties" by the unambiguous terms of Section 100 includes "real properties held
primarily for sale to c[u]st[o]mers or held for lease in the ordinary course of business." Having been defined in
Section 100 of the NIRC, the term "goods" as used in Section 105 of the same code could not have a different
meaning. This has been explained in the Decision dated April 2, 2009, thus:

xxxx

Section 4.105-1 of RR 7-95 restricted the definition of "goods," viz.:

"However, in the case of real estate dealers, the basis of the presumptive input tax shall be the improvements,
such as buildings, roads, drainage systems, and other similar structures, constructed on or after the effectivity
of EO 273 (January 1, 1988)."

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As mandated by Article 7 of the Civil Code, an administrative rule or regulation cannot contravene the law on
which it is based. RR 7-95 is inconsistent with Section 105 insofar as the definition of the term"goods" is
concerned. This is a legislative act beyond the authority of the CIR and the Secretary of Finance. The rules
and regulations that administrative agencies promulgate, which are the product of a delegated legislative
power to create new and additional legal provisions that have the effect of law, should be within the scope of
the statutory authority granted bythe legislature to the objects and purposes of the law, and should not be in
contradiction to, but in conformity with, the standards prescribed by law.

To be valid, an administrative ruleor regulation must conform, not contradict, the provisions of the enabling law.
An implementing rule or regulation cannot modify, expand, or subtract from the law itis intended to implement.
Any rule that is not consistent with the statute itself is null and void. While administrative agencies, such as the
Bureau of Internal Revenue, may issue regulations to implement statutes, they are without authority to limit the
scope of the statute to less than what it provides, or extend or expand the statute beyond itsterms, or in any
way modify explicit provisions of the law. Indeed, a quasi-judicial body or an administrative agency for that
mattercannot amend an act of Congress. Hence, in case of a discrepancy between the basic law and an
interpretative or administrative ruling, the basic law prevails.

To recapitulate, RR 7-95, insofar as it restricts the definition of "goods" as basis of transitional inputtax credit
under Section 105 is a nullity.

On January 1, 1997, RR 6-97 was issued by the Commissioner of Internal Revenue.1âwphi1 RR 6-97 was
basically a reiteration of the same Section 4.105-1 of RR 7-95, except that the RR 6-97 deleted the following
paragraph:

"However, in the case of real estate dealers, the basis of the presumptive input tax shall be the improvements,
such as buildings, roads, drainage systems, and other similar structures, constructed on or after the effectivity
of E.O. 273 (January 1, 1988)."

It is clear, therefore, that under RR 6-97, the allowable transitional input tax credit is not limited to
improvements on real properties. The particular provision of RR 7-95 has effectively been repealed by RR 6-97
which is now in consonance with Section 100 of the NIRC, insofar as the definition of real properties as goods
is concerned. The failure to add a specific repealing clause would not necessarily indicate that there was no
intent to repeal RR 7-95. The fact that the aforequoted paragraph was deleted created an irreconcilable
inconsistency and repugnancy between the provisions of RR 6-97 and RR 7-95.

xxxx

As pointed out in Our Decision ofApril 2, 2009, to give Section 105 a restrictive construction that transitional
input tax credit applies only when taxes were previously paid on the properties in the beginning inventory and
there is a law imposing the tax which is presumed to have been paid, is to impose conditions or requisites to
the application of the transitional tax input credit which are not found in the law. The courts must not read into
the law what is not there. To do so will violate the principle of separation of powers which prohibits this Court
from engaging in judicial legislation.130 (Emphases added.)

As the Court En Banc held in G.R. No. 173425, the issues in this case are not novel. These same issues have
been squarely ruled upon by this Court in the earlier decided casesthat have attained finality.131

It is now this Court’s duty to apply the previous rulings to the present case. Once a case has been decided one
way, any other case involving exactly the same point at issue, as in the present case, should be decided in the
same manner.132

Thus, we find that petitioner is entitled to a refund of the amounts of: 1) ₱486,355,846.78 in G.R. No. 175707,
2) ₱77,151,020.46 in G.R. No. 180035, and 3) ₱269,340,469.45 in G.R. No. 181092, which petitioner paid as

184
value-added tax, or toa tax credit for said amounts. WHEREFORE, in view of the foregoing, the consolidated
petitions are hereby GRANTED. The following are REVERSED and SET ASIDE:

1) Under G.R. No. 175707, the Decisiondated April 22, 2003 of the Court of Appeals in CA-G.R. SP No.
61516 and its subsequent Resolution dated November 30, 2006;

2) Under G.R. No. 180035, the Decisiondated April 30, 2007 of the Court of Appeals in CA-G.R. SP No.
76540 and its subsequent Resolution dated October 8, 2007; and

3) Under G.R. No. 181092, the Decisiondated December 28, 2007 of the Court of Appeals in CA-G.R.
SP No. 61158.

Respondent Commissioner of Internal Revenue is ordered to REFUND, OR, IN THE ALTERNATIVE, TO

ISSUE A TAX CREDIT CERTIFICATE to petitioner Fort Bonifacio Development Corporation, the following
amounts:

1) ₱486,355,846. 78 paid as output value-added tax for the second quarter of 1997 (G.R. No. 175707);

2) ₱77,151,020.46 paid as output value-added tax for the first quarter of 1998 (G.R. No. 180035); and

3) ₱269,340,469.45 paid as output value-added tax for the fourth quarter of 1996 (G.R. No. 181092).

SO ORDERED.

DIGEST:

FACTS:

Petitioner was a real estate developer that bought from the national government a parcel of land that used to
be the Fort Bonifacio military reservation. At the time of the said sale there was as yet no VAT imposed so
Petitioner did not pay any VAT on its purchase. Subsequently, Petitioner sold two parcels of land to Metro
Pacific Corp. In reporting the said sale for VAT purposes (because the VAT had already been imposed in the
interim), Petitioner claimed transitional input VAT corresponding to its inventory of land. The BIR disallowed the
claim of presumptive input VAT and thereby assessed Petitioner for deficiency VAT.

ISSUE:

Is Petitioner entitled to claim the transitional input VAT on its sale of real properties given its nature as a real
estate dealer and if so (i) is the transitional input VAT applied only to the improvements on the real property or
is it applied on the value of the entire real property and (ii) should there have been a previous tax payment for
the transitional input VAT to be creditable?

HELD:

YES. Petitioner is entitled to claim transitional input VAT based on the value of not only the improvements but
on the value of the entire real property and regardless of whether there was in fact actual payment on the
purchase of the real property or not.

185
The amendments to the VAT law do not show any intention to make those in the real estate business subject
to a different treatment from those engaged in the sale of other goods or properties or in any other commercial
trade or business. On the scope of the basis for determining the available transitional input VAT, the CIR has
no power to limit the meaning and coverage of the term "goods" in Section 105 of the Tax Code without
statutory authority or basis. The transitional input tax credit operates to benefit newly VAT-registered persons,
whether or not they previously paid taxes in the acquisition of their beginning inventory of goods, materials and
supplies.

G.R. No. 181961 December 5, 2011

LVM CONSTRUCTION CORPORATION, represented by its Managing Director, ANDRES CHUA LAO,
Petitioner,
vs.
F.T. SANCHEZ/SOCOR/KIMWA (JOINT VENTURE), F.T. SANCHEZ CONSTRUCTION CORPORATION,
SOCOR CONSTRUCTION CORPORATION AND KIMWA CONSTRUCTION AND DEVELOPMENT
CORPORATION all represented by FORTUNATO O. SANCHEZ, JR., Respondents.

DECISION

PEREZ, J.:

Filed pursuant to Rule 45 of the 1997 Rules of Civil Procedure, the petition for review on certiorari at bench
seeks the reversal of the 28 September 2007 Decision1 rendered by the then Thirteenth Division of the Court
of Appeals (CA) in CA-G.R. SP No. 94849,2 the decretal portion of which states:

WHEREFORE, premises considered, the assailed Decision dated April 26, 2006 of the Construction Industry
Arbitration Commission in CIAC Case No. 25-2005 is hereby AFFIRMED.

SO ORDERED.3

The Facts

Petitioner LVM Construction Corporation (LVM) is a duly licensed construction firm primarily engaged in the
construction of roads and bridges for the Department of Public Works and Highways (DPWH). Awarded the
construction of the Arterial Road Link Development Project in Southern Leyte (the Project), LVM sub-
contracted approximately 30% of the contract amount with the Joint Venture composed of respondents F.T.
Sanchez Corporation (FTSC), Socor Construction Corporation (SCC) and Kimwa Construction Development
Corporation (KCDC). For the contract price of ₱90,061,917.25 which was later on reduced to ₱86,318,478.38, 4
the Joint Venture agreed to undertake construction of the portion of the Project starting from Sta. 154 + 210.20
to Sta. 160 + 480.00. With LVM as the Contractor and the Joint Venture as Sub-Contractor, the 27 November
1996 Sub-Contract Agreement5 executed by the parties pertinently provided as follows:

3) That payment to the SUB-CONTRACTOR shall be on item of work accomplished in the sub-
contracted portion of the project at awarded unit cost of the project less NINE PERCENT (9%). The
SUB-CONTRACTOR shall issue a BIR registered receipt to the CONTRACTOR.

4) Ten percent (10%) retention to be deducted for every billing of sub-contractor as prescribed under
the Tender Documents.

xxxx
186
 13) The payment to the SUB-CONTRACTOR shall be made within seven (7) days after the check
issued by DPWH to CONTRACTOR has already been made good.6

For work rendered in the premises, there is no dispute regarding the fact that the Joint Venture sent LVM a
total of 27 Billings. For Billing Nos. 1 to 26, LVM paid the Joint Venture the total sum of ₱80,414,697.12 and
retained the sum of ₱8,041,469.79 by way of the 10% retention stipulated in the Sub-Contract Agreement.7 For
Billing No. 27 in the sum of ₱5,903,780.96, on the other hand, LVM paid the Joint Venture the partial sum of
₱2,544,934.99 on 31 May 2001,8 claiming that it had not yet been fully paid by the DPWH.9 Having completed
the sub-contracted works, the Joint Venture subsequently demanded from LVM the settlement of its unpaid
claims as well as the release of money retained by the latter in accordance with the Sub-Contract Agreement.
In a letter dated 16 May 2001, however, LVM apprised the Joint Venture of the fact that its auditors have
belatedly discovered that no deductions for E-VAT had been made from its payments on Billing Nos. 1 to 26
and that it was, as a consequence, going to deduct the 8.5% payments for said tax from the amount still due in
the premises.10 In its 14 June 2001 Reply, the Joint Venture claimed that, having issued Official Receipts for
every payment it received, it was liable to pay 10% VAT thereon and that LVM can, in turn, claim therefrom an
equivalent input tax of 10%.11

With its claims still unpaid despite the lapse of more than four (4) years from the completion of the sub-
contracted works, the Joint Venture, thru its Managing Director, Fortunato O. Sanchez, Jr., filed against LVM
the 30 June 2005 complaint for sum of money and damages which was docketed before the Construction
Industry Arbitration Commission (CIAC) as CIAC Case No. 25-2005.12 Having submitted a Bill of Particulars in
response to LVM’s motion therefor,13 the Joint Venture went on to file an Amended Complaint dated 23
December 2005 specifying its claims as follows: (a) ₱8,041,469.73 as retention monies for Billing Nos. 1 to 26;
(b) ₱3,358,845.97 as unpaid balance on Billing No. 27; (c) ₱6,186,570.71 as interest on unpaid retention
money computed at 12% per annum reckoned from 6 August 1999 up to 1 January 2006; and (d)
₱5,365,677.70 as interest at 12% per annum on delayed payment of monies collected from DPWH on Billing
Nos. 1 to 26. In addition, the Joint Venture sought indemnity for attorney’s fees equivalent to 10% of the
amount collected and/or in a sum not less than ₱1,000,000.00.14

In its 21 October 2005 Answer with Compulsory Counterclaim, LVM maintained that it did not release the 10%
retention for Billing Nos. 1 to 26 on the ground that it had yet to make the corresponding 8.5% deductions for
E-VAT which the Joint Venture should have paid to the Bureau of Internal Revenue (BIR) and that there is, as
a consequence, a need to offset the sums corresponding thereto from the retention money still in its
possession. Moreover, LVM alleged that the Joint Venture’s claims failed to take into consideration its own
outstanding obligation in the total amount of ₱21,737,094.05, representing the liquidated damages it incurred
as a consequence of its delays in the completion of the project. In addition to said liquidated damages, LVM
prayed for the grant of its counterclaims for exemplary damages and attorney’s fees.15 In its 2 January 2006
supplemental answer, LVM likewise argued that the Joint Venture’s prayer for imposition of 12% interest on the
retention money and the balance of Billing No. 27 is bereft of factual and legal bases since no interest was
stipulated in the parties’ agreement and it was justified in refusing the release of said sums claimed. 16

With the parties’ assent to the 19 December 2005 Terms of Reference which identified, among other matters,
the issues to be resolved in the case,17 the CIAC proceeded to receive the parties’ evidence in support of their
respective causes. On 26 April 2006, the CIAC rendered its decision granting the Joint Venture’s claims for the
payment of the retention money for Billing Nos. 1 to 26 as well as the interest thereon and the unpaid balance
billing from 6 August 1999 to 1 January 2006 in the aggregate sum of ₱11,307,646.68. Discounting the
contractual and legal bases for LVM’s claim that it had the right to offset its E-VAT payments from the retention
money still in its possession, the CIAC ruled that the VAT deductions the DPWH made from its payments to
LVM were for the whole project and already included all its supplies and subcontractors. Instead of withholding
said retention money, LVM was determined to have – to its credit and for its use – the input VAT corresponding
to the 10% equivalent VAT paid by the Joint Venture based on the BIR-registered official receipts it issued.
Finding that the delays incurred by the Joint Venture were justified, the CIAC likewise denied LVM’s
counterclaim for liquidated damages for lack of contractual basis.18

187
Elevated by LVM to the CA through a petition for review filed pursuant to Rule 43 of the 1997 Rules of Civil
Procedure,19 the CIAC’s decision was affirmed in toto in the herein assailed Decision dated 28 September
2007 rendered by said court’s Thirteenth Division in CA-G.R. SP No. 94849.20 In upholding the CIAC’s
rejection of LVM’s insistence on the offsetting of E-VAT payments from the retention money, the CA ruled as
follows:

Clearly, there was no provision in the Sub-Contract Agreement that would hold Sanchez liable for EVAT on the
amounts paid to it by LVM. As pointed out by the CIAC in its Award, ‘the contract documents provide only for
the payment of the awarded cost of the project less 9%. Any other deduction must be clearly stated in the
provisions of the contract or upon agreement of the parties. xxx The tribunal finds no provision that EVAT will
be deducted from the sub-contractor. xxx If [the Joint Venture] should pay or share in the payment of the
EVAT, it must be clearly defined in the sub-contract agreement.’

Elucidating further, CIAC pointed out that Sanchez, under the contract was required to issue official receipts
registered with the BIR for every payment LVM makes for the progress billings, which it did. For these official
receipts issued by Sanchez to LVM, Sanchez already paid 10% VAT to the BIR, thus: ‘The VAT Law is very
clear. Everyone must pay 10% VAT based on their issued official receipts. These receipts must be official
receipts and registered with the BIR. Respondent (LVM) must pay its output Vat based on its receipts.
Complainant (Sanchez) must also pay output VAT based on its receipts. The law however allow each entity to
deduct the input VAT based on the official receipts issued to it. Clearly, therefore, respondent [LVM], has to its
credit the 10% output VAT paid by claimant [Joint Venture] based on the official receipts issued to it.
Respondent [LVM] can use this input VAT to offset any output VAT respondent [LVM] must pay for any of its
other projects."21

LVM’s motion for reconsideration of the foregoing decision was denied for lack of merit in the CA’s 26 February
2008 Resolution,22 hence, this Rule 45 petition for review on certiorari.

The Issues

LVM urges the grant of its petition for review upon the following errors imputed against the CA, to wit:

CONTRARY TO THE FINDING OF THE COURT OF APPEALS, RESPONDENTS’ LIABILITY TO PAY

VALUE ADDED TAX NEED NOT BE STATED IN THE SUB-CONTRACT AGREEMENT DATED 27
NOVEMBER 1996 AS THE PROVISIONS OF REPUBLIC ACT 8424, OTHERWISE KNOWN AS THE
NATIONAL INTERNAL REVENUE CODE OF THE PHILIPPINES, FORM PART OF, AND ARE
DEEMED INCORPORATED AND READ INTO SAID AGREEMENT.

II

THE COURT OF APPEALS ERRED WHEN IT RULED THAT RESPONDENTS ARE DEEMED TO
HAVE ALREADY PAID VALUE ADDED TAX MERELY BECAUSE RESPONDENTS HAD ALLEGEDLY
ISSUED RECEIPTS FOR SERVICES RENDERED.23

The Court’s Ruling

The petition is bereft of merit.

For lack of any stipulation regarding the same in the parties’ Sub-Contract Agreement, we find that the CA
correctly brushed aside LVM’s insistence on deducting its supposed E-VAT payments from the retention
money demanded by the Joint Venture. Indeed, a contract constitutes the law between the parties who are,
therefore, bound by its stipulations24 which, when couched in clear and plain language, should be applied
188
according to their literal tenor.25 That there was no agreement regarding the offsetting urged by LVM may
likewise be readily gleaned from the parties’ contemporaneous and subsequent acts which are given primordial
consideration in determining their intention.26 The record shows that, except for deducting sums corresponding
to the 10% retention agreed upon, 9% as contingency on sub-contract, 1% withholding tax and such other
itemized miscellaneous expenses, LVM settled the Joint Venture’s Billing Nos. 1 to 26 without any mention of
deductions for the E-VAT payments it claims to have advanced.27 It was, in fact, only on 16 May 2001 that
LVM’s Managing Director, Andres C. Lao, apprised the Joint Venture in writing of its intention to deduct said
payments,28 to wit:

If you would recall, during our last meeting with Deputy Project Manager of the DPWH-PJHL, Eng. Jimmy T.
Chan, last March 2001 at the PJHL Office in Palo, Leyte, our company made a commitment to pay up to 99%
accomplishment and release the retention money up to the 23rd partial billing after receipt by our company of
the 27th partial billing from JBIC and GOP relative to the above mentioned project.

Much as our company wants to comply with said commitment, our auditors recently discovered that all
payments made by us to your Joint Venture, relative to the above mentioned project were made without the
corresponding deduction of the E-VAT of 8.50% x 10/11, which your Joint Venture should have paid to the BIR.
Records would show that from billing number 1 up to 26, no deductions for E-VAT were made. As a matter of
fact, our company was the one who shouldered all payments due for the E-VAT which should have been
deducted from the payments made by us to your Joint Venture. Copy of the payments made by our company
to the BIR relative to the E-VAT is hereto attached as Annex "1" for your perusal and ready reference.1avvphi1

This being the case and to offset the advances made by our company, we would like to inform you that our
company would deduct the payments made for E-VAT to the amount due to your Joint Venture. Only by doing
so, would our advances be settled and liquidated. We hope that our auditor and your auditor can discuss this
matter to avoid any possible conflict regarding this matter.

From the foregoing letter, it is evident that LVM unilaterally broached its intention of deducting the subject E-
VAT payments only on 15 May 2001 or long after the project’s completion on 9 July 1999.29 In the absence of
any stipulation thereon, however, the CA correctly disallowed the offsetting of said sums from the retention
money undoubtedly due the Joint Venture. Courts are obliged to give effect to the parties’ agreement and
enforce the contract to the letter.30 The rule is settled that they have no authority to alter a contract by
construction or to make a new contract for the parties; their duty is confined to the interpretation of the one
which the parties have made for themselves, without regard to its wisdom or folly. Courts cannot supply
material stipulations, read into the contract words it does not contain31 or, for that matter, read into it any other
intention that would contradict its plain import.32 This is particularly true in this case where, in addition to the
dearth of a meeting of minds between the parties, their contemporaneous and subsequent acts fail to yield any
intention to offset the said E-VAT payments from the retention money still in LVM’s possession.lawphi1

In taking exception to the CA’s affirmance of the CIAC’s rejection of its position for lack of contractual basis,
LVM argues that the Joint Venture’s liability for E-VAT as an entity that renders services in the course of trade
or business need not be stated in the Sub-Contract Agreement considering that it is an obligation imposed by
law which forms part of, and is read into, every contract.33 As correctly argued by the Joint Venture, however,
there are two (2) contracts under the factual milieu of the case: the main contract DPWH entered into with LVM
for the construction of the Arterial Road Link Development Project in Southern Leyte and the Sub-Contract
Agreement the latter in turn concluded with the Joint Venture over 30% of said project’s contract amount. As
the entity which directly dealt with the government insofar as the main contract was concerned, LVM was itself
required by law to pay the 8.5% VAT which was withheld by the DPWH in accordance with Republic Act No.
842434 or the Tax Reform Act of 1997 as well as the National Internal Revenue Code of 1997 (NIRC). Section
114 (C) of said law provides as follows:

"Section 114. Return and Payment of Value-Added Tax. –

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(C) Withholding of Creditable Value-added Tax. - The Government or any of its political subdivisions,
instrumentalities or agencies, including government-owned or -controlled corporations (GOCCs) shall, before
making payment on account of each purchase of goods from sellers and services rendered by contractors
which are subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold
the value-added tax due at the rate of three percent (3%) of the gross payment for the purchase of goods and
six percent (6%) on gross receipts for services rendered by contractors on every sale or installment payment
which shall be creditable against the value-added tax liability of the seller or contractor: Provided, however,
That in the case of government public works contractors, the withholding rate shall be eight and one-half
percent (8.5%): Provided, further, That the payment for lease or use of properties or property rights to
nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For this
purpose, the payor or person in control of the payment shall be considered as the withholding agent."

For the Sub-Contract Agreement, on the other hand, respondent F. Sanchez Construction, acting on behalf of
the Joint Venture, issued BIR-registered receipts for the sums paid by LVM for Billing Nos. 1 to 26, indicating
the total amount paid by the latter, the retention fee deducted therefrom and the tax due thereon. 35 These were
in consonance with paragraph 3 of the Sub-Contract Agreement which, after stating that LVM’s payment shall
"be on item of work accomplished in the sub-contracted portion of the project awarded unit cost of the project
less NINE PERCENT (9%)," simply provided, that "(t)he SUB-CONTRACTOR shall issue a BIR registered
receipt to the CONTRACTOR."36 As the VAT-registered person, on the other hand, Fortunato T. Sanchez, Sr.37
also filed the corresponding Monthly VAT Declarations38 with the BIR which, by themselves, are evidence of
the Joint Venture’s VAT liability for LVM’s payments on its billings. In fixing the base of the tax, the first
paragraph A Section 108 of the NIRC provides that "(t)here shall be levied assessed and collected, a value-
added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services,
including the use or lease of properties."

In the absence of any stipulation regarding the Joint Venture’s sharing in the VAT deducted and withheld by
the DPWH from its payment on the main contract, the CIAC and the CA correctly ruled that LVM has no basis
in offsetting the amounts of said tax from the retention still in its possession. VAT is a uniform tax levied on
every importation of goods, whether or not in the course of trade or business, or imposed on each sale, barter,
exchange or lease of goods or properties or on each rendition of services in the course of trade or business. 39
It 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.40 As
an indirect tax that may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or
services, VAT should be understood not in the context of the person or entity that is primarily, directly and
legally liable for its payment, but in terms of its nature as a tax on consumption.41

Neither do we find merit in LVM’s harping over the lack of showing in the record that the Joint Venture has
actually paid its liability for VAT. For this purpose, LVM insists that the Official Receipts for its payments on the
Joint Venture’s billing were issued by respondent F. Sanchez Construction and that the Monthly VAT
Declarations were, in fact, filed by Fortunato Sanchez, Sr. However, the evidence on record is to the effect
that, failing to register with the Securities and Exchange Commission (SEC) and to obtain a Mayor’s Permit
and authorization from the BIR to print its official receipts, the Joint Venture apprised LVM of its intention to use
respondent F. Sanchez Construction’s BIR-registered receipts.42 Aside from being indicative of its knowledge
of the foregoing circumstances, LVM’s previous unqualified acceptance of said official receipts should, clearly,
bar the belated exceptions it now takes with respect thereto. A party, having performed affirmative acts upon
which another person based his subsequent actions, cannot thereafter refute his acts or renege on the effects
of the same, to the prejudice of the latter.43

To recapitulate, LVM, as Contractor for the Project, was liable for the 8.5% VAT which was withheld by the
DPWH from its payments, pursuant to Section 114 (C) of the NIRC. Absent any agreement to that effect, LVM
cannot deduct the amounts thus withheld from the sums it still owed the Joint Venture which, as Sub-
Contractor of 30% of the Project, had its own liability for 10% VAT insofar as the sums paid for the sub-
contracted works were concerned. Although the burden to pay an indirect tax like VAT can, admittedly, be
passed on to the purchaser of the goods or services, it bears emphasizing that the liability to pay the same
190
remains with the manufacturer or seller like LVM and the Joint Venture. In the same manner that LVM is liable
for the VAT due on the payments made by the DPWH pursuant to the contract on the Project, the Joint
Venture is, consequently, liable for the VAT due on the payments made by LVM pursuant to the parties’ Sub-
Contract.

WHEREFORE, premises considered, the petition is DENIED for lack of merit and the CA’s 28 September 2007
Decision is, accordingly, AFFIRMED in toto.

SO ORDERED.

DIGEST:

FAC T S:

LVM Construction Corporation (LVM) is a duly licensed construction firm primarily engaged in the construction
of roads and bridges for DPWH
 LVM was awarded the construction of the Arterial Road Link Development Project in Southern Leyte (the
Project),
 It sub-contracted30% of the contract amount with the Joint Venture composed of respondents F.T. Sanchez
Corporation (FTSC), Socor Construction Corporation (SCC) and Kimwa Construction Development
Corporation (KCDC).
LVM was the Contractor and the Joint Venture as Sub-Contractor
The Sub-Contract Agreementexecuted by the parties provided that: 3)
Payment to the SUB- CONTRACTOR shall be on item of work accomplished in the sub-contracted portion of
the project at awarded unit cost of the project less
9% . The SUB-CONTRACTOR shall issue a BIR registered receipt to the CONTRACTOR.4) 10%retention to
be deducted for every billing of sub-contractor
as prescribed under the Tender Documents.13) The payment to the SUB-CONTRACTOR shall be made
within seven (7) days after the
check issued by DPWH to CONTRACTOR has already been made good.
For work rendered in the premises, Joint Venture sent LVM a total of 27 Billings
LVM paid the Joint Venture apartial sum claiming that it had not yet been fully paid by the DPWH
Having completed the sub-contracted works, the Joint Venture subsequently demanded from LVM the
settlement of its unpaid claims as well as the release of money retained by the latter in accordance with the
Sub -Contract Agreement.
In a letter, LVM explainedthe Joint Venture of the fact that its auditors have belatedly discovered that no
deductions for E-VAT had been made from its payments on Billing Nos. 1 to 26 and that it was, as a
consequence, going to deduct the 8.5% payments for said tax from the amount still due in the premises
The Joint Venture claimed that, having issued Official Receipts for every payment it received, it was liable to
pay 10% VAT thereon and that LVM can, in turn, claim therefrom an equivalent input tax of 10%.
With its claims still unpaid despite the lapse of more than 4 years from the completion of the sub-contracted
works, the Joint Venture, thru its Managing Director,FortunatoO. Sanchez, Jr., filed against LVM complaint for
sum of money and damageswhich was docketed before the Construction Industry Arbitration Commission
Having submitted a Bill of Particulars in response to LVM’s motion,
Joint Venture went on to file an Amended Complaint claiming amounts of unpaid balances and interests as
well as attorneys fees
LVM maintained that it did not release the 10% retention
for the 26 Billing on the ground that it had yet to make the corresponding 8.5% deductions for E-VAT which the
Joint Venture should have
paid to the BIR and as a consequence, there was a need to offset
the sums corresponding thereto from the retention money still in its possession.

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Moreover, LVM alleged that the Joint Venture’s claims failed to take into consideration its own outstanding
obligation representing the liquidated damages it incurred as a consequence of its delays in the completion of
the project
CIAC’s decision: granted the Joint Venture’s claims for the payment of the retention money for the 26billings
as well as the interest and also the unpaid balance billing
 CIAC ALSO DISREGARDED THE CONTRACTUAL AND LEGAL BASES FOR LVM’S CLAIM THAT IT HAD
THE RIGHT TO OFFSET ITS E-VAT PAYMENTS FROM THE RETENTION MONEY STILL IN ITS
POSSESSION AND RULED THAT THE VAT DEDUCTIONS THE DPWH MADE FROM ITS PAYMENTS TO
LVM WERE FOR THE WHOLE PROJECT AND ALREADY INCLUDED ALL ITS SUPPLIES AND
SUBCONTRACTORS.
Instead of withholding said retention money, LVM was determined to have
–to its credit and for its use
–the input VAT corresponding to the 10% equivalent VAT paid by the Joint Venture based on the BIR
-registered official receipts it issued.
Finding that the delays incurred by the Joint Venture were justified, the CIAC likewise denied LVM’s
counterclaim for liquidated damages for lack of contractual basis.18
LVM appealed to CA but the latter upheld
CIAC’s rejection of LVM’s insistence on the offsetting of
E-VAT payments from the retention money
, it ruled that:

there was no provision in the Sub-Contract Agreement that would hold Sanchez liable for EVAT on the
amounts paid to it by LVM.

As pointed out by the CIAC, ‘the contract documents provide only for the payment of the awarded cost of the
project less 9%

Any other deduction must be clearly stated in the provisions of the contract or upon agreement of the parties.
xxx The tribunal finds no provision that EVAT will be
deducted from the sub -contractor. xxx If [the Joint Venture] should pay or share in the payment of the EVAT, it
must be clearly defined in the sub
-contract agreement.’ CIAC pointed out that Sanchez was required to issue official receipts registered with the
BIR for every payment LVM makes for the progress billings, which it did.
For these official receipts issued by Sanchez to LVM, Sanchez already paid 10% VAT to the BIR, thus: ‘The
VAT Law is very clear. Everyone must pay 10% VAT based on their issued official receipts.These receipts
must be official receipts and registered with the BIR.LVMmust pay its output Vat based on its receipts
Complainant (Sanchez) must also pay output VAT based on its receipts

The law however allow each entity to deduct the input VAT based on the official receipts issued to it. Thus,
LVM has to its credit the 10% output VAT paid by
Joint Venture based on the official receipts issued to it. LVMcan use this input VAT to offset any output VAT
LVM must pay for any of its other projects."

ISSUES
1.WONrespondents’ liability to pay value added tax need not be stated in the sub-contract agreement form
part of, and are deemed incorporated and read into said agreement.
(YES)
2.WON respondents are deemed to have
already paid value added tax merely because respondents had
allegedly issued receipts for services rendered.

RULING:
The petition is bereft of merit.

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1st ISSUE:
oFOR LACK OF ANY STIPULATION REGARDING THE SAME IN THE PARTIES’ SUB-CONTRACT
AGREEMENT, SC RULED THAT SHOULD NOT DEDUCT ITS E-VAT PAYMENTS FROM THE RETENTION
MONEY DEMANDED BY THE JOINT VENTURE

o a contract constitutes the law between the parties who are, therefore, bound by its stipulationswhich,
when couched in clear and plain language, should be applied according to their literal tenor
othere was no agreement regarding the offsetting
oThe record shows that, except for deducting sums corresponding to the 10% retention agreed upon, 9%
as contingency on sub-contract, 1% withholding tax and such other itemized miscellaneous expenses, LVM
settled the Joint Venture’s Billing Nos. 1 to 26 without any mention of deductions for the E-VAT payments it
claims to have advanced. It was, in factLVM’s Managing Director, Andres C. Lao,
explained(in a letter)the Joint Venture in writing of its intention to deduct said payments

o From the letter, it is evident that LVM unilaterally broached its intention of deducting the subject E-VAT
payments only on 15 May 2001 or long after the project’s completion on 9 July 1999
o In the absence of any stipulation thereon, however, the CA correctly disallowed the offsetting of said
sums from the retention money undoubtedly due the Joint Venture. Courts are obliged to give effect to
the parties’ agreement and enforce the contract to the letter

oThe rule is settled that they have no authority to alter a contract by construction or to make a new contract for
the parties; their duty is confined to the interpretation of the one which the parties have made for themselves,
without regard to its wisdom or folly.
oCourts cannot supply material stipulations, read into the contract words it does not contain 31 or, for that
matter, read into it any other intention that would contradict its plain import. This is particularly true in this case
where, in addition to the dearth of a meeting of minds between the parties, their contemporaneous and
subsequent acts fail to yield any intention to offset the said E-VAT payments from the retention n money still in
LVM’s possession.
O As correctly argued by the Joint Venture, however, there are two (2) contracts under the factual milieu of the
case: the main contract DPWH entered into with LVM for the construction project and the Sub-Contract
Agreement the latter in turn concluded with the Joint Venture over 30% of said project’s contract amount.
O As the entity which directly dealt with the government insofar as the main contract was concerned, LVM was
itself required by law to pay the 8.5% VAT which was withheld by the DPWH in accordance with Republic Act
No. 842434 or the Tax Reform Act of 1997 as well as the National Internal Revenue Code of 1997 (NIRC).
Section 114 (C) of said law provides as follows:

"Section 114. Return and Payment of Value-Added Tax. (C) Withholding of Creditable Value-added Tax.

The Government or any of its political subdivisions, instrumentalities or agencies, including government-owned
or -controlled corporations (GOCCs)
shall, before making payment on account of each purchase of goods from sellers and services rendered by
contractors which are subject to the value-added taximposed in Sections 106 and 108 of this Code, deduct
and withhold the value-added tax due at the rate of three percent (3%) of the gross payment for the purchase
of goods and six percent (6%) on gross receipts for services rendered by contractors on every sale or
installment payment which shall be creditable against the value -added tax liability of the seller or contractor
: Provided, however, That In the case of government public works contractors, the withholding rate shall be
eight and one-half percent (8.5%): Provided, further, That the payment for lease or use of properties or
property rights to nonresident owners shall be subject to ten percent ( 10%) withholding tax at the time of
payment. For this purpose, the payor or person in control of the payment shall be considered as the
withholding agent."
O In fixing the base of the tax, the first paragraph A Section 108 of the NIRC provides that "(t)here shall be
levied assessed and collected, a value -added tax equivalent to ten percent (10%) of gross receipts
derived from the sale or exchange of services, including the use or lease of properties."
O In the absence of any stipulation regarding the Joint Vent

193
ure’s sharing in the VAT deducted and
withheld by the DPWH from its payment on the main contract, the CIAC and the CA correctly ruled that LVM
has no basis in offsetting the amounts of said tax from the retention still in its possession.
oVAT is a uniform tax levied on every importation of goods, whether or not in the course of trade or
business, or imposed on each sale, barter, exchange or lease of goods or properties or on each rendition of
services in the course of trade or business.It 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 a
ttributable thereto.As an indirect tax that may be shifted or passed on to the buyer, transferee or lessee of the
goods, properties or services, VAT should be understood not in the context of the person or entity that is
primarily, directly and legally liable for its payment, but in terms of its nature as a tax on consumption.

2ndISSUE
SC did not find merit in LVM’s harping over the lack of showing in the record that the Joint Venture has
actually paid its liability for VAT. LVM insists th at the ORs for its payments on the Joint Venture’s billing were
issued by respondent F. Sanchez Construction and that the Monthly VAT Declarations were, in fact, filed by
Fortunato Sanchez, Sr. However, the evidence on record is to the effect that, failing to register with the
Securities and Exchange Commission (SEC) and to obtain a Mayor’s Perm it and authorization from the BIR
to print its official receipts, the Joint Venture apprised LVM of its intention to use respondent F. Sanchez
Construction’s BIR-registered receipts.

oAside from being indicative of its knowledge of the foregoing circumstances, LVM’s previous unqualified
acceptance of said official receipts should, clearly, bar the belated exceptions it now takes with respect thereto.
A party, having performed affirmative acts upon which another person based his subsequent actions, cannot
thereafter refute his acts or renege on the effects of the same, to the prejudice of the latter.

LVM, AS CONTRACTOR FOR THE PROJECT, WAS LIABLE FOR THE 8.5% VAT WHICH WAS WITHHELD
BY THE DPWH FROM ITS PAYMENTS, PURSUANT TO SECTION 114 (C) OF THE NIRC. ABSENT
ANY AGREEMENT TO THAT EFFECT, LVM CANNOT DEDUCT THE
AMOUNTS THUS WITHHELD FROM THE SUMS IT STILL OWED THE JOINT VENTURE WHICH, AS SUB-
CONTRACTOR OF 30% OF THE PROJECT, HAD ITS OWN LIABILITY FOR 10% VAT INSOFAR AS THE
SUMS PAID FOR THE SUB-CONTRACTED WORKS
WERE CONCERNED.

Although the burden to pay an indirect tax like VAT can, admittedly, be passed on to the purchaser of the
goods or services, it bears emphasizing that the liability to pay the same remains with the manufacturer or
seller like LVM and the Joint Venture. In the same manner that LVM is liable for the VAT due on the payments
made by the DPWH pursuant to the contract on the Project, the Joint Venture is, consequently,
liable for the VAT due on the payments made by LVM pursuant to the parties’ Sub-Contract.

8.VAT REFUNDS

COMMISSIONER OF INTERNAL G.R. No. 172129

REVENUE,
Present:
Petitioner,
QUISUMBING, J., Chairperson,

194
 - versus - CARPIO MORALES,

MIRANT PAGBILAO CORPORATION TINGA,

(Formerly SOUTHERN ENERGY
QUEZON, INC.), VELASCO, JR., and

Respondent. BRION, JJ.

Promulgated:

September 12, 2008

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

DECISION

VELASCO, JR., J.:

Before us is a Petition for Review on Certiorari under Rule 45 assailing and seeking to set aside the Decision1
dated December 22, 2005 of the Court of Appeals (CA) in CA-G.R. SP No. 78280 which modified the March
18, 2003 Decision2 of the Court of Tax Appeals (CTA) in CTA Case No. 6133 entitled Mirant Pagbilao
Corporation (Formerly Southern Energy Quezon, Inc.) v. Commissioner of Internal Revenue and ordered the
Bureau of Internal Revenue (BIR) to refund or issue a tax credit certificate (TCC) in favor of respondent Mirant
Pagbilao Corporation (MPC) in the amount representing its unutilized input value added tax (VAT) for the
second quarter of 1998. Also assailed is the CA’s Resolution3 of March 31, 2006 denying petitioner’s motion
for reconsideration.

The Facts

MPC, formerly Southern Energy Quezon, Inc., and also formerly known as Hopewell (Phil.) Corporation, is a
domestic firm engaged in the generation of power which it sells to the National Power Corporation (NPC). For
the construction of the electrical and mechanical equipment portion of its Pagbilao, Quezon plant, which
appears to have been undertaken from 1993 to 1996, MPC secured the services of Mitsubishi Corporation
(Mitsubishi) of Japan.

Under Section 134 of Republic Act No. (RA) 6395, the NPC’s revised charter, NPC is exempt from all taxes. In
Maceda v. Macaraig,5 the Court construed the exemption as covering both direct and indirect taxes.

In the light of the NPC’s tax exempt status, MPC, on the belief that its sale of power generation services to
NPC is, pursuant to Sec. 108(B)(3) of the Tax Code,6 zero-rated for VAT purposes, filed on December 1, 1997
with Revenue District Office (RDO) No. 60 in Lucena City an Application for Effective Zero Rating. The
application covered the construction and operation of its Pagbilao power station under a Build, Operate, and
Transfer scheme.

Not getting any response from the BIR district office, MPC refiled its application in the form of a "request for
ruling" with the VAT Review Committee at the BIR national office on January 28, 1999. On May 13, 1999, the
Commissioner of Internal Revenue issued VAT Ruling No. 052-99, stating that "the supply of electricity by
Hopewell Phil. to the NPC, shall be subject to the zero percent (0%) VAT, pursuant to Section 108 (B) (3) of
the National Internal Revenue Code of 1997."

It must be noted at this juncture that consistent with its belief to be zero-rated, MPC opted not to pay the VAT
component of the progress billings from Mitsubishi for the period covering April 1993 to September 1996—for
the E & M Equipment Erection Portion of MPC’s contract with Mitsubishi. This prompted Mitsubishi to advance
195
the VAT component as this serves as its output VAT which is essential for the determination of its VAT
payment. Apparently, it was only on April 14, 1998 that MPC paid Mitsubishi the VAT component for the
progress billings from April 1993 to September 1996, and for which Mitsubishi issued Official Receipt (OR) No.
0189 in the aggregate amount of PhP 135,993,570.

On August 25, 1998, MPC, while awaiting approval of its application aforestated, filed its quarterly VAT return
for the second quarter of 1998 where it reflected an input VAT of PhP 148,003,047.62, which included PhP
135,993,570 supported by OR No. 0189. Pursuant to the procedure prescribed in Revenue Regulations No. 7-
95, MPC filed on December 20, 1999 an administrative claim for refund of unutilized input VAT in the amount
of PhP 148,003,047.62.

Since the BIR Commissioner failed to act on its claim for refund and obviously to forestall the running of the
two-year prescriptive period under Sec. 229 of the National Internal Revenue Code (NIRC), MPC went to the
CTA via a petition for review, docketed as CTA Case No. 6133.

Answering the petition, the BIR Commissioner, citing Kumagai-Gumi Co. Ltd. v. CIR,7 asserted that MPC’s
claim for refund cannot be granted for this main reason: MPC’s sale of electricity to NPC is not zero-rated for
its failure to secure an approved application for zero-rating.

Before the CTA, among the issues stipulated by the parties for resolution were, in gist, the following:

1. Whether or not [MPC] has unapplied or unutilized creditable input VAT for the 2nd quarter of 1998
attributable to zero-rated sales to NPC which are proper subject for refund pursuant to relevant provisions of
the NIRC;

2. Whether the creditable input VAT of MPC for said period, if any, is substantiated by documents; and

3. Whether the unutilized creditable input VAT for said quarter, if any, was applied against any of the VAT
output tax of MPC in the subsequent quarter.

To provide support to the CTA in verifying and analyzing documents and figures and entries contained therein,
the Sycip Gorres & Velayo (SGV), an independent auditing firm, was commissioned.

The Ruling of the CTA

On the basis of its affirmative resolution of the first issue, the CTA, by its Decision dated March 18, 2003,
granted MPC’s claim for input VAT refund or credit, but only for the amount of PhP 10,766,939.48. The fallo of
the CTA’s decision reads:

In view of all the foregoing, the instant petition is PARTIALLY GRANTED. Accordingly, respondent is hereby
ORDERED to REFUND or in the alternative, ISSUE A TAX CREDIT CERTIFICATE in favor of the petitioner its
unutilized input VAT payments directly attributable to its effectively zero-rated sales for the second quarter of
1998 in the reduced amount of P10,766,939.48, computed as follows:

Claimed Input VAT P148,003,047.62

Less: Disallowances

a.) As summarized by SGV & Co. in its initial report (Exh. P)

I. Input Taxes on Purchases of Services:

1. Supported by documents
196
other than VAT Ors P 10,629.46

2. Supported by photocopied VAT OR 879.09

II. Input Taxes on Purchases of Goods:

1. Supported by documents other than

VAT invoices 165,795.70

2. Supported by Invoices with TIN only 1,781.82

3. Supported by photocopied VAT

invoices 3,153.62

III. Input Taxes on Importation of Goods:

1. Supported by photocopied documents

[IEDs and/or Bureau of Customs

(BOC) Ors] 716,250.00

2. Supported by broker’s computations 91,601.00 990,090.69

b.) Input taxes without supporting documents as

summarized in Annex A of SGV & Co.’s

supplementary report (CTA records, page 134) 252,447.45

c.) Claimed input taxes on purchases of services from

Mitsubishi Corp. for being substantiated by dubious OR 135,996,570.008

Refundable Input P10,766,939.48

SO ORDERED.9

Explaining the disallowance of over PhP 137 million claimed input VAT, the CTA stated that most of MPC’s
purchases upon which it anchored its claims for refund or tax credit have not been amply substantiated by
pertinent documents, such as but not limited to VAT ORs, invoices, and other supporting documents. Wrote
the CTA:

We agree with the above SGV findings that out of the remaining taxes of P136,246,017.45, the amount of
P252,477.45 was not supported by any document and should therefore be outrightly disallowed.

As to the claimed input tax of P135,993,570.00 (P136,246,017.45 less P252,477.45 ) on purchases of services
from Mitsubishi Corporation, Japan, the same is found to be of doubtful veracity. While it is true that said
amount is substantiated by a VAT official receipt with Serial No. 0189 dated April 14, 1998 x x x, it must be

197
observed, however, that said VAT allegedly paid pertains to the services which were rendered for the period
1993 to 1996. x x x

The Ruling of the CA

Aggrieved, MPC appealed the CTA’s Decision to the CA via a petition for review under Rule 43, docketed as
CA-G.R. SP No. 78280. On December 22, 2005, the CA rendered its assailed decision modifying that of the
CTA decision by granting most of MPC’s claims for tax refund or credit. And in a Resolution of March 31, 2006,
the CA denied the BIR Commissioner’s motion for reconsideration. The decretal portion of the CA decision
reads:

WHEREFORE, premises considered, the instant petition is GRANTED. The assailed Decision of the Court of
Tax Appeals dated March 18, 2003 is hereby MODIFIED. Accordingly, respondent Commissioner of Internal
Revenue is ordered to refund or issue a tax credit certificate in favor of petitioner Mirant Pagbilao Corporation
its unutilized input VAT payments directly attributable to its effectively zero-rated sales for the second quarter
of 1998 in the total amount of P146,760,509.48.

SO ORDERED.10

The CA agreed with the CTA on MPC’s entitlement to (1) a zero-rating for VAT purposes for its sales and
services to tax-exempt NPC; and (2) a refund or tax credit for its unutilized input VAT for the second quarter of
1998. Their disagreement, however, centered on the issue of proper documentation, particularly the
evidentiary value of OR No. 0189.

The CA upheld the disallowance of PhP 1,242,538.14 representing zero-rated input VAT claims supported only
by photocopies of VAT OR/Invoice, documents other than VAT Invoice/OR, and mere broker’s computations.
But the CA allowed MPC’s refund claim of PhP 135,993,570 representing input VAT payments for purchases
of goods and/or services from Mitsubishi supported by OR No. 0189. The appellate court ratiocinated that the
CTA erred in disallowing said claim since the OR from Mitsubishi was the best evidence for the payment of
input VAT by MPC to Mitsubishi as required under Sec. 110(A)(1)(b) of the NIRC. The CA ruled that the legal
requirement of a VAT Invoice/OR to substantiate creditable input VAT was complied with through OR No. 0189
which must be viewed as conclusive proof of the payment of input VAT. To the CA, OR No. 0189 represented
an undisputable acknowledgment and receipt by Mitsubishi of the input VAT payment of MPC.

The CA brushed aside the CTA’s ruling and disquisition casting doubt on the veracity and genuineness of the
Mitsubishi-issued OR No. 0189. It reasoned that the issuance date of the said receipt, April 14, 1998, must be
taken conclusively to represent the input VAT payments made by MPC to Mitsubishi as MPC had no real
control on the issuance of the OR. The CA held that the use of a different exchange rate reflected in the OR is
of no consequence as what the OR undeniably attests and acknowledges was Mitsubishi’s receipt of MPC’s
input VAT payment.

The Issue

Hence, the instant petition on the sole issue of "whether or not respondent [MPC] is entitled to the refund of its
input VAT payments made from 1993 to 1996 amounting to [PhP] 146,760,509.48."11

The Court’s Ruling

As a preliminary matter, it should be stressed that the BIR Commissioner, while making reference to the figure
PhP 146,760,509.48, joins the CA and the CTA on their disposition on the propriety of the refund of or the
issuance of a TCC for the amount of PhP 10,766,939.48. In fine, the BIR Commissioner trains his sight and
focuses his arguments on the core issue of whether or not MPC is entitled to a refund for PhP 135,993,570

198
(PhP 146,760,509.48 - PhP 10,766,939.48 = PhP 135,993,570) it allegedly paid as creditable input VAT for
services and goods purchased from Mitsubishi during the 1993 to 1996 stretch.

The divergent factual findings and rulings of the CTA and CA impel us to evaluate the evidence adduced
below, particularly the April 14, 1998 OR 0189 in the amount of PhP 135,996,570 [for US$ 5,190,000 at US$1:
PhP 26.203 rate of exchange]. Verily, a claim for tax refund may be based on a statute granting tax exemption,
or, as Commissioner of Internal Revenue v. Fortune Tobacco Corporation12 would have it, the result of
legislative grace. In such case, the claim is to be construed strictissimi juris against the taxpayer,13 meaning
that the claim cannot be made to rest on vague inference. Where the rule of strict interpretation against the
taxpayer is applicable as the claim for refund partakes of the nature of an exemption, the claimant must show
that he clearly falls under the exempting statute. On the other hand, a tax refund may be, as usually it is,
predicated on tax refund provisions allowing a refund of erroneous or excess payment of tax. The return of
what was erroneously paid is founded on the principle of solutio indebiti, a basic postulate that no one should
unjustly enrich himself at the expense of another. The caveat against unjust enrichment covers the
government.14 And as decisional law teaches, a claim for tax refund proper, as here, necessitates only the
preponderance-of-evidence threshold like in any ordinary civil case.15

We apply the foregoing elementary principles in our evaluation on whether OR 0189, in the backdrop of the
factual antecedents surrounding its issuance, sufficiently proves the alleged unutilized input VAT claimed by
MPC.

The Court can review issues of fact where there are

divergent findings by the trial and appellate courts

As a matter of sound practice, the Court refrains from reviewing the factual determinations of the CA or
reevaluate the evidence upon which its decision is founded. One exception to this rule is when the CA and the
trial court diametrically differ in their findings,16 as here. In such a case, it is incumbent upon the Court to
review and determine if the CA might have overlooked, misunderstood, or misinterpreted certain facts or
circumstances of weight, which, if properly considered, would justify a different conclusion.17 In the instant
case, the CTA, unlike the CA, doubted the veracity of OR No. 0189 and did not appreciate the same to support
MPC’s claim for tax refund or credit.

Petitioner BIR Commissioner, echoing the CTA’s stand, argues against the sufficiency of OR No. 0189 to
prove unutilized input VAT payment by MPC. He states in this regard that the BIR can require additional
evidence to prove and ascertain payment of creditable input VAT, or that the claim for refund or tax credit was
filed within the prescriptive period, or had not previously been refunded to the taxpayer.

To bolster his position on the dubious character of OR No. 0189, or its insufficiency to prove input VAT
payment by MPC, petitioner proffers the following arguments:

(1) The input tax covered by OR No. 0189 pertains to purchases by MPC from Mitsubishi covering the period
from 1993 to 1996; however, MPC’s claim for tax refund or credit was filed on December 20, 1999, clearly way
beyond the two-year prescriptive period set in Sec. 112 of the NIRC;

(2) MPC failed to explain why OR No. 0189 was issued by Mitsubishi (Manila) when the invoices which the
VAT were originally billed came from the Mitsubishi’s head office in Japan;

(3) The exchange rate used in OR No. 0189 was pegged at PhP 26.203: USD 1 or the exchange rate
prevailing in 1993 to 1996, when, on April 14, 1998, the date OR No. 0189 was issued, the exchange rate was
already PhP 38.01 to a US dollar;

199
(4) OR No. 0189 does not show or include payment of accrued interest which Mitsubishi was charging and
demanded from MPC for having advanced a considerable amount of VAT. The demand, per records, is
embodied in the May 12, 1995 letter of Mitsubishi to MPC;

(5) MPC failed to present to the CTA its VAT returns for the second and third quarters of 1995, when the bulk
of the VAT payment covered by OR No. 0189—specifically PhP 109,329,135.17 of the total amount of PhP
135,993,570—was billed by Mitsubishi, when such return is necessary to ascertain that the total amount
covered by the receipt or a large portion thereof was not previously refunded or credited; and

(6) No other documents proving said input VAT payment were presented except OR No. 0189 which,
considering the fact that OR No. 0188 was likewise issued by Mitsubishi and presented before the CTA but
admittedly for payments made by MPC on progress billings covering service purchases from 1993 to 1996,
does not clearly show if such input VAT payment was also paid for the period 1993 to 1996 and would be
beyond the two-year prescriptive period.

The petition is partly meritorious.

Belated payment by MPC of its obligation for creditable input VAT

As no less found by the CTA, citing the SGV’s report, the payments covered by OR No. 0189 were for goods
and service purchases made by MPC through the progress billings from Mitsubishi for the period covering April
1993 to September 1996—for the E & M Equipment Erection Portion of MPC’s contract with Mitsubishi. 18 It is
likewise undisputed that said payments did not include payments for the creditable input VAT of MPC. This fact
is shown by the May 12, 1995 letter19 from Mitsubishi where, as earlier indicated, it apprised MPC of the
advances Mitsubishi made for the VAT payments, i.e., MPC’s creditable input VAT, and for which it was
holding MPC accountable for interest therefor.

In net effect, MPC did not, for the VATable MPC-Mitsubishi 1993 to 1996 transactions adverted to, immediately
pay the corresponding input VAT. OR No. 0189 issued on April 14, 1998 clearly reflects the belated payment of
input VAT corresponding to the payment of the progress billings from Mitsubishi for the period covering April 7,
1993 to September 6, 1996. SGV found that OR No. 0189 in the amount of PhP 135,993,570 (USD 5,190,000)
was duly supported by bank statement evidencing payment to Mitsubishi (Japan).20 Undoubtedly, OR No. 0189
proves payment by MPC of its creditable input VAT relative to its purchases from Mitsubishi.

OR No. 0189 by itself sufficiently proves payment of VAT

The CA, citing Sec. 110(A)(1)(B) of the NIRC, held that OR No. 0189 constituted sufficient proof of payment of
creditable input VAT for the progress billings from Mitsubishi for the period covering April 7, 1993 to September
6, 1996. Sec. 110(A)(1)(B) of the NIRC pertinently provides:

Section 110. Tax Credits. –

A. Creditable Input Tax. –

(1) Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 113
hereof on the following transactions shall be creditable against the output tax:

(a) Purchase or importation of goods:

xxxx

(b) Purchase of services on which a value-added tax has been actually paid. (Emphasis ours.)

200
Without necessarily saying that the BIR is precluded from requiring additional evidence to prove that input tax
had indeed paid or, in fine, that the taxpayer is indeed entitled to a tax refund or credit for input VAT, we agree
with the CA’s above disposition. As the Court distinctly notes, the law considers a duly-executed VAT invoice
or OR referred to in the above provision as sufficient evidence to support a claim for input tax credit. And any
doubt as to what OR No. 0189 was for or tended to prove should reasonably be put to rest by the SGV report
on which the CTA notably placed much reliance. The SGV report stated that "[OR] No. 0189 dated April 14,
1998 is for the payment of the VAT on the progress billings" from Mitsubishi Japan "for the period April 7, 1993
to September 6, 1996 for the E & M Equipment Erection Portion of the Company’s contract with Mitsubishi
Corporation (Japan)."21

VAT presumably paid on April 14, 1998

While available records do not clearly indicate when MPC actually paid the creditable input VAT amounting to
PhP 135,993,570 (USD 5,190,000) for the aforesaid 1993 to 1996 service purchases, the presumption is that
payment was made on the date appearing on OR No. 0189, i.e., April 14, 1998. In fact, said creditable input
VAT was reflected in MPC’s VAT return for the second quarter of 1998.

The aforementioned May 12, 1995 letter from Mitsubishi to MPC provides collaborating proof of the belated
payment of the creditable input VAT angle. To reiterate, Mitsubishi, via said letter, apprised MPC of the VAT
component of the service purchases MPC made and reminded MPC that Mitsubishi had advanced VAT
payments to which Mitsubishi was entitled and from which it was demanding interest payment. Given the
scenario depicted in said letter, it is understandable why Mitsubishi, in its effort to recover the amount it
advanced, used the PhP 26.203: USD 1 exchange formula in OR No. 0189 for USD 5,190,000.

No showing of interest payment not fatal to claim for refund

Contrary to petitioner’s posture, the matter of nonpayment by MPC of the interests demanded by Mitsubishi is
not an argument against the fact of payment by MPC of its creditable input VAT or of the authenticity or
genuineness of OR No. 0189; for at the end of the day, the matter of interest payment was between Mitsubishi
and MPC and may very well be covered by another receipt. But the more important consideration is the fact
that MPC, as confirmed by the SGV, paid its obligation to Mitsubishi, and the latter issued to MPC OR No.
0189, for the VAT component of its 1993 to 1996 service purchases.

The next question is, whether or not MPC is entitled to a refund or a TCC for the alleged unutilized input VAT
of PhP 135,993,570 covered by OR No. 0189 which sufficiently proves payment of the input VAT.

We answer the query in the negative.

Claim for refund or tax credit filed out of time

The claim for refund or tax credit for the creditable input VAT payment made by MPC embodied in OR No.
0189 was filed beyond the period provided by law for such claim. Sec. 112(A) of the NIRC pertinently reads:

(A) Zero-rated or Effectively Zero-rated Sales. – Any VAT-registered person, whose sales are zero-rated or
effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were
made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid
attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied
against output tax: x x x. (Emphasis ours.)

The above proviso clearly provides in no uncertain terms that unutilized input VAT payments not otherwise
used for any internal revenue tax due the taxpayer must be claimed within two years reckoned from the close
of the taxable quarter when the relevant sales were made pertaining to the input VAT regardless of
whether said tax was paid or not. As the CA aptly puts it, albeit it erroneously applied the aforequoted Sec.
201
112(A), "[P]rescriptive period commences from the close of the taxable quarter when the sales were made and
not from the time the input VAT was paid nor from the time the official receipt was issued." 22 Thus, when a
zero-rated VAT taxpayer pays its input VAT a year after the pertinent transaction, said taxpayer only has a
year to file a claim for refund or tax credit of the unutilized creditable input VAT. The reckoning frame would
always be the end of the quarter when the pertinent sales or transaction was made, regardless when the input
VAT was paid. Be that as it may, and given that the last creditable input VAT due for the period covering the
progress billing of September 6, 1996 is the third quarter of 1996 ending on September 30, 1996, any claim for
unutilized creditable input VAT refund or tax credit for said quarter prescribed two years after September 30,
1996 or, to be precise, on September 30, 1998. Consequently, MPC’s claim for refund or tax credit filed on
December 10, 1999 had already prescribed.

Reckoning for prescriptive period under

Secs. 204(C) and 229 of the NIRC inapplicable

To be sure, MPC cannot avail itself of the provisions of either Sec. 204(C) or 229 of the NIRC which, for the
purpose of refund, prescribes a different starting point for the two-year prescriptive limit for the filing of a claim
therefor. Secs. 204(C) and 229 respectively provide:

Sec. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes.— The
Commissioner may –

xxxx

(c) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the
value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his
discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value
upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer
files in writing with the Commissioner a claim for credit or refund within two (2) years after the
payment of the tax or penalty: Provided, however, That a return filed showing an overpayment shall be
considered as a written claim for credit or refund.

xxxx

Sec. 229. Recovery of Tax Erroneously or Illegally Collected.— No suit or proceeding shall be maintained in
any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or
illegally assessed or collected, or of any penalty claimed to have been collected without authority, of any sum
alleged to have been excessively or in any manner wrongfully collected without authority, or of any sum
alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has
been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such
tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date
of payment of the tax or penalty regardless of any supervening cause that may arise after payment:
Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit any tax,
where on the face of the return upon which payment was made, such payment appears clearly to have been
erroneously paid. (Emphasis ours.)

Notably, the above provisions also set a two-year prescriptive period, reckoned from date of payment of the tax
or penalty, for the filing of a claim of refund or tax credit. Notably too, both provisions apply only to instances of
erroneous payment or illegal collection of internal revenue taxes.

MPC’s creditable input VAT not erroneously paid

202
For perspective, under Sec. 105 of the NIRC, creditable input VAT is an indirect tax which can be shifted or
passed on to the buyer, transferee, or lessee of the goods, properties, or services of the taxpayer. The fact that
the subsequent sale or transaction involves a wholly-tax exempt client, resulting in a zero-rated or effectively
zero-rated transaction, does not, standing alone, deprive the taxpayer of its right to a refund for any unutilized
creditable input VAT, albeit the erroneous, illegal, or wrongful payment angle does not enter the equation.

In Commissioner of Internal Revenue v. Seagate Technology (Philippines), the Court explained the nature of
the VAT and the entitlement to tax refund or credit of a zero-rated taxpayer:

Viewed broadly, the VAT is a uniform tax x x x levied on every importation of goods, whether or not in the
course of trade or business, or imposed on each sale, barter, exchange or lease of goods or properties or on
each rendition of services in the course of trade or business as they pass along the production and distribution
chain, the tax being limited only to the value added to such goods, properties or services by the seller,
transferor or lessor. It is an indirect tax that may be shifted or passed on to the buyer, transferee or lessee of
the goods, properties or services. As such, it should be understood not in the context of the person or entity
that is primarily, directly and legally liable for its payment, but in terms of its nature as a tax on consumption. In
either case, though, the same conclusion is arrived at.

The law that originally imposed the VAT in the country, as well as the subsequent amendments of that law, has
been drawn from the tax credit method. Such method adopted the mechanics and self-enforcement features of
the VAT as first implemented and practiced in Europe x x x. Under the present method that relies on invoices,
an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its
purchases, inputs and imports.

If at the end of a taxable quarter the output taxes charged by a seller are equal to the input taxes passed on by
the suppliers, no payment is required. It is when the output taxes exceed the input taxes that the excess has to
be paid. If, however, the input taxes exceed the output taxes, the excess shall be carried over to the
succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively zero-rated
transactions or from the acquisition of capital goods, any excess over the output taxes shall instead be
refunded to the taxpayer or credited against other internal revenue taxes.

xxxx

Zero-rated transactions generally refer to the export sale of goods and supply of services. The tax rate is set at
zero. When applied to the tax base, such rate obviously results in no tax chargeable against the purchaser.
The seller of such transactions charges no output tax, but can claim a refund of or a tax credit certificate for the
VAT previously charged by suppliers.23 (Emphasis added.)

Considering the foregoing discussion, it is clear that Sec. 112(A) of the NIRC, providing a two-year prescriptive
period reckoned from the close of the taxable quarter when the relevant sales or transactions were made
pertaining to the creditable input VAT, applies to the instant case, and not to the other actions which refer to
erroneous payment of taxes.

As a final consideration, the Court wishes to remind the BIR and other tax agencies of their duty to treat claims
for refunds and tax credits with proper attention and urgency. Had RDO No. 60 and, later, the BIR proper
acted, instead of sitting, on MPC’s underlying application for effective zero rating, the matter of addressing
MPC’s right, or lack of it, to tax credit or refund could have plausibly been addressed at their level and
perchance freed the taxpayer and the government from the rigors of a tedious litigation.

The all too familiar complaint is that the government acts with dispatch when it comes to tax collection, but
pays little, if any, attention to tax claims for refund or exemption. It is high time our tax collectors prove the
cynics wrong.

203
WHEREFORE, the petition is PARTLY GRANTED. The Decision dated December 22, 2005 and the
Resolution dated March 31, 2006 of the CA in CA-G.R. SP No. 78280 are AFFIRMED with the
MODIFICATION that the claim of respondent MPC for tax refund or credit to the extent of PhP 135,993,570,
representing its input VAT payments for service purchases from Mitsubishi Corporation of Japan for the
construction of a portion of its Pagbilao, Quezon power station, is DENIED on the ground that the claim had
prescribed. Accordingly, petitioner Commissioner of Internal Revenue is ordered to refund or, in the alternative,
issue a tax credit certificate in favor of MPC, its unutilized input VAT payments directly attributable to its
effectively zero-rated sales for the second quarter in the total amount of PhP 10,766,939.48.

No pronouncement as to costs. SO ORDERED.

DIGEST:

COMMISSIONER OF INTERNAL REVENUE vs. MIRANT (PHILIPPINES) OPERATIONS, CORPORATION-

Tax Credit and Tax Refund

FACTS:

Mirant filed its final adjusted Annual Income Tax Return for fiscal year ending 1999 declaring a net loss. It then
amended the said return this time reflecting an increased net loss and showing that it opted to carry over as tax
credit its overpayment to the succeeding taxable year. This excess tax credit was unutilized in 2000 as Mirant
still reported a net loss. Mirant then filed a claim for refund of its excess creditable income tax for 1999.

ISSUE:

Can Mirant claim for refund its excess credits from 1999?

HELD:

NO. Mirant’s choice to carry over its 1999 excess income tax credit to succeeding taxable years is irrevocable,
regardless of whether it was able to actually apply the said amount to a tax liability. It is a mistake to
understand the phrase "for that taxable period" as a prescriptive period for the irrevocability rule – i.e., that
since the tax credit in this case was acquired in 1999, and Respondent opted to carry it over to 2000, then the
irrevocability of the option to carry over expired by the end of 2000, leaving Respondent free to again take
another option as regards its 1999 excess income tax credit. The Court ruled that this interpretation effectively
renders nugatory the irrevocability rule.

G.R. No. 184823 October 6, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
AICHI FORGING COMPANY OF ASIA, INC., Respondent.

DECISION
204
DEL CASTILLO, J.:

A taxpayer is entitled to a refund either by authority of a statute expressly granting such right, privilege, or
incentive in his favor, or under the principle of solutio indebiti requiring the return of taxes erroneously or
illegally collected. In both cases, a taxpayer must prove not only his entitlement to a refund but also his
compliance with the procedural due process as non-observance of the prescriptive periods within which to file
the administrative and the judicial claims would result in the denial of his claim.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside the July 30, 2008
Decision1 and the October 6, 2008 Resolution2 of the Court of Tax Appeals (CTA) En Banc.

Factual Antecedents

Respondent Aichi Forging Company of Asia, Inc., a corporation duly organized and existing under the laws of
the Republic of the Philippines, is engaged in the manufacturing, producing, and processing of steel and its by-
products.3 It is registered with the Bureau of Internal Revenue (BIR) as a Value-Added Tax (VAT) entity4 and
its products, "close impression die steel forgings" and "tool and dies," are registered with the Board of
Investments (BOI) as a pioneer status.5

On September 30, 2004, respondent filed a claim for refund/credit of input VAT for the period July 1, 2002 to
September 30, 2002 in the total amount of ₱3,891,123.82 with the petitioner Commissioner of Internal
Revenue (CIR), through the Department of Finance (DOF) One-Stop Shop Inter-Agency Tax Credit and Duty
Drawback Center.6

Proceedings before the Second Division of the CTA

On even date, respondent filed a Petition for Review7 with the CTA for the refund/credit of the same input VAT.
The case was docketed as CTA Case No. 7065 and was raffled to the Second Division of the CTA.

In the Petition for Review, respondent alleged that for the period July 1, 2002 to September 30, 2002, it
generated and recorded zero-rated sales in the amount of ₱131,791,399.00,8 which was paid pursuant to
Section 106(A) (2) (a) (1), (2) and (3) of the National Internal Revenue Code of 1997 (NIRC); 9 that for the said
period, it incurred and paid input VAT amounting to ₱3,912,088.14 from purchases and importation attributable
to its zero-rated sales;10 and that in its application for refund/credit filed with the DOF One-Stop Shop Inter-
Agency Tax Credit and Duty Drawback Center, it only claimed the amount of ₱3,891,123.82. 11

In response, petitioner filed his Answer12 raising the following special and affirmative defenses, to wit:

4. Petitioner’s alleged claim for refund is subject to administrative investigation by the Bureau;

5. Petitioner must prove that it paid VAT input taxes for the period in question;

6. Petitioner must prove that its sales are export sales contemplated under Sections 106(A) (2) (a), and
108(B) (1) of the Tax Code of 1997;

7. Petitioner must prove that the claim was filed within the two (2) year period prescribed in Section 229
of the Tax Code;

8. In an action for refund, the burden of proof is on the taxpayer to establish its right to refund, and
failure to sustain the burden is fatal to the claim for refund; and

9. Claims for refund are construed strictly against the claimant for the same partake of the nature of
exemption from taxation.13
205
Trial ensued, after which, on January 4, 2008, the Second Division of the CTA rendered a Decision partially
granting respondent’s claim for refund/credit. Pertinent portions of the Decision read:

For a VAT registered entity whose sales are zero-rated, to validly claim a refund, Section 112 (A) of the NIRC
of 1997, as amended, provides:

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

(A) Zero-rated or Effectively Zero-rated Sales. – Any VAT-registered person, whose sales are zero-rated or
effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were
made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable
to such sales, except transitional input tax, to the extent that such input tax has not been applied against output
tax: x x x

Pursuant to the above provision, petitioner must comply with the following requisites: (1) the taxpayer is
engaged in sales which are zero-rated or effectively zero-rated; (2) the taxpayer is VAT-registered; (3) the
claim must be filed within two years after the close of the taxable quarter when such sales were made; and (4)
the creditable input tax due or paid must be attributable to such sales, except the transitional input tax, to the
extent that such input tax has not been applied against the output tax.

The Court finds that the first three requirements have been complied [with] by petitioner.

With regard to the first requisite, the evidence presented by petitioner, such as the Sales Invoices (Exhibits "II"
to "II-262," "JJ" to "JJ-431," "KK" to "KK-394" and "LL") shows that it is engaged in sales which are zero-rated.

The second requisite has likewise been complied with. The Certificate of Registration with OCN
1RC0000148499 (Exhibit "C") with the BIR proves that petitioner is a registered VAT taxpayer.

In compliance with the third requisite, petitioner filed its administrative claim for refund on September 30, 2004
(Exhibit "N") and the present Petition for Review on September 30, 2004, both within the two (2) year
prescriptive period from the close of the taxable quarter when the sales were made, which is from September
30, 2002.

As regards, the fourth requirement, the Court finds that there are some documents and claims of petitioner that
are baseless and have not been satisfactorily substantiated.

xxxx

In sum, petitioner has sufficiently proved that it is entitled to a refund or issuance of a tax credit certificate
representing unutilized excess input VAT payments for the period July 1, 2002 to September 30, 2002, which
are attributable to its zero-rated sales for the same period, but in the reduced amount of ₱3,239,119.25,
computed as follows:

Amount of Claimed Input VAT ₱ 3,891,123.82

Less:
Exceptions as found by the ICPA 41,020.37

Net Creditable Input VAT ₱ 3,850,103.45

Less:
Output VAT Due 610,984.20
Excess Creditable Input VAT ₱ 3,239,119.25

206
WHEREFORE, premises considered, the present Petition for Review is PARTIALLY GRANTED. Accordingly,
respondent is hereby ORDERED TO REFUND OR ISSUE A TAX CREDIT CERTIFICATE in favor of petitioner
[in] the reduced amount of THREE MILLION TWO HUNDRED THIRTY NINE THOUSAND ONE HUNDRED
NINETEEN AND 25/100 PESOS (₱3,239,119.25), representing the unutilized input VAT incurred for the
months of July to September 2002.

SO ORDERED.14

Dissatisfied with the above-quoted Decision, petitioner filed a Motion for Partial Reconsideration,15 insisting
that the administrative and the judicial claims were filed beyond the two-year period to claim a tax refund/credit
provided for under Sections 112(A) and 229 of the NIRC. He reasoned that since the year 2004 was a leap
year, the filing of the claim for tax refund/credit on September 30, 2004 was beyond the two-year period, which
expired on September 29, 2004.16 He cited as basis Article 13 of the Civil Code,17 which provides that when
the law speaks of a year, it is equivalent to 365 days. In addition, petitioner argued that the simultaneous filing
of the administrative and the judicial claims contravenes Sections 112 and 229 of the NIRC.18 According to the
petitioner, a prior filing of an administrative claim is a "condition precedent"19 before a judicial claim can be
filed. He explained that the rationale of such requirement rests not only on the doctrine of exhaustion of
administrative remedies but also on the fact that the CTA is an appellate body which exercises the power of
judicial review over administrative actions of the BIR. 20

The Second Division of the CTA, however, denied petitioner’s Motion for Partial Reconsideration for lack of
merit. Petitioner thus elevated the matter to the CTA En Banc via a Petition for Review.21

Ruling of the CTA En Banc

On July 30, 2008, the CTA En Banc affirmed the Second Division’s Decision allowing the partial tax
refund/credit in favor of respondent. However, as to the reckoning point for counting the two-year period, the
CTA En Banc ruled:

Petitioner argues that the administrative and judicial claims were filed beyond the period allowed by law and
hence, the honorable Court has no jurisdiction over the same. In addition, petitioner further contends that
respondent's filing of the administrative and judicial [claims] effectively eliminates the authority of the honorable
Court to exercise jurisdiction over the judicial claim.

We are not persuaded.

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

SEC. 114. Return and Payment of Value-added Tax. –

(A) In General. – Every person liable to pay the value-added tax imposed under this Title shall file a quarterly
return of the amount of his gross sales or receipts within twenty-five (25) days following the close of each
taxable quarter prescribed for each taxpayer: Provided, however, That VAT-registered persons shall pay the
value-added tax on a monthly basis.

[x x x x ]

Based on the above-stated provision, a taxpayer has twenty five (25) days from the close of each taxable
quarter within which to file a quarterly return of the amount of his gross sales or receipts. In the case at bar, the
taxable quarter involved was for the period of July 1, 2002 to September 30, 2002. Applying Section 114 of the
1997 NIRC, respondent has until October 25, 2002 within which to file its quarterly return for its gross sales or
receipts [with] which it complied when it filed its VAT Quarterly Return on October 20, 2002.

207
In relation to this, the reckoning of the two-year period provided under Section 229 of the 1997 NIRC should
start from the payment of tax subject claim for refund. As stated above, respondent filed its VAT Return for the
taxable third quarter of 2002 on October 20, 2002. Thus, respondent's administrative and judicial claims for
refund filed on September 30, 2004 were filed on time because AICHI has until October 20, 2004 within which
to file its claim for refund.

In addition, We do not agree with the petitioner's contention that the 1997 NIRC requires the previous filing of
an administrative claim for refund prior to the judicial claim. This should not be the case as the law does not
prohibit the simultaneous filing of the administrative and judicial claims for refund. What is controlling is that
both claims for refund must be filed within the two-year prescriptive period.

In sum, the Court En Banc finds no cogent justification to disturb the findings and conclusion spelled out in the
assailed January 4, 2008 Decision and March 13, 2008 Resolution of the CTA Second Division. What the
instant petition seeks is for the Court En Banc to view and appreciate the evidence in their own perspective of
things, which unfortunately had already been considered and passed upon.

WHEREFORE, the instant Petition for Review is hereby DENIED DUE COURSE and DISMISSED for lack of
merit. Accordingly, the January 4, 2008 Decision and March 13, 2008 Resolution of the CTA Second Division
in CTA Case No. 7065 entitled, "AICHI Forging Company of Asia, Inc. petitioner vs. Commissioner of Internal
Revenue, respondent" are hereby AFFIRMED in toto.

SO ORDERED.22

Petitioner sought reconsideration but the CTA En Banc denied23 his Motion for Reconsideration.

Issue

Hence, the present recourse where petitioner interposes the issue of whether respondent’s judicial and
administrative claims for tax refund/credit were filed within the two-year prescriptive period provided in Sections
112(A) and 229 of

the NIRC.24

Petitioner’s Arguments

Petitioner maintains that respondent’s administrative and judicial claims for tax refund/credit were filed in
violation of Sections 112(A) and 229 of the NIRC.25 He posits that pursuant to Article 13 of the Civil Code,26
since the year 2004 was a leap year, the filing of the claim for tax refund/credit on September 30, 2004 was
beyond the two-year period, which expired on September 29, 2004.27

Petitioner further argues that the CTA En Banc erred in applying Section 114(A) of the NIRC in determining the
start of the two-year period as the said provision pertains to the compliance requirements in the payment of
VAT.28 He asserts that it is Section 112, paragraph (A), of the same Code that should apply because it
specifically provides for the period within which a claim for tax refund/ credit should be made.29

Petitioner likewise puts in issue the fact that the administrative claim with the BIR and the judicial claim with the
CTA were filed on the same day.30 He opines that the simultaneous filing of the administrative and the judicial
claims contravenes Section 229 of the NIRC, which requires the prior filing of an administrative claim.31 He
insists that such procedural requirement is based on the doctrine of exhaustion of administrative remedies and
the fact that the CTA is an appellate body exercising judicial review over administrative actions of the CIR. 32

Respondent’s Arguments

208
For its part, respondent claims that it is entitled to a refund/credit of its unutilized input VAT for the period July
1, 2002 to September 30, 2002 as a matter of right because it has substantially complied with all the
requirements provided by law.33 Respondent likewise defends the CTA En Banc in applying Section 114(A) of
the NIRC in computing the prescriptive period for the claim for tax refund/credit. Respondent believes that
Section 112(A) of the NIRC must be read together with Section 114(A) of the same Code.34

As to the alleged simultaneous filing of its administrative and judicial claims, respondent contends that it first
filed an administrative claim with the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the
DOF before it filed a judicial claim with the CTA.35 To prove this, respondent points out that its Claimant
Information Sheet No. 4970236 and BIR Form No. 1914 for the third quarter of 2002,37 which were filed with the
DOF, were attached as Annexes "M" and "N," respectively, to the Petition for Review filed with the CTA. 38
Respondent further contends that the non-observance of the 120-day period given to the CIR to act on the
claim for tax refund/credit in Section 112(D) is not fatal because what is important is that both claims are filed
within the two-year prescriptive period.39 In support thereof, respondent cites Commissioner of Internal
Revenue v. Victorias Milling Co., Inc.40 where it was ruled that "[i]f, however, the [CIR] takes time in deciding
the claim, and the period of two years is about to end, the suit or proceeding must be started in the [CTA]
before the end of the two-year period without awaiting the decision of the [CIR]."41 Lastly, respondent argues
that even if the period had already lapsed, it may be suspended for reasons of equity considering that it is not a
jurisdictional requirement.42

Our Ruling

The petition has merit.

Unutilized input VAT must be claimed within two years after the close of the taxable quarter when the sales
were made

In computing the two-year prescriptive period for claiming a refund/credit of unutilized input VAT, the Second
Division of the CTA applied Section 112(A) of the NIRC, which states:

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

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

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

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

(A) In General. – Every person liable to pay the value-added tax imposed under this Title shall file a quarterly
return of the amount of his gross sales or receipts within twenty-five (25) days following the close of each
taxable quarter prescribed for each taxpayer: Provided, however, That VAT-registered persons shall pay the
value-added tax on a monthly basis.

209
Any person, whose registration has been cancelled in accordance with Section 236, shall file a return and pay
the tax due thereon within twenty-five (25) days from the date of cancellation of registration: Provided, That
only one consolidated return shall be filed by the taxpayer for his principal place of business or head office and
all branches.

xxxx

SEC. 229. Recovery of tax erroneously or illegally collected. –

No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax
hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have
been collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully
collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or
proceeding may be maintained, whether or not such tax, penalty or sum has been paid under protest or
duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of
payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided,
however, That the Commissioner may, even without written claim therefor, refund or credit any tax, where on
the face of the return upon which payment was made, such payment appears clearly to have been erroneously
paid. (Emphasis supplied.)

Hence, the CTA En Banc ruled that the reckoning of the two-year period for filing a claim for refund/credit of
unutilized input VAT should start from the date of payment of tax and not from the close of the taxable quarter
when the sales were made.43

The pivotal question of when to reckon the running of the two-year prescriptive period, however, has already
been resolved in Commissioner of Internal Revenue v. Mirant Pagbilao Corporation,44 where we ruled that
Section 112(A) of the NIRC is the applicable provision in determining the start of the two-year period for
claiming a refund/credit of unutilized input VAT, and that Sections 204(C) and 229 of the NIRC are inapplicable
as "both provisions apply only to instances of erroneous payment or illegal collection of internal revenue
taxes."45 We explained that:

The above proviso [Section 112 (A) of the NIRC] clearly provides in no uncertain terms that unutilized input
VAT payments not otherwise used for any internal revenue tax due the taxpayer must be claimed
within two years reckoned from the close of the taxable quarter when the relevant sales were made
pertaining to the input VAT regardless of whether said tax was paid or not. As the CA aptly puts it, albeit
it erroneously applied the aforequoted Sec. 112 (A), "[P]rescriptive period commences from the close of the
taxable quarter when the sales were made and not from the time the input VAT was paid nor from the time the
official receipt was issued." Thus, when a zero-rated VAT taxpayer pays its input VAT a year after the pertinent
transaction, said taxpayer only has a year to file a claim for refund or tax credit of the unutilized creditable input
VAT. The reckoning frame would always be the end of the quarter when the pertinent sales or transaction was
made, regardless when the input VAT was paid. Be that as it may, and given that the last creditable input VAT
due for the period covering the progress billing of September 6, 1996 is the third quarter of 1996 ending on
September 30, 1996, any claim for unutilized creditable input VAT refund or tax credit for said quarter
prescribed two years after September 30, 1996 or, to be precise, on September 30, 1998. Consequently,
MPC’s claim for refund or tax credit filed on December 10, 1999 had already prescribed.

Reckoning for prescriptive period under

Secs. 204(C) and 229 of the NIRC inapplicable

210
To be sure, MPC cannot avail itself of the provisions of either Sec. 204(C) or 229 of the NIRC which, for the
purpose of refund, prescribes a different starting point for the two-year prescriptive limit for the filing of a claim
therefor. Secs. 204(C) and 229 respectively provide:

Sec. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. – The
Commissioner may –

xxxx

(c) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the
value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his
discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value
upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in
writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or
penalty: Provided, however, That a return filed showing an overpayment shall be considered as a written claim
for credit or refund.

xxxx

Sec. 229. Recovery of Tax Erroneously or Illegally Collected. – No suit or proceeding shall be maintained in
any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or
illegally assessed or collected, or of any penalty claimed to have been collected without authority, of any sum
alleged to have been excessively or in any manner wrongfully collected without authority, or of any sum
alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has
been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such
tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of
payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided,
however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on
the face of the return upon which payment was made, such payment appears clearly to have been erroneously
paid.

Notably, the above provisions also set a two-year prescriptive period, reckoned from date of payment of the tax
or penalty, for the filing of a claim of refund or tax credit. Notably too, both provisions apply only to
instances of erroneous payment or illegal collection of internal revenue taxes.

MPC’s creditable input VAT not erroneously paid

For perspective, under Sec. 105 of the NIRC, creditable input VAT is an indirect tax which can be shifted or
passed on to the buyer, transferee, or lessee of the goods, properties, or services of the taxpayer. The fact that
the subsequent sale or transaction involves a wholly-tax exempt client, resulting in a zero-rated or effectively
zero-rated transaction, does not, standing alone, deprive the taxpayer of its right to a refund for any unutilized
creditable input VAT, albeit the erroneous, illegal, or wrongful payment angle does not enter the equation.

xxxx

Considering the foregoing discussion, it is clear that Sec. 112 (A) of the NIRC, providing a two-year
prescriptive period reckoned from the close of the taxable quarter when the relevant sales or
transactions were made pertaining to the creditable input VAT, applies to the instant case, and not to
the other actions which refer to erroneous payment of taxes.46 (Emphasis supplied.)

211
In view of the foregoing, we find that the CTA En Banc erroneously applied Sections 114(A) and 229 of the
NIRC in computing the two-year prescriptive period for claiming refund/credit of unutilized input VAT. To be
clear, Section 112 of the NIRC is the pertinent provision for the refund/credit of input VAT. Thus, the two-year
period should be reckoned from the close of the taxable quarter when the sales were made.

The administrative claim was timely filed

Bearing this in mind, we shall now proceed to determine whether the administrative claim was timely filed.

Relying on Article 13 of the Civil Code,47 which provides that a year is equivalent to 365 days, and taking into
account the fact that the year 2004 was a leap year, petitioner submits that the two-year period to file a claim
for tax refund/ credit for the period July 1, 2002 to September 30, 2002 expired on September 29, 2004.48

We do not agree.

In Commissioner of Internal Revenue v. Primetown Property Group, Inc.,49 we said that as between the Civil
Code, which provides that a year is equivalent to 365 days, and the Administrative Code of 1987, which states
that a year is composed of 12 calendar months, it is the latter that must prevail following the legal maxim, Lex
posteriori derogat priori.50 Thus:

Both Article 13 of the Civil Code and Section 31, Chapter VIII, Book I of the Administrative Code of 1987 deal
with the same subject matter – the computation of legal periods. Under the Civil Code, a year is equivalent to
365 days whether it be a regular year or a leap year. Under the Administrative Code of 1987, however, a year
is composed of 12 calendar months. Needless to state, under the Administrative Code of 1987, the number of
days is irrelevant.

There obviously exists a manifest incompatibility in the manner of

computing legal periods under the Civil Code and the Administrative Code of 1987. For this reason, we hold
that Section 31, Chapter VIII, Book I of the Administrative Code of 1987, being the more recent law, governs
the computation of legal periods. Lex posteriori derogat priori.

Applying Section 31, Chapter VIII, Book I of the Administrative Code of 1987 to this case, the two-year
prescriptive period (reckoned from the time respondent filed its final adjusted return on April 14, 1998)
consisted of 24 calendar months, computed as follows:

Year 1 1st calendar month
2nd calendar month
3rd calendar month
4th calendar month
5th calendar month
6th calendar month
7th calendar month
8th calendar month
9th calendar month
10th calendar month
11th calendar month
April 15, 1998 to May 14, 1998
May 15, 1998 to June 14, 1998
June 15, 1998 to July 14, 1998
July 15, 1998 to August 14, 1998
August 15, 1998 to September 14, 1998
September 15, 1998 to October 14, 1998
October 15, 1998 to November 14, 1998
November 15, 1998 to December 14, 1998
December 15, 1998 to January 14, 1999
January 15, 1999 to February 14, 1999
February 15, 1999 to March 14, 1999
212
 12th calendar month
Year 2 13th calendar month
14th calendar month
15th calendar month
16th calendar month
17th calendar month
18th calendar month
19th calendar month
20th calendar month
21st calendar month
22nd calendar month
23rd calendar month
24th calendar month
March 15, 1999 to April 14, 1999
April 15, 1999 to May 14, 1999
May 15, 1999 to June 14, 1999
June 15, 1999 to July 14, 1999
July 15, 1999 to August 14, 1999
August 15, 1999 to September 14, 1999
September 15, 1999 to October 14, 1999
October 15, 1999 to November 14, 1999
November 15, 1999 to December 14, 1999
December 15, 1999 to January 14, 2000
January 15, 2000 to February 14, 2000
February 15, 2000 to March 14, 2000
March 15, 2000 to April 14, 2000

We therefore hold that respondent's petition (filed on April 14, 2000) was filed on the last day of the 24th
calendar month from the day respondent filed its final adjusted return. Hence, it was filed within the
reglementary period.51

Applying this to the present case, the two-year period to file a claim for tax refund/credit for the period July 1,
2002 to September 30, 2002 expired on September 30, 2004. Hence, respondent’s administrative claim was
timely filed.

The filing of the judicial claim was premature

However, notwithstanding the timely filing of the administrative claim, we

are constrained to deny respondent’s claim for tax refund/credit for having been filed in violation of Section
112(D) of the NIRC, which provides that:

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

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. (Emphasis
supplied.)

Section 112(D) of the NIRC clearly provides that the CIR has "120 days, from the date of the submission of the
complete documents in support of the application [for tax refund/credit]," within which to grant or deny the
213
claim. In case of full or partial denial by the CIR, the taxpayer’s recourse is to file an appeal before the CTA
within 30 days from receipt of the decision of the CIR. However, if after the 120-day period the CIR fails to act
on the application for tax refund/credit, the remedy of the taxpayer is to appeal the inaction of the CIR to CTA
within 30 days.

In this case, the administrative and the judicial claims were simultaneously filed on September 30, 2004.
Obviously, respondent did not wait for the decision of the CIR or the lapse of the 120-day period. For this
reason, we find the filing of the judicial claim with the CTA premature.

Respondent’s assertion that the non-observance of the 120-day period is not fatal to the filing of a judicial claim
as long as both the administrative and the judicial claims are filed within the two-year prescriptive period52 has
no legal basis.

There is nothing in Section 112 of the NIRC to support respondent’s view. Subsection (A) of the said provision
states that "any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two
years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable to such sales." The phrase "within two (2)
years x x x apply for the issuance of a tax credit certificate or refund" refers to applications for refund/credit
filed with the CIR and not to appeals made to the CTA. This is apparent in the first paragraph of subsection (D)
of the same provision, which states that the CIR has "120 days from the submission of complete documents in
support of the application filed in accordance with Subsections (A) and (B)" within which to decide on the claim.

In fact, applying the two-year period to judicial claims would render nugatory Section 112(D) of the NIRC,
which already provides for a specific period within which a taxpayer should appeal the decision or inaction of
the CIR. The second paragraph of Section 112(D) of the NIRC envisions two scenarios: (1) when a decision is
issued by the CIR before the lapse of the 120-day period; and (2) when no decision is made after the 120-day
period. In both instances, the taxpayer has 30 days within which to file an appeal with the CTA. As we see it
then, the 120-day period is crucial in filing an appeal with the CTA.

With regard to Commissioner of Internal Revenue v. Victorias Milling, Co., Inc.53 relied upon by respondent, we
find the same inapplicable as the tax provision involved in that case is Section 306, now Section 229 of the
NIRC. And as already discussed, Section 229 does not apply to refunds/credits of input VAT, such as the
instant case.

In fine, the premature filing of respondent’s claim for refund/credit of input VAT before the CTA warrants a
dismissal inasmuch as no jurisdiction was acquired by the CTA.

WHEREFORE, the Petition is hereby GRANTED. The assailed July 30, 2008 Decision and the October 6,
2008 Resolution of the Court of Tax Appeals are hereby REVERSED and SET ASIDE. The Court of Tax
Appeals Second Division is DIRECTED to dismiss CTA Case No. 7065 for having been prematurely filed.

SO ORDERED.

DIGEST:

COMMISSIONER OF INTERNAL REVENUE vs. AICHI FORGING COMPANY OF ASIA, INC.- Tax Refund

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FACTS:

On September 30, 2004, Aichi Forging filed a claim for refund/credit of input VAT attributable to its zero-rated
sales for the period July 1, 2002 to September 30, 2002 with the CIR through the DOF One-Stop Shop. On the
same day, Aichi Forging filed a Petition for Review with the CTA for the same action. The BIR disputed the
claim and alleged that the same was filed beyond the two-year period given that 2004 was a leap year and
thus the claim should have been filed on September 29, 2004. The CIR also raised issues related to the
reckoning of the 2-year period and the simultaneous filing of the administrative and judicial claims.

ISSUES:

(1) Was the Petitioner’s administrative claim filed out of time?

(2) Was the filing of the judicial claim premature?

HELD:

(1) NO. The right to claim the refund must be reckoned from the “close of the taxable quarter when the sales
were made” – in this case September 30, 2004. The Court added that the rules under Sections 204 (C) and
229 as cross-referred to Section 114 do not apply as they only cover erroneous payments or illegal collections
of taxes which is not the case for refund of unutilized input VAT. Thus, the claim was filed on time even if 2004
was a leap year since the sanctioned method of counting is the number of months.

(2) YES. Section 112 mandates that the taxpayer filing the refund must either wait for the decision of the CIR
or the lapse of the 120-day period provided therein before filing its judicial claim. Failure to observe this rule is
fatal to a claim. Thus, Section 112 (A) was interpreted to refer only to claims filed with the CIR and not appeals
to the CTA given that the word used is “application”. Finally, the Court said that applying the 2-year period
even to judicial claims would render nugatory Section 112 (D) which already provides for a specific period to
appeal to the CTA --- i.e., (a) within 30 days after a decision within the 120-day period and (b) upon expiry of
the 120-day without a decision.

G.R. No. 181136 June 13, 2012

WESTERN MINDANAO POWER CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

SERENO, J.:

This is a Petition for Review under Rule 45 seeking the reversal of the 15 November 2007 Decision and 9
January 2008 Resolution of the Court of Tax Appeals (CTA) En Banc in C.T.A. EB No. 272,1 which upheld the
Court of Tax Appeals Second Division’s denial of the Petition for refund of unutilized input Value Added Tax
(VAT) on the ground that the Official Receipts of petitioner Western Mindanao Power Corporation (WMPC) did
not contain the phrase "zero-rated," as required under Revenue Regulations No. 7-95 (RR 7-95).

Petitioner WMPC is a domestic corporation engaged in the production and sale of electricity. It is registered
with the Bureau of Internal Revenue (BIR) as a VAT taxpayer. Petitioner alleges that it sells electricity solely to
the National Power Corporation (NPC), which is in turn exempt from the payment of all forms of taxes, duties,
215
fees and imposts, pursuant to Section 132 of Republic Act (R.A.) No. 6395 (An Act Revising the Charter of the
National Power Corporation). In view thereof and pursuant to Section 108(B) (3) of the National Internal
Revenue Code (NIRC),3 petitioner’s power generation services to NPC is zero-rated.

Under Section 112(A) of the NIRC,4 a VAT-registered taxpayer may, within two years after the close of the
taxable quarter, apply for the issuance of a tax credit or refund of creditable input tax due or paid and
attributable to zero-rated or effectively zero-rated sales. Hence, on 20 June 2000 and 13 June 2001, WMPC
filed with the Commissioner of Internal Revenue (CIR) applications for a tax credit certificate of its input VAT
covering the taxable
3rd and 4th quarters of 1999 (amounting to ₱ 3,675,026.67)5 and all the taxable quarters of 2000 (amounting
to ₱ 5,649,256.81).6

Noting that the CIR was not acting on its application, and fearing that its claim would soon be barred by
prescription, WMPC on 28 September 2001 filed with the Court of Tax Appeals (CTA) in Division a Petition for
Review docketed as C.T.A. Case No. 6335, seeking refund/tax credit certificates for the total amount of ₱
9,324,283.30.

The CIR filed its Comment on the CTA Petition, arguing that WMPC was not entitled to the latter’s claim for a
tax refund in view of its failure to comply with the invoicing requirements under Section 113 of the NIRC in
relation to Section 4.108-1 of RR 7-95, which provides:

SECTION 4.108-1. Invoicing Requirements — All VAT-registered persons shall, for every sale or lease of
goods or properties or services, issue duly registered receipts or sales or commercial invoices which must
show:

1. the name, TIN and address of seller;

2. date of transaction;

3. quantity, unit cost and description of merchandise or nature of service;

4. the name, TIN, business style, if any, and address of the VAT-registered purchaser, customer or
client;

5. the word "zero rated" imprinted on the invoice covering zero-rated sales; and

6. the invoice value or consideration.

In the case of sale of real property subject to VAT and where the zonal or market value is higher than the
actual consideration, the VAT shall be separately indicated in the invoice or receipt.

Only VAT-registered persons are required to print their TIN followed by the word "VAT" in their invoice or
receipts and this shall be considered as a "VAT Invoice." All purchases covered by invoices other than "VAT"
Invoice" shall not give rise to any input tax.

If the taxable person is also engaged in exempt operations, he should issue separate invoices or receipts for
the taxable and exempt operations. A "VAT Invoice" shall be issued only for sales of goods, properties or
services subject to VAT imposed in Sections 100 and 102 of the Code.

The invoice or receipt shall be prepared at least in duplicate, the original to be given to the buyer and the
duplicate to be retained by the seller as part of his accounting records. (Underscoring supplied.)

216
WMPC countered that the invoicing and accounting requirements laid down in RR 7-95 were merely
"compliance requirements," which were not indispensable to establish the claim for refund of excess and
unutilized input VAT. Also, Section 113 of the NIRC prevailing at the time the sales transactions were made did
not expressly state that failure to comply with all the invoicing requirements would result in the disallowance of
a tax credit refund. 7 The express requirement – that "the term ‘zero-rated sale’ shall be written or printed
prominently" on the VAT invoice or official receipt for sales subject to zero percent (0%) VAT – appeared in
Section 113 of the NIRC only after it was amended by Section 11 of R.A. 9337.8 This amendment cannot be
applied retroactively, considering that it took effect only on 1 July 2005, or long after petitioner filed its claim for
a tax refund, and considering further that the RR 7-95 is punitive in nature. Further, since there was no
statutory requirement for imprinting the phrase "zero-rated" on official receipts prior to 1 July 2005, the RR 7-95
constituted undue expansion of the scope of the legislation it sought to implement.

CTA Second Division Decision

On 1 September 2006, the CTA Second Division dismissed9 the Petition. It held that while petitioner submitted
in evidence its Quarterly VAT Returns for the periods applied for, "the same do not reflect any zero-rated or
effectively zero-rated sales allegedly incurred during said periods. The spaces provided for such amounts were
left blank, which only shows that there existed no zero-rated or effectively zero-rated sales for the 3rd and 4th
quarters of 1999 and the four quarters of 2000."10 Moreover, it found that petitioner’s VAT Invoices and Official
Receipts did not contain on their face the phrase "zero-rated," contrary to Section 4.108-1 of RR 7-95.

Petitioner moved for reconsideration, but the motion was denied by the CTA in Division in its Resolution dated
30 January 2007.11

CTA En Banc Decision

On 13 March 2007, WMPC appealed to the CTA En Banc, which on 15 November 2007 issued a Decision
dismissing the appeal and affirming the CTA ruling. The CTA En Banc held that the receipts and evidence
presented by petitioner failed to fully substantiate the existence of the latter’s effectively zero-rated sales to
NPC for the 3rd and 4th quarters of taxable year 1999 and the four quarters of taxable year 2000. The CTA En
Banc quoted the CTA Second Division finding that the Quarterly VAT Returns that petitioner adduced in
evidence did not reflect any zero-rated or effectively zero-rated sales allegedly incurred during the said period,
to wit:

Petitioner submitted in evidence its Quarterly Value Added Tax Returns for the 3rd and 4th quarters of 1999
and the four quarters of 2000 to prove that it had duly reported the input taxes paid on its domestic purchases
of goods and services (Exhibits ‘E’ to ‘J’). However, a closer examination of the returns clearly shows that the
same do not reflect any zero-rated or effectively zero-rated sales allegedly incurred during the said periods.
The spaces provided for such amounts were left blank, which only shows that there existed no zero-rated or
effectively zero-rated sales for the 3rd and 4th quarters of 1999 and the four quarters of 2000.

In addition, the CTA En Banc noted that petitioner’s Official Receipts and VAT Invoices did not have the word
"zero-rated" imprinted/stamped thereon, contrary to the clear mandate of Section 4.108-1 of RR 7-95.

CTA Presiding Justice Ernesto Acosta filed a Concurring and Dissenting Opinion. Justice Acosta disagreed
with the majority’s view regarding the supposed mandatory requirement of imprinting the term "zero-rated" on
official receipts or invoices. He opined that Section 113 in relation to Section 23712 of the NIRC does not
require the imprinting of the phrase "zero-rated" on an invoice or official receipt for the document to be
considered valid for the purpose of claiming a refund or an issuance of a tax credit certificate. Hence, the
absence of the term "zero-rated" in an invoice or official receipt does not affect its admissibility or competency
as evidence in support of a refund claim. Also, assuming that stamping the term "zero-rated" on an invoice or
official receipt is a requirement of the current NIRC, the denial of a refund claim is not the imposable penalty
for failure to comply with that requirement.

217
Nevertheless, Justice Acosta agreed with the "decision to deny the claim due to petitioner’s failure to prove the
input taxes it paid on its domestic purchases of goods and services during the period involved."

WMPC filed a Motion for Reconsideration, which was denied by the CTA En Banc in a Resolution dated 9
January 2008.13

Hence, the present Petition.

Issue

Whether the CTA En Banc seriously erred in dismissing the claim of petitioner for a refund or tax credit on
input tax on the ground that the latter’s Official Receipts do not contain the phrase "zero-rated"

Our Ruling

We deny the Petition.

Being a derogation of the sovereign authority, a statute granting tax exemption is strictly construed against the
person or entity claiming the exemption. When based on such statute, a claim for tax refund partakes of the
nature of an exemption. Hence, the same rule of strict interpretation against the taxpayer-claimant applies to
the claim.14

In the present case, petitioner’s claim for a refund or tax credit of input VAT is anchored on Section 112(A) of
the NIRC, viz:

Section 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 of 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.

Thus, a taxpayer engaged in zero-rated or effectively zero-rated sale may apply for the issuance of a tax credit
certificate, or refund of creditable input tax due or paid, attributable to the sale.

In a claim for tax refund or tax credit, the applicant must prove not only entitlement to the grant of the claim
under substantive law. It must also show satisfaction of all the documentary and evidentiary requirements for
an administrative claim for a refund or tax credit.15 Hence, the mere fact that petitioner’s application for zero-
rating has been approved by the CIR does not, by itself, justify the grant of a refund or tax credit. The taxpayer
claiming the refund must further comply with the invoicing and accounting requirements mandated by the
NIRC, as well as by revenue regulations implementing them. 16

Under the NIRC, a creditable input tax should be evidenced by a VAT invoice or official receipt,17 which may
only be considered as such when it complies with the requirements of RR 7-95, particularly Section 4.108-1.
This section requires, among others, that "(i)f the sale is subject to zero percent (0%) value-added tax, the
term ‘zero-rated sale’ shall be written or printed prominently on the invoice or receipt."
218
We are not persuaded by petitioner’s argument that RR 7-95 constitutes undue expansion of the scope of the
legislation it seeks to implement on the ground that the statutory requirement for imprinting the phrase "zero-
rated" on VAT official receipts appears only in Republic Act No. 9337. This law took effect on 1 July 2005, or
long after petitioner had filed its claim for a refund.1âwphi1

RR 7-95, which took effect on 1 January 1996, proceeds from the rule-making authority granted to the
Secretary of Finance by the NIRC for the efficient enforcement of the same Tax Code and its amendments. In
Panasonic Communications Imaging Corporation of the Philippines v. Commissioner of Internal Revenue,18
we ruled that this provision is "reasonable and is in accord with the efficient collection of VAT from the covered
sales of goods and services." Moreover, we have held in Kepco Philippines Corporation v. Commissioner of
Internal Revenue19 that the subsequent incorporation of Section 4.108-1 of RR 7-95 in Section 113 (B) (2) (c)
of R.A. 9337 actually confirmed the validity of the imprinting requirement on VAT invoices or official receipts –
a case falling under the principle of legislative approval of administrative interpretation by reenactment.

In fact, this Court has consistently held as fatal the failure to print the word "zero-rated" on the VAT invoices or
official receipts in claims for a refund or credit of input VAT on zero-rated sales, even if the claims were made
prior to the effectivity of R.A. 9337.20 Clearly then, the present Petition must be denied.

In addition, it is notable that the CTA Second Division and the CTA En Banc, including Presiding Justice
Acosta in his Concurring and Dissenting Opinion, both found that petitioner failed to sufficiently substantiate
the existence of its effectively zero-rated sales to NPC for the 3rd and 4th quarters of taxable year 1999, as
well as all four quarters of taxable year 2000. It must also be noted that the CTA is a highly specialized court
dedicated exclusively to the study and consideration of revenue-related problems, in which it has necessarily
developed an expertise.21 Hence, its factual findings, when supported by substantial evidence, will not be
disturbed on appeal.22 We find no sufficient reason to exempt the present case from this general rule.

WHEREFORE, premises considered, we DENY the Petition and AFFIRM the Decision dated 15 November
2007 and Resolution dated 9 January 2008 of the Court of Tax Appeals En Banc in CTA EB No. 272.

SO ORDERED.

DIGEST:

Facts:

WMPC, engaged in the production and sale of electricity, is registered as a VAT taxpayer. It sells electricity
solely to the National Power Corporation (NPC), which is in turn exempt from the payment of all forms of taxes,
duties, fees and imposts, pursuant to its charter. Also, pursuant to Section 108(B) (3) of the NIRC, WMPC’s
power generation services to NPC is zero-rated. Thus, WMPC tried to file an application for tax credit
certificates on input VAT paid to its zero-rated sales. However, its application was denied because of WMPC’s
failure to comply with the invoicing requirements under Section 113 of the NIRC in relation to Sec 4.108-1 of
RR 7-95.

Issue: W/N denial of application for tax refund or tax credit on the ground that the taxpayer’s Official Receipts
do not contain the phrase “zero-rated” is proper

Yes. Failure to indicate the term zero-rated in the invoice or receipt for zero-rated transactions is fatal.
219
In a claim for tax refund or tax credit, the taxpayer must prove not only entitled to the grant of claim under
substantive law, but must also show satisfaction of all the documentary and evidentiary requirements for an
administrative claim of a refund or tax credit. Hence, the mere fact that the applicant’s zero-rating has been
approved by the CIR does not, by itself, justify the grant of a refund or tax credit. The taxpayer must further
comply with the invoicing and accounting requirements mandated by the NIRC, as well as the revenue
regulations implementing them.

Under the NIRC, a creditable input tax should be evidenced by a VAT receipt or Official Receipt, which may
only be considered as such when it complies with the requirements of RR 7-95 particulary Section 4.108-1
thereof. This section requires, among others, that if the sale is subject to zero-percent VAT, the term zero-rated
sale shall be written or printed prominently on the invoice or receipt

G.R. No. 187485 February 12, 2013

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
SAN ROQUE POWER CORPORATION, Respondent.

X----------------------------X

G.R. No. 196113

TAGANITO MINING CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

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

G.R. No. 197156

PHILEX MINING CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

CARPIO, J.:

The Cases

G.R. No. 187485 is a petitiOn for review1 assailing the Decision2 promulgated on 25 March 2009 as well as the
Resolution3 promulgated on 24 April 2009 by the Court of Tax Appeals En Banc (CTA EB) in CTA EB No. 408.
The CTA EB affirmed the 29 November 2007 Amended Decision4 as well as the 11 July 2008 Resolution5 of
the Second Division of the Court of Tax Appeals (CTA Second Division) in CTA Case No. 6647. The CTA
220
Second Division ordered the Commissioner of Internal Revenue (Commissioner) to refund or issue a tax credit
for P483,797,599.65 to San Roque Power Corporation (San Roque) for unutilized input value-added tax (VAT)
on purchases of capital goods and services for the taxable year 2001.

G.R. No. 196113 is a petition for review6 assailing the Decision7 promulgated on 8 December 2010 as well as
the Resolution8 promulgated on 14 March 2011 by the CTA EB in CTA EB No. 624. In its Decision, the CTA
EB reversed the 8 January 2010 Decision9 as well as the 7 April 2010 Resolution10of the CTA Second Division
and granted the CIR’s petition for review in CTA Case No. 7574. The CTA EB dismissed, for having been
prematurely filed, Taganito Mining Corporation’s (Taganito) judicial claim for P8,365,664.38 tax refund or
credit.

G.R. No. 197156 is a petition for review11 assailing the Decision12promulgated on 3 December 2010 as well as
the Resolution13 promulgated on 17 May 2011 by the CTA EB in CTA EB No. 569. The CTA EB affirmed the
20 July 2009 Decision as well as the 10 November 2009 Resolution of the CTA Second Division in CTA Case
No. 7687. The CTA Second Division denied, due to prescription, Philex Mining Corporation’s (Philex) judicial
claim for P23,956,732.44 tax refund or credit.

On 3 August 2011, the Second Division of this Court resolved14 to consolidate G.R. No. 197156 with G.R. No.
196113, which were pending in the same Division, and with G.R. No. 187485, which was assigned to the
Court En Banc. The Second Division also resolved to refer G.R. Nos. 197156 and 196113 to the Court En
Banc, where G.R. No. 187485, the lower-numbered case, was assigned.

G.R. No. 187485

CIR v. San Roque Power Corporation

The Facts

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

[CIR] is the duly appointed Commissioner of Internal Revenue, empowered, among others, to act upon and
approve claims for refund or tax credit, with office at the Bureau of Internal Revenue ("BIR") National Office
Building, Diliman, Quezon City.

[San Roque] is a domestic corporation duly organized and existing under and by virtue of the laws of the
Philippines with principal office at Barangay San Roque, San Manuel, Pangasinan. It was incorporated in
October 1997 to design, construct, erect, assemble, own, commission and operate power-generating plants
and related facilities pursuant to and under contract with the Government of the Republic of the Philippines, or
any subdivision, instrumentality or agency thereof, or any governmentowned or controlled corporation, or other
entity engaged in the development, supply, or distribution of energy.

As a seller of services, [San Roque] is duly registered with the BIR with TIN/VAT No. 005-017-501. It is
likewise registered with the Board of Investments ("BOI") on a preferred pioneer status, to engage in the
design, construction, erection, assembly, as well as to own, commission, and operate electric power-
generating plants and related activities, for which it was issued Certificate of Registration No. 97-356 on
February 11, 1998.

On October 11, 1997, [San Roque] entered into a Power Purchase Agreement ("PPA") with the National Power
Corporation ("NPC") to develop hydro-potential of the Lower Agno River and generate additional power and
energy for the Luzon Power Grid, by building the San Roque Multi-Purpose Project located in San Manuel,
Pangasinan. The PPA provides, among others, that [San Roque] shall be responsible for the design,
construction, installation, completion, testing and commissioning of the Power Station and shall operate and
maintain the same, subject to NPC instructions. During the cooperation period of twenty-five (25) years

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commencing from the completion date of the Power Station, NPC will take and pay for all electricity available
from the Power Station.

On the construction and development of the San Roque Multi- Purpose Project which comprises of the dam,
spillway and power plant, [San Roque] allegedly incurred, excess input VAT in the amount of ₱559,709,337.54
for taxable year 2001 which it declared in its Quarterly VAT Returns filed for the same year. [San Roque] duly
filed with the BIR separate claims for refund, in the total amount of ₱559,709,337.54, representing unutilized
input taxes as declared in its VAT returns for taxable year 2001.

However, on March 28, 2003, [San Roque] filed amended Quarterly VAT Returns for the year 2001 since it
increased its unutilized input VAT to the amount of ₱560,200,283.14. Consequently, [San Roque] filed with the
BIR on even date, separate amended claims for refund in the aggregate amount of ₱560,200,283.14.

[CIR’s] inaction on the subject claims led to the filing by [San Roque] of the Petition for Review with the Court
[of Tax Appeals] in Division on April 10, 2003.

Trial of the case ensued and on July 20, 2005, the case was submitted for decision.15

The Court of Tax Appeals’ Ruling: Division

The CTA Second Division initially denied San Roque’s claim. In its Decision16 dated 8 March 2006, it cited the
following as bases for the denial of San Roque’s claim: lack of recorded zero-rated or effectively zero-rated
sales; failure to submit documents specifically identifying the purchased goods/services related to the claimed
input VAT which were included in its Property, Plant and Equipment account; and failure to prove that the
related construction costs were capitalized in its books of account and subjected to depreciation.

The CTA Second Division required San Roque to show that it complied with the following requirements of
Section 112(B) of Republic Act No. 8424 (RA 8424)17 to be entitled to a tax refund or credit of input VAT
attributable to capital goods imported or locally purchased: (1) it is a VAT-registered entity; (2) its input taxes
claimed were paid on capital goods duly supported by VAT invoices and/or official receipts; (3) it did not offset
or apply the claimed input VAT payments on capital goods against any output VAT liability; and (4) its claim for
refund was filed within the two-year prescriptive period both in the administrative and judicial levels.

The CTA Second Division found that San Roque complied with the first, third, and fourth requirements, thus:

The fact that [San Roque] is a VAT registered entity is admitted (par. 4, Facts Admitted, Joint Stipulation of
Facts, Records, p. 157). It was also established that the instant claim of ₱560,200,823.14 is already net of the
₱11,509.09 output tax declared by [San Roque] in its amended VAT return for the first quarter of 2001.
Moreover, the entire amount of ₱560,200,823.14 was deducted by [San Roque] from the total available input
tax reflected in its amended VAT returns for the last two quarters of 2001 and first two quarters of 2002
(Exhibits M-6, O-6, OO-1 & QQ-1). This means that the claimed input taxes of ₱560,200,823.14 did not form
part of the excess input taxes of ₱83,692,257.83, as of the second quarter of 2002 that was to be carried-over
to the succeeding quarters. Further, [San Roque’s] claim for refund/tax credit certificate of excess input VAT
was filed within the two-year prescriptive period reckoned from the dates of filing of the corresponding quarterly
VAT returns.

For the first, second, third, and fourth quarters of 2001, [San Roque] filed its VAT returns on April 25, 2001,
July 25, 2001, October 23, 2001 and January 24, 2002, respectively (Exhibits "H, J, L, and N"). These returns
were all subsequently amended on March 28, 2003 (Exhibits "I, K, M, and O"). On the other hand, [San Roque]
originally filed its separate claims for refund on July 10, 2001, October 10, 2001, February 21, 2002, and May
9, 2002 for the first, second, third, and fourth quarters of 2001, respectively, (Exhibits "EE, FF, GG, and HH")
and subsequently filed amended claims for all quarters on March 28, 2003 (Exhibits "II, JJ, KK, and LL").
Moreover, the Petition for Review was filed on April 10, 2003. Counting from the respective dates when [San

222
Roque] originally filed its VAT returns for the first, second, third and fourth quarters of 2001, the administrative
claims for refund (original and amended) and the Petition for Review fall within the two-year prescriptive
period.18

San Roque filed a Motion for New Trial and/or Reconsideration on 7 April 2006. In its 29 November 2007
Amended Decision,19 the CTA Second Division found legal basis to partially grant San Roque’s claim. The
CTA Second Division ordered the Commissioner to refund or issue a tax credit in favor of San Roque in the
amount of ₱483,797,599.65, which represents San Roque’s unutilized input VAT on its purchases of capital
goods and services for the taxable year 2001. The CTA based the adjustment in the amount on the findings of
the independent certified public accountant. The following reasons were cited for the disallowed claims:
erroneous computation; failure to ascertain whether the related purchases are in the nature of capital goods;
and the purchases pertain to capital goods. Moreover, the reduction of claims was based on the following: the
difference between San Roque’s claim and that appearing on its books; the official receipts covering the
claimed input VAT on purchases of local services are not within the period of the claim; and the amount of VAT
cannot be determined from the submitted official receipts and invoices. The CTA Second Division denied San
Roque’s claim for refund or tax credit of its unutilized input VAT attributable to its zero-rated or effectively zero-
rated sales because San Roque had no record of such sales for the four quarters of 2001.

The dispositive portion of the CTA Second Division’s 29 November 2007 Amended Decision reads:

WHEREFORE, [San Roque’s] "Motion for New Trial and/or Reconsideration" is hereby PARTIALLY GRANTED
and this Court’s Decision promulgated on March 8, 2006 in the instant case is hereby MODIFIED.

Accordingly, [the CIR] is hereby ORDERED to REFUND or in the alternative, to ISSUE A TAX CREDIT
CERTIFICATE in favor of [San Roque] in the reduced amount of Four Hundred Eighty Three Million Seven
Hundred Ninety Seven Thousand Five Hundred Ninety Nine Pesos and Sixty Five Centavos
(₱483,797,599.65) representing unutilized input VAT on purchases of capital goods and services for the
taxable year 2001.

SO ORDERED.20

The Commissioner filed a Motion for Partial Reconsideration on 20 December 2007. The CTA Second Division
issued a Resolution dated 11 July 2008 which denied the CIR’s motion for lack of merit.

The Court of Tax Appeals’ Ruling: En Banc

The Commissioner filed a Petition for Review before the CTA EB praying for the denial of San Roque’s claim
for refund or tax credit in its entirety as well as for the setting aside of the 29 November 2007 Amended
Decision and the 11 July 2008 Resolution in CTA Case No. 6647.

The CTA EB dismissed the CIR’s petition for review and affirmed the challenged decision and resolution.

The CTA EB cited Commissioner of Internal Revenue v. Toledo Power, Inc.21 and Revenue Memorandum
Circular No. 49-03,22 as its bases for ruling that San Roque’s judicial claim was not prematurely filed. The
pertinent portions of the Decision state:

More importantly, the Court En Banc has squarely and exhaustively ruled on this issue in this wise:

It is true that Section 112(D) of the abovementioned provision applies to the present case. However,
what the petitioner failed to consider is Section 112(A) of the same provision. The respondent is also
covered by the two (2) year prescriptive period. We have repeatedly held that the claim for refund with the BIR
and the subsequent appeal to the Court of Tax Appeals must be filed within the two-year period.

223
Accordingly, the Supreme Court held in the case of Atlas Consolidated Mining and Development Corporation
vs. Commissioner of Internal Revenue that the two-year prescriptive period for filing a claim for input tax is
reckoned from the date of the filing of the quarterly VAT return and payment of the tax due. If the said period
is about to expire but the BIR has not yet acted on the application for refund, the taxpayer may
interpose a petition for review with this Court within the two year period.

In the case of Gibbs vs. Collector, the Supreme Court held that if, however, the Collector (now Commissioner)
takes time in deciding the claim, and the period of two years is about to end, the suit or proceeding must be
started in the Court of Tax Appeals before the end of the two-year period without awaiting the decision of the
Collector.

Furthermore, in the case of Commissioner of Customs and Commissioner of Internal Revenue vs. The
Honorable Court of Tax Appeals and Planters Products, Inc., the Supreme Court held that the taxpayer
need not wait indefinitely for a decision or ruling which may or may not be forthcoming and which he
has no legal right to expect. It is disheartening enough to a taxpayer to keep him waiting for an indefinite
period of time for a ruling or decision of the Collector (now Commissioner) of Internal Revenue on his claim for
refund. It would make matters more exasperating for the taxpayer if we were to close the doors of the courts of
justice for such a relief until after the Collector (now Commissioner) of Internal Revenue, would have, at his
personal convenience, given his go signal.

This Court ruled in several cases that once the petition is filed, the Court has already acquired jurisdiction over
the claims and the Court is not bound to wait indefinitely for no reason for whatever action respondent (herein
petitioner) may take. At stake are claims for refund and unlike disputed assessments, no decision of
respondent (herein petitioner) is required before one can go to this Court. (Emphasis supplied and
citations omitted)

Lastly, it is apparent from the following provisions of Revenue Memorandum Circular No. 49-03 dated August
18, 2003, that [the CIR] knows that claims for VAT refund or tax credit filed with the Court [of Tax Appeals] can
proceed simultaneously with the ones filed with the BIR and that taxpayers need not wait for the lapse of the
subject 120-day period, to wit:

In response to [the] request of selected taxpayers for adoption of procedures in handling refund cases that are
aligned to the statutory requirements that refund cases should be elevated to the Court of Tax Appeals before
the lapse of the period prescribed by law, certain provisions of RMC No. 42-2003 are hereby amended and
new provisions are added thereto.

In consonance therewith, the following amendments are being introduced to RMC No. 42-2003, to wit:

I.) A-17 of Revenue Memorandum Circular No. 42-2003 is hereby revised to read as follows:

In cases where the taxpayer has filed a "Petition for Review" with the Court of Tax Appeals involving a
claim for refund/TCC that is pending at the administrative agency (Bureau of Internal Revenue or OSS-
DOF), the administrative agency and the tax court may act on the case separately. While the case is
pending in the tax court and at the same time is still under process by the administrative agency, the litigation
lawyer of the BIR, upon receipt of the summons from the tax court, shall request from the head of the
investigating/processing office for the docket containing certified true copies of all the documents pertinent to
the claim. The docket shall be presented to the court as evidence for the BIR in its defense on the tax
credit/refund case filed by the taxpayer. In the meantime, the investigating/processing office of the
administrative agency shall continue processing the refund/TCC case until such time that a final decision has
been reached by either the CTA or the administrative agency.

If the CTA is able to release its decision ahead of the evaluation of the administrative agency, the latter
shall cease from processing the claim. On the other hand, if the administrative agency is able to process the

224
claim of the taxpayer ahead of the CTA and the taxpayer is amenable to the findings thereof, the concerned
taxpayer must file a motion to withdraw the claim with the CTA.23 (Emphasis supplied)

G.R. No. 196113

Taganito Mining Corporation v. CIR

The Facts

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

Petitioner, Taganito Mining Corporation, is a corporation duly organized and existing under and by virtue of the
laws of the Philippines, with principal office at 4th Floor, Solid Mills Building, De La Rosa St., Lega[s]pi Village,
Makati City. It is duly registered with the Securities and Exchange Commission with Certificate of Registration
No. 138682 issued on March 4, 1987 with the following primary purpose:

To carry on the business, for itself and for others, of mining lode and/or placer mining, developing, exploiting,
extracting, milling, concentrating, converting, smelting, treating, refining, preparing for market, manufacturing,
buying, selling, exchanging, shipping, transporting, and otherwise producing and dealing in nickel, chromite,
cobalt, gold, silver, copper, lead, zinc, brass, iron, steel, limestone, and all kinds of ores, metals and their by-
products and which by-products thereof of every kind and description and by whatsoever process the same
can be or may hereafter be produced, and generally and without limit as to amount, to buy, sell, locate,
exchange, lease, acquire and deal in lands, mines, and mineral rights and claims and to conduct all business
appertaining thereto, to purchase, locate, lease or otherwise acquire, mining claims and rights, timber rights,
water rights, concessions and mines, buildings, dwellings, plants machinery, spare parts, tools and other
properties whatsoever which this corporation may from time to time find to be to its advantage to mine lands,
and to explore, work, exercise, develop or turn to account the same, and to acquire, develop and utilize water
rights in such manner as may be authorized or permitted by law; to purchase, hire, make, construct or
otherwise, acquire, provide, maintain, equip, alter, erect, improve, repair, manage, work and operate private
roads, barges, vessels, aircraft and vehicles, private telegraph and telephone lines, and other communication
media, as may be needed by the corporation for its own purpose, and to purchase, import, construct, machine,
fabricate, or otherwise acquire, and maintain and operate bridges, piers, wharves, wells, reservoirs, plumes,
watercourses, waterworks, aqueducts, shafts, tunnels, furnaces, cook ovens, crushing works, gasworks,
electric lights and power plants and compressed air plants, chemical works of all kinds, concentrators,
smelters, smelting plants, and refineries, matting plants, warehouses, workshops, factories, dwelling houses,
stores, hotels or other buildings, engines, machinery, spare parts, tools, implements and other works,
conveniences and properties of any description in connection with or which may be directly or indirectly
conducive to any of the objects of the corporation, and to contribute to, subsidize or otherwise aid or take part
in any operations;

and is a VAT-registered entity, with Certificate of Registration (BIR Form No. 2303) No. OCN 8RC0000017494.
Likewise, [Taganito] is registered with the Board of Investments (BOI) as an exporter of beneficiated nickel
silicate and chromite ores, with BOI Certificate of Registration No. EP-88-306.

Respondent, on the other hand, is the duly appointed Commissioner of Internal Revenue vested with authority
to exercise the functions of the said office, including inter alia, the power to decide refunds of internal revenue
taxes, fees and other charges, penalties imposed in relation thereto, or other matters arising under the National
Internal Revenue Code (NIRC) or other laws administered by Bureau of Internal Revenue (BIR) under Section
4 of the NIRC. He holds office at the BIR National Office Building, Diliman, Quezon City.

[Taganito] filed all its Monthly VAT Declarations and Quarterly Vat Returns for the period January 1, 2005 to
December 31, 2005. For easy reference, a summary of the filing dates of the original and amended Quarterly
VAT Returns for taxable year 2005 of [Taganito] is as follows:

225
 Exhibit(s) Quarter Nature of Mode of filing Filing Date
the Return
L to L-4 1st Original Electronic April 15, 2005
M to M-3 Amended Electronic July 20, 2005
N to N-4 Amended Electronic October 18, 2006
Q to Q-3 2nd Original Electronic July 20, 2005
R to R-4 Amended Electronic October 18, 2006
U to U-4 3rd Original Electronic October 19, 2005
V to V-4 Amended Electronic October 18, 2006
Y to Y-4 4th Original Electronic January 20, 2006
Z to Z-4 Amended Electronic October 18, 2006

As can be gleaned from its amended Quarterly VAT Returns, [Taganito] reported zero-rated sales amounting
to P1,446,854,034.68; input VAT on its domestic purchases and importations of goods (other than capital
goods) and services amounting to P2,314,730.43; and input VAT on its domestic purchases and importations
of capital goods amounting to P6,050,933.95, the details of which are summarized as follows:

Period Zero-Rated Sales Input VAT on Input VAT on Total Input VAT
Covered Domestic Domestic
Purchases and Purchases and
Importations Importations
of Goods and of Capital
Services Goods
01/01/05 - P551,179,871.58 P1,491,880.56 P239,803.22 P1,731,683.78
03/31/05
04/01/05 - 64,677,530.78 204,364.17 5,811,130.73 6,015,494.90
06/30/05
07/01/05 - 480,784,287.30 144,887.67 - 144,887.67
09/30/05
10/01/05 - 350,212,345.02 473,598.03 - 473,598.03
12/31/05
TOTAL P1,446,854,034.68 P2,314,730.43 P6,050,933.95 P8,365,664.38

On November 14, 2006, [Taganito] filed with [the CIR], through BIR’s Large Taxpayers Audit and Investigation
Division II (LTAID II), a letter dated November 13, 2006 claiming a tax credit/refund of its supposed input VAT
amounting to ₱8,365,664.38 for the period covering January 1, 2004 to December 31, 2004. On the same
date, [Taganito] likewise filed an Application for Tax Credits/Refunds for the period covering January 1, 2005 to
December 31, 2005 for the same amount.

On November 29, 2006, [Taganito] sent again another letter dated November 29, 2004 to [the CIR], to correct
the period of the above claim for tax credit/refund in the said amount of ₱8,365,664.38 as actually referring to
the period covering January 1, 2005 to December 31, 2005.

As the statutory period within which to file a claim for refund for said input VAT is about to lapse without action
on the part of the [CIR], [Taganito] filed the instant Petition for Review on February 17, 2007.

226
In his Answer filed on March 28, 2007, [the CIR] interposes the following defenses:

4. [Taganito’s] alleged claim for refund is subject to administrative investigation/examination by the

Bureau of Internal Revenue (BIR);

5. The amount of ₱8,365,664.38 being claimed by [Taganito] as alleged unutilized input VAT on
domestic purchases of goods and services and on importation of capital goods for the period January
1, 2005 to December 31, 2005 is not properly documented;

6. [Taganito] must prove that it has complied with the provisions of Sections 112 (A) and (D) and 229 of
the National Internal Revenue Code of 1997 (1997 Tax Code) on the prescriptive period for claiming tax
refund/credit;

7. Proof of compliance with the prescribed checklist of requirements to be submitted involving claim for
VAT refund pursuant to Revenue Memorandum Order No. 53-98, otherwise there would be no
sufficient compliance with the filing of administrative claim for refund, the administrative claim
thereof being mere proforma, which is a condition sine qua non prior to the filing of judicial
claim in accordance with the provision of Section 229 of the 1997 Tax Code. Further, Section 112 (D)
of the Tax Code, as amended, requires the submission of complete documents in support of the
application filed with the BIR before the 120-day audit period shall apply, and before the taxpayer
could avail of judicial remedies as provided for in the law. Hence, [Taganito’s] failure to submit
proof of compliance with the above-stated requirements warrants immediate dismissal of the petition for
review.

8. [Taganito] must prove that it has complied with the invoicing requirements mentioned in Sections 110
and 113 of the 1997 Tax Code, as amended, in relation to provisions of Revenue Regulations No. 7-95.

9. In an action for refund/credit, the burden of proof is on the taxpayer to establish its right to refund,
and failure to sustain the burden is fatal to the claim for refund/credit (Asiatic Petroleum Co. vs.
Llanes, 49 Phil. 466 cited in Collector of Internal Revenue vs. Manila Jockey Club, Inc., 98 Phil.
670);

10. Claims for refund are construed strictly against the claimant for the same partake the nature of
exemption from taxation (Commissioner of Internal Revenue vs. Ledesma, 31 SCRA 95) and as
such, they are looked upon with disfavor (Western Minolco Corp. vs. Commissioner of Internal
Revenue, 124 SCRA 1211).

SPECIAL AND AFFIRMATIVE DEFENSES

11. The Court of Tax Appeals has no jurisdiction to entertain the instant petition for review for failure on the
part of [Taganito] to comply with the provision of Section 112 (D) of the 1997 Tax Code which provides, thus:

Section 112. Refunds or Tax Credits of Input Tax. –

xxx xxx xxx

(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 (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 cases of full or partial denial 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
227
the receipt of the decision denying the claim or after the expiration of the one hundred twenty
dayperiod, appeal the decision or the unacted claim with the Court of Tax Appeals. (Emphasis supplied.)

12. As stated, [Taganito] filed the administrative claim for refund with the Bureau of Internal Revenue on
November 14, 2006. Subsequently on February 14, 2007, the instant petition was filed. Obviously the 120 days
given to the Commissioner to decide on the claim has not yet lapsed when the petition was filed. The petition
was prematurely filed, hence it must be dismissed for lack of jurisdiction.

During trial, [Taganito] presented testimonial and documentary evidence primarily aimed at proving its
supposed entitlement to the refund in the amount of ₱8,365,664.38, representing input taxes for the period
covering January 1, 2005 to December 31, 2005. [The CIR], on the other hand, opted not to present evidence.
Thus, in the Resolution promulgated on January 22, 2009, this case was submitted for decision as of such
date, considering [Taganito’s] "Memorandum" filed on January 19, 2009 and [the CIR’s] "Memorandum" filed
on December 19, 2008.24

The Court of Tax Appeals’ Ruling: Division

The CTA Second Division partially granted Taganito’s claim. In its Decision25 dated 8 January 2010, the CTA
Second Division found that Taganito complied with the requirements of Section 112(A) of RA 8424, as
amended, to be entitled to a tax refund or credit of input VAT attributable to zero-rated or effectively zero-rated
sales.26

The pertinent portions of the CTA Second Division’s Decision read:

Finally, records show that [Taganito’s] administrative claim filed on November 14, 2006, which was amended
on November 29, 2006, and the Petition for Review filed with this Court on February 14, 2007 are well within
the two-year prescriptive period, reckoned from March 31, 2005, June 30, 2005, September 30, 2005, and
December 31, 2005, respectively, the close of each taxable quarter covering the period January 1, 2005 to
December 31, 2005.

In fine, [Taganito] sufficiently proved that it is entitled to a tax credit certificate in the amount of ₱8,249,883.33
representing unutilized input VAT for the four taxable quarters of 2005.

WHEREFORE, premises considered, the instant Petition for Review is hereby PARTIALLY
GRANTED. Accordingly, [the CIR] is hereby ORDERED to REFUND to [Taganito] the amount of EIGHT
MILLION TWO HUNDRED FORTY NINE THOUSAND EIGHT HUNDRED EIGHTY THREE PESOS AND
THIRTY THREE CENTAVOS (P8,249,883.33) representing its unutilized input taxes attributable to zero-rated
sales from January 1, 2005 to December 31, 2005.

SO ORDERED.27

The Commissioner filed a Motion for Partial Reconsideration on 29 January 2010. Taganito, in turn, filed a
Comment/Opposition on the Motion for Partial Reconsideration on 15 February 2010.

In a Resolution28 dated 7 April 2010, the CTA Second Division denied the CIR’s motion. The CTA Second
Division ruled that the legislature did not intend that Section 112 (Refunds or Tax Credits of Input Tax) should
be read in isolation from Section 229 (Recovery of Tax Erroneously or Illegally Collected) or vice versa. The
CTA Second Division applied the mandatory statute of limitations in seeking judicial recourse prescribed under
Section 229 to claims for refund or tax credit under Section 112.

The Court of Tax Appeals’ Ruling: En Banc

228
On 29 April 2010, the Commissioner filed a Petition for Review before the CTA EB assailing the 8 January
2010 Decision and the 7 April 2010 Resolution in CTA Case No. 7574 and praying that Taganito’s entire claim
for refund be denied.

In its 8 December 2010 Decision,29 the CTA EB granted the CIR’s petition for review and reversed and set
aside the challenged decision and resolution.

The CTA EB declared that Section 112(A) and (B) of the 1997 Tax Code both set forth the reckoning of the
two-year prescriptive period for filing a claim for tax refund or credit over input VAT to be the close of the
taxable quarter when the sales were made. The CTA EB also relied on this Court’s rulings in the cases
of Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. (Aichi)30 and Commisioner of
Internal Revenue v. Mirant Pagbilao Corporation (Mirant).31 Both Aichi and Mirant ruled that the two-year
prescriptive period to file a refund for input VAT arising from zero-rated sales should be reckoned from the
close of the taxable quarter when the sales were made. Aichi further emphasized that the failure to await the
decision of the Commissioner or the lapse of 120-day period prescribed in Section 112(D) amounts to a
premature filing.

The CTA EB found that Taganito filed its administrative claim on 14 November 2006, which was well within the
period prescribed under Section 112(A) and (B) of the 1997 Tax Code. However, the CTA EB found that
Taganito’s judicial claim was prematurely filed. Taganito filed its Petition for Review before the CTA Second
Division on 14 February 2007. The judicial claim was filed after the lapse of only 92 days from the filing of its
administrative claim before the CIR, in violation of the 120-day period prescribed in Section 112(D) of the 1997
Tax Code.

The dispositive portion of the Decision states:

WHEREFORE, the instant Petition for Review is hereby GRANTED. The assailed Decision dated January 8,
2010 and Resolution dated April 7, 2010 of the Special Second Division of this Court are hereby REVERSED
and SET ASIDE. Another one is hereby entered DISMISSING the Petition for Review filed in CTA Case No.
7574 for having been prematurely filed.

SO ORDERED.32

In his dissent,33 Associate Justice Lovell R. Bautista insisted that Taganito timely filed its claim before the CTA.
Justice Bautista read Section 112(C) of the 1997 Tax Code (Period within which Refund or Tax Credit of Input
Taxes shall be Made) in conjunction with Section 229 (Recovery of Tax Erroneously or Illegally Collected).
Justice Bautista also relied on this Court’s ruling in Atlas Consolidated Mining and Development Corporation v.
Commissioner of Internal Revenue (Atlas),34 which stated that refundable or creditable input VAT and illegally
or erroneously collected national internal revenue tax are the same, insofar as both are monetary amounts
which are currently in the hands of the government but must rightfully be returned to the taxpayer. Justice
Bautista concluded:

Being merely permissive, a taxpayer claimant has the option of seeking judicial redress for refund or tax credit
of excess or unutilized input tax with this Court, either within 30 days from receipt of the denial of its claim, or
after the lapse of the 120-day period in the event of inaction by the Commissioner, provided that both
administrative and judicial remedies must be undertaken within the 2-year period.35

Taganito filed its Motion for Reconsideration on 29 December 2010. The Commissioner filed an Opposition on
26 January 2011. The CTA EB denied for lack of merit Taganito’s motion in a Resolution36 dated 14 March
2011. The CTA EB did not see any justifiable reason to depart from this Court’s rulings in Aichi and Mirant.

G.R. No. 197156

Philex Mining Corporation v. CIR

229
 The Facts

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

[Philex] is a corporation duly organized and existing under the laws of the Republic of the Philippines, which is
principally engaged in the mining business, which includes the exploration and operation of mine properties
and commercial production and marketing of mine products, with office address at 27 Philex Building, Fairlaine
St., Kapitolyo, Pasig City.

[The CIR], on the other hand, is the head of the Bureau of Internal Revenue ("BIR"), the government entity
tasked with the duties/functions of assessing and collecting all national internal revenue taxes, fees, and
charges, and enforcement of all forfeitures, penalties and fines connected therewith, including the execution of
judgments in all cases decided in its favor by [the Court of Tax Appeals] and the ordinary courts, where she
can be served with court processes at the BIR Head Office, BIR Road, Quezon City.

On October 21, 2005, [Philex] filed its Original VAT Return for the third quarter of taxable year 2005 and
Amended VAT Return for the same quarter on December 1, 2005.

On March 20, 2006, [Philex] filed its claim for refund/tax credit of the amount of ₱23,956,732.44 with the One
Stop Shop Center of the Department of Finance. However, due to [the CIR’s] failure to act on such claim, on
October 17, 2007, pursuant to Sections 112 and 229 of the NIRC of 1997, as amended, [Philex] filed a Petition
for Review, docketed as C.T.A. Case No. 7687.

In [her] Answer, respondent CIR alleged the following special and affirmative defenses:

4. Claims for refund are strictly construed against the taxpayer as the same partake the nature of an
exemption;

5. The taxpayer has the burden to show that the taxes were erroneously or illegally paid. Failure on the
part of [Philex] to prove the same is fatal to its cause of action;

6. [Philex] should prove its legal basis for claiming for the amount being refunded. 37

The Court of Tax Appeals’ Ruling: Division

The CTA Second Division, in its Decision dated 20 July 2009, denied Philex’s claim due to prescription. The
CTA Second Division ruled that the two-year prescriptive period specified in Section 112(A) of RA 8424, as
amended, applies not only to the filing of the administrative claim with the BIR, but also to the filing of the
judicial claim with the CTA. Since Philex’s claim covered the 3rd quarter of 2005, its administrative claim filed
on 20 March 2006 was timely filed, while its judicial claim filed on 17 October 2007 was filed late and therefore
barred by prescription.

On 10 November 2009, the CTA Second Division denied Philex’s Motion for Reconsideration.

The Court of Tax Appeals’ Ruling: En Banc

Philex filed a Petition for Review before the CTA EB praying for a reversal of the 20 July 2009 Decision and the
10 November 2009 Resolution of the CTA Second Division in CTA Case No. 7687.

The CTA EB, in its Decision38 dated 3 December 2010, denied Philex’s petition and affirmed the CTA Second
Division’s Decision and Resolution.

The pertinent portions of the Decision read:

230
In this case, while there is no dispute that [Philex’s] administrative claim for refund was filed within the two-year
prescriptive period; however, as to its judicial claim for refund/credit, records show that on March 20, 2006,
[Philex] applied the administrative claim for refund of unutilized input VAT in the amount of ₱23,956,732.44
with the One Stop Shop Center of the Department of Finance, per Application No. 52490. From March 20,
2006, which is also presumably the date [Philex] submitted supporting documents, together with the aforesaid
application for refund, the CIR has 120 days, or until July 18, 2006, within which to decide the claim. Within 30
days from the lapse of the 120-day period, or from July 19, 2006 until August 17, 2006, [Philex] should have
elevated its claim for refund to the CTA. However, [Philex] filed its Petition for Review only on October 17,
2007, which is 426 days way beyond the 30- day period prescribed by law.

Evidently, the Petition for Review in CTA Case No. 7687 was filed 426 days late. Thus, the Petition for Review
in CTA Case No. 7687 should have been dismissed on the ground that the Petition for Review was filed way
beyond the 30-day prescribed period; thus, no jurisdiction was acquired by the CTA in Division; and not due to
prescription.

WHEREFORE, premises considered, the instant Petition for Review is hereby DENIED DUE COURSE, and
accordingly, DISMISSED. The assailed Decision dated July 20, 2009, dismissing the Petition for Review in
CTA Case No. 7687 due to prescription, and Resolution dated November 10, 2009 denying [Philex’s] Motion
for Reconsideration are hereby AFFIRMED, with modification that the dismissal is based on the ground that
the Petition for Review in CTA Case No. 7687 was filed way beyond the 30-day prescribed period to appeal.

SO ORDERED.39

G.R. No. 187485

CIR v. San Roque Power Corporation

The Commissioner raised the following grounds in the Petition for Review:

I. The Court of Tax Appeals En Banc erred in holding that [San Roque’s] claim for refund was not
prematurely filed.

II. The Court of Tax Appeals En Banc erred in affirming the amended decision of the Court of Tax
Appeals (Second Division) granting [San Roque’s] claim for refund of alleged unutilized input VAT on its
purchases of capital goods and services for the taxable year 2001 in the amount of P483,797,599.65. 40

G.R. No. 196113

Taganito Mining Corporation v. CIR

Taganito raised the following grounds in its Petition for Review:

I. The Court of Tax Appeals En Banc committed serious error and acted with grave abuse of discretion
tantamount to lack or excess of jurisdiction in erroneously applying the Aichi doctrine in violation of
[Taganito’s] right to due process.

II. The Court of Tax Appeals committed serious error and acted with grave abuse of discretion
amounting to lack or excess of jurisdiction in erroneously interpreting the provisions of Section 112
(D).41

G.R. No. 197156

Philex Mining Corporation v. CIR

Philex raised the following grounds in its Petition for Review:

231
 I. The CTA En Banc erred in denying the petition due to alleged prescription. The fact is that the petition
was filed with the CTA within the period set by prevailing court rulings at the time it was filed.

II. The CTA En Banc erred in retroactively applying the Aichi ruling in denying the petition in this instant
case.42

The Court’s Ruling

For ready reference, the following are the provisions of the Tax Code applicable to the present cases:

Section 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.

xxxx

Section 110(B):

Sec. 110. Tax Credits. —

(B) Excess Output or Input Tax. — If at the end of any taxable quarter the output tax exceeds the input tax, the
excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall
be carried over to the succeeding quarter or quarters: [Provided, That the input tax inclusive of input VAT
carried over from the previous quarter that may be credited in every quarter shall not exceed seventy percent
(70%) of the output VAT:]43 Provided, however, That any input tax attributable to zero-rated sales by a
VAT-registered person may at his option be refunded or credited against other internal revenue taxes,
subject to the provisions of Section 112.

Section 112:44

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.

(B) Capital Goods.- A VAT — registered person may apply for the issuance of a tax credit certificate or
refund of input taxes paid on capital goods imported or locally purchased, to the extent that such input
232
 taxes have not been applied against output taxes. The application may be made only within two (2)
years after the close of the taxable quarter when the importation or purchase was made.

(C) Cancellation of VAT Registration. — A person whose registration has been cancelled due to
retirement from or cessation of business, or due to changes in or cessation of status under Section
106(C) of this Code may, within two (2) years from the date of cancellation, apply for the issuance of a
tax credit certificate for any unused input tax which may be used in payment of his other internal
revenue taxes

(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 Subsection (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.

(E) Manner of Giving Refund. — Refunds shall be made upon warrants drawn by the Commissioner or
by his duly authorized representative without the necessity of being countersigned by the Chairman,
Commission on Audit, the provisions of the Administrative Code of 1987 to the contrary
notwithstanding: Provided, that refunds under this paragraph shall be subject to post audit by the
Commission on Audit.

Section 229:

Recovery of Tax Erroneously or Illegally Collected. — No suit or proceeding shall be maintained in any court
for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum
alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit
has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not
such tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of
payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided,
however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on
the face of the return upon which payment was made, such payment appears clearly to have been erroneously
paid.

(All emphases supplied)

I. Application of the 120+30 Day Periods

a. G.R. No. 187485 - CIR v. San Roque Power Corporation

On 10 April 2003, a mere 13 days after it filed its amended administrative claim with the Commissioner on 28
March 2003, San Roque filed a Petition for Review with the CTA docketed as CTA Case No. 6647. From this
we gather two crucial facts: first, San Roque did not wait for the 120-day period to lapse before filing its judicial
claim; second, San Roque filed its judicial claim more than four (4) years before the Atlas45 doctrine, which
was promulgated by the Court on 8 June 2007.

233
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.46

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." 47 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"48 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.49

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."50 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.51 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
234
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+3052 day
periods.

In fact, Section 106(b) and (e) of the Tax Code of 1977 as amended, which was the law cited by the Court
in Atlas as the applicable provision of the law did not yet provide for the 30-day period for the taxpayer to
appeal to the CTA from the decision or inaction of the Commissioner.53 Thus, the Atlas doctrine cannot be
invoked by anyone to disregard compliance with the 30-day mandatory and jurisdictional period. Also,
the difference between the Atlas doctrine on one hand, and the Mirant54 doctrine on the other hand, is a mere
20 days. The Atlas doctrine counts the two-year prescriptive period from the date of payment of the output
VAT, which means within 20 days after the close of the taxable quarter. The output VAT at that time must be
paid at the time of filing of the quarterly tax returns, which were to be filed "within 20 days following the end of
each quarter."

Thus, in Atlas, the three tax refund claims listed below were deemed timely filed because the administrative
claims filed with the Commissioner, and the petitions for review filed with the CTA, were all filed within two
years from the date of payment of the output VAT, following Section 229:

Date of Filing Return Date of Filing Date of Filing

Period Covered
& Payment of Tax Administrative Claim Petition With CTA
2nd Quarter, 1990 20 July 1990 21 August 1990 20 July 1992
Close of Quarter
30 June 1990
3rd Quarter, 1990 18 October 1990 21 November 1990 9 October 1992
Close of Quarter
30 September 1990
4th Quarter, 1990 20 January 1991 19 February 1991 14 January 1993
Close of Quarter
31 December 1990

Atlas paid the output VAT at the time it filed the quarterly tax returns on the 20th, 18th, and 20th day after the
close of the taxable quarter. Had the twoyear prescriptive period been counted from the "close of the taxable
quarter" as expressly stated in the law, the tax refund claims of Atlas would have already prescribed. In
contrast, the Mirant doctrine counts the two-year prescriptive period from the "close of the taxable quarter
when the sales were made" as expressly stated in the law, which means the last day of the taxable
quarter. The 20-day difference55 between the Atlas doctrine and the later Mirant doctrine is not material
to San Roque’s claim for tax refund.

Whether the Atlas doctrine or the Mirant doctrine is applied to San Roque is immaterial because what is at
issue in the present case is San Roque’s non-compliance with the 120-day mandatory and jurisdictional period,
which is counted from the date it filed its administrative claim with the Commissioner. The 120-day period may
extend beyond the two-year prescriptive period, as long as the administrative claim is filed within the two-year

235
prescriptive period. However, San Roque’s fatal mistake is that it did not wait for the Commissioner to decide
within the 120-day period, a mandatory period whether the Atlas or the Mirant doctrine is applied.

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)56 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.

b. G.R. No. 196113 - Taganito Mining Corporation v. CIR

Like San Roque, Taganito also filed its petition for review with the CTA without waiting for the 120-day period
to lapse. Also, like San Roque, Taganito filed its judicial claim before the promulgation of the Atlas doctrine.
Taganito filed a Petition for Review on 14 February 2007 with the CTA. This is almost four months before the
adoption of the Atlas doctrine on 8 June 2007. Taganito is similarly situated as San Roque - both cannot claim
being misled, misguided, or confused by the Atlas doctrine.

However, Taganito can invoke BIR Ruling No. DA-489-0357 dated 10 December 2003, which expressly ruled
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." Taganito filed its judicial claim after the issuance
of BIR Ruling No. DA-489-03 but before the adoption of the Aichi doctrine. Thus, as will be explained later,
Taganito is deemed to have filed its judicial claim with the CTA on time.

c. G.R. No. 197156 – Philex Mining Corporation v. CIR

Philex (1) filed on 21 October 2005 its original VAT Return for the third quarter of taxable year 2005; (2) filed
on 20 March 2006 its administrative claim for refund or credit; (3) filed on 17 October 2007 its Petition for
Review with the CTA. The close of the third taxable quarter in 2005 is 30 September 2005, which is the
reckoning date in computing the two-year prescriptive period under Section 112(A).

Philex timely filed its administrative claim on 20 March 2006, within the two-year prescriptive period. Even if the
two-year prescriptive period is computed from the date of payment of the output VAT under Section 229, Philex
still filed its administrative claim on time. Thus, the Atlas doctrine is immaterial in this case. The
Commissioner had until 17 July 2006, the last day of the 120-day period, to decide Philex’s claim. Since the

236
Commissioner did not act on Philex’s claim on or before 17 July 2006, Philex had until 17 August 2006, the last
day of the 30-day period, to file its judicial claim. The CTA EB held that 17 August 2006 was indeed the last
day for Philex to file its judicial claim. However, Philex filed its Petition for Review with the CTA only on 17
October 2007, or four hundred twenty-six (426) days after the last day of filing. In short, Philex was late by
one year and 61 days in filing its judicial claim. As the CTA EB correctly found:

Evidently, the Petition for Review in C.T.A. Case No. 7687 was filed 426 days late. Thus, the Petition for
Review in C.T.A. Case No. 7687 should have been dismissed on the ground that the Petition for Review was
filed way beyond the 30-day prescribed period; thus, no jurisdiction was acquired by the CTA Division; x x
x58 (Emphasis supplied)

Unlike San Roque and Taganito, Philex’s case is not one of premature filing but of late filing. Philex did not file
any petition with the CTA within the 120-day period. Philex did not also file any petition with the CTA within 30
days after the expiration of the 120-day period. Philex filed its judicial claim long after the expiration of the
120-day period, in fact 426 days after the lapse of the 120-day period. In any event, whether governed by
jurisprudence before, during, or after the Atlas case, Philex’s judicial claim will have to be rejected
because of late filing. Whether the two-year prescriptive period is counted from the date of payment of the
output VAT following the Atlas doctrine, or from the close of the taxable quarter when the sales attributable to
the input VAT were made following the Mirant and Aichi doctrines, Philex’s judicial claim was indisputably filed
late.

The Atlas doctrine cannot save Philex from the late filing of its judicial claim. The inaction of the Commissioner
on Philex’s claim during the 120-day period is, by express provision of law, "deemed a denial" of Philex’s claim.
Philex had 30 days from the expiration of the 120-day period to file its judicial claim with the CTA. Philex’s
failure to do so rendered the "deemed a denial" decision of the Commissioner final and inappealable. The right
to appeal to the CTA from a decision or "deemed a denial" decision of the Commissioner is merely a statutory
privilege, not a constitutional right. The exercise of such statutory privilege requires strict compliance with the
conditions attached by the statute for its exercise.59 Philex failed to comply with the statutory conditions and
must thus bear the consequences.

II. Prescriptive Periods under Section 112(A) and (C)

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 twoyear 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
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 "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 days60), 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).

III. "Excess" Input VAT and "Excessively" Collected Tax

The input VAT is not "excessively" collected as understood under Section 229 because at the time the input
VAT is collected the amount paid is correct and proper. The input VAT is a tax liability of, and legally paid
by, a VAT-registered seller61 of goods, properties or services used as input by another VAT-registered person
in the sale of his own goods, properties, or services. This tax liability is true even if the seller passes on the
input VAT to the buyer as part of the purchase price. The second VAT-registered person, who is not legally
liable for the input VAT, is the one who applies the input VAT as credit for his own output VAT.62 If the input
VAT is in fact "excessively" collected as understood under Section 229, then it is the first VAT-registered
person - the taxpayer who is legally liable and who is deemed to have legally paid for the input VAT - who can
ask for a tax refund or credit under Section 229 as an ordinary refund or credit outside of the VAT System. In
such event, the second VAT-registered taxpayer will have no input VAT to offset against his own output VAT.

In a claim for refund or credit of "excess" input VAT under Section 110(B) and Section 112(A), the input VAT is
not "excessively" collected as understood under Section 229. At the time of payment of the input VAT the
amount paid is the correct and proper amount. Under the VAT System, there is no claim or issue that the input
VAT is "excessively" collected, that is, that the input VAT paid is more than what is legally due. The person
legally liable for the input VAT cannot claim that he overpaid the input VAT by the mere existence of an
"excess" input VAT. The term "excess" input VAT simply means that the input VAT available as credit exceeds
the output VAT, not that the input VAT is excessively collected because it is more than what is legally due.
Thus, the taxpayer who legally paid the input VAT cannot claim for refund or credit of the input VAT as
"excessively" collected under Section 229.

Under Section 229, the prescriptive period for filing a judicial claim for refund is two years from the date of
payment of the tax "erroneously, x x x illegally, x x x excessively or in any manner wrongfully collected." The
prescriptive period is reckoned from the date the person liable for the tax pays the tax. Thus, if the input VAT is
in fact "excessively" collected, that is, the person liable for the tax actually pays more than what is legally due,
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the taxpayer must file a judicial claim for refund within two years from his date of payment. Only the person
legally liable to pay the tax can file the judicial claim for refund. The person to whom the tax is passed
on as part of the purchase price has no personality to file the judicial claim under Section 229.63

Under Section 110(B) and Section 112(A), the prescriptive period for filing a judicial claim for "excess" input
VAT is two years from the close of the taxable quarter when the sale was made by the person legally liable to
pay the output VAT. This prescriptive period has no relation to the date of payment of the "excess" input VAT.
The "excess" input VAT may have been paid for more than two years but this does not bar the filing of a
judicial claim for "excess" VAT under Section 112(A), which has a different reckoning period from Section 229.
Moreover, the person claiming the refund or credit of the input VAT is not the person who legally paid the input
VAT. Such person seeking the VAT refund or credit does not claim that the input VAT was "excessively"
collected from him, or that he paid an input VAT that is more than what is legally due. He is not the taxpayer
who legally paid the input VAT.

As its name implies, the Value-Added Tax system is a tax on the value added by the taxpayer in the chain of
transactions. For simplicity and efficiency in tax collection, the VAT is imposed not just on the value added by
the taxpayer, but on the entire selling price of his goods, properties or services. However, the taxpayer is
allowed a refund or credit on the VAT previously paid by those who sold him the inputs for his goods,
properties, or services. The net effect is that the taxpayer pays the VAT only on the value that he adds to the
goods, properties, or services that he actually sells.

Under Section 110(B), a taxpayer can apply his input VAT only against his output VAT. The only exception is
when the taxpayer is expressly "zero-rated or effectively zero-rated" under the law, like companies generating
power through renewable sources of energy.64 Thus, a non zero-rated VAT-registered taxpayer who has no
output VAT because he has no sales cannot claim a tax refund or credit of his unused input VAT under the
VAT System. Even if the taxpayer has sales but his input VAT exceeds his output VAT, he cannot seek a tax
refund or credit of his "excess" input VAT under the VAT System. He can only carry-over and apply his
"excess" input VAT against his future output VAT. If such "excess" input VAT is an "excessively" collected
tax, the taxpayer should be able to seek a refund or credit for such "excess" input VAT whether or not he has
output VAT. The VAT System does not allow such refund or credit. Such "excess" input VAT is not an
"excessively" collected tax under Section 229. The "excess" input VAT is a correctly and properly collected tax.
However, such "excess" input VAT can be applied against the output VAT because the VAT is a tax imposed
only on the value added by the taxpayer. If the input VAT is in fact "excessively" collected under Section 229,
then it is the person legally liable to pay the input VAT, not the person to whom the tax was passed on as part
of the purchase price and claiming credit for the input VAT under the VAT System, who can file the judicial
claim under Section 229.

Any suggestion that the "excess" input VAT under the VAT System is an "excessively" collected tax under
Section 229 may lead taxpayers to file a claim for refund or credit for such "excess" input VAT under Section
229 as an ordinary tax refund or credit outside of the VAT System. Under Section 229, mere payment of a tax
beyond what is legally due can be claimed as a refund or credit. There is no requirement under Section 229 for
an output VAT or subsequent sale of goods, properties, or services using materials subject to input VAT.

From the plain text of Section 229, it is clear that what can be refunded or credited is a tax that is "erroneously,
x x x illegally, x x x excessively or in any manner wrongfully collected." In short, there must be a wrongful
payment because what is paid, or part of it, is not legally due. As the Court held in Mirant, Section 229 should
"apply only to instances of erroneous payment or illegal collection of internal revenue taxes."
Erroneous or wrongful payment includes excessive payment because they all refer to payment of taxes not
legally due. Under the VAT System, there is no claim or issue that the "excess" input VAT is "excessively or in
any manner wrongfully collected." In fact, if the "excess" input VAT is an "excessively" collected tax under
Section 229, then the taxpayer claiming to apply such "excessively" collected input VAT to offset his output
VAT may have no legal basis to make such offsetting. The person legally liable to pay the input VAT can claim
a refund or credit for such "excessively" collected tax, and thus there will no longer be any "excess" input VAT.
This will upend the present VAT System as we know it.
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IV. Effectivity and Scope of the Atlas , Mirant and Aichi Doctrines

The Atlas doctrine, which held that claims for refund or credit of input VAT must comply with the two-year
prescriptive period under Section 229, should be effective only from its promulgation on 8 June 2007 until
its abandonment on 12 September 2008 in Mirant. The Atlas doctrine was limited to the reckoning of the
two-year prescriptive period from the date of payment of the output VAT. Prior to the Atlas doctrine, the two-
year prescriptive period for claiming refund or credit of input VAT should be governed by Section 112(A)
following the verba legis rule. The Mirant ruling, which abandoned the Atlas doctrine, adopted the verba
legis rule, thus applying Section 112(A) in computing the two-year prescriptive period in claiming refund or
credit of input VAT.

The Atlas doctrine has no relevance to the 120+30 day periods under Section 112(C) because the application
of the 120+30 day periods was not in issue in Atlas. The application of the 120+30 day periods was first raised
in Aichi, which adopted the verba legis rule in holding that the 120+30 day periods are mandatory and
jurisdictional. The language of Section 112(C) is plain, clear, and unambiguous. When Section 112(C) states
that "the Commissioner shall grant a refund or issue the tax credit within one hundred twenty (120) days from
the date of submission of complete documents," the law clearly gives the Commissioner 120 days within which
to decide the taxpayer’s claim. Resort to the courts prior to the expiration of the 120-day period is a patent
violation of the doctrine of exhaustion of administrative remedies, a ground for dismissing the judicial suit due
to prematurity. Philippine jurisprudence is awash with cases affirming and reiterating the doctrine of exhaustion
of administrative remedies.65 Such doctrine is basic and elementary.

When Section 112(C) states that "the taxpayer affected may, within thirty (30) days from 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 law does not make the 120+30 day periods optional just
because the law uses the word "may." The word "may" simply means that the taxpayer may or may not
appeal the decision of the Commissioner within 30 days from receipt of the decision, or within 30 days from
the expiration of the 120-day period. Certainly, by no stretch of the imagination can the word "may" be
construed as making the 120+30 day periods optional, allowing the taxpayer to file a judicial claim one day
after filing the administrative claim with the Commissioner.

The old rule66 that the taxpayer may file the judicial claim, without waiting for the Commissioner’s decision if the
two-year prescriptive period is about to expire, cannot apply because that rule was adopted before the
enactment of the 30-day period. The 30-day period was adopted precisely to do away with the old rule, so
that under the VAT System the taxpayer will always have 30 days to file the judicial claim even if the
Commissioner acts only on the 120th day, or does not act at all during the 120-day period. With the 30-
day period always available to the taxpayer, the taxpayer can no longer file a judicial claim for refund or credit
of input VAT without waiting for the Commissioner to decide until the expiration of the 120-day period.

To repeat, a claim for tax refund or credit, like a claim for tax exemption, is construed strictly against the
taxpayer. One of the conditions for a judicial claim of refund or credit under the VAT System is compliance with
the 120+30 day mandatory and jurisdictional periods. Thus, strict compliance with the 120+30 day periods is
necessary for such a claim to prosper, whether before, during, or after the effectivity of the Atlas doctrine,
except for the period from the issuance of BIR Ruling No. DA-489-03 on 10 December 2003 to 6 October 2010
when the Aichi doctrine was adopted, which again reinstated the 120+30 day periods as mandatory and
jurisdictional.

V. Revenue Memorandum Circular No. 49-03 (RMC 49-03) dated 15 April 2003

There is nothing in RMC 49-03 that states, expressly or impliedly, that the taxpayer need not wait for the 120-
day period to expire before filing a judicial claim with the CTA. RMC 49-03 merely authorizes the BIR to
continue processing the administrative claim even after the taxpayer has filed its judicial claim, without saying
that the taxpayer can file its judicial claim before the expiration of the 120-day period. RMC 49-03 states: "In
cases where the taxpayer has filed a ‘Petition for Review’ with the Court of Tax Appeals involving a claim for
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refund/TCC that is pending at the administrative agency (either the Bureau of Internal Revenue or the One-
Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance), the
administrative agency and the court may act on the case separately." Thus, if the taxpayer files its judicial
claim before the expiration of the 120-day period, the BIR will nevertheless continue to act on the
administrative claim because such premature filing cannot divest the Commissioner of his statutory power and
jurisdiction to decide the administrative claim within the 120-day period.

On the other hand, if the taxpayer files its judicial claim after the 120- day period, the Commissioner can still
continue to evaluate the administrative claim. There is nothing new in this because even after the expiration of
the 120-day period, the Commissioner should still evaluate internally the administrative claim for purposes of
opposing the taxpayer’s judicial claim, or even for purposes of determining if the BIR should actually concede
to the taxpayer’s judicial claim. The internal administrative evaluation of the taxpayer’s claim
must necessarily continue to enable the BIR to oppose intelligently the judicial claim or, if the facts and the
law warrant otherwise, for the BIR to concede to the judicial claim, resulting in the termination of the judicial
proceedings.

What is important, as far as the present cases are concerned, is that the mere filing by a taxpayer of a
judicial claim with the CTA before the expiration of the 120-day period cannot operate to divest the
Commissioner of his jurisdiction to decide an administrative claim within the 120-day mandatory
period, unless the Commissioner has clearly given cause for equitable estoppel to apply as expressly
recognized in Section 246 of the Tax Code.67

VI. BIR Ruling No. DA-489-03 dated 10 December 2003

BIR Ruling No. DA-489-03 does provide a valid claim for equitable estoppel under Section 246 of the Tax
Code. 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." Prior
to this ruling, the BIR held, as shown by its position in the Court of Appeals,68 that the expiration of the 120-day
period is mandatory and jurisdictional before a judicial claim can be filed.

There is no dispute that the 120-day period is mandatory and jurisdictional, and that the CTA does not acquire
jurisdiction over a judicial claim that is filed before the expiration of the 120-day period. There are, however,
two exceptions to this rule. The first exception is if the Commissioner, through a specific ruling, misleads a
particular taxpayer to prematurely file a judicial claim with the CTA. Such specific ruling is applicable only to
such particular taxpayer. The second exception is where the Commissioner, through a general interpretative
rule issued under Section 4 of the Tax Code, misleads all taxpayers into filing prematurely judicial claims with
the CTA. In these cases, the Commissioner cannot be allowed to later on question the CTA’s assumption of
jurisdiction over such claim since equitable estoppel has set in as expressly authorized under Section 246 of
the Tax Code.

Section 4 of the Tax Code, a new provision introduced by RA 8424, expressly grants to the Commissioner the
power to interpret tax laws, thus:

Sec. 4. Power of the Commissioner To Interpret Tax Laws and To Decide Tax Cases. — The power to
interpret the provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction of
the Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties
imposed in relation thereto, or other matters arising under this Code or other laws or portions thereof
administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the exclusive
appellate jurisdiction of the Court of Tax Appeals.

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Since the Commissioner has exclusive and original jurisdiction to interpret tax laws, taxpayers acting in
good faith should not be made to suffer for adhering to general interpretative rules of the Commissioner
interpreting tax laws, should such interpretation later turn out to be erroneous and be reversed by the
Commissioner or this Court. Indeed, Section 246 of the Tax Code expressly provides that a reversal of a BIR
regulation or ruling cannot adversely prejudice a taxpayer who in good faith relied on the BIR regulation or
ruling prior to its reversal. Section 246 provides as follows:

Sec. 246. Non-Retroactivity of Rulings. — Any revocation, modification or reversal of any of the rules and
regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars
promulgated by the Commissioner shall not be given retroactive application if the revocation,
modification or reversal will be prejudicial to the taxpayers, except in the following cases:

(a) Where the taxpayer deliberately misstates or omits material facts from his return or any document
required of him by the Bureau of Internal Revenue;

(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are materially different
from the facts on which the ruling is based; or

(c) Where the taxpayer acted in bad faith. (Emphasis supplied)

Thus, a general interpretative rule issued by the Commissioner may be relied upon by taxpayers from the time
the rule is issued up to its reversal by the Commissioner or this Court. Section 246 is not limited to a reversal
only by the Commissioner because this Section expressly states, "Any revocation, modification or reversal"
without specifying who made the revocation, modification or reversal. Hence, a reversal by this Court is
covered under Section 246.

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 Aichi69 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. As held by this Court in CIR v. Philippine Health Care
Providers, Inc.:70

In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals, this Court held that under Section 246 of the 1997
Tax Code, the Commissioner of Internal Revenue is precluded from adopting a position contrary to one
previously taken where injustice would result to the taxpayer. Hence, where an assessment for deficiency
withholding income taxes was made, three years after a new BIR Circular reversed a previous one upon which
the taxpayer had relied upon, such an assessment was prejudicial to the taxpayer. To rule otherwise, opined
the Court, would be contrary to the tenets of good faith, equity, and fair play.

This Court has consistently reaffirmed its ruling in ABS-CBN Broadcasting Corp.1âwphi1 in the later cases
of Commissioner of Internal Revenue v. Borroughs, Ltd., Commissioner of Internal Revenue v. Mega Gen.
Mdsg. Corp., Commissioner of Internal Revenue v. Telefunken Semiconductor (Phils.) Inc., and Commissioner
of Internal Revenue v. Court of Appeals. The rule is that the BIR rulings have no retroactive effect where a
grossly unfair deal would result to the prejudice of the taxpayer, as in this case.

More recently, in Commissioner of Internal Revenue v. Benguet Corporation, wherein the taxpayer was entitled
to tax refunds or credits based on the BIR’s own issuances but later was suddenly saddled with deficiency
taxes due to its subsequent ruling changing the category of the taxpayer’s transactions for the purpose of

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paying its VAT, this Court ruled that applying such ruling retroactively would be prejudicial to the taxpayer.
(Emphasis supplied)

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

However, BIR Ruling No. DA-489-03 cannot be given retroactive effect for four reasons: first, it is admittedly an
erroneous interpretation of the law; second, prior to its issuance, the BIR held that the 120-day period was
mandatory and jurisdictional, which is the correct interpretation of the law; third, prior to its issuance, no
taxpayer can claim that it was misled by the BIR into filing a judicial claim prematurely; and fourth, a claim for
tax refund or credit, like a claim for tax exemption, is strictly construed against the taxpayer.

San Roque, therefore, cannot benefit from BIR Ruling No. DA-489-03 because it filed its judicial claim
prematurely on 10 April 2003, before the issuance of BIR Ruling No. DA-489-03 on 10 December 2003. To
repeat, San Roque cannot claim that it was misled by the BIR into filing its judicial claim prematurely because
BIR Ruling No. DA-489-03 was issued only after San Roque filed its judicial claim. At the time San Roque filed
its judicial claim, the law as applied and administered by the BIR was that the Commissioner had 120 days to
act on administrative claims. This was in fact the position of the BIR prior to the issuance of BIR Ruling No.
DA-489-03. Indeed, San Roque never claimed the benefit of BIR Ruling No. DA-489-03 or RMC 49-03,
whether in this Court, the CTA, or before the Commissioner.

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.

Philex’s situation is not a case of premature filing of its judicial claim but of late filing, indeed very late filing.
BIR Ruling No. DA-489-03 allowed premature filing of a judicial claim, which means non-exhaustion of the 120-
day period for the Commissioner to act on an administrative claim. Philex cannot claim the benefit of BIR
Ruling No. DA-489-03 because Philex did not file its judicial claim prematurely but filed it long after the lapse of
the 30-day period following the expiration of the 120-day period. In fact, Philex filed its judicial claim 426
days after the lapse of the 30-day period.

VII. Existing Jurisprudence

There is no basis whatsoever to the claim that in five cases this Court had already made a ruling that the filing
dates of the administrative and judicial claims are inconsequential, as long as they are within the two-year
prescriptive period. The effect of the claim of the dissenting opinions is that San Roque’s failure to wait for the
120-day mandatory period to lapse is inconsequential, thus allowing San Roque to claim the tax refund or

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credit. However, the five cases cited by the dissenting opinions do not support even remotely the claim that this
Court had already made such a ruling. None of these five cases mention, cite, discuss, rule or even hint
that compliance with the 120-day mandatory period is inconsequential as long as the administrative
and judicial claims are filed within the two-year prescriptive period.

In CIR v. Toshiba Information Equipment (Phils.), Inc.,71 the issue was whether any output VAT was actually
passed on to Toshiba that it could claim as input VAT subject to tax credit or refund. The Commissioner argued
that "although Toshiba may be a VAT-registered taxpayer, it is not engaged in a VAT-taxable business." The
Commissioner cited Section 4.106-1 of Revenue Regulations No. 75 that "refund of input taxes on capital
goods shall be allowed only to the extent that such capital goods are used in VAT-taxable business." In the
words of the Court, "Ultimately, however, the issue still to be resolved herein shall be whether respondent
Toshiba is entitled to the tax credit/refund of its input VAT on its purchases of capital goods and services, to
which this Court answers in the affirmative." Nowhere in this case did the Court discuss, state, or rule that the
filing dates of the administrative and judicial claims are inconsequential, as long as they are within the two-year
prescriptive period.

In Intel Technology Philippines, Inc. v. CIR,72 the Court stated: "The issues to be resolved in the instant case
are (1) whether the absence of the BIR authority to print or the absence of the TIN-V in petitioner’s export sales
invoices operates to forfeit its entitlement to a tax refund/credit of its unutilized input VAT attributable to its
zero-rated sales; and (2) whether petitioner’s failure to indicate "TIN-V" in its sales invoices automatically
invalidates its claim for a tax credit certification." Again, nowhere in this case did the Court discuss, state, or
rule that the filing dates of the administrative and judicial claims are inconsequential, as long as they are within
the two-year prescriptive period.

In AT&T Communications Services Philippines, Inc. v. CIR,73 the Court stated: "x x x the CTA First Division,
conceding that petitioner’s transactions fall under the classification of zero-rated sales, nevertheless denied
petitioner’s claim ‘for lack of substantiation,’ x x x." The Court quoted the ruling of the First Division that
"valid VAT official receipts, and not mere sale invoices, should have been submitted" by petitioner to
substantiate its claim. The Court further stated: "x x x the CTA En Banc, x x x affirmed x x x the CTA First
Division," and "petitioner’s motion for reconsideration having been denied x x x, the present petition for review
was filed." Clearly, the sole issue in this case is whether petitioner complied with the substantiation
requirements in claiming for tax refund or credit. Again, nowhere in this case did the Court discuss, state, or
rule that the filing dates of the administrative and judicial claims are inconsequential, as long as they are within
the two-year prescriptive period.

In CIR v. Ironcon Builders and Development Corporation,74 the Court put the issue in this manner: "Simply put,
the sole issue the petition raises is whether or not the CTA erred in granting respondent Ironcon’s application
for refund of its excess creditable VAT withheld." The Commissioner argued that "since the NIRC does not
specifically grant taxpayers the option to refund excess creditable VAT withheld, it follows that such refund
cannot be allowed." Thus, this case is solely about whether the taxpayer has the right under the NIRC to ask
for a cash refund of excess creditable VAT withheld. Again, nowhere in this case did the Court discuss, state,
or rule that the filing dates of the administrative and judicial claims are inconsequential, as long as they are
within the two-year prescriptive period.

In CIR v. Cebu Toyo Corporation,75 the issue was whether Cebu Toyo was exempt or subject to VAT.
Compliance with the 120-day period was never an issue in Cebu Toyo. As the Court explained:

Both the Commissioner of Internal Revenue and the Office of the Solicitor General argue that respondent Cebu
Toyo Corporation, as a PEZA-registered enterprise, is exempt from national and local taxes, including
VAT, under Section 24 of Rep. Act No. 7916 and Section 109 of the NIRC. Thus, they contend that respondent
Cebu Toyo Corporation is not entitled to any refund or credit on input taxes it previously paid as provided under
Section 4.103-1 of Revenue Regulations No. 7-95, notwithstanding its registration as a VAT taxpayer. For
petitioner claims that said registration was erroneous and did not confer upon the respondent any right to claim
recognition of the input tax credit.
244
The respondent counters that it availed of the income tax holiday under E.O. No. 226 for four years from
August 7, 1995 making it exempt from income tax but not from other taxes such as VAT. Hence, according to
respondent, its export sales are not exempt from VAT, contrary to petitioner’s claim, but its export
sales is subject to 0% VAT. Moreover, it argues that it was able to establish through a report certified by an
independent Certified Public Accountant that the input taxes it incurred from April 1, 1996 to December 31,
1997 were directly attributable to its export sales. Since it did not have any output tax against which said input
taxes may be offset, it had the option to file a claim for refund/tax credit of its unutilized input taxes.

Considering the submission of the parties and the evidence on record, we find the petition bereft of merit.

Petitioner’s contention that respondent is not entitled to refund for being exempt from VAT is
untenable. This argument turns a blind eye to the fiscal incentives granted to PEZA-registered enterprises
under Section 23 of Rep. Act No. 7916. Note that under said statute, the respondent had two options with
respect to its tax burden. It could avail of an income tax holiday pursuant to provisions of E.O. No. 226, thus
exempt it from income taxes for a number of years but not from other internal revenue taxes such as VAT; or it
could avail of the tax exemptions on all taxes, including VAT under P.D. No. 66 and pay only the preferential
tax rate of 5% under Rep. Act No. 7916. Both the Court of Appeals and the Court of Tax Appeals found that
respondent availed of the income tax holiday for four (4) years starting from August 7, 1995, as clearly
reflected in its 1996 and 1997 Annual Corporate Income Tax Returns, where respondent specified that it was
availing of the tax relief under E.O. No. 226. Hence, respondent is not exempt from VAT and it correctly
registered itself as a VAT taxpayer. In fine, it is engaged in taxable rather than exempt transactions.
(Emphasis supplied)

Clearly, the issue in Cebu Toyo was whether the taxpayer was exempt from VAT or subject to VAT at
0% tax rate. If subject to 0% VAT rate, the taxpayer could claim a refund or credit of its input VAT. Again,
nowhere in this case did the Court discuss, state, or rule that the filing dates of the administrative and judicial
claims are inconsequential, as long as they are within the two-year prescriptive period.

While this Court stated in the narration of facts in Cebu Toyo that the taxpayer "did not bother to wait for the
Resolution of its (administrative) claim by the CIR" before filing its judicial claim with the CTA, this issue was
not raised before the Court. Certainly, this statement of the Court is not a binding precedent that the taxpayer
need not wait for the 120-day period to lapse.

Any issue, whether raised or not by the parties, but not passed upon by the Court, does not have any
value as precedent. As this Court has explained as early as 1926:

It is contended, however, that the question before us was answered and resolved against the contention of the
appellant in the case of Bautista vs. Fajardo (38 Phil. 624). In that case no question was raised nor was it even
suggested that said section 216 did not apply to a public officer. That question was not discussed nor referred
to by any of the parties interested in that case. It has been frequently decided that the fact that a statute has
been accepted as valid, and invoked and applied for many years in cases where its validity was not raised or
passed on, does not prevent a court from later passing on its validity, where that question is squarely and
properly raised and presented. Where a question passes the Court sub silentio, the case in which the
question was so passed is not binding on the Court (McGirr vs. Hamilton and Abreu, 30 Phil. 563), nor
should it be considered as a precedent. (U.S. vs. Noriega and Tobias, 31 Phil. 310; Chicote vs. Acasio, 31
Phil. 401; U.S. vs. More, 3 Cranch [U.S.] 159, 172; U.S. vs. Sanges, 144 U.S. 310, 319; Cross vs. Burke, 146
U.S. 82.) For the reasons given in the case of McGirr vs. Hamilton and Abreu, supra, the decision in the case
of Bautista vs. Fajardo, supra, can have no binding force in the interpretation of the question presented
here.76 (Emphasis supplied)

In Cebu Toyo, the nature of the 120-day period, whether it is mandatory or optional, was not even raised as an
issue by any of the parties. The Court never passed upon this issue. Thus, Cebu Toyo does not constitute
binding precedent on the nature of the 120-day period.

245
There is also the claim that there are numerous CTA decisions allegedly supporting the argument that the filing
dates of the administrative and judicial claims are inconsequential, as long as they are within the two-year
prescriptive period. Suffice it to state that CTA decisions do not constitute precedents, and do not bind this
Court or the public. That is why CTA decisions are appealable to this Court, which may affirm, reverse or
modify the CTA decisions as the facts and the law may warrant. Only decisions of this Court constitute binding
precedents, forming part of the Philippine legal system.77 As held by this Court in The Philippine Veterans
Affairs Office v. Segundo:78

x x x Let it be admonished that decisions of the Supreme Court "applying or interpreting the laws or the
Constitution . . . form part of the legal system of the Philippines," and, as it were, "laws" by their own right
because they interpret what the laws say or mean. Unlike rulings of the lower courts, which bind the
parties to specific cases alone, our judgments are universal in their scope and application, and equally
mandatory in character. Let it be warned that to defy our decisions is to court contempt. (Emphasis supplied)

The same basic doctrine was reiterated by this Court in De Mesa v. Pepsi Cola Products Phils., Inc.:79

The principle of stare decisis et non quieta movere is entrenched in Article 8 of the Civil Code, to wit:

ART. 8. Judicial decisions applying or interpreting the laws or the Constitution shall form a part of the legal
system of the Philippines.

It enjoins adherence to judicial precedents. It requires our courts to follow a rule already established in a
final decision of the Supreme Court. That decision becomes a judicial precedent to be followed in
subsequent cases by all courts in the land. The doctrine of stare decisis is based on the principle that once a
question of law has been examined and decided, it should be deemed settled and closed to further argument.
(Emphasis supplied)

VIII. Revenue Regulations No. 7-95 Effective 1 January 1996

Section 4.106-2(c) of Revenue Regulations No. 7-95, by its own express terms, applies only if the taxpayer
files the judicial claim "after" the lapse of the 60-day period, a period with which San Roque failed to
comply. Under Section 4.106-2(c), the 60-day period is still mandatory and jurisdictional.

Moreover, it is a hornbook principle that a prior administrative regulation can never prevail over a later contrary
law, more so in this case where the later law was enacted precisely to amend the prior administrative
regulation and the law it implements.

The laws and regulation involved are as follows:

1977 Tax Code, as amended by Republic Act No. 7716 (1994)

Sec. 106. Refunds or tax credits of creditable input tax. —

(a) x x x x

(d) Period within which refund or tax credit of input tax shall be made - In proper cases, the
Commissioner shall grant a refund or issue the tax credit for creditable input taxes within sixty (60)
days from the date of submission of complete documents in support of the application filed in
accordance with subparagraphs (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 receipt of
the decision denying the claim or after the expiration of the sixty-day period, appeal the
decision or the unacted claim with the Court of Tax Appeals.
246
Revenue Regulations No. 7-95 (1996)

Section 4.106-2. Procedures for claiming refunds or tax credits of input tax — (a) x x x

xxxx

(c) Period within which refund or tax credit of input taxes shall be made. — In proper cases, the Commissioner
shall grant a tax credit/refund for creditable input taxes within sixty (60) days from the date of submission of
complete documents in support of the application filed in accordance with subparagraphs (a) and (b) above.

In case of full or partial denial of the claim for tax credit/refund as decided by the Commissioner of Internal
Revenue, the taxpayer may appeal to the Court of Tax Appeals within thirty (30) days from the receipt of said
denial, otherwise the decision will become final. However, if no action on the claim for tax credit/refund has
been taken by the Commissioner of Internal Revenue after the sixty (60) day period from the date of
submission of the application but before the lapse of the two (2) year period from the date of filing of
the VAT return for the taxable quarter, the taxpayer may appeal to the Court of Tax Appeals.

xxxx

1997 Tax Code

Section 112. Refunds or Tax Credits of Input Tax —

(A) x x x

xxxx

(D) Period within which Refund or Tax Credit of Input Taxes shall be made. — In proper cases, the
Commissioner shall grant the 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
hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.

There can be no dispute that under Section 106(d) of the 1977 Tax Code, as amended by RA 7716, the
Commissioner has a 60-day period to act on the administrative claim. This 60-day period is mandatory and
jurisdictional.

Did Section 4.106-2(c) of Revenue Regulations No. 7-95 change this, so that the 60-day period is no longer
mandatory and jurisdictional? The obvious answer is no.

Section 4.106-2(c) itself expressly states that if, "after the sixty (60) day period," the Commissioner fails to
act on the administrative claim, the taxpayer may file the judicial claim even "before the lapse of the two (2)
year period." Thus, under Section 4.106-2(c) the 60-day period is still mandatory and jurisdictional.

Section 4.106-2(c) did not change Section 106(d) as amended by RA 7716, but merely implemented it, for two
reasons. First, Section 4.106-2(c) still expressly requires compliance with the 60-day period. This cannot
be disputed.1âwphi1

247
Second, under the novel amendment introduced by RA 7716, mere inaction by the Commissioner during the
60-day period is deemed a denial of the claim. Thus, Section 4.106-2(c) states that "if no action on the claim
for tax refund/credit has been taken by the Commissioner after the sixty (60) day period," the taxpayer "may"
already file the judicial claim even long before the lapse of the two-year prescriptive period. Prior to the
amendment by RA 7716, the taxpayer had to wait until the two-year prescriptive period was about to expire if
the Commissioner did not act on the claim.80 With the amendment by RA 7716, the taxpayer need not wait until
the two-year prescriptive period is about to expire before filing the judicial claim because mere inaction by the
Commissioner during the 60-day period is deemed a denial of the claim. This is the meaning of the phrase
"but before the lapse of the two (2) year period" in Section 4.106-2(c). As Section 4.106- 2(c) reiterates
that the judicial claim can be filed only "after the sixty (60) day period," this period remains mandatory and
jurisdictional. Clearly, Section 4.106-2(c) did not amend Section 106(d) but merely faithfully implemented it.

Even assuming, for the sake of argument, that Section 4.106-2(c) of Revenue Regulations No. 7-95, an
administrative issuance, amended Section 106(d) of the Tax Code to make the period given to the
Commissioner non-mandatory, still the 1997 Tax Code, a much later law, reinstated the original intent and
provision of Section 106(d) by extending the 60-day period to 120 days and re-adopting the original
wordings of Section 106(d). Thus, Section 4.106-2(c), a mere administrative issuance, becomes inconsistent
with Section 112(D), a later law. Obviously, the later law prevails over a prior inconsistent administrative
issuance.

Section 112(D) of the 1997 Tax Code is clear, unequivocal, and categorical that the Commissioner has 120
days to act on an administrative claim. The taxpayer can file the judicial claim (1) only within thirty days after
the Commissioner partially or fully denies the claim within the 120- day period, or (2) only within thirty
days from the expiration of the 120- day period if the Commissioner does not act within the 120-day period.

There can be no dispute that upon effectivity of the 1997 Tax Code on 1 January 1998, or more than five
years before San Roque filed its administrative claim on 28 March 2003, the law has been clear: the 120-
day period is mandatory and jurisdictional. San Roque’s claim, having been filed administratively on 28 March
2003, is governed by the 1997 Tax Code, not the 1977 Tax Code. Since San Roque filed its judicial claim
before the expiration of the 120-day mandatory and jurisdictional period, San Roque’s claim cannot prosper.

San Roque cannot also invoke Section 4.106-2(c), which expressly provides that the taxpayer can only file the
judicial claim "after" the lapse of the 60-day period from the filing of the administrative claim. San Roque filed
its judicial claim just 13 days after filing its administrative claim. To recall, San Roque filed its judicial
claim on 10 April 2003, a mere 13 days after it filed its administrative claim.

Even if, contrary to all principles of statutory construction as well as plain common sense, we gratuitously apply
now Section 4.106-2(c) of Revenue Regulations No. 7-95, still San Roque cannot recover any refund or
credit because San Roque did not wait for the 60-day period to lapse, contrary to the express
requirement in Section 4.106-2(c). In short, San Roque does not even comply with Section 4.106-2(c). A
claim for tax refund or credit is strictly construed against the taxpayer, who must prove that his claim clearly
complies with all the conditions for granting the tax refund or credit. San Roque did not comply with the
express condition for such statutory grant.

A final word. Taxes are the lifeblood of the nation. The Philippines has been struggling to improve its tax
efficiency collection for the longest time with minimal success. Consequently, the Philippines has suffered the
economic adversities arising from poor tax collections, forcing the government to continue borrowing to fund
the budget deficits. This Court cannot turn a blind eye to this economic malaise by being unduly liberal to
taxpayers who do not comply with statutory requirements for tax refunds or credits. The tax refund claims in
the present cases are not a pittance. Many other companies stand to gain if this Court were to rule otherwise.
The dissenting opinions will turn on its head the well-settled doctrine that tax refunds are strictly construed
against the taxpayer.

248
WHEREFORE, the Court hereby (1) GRANTS the petition of the Commissioner of Internal Revenue in G.R.
No. 187485 to DENY the P483,797,599.65 tax refund or credit claim of San Roque Power Corporation;
(2) GRANTS the petition of Taganito Mining Corporation in G.R. No. 196113 for a tax refund or credit of
P8,365,664.38; and (3) DENIES the petition of Philex Mining Corporation in G.R. No. 197156 for a tax refund
or credit of P23,956,732.44.

SO ORDERED.

DIGEST:

COMMISSIONER OF INTERNAL REVENUE vs. SAN ROQUE POWER CORP.

G.R. No. 187485 February 12, 2013
707 SCRA 66 Supreme Court En Banc

FACTS:
 On October 11, 1997, San Roque Power Corporation (San Roque) entered into a Power Purchase
Agreement (PPA) with the National Power Corporation (NPC) by building the San Roque Multi-Purpose
Project in San Manuel, Pangasinan.
 The San Roque Multi-Purpose Project allegedly incurred, excess input VAT in the amount of
P559,709,337.54 for taxable year 2001 which it declared in its Quarterly VAT Returns filed for the same
year.
 San Roque duly filed with the BIR separate claims for refund, amounting to P559,709,337.54, representing
unutilized input taxes as declared in its VAT returns for taxable year 2001.
 However, on March 28, 2003, San Roque filed amended Quarterly VAT Returns for the year 2001 since it
increased its unutilized input VAT To the amount of P560,200,283.14. San Roque filed with the BIR on the
same date, separate amended claims for refund in the aggregate amount of P560,200,283.14.
 On April 10, 2003, a mere 13 days after it filed its amended administrative claim with the CIR on March 28,
2003, San Roque filed a Petition for Review with the CTA.
 CIR alleged that the claim by San Roque was prematurely filed with the CTA.

ISSUE:
 WON San Roque is entitled to tax refund? – NO.

HELD:
 No. San Roque is not entitled to a tax refund because it failed to comply with the mandatory and
jurisdictional requirement of waiting 120 days before filing its judicial claim.
 On April 10, 2003, a mere 13 days after it filed its amended administrative claim with the CIR on March 28,
2003, San Roque filed a Petition for Review with the CTA, which showed that San Roque did not wait for
the 120-day period to lapse before filing its judicial claim.
 Compliance with the 120-day waiting period is mandatory and jurisdictional, under RA 8424 or the Tax
Reform Act of 1997. Failure to comply renders the petition void.
 It violates the doctrine of exhaustion of administrative remedies and renders the petition premature and
without a cause of action, with the effect that the CTA does not acquire jurisdiction over the taxpayer’s
petition.
 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."
 Thus, San Roque’s petition with the CTA is a mere scrap of paper.
 Well-settled is the rule that tax refunds or credits, just like tax exemptions, are strictly construed
against the taxpayer.
 Whether the Atlas doctrine or the Mirant doctrine is applied to San Roque is immaterial because what is at
issue in the present case is San Roque’s non-compliance with the 120-day mandatory and jurisdictional
249
 period, which is counted from the date it filed its administrative claim with the CIR. The 120-day period may
extend beyond the two-year prescriptive period, as long as the administrative claim is filed within the two-
year prescriptive period. However, San Roque’s fatal mistake is that it did not wait for the CIR to decide
within the 120-day period, a mandatory period whether the Atlas or the Mirant doctrine is applied.
 Section 112(D) of the 1997 Tax Code is clear, unequivocal, and categorical that the CIR has 120 days to
act on an administrative claim. The taxpayer can file the judicial claim
(1) Only within 30 days after the CIR partially or fully denies the claim within the 120- day period, or
(2) only within 30 days from the expiration of the 120- day period if the CIR does not act within the 120-
day period.
 Even if, contrary to all principles of statutory construction as well as plain common sense, we gratuitously
apply now Section 4.106-2(c) of Revenue Regulations No. 7-95, still San Roque cannot recover any
refund or credit because San Roque did not wait for the 60-day period to lapse, contrary to the
express requirement in Section 4.106-2(c).
 SC granted the petition of CIR to deny the tax refund or credit claim of San Roque.

NIPPON EXPRESS (PHILIPPINES) CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL

REVENUE, Respondent.

DECISION

MENDOZA, J.:

Before this court is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court, seeking to
set aside the May 13, 2011 Resolution1 of the Court of Tax Appeals (CTA) En Bane in C.T.A. E. B. No. 505
(C.T.A. Case No. 6688) entitled Commissioner of Internal Revenue v. Nippon Express (Philippines)
Corporation.

The Facts

Petitioner Nippon Express (Philippines) Corporation (petitioner) is a corporation duly organized and registered
with the Securities and Exchange Commission. It is also a value-added tax (VAT)-registered entity with the
Large Taxpayer District of the Bureau of Internal Revenue (BIR).2 For the year 2001, it regularly filed its
amended quarterly VAT returns. On April 24, 2003, it filed an administrative claim for refund of P20,345,824.29
representing excess input tax attributable to its effectively zero-rated sales in 2001, computed as
follows:3chanroblesvirtualawlibrary

Output VAT from Taxable Sales (10%) P 5,827,022.20

Less: Input VAT from Taxable Sales (1,789,111.32)
Input VAT from Zero-rated Sales (24,383,735.17)
Refundable Excess Input VAT (P 20,345,824.29)

Pending review by the BIR, on April 25, 2003, petitioner filed a petition for review with the CTA, requesting for
the issuance of a tax credit certificate in the amount of P20,345,824.29.4chanroblesvirtualawlibrary

250
On January 26, 2009, the First Division of the CTA denied the petition for insufficiency of evidence. 5 Upon
motion for reconsideration, however, the CTA First Division promulgated its Amended Decision,6 dated March
24, 2009, ordering the respondent, Commissioner of Internal Revenue (CIR) to issue a tax credit certificate in
favor of petitioner in the amount of P10,928,607.31 representing excess or unutilized input tax for the second,
third and fourth quarters of 2001. The CTA First Division took judicial notice of the records of C.T.A. Case No.
6967, also involving petitioner, to show that the claim of input tax had not been applied against any output tax
in the succeeding quarters. As to the timeliness of the filing of petitioner's administrative and judicial claims, the
CTA First Division ruled that while the administrative application for refund was made within the two-year
prescriptive period, petitioner's immediate recourse to the court was a premature invocation of the court's
jurisdiction due to the non-observance of the procedure in Section 112(D)7 of the National Internal Revenue
Code (NIRC) providing that an appeal may be made with the CTA within 30 days from the receipt of the
decision of the CIR denying the claim or after the expiration of the 120-day period without action on the part of
the CIR. Considering, however, that the CIR did not register his objection when he filed his Answer, he is
deemed to have waived his objection thereto.8 The CIR sought reconsideration but his motion was denied in
the June 16, 2009 Resolution9 of the CTA First Division.

The CIR elevated the case to the CTA En Banc which, on June 11, 2010, reversed and set aside the March
24, 2009 Amended Decision and the June 16, 2009 Resolution of the CTA First Division.10 Accordingly,
petitioner's claim for refund or issuance of a tax credit certificate was denied for lack of merit. The CTA En
Banc ruled that the sales invoices issued by petitioner were insufficient to establish its zero-rated sale of
services. Without the proper VAT official receipts issued to its clients, the payments received by petitioner
could not qualify for zero-rating for VAT purposes. As a result, the claimed input VAT payments allegedly
attributable to such sales could not be granted.

The CTA En Banc later changed its position on September 22, 2010 when it issued its Amended
Decision11 granting petitioner's motion for reconsideration, setting aside its own June 11, 2010 Decision and
affirming the March 24, 2009 Amended Decision of the CTA First Division. In view of the pronouncement of the
Court in the case of AT&T Communications Services Philippines, Inc. v. Commissioner of Internal
Revenue,12 that Section 113 of the NIRC did not distinguish between a sales invoice and an official receipt, the
CTA En Banc found petitioner's sales invoices to be acceptable proof to support its claim for refund or
issuance of a tax credit certificate representing its excess or unutilized input VAT arising from zero-rated or
effectively zero-rated sales.

The CIR filed a motion for reconsideration, arguing that the sales invoice, which supported the sale of goods,
was not the same as the official receipt, which must support the sale of services. In addition, it pointed out that
the CTA had no jurisdiction over the petition for review because it was filed before the lapse of the 120-day
period accorded to the CIR to decide on its administrative claim for input VAT
refund.13chanroblesvirtualawlibrary

In another reversal of opinion, the CTA En Banc set aside the March 24, 2009 Amended Decision and the
June 16, 2009 Resolution of the CTA First Division and dismissed the petition for review for lack of jurisdiction.
In its May 13, 2011 Resolution,14 the CTA En Banc held that the 120-day period under Section 112(D) of the
NIRC, which granted the CIR the opportunity to act on the claim for refund, was jurisdictional in nature such
that petitioner's failure to observe the said period before resorting to judicial action warranted the dismissal of
its petition for review for having been prematurely filed, in accordance with the ruling in Commissioner of
Internal Revenue v. Aichi Forging Company of Asia, Inc.15 With respect to the use of official receipts
interchangeably with sales invoices, the tax court cited the ruling of the Court in Kepco Philippines Corporation
v. Commissioner of Internal Revenue16 which concluded that a VAT invoice and a VAT receipt should not be
confused as referring to the same thing. A VAT invoice was the seller's best proof of the sale of the goods or
services to the buyer while the VAT receipt was the buyer's best evidence of the payment of goods and
services received from the seller.

Hence, this petition.

251
 The Issues

Petitioner raises the following questions:

WHETHER OR NOT THE COURT OF TAX APPEALS HAS NO JURISDICTION TO ENTERTAIN THE
INSTANT CASE. WHETHER OR NOT THE PETITIONER'S VAT INVOICES ARE INSUFFICIENT PROOF TO
SUPPORT ITS ZERO-RATED SALES.17chanroblesvirtualawlibrary

The Court's Ruling

The Court finds the petition to be without merit.

As regards the first issue, petitioner argues that the non-exhaustion of administrative remedies is not a
jurisdictional defect as to prevent the tax court from taking cognizance of the case.18 It merely renders the filing
of the case premature and makes it susceptible to dismissal for lack of cause of action, if invoked. Considering,
however, that the CIR failed to seasonably object to the filing of the case by petitioner with the CTA, it is
deemed to have waived any defect in the petition for review. In fact, petitioner points out that the this issue was
only raised for the first time in the respondent's Supplemental Motion for Reconsideration, dated December 3,
2010, which was filed after the promulgation of the September 22, 2010 Amended Decision of the CTA En
Banc. Finally, petitioner insists that it cannot be faulted for relying on prevailing CTA jurisprudence requiring
that both administrative and judicial claims for refund be filed within two (2) years from the date of the filing of
the return and the payment of the tax due. Because this case was filed more than seven years prior to Aichi,
the doctrine espoused therein cannot be applied retroactively as it would impair petitioner's substantial rights
and will deprive it of its right to refund.19chanroblesvirtualawlibrary

Petitioner is mistaken.

The provision in question is Section 112(D) (now subparagraph C) of the NIRC:

Sec. 112. Refunds or Tax Credits of Input Tax

xxx

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

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

A simple reading of the abovequoted provision reveals that the taxpayer may appeal the denial or the inaction
of the CIR only within thirty (30) days from receipt of the decision denying the claim or the expiration of the
120-day period given to the CIR to decide the claim. Because the law is categorical in its language, there is no
need for further interpretation by the courts and non-compliance with the provision cannot be justified.20 As
eloquently stated in Rizal Commercial Banking Corporation v. Intermediate Appellate Court and BF Homes,
Inc.:21chanroblesvirtualawlibrary

It bears stressing that the first and fundamental duty of the Court is to apply the law. When the law is clear and
free from any doubt or ambiguity, there is no room for construction or interpretation. As has been our
252
consistent ruling, where the law speaks in clear and categorical language, there is no occasion for
interpretation; there is only room for application (Cebu Portland Cement Co. vs. Municipality of Naga, 24
SCRA-708 [1968]).

Where the law is clear and unambiguous, it must be taken to mean exactly what it says and the court has no
choice but to see to it that its mandate is obeyed (Chartered Bank Employees Association vs. Ople, 138 SCRA
273 [1985]; Luzon Surety Co., Inc. vs. De Garcia, 30 SCRA 111 [1969]; Quijano vs. Development Bank of the
Philippines, 35 SCRA 270 [1970]).

Only when the law is ambiguous or of doubtful meaning may the court interpret or construe its true intent.
Ambiguity is a condition of admitting two or more meanings, of being understood in more than one way, or of
referring to two or more things at the same time. A statute is ambiguous if it is admissible of two or more
possible meanings, in which case, the Court is called upon to exercise one of its judicial functions, which is to
interpret the law according to its true intent.22chanroblesvirtualawlibrary

Moreover, contrary to petitioner's position, the 120+30-day period is indeed mandatory and jurisdictional, as
recently ruled in Commissioner of Internal Revenue v. San Roque Power Corporation.23 Thus, failure to
observe the said period before filing a judicial claim with the CTA would not only make such petition premature,
but would also result in the non-acquisition by the CTA of jurisdiction to hear the said case.

Because the 120+30 day period is jurisdictional, the issue of whether petitioner complied with the said time
frame may be broached at any stage, even on appeal. Well-settled is the rule that the question of jurisdiction
over the subject matter can be raised at any time during the proceedings.

Jurisdiction cannot be waived because it is conferred by law and is not dependent on the consent or objection
or the acts or omissions of the parties or any one of them.24 Consequently, the fact that the CIR failed to
immediately express its objection to the premature filing of the petition for review before the CTA is of no
moment.

As to petitioner's contention that it relied on the previous decisions of the CTA on the matter, the Court finds it
apt to quote its ruling in San Roque:

There is also the claim that there are numerous CTA decisions allegedly supporting the argument that the filing
dates of the administrative and judicial claims are inconsequential, as long as they are within the two-year
prescriptive period. Suffice it to state that CTA decisions do not constitute precedents, and do not bind this
Court or the public. That is why CTA decisions are appealable to this Court, which may affirm, reverse or
modify the CTA decisions as the facts and the law may warrant. Only decisions of this Court constitute binding
precedents, forming part of the Philippine legal system.25chanroblesvirtualawlibrary

Pursuant to the ruling of the Court in San Roque, the 120+30-day period is mandatory and jurisdictional from
the time of the effectivity of Republic Act (R.A.) No. 8424 or the Tax Reform Act of 1997. The Court, however,
took into consideration the issuance by the BIR of Ruling No. DA-489-03, which expressly stated that the
taxpayer need not wait for the lapse of the 120-day period before seeking judicial relief. Because taxpayers
cannot be faulted for relying on this declaration by the BIR, the Court deemed it reasonable to allow taxpayers
to file its judicial claim even before the expiration of the 120-day period. This exception is to be observed from
the issuance of the said ruling on December 10, 2003 up until its reversal by Aichi on October 6, 2010. In the
landmark case of Aichi, this Court made a definitive statement that the failure of a taxpayer to wait for the
decision of the CIR or the lapse of the 120-day period will render the tiling of the judicial claim with the CTA
premature.26 As a consequence, its promulgation once again made it clear to the taxpayers that the 120+ 30-
day period must be observed.

As laid down in San Roque, judicial claims filed from January 1, 1998 until the present should strictly adhere to
the 120+ 30-day period referred to in Section 112 of the NIRC. The only exception is the period from

253
December 10, 2003 until October 6, 2010, during which, judicial claims may be tiled even before the expiration
of the 120-day period granted to the CIR to decide on the claim for refund.

Based on the foregoing discussion and the ruling in San Roque, the petition must fail because the judicial claim
of petitioner was filed on April 25, 2003, only one day after it submitted its administrative claim to the CIR.
Petitioner failed to wait for the lapse of the requisite 120-day period or the denial of its claim by the CIR before
elevating the case to the CT A by a petition for review. As its judicial claim was filed during which strict
compliance with the 120+ 30-day period was required, the Court cannot but declare that the filing of the
petition for review with the CT A was premature and that the CTA had no jurisdiction to hear the case.

Having thus concluded, the Court sees no need to discuss other issues which may have been raised in the
petition.

WHEREFORE, the petition is DENIED. SO ORDERED.

Facts:
Petitioner Corporation applied for a tax credit/refund based on section 112 of the Tax Code in the
amount of P24,826,667.61 representing the value of input VAT paid by the corporation in relation to sales
which are attributable to zero-rated sales. Petitioner corporation filed the administrative claim with the with the
One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance (OSSAC-
DOF) on September 24, 2001. Having no resolution from the OSSAC-DOF, petitioner corporation filed a
petition for review with the CTA on April 24, 2002. The CTA denied the calim for tax credit/refund for
petitioner’s failure to comply with the receipt and invoicing requirements provided by the Tax Code for refund
based on zero-rated transactions.

Issues:

1. Did the CTA acquire jurisdiction over the controversy?

2. Is there a difference between ainvoicing requirements and receipt requirements in zero-rated
transactions?

Ruling:

1. No, the CTA did not acquire jurisdiction over the controversy. The Supreme Court stated that strict
compliance with the prescriptive periods in claiming for refund of creditable input tax due or paid
attributable to any zero-rated or effectively zero-rates sales (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). Petitioner Corporation has failed to
comply with the 120+30 day period, which is mandatory and jurisdictional, in filing its petition for review.
The 120 day period for the administrative office to act ended on September 22, 2001, thus petitioner
should have filed its petition for review thirty days thereafter or on or before April 24, 2002.
2. A VAT invoice is necessary for every sale, barter or exchange of goods or properties while a
VAT official receipt properly pertains to every lease of goods or properties, and every sale, barter or
exchange of services. In other words, the VAT invoice is the seller’s best proof of the sale of the goods
or services to the buyer while the VAT receipt is the buyer’s best evidence of the payment of goods or
services received from the seller.

254
G.R. No. 175142 July 22, 2013

BONIFACIO WATER CORPORATION (formerly BONIFACIO VIVENDI WATER

CORPORATION), Petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

PERALTA, J.:

This resolves the Petition for Review on Certiorari under Rule 45 of the Rules of Court which seeks the review
of the Court of Tax Appeals En Banc Decision1 dated June 26, 2006, and Resolution2 dated October 19, 2006.

The facts follow.

Petitioner is a domestic corporation engaged in the collection, purification and distribution of water. It is
registered with the Bureau of Internal Revenue (BIR) as a value-added tax (VAT) taxpayer, with VAT
Registration/Taxpayer Identification No. 201-403-657-000.

Petitioner duly filed with the BIR its quarterly VAT returns for the 4th quarter of 1999, 1st quarter of 2000, 2nd
quarter of 2000, 3rd quarter of 2000, and 4th quarter of 2000, declaring the following information:

QUARTE TAXABLE OUTPUT INPUT TAX DOMESTIC INPUT VAT TOTAL EXCESS
R EXH SALES VAT CARRIED PURCHASES AVAILABLE INPUT
INVOLVE . OVER INPUT VAT VAT
D FROM
PREVIOUS
QUARTER
(A) (B) (C) (D) (E) (F)=(C)+(E) (G)=(B)+(F)
2000
4th Qtr. A - 25,291,053.6 196,306,597.3 19,630,659.7 44,921,713.35 44,921,713.3
2 0 3 5
1999
1st Qtr. B - 44,921,713.3 186,000,881.7 18,600,088.1 63,521,801.52 63,521,801.5
5 0 7 2
2nd Qtr. C 2,182,615.7 218,261.5 63,521,801.5 151,074,719.1 15,107,471.9 78,629,273.43 78,411,011.8
5 7 2 0 1 6
3rd Qtr. D 1,505,786.7 292,412.7 78,411,011.8 121,599,043.0 12,159,904.3 90,570,916.16 90,420,337.4
0 1 6 0 0 9
4th Qtr. E 2,924,127.1 292,412.7 90,420,337.4 96,717,388.90 9,671,738.89 100,092,076.3 99,799,663.6
0 1 9 8 7

For said period, petitioner alleges that its input VAT included, among others, input VAT paid on purchases of
capital goods amounting to ₱65,642,814.65. These purchases supposedly pertain to payment to contractors in
connection with the construction of petitioner’s Sewage Treatment Plant, Water and Waste System, and Water
Treatment Plant, broken down as follows:

Quarter Input VAT Paid on Total Amount

Purchase of Capital Goods

255
 1999
4th Quarter ₱11,607,748.20 ₱11,607,748.20
2000
1st Quarter ₱18,281,682.96
2nd Quarter 14,884,531.96
3rd Quarter 21,705,122.19
4th Quarter (836,270.66) 54,035,066.45
Grand Total ₱65,642,814.65

On January 22, 2002, petitioner filed with Revenue District Office No. 44–Pateros and Taguig, Revenue
Region No. 8 of the BIR, an administrative claim for refund or issuance of a tax credit certificate in the amount
of ₱65,642,814.65 representing unutilized input VAT on capital goods purchased for the period beginning the
4th quarter of 1999 up to the 4th quarter of 2000.

The next day, petitioner filed its Petition for Review with the Court of Tax Appeals (CTA), to toll the running of
the two-year prescriptive period.

On March 29, 2005, the CTA Second Division rendered a Decision3 partially granting petitioner’s claim for
refund in the reduced amount of ₱40,875,208.64.

In said case, the CTA Second Division held that an examination of the various official receipts presented by
petitioner, to support its purchases for capital goods, shows that some of its purchases, such as rental,
management fees and direct overhead, cannot be considered as capital goods. Further, it ruled that the official
receipts under the name "Bonifacio GDE Water Corporation" were disallowed on the ground that the use of
said business name by petitioner was never approved by the Securities and Exchange Commission (SEC).
Thus, the court ruled as follows:

WHEREFORE, in the light of the foregoing, the Petition for Review is PARTIALLY GRANTED. The respondent
is hereby ORDERED TO REFUND or TO ISSUE A TAX CREDIT CERTIFICATE in favor of the petitioner in the
reduced amount of ₱40,875,208.64, representing unutilized input VAT on capital goods for the period from the
4th quarter of 1999 to the 4th quarter of 2000, computed as follows:

Amount Claimed P 65,642,814.65

Less: Disallowance per
Court’s Evaluation 24,767,606.01
Refundable Amount P 40,875,208.64

SO ORDERED.4

The parties filed their respective motions for reconsideration against said Decision. However, in a
Resolution5 dated August 23, 2005, the CTA Second Division held as follows:

In sum, the refundable amount to be granted to petitioner should be increased to ₱45,446,280.55, computed
as follows:

Refundable Amount per Decision P 40,875,208.64

256
 Add: Additional Input VAT
a.) Construction in Progress P 1,439,629.72
b.) Input VAT found not to
have been recorded twice 3,131,442.19 4,571,071.91
Total Refundable Amount P 45,446,280.55

IN VIEW OF ALL THE FOREGOING, respondent’s Motion for Reconsideration is DENIED for lack of merit,
while petitioner’s Motion for Partial Reconsideration is PARTIALLY GRANTED.

Accordingly, respondent is ORDERED to REFUND or TO ISSUE A TAX CREDIT CERTIFICATE in favor of

petitioner in the increased amount of ₱45,446,280.55 as computed above.

SO ORDERED.6

Petitioner thereafter filed its petition for review with the CTA En Banc arguing that it has presented substantial
evidence that proves its input VAT on purchases of capital goods from the 4th quarter of 1999 to the 4th
quarter of 2000, as well as the fact that petitioner and "Bonifacio GDE Corporation" are one and the same
entity.

In a Decision7 dated June 26, 2006, the CTA En Banc affirmed in toto the assailed Decision and Resolution of
the CTA Second Division. The fallo of the Decision states:

WHEREFORE, premises considered, the assailed Decision and Resolution of the Second Division are hereby
AFFIRMED in toto, and the Petition for Review is hereby DISMISSED for lack of merit.

SO ORDERED.8

Unfazed, petitioner filed a motion for reconsideration against said Decision, which was denied in a
Resolution9 dated October 19, 2006.

Thus, the present petition wherein petitioner lists the following grounds in support of its petition:

GROUNDS FOR THE PETITION

PETITIONER RESPECTFULLY MOVES THAT THE ASSAILED DECISION DATED 26 JUNE 2006, AND THE
RESOLUTION DATED 19 OCTOBER 2006, ISSUED BY THE CTA EN BANC, BE SET ASIDE, BASED ON
ANY OR ALL OF THE FOLLOWING GROUNDS:

THE CTA EN BANC ERRED WHEN IT SANCTIONED THE PARTIAL DENIAL OF PETITIONER’S CLAIM
FOR REFUND ON THE GROUND THAT PETITIONER’S INVOICES ARE NOT COMPLIANT WITH
ADMINISTRATIVE REGULATIONS.

II

THE CTA EN BANC ERRED WHEN IT SANCTIONED THE PARTIAL DENIAL OF PETITIONER’S CLAIM
FOR REFUND BY ITS FAILURE TO APPLY THE DEFINITION OF CAPITAL GOODS CONTAINED IN
EXISTING JURISPRUDENCE TO CERTAIN PURCHASES OF PETITIONER.

257
 III

THE CTA EN BANC FAILED TO APPLY THE RULES REGARDING JUDICIAL ADMISSIONS IN THE
PROCEEDINGS BELOW.

IV

IN CIVIL CASES, SUCH AS CLAIMS FOR REFUND, STRICT COMPLIANCE WITH TECHNICAL RULES OF
EVIDENCE IS NOT REQUIRED. MOREOVER, A MERE PREPONDERANCE OF EVIDENCE WILL SUFFICE
TO JUSTIFY THE GRANT OF A CLAIM. THE CTA EN BANC SANCTIONED THE USE OF A HIGHER
STANDARD OF EVIDENCE IN A NON-CRIMINAL PROCEEDING.10

Simply, the issue is whether or not the CTA En Banc erred in not granting petitioner’s claim for refund or
issuance of a tax credit certificate in the amount of ₱65,642,814.65.

Petitioner contends that non-compliance with the invoicing requirements under the 1997 Tax Code does not
automatically result in the denial of a claim for refund or tax credit when the same is supported by substantial
evidence. It contends that the CTA En Banc erred in sustaining the ruling that petitioner is not entitled to a
refund of the input VAT evidenced by official receipts in the name of "Bonifacio GDE Water Corporation."

Petitioner further submits that the CTA erred in failing to properly apply the definition of capital goods and
insists that services incurred in the construction and installation of capital assets and goods should be included
in the cost of capital goods for purposes of determining the proper amount of refundable input VAT.

It also posits that respondent made an "informal judicial admission" and partially recognized its claims for
excess input VAT on purchases of capital goods when Revenue District No. 44 issued a memorandum
acknowledging, inter alia, that the input taxes claimed as refund were duly supported by valid VAT invoices
and/or receipts.

Lastly, petitioner asserts that the CTA imposed an overly strict standard of evidence in disallowing petitioner’s
invoices bearing the name "Bonifacio GDE Water Corporation." It claims that the denial of the claim in its
entirety based purely on technical grounds unduly deprives petitioner of a right granted by law and constitutes
an undue deprivation of its property.

For its part, respondent argues that the instant petition raises purely questions of fact which is not allowed
under Rule 45 of the Rules of Court. He highlights the fact that the issue of whether or not petitioner was able
to present substantial evidence to prove and support its claim for tax refund or tax credit calls for this Court to
review and evaluate all the evidence to enable it to determine and resolve the issues raised by petitioner.

Moreover, respondent avers that the CTA En Banc committed no error in not applying the rules regarding
judicial admissions, since no judicial admission was made by or was attributable to respondent, either in the
pleadings or in the course of the trial proceedings. He argues that the admission made by a subordinate BIR
official in support of the course of action which he had proposed or submitted for approval by his superior
cannot by any stretch of imagination be considered an admission, much less a judicial admission, of the latter.

Finally, respondent stresses that the CTA En Banc did not err in using stricter rules of evidence in cases
involving claims for tax refund or tax credit as the same are in the nature of tax exemptions and are regarded
as in derogation of sovereign authority and to be construed strictissimi juris against the entity claiming the
exemption.

We agree with respondent.

258
At the outset, it must be emphasized that an appeal by petition for review on certiorari cannot determine factual
issues. In the exercise of its power of review, the Court is not a trier of facts and does not normally undertake
the re-examination of the evidence presented by the contending parties during trial.11 However, although the
rules provide for certain recognized exceptions,12 the circumstances surrounding the present case do not fall
under any of them.

Assuming, however, that this Court can take cognizance of the instant case, it bears stressing that the
arguments raised by petitioner have already been extensively discussed by both the CTA Second Division and
the CTA En Banc, to wit:

Petitioner, in support of its first ground, argues that it has presented substantial evidence that unequivocally
proved petitioner’s input VAT on purchases of capital goods from the 4th quarter of 1999 to the 4th quarter of
2000 as well as the fact that petitioner and Bonifacio GDE Corporation are one and the same entity.

We do not agree.

The change of name to Bonifacio GDE Corporation being unauthorized and without approval from the
Securities and Exchange Commission, petitioner cannot now seek for a refund of input taxes which are
supported by receipts under that name. This is pursuant to Sections 4.104-5 and 4.108-1 of Revenue
Regulations No. 7-95 in relation to Sections 113 and 237 of the Tax Code, reproduced below for easy
reference.

xxxx

The requisite that the receipt be issued showing the name, business style, if any, and address of the
purchaser, customer or client is precise so that when the books of accounts are subjected to a tax audit
examination, all entries therein could be shown as adequately supported and proven as legitimate business
transactions. The absence of official receipts issued in the taxpayer’s name is tantamount to non-compliance
with the substantiation requirements provided by law.

Petitioner cannot raise the argument that, "non-compliance with the invoicing requirements under the 1997
NIRC, as amended, does not automatically result in the denial of a claim for refund or tax credit when the same
is supported by substantial evidence" and that, "In civil cases, such as claims for refund, strict compliance with
technical rules of evidence is not required. Moreover, a mere preponderance of evidence will suffice to justify
the grant of a claim," in addition to its first ground in the instant petition. Taxpayers claiming for a refund or tax
credit certificate must comply with the strict and mandatory invoicing and accounting requirements provided
under the 1997 NIRC, as amended, and its implementing rules and regulations. Rules and regulations with
regard to procedures are implemented not to be ignored or to be taken for granted, but are strictly adhered to
for they are developed from the law itself.13

From the foregoing, it is clear that petitioner must show satisfaction of all the documentary and evidentiary
requirements before an administrative claim for refund or tax credit will be granted. Perforce, the taxpayer
claiming the refund must comply with the invoicing and accounting requirements mandated by the Tax Code,
as well as the revenue regulations implementing them.14

Thus, the change of petitioner’s name to "Bonifacio GDE Water Corporation," being unauthorized and without
approval of the SEC, and the issuance of official receipts under that name which were presented to support
petitioner’s claim for tax refund, cannot be used to allow the grant of tax refund or issuance of a tax credit
certificate in petitioner’s favor. The absence of official receipts issued in its name is tantamount to
noncompliance with the substantiation requirements provided by law and, hence, the CTA En Banc’s partial
grant of its refund on that ground should be upheld.

259
Also, petitioner’s allegation that some of the disallowed input taxespaid on services related to the construction
of petitioner’s Waste Water Treatment and Water Sewerage Distribution Networks, should be included as part
of its capital goods, must fail. As comprehensively discussed by the CTA Second Division in its
Resolution15 dated August 23, 2005 –

Petitioner alleges that the disallowed input taxes are paid on services related to the construction of petitioner’s
Waste Water Treatment Plant and Water Sewerage Distribution Networks, summarized as follows:

Expense Exhibit Payee

Professional services, project management and design, O-27 Symonds Travers
advisory works for operations and management, and Morgan
contract preparation/ supervision.
Lease for Water Treatment Plant, Waste Water Treatment O-29 Fort Bonifacio
Plant and Elevated Reservoir from April 1999 to August Development
2000 Corporation
Professional services for project management and design O-33 Symonds Travers
for August 2000 Morgan
Rental on BDCA lot from 1 September 2000 to 31 O-35 Fort Bonifacio
November 2001 for the Water Treatment Plant, Waste Development
Water Treatment Plant and Elevated Reservoir Corporation
Insurance for turned-over waste water treatment facilities O-36 -do-
Professional services O-37 Symonds Travers
Morgan
Fort Bonifacio
O-39 Development
Corporation
Contracted services and secondment O-41 Sade Compagnie
Generale de Travaux
Contracted services for additional service connection O-42 -do-

xxxx

Thus, it can be seen that the aforesaid expenses were correspondingly charged to "Pre-Operating Expense,"
"Accrued Expense," "Direct Overhead," "Prepaid Insurance," and "Construction in Progress."

Records reveal that petitioner’s Property, Plant & Equipment account is composed of the following specific
account titles, to wit:

2000 1999

Plant, machinery and equipment ₱ 625,868,017.00 ₱ -

Sewerage and water pipelines 563,252,132.00 -
Reservoir, tanks and pumping station 186,127,317.00 -
Leasehold improvements 162,561,913.00 -

260
 Electronic and instrumentation 153,544,879.00 -
Building 64,8865,059.00 -
Wells 20,248,580.00 -
Office furnitures, fixtures & equipment 6,658,699.00 335,209.00
Transportation rquipment 3,004,053.00 -

₱ 1,786,130,649.00 ₱ 335,209.00
Less: Accumulated Depreciation 868,012.00 -

₱ 1,785,262.637.00 ₱ 335,209.00
Construction in Progress 73,185,765.00 832,065,352.00

₱ 1,858,448,402.00 ₱ 832,400,561.00

Only the above real accounts are to be considered as capital goods since "capital goods" is defined as:

"Capital goods or properties" refer to goods or properties with estimated useful life greater than one year and
which are treated as depreciable assets under Section 29(f), used directly or indirectly in the production or sale
of taxable goods or services.

Had petitioner intended the aforementioned itemized expenses to be part of Property, Plant & Equipment, then
it should have recorded the same to the foregoing specific accounts. Except for the account "Construction in
Progress," the other expense items do not fall within the definition of capital goods pursuant to Section 4.106-
1(b) of Revenue Regulations No. 7-95.161âwphi1

As a final point, it is doctrinal that the Court will not lightly set aside the conclusions reached by the CT A
which, by the very nature of its function of being dedicated exclusively to the resolution of tax problems, has
accordingly developed an expertise on the subject, unless there has been an abuse or improvident exercise of
authority.17

In fact, in Barcelon, Roxas Securities, Inc. v. Commissioner of Internal Revenue,18 this Court held that it
accords the findings of fact by the CT A with the highest respect. It ruled that factual findings made by the CT A
can only be disturbed on appeal if they are supported by substantial evidence or there is a showing of gross
error or abuse on the part of the Tax Court. In the absence of any clear and convincing proof to the contrary,
this Court must presume that the CT A rendered a decision which is valid in every respect.19

In the present case, no cogent reason exists for this Court to deviate from this well-entrenched principle, since
the CT A En Bane neither abused its authority nor committed gross error in partially denying petitioner's refund
claim.

WHEREFORE, premises considered, the instant petition is DENIED. The Court of Tax Appeals En Bane
Decision dated June 26, 2006, and Resolution dated October 19, 2006, are hereby AFFIRMED.

Bonifacio Water Corporation v CIR

261
 G.R. No. 175142, July 22, 2013

FACTS:

This is a Petition for Review on Certiorari, which seeks to review the decision of the CTA En Banc.

Petitioner is a domestic corporation engaged in the collection, purification and distribution of water, which duly
filed its VAT returns for periods: 4th quarter 1999 and 1st, 2nd and 3rd quarters 2000. For the said period, it
alleges that its input VAT included, among others, input VAT on purchases of capital goods amounting to
P65,642,814.65. These pertain to payments to contactors in connection with the construction of its Plant.

On January 22, 2012, petitioner filed with the BIR an administrative claim for refund or issuance of tax credit
certificate in the amount of P65,642,814.65 representing the unutilized input tax on purchases of capital goods.
The next day, petitioner filed its Petition for Review with the CTA to toll the running of the two-year prescriptive
period.

CTA Second Division partially granted the claim for refund and reduced the amount to only P40,875,208.64 for
the reason that some of its purchases, such as rental, management fees and direct overhead cannot be
considered as capital goods and some official receipts under the name "Bonifacio GDE Water Corporation"
were disallowed on the ground that the use of said business name by petitioner was never approved by the
Securities and Exchange Commission (SEC). Petitioner and Respondent filed their respective Motions for
Reconsideration (MR). However, respondent’s MR is denied while petitioner’s MR was partially granted,
increasing the amount of the refund to P45,446,280.55.

Petitioner thereafter filed its Petition for Review with the CTA En Banc arguing that it has presented substantial
evidence that proves its input VAT on purchases of capital goods from the 4th quarter of 1999 to the 4th
quarter of 2000, as well as the fact that petitioner and "Bonifacio GDE Corporation" are one and the same
entity. However, the CTA En Bank denied the petition and affirmed in toto the CTA Second Division’s decision.

ISSUES:

(1) Are the official receipts under the name "Bonifacio GDE Water Corporation" allowed as evidence to support
petitioner’s claim for refund?

(2) Are payments for rentals, management fees and direct overhead considered capital goods?

HELD:
262
(1) No. Official receipts under the name "Bonifacio GDE Water Corporation", being unauthorized and without
approval from SEC, are not allowed as evidence to support petitioner’s claim for refund of input taxes. The
requisite that the receipt be issued showing the name, business style, if any, and address of the purchaser,
customer or client is precise so that when the books of accounts are subjected to a tax audit examination, all
entries therein could be shown as adequately supported and proven as legitimate business transactions. The
absence of official receipts issued in the taxpayer’s name is tantamount to non-compliance with the
substantiation requirements provided by law.

Thus, the change of petitioner’s name to "Bonifacio GDE Water Corporation," being unauthorized and without
approval of the SEC and the issuance of official receipts under that name which were presented to support
petitioner’s claim for tax refund, cannot be used to allow the grant of tax refund or issuance of a tax credit
certificate in petitioner’s favor.

(2) No. Payments for rentals, management fees and direct overhead are not considered capital goods.
"Capital goods or properties" refer to goods or properties with estimated useful life greater than one year
and which are treated as depreciable assets under Section 29(f), used directly or indirectly in the production or
sale of taxable goods or services. These expenses were correspondingly charged to "Pre-Operating Expense,"
"Accrued Expense," "Direct Overhead," "Prepaid Insurance," and "Construction in Progress”. Had petitioner
intended the aforementioned itemized expenses to be part of Property, Plant & Equipment, then it should have
recorded the same to the foregoing specific accounts. Except for the account "Construction in Progress," the
other expense items do not fall within the definition of capital goods pursuant to Section 4.106-1(b) of Revenue
Regulations No. 7-95.

Hence, such expenses cannot be considered capital goods.

G.R. No. 190872 October 17, 2013

REPUBLIC OF THE PHILIPPINES represented by the Commissioner of Internal Revenue, Petitioner,

vs.
GST PHILIPPINES, INC., Respondent.

DECISION

PERLAS-BERNABE, J.:

It is true that every citizen has a civic responsibility nay an obligation to honestly pay the right taxes as a
contribution to the government in order to keep and maintain a civilized society. Corollarily, the government is
expected to implement tax laws in good faith; to discharge its duty to collect what is due to it; and consistent
with the principles of fair play and equity to justly return what has been erroneously and excessively given to it
after careful verification but without infringing upon the fundamental rights of the taxpayer.

In this Petition for Review on Certiorari1 under Rule 45 of the 1997 Rules of Civil Procedure, petitioner
Republic of the Philippines, represented by the Commissioner of Internal Revenue (CIR), assails the October
263
30, 2009 Decision2 and January 5, 2010 Resolution3 of the Court of Tax Appeals (CTA) En Banc in C.T.A. EB
No. 484, granting respondent GST Philippines, Inc. (GST) a refund of its unutilized excess input value added
tax (VAT) attributable to zero-rated sales for the four quarters of taxable year 2004 and the first three quarters
of taxable year 2005.

The facts

GST is a corporation duly organized and existing under the laws of the Philippines, and primarily engaged in
the business of manufacturing, processing, selling, and dealing in all kinds of iron, steel or other metals. 4 It is a
duly registered VAT enterprise with taxpayer identification number 000-155-645-000,5 which deals with
companies registered with (1) the Board of Investments (BOI) pursuant to Executive Order No. (EO)
226,6 whose manufactured products are 100% exported to foreign countries; and (2) the Philippine Economic
Zone Authority (PEZA).7 Sales made by a VAT-registered person to a PEZA-registered entity are considered
exports to a foreign country subject to a zero rate.8

During the taxable years 2004 and 2005, GST filed Quarterly VAT Returns showing its zero-rated sales, as
follows:9

Period Date of Filing Zero-Rated Sales

1st Quarter of year 2004 April 16, 2004 P 77,687,420.54
2nd Quarter of year 2004 July 15, 2004 53,737,063.05
3rd Quarter of year 2004 October 15, 2004 74,280,682.00
4th Quarter of year 2004 January 11, 2005 104,633,604.23
1st Quarter of year 2005 April 25, 2005 37,742,969.02
2nd Quarter of year 2005 July 19, 2005 56,133,761.00
3rd Quarter of year 2005 October 26, 2005 51,147,677.80

Claiming unutilized excess input VAT in the total amount of ₱32,722,109.68 attributable to the foregoing zero-
rated sales,10 GST filed before the Bureau of Internal Revenue (BIR) separate claims for refund on the
following dates:11

Period Date of Filing of

Administrative Claim
For Refund
1st Quarter of year 2004 June 9, 2004
2nd Quarter of year 2004 August 12, 2004
3rd Quarter of year 2004 February 18, 2005
4th Quarter of year 2004 February 18, 2005
1st Quarter of year 2005 May 11, 2005
2nd Quarter of year 2005 November 18, 2005
3rd Quarter of year 2005 November 18, 2005

For failure of the CIR to act on its administrative claims, GST filed a petition for review before the CTA on
March 17, 2006. After due proceedings, the CTA First Division rendered a Decision12 on January 27, 2009
granting GST’s claims for refund but at the reduced amount of ₱27,369,114.36. The CIR was also ordered to
issue the corresponding tax credit certificate.13
264
The CIR moved for reconsideration, which was denied14 by the CTA First Division for lack of merit, thus,
prompting the elevation of the case to the CTA En Banc via a petition for review.15

The CIR raised therein the failure of GST to substantiate its entitlement to a refund,16 and argued that the
judicial appeal to the CTA was filed beyond the reglementary periods prescribed in Section 112 of RA
842417 (Tax Code).18

On October 30, 2009, the CTA En Banc affirmed19 the Decision of the CTA First Division finding GST’s
administrative and judicial claims for refund to have been filed well within the prescribed periods provided in
the Tax Code.20 The CIR’s motion for reconsideration was denied by the CTA En Banc in its Resolution21 dated
January 5, 2010.

Hence, the instant petition.

The Issue

The CIR no longer raises the alleged failure of GST to comply with the substantiation requirements for the
questioned claims for refund nor questions the reduced award granted by the CTA En Banc in the amount of
₱27,369,114.36. Thus, the lone issue for resolution is whether GST’s action for refund has complied with the
prescriptive periods under the Tax Code.

The Ruling of the Court

Laws Providing Refunds or Tax
Credit of Unutilized Excess Input VAT

Refund or tax credit of unutilized excess input VAT has been allowed as early as in the Original VAT Law – EO
273.22 This was later amended by RA 771623 and RA 8424, and further amended by RA 933724 which took
effect on November 1, 2005.25 Since GST’s claims for refund covered the periods before the effectivity of RA
9337, the old provision on VAT refund, specifically Section 112, as amended by RA 8424, shall apply.26 It
reads:

Section 112. Refunds or Tax Credits of Input Tax. –

(A) Zero-rated or Effectively Zero-rated Sales. – Any VAT-registered person, whose sales are zero-rated or
effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were
made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable
to such sales, except transitional input tax, to the extent that such input tax has not been applied against output
tax: x x x. (Emphasis supplied)

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. (Emphasis
supplied)

265
The CIR, adopting the dissenting opinion27 of CTA Presiding Justice Ernesto D. Acosta to the CTA En Banc
Decision dated October 30, 2009, maintains that the two-year prescriptive period under Section 112 (A) of the
Tax Code reckoned from the close of the taxable quarter involved is limited only to the filing of an
administrative – not judicial – claim.28 In turn, under paragraph (D) of the same Section, the CIR has 120 days
to decide on the claim counted from the date of the submission of complete documents and not from the mere
filing of the administrative claim. The taxpayer then has 30 days from receipt of the adverse decision, or from
the expiration of the 120-day period without the CIR acting upon the claim, to institute his judicial claim before
the CTA.29

Thus, in the present case, the claims filed for the four quarters of taxable year 2004, as well as the first quarter
of taxable year 2005, had already prescribed. While those of the second and third quarters of taxable year
2005 were prematurely filed, as summarized in the table presented by Justice Acosta, to wit:

Applying the above discourse in the case at bar, a table is prepared for easy reference:

Filing of 120th day 30th day Section Filing of the Remarks

Administrative Section 112 (D), 112 (D), 2nd par., Petition before the
Claim NIRC of NIRC of 1997 First Division of
1997 this Court
June 9, 2004 October 7, 2004 November 6, 2004 March 17, 2006 Prescribed
August 12, 2004 December 10, January 9, 2005 March 17, 2006 Prescribed
2004
February 18, June 18, 2005 July 18, 2005 March 17, 2006 Prescribed
2005
May 11, 2005 September 8, October 8, 2005 March 17, 2006 Prescribed
2005
November 18, March 18, 2006 April 17, 2006 March 17, 2006 Prescribed
2005

Based on the above, the filing of the Petition for Review before the First Division has already prescribed with
respect to the administrative claim filed on June 9, 2004; August 12, 2004; February 18, 2005; and May 11,
2005 for being filed beyond the 30th day provided under the second paragraph of Section 112 (D) of the NIRC
of 1997. The petition is therefore dismissible for being out of time.

Anent the administrative claim filed on November 18, 2005, the filing of the petition before the First Division is
premature for failure of respondent to wait for the 120-day period to expire. It failed to exhaust the available
administrative remedies. Hence, the instant petition is likewise dismissible for lack of cause of action. 30

For its part, GST asserts that under Section 112 (A) of the Tax Code, the prescriptive period is complied with if
both the administrative and judicial claims are filed within the two-year prescriptive period;31 and that
compliance with the 120-day and 30-day periods under Section 112 (D) of the Tax Code is not mandatory.32 It
explained that the 30-day period only refers to a case where a decision is rendered by the CIR and not when
the claim for refund is not acted upon, in which case, the taxpayer may appeal to the CTA anytime even prior
to or after the expiration of the 120-day period as long as it is within the two-year prescriptive period. On the
other hand, the CIR may still choose to resolve the administrative claim even beyond the 120-day period. In
any case, compliance with the 120-day and 30-day periods is merely directory and permissive, not mandatory
nor jurisdictional.33

The 120+30 day periods are

mandatory and jurisdictional.

266
The Court had already clarified in the case of CIR v. Aichi Forging Company of Asia, Inc. (Aichi), 34 promulgated
on October 6, 2010, that the two-year prescriptive period applies only to administrative claims and not to
judicial claims. Morever, it was ruled that the 120-day and 30-day periods are not merely directory but
mandatory. Accordingly, the judicial claim of Aichi, which was simultaneously filed with its administrative claim,
was found to be premature. The Court held:

In fact, applying the two-year period to judicial claims would render nugatory Section 112(D) [now Section 112
(C)] of the NIRC, which already provides for a specific period within which a taxpayer should appeal the
decision or inaction of the CIR.

The second paragraph of Section 112(D) [now Section 112 (C)] of the NIRC envisions two scenarios: (1) when
a decision is issued by the CIR before the lapse of the 120-day period; and (2) when no decision is made after
the 120-day period. In both instances, the taxpayer has 30 days within which to file an appeal with the CTA. As
we see it then, the 120-day period is crucial in filing an appeal with the CTA.35 (Emphasis supplied)

The taxpayer will always have 30 days to file the judicial claim even if the Commissioner acts only on the 120th
day, or does not act at all during the 120-day period. With the 30-day period always available to the taxpayer,
the taxpayer can no longer file a judicial claim for refund or tax credit of unutilized excess input VAT without
waiting for the Commissioner to decide until the expiration of the 120-day period.36 Failure to comply with the
120-day waiting period 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.37

San Roque case provides exception to the strict compliance with the 120-day period

While the Court En Banc reiterated in the recent consolidated cases of CIR v. San Roque Power Corporation (
San Roque ),38 promulgated on February 12, 2013, that the 120-day period is mandatory and jurisdictional,
however, it categorically held that BIR Ruling No. DA-489-03 dated December 10, 2003 provided a valid claim
for equitable estoppel under Section 24639 of the Tax Code. 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."40 Speaking through Associate Justice Antonio T. Carpio, the Court
ratiocinated as follows:

There is no dispute that the 120-day period is mandatory and jurisdictional, and that the CTA does not acquire
jurisdiction over a judicial claim that is filed before the expiration of the 120-day period. There are, however,
two exceptions to this rule. The first exception is if the Commissioner, through a specific ruling, misleads a
particular taxpayer to prematurely file a judicial claim with the CTA. Such specific ruling is applicable only to
such particular taxpayer. The second exception is where the Commissioner, through a general interpretative
rule issued under Section 4 of the Tax Code, misleads all taxpayers into filing prematurely judicial claims with
the CTA. In these cases, the Commissioner cannot be allowed to later on question the CTA's assumption of
jurisdiction over such claim since equitable estoppel has set in as expressly authorized under Section 246 of
the Tax Code.

Section 4 of the Tax Code, a new provision introduced by RA 8424, expressly grants to the Commissioner the
power to interpret tax laws, thus:

Sec. 4. Power of the Commissioner To Interpret Tax Laws and To Decide Tax Cases. – The power to interpret
the provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction of the
Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties
imposed in relation thereto, or other matters arising under this Code or other laws or portions thereof

267
administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the exclusive
appellate jurisdiction of the Court of Tax Appeals.

Since the Commissioner has exclusive and original jurisdiction to interpret tax laws, taxpayers acting in good
faith should not be made to suffer for adhering to general interpretative rules of the Commissioner interpreting
tax laws, should such interpretation later turn out to be erroneous and be reversed by the Commissioner or this
Court. Indeed, Section 246 of the Tax Code expressly provides that a reversal of a BIR regulation or ruling
cannot adversely prejudice a taxpayer who in good faith relied on the BIR regulation or ruling prior to its
reversal. x x x.41

BIR Ruling No. DA-489-03 was classified in San Roque as a general interpretative rule having been made in
response to a query by a government agency tasked with processing tax refunds and credits – the One Stop
Shop Inter-Agency Tax Credit and Drawback Center of the Department of Finance. As such, all taxpayers can
rely on said ruling from the time of its issuance on December 10, 2003 up to its reversal by this Court in Aichi
on October 6, 2010, where it was held that the 120+30 day periods are mandatory and jurisdictional.42

Therefore, GST can benefit from BIR Ruling No. DA-489-03 with respect to its claims for refund of unutilized
excess input VAT for the second and third quarters of taxable year 2005 which were filed before the CIR on
November 18, 2005 but elevated to the CTA on March 17, 2006 before the expiration of the 120-day period
(March 18, 2006 being the 120th day). BIR Ruling No. DA-489-03 effectively shielded the filing of GST's
judicial claim from the vice of prematurity.43

GST's claims, however, for the four quarters of taxable year 2004 and the first quarter of taxable year 2005
should be denied for late filing of the petition for review before the CTA. GST filed its VAT Return for the first
quarter of 2004 on April 16, 2004. Reckoned from the close of the first taxable quarter of 2004 on March 31,
2004, the administrative claim filed on June 9, 2004 was well within the required two-year prescriptive period
from the close of the taxable quarter, the last day of filing being March 31, 2006. The CIR then had 120 days
from June 9, 2004, or until October 7, 2004, to decide the claim. Since the Commissioner did not act on the
claim within the said period, GST had 30 days from October 7, 2004, or until November 6, 2004, to file its
judicial claim. However, GST filed its petition for review before the CTA only on March 17, 2006, or 496 days
after the last day of filing. In short, GST was late by one year and 131 days in filing its judicial claim.

For the second quarter of taxable year 2004, GST filed its administrative claim on August 12, 2004. The 120-
day period from the filing of such claim ended on December 10, 2004, and the 30th day within which to file a
judicial claim fell on January 9, 2005. However, GST filed its petition for review before the CTA only on March
17, 2006, or 432 days after the last day of filing.

GST was late by one year and 67 days in filing its judicial claim.

For the third and fourth quarters of taxable year 2004, GST filed its administrative claims on February 18,
2005. The 120th day, or June 18, 2005, lapsed without any action from the CIR. Thus, GST had 30 days
therefrom, or until July 18, 2005, to file its judicial claim, but it did so only on March 17, 2006, or 242 days after
the last day of filing. GST was late by 242 days in filing its judicial claim.

Finally, for the first quarter of taxable year 2005, GST filed its administrative claim on May 11,
2005.1âwphi1 The 120-day period ended on September 8, 2005, again with no action from the CIR.
Nonetheless, GST failed to elevate its claim to the CTA within 30 days, or until October 8, 2005. The petition
for review filed by GST on March 17, 2006, or 160 days after the last day of filing was, therefore, late.

Following is a tabular summation of the relevant dates of GST's administrative and judicial claims, and the
corresponding action on said claims:

1âwphi1

268
 30th day
120th day
Filing of [Section Filing of
Taxable [Section Action on
Administrative 112(D), Judicia Remarks
Period 112(D), NIRC Claim
claim NIRC of lClaim
of 1997]
1997]
October 7, November 6, March Field late DENY
1st 2004 2004 17, pursuant to
Quarter June 9, 2004 2006 Section
2004 112 (C),
NIRC of
1997
December January 9, March Field late DENY
2nd 10, 2004 2005 17, pursuant to
Quarter August 12, 2006 Section
2004 2004 112 (C),
NIRC of
1997
June 18, July 18, March Field late DENY
3rd 2005 2005 17, pursuant to
Quarter February 18, 2006 Section
2004 2005 112 (C),
NIRC of
1997
June 18, July 18, March Field late DENY
4th 2005 2005 17, pursuant to
Quarter February 18, 2006 Section
2004 2005 112 (C),
NIRC of
1997
DENY
1st May 11, 2005 September 8, October 8, March Field late pursuant to
Quarter 2005 2005 17, Section
2005 2006 112 (C),
NIRC of
1997
GRANT
2nd November 18, March 18, April 17, March Prematurely pursuant to
Quarter 2005 2006 2006 17, filed BIR Ruling
2005 2006 No. DA-
489-03
GRANT
3rd November 18, March 18, April 17, March Prematurely pursuant to
Quarter 2005 2006 2006 17, filed BIR Ruling
2005 2006 No. DA-
489-03

As may be observed from the Court's application of the 120+30 day periods to GST's claims, the 120-day
period is uniformly reckoned from the date of the filing of the administrative claims. The CIR insists, 44 however,
that the filing of the administrative claim was not necessarily the same time when the complete supporting
documents were submitted to the Commissioner.

269
The Court agrees. However, this issue is not determinative of the resolution of this case for failure of the CIR to
show that GST further submitted supporting documents subsequent to the filing of its administrative claims.
Thus, the reckoning date of the 120-day period commenced simultaneously45 with the filing of the
administrative claims when GST was presumed to have attached the relevant documents to support its
applications for refund or tax credit.

As a final note, it is incumbent on the Court to emphasize that tax refunds partake of the nature of tax
exemptions which are a derogation of the power of taxation of the State. Consequently, they are construed
strictly against a taxpayer and liberally in favor of the State.46 Thus, as emphasized in Aichi, a taxpayer must
prove not only its entitlement to a refund but also its compliance with prescribed procedures. 47

WHEREFORE, the petition is PARTLY GRANTED. The Decision dated October 30, 2009 of the Court of Tax
Appeals En Banc in C.T.A. EB No. 484, affirming the Decision dated January 27, 2009 of the CTA First
Division in C.T.A. Case No. 7419, is AFFIRMED with MODIFICATION. The claims of respondent GST
Philippines, Inc. for refund or tax credit for unutilized excess input VAT for the four quarters of taxable year
2004, as well as the first quarter of taxable year 2005 are hereby DENIED for being filed beyond the
prescriptive period, while the claims for refund for the second and third quarters of taxable year 2005 are
GRANTED. Accordingly, the Commissioner of Internal Revenue is ordered to refund or, in the alternative, to
issue a tax credit certificate to respondent GST Philippines, Inc. corresponding only to the amount representing
unutilized excess input VAT for the second and third quarters of taxable year 2005 out of the total amount of
₱27,369,114.36 awarded by the CTA.

SO ORDERED.

NO DIGEST

G.R. No. 191498 January 15, 2014

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
MINDANAO II GEOTHERMAL PARTNERSHIP, Respondent.

DECISION

SERENO, CJ:

This Rule 45 Petition1 requires this Court to address the question of timeliness with respect to petitioner's
administrative and judicial claims for refund and credit of accumulated unutilized input Value Added Tax (VAT)
under Section 112(A) and Section 112(D) of the 1997 Tax Code. Petitioner Mindanao II Geothermal
Partnership (Mindanao II) assails the Decision2 and Resolution3 of the Court of Tax Appeals En Banc (CTA En
Banc) in CTA En Banc Case No. 448, affirming the Decision in CTA Case No. 7507 of the CTA Second
Division.4 The latter ordered the refund or issuance of a tax credit certificate in the amount of ₱6,791,845.24
representing unutilized input VAT incurred for the second, third, and fourth quarters of taxable year 2004 in
favor of herein respondent, Mindanao II.

FACTS

270
Mindanao II is a partnership registered with the Securities and Exchange Commission. 5 It is engaged in the
business of power generation and sale of electricity to the National Power Corporation (NAPOCOR) 6 and is
accredited by the Department of Energy.7

Mindanao II filed its Quarterly VAT Returns for the second, third and fourth quarters of taxable year 2004 on
the following dates:8

Date filed
Quarter Taxable Year
Original Amended
26 July 2004 12 July 2005 2nd 2004
22 October 2004 12 July 2005 3rd 2004
25 January 2005 12 July 2005 4th 2004

On 6 October 2005, Mindanao II filed with the Bureau of Internal Revenue (BIR) an application for the refund or
credit of accumulated unutilized creditable input taxes.9 In support of the administrative claim for refund or
credit, Mindanao II alleged, among others, that it is registered with the BIR as a value-added taxpayer10 and all
its sales are zero-rated under the EPIRA law.11 It further stated that for the second, third, and fourth quarters of
taxable year 2004, it paid input VAT in the aggregate amount of ₱7,167,005.84, which were directly attributable
to the zero-rated sales. The input taxes had not been applied against output tax.

Pursuant to Section 112(D) of the 1997 Tax Code, the Commissioner of Internal Revenue (CIR) had a period
of 120 days, or until 3 February 2006, to act on the claim. The administrative claim, however, remained
unresolved on 3 February 2006.

Under the same provision, Mindanao II could treat the inaction of the CIR as a denial of its claim, in which
case, the former would have 30 days to file an appeal to the CTA, that is, on 5 March 2006. Mindanao II,
however, did not file an appeal within the 30-day period.

Apparently, Mindanao II believed that a judicial claim must be filed within the two-year prescriptive period
provided under Section 112(A) and that such time frame was to be reckoned from the filing of its Quarterly VAT
Returns for the second, third, and fourth quarters of taxable year 2004, that is, from 26 July 2004, 22 October
2004, and 25 January 2005, respectively. Thus, on 21 July 2006, Mindanao II, claiming inaction on the part of
the CIR and that the two-year prescriptive period was about to expire, filed a Petition for Review with the CTA
docketed as CTA Case No. 6133.12

On 8 June 2007, while the application for refund or credit of unutilized input VAT of Mindanao II was pending
before the CTA Second Division, this Court promulgated Atlas Consolidated Mining and Development
Corporation v. CIR13(Atlas). Atlas held that the two-year prescriptive period for the filing of a claim for an input
VAT refund or credit is to be reckoned from the date of filing of the corresponding quarterly VAT return and
payment of the tax.

On 12 August 2008, the CTA Second Division rendered a Decision14 ordering the CIR to grant a refund or a tax
credit certificate, but only in the reduced amount of ₱6,791,845.24, representing unutilized input VAT incurred
for the second, third and fourth quarters of taxable year 2004.15

In support of its ruling, the CTA Second Division held that Mindanao II complied with the twin requisites for
VAT zero-rating under the EPIRA law: first, it is a generation company, and second, it derived sales from
power generation. It also ruled that Mindanao II satisfied the requirements for the grant of a refund/credit under
Section 112 of the Tax Code: (1) there must be zero-rated or effectively zero-rated sales; (2) input taxes must
have been incurred or paid; (3) the creditable input tax due or paid must be attributable to zero-rated sales or

271
effectively zero-rated sales; (4) the input VAT payments must not have been applied against any output
liability; and (5) the claim must be filed within the two-year prescriptive period.16

As to the second requisite, however, the input tax claim to the extent of ₱375,160.60 corresponding to
purchases of services from Mitsubishi Corporation was disallowed, since it was not substantiated by official
receipts.17

As regards to the fifth requirement in section 112 of the Tax Code, the tax court, citing Atlas, counted from 26
July 2004, 22 October 2004, and 25 January 2005 – the dates when Mindanao II filed its Quarterly VAT
Returns for the second, third, and fourth quarters of taxable year 2004, respectively – and determined that both
the administrative claim filed on 6 October 2005 and the judicial claim filed on 21 July 2006 fell within the two-
year prescriptive period.18

On 1 September 2008, the CIR filed a Motion for Partial Reconsideration,19 pointing out that prescription had
already set in, since the appeal to the CTA was filed only on 21 July 2006, which was way beyond the last day
to appeal – 5 March 2006.20 As legal basis for this argument, the CIR relied on Section 112(D) of the 1997 Tax
Code.21

Meanwhile, on 12 September 2008, this Court promulgated CIR v. Mirant Pagbilao Corporation
(Mirant).22 Mirant fixed the reckoning date of the two-year prescriptive period for the application for refund or
credit of unutilized input VAT at the close of the taxable quarter when the relevant sales were made , as stated
in Section 112(A).23

On 3 December 2008, the CTA Second Division denied the CIR’s Motion for Partial Reconsideration.24 The tax
court stood by its reliance on Atlas25 and on its finding that both the administrative and judicial claims of
Mindanao II were timely filed.26

On 7 January 2009, the CIR elevated the matter to the CTA En Banc via a Petition for Review. 27 Apart from the
contention that the judicial claim of Mindanao II was filed beyond the 30-day period fixed by Section 112(D) of
the 1997 Tax Code,28 the CIR argued that Mindanao II erroneously fixed 26 July 2004, the date when the
return for the second quarter was filed, as the date from which to reckon the two-year prescriptive period for
filing an application for refund or credit of unutilized input VAT under Section 112(A). As the two-year
prescriptive period ended on 30 June 2006, the Petition for Review of Mindanao II was filed out of time on 21
July 2006.29 The CIR invoked the recently promulgated Mirant to support this theory.

On 11 November 2009, the CTA En Banc rendered its Decision denying the CIR’s Petition for Review. 30 On
the question whether the application for refund was timely filed, it held that the CTA Second Division correctly
applied the Atlas ruling.31 It reasoned that Atlas remained to be the controlling doctrine. Mirant was a new
doctrine and, as such, the latter should not apply retroactively to Mindanao II who had relied on the old doctrine
of Atlas and had acted on the faith thereof.32

As to the issue of compliance with the 30-day period for appeal to the CTA, the CTA En Banc held that this
was a requirement only when the CIR actually denies the taxpayer’s claim. But in cases of CIR inaction, the
30-day period is not a mandatory requirement; the judicial claim is seasonably filed as long as it is filed after
the lapse of the 120-day waiting period but within two years from the date of filing of the return. 33

The CIR filed a Motion for Partial Reconsideration34 of the Decision, but it was denied for lack of merit.35

Dissatisfied, the CIR filed this Rule 45 Petition, raising the following arguments in support of its appeal:

I.

THE CTA 2ND DIVISION LACKED JURISDICTION TO TAKE COGNIZANCE OF THE CASE.
272
 II.

THE COURT A QUO’S RELIANCE ON THE RULING IN ATLAS IS MISPLACED.36

ISSUES

The resolution of this case hinges on the question of compliance with the following time requirements for the
grant of a claim for refund or credit of unutilized input VAT: (1) the two-year prescriptive period for filing an
application for refund or credit of unutilized input VAT; and (2) the 120+30 day period for filing an appeal with
the CTA.

THE COURT’S RULING

We deny Mindanao II’s claim for refund or credit of unutilized input VAT on the ground that its judicial claims
were filed out of time, even as we hold that its application for refund was filed on time.

I.

MINDANAO II’S APPLICATION FOR

REFUND WAS FILED ON TIME

We find no error in the conclusion of the tax courts that the application for refund or credit of unutilized input
VAT was timely filed. The problem lies with their bases for the conclusion as to: (1) what should be filed within
the prescriptive period; and (2) the date from which to reckon the prescriptive period.

We thus take a different route to reach the same conclusion, initially focusing our discussion on what should be
filed within the two-year prescriptive period.

A. The Judicial Claim Need Not Be Filed Within the Two-Year Prescriptive Period

Section 112(A) provides:

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

(A) Zero-rated or Effectively Zero-rated Sales — Any VAT-registered person, whose sales are zero-rated or
effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were
made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable
to such sales, except transitional input tax, to the extent that such input tax has not been applied against output
tax: 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.

Both the CTA Second Division and CTA En Banc decisions held that the phrase "apply for the issuance of a
tax credit certificate or refund" in Section 112(A) is construed to refer to both the administrative claim filed with
the CIR and the judicial claim filed with the CTA. This view, however, has no legal basis.

In Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. (Aichi), we dispelled the
misconception that both the administrative and judicial claims must be filed within the two-year prescriptive
period:37
273
There is nothing in Section 112 of the NIRC to support respondent’s view. Subsection (A) of the said provision
states that "any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two
years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable to such sales." The phrase "within two (2)
years x x x apply for the issuance of a tax credit certificate or refund" refers to applications for refund/credit
filed with the CIR and not to appeals made to the CTA. This is apparent in the first paragraph of subsection (D)
of the same provision, which states that the CIR has "120 days from the submission of complete documents in
support of the application filed in accordance with Subsections (A) and (B)" within which to decide on the claim.

In fact, applying the two-year period to judicial claims would render nugatory Section 112 (D) of the NIRC,
which already provides for a specific period within which a taxpayer should appeal the decision or inaction of
the CIR. The second paragraph of Section 112 (D) of the NIRC envisions two scenarios: (1) when a decision is
issued by the CIR before the lapse of the 120-day period; and (2) when no decision is made after the 120-day
period. In both instances, the taxpayer has 30 days within which to file an appeal with the CTA. As we see it
then, the 120-day period is crucial in filing an appeal with the CTA. (Emphasis supplied)

The message of Aichi is clear: it is only the administrative claim that must be filed within the two-year
prescriptive period; the judicial claim need not fall within the two-year prescriptive period.

Having disposed of this question, we proceed to the date for reckoning the prescriptive period under Section
112(A).

B. Reckoning Date is the Close of the Taxable Quarter When the Relevant Sales Were Made.

The other flaw in the reasoning of the tax courts is their reliance on the Atlas ruling, which fixed the reckoning
point to the date of filing the return and payment of the tax.

The CIR’s Stand

The CIR’s stand is that Atlas is not applicable to the case at hand as it involves Section 230 of the 1977 Tax
Code, which contemplates recovery of tax payments erroneously or illegally collected. On the other hand, this
case deals with claims for tax refund or credit of unutilized input VAT for the second, third, and fourth quarters
of 2004, which are covered by Section 112 of the 1977 Tax Code.38

The CIR further contends that Mindanao II cannot claim good faith reliance on the Atlas doctrine since the case
was decided only on 8 June 2007, two years after Mindanao II filed its claim for refund or credit with the CIR
and one year after it filed a Petition for Review with the CTA on 21 July 2006.39

In lieu of Atlas, the CIR proposes that it is the Court's ruling in Mirant that should apply to this case despite the
fact that the latter was promulgated on 12 September 2008, after Mindanao II had filed its administrative claim
in 2005.40It argues that Mirant can be applied retroactively to this case, since the decision merely interprets
Section 112, a provision that was already effective when Mindanao II filed its claims for tax refund or credit.

The Taxpayer’s Defense

On the other hand, Mindanao II counters that Atlas, decided by the Third Division of this Court, could not have
been superseded by Mirant, a Second Division Decision of this Court. A doctrine laid down by the Supreme
Court in a Division may be modified or reversed only through a decision of the Court sitting en banc.41

Mindanao II further contends that when it filed its Petition for Review, the prevailing rule in the CTA reckons the
two-year prescriptive period from the date of the filing of the VAT return.42 Finally, after building its case on
Atlas, Mindanao II assails the CIR’s reliance on the Mirant doctrine stating that it cannot be applied

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retroactively to this case, lest it violate the rock-solid rule that a judicial ruling cannot be given retroactive effect
if it will impair vested rights.43

Section 112(A) is the Applicable Rule

The issue posed is not novel. In the recent case of Commissioner of Internal Revenue v. San Roque Power
Corporation44 (San Roque), this Court resolved the threshold question of when to reckon the two-year
prescriptive period for filing an administrative claim for refund or credit of unutilized input VAT under the 1997
Tax Code in view of our pronouncements in Atlas and Mirant. In that case, we delineated the scope and
effectivity of the Atlas and Mirant doctrines as follows:

The Atlas doctrine, which held that claims for refund or credit of input VAT must comply with the two-year
prescriptive period under Section 229, should be effective only from its promulgation on 8 June 2007 until its
abandonment on 12 September 2008 in Mirant. The Atlas doctrine was limited to the reckoning of the two-year
prescriptive period from the date of payment of the output VAT. Prior to the Atlas doctrine, the two-year
prescriptive period for claiming refund or credit of input VAT should be governed by Section 112(A) following
the verba legis rule. The Mirant ruling, which abandoned the Atlas doctrine, adopted the verba legis rule, thus
applying Section 112(A) in computing the two-year prescriptive period in claiming refund or credit of input VAT.
(Emphases supplied)

Furthermore, San Roque distinguished between Section 112 and Section 229 of the 1997 Tax Code:

The input VAT is not "excessively" collected as understood under Section 229 because at the time the input
VAT is collected the amount paid is correct and proper. The input VAT is a tax liability of, and legally paid by, a
VAT-registered seller of goods, properties or services used as input by another VAT-registered person in the
sale of his own goods, properties, or services. This tax liability is true even if the seller passes on the input VAT
to the buyer as part of the purchase price. The second VAT-registered person, who is not legally liable for the
input VAT, is the one who applies the input VAT as credit for his own output VAT. If the input VAT is in fact
"excessively" collected as understood under Section 229, then it is the first VAT-registered person — the
taxpayer who is legally liable and who is deemed to have legally paid for the input VAT — who can ask for a
tax refund or credit under Section 229 as an ordinary refund or credit outside of the VAT System. In such
event, the second VAT-registered taxpayer will have no input VAT to offset against his own output VAT.

In a claim for refund or credit of "excess" input VAT under Section 110(B) and Section 112(A), the input VAT is
not "excessively" collected as understood under Section 229. At the time of payment of the input VAT the
amount paid is the correct and proper amount. Under the VAT System, there is no claim or issue that the input
VAT is "excessively" collected, that is, that the input VAT paid is more than what is legally due. The person
legally liable for the input VAT cannot claim that he overpaid the input VAT by the mere existence of an
"excess" input VAT. The term "excess" input VAT simply means that the input VAT available as credit exceeds
the output VAT, not that the input VAT is excessively collected because it is more than what is legally due.
Thus, the taxpayer who legally paid the input VAT cannot claim for refund or credit of the input VAT as
"excessively" collected under Section 229.

Under Section 229, the prescriptive period for filing a judicial claim for refund is two years from the date of
payment of the tax "erroneously, . . . illegally, . . . excessively or in any manner wrongfully collected." The
prescriptive period is reckoned from the date the person liable for the tax pays the tax. Thus, if the input VAT is
in fact "excessively" collected, that is, the person liable for the tax actually pays more than what is legally due,
the taxpayer must file a judicial claim for refund within two years from his date of payment. Only the person
legally liable to pay the tax can file the judicial claim for refund. The person to whom the tax is passed on as
part of the purchase price has no personality to file the judicial claim under Section 229.

Under Section 110(B) and Section 112(A), the prescriptive period for filing a judicial claim for "excess" input
VAT is two years from the close of the taxable quarter when the sale was made by the person legally liable to

275
pay the output VAT. This prescriptive period has no relation to the date of payment of the "excess" input VAT.
The "excess" input VAT may have been paid for more than two years but this does not bar the filing of a
judicial claim for "excess" VAT under Section 112(A), which has a different reckoning period from Section 229.
Moreover, the person claiming the refund or credit of the input VAT is not the person who legally paid the input
VAT. Such person seeking the VAT refund or credit does not claim that the input VAT was "excessively"
collected from him, or that he paid an input VAT that is more than what is legally due. He is not the taxpayer
who legally paid the input VAT.

As its name implies, the Value-Added Tax system is a tax on the value added by the taxpayer in the chain of
transactions. For simplicity and efficiency in tax collection, the VAT is imposed not just on the value added by
the taxpayer, but on the entire selling price of his goods, properties or services. However, the taxpayer is
allowed a refund or credit on the VAT previously paid by those who sold him the inputs for his goods,
properties, or services. The net effect is that the taxpayer pays the VAT only on the value that he adds to the
goods, properties, or services that he actually sells.

Under Section 110(B), a taxpayer can apply his input VAT only against his output VAT. The only exception is
when the taxpayer is expressly "zero-rated or effectively zero-rated" under the law, like companies generating
power through renewable sources of energy. Thus, a non zero-rated VAT-registered taxpayer who has no
output VAT because he has no sales cannot claim a tax refund or credit of his unused input VAT under the
VAT System. Even if the taxpayer has sales but his input VAT exceeds his output VAT, he cannot seek a tax
refund or credit of his "excess" input VAT under the VAT System. He can only carry-over and apply his
"excess" input VAT against his future output VAT. If such "excess" input VAT is an "excessively" collected tax,
the taxpayer should be able to seek a refund or credit for such "excess" input VAT whether or not he has
output VAT. The VAT System does not allow such refund or credit. Such "excess" input VAT is not an
"excessively" collected tax under Section 229. The "excess" input VAT is a correctly and properly collected tax.
However, such "excess" input VAT can be applied against the output VAT because the VAT is a tax imposed
only on the value added by the taxpayer. If the input VAT is in fact "excessively" collected under Section 229,
then it is the person legally liable to pay the input VAT, not the person to whom the tax was passed on as part
of the purchase price and claiming credit for the input VAT under the VAT System, who can file the judicial
claim under Section 229.

Any suggestion that the "excess" input VAT under the VAT System is an "excessively" collected tax under
Section 229 may lead taxpayers to file a claim for refund or credit for such "excess" input VAT under Section
229 as an ordinary tax refund or credit outside of the VAT System. Under Section 229, mere payment of a tax
beyond what is legally due can be claimed as a refund or credit. There is no requirement under Section 229 for
an output VAT or subsequent sale of goods, properties, or services using materials subject to input VAT.

From the plain text of Section 229, it is clear that what can be refunded or credited is a tax that is "erroneously
. . . illegally, . . . excessively or in any manner wrongfully collected." In short, there must be a wrongful payment
because what is paid, or part of it, is not legally due. As the Court held in Mirant, Section 229 should "apply
only to instances of erroneous payment or illegal collection of internal revenue taxes." Erroneous or wrongful
payment includes excessive payment because they all refer to payment of taxes not legally due. Under the
VAT System, there is no claim or issue that the "excess" input VAT is "excessively or in any manner wrongfully
collected." In fact, if the "excess" input VAT is an "excessively" collected tax under Section 229, then the
taxpayer claiming to apply such "excessively" collected input VAT to offset his output VAT may have no legal
basis to make such offsetting. The person legally liable to pay the input VAT can claim a refund or credit for
such "excessively" collected tax, and thus there will no longer be any "excess" input VAT. This will upend the
present VAT System as we know it.45

Two things are clear from the above quoted San Roque disquisitions. First, when it comes to recovery of
unutilized input VAT, Section 112, and not Section 229 of the 1997 Tax Code, is the governing law. Second,
prior to 8 June 2007, the applicable rule is neither Atlas nor Mirant, but Section 112(A).

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We present the rules laid down by San Roque in determining the proper reckoning date of the two-year
prescriptive period through the following timeline:

Thus, the task at hand is to determine the applicable period for this case.

In this case, Mindanao II filed its administrative claims for refund or credit for the second, third and fourth
quarters of 2004 on 6 October 2005. The case thus falls within the first period as indicated in the above
timeline. In other words, it is covered by the rule prior to the advent of either Atlas or Mirant.

Accordingly, the proper reckoning date in this case, as provided by Section 112(A) of the 1997 Tax Code, is
the close of the taxable quarter when the relevant sales were made.

C. The Administrative Claims Were Timely Filed

We sum up our conclusions so far: (1) it is only the administrative claim that must be filed within the two-year
prescriptive period; and (2) the two-year prescriptive period begins to run from the close of the taxable quarter
when the relevant sales were made.

Bearing these in mind, we now proceed to determine whether Mindanao II's administrative claims for the
second, third, and fourth quarters of 2004 were timely filed.

Second Quarter

Since the zero-rated sales were made in the second quarter of 2004, the date of reckoning the two-year
prescriptive period is the close of the second quarter, which is on 30 June 2004. Applying Section 112(A),
Mindanao II had two years from 30 June 2004, or until 30 June 2006 to file an administrative claim with the
CIR. Mindanao II filed its administrative claim on 6 October 2005, which is within the two-year prescriptive
period. The administrative claim for the second quarter of 2004 was thus timely filed. For clarity, we present the
rules laid down by San Roque in determining the proper reckoning date of the two-year prescriptive period
through the following timeline:

Third Quarter

As regards the claim for the third quarter of 2004, the two-year prescriptive period started to run on 30
September 2004, the close of the taxable quarter. It ended on 30 September 2006, pursuant to Section 112(A)
of the 1997 Tax Code. Mindanao II filed its administrative claim on 6 October 2005. Thus, since the

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administrative claim was filed well within the two-year prescriptive period, the administrative claim for the third
quarter of 2004 was timely filed. (See timeline below)

Fourth Quarter

Here, the two-year prescriptive period is counted starting from the close of the fourth quarter which is on 31
December 2004. The last day of the prescriptive period for filing an application for tax refund/credit with the
CIR was on 31 December 2006. Mindanao II filed its administrative claim with the CIR on 6 October 2005.
Hence, the claims were filed on time, pursuant to Section 112(A) of the 1997 Tax Code. (See timeline below)

II.

MINDANAO II’S JUDICIAL CLAIMS WERE FILED OUT OF TIME

Notwithstanding the timely filing of the administrative claims, we find that the CTA En Banc erred in holding
that Mindanao II’s judicial claims were timely filed.

A. 30-Day Period Also Applies to Appeals from Inaction

Section 112(D) of the 1997 Tax Code states the time requirements for filing a judicial claim for refund or tax
credit of input VAT:

(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 Subsection (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. (Emphases supplied)

Section 112(D) speaks of two periods: the period of 120 days, which serves as a waiting period to give time for
the CIR to act on the administrative claim for refund or credit, and the period of 30 days, which refers to the
period for interposing an appeal with the CTA. It is with the 30-day period that there is an issue in this case.

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The CTA En Banc’s holding is that, since the word "or" – a disjunctive term that signifies dissociation and
independence of one thing from another – is used in Section 112(D), the taxpayer is given two options: 1) file
an appeal within 30 days from the CIR’s denial of the administrative claim; or 2) file an appeal with the CTA
after expiration of the 120-day period, in which case the 30-day appeal period does not apply. The judicial
claim is seasonably filed so long as it is filed after the lapse of the 120-day waiting period but before the lapse
of the two-year prescriptive period under Section 112(A).46

We do not agree.

The 30-day period applies not only to instances of actual denial by the CIR of the claim for refund or tax credit,
but to cases of inaction by the CIR as well. This is the correct interpretation of the law, as held in San Roque: 47

Section 112(C)48 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.

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. (Emphasis supplied)

The San Roque pronouncement is clear. The taxpayer can file the appeal in one of two ways: (1) file the
judicial claim within thirty days after the Commissioner denies the claim within the 120-day period, or (2) file the
judicial claim within thirty days from the expiration of the 120-day period if the Commissioner does not act
within the 120-day period.

B. The Judicial Claim Was Belatedly Filed

In this case, the facts are not up for debate. Mindanao II filed its administrative claim for refund or credit for the
second, third, and fourth quarters of 2004 on 6 October 2005. The CIR, therefore, had a period of 120 days, or
until 3 February 2006, to act on the claim. The CIR, however, failed to do so. Mindanao II then could treat the
inaction as a denial and appeal it to the CTA within 30 days from 3 February 2006, or until 5 March 2006.

Mindanao II, however, filed a Petition for Review only on 21 July 2006, 138 days after the lapse of the 30-day
period on 5 March 2006. The judicial claim was therefore filed late. (See timeline below.)

C. The 30-Day Period to Appeal is Mandatory and Jurisdictional

However, what is up for debate is the nature of the 30-day time requirement. The CIR posits that it is
mandatory. Mindanao II contends that the requirement of judicial recourse within 30 days is only directory and
permissive, as indicated by the use of the word "may" in Section 112(D).49
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The answer is found in San Roque. There, we declared that the 30-day period to appeal is both mandatory and
jurisdictional:

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

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).

xxxx

When Section 112(C) states that "the taxpayer affected may, within thirty (30) days from 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 law does not make the 120+30 day periods optional just
because the law uses the word " may." The word "may" simply means that the taxpayer may or may not appeal
the decision of the Commissioner within 30 days from receipt of the decision, or within 30 days from the
expiration of the 120-day period. x x x.50

D. Exception to the mandatory and jurisdictional nature of the 120+30 day period not applicable

Nevertheless, San Roque provides an exception to the mandatory and jurisdictional nature of the 120+30 day
period ─ BIR Ruling No. DA-489-03 dated 10 December 2003. The BIR ruling declares 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."

Although Mindanao II has not invoked the BIR ruling, we deem it prudent as well as necessary to dwell on this
issue to determine whether this case falls under the exception.

For this question, we come back to San Roque, which provides that BIR Ruling No. DA-489-03 is a general
interpretative rule; thus, taxpayers can rely on it from the time of its issuance on 10 December 2003 until its
reversal by this Court in Aichi on 6 October 2010, when the 120+30 day periods were held to be mandatory
and jurisdictional. The Court reasoned as follows:

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
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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.51

Thus, in San Roque, the Court applied this exception to Taganito Mining Corporation (Taganito), one of the
taxpayers in San Roque. Taganito filed its judicial claim on 14 February 2007, after the BIR ruling took effect
on 10 December 2003 and before the promulgation of Mirant. The Court stated:

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.52

San Roque was also careful to point out that the BIR ruling does not retroactively apply to premature judicial
claims filed before the issuance of the BIR ruling:

However, BIR Ruling No. DA-489-03 cannot be given retroactive effect for four reasons: first, it is admittedly an
erroneous interpretation of the law; second, prior to its issuance, the BIR held that the 120-day period was
mandatory and jurisdictional, which is the correct interpretation of the law; third, prior to its issuance, no
taxpayer can claim that it was misled by the BIR into filing a judicial claim prematurely; and fourth, a claim for
tax refund or credit, like a claim for tax exemption, is strictly construed against the taxpayer. 53

Thus, San Roque held that taxpayer San Roque Power Corporation, could not seek refuge in the BIR ruling as
it jumped the gun when it filed its judicial claim on 10 April 2003, prior to the issuance of the BIR ruling on 10
December 2003.1âwphi1 The Court stated:

San Roque, therefore, cannot benefit from BIR Ruling No. DA-489-03 because it filed its judicial claim
prematurely on 10 April 2003, before the issuance of BIR Ruling No. DA-489-03 on 10 December 2003. To
repeat, San Roque cannot claim that it was misled by the BIR into filing its judicial claim prematurely because
BIR Ruling No. DA-489-03 was issued only after San Roque filed its judicial claim. At the time San Roque filed
its judicial claim, the law as applied and administered by the BIR was that the Commissioner had 120 days to
act on administrative claims. This was in fact the position of the BIR prior to the issuance of BIR Ruling No.

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DA-489-03. Indeed, San Roque never claimed the benefit of BIR Ruling No. DA-489-03 or RMC 49-03,
whether in this Court, the CTA, or before the Commissioner.54

San Roque likewise ruled out the application of the BIR ruling to cases of late filing. The Court held that the
BIR ruling, as an exception to the mandatory and jurisdictional nature of the 120+30 day periods, is limited to
premature filing and does not extend to late filing of a judicial claim. Thus, the Court found that since Philex
Mining Corporation, the other party in the consolidated case San Roque, filed its claim 426 days after the lapse
of the 30-day period, it could not avail itself of the benefit of the BIR ruling:

Philex’s situation is not a case of premature filing of its judicial claim but of late filing, indeed

Very late filing. BIR Ruling No. DA-489-03 allowed premature filing of a judicial claim, which means non-
exhaustion of the 120-day period for the Commissioner to act on an administrative claim. Philex cannot claim
the benefit of BIR Ruling No. DA-489-03 because Philex did not file its judicial claim prematurely but filed it
long after the lapse of the 30-day period following the expiration of the 120-day period. In fact, Philex filed its
judicial claim 426 days after the lapse of the 30-day period.55

We sum up the rules established by San Roque on the mandatory and jurisdictional nature of the 30-day
period to appeal through the following timeline:

Bearing in mind the foregoing rules for the timely filing of a judicial claim for refund or credit of unutilized input
VAT, we rule on the present case of Mindanao II as follows:

We find that Mindanao II’s situation is similar to that of Philex in San Roque.

As mentioned above, Mindanao II filed its judicial claim with the CTA on 21 July 2006. This was after the
issuance of BIR Ruling No. DA-489-03 on 10 December 2003, but before its reversal on 5 October 2010.
However, while the BIR ruling was in effect when Mindanao II filed its judicial claim, the rule cannot be properly
invoked. The BIR ruling, as discussed earlier, contemplates premature filing. The situation of Mindanao II is
one of late filing. To repeat, its judicial claim was filed on 21 July 2006 – long after 5 March 2006, the last day
of the 30-day period for appeal. In fact, it filed its judicial claim 138 days after the lapse of the 30-day period.
(See timeline below)

E. Undersigned dissented in San Roque to the retroactive application of the mandatory and jurisdictional
nature of the 120+30 day period.

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It is worthy to note that in San Roque, this ponente registered her dissent to the retroactive application of the
mandatory and jurisdictional nature of the 120+30 day period provided under Section 112(D) of the Tax Code
which, in her view, is unfair to taxpayers. It has been the view of this ponente that the mandatory nature of
120+30 day period must be completely applied prospectively or, at the earliest, only upon the finality of Aichi in
order to create stability and consistency in our tax laws. Nevertheless, this ponente is mindful of the fact that
judicial precedents cannot be ignored. Hence, the majority view expressed in San Roque must be applied.

SUMMARY OF RULES ON PRESCRIPTIVE PERIODS FOR CLAIMING REFUND OR CREDIT OF INPUT

VAT

The lessons of this case may be summed up as follows:

A. Two-Year Prescriptive Period

1. It is only the administrative claim that must be filed within the two-year prescriptive period. (Aichi) 2.
The proper reckoning date for the two-year prescriptive period is the close of the taxable quarter when
the relevant sales were made. (San Roque)

3. The only other rule is the Atlas ruling, which applied only from 8 June 2007 to 12 September 2008.
Atlas states that the two-year prescriptive period for filing a claim for tax refund or credit of unutilized
input VAT payments should be counted from the date of filing of the VAT return and payment of the tax.
(San Roque)

B. 120+30 Day Period

1. The taxpayer can file an appeal in one of two ways: (1) file the judicial claim within thirty days after
the Commissioner denies the claim within the 120-day period, or (2) file the judicial claim within thirty
days from the expiration of the 120-day period if the Commissioner does not act within the 120-day
period.

2. The 30-day period always applies, whether there is a denial or inaction on the part of the CIR.

3. As a general rule, the 3 0-day period to appeal is both mandatory and jurisdictional. (Aichi and San
Roque)

4. As an exception to the general rule, premature filing is allowed only if filed between 10 December
2003 and 5 October 2010, when BIR Ruling No. DA-489-03 was still in force. (San Roque)

5. Late filing is absolutely prohibited, even during the time when BIR Ruling No. DA-489-03 was in
force. (San Roque)

SUMMARY AND CONCLUSION

In sum, our finding is that the three administrative claims for the refund or credit of unutilized input VAT were all
timely filed, while the corresponding judicial claims were belatedly filed.

The foregoing considered, the CT A lost jurisdiction over Mindanao Il’s claims for refund or credit.1âwphi1 The
CTA EB erred in granting these claims.

WHEREFORE, we GRANT the Petition. The assailed Court of Tax Appeals En Banc Decision dated 11
November 2009 and Resolution dated 3 March 2010 of the in CTA EB Case No. 448 (CTA Case No. 7507) are
hereby REVERSED and SET ASIDE. A new ruling is entered DENYING respondent s claim for a tax refund or
credit of ₱6,791,845.24.
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SO ORDERED.

Facts:
Mindanao II is a registered taxpayer whose sales to NAPOCOR are all zero-rated pursuant to the
EPIRA Law. On Oct 6 2005, it filed with the BIR an application for the refund or credit of accumulated
unutilized creditable input taxes for the second, third, and fourth taxable quarters of the taxable year 2004. The
administrative claim was not acted upon until Feb 3 2006, or 120 days after Oct 6 2005. Believing that a
judicial claim must be filed within the 2-year prescriptive period provided under Sec 112 (A) and that it must be
reckoned from the date of filing of its VAT returns, Mindanao filed on July 26 2006 a petition for review before
the CTA claiming inaction on the part of the CIR.
On Aug 12 2008, the CTA Division granted Mindanao II’s claim for refund/credit and held that its judicial
claim was timely filed within the 2-year prescriptive period. The CIR opposed the rulings claiming that
prescription had already set in when Mindanao II filed its judicial claim beyond the 30-day period fixed in
Section 112 (C).
CTA En Banc's Contentions

Issue 1: W/N Mindanao II’s administrative claim for refund/credit was timely filed

Yes. Pursuant to Section 112 (A) of the 1997 Tax Code, it is only the administrative claim which is to be filed
within the two-year prescriptive period, and the two-year prescriptive period begins to run from the close of the
taxable quarter when the sales were made. Here, Mindanao II filed its claim for refund/credit for the second,
third, and fourth quarters of 2004 on Oct 6 2005. Such date is well within the two-year prescriptive period which
runs from June 30 2004 (2nd Quarter), Sept 30 2004 (3rd Quarter) and Dec 31 2004 (4th Quarter).
[The Atlas and Mirant rulings are simply not applicable in this case because Mindanao II’s application for
refund/credit on Oct 6 2005 was filed before their promulgation. The Atlas ruling is held to be applicable only
on cases filed from June 8 2007, the date of its promulgation, and up to Sept 12 2008, the date when the
Mirant case was promulgated.
In Atlas, the court laid down a rule that the 2-year prescriptive period is reckoned from the date of filing of the
return and payment of taxes. In Mirant, such rule was abandoned. Following the verba legis doctrine, Mirant
held that in administrative claims for refund/credit of unutilized input VAT, the 2-year prescriptive period begins
to run from the close of taxable quarter when the relevant sales were made. This rule, which is obviously
consistent with the plain wordings of Section 112 (A), was also affirmed in the recent case of San Roque.]

Issue 2: W/N Mindanao II’s judicial claim for refund/credit was timely filed

No. Under Section 112 (C), the judicial claim must be filed by the taxpayer within 30 days after the 120-day
waiting period if its administrative claim was not acted upon by CIR. Here, Mindanao II filed its application for
refund on Oct 6 2005. When it was not acted upon, it filed a judicial claim but only on July 21 2006, or 138
days after the lapse of the 30-day period on 5 March 2006. Its petition for review before the CTA was therefore
filed late.
Contrary to the erroneous contentions of the CTA En Banc, the correct interpretation of Section 112, as held in
San Roque, is that the 30-day period applies not only to instances of actual denial by the CIR of the claim for
refund or tax credit, but to cases of inaction by the CIR as well. Also, following the verba legis doctrine, the 30-
day period to appeal is both mandatory and jurisdictional. Section 112 (C) is clear, plain and unequivocal in
expressly providing that the taxpayer has a 30-day period to appeal the decision or inaction of the
Commissioner. ##
***When reading the full text of this case, please note the difference in letterings of Section 112 particularly
Section 112 (C) and (D) of the NIRC as amended by RA 9337 of 2005. In this digested version, Section 112
(C) is used to refer to Section 112 (D) of the old NIRC. ***
Summary of Rules on Prescriptive Periods for Claiming Refund or Credit of Input Tax
Two-Year Prescriptive Period
1. It is only the administrative claim that must be filed within the two-year prescriptive period. (Aichi)
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 2. The proper reckoning date for the two-year prescriptive period is the close of the taxable quarter when
the relevant sales were made. (San Roque)
3. The only other rule is the Atlas ruling, which applied only from 8 June 2007 to12 September 2008. Atlas
states that the two-year prescriptive period for filing a claim for tax refund or credit of unutilized input
VAT payments should be counted from the date of filing of the VAT return and payment of the tax. (San
Roque)
120 + 30 Day Period
1. The taxpayer can file an appeal in one of two ways:
(1) file the judicial claim within thirty days after the Commissioner denies the claim within the 120-day period, or
(2) file the judicial claim within thirty days from the expiration of the 120-day period if the Commissioner does
not act within the 120-day period.
2. The 30-day period always applies, whether there is a denial or inaction on the part of the CIR.
3. As a general rule, the 30-day period to appeal is both mandatory and jurisdictional. (Aichi and San
Roque)
4. As an exception to the general rule, premature filing is allowed only if filed between 10 December 2003
and 5 October 2010, when BIR Ruling No. DA-489-03 was still in force. (San Roque)
5. Late filing is absolutely prohibited, even during the time when BIR Ruling No. DA-489-03 was in force.
(San Roque)

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