CONTEX CORPORATION, petitioner, vs. REVENUE, respondent.

HON.

COMMISSIONER

OF

INTERNAL

DECISION QUISUMBING, J.: For review is the Decision [1] dated September 3, 2001, of the Court of Appea s, in CA!"#$# S% &o# '2(23, which reversed and set aside the decision [2] dated )ctober 13, 2000, of the Court of *a+ Appea s ,C*A-# *he C*A had ordered the Commissioner of .nterna $evenue ,C.$- to refund the sum of %'(3,0'1#/0 to petitioner as erroneous 0 paid input va ue!added ta+ ,1A*- or in the a ternative, to issue a ta+ credit certificate for said amount# %etitioner a so assai s the appe ate court2s $eso ution,[3] dated December 1/, 2001, den0in3 the motion for reconsideration# %etitioner is a domestic corporation en3a3ed in the business of manufacturin3 hospita te+ti es and 3arments and other hospita supp ies for e+port# %etitioner2s p ace of business is at the Subic 4a0 Freeport 5one ,S4F5-# .t is du 0 re3istered with the Subic 4a0 6etropo itan Authorit0 ,S46A- as a Subic 4a0 Freeport 7nterprise, pursuant to the provisions of $epub ic Act &o# 8228#[9] As an S46A!re3istered firm, petitioner is e+empt from a oca and nationa interna revenue ta+es e+cept for the preferentia ta+ provided for in Section 12 ,c-[:] of $ep# Act &o# 8228# %etitioner a so re3istered with the 4ureau of .nterna $evenue ,4.$- as a non!1A* ta+pa0er under Certificate of $e3istration $D) Contro &o# /:!1(0!000133# From ;anuar0 1, 1//8 to December 31, 1//(, petitioner purchased various supp ies and materia s necessar0 in the conduct of its manufacturin3 business# *he supp iers of these 3oods shifted unto petitioner the 10< 1A* on the purchased items, which ed the petitioner to pa0 input ta+es in the amounts of %:3/,911#(( and %:09,0:8#9/ for 1//8 and 1//(, respective 0#['] Actin3 on the be ief that it was e+empt from a nationa and oca ta+es, inc udin3 1A*, pursuant to $ep# Act &o# 8228, petitioner fi ed two app ications for ta+ refund or ta+ credit of the 1A* it paid# 6r# 7di berto Car os, revenue district officer of 4.$ $D) &o# 1/, denied the first app ication etter, dated December 2/, 1//(# =nfa>ed b0 the denia , petitioner on 6a0 9, 1///, fi ed another app ication for ta+ refund?credit, this time direct 0 with Att0# A berto %a3abao, the re3iona director of 4.$ $evenue $e3ion &o# 9# *he second etter sou3ht a refund or issuance of a ta+ credit certificate in the amount of%1,10(,308#82, representin3 erroneous 0 paid input 1A* for the period ;anuar0 1, 1//8 to &ovember 30, 1//(# @hen no response was forthcomin3 from the 4.$ $e3iona Director, petitioner then e evated the matter to the Court of *a+ Appea s, in a petition for review docAeted as C*A Case &o# :(/:# %etitioner stressed that Section 112,A-[8] if read in re ation to Section 10',A-,2-,a-[(] of the &ationa .nterna $evenue Code, as amended and Section 12,b- [/] and ,c- of $ep# Act &o# 8228 wou d show that it was not iab e in an0 wa0 for an0 va ue!added ta+# .n opposin3 the c aim for ta+ refund or ta+ credit, the 4.$ asAed the C*A to app 0 the ru e that c aims for refund are strict 0 construed a3ainst the ta+pa0er# Since petitioner fai ed to estab ish both its ri3ht to a ta+ refund or ta+ credit and its comp iance with the ru es on ta+ refund as provided for in Sections 209[10] and 22/[11] of the *a+ Code, its c aim shou d be denied, accordin3 to the 4.$# )n )ctober 13, 2000, the C*A decided C*A Case &o# :(/: as fo owsB

@C7$7F)$7, in view of the fore3oin3, the %etition for $eview is hereb0 %A$*.ADDE "$A&*7D# $espondent is hereb0 )$D7$7D to $7F=&D or in the a ternative to .SS=7 A *AF C$7D.* C7$*.F.CA*7 in favor of %etitioner the sum of %'(3,0'1#/0, representin3 erroneous 0 paid input 1A*# S) )$D7$7D#[12] .n 3rantin3 a partia refund, the C*A ru ed that petitioner misread Sections 10',A-,2-,a- and 112,A- of the *a+ Code# *he ta+ court stressed that these provisions app 0 on 0 to those entities re3istered as 1A* ta+pa0ers whose sa es are >ero!rated# %etitioner does not fa under this cate3or0, since it is a non!1A* ta+pa0er as evidenced b0 the Certificate of $e3istration $D) Contro &o# /:!1(0!000133 issued b0 $D)$osemarie $a3asa of 4.$ $D) &o# 1( of the Subic 4a0 Freeport 5one and thus it is e+empt from 1A*, pursuant to $ep# Act &o# 8228, said theC*A# &onethe ess, the C*A he d that the petitioner is e+empt from the imposition of input 1A* on its purchases of supp ies and materia s# .t pointed out that under Section 12,c- of $ep# Act &o# 8228 and the .mp ementin3 $u es and $e3u ations of the 4ases Conversion and Deve opment Act of 1//2, a that petitioner is reGuired to pa0 as a S4F5!re3istered enterprise is a :< preferentia ta+# *he C*A a so disa owed a refunds of input 1A* paid b0 the petitioner prior to ;une 2/, 1//8 for bein3 barred b0 the two!0ear prescriptive period under Section 22/ of the *a+ Code# *he ta+ court a so imited the refund on 0 to the input 1A* paid b0 the petitioner on the supp ies and materia s direct 0 used b0 the petitioner in the manufacture of its 3oods# .t strucA down a c aims for input 1A* paid on maintenance, office supp ies, frei3ht char3es, and a materia s and supp ies shipped or de ivered to the petitioner2s 6aAati and %asa0 Cit0 offices# $espondent C.$ then fi ed a petition, docAeted as CA!"#$# S% &o# '2(23, for review of the C*A decision b0 the Court of Appea s# $espondent maintained that the e+emption of Conte+ Corp# under $ep# Act &o# 8228 was imited on 0 to direct ta+es and not to indirect ta+es such as the input component of the 1A*# *he Commissioner pointed out that from its ver0 nature, the va ue!added ta+ is a burden passed on b0 a 1A* re3istered person to the end usersH hence, the direct iabi it0 for the ta+ ies with the supp iers and not Conte+# Findin3 merit in the C.$2s ar3uments, the appe ate court decided CA!"#$# S% &o# '2(23 in his favor, thusB @C7$7F)$7, premises considered, the appea ed decision is hereb0 $717$S7D A&D S7* AS.D7# Conte+2s c aim for refund of erroneous 0 paid ta+es is D7&.7D accordin3 0# S) )$D7$7D#[13] .n reversin3 the C*A, the Court of Appea s he d that the e+emption from duties and ta+es on the importation of raw materia s, capita , and eGuipment of S4F5!re3istered enterprises under $ep# Act &o# 8228 and its imp ementin3 ru es covers on 0 Ithe 1A* imposab e under Section 108 of the [*a+ Code], which is a direct iabi it0 of the importer, and in no wa0 inc udes the va ue!added ta+ of the se er!e+porter the burden of which was passed on to the importer as an additiona costs of the 3oods#J[19] *his was because the e+emption 3ranted b0 $ep# Act &o# 8228 re ates to the act of importation and Section 108[1:] of the *a+ Code specifica 0 imposes the 1A* on importations# *he appe ate court app ied the princip e that ta+ e+emptions are strict 0 construed a3ainst the ta+pa0er# *he Court of Appea s pointed out that under the

imp ementin3 ru es of $ep# Act &o# 8228, the e+emption of S4F5!re3istered enterprises from interna revenue ta+es is Gua ified as pertainin3 on 0 to those for which the0 ma0 be direct 0 iab e# .t then stated that apparent 0, the e3is ative intent behind $ep# Act &o# 8228 was to 3rant e+emptions on 0 to direct ta+es, which S4F5!re3istered enterprise ma0 be iab e for and on 0 in connection with their importation of raw materia s, capita , and eGuipment as we as the sa e of their 3oods and services# %etitioner time 0 moved for reconsideration of the Court of Appea s decision, but the motion was denied# Cence, the instant petition raisin3 as issues for our reso ution the fo owin3B A# @C7*C7$ )$ &)* *C7 7F76%*.)& F$)6 ADD D)CAD A&D &A*.)&AD .&*7$&AD $717&=7 *AF7S %$)1.D7D .& $7%=4D.C AC* &)# 8228 C)17$S *C7 1AD=7 ADD7D *AF %A.D 4E %7*.*.)&7$, A S=4.C 4AE F$77%)$* 7&*7$%$.S7 )& .*S %=$CCAS7S )F S=%%D.7S A&D 6A*7$.ADS# @C7*C7$ )$ &)* *C7 C)=$* )F *AF A%%7ADS C)$$7C*DE C7DD *CA* %7*.*.)&7$ .S 7&*.*D7D *) A *AF C$7D.* )$ $7F=&D )F *C7 1A* %A.D )& .*S %=$CCAS7S )F S=%%D.7S A&D $A@ 6A*7$.ADS F)$ *C7 E7A$S 1//8 A&D 1//(#[1']

4#

Simp 0 stated, we sha reso ve now the issues concernin3B ,1- the correctness of the findin3 of the Court of Appea s that the 1A* e+emption embodied in $ep# Act &o# 8228 does not app 0 to petitioner as a purchaserH and ,2- the entit ement of the petitioner to a ta+ refund on its purchases of supp ies and raw materia s for 1//8 and 1//(# )n the first issue, petitioner ar3ues that the appe ate court2s restrictive interpretation of petitioner2s 1A* e+emption as imited to those covered b0 Section 108 of the *a+ Code is erroneous and devoid of e3a basis# .t contends that the provisions of $ep# Act &o# 8228 c ear 0 and unambi3uous 0 mandate that no oca and nationa ta+es sha be imposed upon S4F5!re3istered firms and hence, said aw shou d 3overn the case# %etitioner ca s our attention to re3u ations issued b0 both the S46A and 4.$ c ear 0 and cate3orica 0 providin3 that the ta+ e+emption provided for b0 $ep# Act &o# 8228 inc udes e+emption from the imposition of 1A* on purchases of supp ies and materia s# *he respondent taAes the diametrica 0 opposite view that whi e $ep# Act &o# 8228 does 3rant ta+ e+emptions, such 3rant is not a !encompassin3 but is imited on 0 to those ta+es for which a S4F5!re3istered business ma0 be direct 0 iab e# Cence, S4F5 ocators are not re ieved from the indirect ta+es that ma0 be shifted to them b0 a 1A*!re3istered se er# At this Kuncture, it must be stressed that the 1A* is an indirect ta+# As such, the amount of ta+ paid on the 3oods, properties or services bou3ht, transferred, or eased ma0 be shifted or passed on b0 the se er, transferor, or essor to the bu0er, transferee or essee# [18] =n iAe a direct ta+, such as the income ta+, which primari 0 ta+es an individua 2s abi it0 to pa0 based on his income or net wea th, an indirect ta+, such as the 1A*, is a ta+ on consumption of 3oods, services, or certain transactions invo vin3 the same# *he 1A*, thus, forms a substantia portion of consumer e+penditures# Further, in indirect ta+ation, there is a need to distin3uish between the iabi it0 for the ta+ and the burden of the ta+# As ear ier pointed out, the amount of ta+ paid ma0 be shifted or passed on b0 the se er to the bu0er# @hat is transferred in such instances is not the iabi it0 for

the ta+, but the ta+ burden# .n addin3 or inc udin3 the 1A* due to the se in3 price, the se er remains the person primari 0 and e3a 0 iab e for the pa0ment of the ta+# @hat is shifted on 0 to the intermediate bu0er and u timate 0 to the fina purchaser is the burden of the ta+# [1(] Stated different 0, a se er who is direct 0 and e3a 0 iab e for pa0ment of an indirect ta+, such as the 1A* on 3oods or services is not necessari 0 the person who u timate 0 bears the burden of the same ta+# .t is the fina purchaser or consumer of such 3oods or services who, a thou3h not direct 0 and e3a 0 iab e for the pa0ment thereof, u timate 0 bears the burden of the ta+#[1/] 7+emptions from 1A* are 3ranted b0 e+press provision of the *a+ Code or specia aws# =nder 1A*, the transaction can have preferentia treatment in the fo owin3 wa0sB ,a- 1A* 7+emption# An e+emption means that the sa e of 3oods or properties and?or services and the use or ease of properties is not subKect to 1A* ,output ta+- and the se er is not a owed an0 ta+ credit on 1A* ,input ta+- previous 0 paid#[20] *his is a case wherein the 1A* is removed at the e+empt sta3e ,i#e#, at the point of the sa e, barter or e+chan3e of the 3oods or properties-# *he person maAin3 the e+empt sa e of 3oods, properties or services sha not bi an0 output ta+ to his customers because the said transaction is not subKect to 1A*# )n the other hand, a 1A*! re3istered purchaser of 1A*!e+empt 3oods?properties or services which are e+empt from 1A* is not entit ed to an0 input ta+ on such purchase despite the issuance of a 1A* invoice or receipt#[21] ,b- 5ero!rated Sa es# *hese are sa es b0 1A*!re3istered persons which are subKect to 0< rate, meanin3 the ta+ burden is not passed on to the purchaser# A >ero!rated sa e b0 a 1A*! re3istered person, which is a ta+ab e transaction for 1A* purposes, sha not resu t in an0 output ta+# Cowever, the input ta+ on his purchases of 3oods, properties or services re ated to such >ero!rated sa e sha be avai ab e as ta+ credit or refund in accordance with these re3u ations#[22] =nder 5ero!ratin3, a 1A* is removed from the >ero!rated 3oods, activit0 or firm# .n contrast, e+emption on 0 removes the 1A* at the e+empt sta3e, and it wi actua 0 increase, rather than reduce the tota ta+es paid b0 the e+empt firm2s business or non!retai customers# .t is for this reason that a sharp distinction must be made between >ero!ratin3 and e+emption in desi3natin3 a va ue!added ta+#[23] Apropos, the petitioner2s c aim to 1A* e+emption in the instant case for its purchases of supp ies and raw materia s is founded main 0 on Section 12 ,b- and ,c- of $ep# Act &o# 8228, which basica 0 e+empts them from a nationa and oca interna revenue ta+es, inc udin3 1A* and Section 9 ,A-,a- of 4.$ $evenue $e3u ations &o# 1!/:#[29] )n this point, petitioner ri3ht 0 c aims that it is indeed 1A*!7+empt and this fact is not controverted b0 the respondent# .n fact, petitioner is re3istered as a &)&!1A* ta+pa0er per Certificate of $e3istration[2:] issued b0 the 4.$# As such, it is e+empt from 1A* on a its sa es and importations of 3oods and services# %etitioner2s c aim, however, for e+emption from 1A* for its purchases of supp ies and raw materia s is incon3ruous with its c aim that it is 1A*!7+empt, for on 0 1A*!$e3istered entities can c aim .nput 1A* Credit?$efund# *he point of contention here is whether or not the petitioner ma0 c aim a refund on the .nput 1A* erroneous 0 passed on to it b0 its supp iers#

@hi e it is true that the petitioner shou d not have been iab e for the 1A* inadvertent 0 passed on to it b0 its supp ier since such is a >ero!rated sa e on the part of the supp ier, the petitioner is not the proper part0 to c aim such 1A* refund# Section 9#100!2 of 4.$2s $evenue $e3u ations 8!/:, as amended, or the IConsolidated Value-Added Tax RegulationsJ provideB Sec# 9#100!2# 5ero!rated Sa es# A >ero!rated sa e b0 a 1A*!re3istered person, which is a ta+ab e transaction for 1A* purposes, sha not resu t in an0 output ta+# Cowever, the input ta+ on his purchases of 3oods, properties or services re ated to such >ero!rated sa e sha be avai ab e as ta+ credit or refund in accordance with these re3u ations# *he fo owin3 sa es b0 1A*!re3istered persons sha be subKect to 0<B ,a- 7+port Sa es I7+port Sa esJ sha mean ### ,:*hose considered e+port sa es under Artic es 23 and 88 of 7+ecutive )rder &o# 22', otherwise Anown as the )mnibus .nvestments Code of 1/(8, and other specia aws, e#3# $epub ic Act &o# 8228, otherwise Anown as the 4ases Conversion and Deve opment Act of 1//2# ### ,c- Sa es to persons or entities whose e+emption under specia aws, e#3# $#A# &o# 8228 du 0 re3istered and accredited enterprises with Subic 4a0 6etropo itan Authorit0 ,S46A- and C arA Deve opment Authorit0 ,CDA-, $# A# &o# 8/1', %hi ippine 7conomic 5one Authorit0 ,%75A-, or internationa a3reements, e#3# Asian Deve opment 4anA ,AD4-, .nternationa $ice $esearch .nstitute ,.$$.-, etc# to which the %hi ippines is a si3nator0 effective 0 subKect such sa es to >ero!rate#J Since the transaction is deemed a >ero!rated sa e, petitioner2s supp ier ma0 c aim an .nput 1A* credit with no correspondin3 )utput 1A* iabi it0# Con3ruent 0, no )utput 1A* ma0 be passed on to the petitioner# )n the second issue, it ma0 not be amiss to re!emphasi>e that the petitioner is re3istered as a &)&!1A* ta+pa0er and thus, is e+empt from 1A*# As an e+empt 1A* ta+pa0er, it is not a owed an0 ta+ credit on 1A* ,input ta+- previous 0 paid# .n fine, even if we are to assume that e+emption from the burden of 1A* on petitioner2s purchases did e+ist, petitioner is sti not entit ed to an0 ta+ credit or refund on the input ta+ previous 0 paid as petitioner is an e+empt 1A* ta+pa0er# $ather, it is the petitioner2s supp iers who are the proper parties to c aim the ta+ credit and accordin3 0 refund the petitioner of the 1A* erroneous 0 passed on to the atter# Accordin3 0, we find that the Court of Appea s did not commit an0 reversib e error of aw in ho din3 that petitioner2s 1A* e+emption under $ep# Act &o# 8228 is imited to the 1A* on which it is direct 0 iab e as a se er and hence, it cannot c aim an0 refund or e+emption for an0 input 1A* it paid, if an0, on its purchases of raw materia s and supp ies#

WHEREFORE, the petition is D7&.7D for acA of merit# *he Decision dated September 3, 2001, of the Court of Appea s in CA!"#$# S% &o# '2(23, as we as its $eso ution of December 1/, 2001 are AFF.$67D# &o pronouncement as to costs# SO ORDERED.