21_CIR vs SM Prime Holdings

Facts:
These are consolidated cases. It arose when BIR sent SM Prime Preliminary Assessment
Notice (PAN) for value added tax (VAT) deficiency on cinema ticket sales; BIR sent First
Asia a PAN for VAT deficiency on
cinema ticket sales.
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
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 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28-2001 on which the deficiency assessments were based is an unpublished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.
ISSUE: Whether the gross receipts derived by operators or proprietors of cinema/theater
houses from admission tickets are subject to VAT.
RULING:

(1)

The enumeration of services

subject to VAT under Section 108 of the
NIRC is not exhaustive
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.
The words, including, similar services, and shall likewise include, indicate that
the enumeration is by way of example only.[39]Among those included in the
enumeration is the lease of motion picture films, films, tapes and discs. This,
however, is not the same as the showing or exhibition of motion pictures or
films. As pointed out by the CTA En Banc:
Exhibition in 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]

(2)

The legislature never intended

operators
or proprietors of cinema/theater houses to be
covered by VAT
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%:
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)

These reveal the legislative intent not to impose VAT on persons already covered by
the amusement tax. This holds true even in the case of cinema/theater operators taxed
under the LGC of 1991 precisely because the VAT law was intended to replace the
percentage tax on certain services.The mere fact that they are taxed by the local
government unit and not by the national government is immaterial. The Local Tax Code, in
transferring the power to tax gross receipts derived by cinema/theater operators or
proprietor from admission tickets to the local government, did not intend to treat
cinema/theater houses as a separate class. No distinction must, therefore, be made
between the places of amusement taxed by the national government and those taxed by
the local government.
(3)
The repeal of the Local Tax Code
by the LGC of 1991 is not a legal basis for
the imposition of VAT
The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the
imposition of VAT on the gross receipts of cinema/theater operators or proprietors derived
from admission tickets. The removal of the prohibition under the Local Tax Code did not
grant nor restore to the national government the power to impose amusement tax on
cinema/theater operators or proprietors. Neither did it expand the coverage of VAT. Since
the imposition of a tax is a burden on the taxpayer, it cannot be presumed nor can it be

extended by implication. A law will not be construed as imposing a tax unless it does so
clearly, expressly, and unambiguously.[59] As it is, the power to impose amusement tax on
cinema/theater operators or proprietors remains with the local government.

(4)

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]

(5)

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]
22_TAMBUNTING PAWNSHOP INC. VS CIR
FACTS:
Petitioner protested the assessment.[2] As the protest merited no response, it
filed a Petition for Review[3] with the Court of Tax Appeals (CTA) pursuant to Section
228 of the National Internal Revenue Code. Petitioner contends that [4]a pawnshop is
not enumerated as one of those engaged in sale or exchange of services [17] in
Section 108 of the National Internal Revenue Code. [18] Citing Commissioner of
Internal Revenue v. Michel J. Lhuillier Pawnshops, Inc.,[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. [20]
ISSUE:Whether pawnshops are liable to pay VAT.
RULING: The Court, in First Planters Pawnshop, Inc. v. Commissioner of
Internal Revenue,[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
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 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.
On petitioners argument that pawn tickets are neither securities nor printed
evidence of indebtedness.[22]
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
intended only as security, either by express stipulation or otherwise, there
shall be collected a documentary stamp tax x x x.
Construing this provision vis a vis pawn tickets, the Court held in Michel J. Lhuillier
Pawnshop, Inc. v. Commissioner of Internal Revenue: 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.
Pledge is among the privileges, the exercise of which is subject to DST.
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.[23]
23_CIR vs. Burmeister and Wain Scandinavian Contractor Mindanao,
Inc
FACTS:
[Respondent] is a domestic corporation duly organized and existing under
and by virtue of the laws of the Philippines with principal address located
atDaruma Building, Jose P. Laurel Avenue, Lanang, Davao City.

It
is
represented
that
a
foreign
consortium
composed of Burmeister and Wain Scandinavian Contractor A/S (BWSCDenmark), 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 [NAPOCORs] two power barges. The
Consortium appointed BWSC-Denmark as its coordination manager.
BWSC-Denmark established [respondent] which subcontracted the actual
operation and maintenance of NAPOCORs 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
Consortiums
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 foreignCURRENCY 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.
For the year 1996, [respondent] seasonably filed its quarterly Value-Added
Tax Returns reflecting, among others, a total zero-rated sales
ofP147,317,189.62 with VAT input taxes of P3,361,174.14, detailed as
follows:
On January 7,1999, [respondent] was able to secure VAT Ruling No. 003-99
from the VAT Review Committee which reconfirmed BIR Ruling No. 023-95
insofar as it held that the services being rendered by BWSCMI is subject to
VAT at zero percent (0%).
On the strength of the aforementioned rulings, [respondent] 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]
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 respondents services are subject to 0% VAT.Rather, it is based on the
non-retroactivity of the prejudicial revocation of BIR Ruling No. 023-95 [17] and VAT

Ruling No. 003-99,[18]which held that respondents services are subject to 0% VAT
and which respondent invoked in applying for refund of the output VAT.
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 foreignCURRENCY 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);
xxxxxxxxxxxxxxxxxxx

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.
When Section 102(b)(2) stipulates payment in acceptable foreign currency under
BSP rules, the law clearly envisions the payer-recipient of services to be doing

business outside the Philippines. Only those not doing business in the Philippines
can be required under BSP rules[20] to pay in acceptable foreign currency for their
purchase of goods or services from the Philippines. In a domestic transaction, where
the provider and recipient of services are both doing business in the Philippines, the
BSP cannot require any party to make payment in foreign currency.
Services covered by Section 102(b) (1) and (2) are in the nature of export
sales since the payer-recipient of services is doing business outside the
Philippines. Under BSP rules,[21] the proceeds of export sales must be reported to
the Bangko Sentral ng Pilipinas. Thus, there is reason to require the provider of
services under Section 102(b) (1) and (2) to account for the foreign currency
proceeds to the BSP. The same rationale does not apply if the provider and recipient
of the services are both doing business in the Philippines since their transaction is
not in the nature of an export sale even if payment is denominated in foreign
currency.
Further, when the provider and recipient of services are both doing business
in

the

Philippines,

their

transaction

falls

squarely

under

Section

102(a)

governing domestic sale or exchange of services. Indeed, this is a purely local sale
or exchange of services subject to the regular VAT, unless of course the transaction
falls under the other provisions of Section 102(b).
Thus, when Section 102(b)(2) speaks of [s]ervices other than those
mentioned in the preceding subparagraph, the legislative intent is that only
the services are different between subparagraphs 1 and 2. The requirements for
zero-rating, including the essential condition that the recipient of services is doing
business outside the Philippines, remain the same under both subparagraphs.
Significantly, the amended Section 108(b)[22] [previously Section 102(b)] of the
present Tax Code clarifies this legislative intent. Expressly included among the
transactions subject to 0% VAT are [s]ervices other than those mentioned in the
[first] paragraph [of Section 108(b)] rendered to a person engaged in business
conducted outside the Philippines or to a nonresident person not engaged
in business who is outside the Philippines when the services are performed,
the consideration for which is paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the BSP.

In this case, the payer-recipient of respondents services is the Consortium which is a

joint-venture doing business in the Philippines. While the Consortiums principal
members are non-resident foreign corporations, the Consortium itself is doing
business in the Philippines. This is shown clearly in BIR Ruling No. 023-95 which
states that the contract between the Consortium and NAPOCOR is for a 15-year
term
.for the operation and maintenance of two 100-Megawatt power barges
(Power Barges) acquired by NAPOCOR for a 15-year term.[23]
Considering

this

length

of

time,

the

Consortiums

operation

and

maintenance of NAPOCORs power barges cannot be classified as a single or isolated

transaction. The Consortium does not fall under Section 102(b)(2) which requires
that the recipient of the services must be a person doing business outside the
Philippines. Therefore, respondents services to the Consortium, not being supplied
to a person doing business outside the Philippines, cannot legally qualify for 0% VAT.
Respondent,

as

subcontractor

maintains NAPOCORs power

of

barges

in

the
the

Consortium,
Philippines.

operates

NAPOCOR

pays

and
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

15-year

contract

to

operate

and

maintain NAPOCORs two 100-megawatt power barges in Mindanao.

The Court recognizes the rule that the VAT system generally follows the
destination principle (exports are zero-rated whereas imports are taxed). However,
as the Court stated in American Express, there is an exception to this rule. [25] This
exception refers to the 0% VAT on services enumerated in Section 102 and

performed in the Philippines. 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.

Nevertheless, in seeking a refund of its excess output tax, respondent relied on VAT
Ruling No. 003-99,[28] which reconfirmed BIR RulingNo. 023-95 [29] insofar as it held
that the services being rendered by BWSCMI is subject to VAT at zero percent
(0%). Respondents reliance on these BIR rulings binds petitioner.
Petitioners filing of his Answer before the CTA challenging respondents claim for
refund effectively serves as a revocation of VAT Ruling No. 003-99 and BIR Ruling
No. 023-95. However, such revocation cannot be given retroactive effect since it will
prejudice respondent. Changing respondents status will deprive respondent of a
refund of a substantial amount representing excess output tax. [30] Section 246 of the
Tax Code provides that any revocation of a ruling by the Commissioner of Internal
Revenue shall not be given retroactive application if the revocation will prejudice
the taxpayer. Further, there is no showing of the existence of any of the exceptions
enumerated in Section 246 of the Tax Code for the retroactive application of such
revocation.
However, upon the filing of petitioners Answer dated 2 March 2000 before the CTA
contesting respondents claim for refund, respondents services shall be subject to
the regular 10% VAT.[31] Such filing is deemed a revocation of VAT Ruling No. 003-99
and BIR Ruling No. 023-95.
24_CIR vs American Express International
FACTS:
"[Respondent] is a Philippine branch of American Express International, Inc., a
corporation duly organized and existing under and by virtue of the laws of the State
of Delaware, U.S.A., with office in the Philippines at the Ground Floor, ACE Building,
corner Rada and de la Rosa Streets, Legaspi Village, Makati City. It is a servicing unit
of American Express International, Inc. - Hongkong Branch (Amex-HK) and is
engaged primarily to facilitate the collections of Amex-HK receivables from card
members situated in the Philippines and payment to service establishments in the
Philippines.

"Amex Philippines registered itself with the Bureau of Internal Revenue (BIR),
Revenue District Office No. 47 (East Makati) as a value-added tax (VAT) taxpayer
effective March 1988 and was issued VAT Registration Certificate No. 088445
bearing VAT Registration No. 32A-3-004868. For the period January 1, 1997 to
December 31, 1997, [respondent] filed with the BIR its quarterly VAT returns"
April 13, 1999- [respondent] filed with the BIR a letter-request for the refund of its
1997 excess input taxes in the amount of P3,751,067.04, which amount was arrived
at after deducting from its total input VAT paid ofP3,763,060.43 its applied output
VAT liabilities only for the third and fourth quarters of 1997 amounting to P5,193.66
and P6,799.43, respectively. [Respondent] cites as basis therefor, Section 110 (B) of
the 1997 Tax Code. According to [respondent], being a VAT-registered entity, it is
subject to the VAT imposed under Title IV of the Tax Code
ISSUE: Whether or not the Court of Appeals committed reversible error in holding
that respondent is entitled to the refund of the amount of P3,352,406.59 allegedly
representing excess input VAT for the year 1997.
RULING:
Entitlement to Tax Refund
Section 102 of the Tax Code11 provides:
"Sec. 102. Value-added tax on sale of services and use or lease of properties. -- (a)
Rate and base of tax. -- There shall be levied, assessed and collected, a value-added
tax equivalent to ten percent (10%) of gross receipts derived from the sale or
exchange of services x x x.
"The phrase 'sale or exchange of services' means the performance of all kinds of
services in the Philippines for others for a fee, remuneration or consideration,
including those performed or rendered by x x x persons engaged in milling,
processing, manufacturing or repacking goods for others; x x x services of banks,
non-bank financial intermediaries and finance companies; x x x and similar services
regardless of whether or not the performance thereof calls for the exercise or use of
the physical or mental faculties. The phrase 'sale or exchange of services' shall
likewise include:
xxxxxxxxx
(3) The supply of x x x commercial knowledge or information;
(4) The supply of any assistance that is ancillary and subsidiary to and is furnished
as a means of enabling the application or enjoyment of x x x any such knowledge or
information as is mentioned in subparagraph (3);
xxxxxxxxx

(6) The supply of technical advice, assistance or services rendered in connection

with technical management or administration of any x x x commercial undertaking,
venture, project or scheme;
xxxxxxxxx
"The term 'gross receipts means the total amount of money or its equivalent
representing the contract price, compensation, service fee, rental or royalty,
including the amount charged for materials supplied with the services and deposits
and advanced payments actually or constructively received during the taxable
quarter for the services performed or to be performed for another person, excluding
value-added tax.
"(b) Transactions subject to zero percent (0%) rate. -- The following services
performed in the Philippines by VAT-registered persons shall be subject to zero
percent (0%) rate[:]
(1) Processing, manufacturing or repacking goods for other persons doing business
outside the Philippines which goods are subsequently exported, where the services
are paid for in acceptable foreign currency and accounted for in accordance with the
rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
(2) Services other than those mentioned in the preceding subparagraph, the
consideration for which is paid for in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the [BSP];"
xxxxxxxxx
Zero Rating of "Other" Services
Services performed by VAT-registered persons in the Philippines (other than the
processing, manufacturing or repacking of goods for persons doing business outside
the Philippines), when paid in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP, are zero-rated.
Respondent is a VAT-registered person that facilitates the collection and payment of
receivables belonging to its non-resident foreign client, for which it gets paid in
acceptable foreign currency inwardly remitted and accounted for in conformity with
BSP rules and regulations. Certainly, the service it renders in the Philippines is not in
the same category as "processing, manufacturing or repacking of goods" and
should, therefore, be zero-rated. Service has been defined as "the art of doing
something useful for a person or company for a fee" 13 or "useful labor or work
rendered or to be rendered by one person to another." 14 For facilitating in the
Philippines the collection and payment of receivables belonging to its Hong Kongbased foreign client, and getting paid for it in duly accounted acceptable foreign
currency, respondent renders service falling under the category of zero rating.
Pursuant to the Tax Code, a VAT of zero percent should, therefore, be levied upon
the supply of that service.15

Branch and Home Office

Gratia argumenti that the sending of drafts and bills by service establishments to
respondent is equivalent to the act of sending them directly to its parent company
abroad, and that the parent companys subsequent redemption of these drafts and
billings of credit card holders is also attributable to respondent, then with greater
reason should the service rendered by respondent be zero-rated under our VAT
system. The service partakes of the nature of export sales as applied to
goods,39 especially when rendered in the Philippines by a VAT-registered
person40 that gets paid in acceptable foreign currency accounted for in accordance
with BSP rules and regulations.
VAT Requirements for the Supply of Service
The VAT is a tax on consumption 41 "expressed as a percentage of the value added to
goods or services"42purchased by the producer or taxpayer. 43 As an indirect tax44 on
services,45 its main object is the transaction 46itself or, more concretely, the
performance of all kinds of services47 conducted in the course of trade or business in
the Philippines.48 These services must be regularly conducted in this country;
undertaken in "pursuit of a commercial or an economic activity;" 49 for a valuable
consideration; and not exempt under the Tax Code, other special laws, or any
international agreement.50
Without doubt, the transactions respondent entered into with its Hong Kong-based
client meet all these requirements.
First, respondent regularly renders in the Philippines the service of facilitating
the collection and payment of receivables belonging to a foreign company
that is a clearly separate and distinct entity.
Second, such service is commercial in nature; carried on over a sustained
period of time; on a significant scale; with a reasonable degree of frequency;
and not at random, fortuitous or attenuated.
Third, for this service, respondent definitely receives consideration in foreign
currency that is accounted for in conformity with law.
Finally, respondent is not an entity exempt under any of our laws or
international agreements.
Services Subject to Zero VAT
As a general rule, the VAT system uses the destination principle as a basis for the
jurisdictional reach of the tax. 51Goods and services are taxed only in the country
where they are consumed. Thus, exports are zero-rated, while imports are taxed.
Confusion in zero rating arises because petitioner equates the performance of a
particular type of service with the consumption of its output abroad. In the present
case, the facilitation of the collection of receivables is different from the utilization

or consumption of the outcome of such service. While the facilitation is done in the
Philippines, the consumption is not. Respondent renders assistance to its foreign
clients -- the ROCs outside the country -- by receiving the bills of service
establishments located here in the country and forwarding them to the ROCs
abroad. The consumption contemplated by law, contrary to petitioners
administrative interpretation,52 does not imply that the service be done abroad in
order to be zero-rated.
Consumption is "the use of a thing in a way that thereby exhausts it." 53 Applied to
services, the term means the performance or "successful completion of a
contractual duty, usually resulting in the performers release from any past or future
liability x x x."54 The services rendered by respondent are performed or successfully
completed upon its sending to its foreign client the drafts and bills it has gathered
from service establishments here. Its services, having been performed in the
Philippines, are therefore also consumed in the Philippines.
Unlike goods, services cannot be physically used in or bound for a specific place
when their destination is determined. Instead, there can only be a "predetermined
end of a course"55 when determining the service "location or position x x x for legal
purposes."56 Respondents facilitation service has no physical existence, yet takes
place upon rendition, and therefore upon consumption, in the Philippines. Under the
destination principle, as petitioner asserts, such service is subject to VAT at the rate
of 10 percent.
Respondents Services Exempt from the Destination Principle
However, the law clearly provides for an exception to the destination principle; that
is, for a zero percent VAT rate for services that are performed in the Philippines,
"paid for in acceptable foreign currency and accounted for in accordance with the
rules and regulations of the [BSP]." 57 Thus, for the supply of service to be zero-rated
as an exception, the law merely requires that first, the service be performed in the
Philippines; second, the service fall under any of the categories in Section 102(b) of
the Tax Code; and, third, it be paid in acceptable foreign currency accounted for in
accordance with BSP rules and regulations.
Indeed, these three requirements for exemption from the destination principle are
met by respondent. Thus, it should be zero-rated.
Performance of Service versus Product Arising from Performance
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.59

Tax Situs of a Zero-Rated Service

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 60 to impose the VAT.61 Performed in the
Philippines, such service is necessarily subject to its jurisdiction, 62 for the State
necessarily has to have "a substantial connection" 63 to it, in order to enforce a zero
rate.64 The place of payment is immaterial; 65 much less is the place where the
output of the service will be further or ultimately used.
VAT Ruling Nos. 040-98 and 080-89
VAT Ruling No. 040-98 relied upon by petitioner is a less general interpretation at
the administrative level,75rendered by the BIR commissioner upon request of a
taxpayer to clarify certain provisions of the VAT law. As correctly held by the CA,
when this ruling states that the service must be "destined for consumption outside
of the Philippines"76 in order to qualify for zero rating, it contravenes both the law
and the regulations issued pursuant to it. 77 This portion of VAT Ruling No. 040-98 is
clearly ultra vires and invalid.78
Although "[i]t is widely accepted that the interpretation placed upon a statute by
the executive officers, whose duty is to enforce it, is entitled to great respect by the
courts,"79 this interpretation is not conclusive and will have to be "ignored if
judicially found to be erroneous"80 and "clearly absurd x x x or improper." 81 An
administrative issuance that overrides the law it merely seeks to interpret, instead
of remaining consistent and in harmony with it, will not be countenanced by this
Court.82
In the present case, respondent has relied upon VAT Ruling No. 080-89, which
clearly recognizes its zero rating. Changing this status will certainly deprive
respondent of a refund of the substantial amount of excess input taxes to which it is
entitled.
Again, assuming arguendo that VAT Ruling No. 040-98 revoked VAT Ruling No. 08089, such revocation could not be given retroactive effect if the application of the
latter ruling would only be prejudicial to respondent. 83
"Consumed Abroad" Not Required by Legislature
"Senator Herrera: What is important here is that these services are paid in
acceptable foreign currency remitted inwardly to the Philippines.
"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."90

25_Philippine Phosphate Fertilizer v. CIR

FACTS:
Philippine Phosphate Fertilizer Corporation (Philphos) is a domestic corporation
registered with the Export Processing Zone Authority (EPZA). It manufactures
fertilizers for domestic and international distribution and as such, utilizes fuel, oil
and other petroleum products which it procures locally from Petron Philippines
Corporation (Petron). Petron initially pays the Bureau of Internal Revenue (BIR) and
the Bureau of Customs the taxes and duties imposed upon the petroleum products.
Petron is then reimbursed by petitioner when Petron sells such petroleum products
to the petitioner. In a letter dated August 28, 1995, petitioner sought a refund of
specific taxes paid on the purchases of petroleum products from Petron for the
period of September 1993 to December 1994 in the total amount of P602,349.00
which claim is pursuant to the incentives it enjoyed by virtue of its EPZA
registration. Since the two-year period within which petitioner could file a case for
tax refund before the Court of Tax Appeals (CTA) was about to expire and no action
had been taken by the BIR, petitioner instituted a petition for review before the CTA
against the Commissioner of Internal Revenue (CIR). [2] The CTA rationalized thus:
[P]etitioner, as an EPZA registered enterprise is exempted from the
payment of excise taxes, and if said taxes were passed on by the supplier
to EPZAregistered enterprise like the petitioner, tax credit shall be
granted to the latter. The fact that it was not the petitioner who had paid
the taxes directly to the Bureau of Internal Revenue does not have an
adverse effect on petitioners action for refund. The law granting the
exemption makes no distinction as to the circumstances when the law shall apply.
Since the law makes no distinction, neither should we. The exemption is so broad as
to cover the present situation. Since an export processing zone is not
considered to be covered by Philippine customs and internal revenue laws,
the taxes paid by the petitioner on the petroleum products should be
refunded or credited in its favor. Thus, the only thing left for us to do is to
determine whether or not petitioner is entitled to the amount claimed for
refund. This Court cannot verify the exact amount of excise taxes which
correspond to the petroleum products delivered to petitioner. Petitioner
merely presented a summary of petroleum products sold and delivered by
Petron during the period covered by the claim. We cannot, by the
summary alone, ascertain the veracity of the amount being claimed
neither can it prove the existence of the invoices being referred to
therein. Petitioner should have submitted the invoices supporting the
schedules of petroleum products sold and delivered to it by Petron. These
invoices would reveal whether or not the amount claimed for refund by
petitioner is correct.
In an action for refund/credits the taxpayer has the burden of showing that the
taxes paid are erroneously collected and that failure to meet such a burden is fatal
to his cause. Tax refunds partake of the nature of the tax exemptions and therefore

cannot be allowed unless granted in the most explicit and categorical language. The
grant of refund privileges must be strictly construed against the taxpayer and
liberally in favor of the government
It can be revealed from the evidence presented by the Petitioner that it
failed to present a certification of an independent Certified Public
Accountant, as well as the invoices supporting the schedules of petroleum
products sold and delivered to it by Petron. From this perspective alone,
the claim for refund was correctly denied. Now that an unfavorable
decision has been rendered by this Court, Petitioner belatedly seeks to
present the invoices as additional evidence.

ISSUE: Whether or not the CTA should have granted petitioners claim for refund.

RULING:
The general rule is that claimants of tax refunds bear the burden of proving the
factual basis of their claims.[43] This is because tax refunds are in the nature of tax
exemptions, the statutes of which are construed strictissimi juris against the
taxpayer and liberally in favor of the taxing authority. [44]Taxes are the lifeblood of the
nation, therefore statutes that allow exemptions are construed strictly against the
grantee and liberally in favor of the government. [45]
In this case, there is no dispute that petitioner is entitled to exemption from the
payment of excise taxes by virtue of its being an EPZA registered enterprise. [46] As
stated by the CTA, the only thing left to be determined is whether or not petitioner
is entitled to the amount claimed for refund.[47]
Petitioners entire claim for refund, however, was denied for petitioners failure to
present invoices allegedly in violation of CTA Circular No. 1-95. But nowhere in said
Circular is it stated that invoices are required to be presented in claiming refunds.
What the Circular states is that:
1. The party who desires to introduce as evidence such voluminous documents
must present: (a) Summary containing the total amount/s of the tax account or tax
paid for the period involved and a chronological or numerical list of the numbers,
dates and amounts covered by the invoices or receipts; and (b) a Certification of an
independent Certified Public Accountant attesting to the correctness of the contents
of the summary after making an examination and evaluation of the voluminous
receipts and invoices. Such summary and certification must properly be identified
by a competent witness from the accounting firm. (Emphasis supplied)

The certification of an independent CPA is not another mandatory requirement

under the Circular which petitioner failed to comply with. It is rather a requirement
that must accompany the invoices should one decide to present invoices under the
Circular. Since petitioner did not present invoices, on the assumption that such were
not necessary in this case, it logically did not present a certification because there
was nothing to certify.
On this point, we agree with the dissenting opinion of CTA Presiding Judge
Ernesto D. Acosta who stated that:
The reason advanced by the Petitionerthat they thought the presentation by the
Manager of Petron Corporation of a duly notarized certification (supporting the
schedules of invoices), coupled with testimonies of witness, Mrs. Sylvia Osorio of
Petron Corporation, are enough to prove their case could easily fall under the
phrase mistake or excusable negligence as a ground for new trial under Sec. 1(a) of
Rule 37 and not under the phrase newly discovered evidence as stated in our said
resolution. The denial of this motion is too harsh considering that this case is only
civil in nature, govern (sic) merely by the rule on preponderance of evidence. [50]