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TAXATION :VAT

G.R. No. 146984 July 28, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner,


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

DECISION

TINGA, J.:

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

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

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

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

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

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

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

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

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

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

However, the Court of Appeals reversed itself upon reconsidering the case, through a Resolution dated 5 February
2001.13 This time, the appellate court ruled that the "change of ownership of business" as contemplated in R.R. No. 5-
87 must be a consequence of the "retirement from or cessation of business" by the owner of the goods, as provided for
in Section 100 of the Tax Code. The Court of Appeals also agreed with the CTA that the classification of transactions
"deemed sale" was a classification statute, and not an exemption statute, thus warranting the resolution of any doubt
in favor of the taxpayer.14

To the mind of the Court, the arguments raised in the present petition have already been adequately discussed and
refuted in the rulings assailed before us. Evidently, the petition should be denied. Yet the Court finds that Section 99 of
the Tax Code is sufficient reason for upholding the refund of VAT payments, and the subsequent disquisitions by the
lower courts on the applicability of Section 100 of the Tax Code and Section 4 of R.R. No. 5-87 are ultimately irrelevant.

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

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

That the sale of the vessels was not in the ordinary course of trade or business of NDC was appreciated by both the
CTA and the Court of Appeals, the latter doing so even in its first decision which it eventually reconsidered. 20We cite
with approval the CTAs explanation on this point:
In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955 (97 Phil. 992), the term
"carrying on business" does not mean the performance of a single disconnected act, but means conducting,
prosecuting and continuing business by performing progressively all the acts normally incident thereof; while
"doing business" conveys the idea of business being done, not from time to time, but all the time. [J. Aranas,
UPDATED NATIONAL INTERNAL REVENUE CODE (WITH ANNOTATIONS), p. 608-9 (1988)]. "Course of business"
is what is usually done in the management of trade or business. [Idmi v. Weeks & Russel, 99 So. 761, 764,
135 Miss. 65, cited in Words & Phrases, Vol. 10, (1984)].

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

This finding is confirmed by the Revised Charter22 of the NDC which bears no indication that the NDC was created for
the primary purpose of selling real property.23

The conclusion that the sale was not in the course of trade or business, which the CIR does not dispute before this
Court,24 should have definitively settled the matter. Any sale, barter or exchange of goods or services not in the
course of trade or business is not subject to VAT.

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

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

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

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

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

WHEREFORE, the petition is DENIED. No costs.

SO ORDERED.

G.R. No. 178090 February 8, 2010


PANASONIC COMMUNICATIONS IMAGING CORPORATION OF THE PHILIPPINES (formerly MATSUSHITA
BUSINESS MACHINE CORPORATION OF THE PHILIPPINES), Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

ABAD, J.:

This petition for review puts in issue the May 23, 2007 Decision1 of the Court of Tax Appeals (CTA) en banc in CTA
EB 239, entitled "Panasonic Communications Imaging Corporation of the Philippines v. Commissioner of Internal
Revenue," which affirmed the denial of petitioners claim for refund.

The Facts and the Case

Petitioner Panasonic Communications Imaging Corporation of the Philippines (Panasonic) produces and exports plain
paper copiers and their sub-assemblies, parts, and components. It is registered with the Board of Investments as a
preferred pioneer enterprise under the Omnibus Investments Code of 1987. It is also a registered value-added tax
(VAT) enterprise.

From April 1 to September 30, 1998 and from October 1, 1998 to March 31, 1999, petitioner Panasonic generated
export sales amounting to US$12,819,475.15 and US$11,859,489.78, respectively, for a total of US$24,678,964.93.
Believing that these export sales were zero-rated for VAT under Section 106(A)(2)(a)(1) of the 1997 National Internal
Revenue Code as amended by Republic Act (R.A.) 8424 (1997 NIRC),2 Panasonic paid input VAT of P4,980,254.26
and P4,388,228.14 for the two periods or a total of P9,368,482.40 attributable to its zero-rated sales.

Claiming that the input VAT it paid remained unutilized or unapplied, on March 12, 1999 and July 20, 1999 petitioner
Panasonic filed with the Bureau of Internal Revenue (BIR) two separate applications for refund or tax credit of what it
paid. When the BIR did not act on the same, Panasonic filed on December 16, 1999 a petition for review with the CTA,
averring the inaction of the respondent Commissioner of Internal Revenue (CIR) on its applications.

After trial or on August 22, 2006 the CTAs First Division rendered judgment,3 denying the petition for lack of merit.
The First Division said that, while petitioner Panasonics export sales were subject to 0% VAT under Section 106(A)(2)
(a)(1) of the 1997 NIRC, the same did not qualify for zero-rating because the word "zero-rated" was not printed on
Panasonics export invoices. This omission, said the First Division, violates the invoicing requirements of Section 4.108-
1 of Revenue Regulations (RR) 7-95.4

Its motion for reconsideration having been denied, on January 5, 2007 petitioner Panasonic appealed the First
Divisions decision to the CTA en banc. On May 23, 2007 the CTA en banc upheld the First Divisions decision and
resolution and dismissed the petition. Panasonic filed a motion for reconsideration of the en banc decision but this was
denied. Thus, petitioner filed the present petition in accordance with R.A. 9282.5

The Issue Presented

The sole issue presented in this case is whether or not the CTA en banc correctly denied petitioner Panasonics claim
for refund of the VAT it paid as a zero-rated taxpayer on the ground that its sales invoices did not state on their faces
that its sales were "zero-rated."

The Courts Ruling

The VAT is a tax on consumption, an indirect tax that the provider of goods or services may pass on to his customers.
Under the VAT method of taxation, which is invoice-based, an entity can subtract from the VAT charged on its sales or
outputs the VAT it paid on its purchases, inputs and imports.6 For example, when a seller charges VAT on its sale, it
issues an invoice to the buyer, indicating the amount of VAT he charged. For his part, if the buyer is also a seller
subjected to the payment of VAT on his sales, he can use the invoice issued to him by his supplier to get a reduction of
his own VAT liability. The difference in tax shown on invoices passed and invoices received is the tax paid to the
government. In case the tax on invoices received exceeds that on invoices passed, a tax refund may be claimed.

Under the 1997 NIRC, if at the end of a taxable quarter the seller charges output taxes7 equal to the input taxes8that
his suppliers passed on to him, no payment is required of him. It is when his output taxes exceed his input taxes that
he has to pay the excess to the BIR. If the input taxes exceed the output taxes, however, the excess payment 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.9

Zero-rated transactions generally refer to the export sale of goods and services. The tax rate in this case is set at zero.
When applied to the tax base or the selling price of the goods or services sold, such zero rate results in no tax
chargeable against the foreign buyer or customer. But, although the seller in such transactions charges no output tax,
he can claim a refund of the VAT that his suppliers charged him. The seller thus enjoys automatic zero rating, which
allows him to recover the input taxes he paid relating to the export sales, making him internationally competitive.10

For the effective zero rating of such transactions, however, the taxpayer has to be VAT-registered and must comply
with invoicing requirements.11 Interpreting these requirements, respondent CIR ruled that under Revenue
Memorandum Circular (RMC) 42-2003, the taxpayers failure to comply with invoicing requirements will result in the
disallowance of his claim for refund. RMC 42-2003 provides:

A-13. Failure by the supplier to comply with the invoicing requirements on the documents supporting the sale of goods
and services will result to the disallowance of the claim for input tax by the purchaser-claimant.1avvphi1

If the claim for refund/TCC is based on the existence of zero-rated sales by the taxpayer but it fails to comply with the
invoicing requirements in the issuance of sales invoices (e.g., failure to indicate the TIN), its claim for tax credit/refund
of VAT on its purchases shall be denied considering that the invoice it is issuing to its customers does not depict its
being a VAT-registered taxpayer whose sales are classified as zero-rated sales. Nonetheless, this treatment is without
prejudice to the right of the taxpayer to charge the input taxes to the appropriate expense account or asset account
subject to depreciation, whichever is applicable. Moreover, the case shall be referred by the processing office to the
concerned BIR office for verification of other tax liabilities of the taxpayer.

Petitioner Panasonic points out, however, that in requiring the printing on its sales invoices of the word "zero-rated,"
the Secretary of Finance unduly expanded, amended, and modified by a mere regulation (Section 4.108-1 of RR 7-95)
the letter and spirit of Sections 113 and 237 of the 1997 NIRC, prior to their amendment by R.A. 9337. 12 Panasonic
argues that the 1997 NIRC, which applied to its paymentsspecifically Sections 113 and 237required the VAT-
registered taxpayers receipts or invoices to indicate only the following information:

(1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification number
(TIN);

(2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such
amount includes the value-added tax;

(3) The date of transaction, quantity, unit cost and description of the goods or properties or nature of the
service; and

(4) The name, business style, if any, address and taxpayers identification number (TIN) of the purchaser,
customer or client.

Petitioner Panasonic points out that Sections 113 and 237 did not require the inclusion of the word "zero-rated" for
zero-rated sales covered by its receipts or invoices. The BIR incorporated this requirement only after the enactment of
R.A. 9337 on November 1, 2005, a law that did not yet exist at the time it issued its invoices.

But when petitioner Panasonic made the export sales subject of this case, i.e., from April 1998 to March 1999, the rule
that applied was Section 4.108-1 of RR 7-95, otherwise known as the Consolidated Value-Added Tax Regulations, which
the Secretary of Finance issued on December 9, 1995 and took effect on January 1, 1996. It already required the
printing of the word "zero-rated" on the invoices covering zero-rated sales. When R.A. 9337 amended the 1997 NIRC
on November 1, 2005, it made this particular revenue regulation a part of the tax code. This conversion from
regulation to law did not diminish the binding force of such regulation with respect to acts committed prior to the
enactment of that law.

Section 4.108-1 of RR 7-95 proceeds from the rule-making authority granted to the Secretary of Finance under Section
245 of the 1977 NIRC (Presidential Decree 1158) for the efficient enforcement of the tax code and of course its
amendments.13 The requirement is reasonable and is in accord with the efficient collection of VAT from the covered
sales of goods and services. As aptly explained by the CTAs First Division, the appearance of the word "zero-rated" on
the face of invoices covering zero-rated sales prevents buyers from falsely claiming input VAT from their purchases
when no VAT was actually paid. If, absent such word, a successful claim for input VAT is made, the government would
be refunding money it did not collect.14

Further, the printing of the word "zero-rated" on the invoice helps segregate sales that are subject to 10% (now 12%)
VAT from those sales that are zero-rated.15 Unable to submit the proper invoices, petitioner Panasonic has been
unable to substantiate its claim for refund.

Petitioner Panasonics citation of Intel Technology Philippines, Inc. v. Commissioner of Internal Revenue16 is misplaced.
Quite the contrary, it strengthens the position taken by respondent CIR. In that case, the CIR denied the claim for tax
refund on the ground of the taxpayers failure to indicate on its invoices the "BIR authority to print." But Sec. 4.108-1
required only the following to be reflected on the invoice:

1. The name, taxpayers identification number (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.

This Court held that, since the "BIR authority to print" is not one of the items required to be indicated on the invoices
or receipts, the BIR erred in denying the claim for refund. Here, however, the ground for denial of petitioner
Panasonics claim for tax refundthe absence of the word "zero-rated" on its invoicesis one which is specifically and
precisely included in the above enumeration. Consequently, the BIR correctly denied Panasonics claim for tax refund.

This Court will not set aside lightly the conclusions reached by the CTA which, by the very nature of its functions, is
dedicated exclusively to the resolution of tax problems and has accordingly developed an expertise on the subject,
unless there has been an abuse or improvident exercise of authority.17 Besides, statutes that grant tax exemptions are
construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. Tax refunds in relation to
the VAT are in the nature of such exemptions. The general rule is that claimants of tax refunds bear the burden of
proving the factual basis of their claims. 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.18

WHEREFORE, the petition is DENIED for lack of merit.

Costs against petitioner.

SO ORDERED.

ROBERTO A. ABAD
Associate Justice

WE CONCUR:

ANTONIO T. CARPIO
Associate Justice

ARTURO D. BRION MARIANO C. DEL CASTILLO


Associate Justice Associate Justice
JOSE P. PEREZ
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to
the writer of the opinion of the Courts Division.

ANTONIO T. CARPIO
Associate Justice
Chairperson, Second Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairpersons Attestation, I certify that the
conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the
opinion of the Courts Division.
REYNATO S. PUNO
Chief Justice

Footnotes

1 Rollo, pp. 37-56; penned by Associate Justice Lovell R. Bautista.

2 Which provides 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, value-added tax equivalent to ten percent (10%) [now 12%] 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.

xxxx

(2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate:

(a) Export Sales. - The term "export sales" means:

(1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any
shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of
the goods so exported and paid for in acceptable foreign currency or its equivalent in goods or services, and
accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP).

3 Rollo, pp. 57-67; penned by Associate Justice Caesar A. Casanova, and concurred in by Associate Justice
Lovell R. Bautista. Presiding Justice Ernesto D. Acosta dissented.

4 The Consolidated Value-Added Tax Regulations, issued on December 9, 1995 and implemented
beginning January 1, 1996, provides:

Sec. 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;

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 invoices or
receipts and this shall be considered as "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. (Emphasis supplied)

5 An Act Expanding the Jurisdiction of the Court of Tax Appeals, Elevating Its Rank to the Level of a Collegiate
Court with Special Jurisdiction and Enlarging Its Membership, which became effective on March 30, 2004.
Under this law, specifically Section 19 thereof, a party adversely affected by a decision or ruling of the Court of
Tax Appeals en banc may file with the Supreme Court a verified petition for review on certiorari pursuant to
Rule 45 of the 1997 Rules of Procedure.

6 Commissioner of Internal Revenue v. Seagate Technology (Philippines), 491 Phil. 317, 332 (2005).

7 In simple terms, output tax is the tax due to the person when he sells goods.

8 Stated simply, input tax is the tax paid by a person, passed on to him by the seller, when he buys goods.

9 Commissioner of Internal Revenue v. Seagate Technology (Philippines), supra note 6, at 333.

10 Id. at 334-335.

11 Id.

12 An Act amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121,
148, 151, 236, 237 and 288 of the National Internal Revenue Code of 1997, as amended, and for other
purposes. Section 113 of the 1997 NIRC was amended to read, at Section 113(B)(2)(c) of the new
law, to include the provision that "if 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."

13 Section 245. Authority of Secretary of Finance to promulgate rules and regulations. The Secretary of
Finance, upon recommendation of the Commissioner, shall promulgate all needed rules and regulations for the
effective enforcement of the provisions of this Code.

14 Citing its own disposition in J.R.A. Philippines, Inc. v. Commissioner of Internal Revenue, CTA Case 6454,
June 30, 2005.

15 American Express International, Inc., Philippine Branch v. Commissioner of Internal Revenue, CTA E.B. 103,
March 3, 2006.

16 G.R. No. 166732, April 27, 2007, 522 SCRA 657.

17 Commissioner of Internal Revenue v. Cebu Toyo Corporation, 491 Phil. 625, 640 (2005).

18 Philippine Phosphate Fertilizer Corporation v. Commissioner of Internal Revenue, 500 Phil. 149, 163 (2005).

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;

5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by [respondent];

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

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

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

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

1. [Respondents] alleged claim for tax refund/credit is subject to administrative routinary investigation/examination by
[petitioners] Bureau;

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

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

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

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

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

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

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

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

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

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

Hence this Petition.5

Sole Issue

Petitioner submits this sole issue for our consideration:

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

The Courts Ruling

The Petition is unmeritorious.

Sole Issue:

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

No doubt, as a PEZA-registered enterprise within a special economic zone,7 respondent is entitled to the fiscal
incentives and 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 226 15 is chosen. Under
this law, respondent shall further be entitled to an income tax holiday; additional deduction for labor expense;
simplification of customs procedure; unrestricted use of consigned equipment; access to a bonded manufacturing
warehouse system; privileges for foreign nationals employed; tax credits on domestic capital equipment, as well as for
taxes and duties on raw materials; and exemption from contractors taxes, wharfage dues, taxes and duties on
imported capital equipment and spare parts, export taxes, duties, imposts and fees,16local taxes and licenses, and
real property taxes.17

A privilege available to respondent under the provision in RA 7227 on tax and duty-free importation of raw materials,
capital and 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.22Banking 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.36Under 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.

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

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 laws intent in not imposing local or national taxes on business enterprises within the ecozone.

Third, foreign and domestic merchandise, raw materials, equipment and the like "shall not be subject to x x x internal
revenue laws and regulations" under PD 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 ecozones 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. 101Indeed, 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) 74-99, however, now clearly
and correctly provides that any VAT-registered suppliers sale of goods, property or services from the customs territory
to any registered enterprise operating in the ecozone -- regardless of the class or type of the latters PEZA registration
-- is legally entitled to a zero rate.111

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

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

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

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

Wisely accorded to ecozones created under RA 7916117 was the governments policy -- spelled out earlier in RA 7227
-- of converting into alternative productive uses118 the former military reservations and their extensions,119as 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 latters prior representation before the lower courts and
the mode of appeal taken by petitioner before this Court.

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

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

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

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

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

Second, grantia argumenti that such an application is required by law, there is still the presumption of regularity in the
performance of official duty.145 Respondents registration carries with it the presumption that, in the absence of
contradictory evidence, an application for effective zero rating was also filed and approval thereof given. Besides, it is
also presumed that the law has been 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 taxpayers negligence -- a result not at all
contemplated. Administrative convenience cannot thwart legislative mandate.

Tax Refund or Credit in Order

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

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

The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA law, 148 for EO 226149also
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

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.

G.R. No. 151135 July 2, 2004

CONTEX CORPORATION, petitioner,


vs.
HON. COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

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 courts Resolution,3 dated December 19, 2001, denying the motion for reconsideration.

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

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

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

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

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

In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply the rule that claims for refund are
strictly construed against the taxpayer. Since petitioner failed to establish both its right to a tax refund or tax credit
and its compliance with the rules on tax refund as provided for in Sections 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 petitioners Makati and Pasay City offices.

Respondent CIR then filed a petition, docketed as CA-G.R. SP No. 62823, for review of the CTA decision by the Court of
Appeals. Respondent maintained that the exemption of Contex Corp. under Rep. Act No. 7227 was limited only to
direct taxes and not to indirect taxes such as the input component of the VAT. The Commissioner pointed out that from
its very nature, the value-added tax is a burden passed on by a VAT registered person to the end users; hence, the
direct liability for the tax lies with the suppliers and not Contex.

Finding merit in the CIRs arguments, the appellate court decided CA-G.R. SP No. 62823 in his favor, thus:

WHEREFORE, premises considered, the appealed decision is hereby REVERSED AND SET ASIDE. Contexs claim
for refund of erroneously paid taxes is DENIED accordingly.

SO ORDERED.13

In reversing the CTA, the Court of Appeals held that the exemption from duties and taxes on the importation of raw
materials, capital, and equipment of SBFZ-registered enterprises under Rep. Act No. 7227 and its implementing rules
covers only "the VAT imposable under Section 107 of the [Tax Code], which is a direct liability of the importer, and in
no way includes the value-added tax of the seller-exporter the burden of which was passed on to the importer as an
additional costs of the goods."14 This was because the exemption granted by Rep. Act No. 7227 relates to the act of
importation and Section 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 courts restrictive interpretation of petitioners VAT exemption as
limited to those covered by Section 107 of the Tax Code is erroneous and devoid of legal basis. It contends that the
provisions of Rep. Act No. 7227 clearly and unambiguously mandate that no local and national taxes shall be imposed
upon SBFZ-registered firms and hence, said law should govern the case. Petitioner calls our attention to regulations
issued by both the SBMA and BIR clearly and categorically providing that the tax exemption provided for by Rep. Act
No. 7227 includes exemption from the imposition of VAT on purchases of supplies and materials.

The respondent takes the diametrically opposite view that while Rep. Act No. 7227 does grant tax exemptions, such
grant is not all-encompassing but is limited only to those taxes for which a SBFZ-registered business may be directly
liable. Hence, SBFZ locators are not relieved from the indirect taxes that may be shifted to them by a VAT-registered
seller.
At this juncture, it must be stressed that the VAT is an indirect tax. As such, the amount of tax paid on the goods,
properties or services bought, transferred, or leased may be shifted or passed on by the seller, transferor, or lessor to
the buyer, transferee or lessee.17 Unlike a direct tax, such as the income tax, which primarily taxes an individuals
ability to pay based on his income or net wealth, an indirect tax, such as the VAT, is a tax on consumption of goods,
services, or certain transactions involving the same. The VAT, thus, forms a substantial portion of consumer
expenditures.

Further, in indirect taxation, there is a need to distinguish between the liability for the tax and the burden of the tax.
As earlier pointed out, the amount of tax paid may be shifted or passed on by the seller to the buyer. What is
transferred in such instances is not the liability for the tax, but the tax burden. In adding or including the VAT due to
the selling price, the seller remains the person primarily and legally liable for the payment of the tax. What is shifted
only to the intermediate buyer and ultimately to the final purchaser is the burden of the tax.18 Stated differently, a
seller who is directly and legally liable for payment of an indirect tax, such as the VAT on goods or services is not
necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser or consumer of such
goods or services who, although not directly and legally liable for the payment thereof, ultimately bears the burden of
the tax.19

Exemptions from VAT are granted by express provision of the Tax Code or special laws. Under VAT, the transaction can
have preferential treatment in the following ways:

(a) VAT Exemption. An exemption means that the sale of goods or properties and/or services and the use or
lease of properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input
tax) previously paid.20 This is a case wherein the VAT is removed at the exempt stage (i.e., at the point of the
sale, barter or exchange of the goods or properties).

The person making the exempt sale of goods, properties or services shall not bill any output tax to his
customers because the said transaction is not subject to VAT. On the other hand, a VAT-registered purchaser of
VAT-exempt goods/properties or services which are exempt from VAT is not entitled to any input tax on such
purchase despite the issuance of a VAT invoice or receipt.21

(b) Zero-rated Sales. These are sales by VAT-registered persons which are subject to 0% rate, meaning the tax
burden is not passed on to the purchaser. A zero-rated sale by a VAT-registered person, which is a taxable
transaction for VAT purposes, shall not result in any output tax. However, the input tax on his purchases of
goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in
accordance with these regulations.22

Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm. In contrast, exemption only removes
the VAT at the exempt stage, and it will actually increase, rather than reduce the total taxes paid by the exempt firms
business or non-retail customers. It is for this reason that a sharp distinction must be made between zero-rating and
exemption in designating a value-added tax.23

Apropos, the petitioners claim to VAT exemption in the instant case for its purchases of supplies and raw materials is
founded mainly on Section 12 (b) and (c) of Rep. Act No. 7227, which basically exempts them from all national and
local internal revenue taxes, including VAT and Section 4 (A)(a) of BIR Revenue Regulations No. 1-95.24

On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is not controverted by the respondent.
In fact, petitioner is registered as a NON-VAT taxpayer per Certificate of Registration25 issued by the BIR. As such, it is
exempt from VAT on all its sales and importations of goods and services.

Petitioners claim, however, for exemption from VAT for its purchases of supplies and raw materials is incongruous with
its claim that it is VAT-Exempt, for only VAT-Registered entities can claim Input VAT Credit/Refund.

The point of contention here is whether or not the petitioner may claim a refund on the Input VAT erroneously passed
on to it by its suppliers.

While it is true that the petitioner should not have been liable for the VAT inadvertently passed on to it by its supplier
since such is a zero-rated sale on the part of the supplier, the petitioner is not the proper party to claim such VAT
refund.

Section 4.100-2 of BIRs Revenue Regulations 7-95, as amended, or the "Consolidated Value-Added Tax Regulations"
provide:

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, petitioners supplier may claim an Input VAT credit with no
corresponding Output VAT liability. Congruently, no Output VAT may be passed on to the petitioner.

On the second issue, it may not be amiss to re-emphasize that the petitioner is registered as a NON-VAT taxpayer and
thus, is exempt from VAT. As an exempt VAT taxpayer, it is not allowed any tax credit on VAT (input tax) previously
paid. In fine, even if we are to assume that exemption from the burden of VAT on petitioners purchases did exist,
petitioner is still not entitled to any tax credit or refund on the input tax previously paid as petitioner is an exempt VAT
taxpayer.

Rather, it is the petitioners suppliers who are the proper parties to claim the tax credit and accordingly refund the
petitioner of the VAT erroneously passed on to the latter.

Accordingly, we find that the Court of Appeals did not commit any reversible error of law in holding that petitioners
VAT exemption under Rep. Act No. 7227 is limited to the VAT on which it is directly liable as a seller and hence, it
cannot claim any refund or exemption for any input VAT it paid, if any, on its purchases of raw materials and supplies.

WHEREFORE, the petition is DENIED for lack of merit. The Decision dated September 3, 2001, of the Court of Appeals
in CA-G.R. SP No. 62823, as well as its Resolution of December 19, 2001 are AFFIRMED. No pronouncement as to costs.

SO ORDERED.

Puno, (Chairman), Callejo, Sr., and Tinga, JJ., concur.


Austria-Martinez, J., on leave.

Footnotes

1 Rollo, pp. 29-38. Penned by Associate Justice Rodrigo V. Cosico, with Associate Justices Ramon A. Barcelona,
and Bienvenido L. Reyes concurring.

2 Id. at 59-70.

3 Id. at 40-41.

4 The Bases Conversion and Development Act of 1992.

5 SEC. 12. Subic Special Economic Zone. Subject to the concurrence by resolution of the sangguniang
panlungsod of the City of Olongapo and the sangguniang bayan of the Municipalities of Subic, Morong and
Hermosa, there is hereby created a Special Economic and Freeport Zone consisting of the City of Olongapo and
the Municipality of Subic, Province of Zambales ...

The abovementioned zone shall be subject to the following policies:


(c) The provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and
national, shall be imposed within the Subic Special Economic Zone (stress supplied). In lieu of paying
taxes, three percent (3%) of the gross income earned by all businesses and enterprises within the Subic
Special Economic Zone shall be remitted to the National Government, one percent (1%) each to the local
government units affected by the declaration of the zone in proportion to their population area, and other
factors. In addition, there is hereby established a development fund of one percent (1%) of the gross income
earned by all businesses and enterprises within the Subic Special Economic Zone to be utilized for the
development of municipalities outside the City of Olongapo and the Municipality of Subic, and other
municipalities contiguous to the base areas.

In case of conflict between national and local laws with respect to tax exemption privileges in the
Subic Special Economic Zone, the same shall be resolved in favor of the latter (stress supplied).

6 Underlining supplied.

7 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):

8 SEC. 106. Value-Added Tax on Sale of Goods or Properties.

(2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate:

(a) Export Sales. The term export sales means:

(1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any
shipping arrangement that may be agreed upon

9 SEC. 12. (b) The Subic Special Economic Zone shall be operated and managed as a separate customs
territory ensuring free flow or movement of goods and capital within, into and exported out of the Subic
Special Economic Zone, as well as provide incentives such as tax and duty-free importations of raw materials,
capital and equipment. However, exportation or removal of goods from the territory of the Subic Special
Economic Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under
the Customs and Tariff Code and other relevant tax laws of the Philippines.

10 SEC. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes.The
Commissioner may

(A) Compromise the payment of any internal revenue tax, when:

(1) A reasonable doubt as to the validity of the claim against the taxpayer exists; or

(2) The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax.

...

(B) Abate or cancel a tax liability, when:

(1) The tax or any portion thereof appears to be unjustly or excessively assessed; or

(2) The administration and collection costs involved do not justify the collection of the amount due.

...

(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 ... 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:..

...

11 SEC. 229. Recovery of Tax Erroneously or Illegally Collected.

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.

12 Rollo, p. 69.

13 Id. at 38.

14 Id. at 37.

15 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.

(B) Transfer of Goods by Tax-exempt Persons.In the case of tax-free importation of goods into the Philippines
by persons, entities or agencies exempt from tax where such goods are subsequently sold, transferred or
exchanged in the Philippines to non-exempt persons or entities, the purchasers, transferees or recipients shall
be considered the importers thereof, who shall be liable for any internal revenue tax on such importation. The
tax due on such importation shall constitute a lien on the goods superior to all charges or liens on the goods,
irrespective of the possessor thereof.

16 Rollo, p. 11.

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

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

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

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

18 Deoferio, Jr. and Mamalateo, THE VALUE ADDED TAX IN THE PHILIPPINES 35-36 (1st ed. 2000).

19 Deoferio, Jr. and Mamalateo, op. cit. 117.

20 BIR Revenue Regulations No. 7-95, Section 4.103-1.

21 Ibid.

22 Id. at Section 4.100-2.

23 Vitug and Acosta. TAX LAW AND JURISPRUDENCE 241 (2nd ed. 2000).
24 BIR Revenue Regulations No. 1-95, or the "Rules and Regulations to Implement the Tax Incentives
Provisions under Paragraphs (b) and (c) of Section 12, Republic Act No. 7227 Otherwise Known as the Bases
Conversion and Development Act of 1992."

"Section 4. Exemptions and Incentives.-

A. All SBMA registered enterprises doing business within the Secured Area in the Zone shall enjoy the following:

a. Exemption from customs and import duties and national internal revenue taxes on importations of raw
materials for manufacture into finished products and capital goods and equipment needed for their business
operation within the Secured Area . . .

...

e. Purchases of raw materials, capital goods and equipment and services by the SBMA and SBF accredited
enterprises from enterprises in the Customs Territory shall be considered effectively zero-rated for VAT
purposes. . . "

CIR vs. Magsaysay lines

G.R. No. 125355 March 30, 2000

COMMISSIONER OF INTERNAL REVENUE, petitioner,


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

PARDO, J.:

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

Commonwealth Management and Services Corporation (COMASERCO, for brevity), is a corporation duly organized and
existing under the laws of the Philippines. It is an affiliate of Philippine American Life Insurance Co. (Philamlife),
organized by the letter to perform collection, consultative and other technical services, including functioning as an
internal auditor, of Philamlife and its other affiliates.1wphi1.nt

On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an assessment to private respondent COMASERCO
for deficiency value-added tax (VAT) amounting to P351,851.01, for taxable year 1988, computed as follows:

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

TOTAL AMOUNT DUE AND COLLECTIBLE P351,831.013


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

On February 10, 1992, COMASERCO filed with the BIR, a letter-protest objecting to the latter's finding of deficiency VAT.
On August 20, 1992, the Commissioner of Internal Revenue sent a collection letter to COMASERCO demanding
payment of the deficiency VAT.
On September 29, 1992, COMASERCO filed with the Court of Tax Appeals4 a petition for review contesting the
Commissioner's assessment. COMASERCO asserted that the services it rendered to Philamlife and its affiliates, relating
to collections, consultative and other technical assistance, including functioning as an internal auditor, were on a "no-
profit, reimbursement-of-cost-only" basis. It averred that it was not engaged in the business of providing services to
Philamlife and its affiliates. COMASERCO was established to ensure operational orderliness and administrative
efficiency of Philamlife and its affiliates, and not in the sale of services. COMASERCO stressed that it was not profit-
motivated, thus not engaged in business. In fact, it did not generate profit but suffered a net loss in taxable year 1988.
COMASERCO averred that since it was not engaged in business, it was not liable to pay VAT.

On June 22, 1995, the Court of Tax Appeals rendered decision in favor of the Commissioner of Internal Revenue, the
dispositive portion of which reads:

WHEREFORE, the decision of the Commissioner of Internal Revenue assessing petitioner deficiency value-
added tax for the taxable year 1988 is AFFIRMED with slight modifications. Accordingly, petitioner is ordered to
pay respondent Commissioner of Internal Revenue the amount of P335,831.01 inclusive of the 25% surcharge
and interest plus 20% interest from January 24, 1992 until fully paid pursuant to Section 248 and 249 of the
Tax Code.

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

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

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

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

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

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

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

We give due course to the petition.

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

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

We agree with the Commissioner.

Sec. 99 of the National Internal Revenue Code of 1986, as amended by Executive Order (E. O.) No. 273 in 1988,
provides that:

Sec. 99. Persons liable. Any person who, in the course of trade or business, sells, barters or exchanges
goods, renders services, or engages in similar transactions and any person who, imports goods shall be subject
to the value-added tax (VAT) imposed in Sections 100 to 102 of this Code. 9

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

We disagree.

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

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

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

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

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

Contrary to COMASERCO's contention the above provision clarifies that even a non-stock, non-profit, organization or
government entity, is liable to pay VAT on the sale of goods or services. VAT is a tax on transactions, imposed at every
stage of the distribution process on the sale, barter, exchange of goods or property, and on the performance of
services, even in the absence of profit attributable thereto. The term "in the course of trade or business" requires the
regular conduct or pursuit of a commercial or an economic activity regardless of whether or not the entity is profit-
oriented.

The definition of the term "in the course of trade or business" present law applies to all transactions even to those
made prior to its enactment. Executive Order No. 273 stated that any person who, in the course of trade or business,
sells, barters or exchanges goods and services, was already liable to pay VAT. The present law merely stresses that
even a nonstock, nonprofit organization or government entity is liable to pay VAT for the sale of goods and services.

Sec. 108 of the National Internal Revenue Code of 1997 10 defines the phrase "sale of services" as the "performance
of all kinds of services for others for a fee, remuneration or consideration." It includes "the supply of technical advice,
assistance or services rendered in connection with technical management or administration of any scientific, industrial
or commercial undertaking or project." 11

On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling No. 010-98 12 emphasizing that a
domestic corporation that provided technical, research, management and technical assistance to its affiliated
companies and received payments on a reimbursement-of-cost basis, without any intention of realizing profit, was
subject to VAT on services rendered. In fact, even if such corporation was organized without any intention realizing
profit, any income or profit generated by the entity in the conduct of its activities was subject to income tax.

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

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

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

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

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

No costs.

SO ORDERED.1wphi1.nt

Panasonic vs CIR

G.R. No. 147295 February 16, 2007

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 hotels premises to the Philippine Amusement and Gaming Corporation
[hereafter, PAGCOR] for casino operations. It also caters food and beverages to PAGCORs casino patrons through the
hotels 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 Petitioners 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

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 CTAs 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 PAGCORs 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 PAGCORs 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

(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 PAGCORs 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 PAGCORs 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%.

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
contractors 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 Acesites 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, petitioners 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

The Government comes within the scope of solutio indebiti principle as elucidated in Commissioner of Internal
Revenue v. Firemans 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 respondents 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.
G.R. No. 150154. August 9, 2005

COMMISSIONER OF INTERNAL REVENUE, Petitioners,


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 P13,118,542.007 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. 9Consequently, on 27 March 1998,
respondent Toshiba filed with the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department
of Finance (DOF) applications for tax credit/refund of its unutilized input VAT for 01 January to 31 March 1996 in the
amount of P14,176,601.28,10 and for 01 April to 30 June 1996 in the amount of P5,161,820.79,11 for a total
of P19,338,422.07. To toll the running of the two-year prescriptive period for judicially claiming a tax credit/refund,
respondent Toshiba, on 31 March 1998, filed with the CTA a Petition for Review. It would subsequently file an Amended
Petition for Review on 10 November 1998 so as to conform to the evidence presented before the CTA during the
hearings.

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

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

6. Taxes are presumed to have been collected in accordance with law. Hence, petitioner must prove that the taxes
sought to be refunded were erroneously or illegally collected.

7. Petitioner must prove the allegations supporting its entitlement to a refund.

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

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

After evaluating the evidence submitted by respondent Toshiba,13 the CTA, in its Decision dated 10 March 2000,
ordered petitioner CIR to refund, or in the alternative, to issue a tax credit certificate to respondent Toshiba in the
amount of P16,188,045.44.14

In a Resolution, dated 24 May 2000, the CTA denied petitioner CIRs Motion for Reconsideration for lack of merit.15
The Court of Appeals, in its Decision dated 27 September 2001, dismissed petitioner CIRs Petition for Review and
affirmed the CTA Decision dated 10 March 2000.

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

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

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

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

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

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

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

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

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

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

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

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

...

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

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

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

Petitioner CIR argues that although respondent Toshiba may be a VAT-registered taxpayer, it is not engaged in a VAT-
taxable business. According to petitioner CIR, respondent Toshiba is actually VAT-exempt, invoking the following
provision of the Tax Code of 1977, as amended
SEC. 103. Exempt transactions. The following shall be exempt from value-added tax.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

II

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

a. The taxpayer-claimant is VAT-registered;

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

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

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

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

III

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

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.

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 [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 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:

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 BIRs collecting agent, PCIBank, as its output tax liability for the year 1996, computed as follows:

Amount subject to 10% VAT P103,558,338.11

Multiply by 10%

VAT Output Tax P 10,355,833.81

Less: 1996 Input VAT P 3,361,174.14

VAT Output Tax Payable P 6,994,659.67

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

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

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

The Ruling of the Court of Tax Appeals

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

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

xxxx

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

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

x x x Considering the principle of solutio indebiti which requires the return of what has been delivered by mistake, the
[petitioner] is obligated to issue the tax credit certificate prayed for by [respondent]. x x 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 petitioners view that since respondents services are not destined
for consumption abroad, they are not of the same nature as project studies, information services, engineering and
architectural designs, and other similar services mentioned in Section 4.102-2(b)(2) of Revenue Regulations No. 5-
967 as subject to 0% VAT. Thus, according to petitioner, respondents services cannot legally qualify for 0% VAT but are
subject to the regular 10% VAT.8

The Court of Appeals found untenable petitioners contention that under VAT Ruling No. 040-98, respondents services
should be destined for consumption abroad to enjoy zero-rating. Contrary to petitioners interpretation, there are two
kinds of transactions or services subject to zero percent VAT 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 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 petitioners 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 petitioners argument that our VAT law generally follows the destination principle
(i.e., exports exempt, imports taxable).14 The Court of Appeals stated that "if indeed the destination principle
underlies and is the basis of the VAT laws, then petitioners proper remedy would be to recommend an amendment of
Section 108(b)(2) to Congress. Without such amendment, however, petitioner should apply the terms of the basic law.
Petitioner could not resort to administrative legislation, as what [he] had done in this case."15

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-
9517 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 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);

(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, respondents 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.

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

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

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

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

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

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

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

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

Respondents reliance on the ruling in American 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 respondents services should be subject to 10% VAT.

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

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

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

WHEREFORE, the Court DENIES the petition.

SO ORDERED.

G.R. No. 152609 June 29, 2005

COMMISSIONER OF INTERNAL REVENUE, Petitioner,


vs.
AMERICAN EXPRESS INTERNATIONAL, INC. (PHILIPPINE BRANCH), Respondent.

DECISION
PANGANIBAN, J.:

As a general rule, the value-added tax (VAT) system uses the destination principle. However, our VAT law itself
provides for a clear exception, under which the supply of service shall be zero-rated when the following requirements
are met: (1) the service is performed in the Philippines; (2) the service falls under any of the categories provided in
Section 102(b) of the Tax Code; and (3) it is paid for in acceptable foreign currency that is accounted for in accordance
with the regulations of the Bangko Sentral ng Pilipinas. Since respondents services meet these requirements, they are
zero-rated. Petitioners Revenue Regulations that alter or revoke the above requirements are ultra vires and invalid.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the February 28, 2002 Decision2of the
Court of Appeals (CA) in CA-GR SP No. 62727. The assailed Decision disposed as follows:

"WHEREFORE, premises considered, the petition is hereby DISMISSED for lack of merit. The assailed decision of the
Court of Tax Appeals (CTA) is AFFIRMED in toto."3

The Facts

Quoting the CTA, the CA narrated the undisputed facts as follows:

"[Respondent] is a Philippine branch of American Express International, Inc., a corporation duly organized and existing
under and by virtue of the laws of the State of Delaware, U.S.A., with office in the Philippines at the Ground Floor, ACE
Building, corner Rada and de la Rosa Streets, Legaspi Village, Makati City. It is a servicing unit of American Express
International, Inc. - Hongkong Branch (Amex-HK) and is engaged primarily to facilitate the collections of Amex-HK
receivables from card members situated in the Philippines and payment to service establishments in the Philippines.

"Amex Philippines registered itself with the Bureau of Internal Revenue (BIR), Revenue District Office No. 47 (East
Makati) as a value-added tax (VAT) taxpayer effective March 1988 and was issued VAT Registration Certificate No.
088445 bearing VAT Registration No. 32A-3-004868. For the period January 1, 1997 to December 31, 1997,
[respondent] filed with the BIR its quarterly VAT returns as follows:

Exhibit Period Covered Date Filed


D 1997 1st Qtr. April 18, 1997
F 2nd Qtr. July 21, 1997
G 3rd Qtr. October 2, 1997
H 4th Qtr. January 20, 1998
"On March 23, 1999, however, [respondent] amended the aforesaid returns and declared the following:

Exh 1997 Taxable Sales Output Zero-rated Domestic Input


VAT Sales Purchases VAT
I 1st qtr P59,597.20 P5,959.72 P17,513,801.11 P6,778,182.30 P677,818.23
J 2nd qtr 67,517.20 6,751.72 17,937,361.51 9,333,242.90 933,324.29
K 3rd qtr 51,936.60 5,193.66 19,627,245.36 8,438,357.00 843,835.70
L 4th qtr 67,994.30 6,799.43 25,231,225.22 13,080,822.10 1,308,082.21

Total P247,045.30 P24,704.53 P80,309,633.20 P37,630,604.30 P3,763,060.43

"On April 13, 1999, [respondent] filed with the BIR a letter-request for the refund of its 1997 excess input taxes in the
amount of P3,751,067.04, which amount was arrived at after deducting from its total input VAT paid of P3,763,060.43
its applied output VAT liabilities only for the third and fourth quarters of 1997 amounting to P5,193.66 and P6,799.43,
respectively. [Respondent] cites as basis therefor, Section 110 (B) of the 1997 Tax Code, to state:

Section 110. Tax Credits. -

xxxxxxxxx

(B) Excess Output or Input Tax. - If at the end of any taxable quarter the output tax exceeds the input tax, the excess
shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be carried over to
the succeeding quarter or quarters. Any input tax attributable to the purchase of capital goods or to zero-rated sales
by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes, subject to
the provisions of Section 112.
"There being no immediate action on the part of the [petitioner], [respondents] petition was filed on April 15, 1999.

"In support of its Petition for Review, the following arguments were raised by [respondent]:

A. Export sales by a VAT-registered person, the consideration for which is paid for in acceptable foreign currency
inwardly remitted to the Philippines and accounted for in accordance with existing regulations of the Bangko Sentral ng
Pilipinas, are subject to [VAT] at zero percent (0%). According to [respondent], being a VAT-registered entity, it is
subject to the VAT imposed under Title IV of the Tax Code, to wit:

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

(1) x x x

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

In addition, [respondent] relied on VAT Ruling No. 080-89, dated April 3, 1989, the pertinent portion of which reads as
follows:

In Reply, please be informed that, as a VAT registered entity whose service is paid for in acceptable foreign currency
which is remitted inwardly to the Philippines and accounted for in accordance with the rules and regulations of the
Central [B]ank of the Philippines, your service income is automatically zero rated effective January 1, 1998. [Section
102(a)(2) of the Tax Code as amended].4 For this, there is no need to file an application for zero-rate.

B. Input taxes on domestic purchases of taxable goods and services related to zero-rated revenues are available as tax
refund in accordance with Section 106 (now Section 112) of the [Tax Code] and Section 8(a) of [Revenue] Regulations
[(RR)] No. 5-87, to state:

Section 106. Refunds or tax credits of input tax. -

(A) Zero-rated or effectively Zero-rated Sales. - Any VAT-registered person, except those covered by paragraph (a)
above, whose sales are zero-rated or are effectively zero-rated, may, within two (2) years after the close of the taxable
quarter when such sales were made, apply for the issuance of tax credit certificate or refund of the input taxes due or
attributable to such sales, to the extent that such input tax has not been applied against output tax. x x x. [Section
106(a) of the Tax Code]5

Section 8. Zero-rating. - (a) In general. - A zero-rated sale is a taxable transaction for value-added tax purposes. A
sale by a VAT-registered person of goods and/or services taxed at zero rate shall not result in any output tax. The input
tax on his purchases of goods or services related to such zero-rated sale shall be available as tax credit or refundable
in accordance with Section 16 of these Regulations. x x x. [Section 8(a), [RR] 5-87].6

"[Petitioner], in his Answer filed on May 6, 1999, claimed by way of Special and Affirmative Defenses that:

7. The claim for refund is subject to investigation by the Bureau of Internal Revenue;

8. Taxes paid and collected are presumed to have been made in accordance with laws and regulations, hence, not
refundable. Claims for tax refund are construed strictly against the claimant as they partake of the nature of tax
exemption from tax and it is incumbent upon the [respondent] to prove that it is entitled thereto under the law and he
who claims exemption must be able to justify his claim by the clearest grant of organic or statu[t]e law. An exemption
from the common burden [cannot] be permitted to exist upon vague implications;

9. Moreover, [respondent] must prove that it has complied with the governing rules with reference to tax recovery or
refund, which are found in Sections 204(c) and 229 of the Tax Code, as amended, which are quoted as follows:

Section 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. - The Commissioner
may - x x x.

(C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of
internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or
change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No
credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a
claim for credit or refund within two (2) years after payment of the tax or penalty: Provided, however, That a return
filed with an overpayment shall be considered a written claim for credit or refund.

Section 229. Recovery of tax erroneously or illegally collected.- No suit or proceeding shall be maintained in any
court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to
have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with
the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty or sum has been
paid under protest or duress.

In any case, no such suit or proceeding shall be begun (sic) after the expiration of two (2) years from the date of
payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided,
however, That the Commissioner may, even without written claim therefor, refund or credit any tax, where on the face
of the return upon which payment was made, such payment appears clearly to have been erroneously paid.

"From the foregoing, the [CTA], through the Presiding Judge Ernesto D. Acosta rendered a decision7 in favor of the
herein respondent holding that its services are subject to zero-rate pursuant to Section 108(b) of the Tax Reform Act of
1997 and Section 4.102-2 (b)(2) of Revenue Regulations 5-96, the decretal portion of which reads as follows:

WHEREFORE, in view of all the foregoing, this Court finds the [petition] meritorious and in accordance with law.
Accordingly, [petitioner] is hereby ORDERED to REFUND to [respondent] the amount of P3,352,406.59 representing
the latters excess input VAT paid for the year 1997."8

Ruling of the Court of Appeals

In affirming the CTA, the CA held that respondents services fell under the first type enumerated in Section 4.102-2(b)
(2) of RR 7-95, as amended by RR 5-96. More particularly, its "services were not of the same class or of the same
nature as project studies, information, or engineering and architectural designs" for non-resident foreign clients;
rather, they were "services other than the processing, manufacturing or repacking of goods for persons doing business
outside the Philippines." The consideration in both types of service, however, was paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas.

Furthermore, the CA reasoned that reliance on VAT Ruling No. 040-98 was unwarranted. By requiring that respondents
services be consumed abroad in order to be zero-rated, petitioner went beyond the sphere of interpretation and into
that of legislation. Even granting that it is valid, the ruling cannot be given retroactive effect, for it will be harsh and
oppressive to respondent, which has already relied upon VAT Ruling No. 080-89 for zero rating.

Hence, this Petition.9

The Issue

Petitioner raises this sole issue for our consideration:

"Whether or not the Court of Appeals committed reversible error in holding that respondent is entitled to the refund of
the amount of P3,352,406.59 allegedly representing excess input VAT for the year 1997."10

The Courts Ruling

The Petition is unmeritorious.

Sole Issue:

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

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

Respondent is a VAT-registered person that facilitates the collection and payment of receivables belonging to its non-
resident foreign client, for which it gets paid in acceptable foreign currency inwardly remitted and accounted for in
conformity with BSP rules and regulations. Certainly, the service it renders in the Philippines is not in the same
category as "processing, manufacturing or repacking of goods" and should, therefore, be zero-rated. In reply to a
query of respondent, the BIR opined in VAT Ruling No. 080-89 that the income respondent earned from its parent
companys regional operating centers (ROCs) was automatically zero-rated effective January 1, 1988.12

Service has been defined as "the art of doing something useful for a person or company for a fee" 13 or "useful labor or
work rendered or to be rendered by one person to another."14 For facilitating in the Philippines the collection and
payment of receivables belonging to its Hong Kong-based foreign client, and getting paid for it in duly accounted
acceptable foreign currency, respondent renders service falling under the category of zero rating. Pursuant to the Tax
Code, a VAT of zero percent should, therefore, be levied upon the supply of that service.15

The Credit Card System and Its Components

For sure, the ancillary business of facilitating the said collection is different from the main business of issuing credit
cards.16 Under the credit card system, the credit card company extends credit accommodations to its card holders for
the purchase of goods and services from its member establishments, to be reimbursed by them later on upon proper
billing. Given the complexities of present-day business transactions, the components of this system can certainly
function as separate billable services.
Under RA 8484,17 the credit card that is issued by banks18 in general, or by non-banks in particular, refers to "any
card x x x or other credit device existing for the purpose of obtaining x x x goods x x x or services x x x on
credit;"19 and is being used "usually on a revolving basis."20 This means that the consumer-credit arrangement that
exists between the issuer and the holder of the credit card enables the latter to procure goods or services "on a
continuing basis as long as the outstanding balance does not exceed a specified limit."21 The card holder is, therefore,
given "the power to obtain present control of goods or service on a promise to pay for them in the future."22

Business establishments may extend credit sales through the use of the credit card facilities of a non-bank credit card
company to avoid the risk of uncollectible accounts from their customers. Under this system, the establishments do
not deposit in their bank accounts the credit card drafts23 that arise from the credit sales. Instead, they merely record
their receivables from the credit card company and periodically send the drafts evidencing those receivables to the
latter.

The credit card company, in turn, sends checks as payment to these business establishments, but it does not redeem
the drafts at full price. The agreement between them usually provides for discounts to be taken by the company upon
its redemption of the drafts.24 At the end of each month, it then bills its credit card holders for their respective drafts
redeemed during the previous month. If the holders fail to pay the amounts owed, the company sustains the loss.25

In the present case, respondents role in the consumer credit26 process described above primarily consists of
gathering the bills and credit card drafts of different service establishments located in the Philippines and forwarding
them to the ROCs outside the country. Servicing the bill is not the same as billing. For the former type of service alone,
respondent already gets paid.

The parent company -- to which the ROCs and respondent belong -- takes charge not only of redeeming the drafts from
the ROCs and sending the checks to the service establishments, but also of billing the credit card holders for their
respective drafts that it has redeemed. While it usually imposes finance charges27 upon the holders, none may be
exacted by respondent upon either the ROCs or the card holders.

Branch and Home Office

By designation alone, respondent and the ROCs are operated as branches. This means that each of them is a unit, "an
offshoot, lateral extension, or division"28 located at some distance from the home office29 of the parent company;
carrying separate inventories; incurring their own expenses; and generating their respective incomes. Each may
conduct sales operations in any locality as an extension of the principal office.30

The extent of accounting activity at any of these branches depends upon company policy,31 but the financial reports
of the entire business enterprise -- the credit card company to which they all belong -- must always show its financial
position, results of operation, and changes in its financial position as a single unit.32 Reciprocal accounts are
reconciled or eliminated, because they lose all significance when the branches and home office are viewed as a single
entity.33 In like manner, intra-company profits or losses must be offset against each other for accounting purposes.

Contrary to petitioners assertion,34 respondent can sell its services to another branch of the same parent
company.35 In fact, the business concept of a transfer price allows goods and services to be sold between and among
intra-company units at cost or above cost.36 A branch may be operated as a revenue center, cost center, profit center
or investment center, depending upon the policies and accounting system of its parent company.37Furthermore, the
latter may choose not to make any sale itself, but merely to function as a control center, where most or all of its
expenses are allocated to any of its branches.38

Gratia argumenti that the sending of drafts and bills by service establishments to respondent is equivalent to the act
of sending them directly to its parent company abroad, and that the parent companys subsequent redemption of
these drafts and billings of credit card holders is also attributable to respondent, then with greater reason should the
service rendered by respondent be zero-rated under our VAT system. The service partakes of the nature of export sales
as applied to goods,39 especially when rendered in the Philippines by a VAT-registered 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 consumption41 "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 transaction46itself 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. Its facilitation
service is performed in the Philippines. It falls under the second category found in Section 102(b) of the Tax Code,
because it is a service other than "processing, manufacturing or repacking of goods" as mentioned in the provision.
Undisputed is the fact that such service meets the statutory condition that it be paid in acceptable foreign currency
duly accounted for in accordance with BSP rules. Thus, it should be zero-rated.

Performance of Service versus Product Arising from Performance

Again, contrary to petitioners stand, for the cost of respondents service to be zero-rated, it need not be tacked in as
part of the cost of goods exported.58 The law neither imposes such requirement nor associates services with exported
goods. It simply states that the services performed by VAT-registered persons in the Philippines -- services other than
the processing, manufacturing or repacking of goods for persons doing business outside this country -- if paid in
acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP, are zero-rated.
The service rendered by respondent is clearly different from the 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 jurisdiction60 to impose the VAT.61Performed 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;65much less is
the place where the output of the service will be further or ultimately used.

Statutory Construction or Interpretation 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.66 "[W]here the law speaks in clear and categorical
language, there is no room for interpretation. There is only room for application."67 The Court has no choice but to
"see to it that its mandate is obeyed."68

No Qualifications Under RR 5-87

In implementing the VAT provisions of the Tax Code, RR 5-87 provides for the zero rating of services other than the
processing, manufacturing or repacking of goods -- in general and without qualifications -- when paid for by the person
to whom such services are rendered in acceptable foreign currency inwardly remitted and duly accounted for in
accordance with the BSP (then Central Bank) regulations. Section 8 of RR 5-87 states:

"SECTION 8. Zero-rating. -- (a) In general. -- A zero-rated sale is a taxable transaction for value-added tax purposes. A
sale by a VAT-registered person of goods and/or services taxed at zero rate shall not result in any output tax. The input
tax on his purchases of goods or services related to such zero-rated sale shall be available as tax credit or refundable
in accordance with Section 16 of these Regulations.

xxxxxxxxx

" (c) Zero-rated sales of services. -- The following services rendered by VAT-registered persons are zero-rated:

(1) Services in connection with the processing, manufacturing or repacking of goods for persons doing business
outside the Philippines, where such goods are actually shipped out of the Philippines to said persons or their assignees
and the services are paid for in acceptable foreign currency inwardly remitted and duly accounted for under the
regulations of the Central Bank of the Philippines.

xxxxxxxxx

(3) Services performed in the Philippines other than those mentioned in subparagraph (1) above which are paid for by
the person or entity to whom the service is rendered in acceptable foreign currency inwardly remitted and duly
accounted for in accordance with Central Bank regulations. Where the contract involves payment in both foreign and
local currency, only the service corresponding to that paid in foreign currency shall enjoy zero-rating. The portion paid
for in local currency shall be subject to VAT at the rate of 10%."

RR 7-95 Broad Enough

RR 7-95, otherwise known as the "Consolidated VAT Regulations,"69 reiterates the above-quoted provision and further
presents as examples only the services performed in the Philippines by VAT-registered hotels and other service
establishments. Again, the condition remains that these services must be paid in acceptable foreign currency inwardly
remitted and accounted for in accordance with the rules and regulations of the BSP. The term "other service
establishments" is obviously broad enough to cover respondents facilitation service. Section 4.102-2 of RR 7-95
provides thus:

"SECTION 4.102-2. Zero-Rating. -- (a) In general. -- A zero-rated sale by a VAT registered person, which is a taxable
transaction for VAT purposes, shall not result in any output tax. However, the input tax on his purchases of goods,
properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with these
regulations.
"(b) Transaction subject to zero-rate. -- The following services performed in the Philippines by VAT-registered persons
shall be subject to 0%:

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

(2) Services other than those mentioned in the preceding subparagraph, e.g. those rendered by hotels and
other service establishments, the consideration for which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP;"

xxxxxxxxx

Meaning of "as well as" in RR 5-96

Section 4.102-2(b)(2) of RR 7-95 was subsequently amended by RR 5-96 to read as follows:

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

Aside from the already scopious coverage of services in Section 4.102-2(b)(2) of RR 7-95, the amendment introduced
by RR 5-96 further enumerates specific services entitled to zero rating. Although superfluous, these sample services
are meant to be merely illustrative. In this provision, the use of the term "as well as" is not restrictive. As a
prepositional phrase with an adverbial relation to some other word, it simply means "in addition to, besides, also or
too."70

Neither the law nor any of the implementing revenue regulations aforequoted categorically defines or limits the
services that may be sold or exchanged for a fee, remuneration or consideration. Rather, both merely enumerate the
items of service that fall under the term "sale or exchange of services."71

Ejusdem Generis
Inapplicable

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

First, although the regulatory provision contains an enumeration of particular or specific words, followed by the
general phrase "and other similar services," such words do not constitute a readily discernible class and are
patently not of the same kind.72 Project studies involve investments or marketing; information services focus
on data technology; engineering and architectural designs require creativity. Aside from calling for the exercise
or use of mental faculties or perhaps producing written technical outputs, no common denominator to the
exclusion of all others characterizes these three services. Nothing sets them apart from other and similar
general services that may involve advertising, computers, consultancy, health care, management,
messengerial work -- to name only a few.

Second, there is the regulatory intent to give the general phrase "and other similar services" a broader
meaning.73 Clearly, the preceding phrase "as well as" is not meant to limit the effect of "and other similar
services."

Third, and most important, the statutory provision upon which this regulation is based is by itself not
restrictive. The scope of the word "services" in Section 102(b)(2) of the Tax Code is broad; it is not susceptible
of narrow interpretation.741avvphi1.zw+

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. 080-89, such revocation could not be
given retroactive effect if the application of the latter ruling would only be prejudicial to respondent. 83 Section 246 of
the Tax Code categorically declares that "[a]ny revocation x x x of x x x any of the rulings x x x promulgated by the
Commissioner shall not be given retroactive application if the revocation x x x will be prejudicial to the taxpayers."84

It is also basic in law that "no x x x rule x x x shall be given retrospective effect85 unless explicitly stated."86 No
indication of such retroactive application to respondent does the Court find in VAT Ruling No. 040-98. Neither do the
exceptions enumerated in Section 24687 of the Tax Code apply.

Though vested with the power to interpret the provisions of the Tax Code88 and not bound by predecessors acts or
rulings, the BIR commissioner may render a different construction to a statute89 only if the new interpretation is in
congruence with the law. Otherwise, no amount of interpretation can ever revoke, repeal or modify what the law says.

"Consumed Abroad" Not Required by Legislature

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

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

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

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

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

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

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

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

"Senator Maceda: I am referring to the second paragraph, in the same Section 102. The first paragraph is when one
manufactures or packages something here and he sends it abroad and they pay him, that is covered. That is clear to
me. The second paragraph says Services other than those mentioned in the preceding subparagraph, the
consideration of which is paid for in acceptable foreign currency
"One example I could immediately think of -- I do not know why this comes to my mind tonight -- is for tourism or
escort services. For example, the services of the tour operator or tour escort -- just a good name for all kinds of
activities -- is made here at the Midtown Ramada Hotel or at the Philippine Plaza, but the payment is made from
outside and remitted into the country.

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

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

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

xxxxxxxxx

Senator Maceda: So, the services by Filipino citizens outside the Philippines are 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."90

Legislative Approval By Reenactment

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

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

In sum, having resolved that transactions of respondent are zero-rated, the Court upholds the formers entitlement to
the refund as determined by the appellate court. Moreover, there is no conflict between the decisions of the CTA and
CA. This Court respects the findings and conclusions of a specialized court like the CTA "which, by the nature of its
functions, is dedicated exclusively to the study and consideration of tax cases and has necessarily developed an
expertise on the subject."93

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

WHEREFORE, the Petition is hereby DENIED, and the assailed Decision AFFIRMED. No pronouncement as to costs.

SO ORDERED.

CIR vs Seagate

Contex Corp vd CIR

G.R. No. 149073 February 16, 2005

COMMISSIONER OF INTERNAL REVENUE, petitioner,


vs.
CEBU TOYO CORPORATION, respondent.

DECISION

QUISUMBING, J.:

In its Decision1 dated July 6, 2001, the Court of Appeals, in CA-G.R. SP No. 60304, affirmed the Resolutions dated
May 31, 20002 and August 2, 2000,3 of the Court of Tax Appeals (CTA) ordering the Commissioner of Internal Revenue
(CIR) to allow a partial refund or, alternatively, to issue a tax credit certificate in favor of Cebu Toyo Corporation in the
sum of P2,158,714.46, representing the unutilized input value-added tax (VAT) payments.

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

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

As an export enterprise, respondent sells 80% of its products to its mother corporation, the Japan-based Toyo Lens
Corporation, pursuant to an Agreement of Offsetting. The rest are sold to various enterprises doing business in the
MEPZ. Inasmuch as both sales are considered export sales subject to Value-Added Tax (VAT) at 0% rate under Section
106(A)(2)(a)6 of the National Internal Revenue Code, as amended, respondent filed its quarterly VAT returns from April
1, 1996 to December 31, 1997 showing a total input VAT of P4,462,412.63.

On March 30, 1998, respondent filed with the Tax and Revenue Group of the One-Stop Inter-Agency Tax Credit and
Duty Drawback Center of the Department of Finance, an application for tax credit/refund of VAT paid for the period
April 1, 1996 to December 31, 1997 amounting to P4,439,827.21 representing excess VAT input payments.

Respondent, however, did not bother to wait for the Resolution of its claim by the CIR. Instead, on June 26, 1998, it
filed a Petition for Review with the CTA to toll the running of the two-year prescriptive period pursuant to Section
2307 of the Tax Code.

Before the CTA, the respondent posits that as a VAT-registered exporter of goods, it is subject to VAT at the rate of 0%
on its export sales that do not result in any output tax. Hence, the unutilized VAT input taxes on its purchases of goods
and services related to such zero-rated activities are available as tax credits or refunds.

The petitioners position is that respondent was not entitled to a refund or tax credit since: (1) it failed to show that the
tax was erroneously or illegally collected; (2) the taxes paid and collected are presumed to have been made in
accordance with law; and (3) claims for refund are strictly construed against the claimant as these partake of the
nature of tax exemption.

Initially, the CTA denied the petition for insufficiency of evidence.8 The tax court sustained respondents argument that
it was a VAT-registered entity. It also found that the petition was timely, as it was filed within the prescription period.
The CTA also ruled that the respondents sales to Toyo Lens Corporation and to certain establishments in the Mactan
Export Processing Zone were export sales subject to VAT at 0% rate. It found that the input VAT covered by
respondents claim was not applied against any output VAT. However, the tax court decreed that the petition should
nonetheless be denied because of the respondents failure to present documentary evidence to show that there were
foreign currency exchange proceeds from its export sales. The CTA also observed that respondent failed to submit the
approval by Bangko Sentral ng Pilipinas (BSP) of its Agreement of Offsetting with Toyo Lens Corporation and the
certification of constructive inward remittance.

Undaunted, respondent filed on February 21, 2000, a Motion for Reconsideration arguing that: (1) proof of its
inward remittance was not required by law; (2) BSP and BIR regulations do not require BSP approval on its Agreement
of Offsetting nor do they require certification on the amount constructively remitted; (3) it was not legally required to
prove foreign currency payments on the remaining sales to MEPZ enterprises; and (4) it had complied with the
substantiation requirements under Section 106(A)(2)(a) of the Tax Code. Hence, it was entitled to a refund of unutilized
VAT input tax.

On May 31, 2000, the tax court partly granted the motion for reconsideration in a Resolution, to wit:
WHEREFORE, finding the motion of petitioner to be meritorious, the same is hereby partially granted. Accordingly, the
Court hereby MODIFIES its decision in the above-entitled case, the dispositive portion of which shall now read as
follows:

WHEREFORE, finding the petition for review partially meritorious, respondent is hereby ORDERED to REFUND or, in the
alternative, to ISSUE a TAX CREDIT CERTIFICATE in favor of Petitioner in the amount of P2,158,714.46 representing
unutilized input tax payments.

SO ORDERED.9

In granting partial reconsideration, the tax court found that there was no need for BSP approval of the Agreement of
Offsetting since the same may be categorized as an inter-company open account offset arrangement. Hence, the
respondent need not present proof of foreign currency exchange proceeds from its sales to MEPZ enterprises pursuant
to Section 106(A)(2)(a)10 of the Tax Code. However, the CTA stressed that respondent must still prove that there was
an actual offsetting of accounts to prove that constructive foreign currency exchange proceeds were inwardly remitted
as required under Section 106(A)(2)(a).

The CTA found that only the amount of Y274,043,858.00 covering respondents sales to Toyo Lens Corporation and
purchases from said mother company for the period August 7, 1996 to August 26, 1997 were actually offset against
respondents related accounts receivable and accounts payable as shown by the Agreement for Offsetting dated
August 30, 1997. Resort to the respondents Accounts Receivable and Accounts Payable subsidiary ledgers
corroborated the amount. The tax court also found that out of the total export sales for the period April 1, 1996 to
December 31, 1997 amounting to Y700,654,606.15, respondents sales to MEPZ enterprises amounted only
to Y136,473,908.05 of said total. Thus, allocating the input taxes supported by receipts to the export sales, the CTA
determined that the refund/credit amounted to only P2,158,714.46,11 computed as follows:

Total Input Taxes Claimed by respondent P4,439,827.21


Less: Exceptions made by SGV
a.) 1996 P651,256.17
b.) 1997 104,129.13 755,385.30
Validly Supported Input Taxes P3,684,441.91
Allocation:
Verified Zero-Rated Sales
a.) Toyo Lens Corporation Y274,043,858.00
b.) MEPZ Enterprises 136,473,908.05 Y410,517,766.05
Divided by Total Zero-Rated Sales Y700,654,606.15
Quotient 0.5859
Multiply by Allowable Input Tax P3,684,441.91
Amount Refundable P2,158,714.[52]12
On June 21, 2000, petitioner Commissioner filed a Motion for Reconsideration arguing that respondent was not
entitled to a refund because as a PEZA-registered enterprise, it was not subject to VAT pursuant to Section 2413of
Republic Act No. 7916,14 as amended by Rep. Act No. 8748.15 Thus, since respondent was not subject to VAT, the
Commissioner contended that the capital goods it purchased must be deemed not used in VAT taxable business and
therefore it was not entitled to refund of input taxes on such capital goods pursuant to Section 4.106-1 of Revenue
Regulations No. 7-95.16

Petitioner filed a Motion for Reconsideration on June 21, 2000 based on the following theories: (1) that respondent
being registered with the PEZA as an ecozone enterprise is not subject to VAT pursuant to Sec. 24 of Rep. Act No.
7916; and (2) since respondents business is not subject to VAT, the capital goods it purchased are considered not used
in a VAT taxable business and therefore is not entitled to a refund of input taxes.17

The respondent opposed the Commissioners Motion for Reconsideration and prayed that the CTA resolution be
modified so as to grant it the entire amount of tax refund or credit it was seeking.

On August 2, 2000, the Court of Tax Appeals denied the petitioners motion for reconsideration. It held that the
grounds relied upon were only raised for the first time and that Section 24 of Rep. Act No. 7916 was not applicable
since respondent has availed of the income tax holiday incentive under Executive Order No. 226 or the Omnibus
Investment Code of 1987 pursuant to Section 2318 of Rep. Act No. 7916. The tax court pointed out that E.O. No. 226
granted PEZA-registered enterprises an exemption from payment of income taxes for 4 or 6 years depending on
whether the registration was as a pioneer or as a non-pioneer enterprise, but subject to other national taxes including
VAT.

The petitioner then filed a Petition for Review with the Court of Appeals (CA), docketed as CA-G.R. SP No. 60304,
praying for the reversal of the CTA Resolutions dated May 31, 2000 and August 2, 2000, and reiterating its claim that
respondent is not entitled to a refund of input taxes since it is VAT-exempt.

On July 6, 2001, the appellate court decided CA-G.R. SP No. 60304 in respondents favor, thus:

WHEREFORE, finding no merit in the petition, this Court DISMISSES it and AFFIRMS the Resolutions dated May 31, 2000
and August 2, 2000 . . . of the Court of Tax Appeals.

SO ORDERED.19

The Court of Appeals found no reason to set aside the conclusions of the Court of Tax Appeals. The appellate court held
as untenable herein petitioners argument that respondent is not entitled to a refund because it is VAT-exempt since
the evidence showed that it is a VAT-registered enterprise subject to VAT at the rate of 0%. It agreed with the ruling of
the tax court that respondent had two options under Section 23 of Rep. Act No. 7916, namely: (1) to avail of an income
tax holiday under E.O. No. 226 and be subject to VAT at the rate of 0%; or (2) to avail of the 5% preferential tax under
P.D. No. 66 and enjoy VAT exemption. Since respondent availed of the incentives under E.O. No. 226, then the 0% VAT
rate would be applicable to it and any unutilized input VAT should be refunded to respondent upon proper application
with and substantiation by the BIR.1awphi1.nt

Hence, the instant petition for review now before us, with herein petitioner alleging that:

I. RESPONDENT BEING REGISTERED WITH THE PHILIPPINE ECONOMIC ZONE AUTHORITY (PEZA) AS AN ECOZONE
EXPORT ENTERPRISE, ITS BUSINESS IS NOT SUBJECT TO VAT PURSUANT TO SECTION 24 OF REPUBLIC ACT NO. 7916 IN
RELATION TO SECTION 103 OF THE TAX CODE, AS AMENDED BY RA NO. 7716.

II. SINCE RESPONDENTS BUSINESS IS NOT SUBJECT TO VAT, IT IS NOT ENTITLED TO REFUND OF INPUT
TAXES PURSUANT TO SECTION 4.103-1 OF REVENUE REGULATIONS NO. 7-95.20

In our view, the main issue for our resolution is whether the Court of Appeals erred in affirming the Court of Tax
Appeals resolution granting a refund in the amount of P2,158,714.46 representing unutilized input VAT on goods and
services for the period April 1, 1996 to December 31, 1997.

Both the Commissioner of Internal Revenue and the Office of the Solicitor General argue that respondent Cebu Toyo
Corporation, as a PEZA-registered enterprise, is exempt from national and local taxes, including VAT, under Section 24
of Rep. Act No. 7916 and Section 10921 of the NIRC. Thus, they contend that respondent Cebu Toyo Corporation is not
entitled to any refund or credit on input taxes it previously paid as provided under Section 4.103-1 22 of Revenue
Regulations No. 7-95, notwithstanding its registration as a VAT taxpayer. For petitioner claims that said registration was
erroneous and did not confer upon the respondent any right to claim recognition of the input tax credit.

The respondent counters that it availed of the income tax holiday under E.O. No. 226 for four years from August 7,
1995 making it exempt from income tax but not from other taxes such as VAT. Hence, according to respondent, its
export sales are not exempt from VAT, contrary to petitioners claim, but its export sales is subject to 0% VAT.
Moreover, it argues that it was able to establish through a report certified by an independent Certified Public
Accountant that the input taxes it incurred from April 1, 1996 to December 31, 1997 were directly attributable to its
export sales. Since it did not have any output tax against which said input taxes may be offset, it had the option to file
a claim for refund/tax credit of its unutilized input taxes.

Considering the submission of the parties and the evidence on record, we find the petition bereft of merit.

Petitioners contention that respondent is not entitled to refund for being exempt from VAT is untenable. This argument
turns a blind eye to the fiscal incentives granted to PEZA-registered enterprises under Section 23 of Rep. Act No. 7916.
Note that under said statute, the respondent had two options with respect to its tax burden. It could avail of an income
tax holiday pursuant to provisions of E.O. No. 226, thus exempt it from income taxes for a number of years but not
from other internal revenue taxes such as VAT; or it could avail of the tax exemptions on all taxes, including VAT under
P.D. No. 66 and pay only the preferential tax rate of 5% under Rep. Act No. 7916. Both the Court of Appeals and the
Court of Tax Appeals found that respondent availed of the income tax holiday for four (4) years starting from August 7,
1995, as clearly reflected in its 1996 and 1997 Annual Corporate Income Tax Returns, where respondent specified that
it was availing of the tax relief under E.O. No. 226. Hence, respondent is not exempt from VAT and it correctly
registered itself as a VAT taxpayer. In fine, it is engaged in taxable rather than exempt transactions.

Taxable transactions are those transactions which are subject to value-added tax either at the rate of ten percent
(10%) or zero percent (0%). In taxable transactions, the seller shall be entitled to tax credit for the value-added tax
paid on purchases and leases of goods, properties or services.23

An exemption means that the sale of goods, properties or services and the use or lease of properties is not subject to
VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax) previously paid. The person making the
exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction
is not subject to VAT. Thus, a VAT-registered purchaser of goods, properties or services that are VAT-exempt, is not
entitled to any input tax on such purchases despite the issuance of a VAT invoice or receipt.24

Now, having determined that respondent is engaged in taxable transactions subject to VAT, let us then proceed to
determine whether it is subject to 10% or zero (0%) rate of VAT. To begin with, it must be recalled that generally, sale
of goods and supply of services performed in the Philippines are taxable at the rate of 10%. However, export sales, or
sales outside the Philippines, shall be subject to value-added tax at 0% if made by a VAT-registered person.25 Under
the value-added tax system, a zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT
purposes, shall not result in any output tax. However, the input tax on his purchase of goods, properties or services
related to such zero-rated sale shall be available as tax credit or refund.261awphi1.nt

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

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

(b) The input VAT on the purchases of a VAT-registered person with zero-rated sales may be allowed as tax
credits or refunded while the seller in an exempt transaction is not entitled to any input tax on his purchases
despite the issuance of a VAT invoice or receipt.

(c) Persons engaged in transactions which are zero-rated, being subject to VAT, are required to register while
registration is optional for VAT-exempt persons.

In this case, it is undisputed that respondent is engaged in the export business and is registered as a VAT taxpayer per
Certificate of Registration of the BIR.27 Further, the records show that the respondent is subject to VAT as it availed of
the income tax holiday under E.O. No. 226. Perforce, respondent is subject to VAT at 0% rate and is entitled to a refund
or credit of the unutilized input taxes, which the Court of Tax Appeals computed at P2,158,714.46, but which we find
after recomputationshould be P2,158,714.52.

The Supreme Court will not set aside lightly the conclusions reached by the Court of Tax Appeals which, by the very
nature of its functions, is dedicated exclusively to the resolution of tax problems and has accordingly developed an
expertise on the subject, unless there has been an abuse or improvident exercise of authority.28 In this case, we find
no cogent reason to deviate from this well-entrenched principle. Thus, we are persuaded that indeed the Court of
Appeals committed no reversible error in affirming the assailed ruling of the Court of Tax Appeals.

WHEREFORE, the petition is DENIED for lack of merit.l^vvphi1.net The assailed Decision dated July 6, 2001 of the
Court of Appeals, in CA-G.R. SP No. 60304 is AFFIRMED with very slight modification. Petitioner is hereby ORDERED to
REFUND or, in the alternative, to ISSUE a TAX CREDIT CERTIFICATE in favor of respondent in the amount
of P2,158,714.52 representing unutilized input tax payments. No pronouncement as to costs.

SO ORDERED.

G.R. No. 158885 April 2, 2009

FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, REGIONAL DIRECTOR, REVENUE REGION NO. 8, CHIEF,
ASSESSMENT DIVISION, REVENUE REGION NO. 8, BIR, Respondents.

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

G.R. No. 170680 April 2, 2009


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

TINGA, J.:

The value-added tax (VAT) system was first introduced in the Philippines on 1 January 1988, with the tax imposable on
"any person who, in the course of trade or business, sells, barters or exchanges goods, renders services, or engages in
similar transactions and any person who imports goods."1 The first VAT law is found in Executive Order No. 273 (E.O.
273), which amended several provisions of the then National Internal Revenue Code of 1986 (Old NIRC). E.O. No. 273
likewise accommodated the potential burdens of the shift to the VAT system by allowing newly liable VAT-registered
persons to avail of a transitional input tax credit, as provided for in Section 105 of the old NIRC, as amended by E.O.
No. 273. Said Section 105 is quoted, thus:

SEC. 105. 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 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.2

There are other measures contained in E.O. No. 273 which were similarly intended to ease the shift to the VAT system.
These measures also took the form of "transitional input taxes which can be credited against output tax," 3and are
found in Section 25 of E.O. No. 273, the section entitled "Transitory Provisions." Said transitory provisions, which were
never incorporated in the Old NIRC, read:

Sec. 25. Transitory provisions. (a) All VAT-registered persons shall be allowed transitional input taxes which can be
credited against output tax in the same manner as provided in Sections 104 of the National Internal Revenue Code as
follows:

1) The balance of the deferred sales tax credit account as of December 31, 1987 which are accounted for in
accordance with regulations prescribed therefor;

2) 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

3) A presumptive input tax equivalent to 8% of the value of the inventory as of December 31, 1987 as goods
for sale, the tax on which was not taken up or claimed as deferred sales tax credit.

Tax credit prescribed in paragraphs (2) and (3) above shall be allowed only to a VAT-registered person who files an
inventory of the goods referred to in said paragraphs as provided in regulations.

(b) Any unused tax credit certificate issued prior to January 1, 1988 for excess tax credits which are applicable against
advance sales tax shall be surrendered to, and replaced by the Commissioner with new tax credit certificates which
can be used in payment for value-added tax liabilities.

(c) Any person already engaged in business whose gross sales or receipts for a 12-month period from September 1,
1986 to August 1, 1987, exceed the amount of P200,000.00, or any person who has been in business for less than 12
months as of August 1, 1987 but expects his gross sales or receipts to exceed P200,000 on or before December 31,
1987, shall apply for registration on or before October 29, 1987.4

On 1 January 1996, Republic Act (Rep. Act) No. 7716 took effect.5 It amended provisions of the Old NIRC principally by
restructuring the VAT system. It was under Rep. Act No. 7716 that VAT was imposed for the first time on the sale of real
properties. This was accomplished by amending Section 100 of the NIRC to include "real properties" among the "goods
or properties," the sale, barter or exchange of which is made subject to VAT. The relevant portions of Section 100, as
amended by Rep. Act No. 7716, thus read:

Sec. 100. Value-added-tax on sale of goods or properties.

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

(1) The term 'goods or properties' shall mean all tangible and intangible objects which are capable of pecuniary
estimation and shall include:

(A) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business;
xxx6

The provisions of Section 105 of the NIRC, on the transitional input tax credit, had remained intact despite the
enactment of Rep. Act No. 7716. Said provisions would however be amended following the passage of the new
National Internal Revenue Code of 1997 (New NIRC), also officially known as Rep Act No. 8424. The section on the
transitional input tax credit was renumbered from Section 105 of the Old NIRC to Section 111(A) of the New NIRC. The
new amendments on the transitional input tax credit are relatively minor, hardly material to the case at bar. They are
highlighted below for easy reference:

Section 111. Transitional/Presumptive Input Tax Credits. -

(A) Transitional Input Tax Credits. - A person who becomes liable to value-added tax or any person who elects to be a
VAT-registered person shall, subject to the filing of an inventory according to rules and regulations prescribed by the
Secretary of finance, upon recommendation of the Commissioner, be allowed input tax on his beginning inventory of
goods, materials and supplies equivalent for eight percent (8%) of the value of such inventory or the actual value-
added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the
output tax.7 (Emphasis supplied).

Rep. Act No. 8424 also made part of the NIRC, for the first time, the concept of "presumptive input tax credits," with
Section 111(b) of the New NIRC providing as follows:

(B) Presumptive Input Tax Credits. -

(1) Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar and
cooking oil, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to one and one-half
percent (1 1/2%) of the gross value in money of their purchases of primary agricultural products which are used as
inputs to their production.

As used in this Subsection, the term 'processing' shall mean pasteurization, canning and activities which through
physical or chemical process alter the exterior texture or form or inner substance of a product in such manner as to
prepare it for special use to which it could not have been put in its original form or condition.

(2) Public works contractors shall be allowed a presumptive input tax equivalent to one and one-half percent (1 1/2%)
of the contract price with respect to government contracts only in lieu of actual input taxes therefrom.8

What we have explained above are the statutory antecedents that underlie the present petitions for review. We now
turn to the factual antecedents.

I.

Petitioner Fort Bonifacio Development Corporation (FBDC) is engaged in the development and sale of real property. On
8 February 1995, FBDC acquired by way of sale from the national government, a vast tract of land that formerly
formed part of the Fort Bonifacio military reservation, located in what is now the Fort Bonifacio Global City (Global City)
in Taguig City.9 Since the sale was consummated prior to the enactment of Rep. Act No. 7716, no VAT was paid
thereon. FBDC then proceeded to develop the tract of land, and from October, 1966 onwards it has been selling lots
located in the Global City to interested buyers.10

Following the effectivity of Rep. Act No. 7716, real estate transactions such as those regularly engaged in by FBDC
have since been made subject to VAT. As the vendor, FBDC from thereon has become obliged to remit to the Bureau of
Internal Revenue (BIR) output VAT payments it received from the sale of its properties to the Bureau of Internal
Revenue (BIR). FBDC likewise invoked its right to avail of the transitional input tax credit and accordingly submitted an
inventory list of real properties it owned, with a total book value of P71,227,503,200.00.11

On 14 October 1996, FBDC executed in favor of Metro Pacific Corporation two (2) contracts to sell, separately
conveying two (2) parcels of land within the Global City in consideration of the purchase prices at P1,526,298,949.00
and P785,009,018.00, both payable in installments.12 For the fourth quarter of 1996, FBDC earned a total
of P3,498,888,713.60 from the sale of its lots, on which the output VAT payable to the BIR was P318,080,792.14. In the
context of remitting its output VAT payments to the BIR, FBDC paid a total of P269,340,469.45 and utilized
(a) P28,413,783.00 representing a portion of its then total transitional/presumptive input tax credit
of P5,698,200,256.00, which petitioner allocated for the two (2) lots sold to Metro Pacific; and (b) its regular input tax
credit of P20,326,539.69 on the purchase of goods and services.13

Between July and October 1997, FBDC sent two (2) letters to the BIR requesting appropriate action on whether its use
of its presumptive input VAT on its land inventory, to the extent of P28,413,783.00 in partial payment of its output VAT
for the fourth quarter of 1996, was in order. After investigating the matter, the BIR recommended that the claimed
presumptive input tax credit be disallowed.14 Consequently, the BIR issued to FBDC a Pre-Assessment Notice (PAN)
dated 23 December 1997 for deficiency VAT for the 4th quarter of 1996. This was followed by a letter of respondent
Commissioner of Internal Revenue (CIR),15 addressed to and received by FBDC on 5 March 1998, disallowing the
presumptive input tax credit arising from the land inventory on the basis of Revenue Regulation 7-95 (RR 7-95) and
Revenue Memorandum Circular 3-96 (RMC 3-96). Section 4.105-1 of RR 7-95 provided the basis in main for the CIRs
opinion, the section reading, thus:

Sec. 4.105-1. Transitional input tax on beginning inventories. Taxpayers who became VAT-registered persons upon
effectivity of RA No. 7716 who have exceeded the minimum turnover of P500,000.00 or who voluntarily register even if
their turnover does not exceed P500,000.00 shall be entitled to a presumptive input tax on the inventory on hand as of
December 31, 1995 on the following: (a) goods purchased for resale in their present condition; (b) materials purchased
for further processing, but which have not yet undergone processing; (c) goods which have been manufactured by the
taxpayer; (d) goods in process and supplies, all of which are for sale or for use in the course of the taxpayers trade or
business as a VAT-registered person.

However, in the case of real estate dealers, the basis of the presumptive input tax shall be the improvements, such as
buildings, roads, drainage systems, and other similar structures, constructed on or after the effectivity of EO 273
(January 1, 1988).

The transitional input tax shall be 8% of the value of the inventory or actual VAT paid, whichever is higher, which
amount may be allowed as tax credit against the output tax of the VAT-registered person.

The CIR likewise cited from the Transitory Provisions of RR 7-95, particularly the following:

(a) Presumptive Input Tax Credits -

xxx

(iii) For real estate dealers, the presumptive input tax of 8% of the book value of improvements on or after January 1,
1988 (the effectivity of E.O. 273) shall be allowed.

For purposes of sub-paragraphs (i), (ii) and (iii) above, an inventory as of December 31, 1995 of such goods or
properties and improvements showing the quantity, description and amount filed with the RDO not later than Janaury
31, 1996.

xxx

Consequently, FBDC received an Assessment Notice in the amount of P45,188,708.08, representing deficiency VAT for
the 4th quarter of 1996, including surcharge, interest and penalty. After respondent Regional Director denied FBDCs
motion for reconsideration/protest, FBDC filed a petition for review with the Court of Tax Appeals (CTA), docketed as
C.T.A. Case No. 5665.16 On 11 August 2000, the CTA rendered a decision affirming the assessment made by the
respondents.17 FBDC assailed the CTA decision through a petition for review filed with the Court of Appeals, docketed
as CA-G.R. SP No. 60477. On 15 November 2002, the Court of Appeals rendered a decision affirming the CTA decision,
but removing the surcharge, interests and penalties, thus reducing the amount due to P28,413,783.00.18 From said
decision, FBDC filed a petition for review with this Court, the first of the two petitions now before us, seeking the
reversal of the CTA decision dated 11 August 2000 and a pronouncement that FBDC is entitled to the
transitional/presumptive input tax credit of P28,413,783.00. This petition has been docketed as G.R. No. 158885.

The second petition, which is docketed as G.R. No. 170680, involves the same parties and legal issues, but concerns
the claim of FBDC that it is entitled to claim a similar transitional/presumptive input tax credit, this time for the third
quarter of 1997. A brief recital of the anteceding facts underlying this second claim is in order.

For the third quarter of 1997, FBDC derived the total amount of P3,591,726,328.11 from its sales and lease of lots, on
which the output VAT payable to the BIR was P359,172,632.81.19 Accordingly, FBDC made cash payments
totaling P347,741,695.74 and utilized its regular input tax credit of P19,743,565.73 on purchases of goods and
services.20 On 11 May 1999, FBDC filed with the BIR a claim for refund of the amount of P347,741,695.74 which it had
paid as VAT for the third quarter of 1997.21 No action was taken on the refund claim, leading FBDC to file a petition for
review with the CTA, docketed as CTA Case No. 5926. Utilizing the same valuation22 of 8% of the total book value of its
beginning inventory of real properties (or P71,227,503,200.00) FBDC argued that its input tax credit was more than
enough to offset the VAT paid by it for the third quarter of 1997.23

On 17 October 2000, the CTA promulgated its decision24 in CTA Case No. 5926, denying the claim for refund. FBDC
then filed a petition for review with the Court of Appeals, docketed as CA-G.R. SP No. 61517. On 3 October 2003, the
Court of Appeals rendered a decision25 affirming the judgment of the CTA. As a result, FBDC filed its second petition,
docketed as G.R. No. 170680.

II.

The two petitions were duly consolidated26 and called for oral argument on 18 April 2006. During the oral arguments,
the parties were directed to discuss the following issues:

1. In determining the 10% value-added tax in Section 100 of the [Old NIRC] on the sale of real properties by
real estate dealers, is the 8% transitional input tax credit in Section 105 applied only to the improvements on
the real property or is it applied on the value of the entire real property?

2. Are Section 4.105.1 and paragraph (a)(III) of the Transitory Provisions of Revenue Regulations No. 7-95 valid
in limiting the 8% transitional input tax to the improvements on the real property?

While the two issues are linked, the main issue is evidently whether Section 105 of the Old NIRC may be interpreted in
such a way as to restrict its application in the case of real estate dealers only to the improvements on the real property
belonging to their beginning inventory, and not the entire real property itself. There would be no controversy before us
if the Old NIRC had itself supplied that limitation, yet the law is tellingly silent in that regard. RR 7-95, which imposes
such restrictions on real estate dealers, is discordant with the Old NIRC, so it is alleged.

III.

On its face, there is nothing in Section 105 of the Old NIRC that prohibits the inclusion of real properties, together with
the improvements thereon, in the beginning inventory of goods, materials and supplies, based on which inventory the
transitional input tax credit is computed. It can be conceded that when it was drafted Section 105 could not have
possibly contemplated concerns specific to real properties, as real estate transactions were not originally subject to
VAT. At the same time, when transactions on real properties were finally made subject to VAT beginning with Rep. Act
No. 7716, no corresponding amendment was adopted as regards Section 105 to provide for a differentiated treatment
in the application of the transitional input tax credit with respect to real properties or real estate dealers.

It was Section 100 of the Old NIRC, as amended by Rep. Act No. 7716, which made real estate transactions subject to
VAT for the first time. Prior to the amendment, Section 100 had imposed the VAT "on every sale, barter or exchange of
goods," without however specifying the kind of properties that fall within or under the generic class "goods" subject to
the tax.

Rep. Act No. 7716, which significantly is also known as the Expanded Value-Added Tax (EVAT) law, expanded the
coverage of the VAT by amending Section 100 of the Old NIRC in several respects, some of which we will enumerate.
First, it made every sale, barter or exchange of "goods or properties" subject to VAT.27 Second, it generally defined
"goods or properties" as "all tangible and intangible objects which are capable of pecuniary estimation."28 Third, it
included a non-exclusive enumeration of various objects that fall under the class "goods or properties" subject to VAT,
including "[r]eal properties held primarily for sale to customers or held for lease in the ordinary course of trade or
business."29

From these amendments to Section 100, is there any differentiated VAT treatment on real properties or real estate
dealers that would justify the suggested limitations on the application of the transitional input tax on them? We see
none.

Rep. Act No. 7716 clarifies that it is the real properties "held primarily for sale to customers or held for lease in the
ordinary course of trade or business" that are subject to the VAT, and not when the real estate transactions are
engaged in by persons who do not sell or lease properties in the ordinary course of trade or business. It is clear that
those regularly engaged in the real estate business are accorded the same treatment as the merchants of other goods
or properties available in the market. In the same way that a milliner considers hats as his goods and a rancher
considers cattle as his goods, a real estate dealer holds real property, whether or not it contains improvements, as his
goods.

Had Section 100 itself supplied any differentiation between the treatment of real properties or real estate dealers and
the treatment of the transactions involving other commercial goods, then such differing treatment would have
constituted the statutory basis for the CIR to engage in such differentiation which said respondent did seek to
accomplish in this case through Section 4.105-1 of RR 7-95. Yet the amendments introduced by Rep. Act No. 7716 to
Section 100, coupled with the fact that the said law left Section 105 intact, reveal the lack of any legislative intention
to make persons or entities in the real estate business subject to a VAT treatment different from those engaged in the
sale of other goods or properties or in any other commercial trade or business.

If the plain text of Rep. Act No. 7716 fails to supply any apparent justification for limiting the beginning inventory of
real estate dealers only to the improvements on their properties, how then were the CIR and the courts a quo able to
justify such a view?

IV.

The fact alone that the denial of FBDCs claims is in accord with Section 4.105-1 of RR 7-95 does not, of course, put
this inquiry to rest. If Section 4.105-1 is itself incongruent to Rep. Act No. 7716, the incongruence cannot by itself
justify the denial of the claims. We need to inquire into the rationale behind Section 4.105-1, as well as the question
whether the interpretation of the law embodied therein is validated by the law itself.

The CTA, in its rulings, proceeded from a thesis which is not readily apparent from the texts of the laws we have cited.
The transitional input tax credit is conditioned on the prior payment of sales taxes or the VAT, so the CTA observed.
The introduction of the VAT through E.O. No. 273 and its subsequent expansion through Rep. Act No. 7716 subjected
various persons to the tax for the very first time, leaving them unable to claim the input tax credit based on their
purchases before they became subject to the VAT. Hence, the transitional input tax credit was designed to alleviate
that relatively iniquitous loss. Given that rationale, according to the CTA, it would be improper to allow FBDC, which
had acquired its properties through a tax-free purchase, to claim the transitional input tax credit. The CTA added that
Section 105.4.1 of RR 7-95 is consonant with its perceived rationale behind the transitional input tax credit since the
materials used for the construction of improvements would have most likely involved the payment of VAT on their
purchase.

Concededly, this theory of the CTA has some sense, extravagantly extrapolated as it is though from the seeming
silence on the part of the provisions of the law. Yet ultimately, the theory is woefully limited in perspective.

It is correct, as pointed out by the CTA, that upon the shift from sales taxes to VAT in 1987 newly-VAT registered people
would have been prejudiced by the inability to credit against the output VAT their payments by way of sales tax on
their existing stocks in trade. Yet that inequity was precisely addressed by a transitory provision in E.O. No. 273 found
in Section 25 thereof. The provision authorized VAT-registered persons to invoke a "presumptive input tax equivalent to
8% of the value of the inventory as of December 31, 1987 of materials and supplies which are not for sale, the tax on
which was not taken up or claimed as deferred sales tax credit", and a similar presumptive input tax equivalent to 8%
of the value of the inventory as of December 31, 1987 of goods for sale, the tax on which was not taken up or claimed
as deferred sales tax credit.30

Section 25 of E.O. No. 273 perfectly remedies the problem assumed by the CTA as the basis for the introduction of
transitional input tax credit in 1987. If the core purpose of the tax credit is only, as hinted by the CTA, to allow for
some mode of accreditation of previously-paid sales taxes, then Section 25 alone would have sufficed. Yet E.O. No. 273
amended the Old NIRC itself by providing for the transitional input tax credit under Section 105, thereby assuring that
the tax credit would endure long after the last goods made subject to sales tax have been consumed.

If indeed the transitional input tax credit is integrally related to previously paid sales taxes, the purported causal link
between those two would have been nonetheless extinguished long ago. Yet Congress has reenacted the transitional
input tax credit several times; that fact simply belies the absence of any relationship between such tax credit and the
long-abolished sales taxes. Obviously then, the purpose behind the transitional input tax credit is not confined to the
transition from sales tax to VAT.

There is hardly any constricted definition of "transitional" that will limit its possible meaning to the shift from the sales
tax regime to the VAT regime. Indeed, it could also allude to the transition one undergoes from not being a VAT-
registered person to becoming a VAT-registered person. Such transition does not take place merely by operation of law,
E.O. No. 273 or Rep. Act No. 7716 in particular. It could also occur when one decides to start a business. Section 105
states that the transitional input tax credits become available either to (1) a person who becomes liable to VAT; or (2)
any person who elects to be VAT-registered. The clear language of the law entitles new trades or businesses to avail of
the tax credit once they become VAT-registered. The transitional input tax credit, whether under the Old NIRC or the
New NIRC, may be claimed by a newly-VAT registered person such as when a business as it commences operations. If
we view the matter from the perspective of a starting entrepreneur, greater clarity emerges on the continued utility of
the transitional input tax credit.

Following the theory of the CTA, the new enterprise should be able to claim the transitional input tax credit because it
has presumably paid taxes, VAT in particular, in the purchase of the goods, materials and supplies in its beginning
inventory. Consequently, as the CTA held below, if the new enterprise has not paid VAT in its purchases of such goods,
materials and supplies, then it should not be able to claim the tax credit. However, it is not always true that the
acquisition of such goods, materials and supplies entail the payment of taxes on the part of the new business. In fact,
this could occur as a matter of course by virtue of the operation of various provisions of the NIRC, and not only on
account of a specially legislated exemption.

Let us cite a few examples drawn from the New NIRC. If the goods or properties are not acquired from a person in the
course of trade or business, the transaction would not be subject to VAT under Section 105.31 The sale would be
subject to capital gains taxes under Section 24(D),32 but since capital gains is a tax on passive income it is the seller,
not the buyer, who generally would shoulder the tax.

If the goods or properties are acquired through donation, the acquisition would not be subject to VAT but to donors tax
under Section 98 instead.33 It is the donor who would be liable to pay the donors tax,34 and the donation would be
exempt if the donors total net gifts during the calendar year does not exceed P100,000.00.35

If the goods or properties are acquired through testate or intestate succession, the transfer would not be subject to
VAT but liable instead for estate tax under Title III of the New NIRC.36 If the net estate does not exceed P200,000.00,
no estate tax would be assessed.37

The interpretation proffered by the CTA would exclude goods and properties which are acquired through sale not in the
ordinary course of trade or business, donation or through succession, from the beginning inventory on which the
transitional input tax credit is based. This prospect all but highlights the ultimate absurdity of the respondents'
position. Again, nothing in the Old NIRC (or even the New NIRC) speaks of such a possibility or qualifies the previous
payment of VAT or any other taxes on the goods, materials and supplies as a pre-requisite for inclusion in the
beginning inventory.

It is apparent that the transitional input tax credit operates to benefit newly VAT-registered persons, whether or not
they previously paid taxes in the acquisition of their beginning inventory of goods, materials and supplies. During that
period of transition from non-VAT to VAT status, the transitional input tax credit serves to alleviate the impact of the
VAT on the taxpayer. At the very beginning, the VAT-registered taxpayer is obliged to remit a significant portion of the
income it derived from its sales as output VAT. The transitional input tax credit mitigates this initial diminution of the
taxpayers income by affording the opportunity to offset the losses incurred through the remittance of the output VAT
at a stage when the person is yet unable to credit input VAT payments.

There is another point that weighs against the CTAs interpretation. Under Section 105 of the Old NIRC, the rate of the
transitional input tax credit is "8% of the value of such inventory or the actual value-added tax paid on such goods,
materials and supplies, whichever is higher."38 If indeed the transitional input tax credit is premised on the previous
payment of VAT, then it does not make sense to afford the taxpayer the benefit of such credit based on "8% of the
value of such inventory" should the same prove higher than the actual VAT paid. This intent that the CTA alluded to
could have been implemented with ease had the legislature shared such intent by providing the actual VAT paid as the
sole basis for the rate of the transitional input tax credit.

The CTA harped on the circumstance that FBDC was excused from paying any tax on the purchase of its properties
from the national government, even claiming that to allow the transitional input tax credit is "tantamount to giving an
undeserved bonus to real estate dealers similarly situated as [FBDC] which the Government cannot afford to provide."
Yet the tax laws in question, and all tax laws in general, are designed to enforce uniform tax treatment to persons or
classes of persons who share minimum legislated standards. The common standard for the application of the
transitional input tax credit, as enacted by E.O. No. 273 and all subsequent tax laws which reinforced or reintegrated
the tax credit, is simply that the taxpayer in question has become liable to VAT or has elected to be a VAT-registered
person. E.O. No. 273 and the subsequent tax laws are all decidedly neutral and accommodating in ascertaining who
should be entitled to the tax credit, and it behooves the CIR and the CTA to adopt a similarly judicious perspective.
IV.

Given the fatal flaws in the theory offered by the CTA as supposedly underlying the transitional input tax credit, is
there any other basis to justify the limitations imposed by the CIR through RR 7-95? We discern nothing more. As seen
in our discussion, there is no logic that coheres with either E.O. No. 273 or Rep. Act No. 7716 which supports the
restriction imposed on real estate brokers and their ability to claim the transitional input tax credit based on the value
of their real properties. In addition, the very idea of excluding the real properties itself from the beginning inventory
simply runs counter to what the transitional input tax credit seeks to accomplish for persons engaged in the sale of
goods, whether or not such "goods" take the form of real properties or more mundane commodities.

Under Section 105, the beginning inventory of "goods" forms part of the valuation of the transitional input tax credit.
Goods, as commonly understood in the business sense, refers to the product which the VAT-registered person offers for
sale to the public. With respect to real estate dealers, it is the real properties themselves which constitute their
"goods." Such real properties are the operating assets of the real estate dealer.

Section 4.100-1 of RR No. 7-95 itself includes in its enumeration of "goods or properties" such "real properties held
primarily for sale to customers or held for lease in the ordinary course of trade or business." Said definition was taken
from the very statutory language of Section 100 of the Old NIRC. By limiting the definition of goods to "improvements"
in Section 4.105-1, the BIR not only contravened the definition of "goods" as provided in the Old NIRC, but also the
definition which the same revenue regulation itself has provided.

The Court of Tax Appeals claimed that under Section 105 of the Old NIRC the basis for the inventory of goods,
materials and supplies upon which the transitional input VAT would be based "shall be left to regulation by the
appropriate administrative authority". This is based on the phrase "filing of an inventory as prescribed by regulations"
found in Section 105. Nonetheless, Section 105 does include the particular properties to be included in the inventory,
namely goods, materials and supplies. It is questionable whether the CIR has the power to actually redefine the
concept of "goods," as she did when she excluded real properties from the class of goods which real estate companies
in the business of selling real properties may include in their inventory. The authority to prescribe regulations can
pertain to more technical matters, such as how to appraise the value of the inventory or what papers need to be filed
to properly itemize the contents of such inventory. But such authority cannot go as far as to amend Section 105 itself,
which the Commissioner had unfortunately accomplished in this case.

It is of course axiomatic that a rule or regulation must bear upon, and be consistent with, the provisions of the
enabling statute if such rule or regulation is to be valid.39 In case of conflict between a statute and an administrative
order, the former must prevail.40 Indeed, the CIR has no power to limit the meaning and coverage of the term "goods"
in Section 105 of the Old NIRC absent statutory authority or basis to make and justify such limitation. A contrary
conclusion would mean the CIR could very well moot the law or arrogate legislative authority unto himself by retaining
sole discretion to provide the definition and scope of the term "goods."

V.

At this juncture, we turn to some of the points raised in the dissent of the esteemed Justice Antonio T. Carpio.

The dissent adopts the CTAs thesis that the transitional input tax credit applies only when taxes were previously paid
on the properties in the beginning inventory. Had the dissenting view won, it would have introduced a new requisite to
the application of the transitional input tax credit and required the taxpayer to supply proof that it had previously paid
taxes on the acquisition of goods, materials and supplies comprising its beginning inventory. We have sufficiently
rebutted this thesis, but the dissent adds a twist to the argument by using the term "presumptive input tax credit" to
imply that the transitional input tax credit involves a presumption that there was a previous payment of taxes.

Let us clarify the distinction between the presumptive input tax credit and the transitional input tax credit. As with the
transitional input tax credit, the presumptive input tax credit is creditable against the output VAT. It necessarily has
come into existence in our tax structure only after the introduction of the VAT. As quoted earlier, 41 E.O. No. 273
provided for a "presumptive input tax credit" as one of the transitory measures in the shift from sales taxes to VAT, but
such presumptive input tax credit was never integrated in the NIRC itself. It was only in 1997, or eleven years after the
VAT was first introduced, that the presumptive input tax credit was first incorporated in the NIRC, more particularly in
Section 111(B) of the New NIRC. As borne out by the text of the provision,42 it is plain that the presumptive input tax
credit is highly limited in application as it may be claimed only by "persons or firms engaged in the processing of
sardines, mackerel and milk, and in manufacturing refined sugar and cooking oil;"43 and "public works contractors."44

Clearly, for more than a decade now, the term "presumptive input tax credit" has contemplated a particularly
idiosyncratic tax credit far divorced from its original usage in the transitory provisions of E.O. No. 273. There is utterly
no sense then in latching on to the term as having any significant meaning for the purpose of the cases at bar.

The dissent, in arguing for the effectivity of Section 4.105-1 of RR 7-95, ratiocinates in this manner: (1) Section 4.105-1
finds basis in Section 105 of the Old NIRC, which provides that the input tax is allowed on the "beginning inventory of
goods, materials and supplies;" (2) input taxes must have been paid on such goods, materials and supplies; (3) unlike
real property itself, the improvements thereon were already subject to VAT even prior to the passage of Rep. Act No.
7716; (4) since no VAT was paid on the real property prior to the passage of Rep. Act No. 7716, it could not form part of
the "beginning inventory of goods, materials and supplies."

This chain of premises have already been debunked. It is apparent that the dissent believes that only those "goods,
materials and supplies" on which input VAT was paid could form the basis of valuation of the input tax credit. Thus, if
the VAT-registered person acquired all the goods, materials and supplies of the beginning inventory through a sale not
in the ordinary course of trade or business, or through succession or donation, said person would be unable to receive
a transitional input tax credit. Yet even RR 7-95, which imposes the restriction only on real estate dealers permits such
other persons who obtained their beginning inventory through tax-free means to claim the transitional input tax credit.
The dissent thus betrays a view that is even more radical and more misaligned with the language of the law than that
expressed by the CIR.

VI.

A final observation. Section 4.105.1 of RR No. 7-95, insofar as it disallows real estate dealers from including the value
of their real properties in the beginning inventory of goods, materials and supplies, has in fact already been repealed.
The offending provisions were deleted with the enactment of Revenue Regulation No. 6-97 (RR 6-97) dated 2 January
1997, which amended RR 7-95.45 The repeal of the basis for the present assessments by RR 6-97 only highlights the
continuing absurdity of the position of the BIR towards FBDC.

FBDC points out that while the transactions involved in G.R. No. 158885 took place during the effectivity of RR 7-95,
the transactions involved in G.R. No. 170680 in fact took place after RR No. 6-97 had taken effect. Indeed, the
assessments subject of G.R. No. 170680 were for the third quarter of 1997, or several months after the effectivity of
RR 6-97. That fact provides additional reason to sustain FBDCs claim for refund of its 1997 Third Quarter VAT
payments. Nevertheless, since the assailed restrictions implemented by RR 7-95 were not sanctioned by law in the
first place there is no longer need to dwell on such fact.

WHEREFORE, the petitions are GRANTED. The assailed decisions of the Court of Tax Appeals and the Court of Appeals
are REVERSED and SET ASIDE. Respondents are hereby (1) restrained from collecting from petitioner the amount
of P28,413,783.00 representing the transitional input tax credit due it for the fourth quarter of 1996; and (2) directed
to refund to petitioner the amount of P347,741,695.74 paid as output VAT for the third quarter of 1997 in light of the
persisting transitional input tax credit available to petitioner for the said quarter, or to issue a tax credit corresponding
to such amount. No pronouncement as to costs.

SO ORDERED.

DISSENTING OPINION

CARPIO, J.:

I dissent. The majority inexplicably grants to petitioner a credit for an input value-added tax (VAT) that petitioner never
paid and could never have paid. At the time of the sale by the government of the land, there was still no VAT on the
sale of land, and the government as seller was, and still is today, not subject to VAT. There is no dispute that if the sale
were to take place today, when there is already VAT on the sale of land, the sale transaction would still be VAT-free
because the government is not subject to VAT, and hence petitioner as buyer cannot avail of any input VAT since
petitioner can never present a VAT receipt. Ironically, the majority allows petitioner an input VAT in a transaction that
took place when there was still no VAT on the sale of land, and the government as seller was, as it is still, not subject to
VAT.

The Cases

Before the Court are two petitions for review1 filed by Fort Bonifacio Development Corporation (FBDC).

In G.R. No. 158885, FBDC assails the Decision promulgated on 15 November 2002 2 by the Court of Appeals in CA-G.R.
SP No. 60477 which affirmed with modification the 11 August 20003 Decision of the Court of Tax Appeals (CTA). The
CTA ordered FBDC to pay to the Bureau of Internal Revenue (BIR), for the fourth quarter of 1997, the assessed amount
of P45,188,708.08 representing disallowed transitional input tax claim, plus 20% delinquency interest per annum from
1 June 1998 until fully paid.

In G.R. No. 170680, FBDC assails the Decision promulgated on 30 October 20034 by the Court of Appeals in CA-G.R. SP
No. 61517 which affirmed the 17 October 2000 Decision5 of the CTA. The CTA denied FBDCs claim for refund of
overpaid value-added tax (VAT) amounting to P347,741,695.74 covering the third quarter of 1997.

The Antecedent Facts

FBDC is owned to the extent of 45% by the Bases Conversion Development Authority (BCDA)6 and to the extent of
55% by private domestic corporations. FBDC is engaged in the development and sale of real properties. On 8 February
1995, FBDC acquired from the national government, under a VAT-free sale transaction, the Fort Bonifacio Global City
(Global City) located within Fort Bonifacio, Taguig, Metro Manila. The acquisition was done by virtue of Republic Act No.
72277 and Executive Order No. 408 dated 8 December 1992. FBDC started developing and selling lots in Global City in
October 1996.

Meanwhile, on 1 January 1996, Republic Act No. 7716 (RA 7716) took effect. RA 7716 restructured the VAT system by
further amending pertinent provisions of the National Internal Revenue Code (NIRC). RA 7716 imposed a VAT, among
others, on the sale of real properties, a transaction not previously subject to VAT. Section 2 of RA 7716 further
amended Section 100 of the NIRC, as amended, thus:

SEC. 2. Section 100 of the National Internal Revenue Code, as amended, is hereby further amended to read as follows:

SEC. 100. Value-added tax on sale of goods or properties. - (a) Rate and base of tax. - There shall be levied, assessed
and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to 10% of the
gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid
by the seller or transferor.

(1) The term "good 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;

xxxx

The term "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.

Pursuant to RA 7716, the sale of parcels of land to FBDCs customers became subject to 10% VAT.

However, Section 105 of the NIRC grants to a person who becomes liable to VAT or who elects to be a VAT-registered
person a transitional input tax, as follows:

Sec. 105. 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 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 paid on such goods, materials and supplies, whichever is higher, which shall be creditable against
the output tax.

On 19 September 1996, in order to avail itself of the transitional input tax credit, FBDC submitted to the BIR, Revenue
District No. 44, Taguig and Pateros, an inventory of its real properties with a total book value of P71,227,503,200 on
which it claims a transitional input tax credit of P5,698,200,256. FBDC also registered itself as a VAT taxpayer.

G.R. No. 158885

On 14 October 1996, FBDC executed two contracts to sell in favor of Metro Pacific Corporation (Metro Pacific) covering
two lots located in Global City. The lots were both payable in installments. For the fourth quarter of 1996, FBDC
received P3,498,888,713.60 from the sale of the two lots, on which the output VAT payable to the BIR amounted
to P318,080,792.14.9 FBDC paid cash to the BIR amounting to P269,340,469.45 and utilized (1) P28,413,783 out of its
total transitional input tax credit of P5,698,200,256 (the amount of P28,413,783 represents the portion of the total
transitional input tax credit allocated by FBDC to the two lots sold to Metro Pacific); and (2) its regular input tax credit
of P20,326,539.69 on purchases of goods and services.10
On 28 July 1997 and 29 October 1997, FBDC submitted to the BIR two letters dated 18 July 1997 11 and 28 October
1997,12 respectively, informing it of the transaction and computation of its VAT payments and requesting for a ruling
on whether its transitional input VAT on the land inventory, amounting to P28,413,783, was in order. After investigation
of FBDCs VAT return for the fourth quarter of 1996, the BIR recommended the disallowance of the claimed transitional
input VAT on land inventory, and the issuance of a notice of assessment for deficiency VAT equivalent to the disallowed
amount. The BIR issued a Pre-Assessment Notice dated 23 December 1997 for deficiency VAT for the fourth quarter of
1996.

On 5 March 1998, FBDC received an undated letter13 from then BIR Commissioner Liwayway Vinzons-Chato
disallowing the presumptive input tax arising from land inventory on the ground that "the basis of the 8% presumptive
input tax of real estate dealers shall be limited to the book value of the improvements [made upon the land], in
addition to its inventory of supplies and materials for use in its business,"14 and not on the book value of the actual
land in FBDCs inventory. The BIR Commissioner cited Revenue Regulation No. 7-95 (RR 7-95) dated 9 December 1995
and Revenue Memorandum Circular No. 3-96 dated 15 January 1996.15 Specifically, the BIR Commissioner referred to
Section 4.105-1 and the Transitory Provisions of RR 7-95 issued in implementation of the amendments made by RA
7716, as follows:

Sec. 4.105-1. Transitional input tax on beginning inventories. - Taxpayers who became VAT-registered persons upon
effectivity of RA No. 7716 who have exceeded the minimum turnover of P500,000.00 or who voluntarily register even if
their turnover does not exceed P500,000.00 shall be entitled to a presumptive input tax on the inventory on hand as of
December 31, 1995 on the following: (a) goods purchased for resale in their present condition; (b) materials purchased
for further processing, but which have not yet undergone processing; (c) goods which have been manufactured by the
taxpayer; (d) goods in process and supplies, all of which are for sale or for use in the course of the taxpayers trade or
business as a VAT-registered person.

However, in the case of real estate dealers, the basis of the presumptive input tax shall be the improvements, such as
buildings, roads, drainage systems, and other similar structures, constructed on or after the effectivity of EO 273
(January 1, 1988).

The transitional input tax shall be 8% of the value of the inventory or actual VAT paid, whichever is higher, which
amount may be allowed as tax credit against the output tax of the VAT-registered person.

xxxx

TRANSITORY PROVISIONS

(a) Presumptive Input Tax Credits -

xxxx

(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 effectivity of E.O. 273) shall be allowed.

For purposes of sub-paragraphs (i), (ii) and (iii) above, an inventory as of December 31, 1995 of such goods or
properties and improvements showing the quantity, description and amount filed with the RDO not later than January
31, 1996.

The BIR Commissioner directed FBDC to pay VAT equivalent to the disallowed presumptive input tax on land inventory
in the amount of P28,413,783, including any surcharges, interest and penalties by the Chief, Assessment Division,
Revenue Region No. 8, Makati City, subject to audit verification. In a letter dated 11 March 1998,16 FBDC requested
the BIR Commissioner for the computation of the surcharges, interest and penalties and for the issuance of
assessment notice to enable it to pursue its remedy under the NIRC.

In a letter dated 4 May 1998,17 Acting Assistant Chief Pascual M. De Leon of the Assessment Division, Revenue Region
8, Makati City sent FBDC a letter informing it that the total amount due was P45,188,708.08. An assessment
notice18 was attached to the letter. In a letter dated 1 July 199819 filed on 2 July 1998, FBDC requested for
"reconsideration/protest" of the 4 May 1998 letter and the assessment notice. In a letter dated 15 July 199820 which
FBDC received on 10 August 1998, Regional Director Antonio I. Ortega of Revenue Region 8 ruled that FBDCs request
for "reconsideration/protest" was barred by the statute of limitations because it was filed more than 30 days from 5
March 1998 when FBDC received the undated letter from the BIR Commissioner disallowing the claim for transitional
input tax.

On 11 August 1998, FBDC filed an appeal by certiorari before the CTA, docketed as CTA Case No. 5665.
G.R. No. 170680

For the third quarter of 1997, FBDC received from its sale and lease of lots P3,591,726,328.11 on which output VAT
payable to the BIR amounted to P359,172,623.81. FBDC made cash payments amounting to P347,741,695.74 and
utilized its regular input tax credit of P19,743,565.73 on its purchases of goods and services.

On 11 May 1999, FBDC filed with the BIR a claim for tax refund of its output VAT cash payments for the third quarter of
1997, amounting to P347,741,695.74. FBDC alleged that the amount was illegally collected because the BIR did not
take into account its transitional input tax credit. Earlier, on 8 October 1998, 17 November 1998, and 11 February
1999, FBDC filed claims for refunds amounting to P269,340,469.45, P359,652,009.47, and P486,355,846.78,
respectively, representing VAT paid on proceeds received from its sale and lease of lots for the quarters ending on 31
December 1996, 31 March 1997, and 30 June 1997. After deducting P269,340,469.45, P359,652,009.47,
and P486,355,846.78 from P5,698,200,256 which FBDC claimed as its total transitional input tax credit, the remaining
input tax credit still sufficiently covered the amount of P347,741,695.74.21

The BIR did not act upon FBDCs claim. The two-year prescriptive period for actions to recover illegally collected tax
provided under Section 230 of the NIRC was to expire on 25 August 1999. Thus, on 24 August 1999, FBDC filed a
petition for review before the CTA, docketed as CTA Case No. 5926. FBDC alleged that its input credit tax was more
than enough to offset the VAT paid for the third quarter of 1997 and as such, it was entitled to a refund or tax credit
of P347,741,695.74.

The Ruling of the Court of Tax Appeals

G.R. No. 158885

In its 11 August 2000 Decision, the CTA denied the petition for review and ordered FBDC to pay to the BIR the assessed
amount of P45,188,708.08 plus 20% delinquency interest per annum from 1 June 1998 until fully paid pursuant to
Section 24922 of the NIRC.

The CTA ruled that FBDCs protest was filed on time. The CTA ruled that the undated letter from the BIR Commissioner
which FBDC received on 5 March 1998 showed that FBDCs liability was not yet definite and final because it was still
subject to audit verification. The CTA ruled that it was the 4 May 1998 letter, with the assessment notice, which
constituted the assessment contemplated under Section 22823 of the NIRC. FBDC received the 4 May 1998 letter on 4
June 1998. Hence, FBDCs request for "reconsideration/protest" filed on 2 July 1998 was timely filed.

The CTA sustained the BIRs application of Section 4.105-1 of RR 7-95 that the basis of the transitional input tax for
real estate dealers shall be the improvements constructed on or after the effectivity of Executive Order No. 273 (EO
273). The CTA rejected FBDCs argument that Section 4.105-1 of RR 7-95 is contrary to Sections 100 and 105 of the
NIRC. The CTA traced the origin of the transitional input tax credit from the original VAT law, EO 273, until Republic Act
No. 8424 or the Tax Reform Act of 1997, which took effect on 1 January 1998. The CTA ruled that the purpose of
granting transitional input tax credit was to give recognition to the sales tax component of inventories which would
qualify as input tax credit had the goods been acquired during the effectivity of the EO 273. The CTA ruled that RA
7716 amended EO 273 to widen its tax base to include other sale of goods and services not previously subject to VAT.
However, RA 7716 did not touch Section 105 of the NIRC on transitional input tax credit, and it remained with the same
purpose as when it was introduced by EO 273.

The CTA also ruled that FBDC purchased the lots in Global City from the national government under a VAT-free sale
transaction. The CTA noted that in 1995, sale of real properties was still exempt from VAT. Hence, FBDC is precluded
from availing of transitional input tax credit.

The dispositive portion of the CTA Decision reads:

WHEREFORE, in view of all the foregoing, the instant Petition for Review is hereby DENIED. Petitioner is ordered to pay
the assessed amount of P45,188,708.08 to the Respondent Commissioner of Internal Revenue plus 20% delinquency
interest per annum from June 1, 1998 until fully paid pursuant to Section 249 of the 1996 Tax Code.

SO ORDERED.24

FBDC filed a petition for review before the Court of Appeals, docketed as CA-G.R. SP No. 60477.

G.R. No. 170680

In a Decision promulgated on 17 October 2000, the CTA denied FBDCs claim for tax refund. Thus:
WHEREFORE, premises considered, the instant Petition for Review on the refund of the overpaid value-added tax in the
amount of P347,741,695.74 covering the third quarter of 1997 is hereby DENIED for lack of merit.

SO ORDERED.25

The CTA ruled that FBDC is not automatically entitled to the 8% transitional input tax allowed under Section 105 of the
NIRC. The CTA stated that FBDC purchased the land at the Global City from the government under a VAT-free sale
transaction. The government, which is a tax-exempt entity, did not pass on any VAT or business tax upon FBDC. Thus,
the CTA ruled that to allow FBDC 8% transitional input tax to offset its output VAT liability without having paid any
previous taxes has the net effect of granting FBDC an outright bonus equivalent to the 10% VAT it may tack on to the
goods it would sell to its subsequent purchasers. The CTA also ruled that the inventory under Section 105 of the NIRC
is limited to improvements, such as buildings, roads, drainage system and other similar structures constructed on the
land because in their construction, the contractors and suppliers have presumably passed on to the owner of the land
or the real estate dealer the business tax due thereon. The CTA also ruled that Section 4.105-1 of RR 7-95 is not
contrary to Sections 100 and 105 of the NIRC. The CTA also cited its 11 August 2000 Decision in CTA Case No. 5665.

FBDC filed a petition for certiorari before the Court of Appeals assailing the 17 October 2000 Decision of the CTA,
docketed as CA-G.R. SP No. 61517.

The Ruling of the Court of Appeals

G.R. No. 158885

In a Decision promulgated on 15 November 2002, the Court of Appeals affirmed with modification the CTAs 11 August
2000 Decision.

The Court of Appeals ruled that the regulations embodied in RR 7-95 were a valid exercise of the BIRs delegated rule-
making power and were consistent with the letter and spirit of substantive laws establishing the VAT system. The Court
of Appeals ruled that RA 7716 amended the governments VAT system instituted under EO 273 and imposed, for the
first time, VAT on sale of real properties. A first-time taxpayer who becomes liable for VAT is entitled to a transitional
input tax under Section 105 of the NIRC. Section 105 provides that the basis for the inventory of goods, materials and
supplies upon which the 8% input VAT will be based shall be left to the regulation by the appropriate administrative
authority. The Court of Appeals ruled that the decision of the BIR to use the improvements introduced by the taxpayer
upon real properties as the basis for the transitional input tax credit satisfied established constitutional and legal
precepts.1avvphi1.zw+

However, the Court of Appeals modified the CTAs 11 August 2000 Decision by deleting the imposition of surcharge,
interest and penalty upon the assessed amount of additional VAT. Thus:

WHEREFORE, premises considered, the Decision of the Court of Tax Appeals, is hereby AFFIRMED with the
MODIFICATION that the assessment of surcharge, interests and penalty by the BIR upon the principal deficiency
amount of value added taxes payable by the petitioner, to be determined by the BIR, is hereby REMOVED from
petitioners liability.

SO ORDERED.26

FBDC filed a motion for reconsideration of the Court of Appeals 15 November 2002 Decision. In its 1 July 2003
Resolution,27 the Court of Appeals denied the motion.

Hence, the petition before this Court.

G.R. No. 170680

In its 30 October 2003 Decision, the Court of Appeals denied FBDCs petition and affirmed the 17 October 2000 CTA
Decision. The Court of Appeals again traced the origin of transitional input tax from EO 273 to RA 7716. The Court of
Appeals ruled that the grant of transitional input tax presupposes that the VAT taxpayer had previously paid some form
of business tax on his inventory of goods. Here, FBDC purchased the land from the national government under a VAT-
free transaction. The Court of Appeals sustained the CTA that to allow FBDC to avail of the 8% transitional input tax to
offset its output tax liability will have the effect of granting FBDC an outright bonus equivalent to the 10% VAT which it
may tack on the purchase price of the lands it would sell to its buyers. The Court of Appeals further ruled that RR 7-95
limiting the transitional input tax to the value of the improvements is a valid implementation of the NIRC.

The dispositive portion of the Court of Appeals Decision reads:


WHEREFORE, the instant Petition is DENIED. The assailed Decision of the Court of Tax Appeals dated October 17, 2000
denying petitioners claim for refund of the value-added tax it paid for the third quarter of 1997 in the amount
of P347,741,695.74 is hereby AFFIRMED.

SO ORDERED.28

FBDC filed a motion for reconsideration. In its 12 December 2005 Resolution,29 the Court of Appeals denied FBDCs
motion.

Hence, the petition before this Court.

The Issue

The main issue is whether petitioner is entitled to transitional input tax credit under Section 105 of the NIRC, on its
Global City land inventory, which petitioner purchased from the government under a VAT-free transaction in 1995.

Overview of the VAT Law

The VAT is essentially a tax on transactions. It is imposed at every stage of the distribution process on the sale, barter,
exchange of goods or property and in the performance of services until it finally reaches the consumer.30Since it is a
value-added tax, it is levied on the value added to goods and services at every link of the chain of transactions in order
to prevent doubly taxing a prior transaction in the subsequent use or sale of the same product.

In computing the tax liability, the taxpayer subtracts from the tax due on sales the taxes on his purchases of raw
materials. He pays only the difference between the tax on sales (output tax) and the tax on outlays for materials,
supplies, services and capital goods (input tax). As a result, previously paid taxes are allowed as input tax
credits deductible from the output VAT liability in subsequent transactions involving the same
product. This is substantially how transitional input tax credit works. The term "transitional" had been placed to
distinguish this from an ordinary input tax since essentially this innovative tax credits function is to pave the smooth
transition from the non-VAT to the VAT system.

The VAT traces its roots from the sales tax and under forms of percentage tax under the old Tax Code. Since 1939,
when the turnover tax was replaced by the manufacturers sales tax, the Tax Code had provided for a single stage
value-added tax on original sales by manufacturers, producers and importers computed on the "cost deduction
method" and later on the basis of the "tax credit method." Up until 1987, the system of taxing goods consisted of (1)
an excise tax on selected articles, (2) fixed and percentage taxes on original and subsequent sales, on importations
and on milled articles, and (3) mining taxes on mineral products. Services were subjected to percentage taxes based
mainly on gross receipts.31

Beginning 1 January 1988, the multi-staged value-added tax had been adopted under EO 273. Among the new
provisions included were the persons liable,32 the VAT on sale of goods,33 and the transitional input tax credit. The
BIR released Revenue Regulation No. 5-87, the implementing rules of EO 273, which took effect on the same date.

On 5 May 1994, Congress approved RA 7716 or the Expanded Value-Added Tax Law, commonly known as the E-VAT.
The new law was enacted in order to extend the scope of the VAT not only to goods but also to properties. In this law,
the VAT was expanded to include real properties held primarily for sale to customers or held for lease in the ordinary
course of trade or business.34 The provision pertaining to transitional input tax credit, Section 105, was not touched
and remained in effect.

However, the constitutionality of the E-VAT law was questioned before this Court. In the consolidated cases of Tolentino
v. Secretary of Finance,35 we issued a temporary restraining order (TRO) on the implementation of RA 7716. On 25
August 1994, this Court ruled in favor of the tax laws validity. After the denial with finality of the motions for
reconsideration assailing the constitutionality of the E-VAT, the TRO was lifted on 30 October 1995.36

Following the release of the decision and the lifting of the TRO, the BIR released RR 7-95 dated 9 December 1995
pertaining to the consolidated VAT regulations of RA 7716. Thus, both RA 7716 and RR 7-95 were made effective and
implemented only on 1 January 1996. Another BIR-issued directive, Revenue Memorandum Circular No. 3-96 dated 15
January 1996, followed suit. The contents of this memorandum were the same as RR 7-95 although in question and
answer form.

On 20 December 1996, Congress approved Republic Act No. 8241 which took effect on 1 January 1997. This tax law
amended several provisions of RA 7716 including Section 105, which segregated the definition of input tax credit to
transitional and presumptive.37 To implement this law, the BIR released a new ruling, Revenue Regulation No. 6-97
dated 2 January 1997.

The most recent full revision of the NIRC is Republic Act No. 8424 or the Tax Reform Act of 1997, which took effect on 1
January 1998. From the years 2000 to 2004, several other amendments38 to the VAT law followed and the latest one is
Republic Act No. 9337, popularly called the Reformed Value-Added Tax Law or R-VAT for short, which was approved by
Congress on 24 May 2005 and which took effect on 1 July 2005. This new law increased the tax base of the VAT from
10% to 12%.

Acquisition of the Fort Bonifacio property from the


national government under a tax-free transaction

As mentioned earlier, the Global City land was previously part of Fort Bonifacio, a military reservation. Being part of a
military reservation, the lands comprising Fort Bonifacio formed part of the public domain. It was only in 1992 when a
portion of Fort Bonifacio ceased to be part of the public domain when Congress passed Republic Act No. 9227,
classifying the lands as alienable and disposable, and authorizing the President to sell and dispose of a portion of the
military reservation, now consisting of the Global City land.39

Petitioner contends that the CA erred in holding that there must have been previous payment of sales tax or VAT by
petitioner on its land before it may claim the input tax credit granted by Section 105 of the NIRC.

Petitioners contention has no merit.

Sections 104 (now Section 110) and 105 (now Section 111) of EO 273, as amended by RA 7716, provide:

SEC. 104. Tax Credits. (a) Creditable input tax.

xxx

The term input tax means the value-added tax due from or paid by a VAT-registered person in the course of his trade
or business on importation of goods or local purchases of goods or services, including lease or use of property, from a
VAT-registered person. It shall also include the transitional input tax determined in accordance with Section 105 of this
Code.

SEC. 105. 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 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.

Petitioner is not entitled to a refund or credit of any transitional input tax since the entire Global City land was bought
by petitioner from the national government in 1995 under a tax-free sale transaction and without any VAT component.
This means that no previous business tax, whether in the form of sales tax or VAT, was paid by petitioner on its
purchase of land from the national government. Simply put, since the national government is outside the operation of
the VAT and is tax-exempt, the national government did not pass on any VAT to petitioner as part of the purchase
price.

However, petitioner asserts that the 8% input tax credit provided for in Section 105 is one that is statutorily presumed
to have been paid and as a consequence, it need not show that taxes were previously paid on its inventory of land.

Petitioners assertion also has no merit.

True, there exists a presumption in Section 105 that tax was paid, whether or not it was actually paid. This can be
inferred from the provision that a taxpayer is "allowed input tax on his beginning inventory x x x equivalent to 8% x x
x, or the actual value-added tax paid x x x, whichever is higher." However, such presumption assumes the
existence of a law imposing the tax presumed to have been paid. Otherwise, the presumption will have
no basis because if no tax has been imposed by law, then there can be no presumption that such a tax
has been paid.

If no tax has been imposed by law, whether it be VAT or sales, percentage, excise or privilege taxes, no such tax is
legally due and payable, and thus there can be no presumption that any such tax has been paid. When the law says
"transitional input tax" or "presumptive input tax," the presumption is that there exists a law imposing
the input tax and such tax is presumed to have been paid.

In the present case, when the national government sold the Global City land to petitioner in 1995, VAT on real
properties was not yet in existence. RA 7716 had not yet been enacted and the sale of real properties was still exempt
from VAT. Transitional or presumptive input tax necessarily requires a transaction where a tax had been imposed by
law. Without any VAT on land imposed by law at the time, the 8% input tax credit cannot be presumed to have been
paid. Thus, petitioner is not entitled to claim input VAT on the purchase of the land against its output VAT liability.

Even if the sale transaction by the national government to petitioner happens today with the VAT on real properties
already in existence, and petitioner subsequently resells the land, petitioner will still not be entitled to any input tax
credit. The simple reason is that the sale by the national government of government-owned land is not
subject to VAT.40 Thus, petitioner cannot now claim any input tax credit if it buys the same land today, and resells
the same.

To illustrate, supposing petitioner buys land from the national government today, constructs a condominium and
thereafter sells the units to third parties, will petitioner be subject to VAT? The simple answer is YES. Indisputably,
petitioner is now subject to output tax as a real estate dealer liable to VAT. Can petitioner charge any input tax against
its output tax liability for the sale? The simple answer is NO. This is because under the present Tax Code, specifically
Section 110,41 the rule is that any input tax shall be creditable against the output tax only if it is evidenced by a VAT
invoice or official receipt. A VAT invoice can be used only for the sale of goods and services that are subject to VAT.
Petitioner will not be able to present a VAT invoice since the national government is exempt from VAT. Without the
invoice to prove that the transaction had been subjected to VAT, petitioner cannot claim any input tax which may be
offset against its output tax. Thus, if a real estate dealer like petitioner cannot claim an input tax today on
its purchase of government land, when VAT on real properties is already in effect, then all the more
petitioner cannot claim any input tax for its 1995 purchase of government land when the E-VAT law was
still inexistent and petitioner had not yet been subjected to VAT.

Petitioner further asserts that there is nothing in Section 105 which states that the 8% transitional input tax credit may
be based only on the improvements on the land. Petitioner insists that in the sale of real properties, VAT is imposed not
only on the "improvements" but also on the land and improvements. Thus, in issuing RR 7-95, particularly Section
4.105-1, the BIR limited the application of Section 105 to the "improvements" on real properties, resulting in
unwarranted legislation.

Again, petitioners assertion has no merit.

Section 4.105-1 of RR 7-95 and its Transitory Provisions relating to transitional input tax on beginning inventories
provide:

SEC. 4.105-1. Transitional input tax on beginning inventories.

Taxpayers who became VAT-registered persons upon effectivity of RA No. 7716 who have exceeded the minimum
turnover of P500,000 or who voluntarily register even if their turnover does not exceed P500,000.00 shall be entitled
to a presumptive input tax on the inventory on hand as of December 31, 1995 on the following: (a) goods purchased
for resale in their present condition; (b) materials purchased for further processing, but which have not yet undergone
processing; (c) goods which have been manufactured by the taxpayer; (d) goods in process and supplies, all of which
are for sale or for use in the course of the 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 the 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 Sec. 103. Only VAT-registered persons shall be entitled to presumptive input tax
credits.

xxx

TRANSITORY PROVISIONS

(b) Presumptive Input Tax Credits

xxx
(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 effectivity of E.O. 273) shall be allowed.

For purposes of sub-paragraphs (i), (ii) and (iii) above, an inventory as of December 31, 1995 of such goods or
properties and improvements showing the quantity, description and amount filed with the RDO not later than January
31, 1996. (Emphasis supplied)

According to RR 7-95, the basis of the 8% input tax is simply the value of the improvements on the land and not the
value of the taxpayers entire inventory of real properties. This provision finds its basis in Section 105 which provides
that input tax is allowed on the taxpayers "beginning inventory of goods, materials and supplies." Here, the
presumptive input tax contemplated by law pertains to the input tax paid for the goods, materials or supplies passed
on to the taxpayer by his suppliers, and used to build improvements on the land. Even before real estate dealers like
petitioner became subject to VAT under RA 7716, improvements on land were already subject to VAT. However, since
the land itself was not subject to VAT or any input tax prior to RA 7716, the land then could not be considered part of
the beginning inventory under Section 105. Thus, the 8% transitional input tax applies only to improvements
on land, but not on the land itself.

In sum, petitioners cause must fail because petitioner acquired the Global City land from the national government
under a tax-free transaction. Consequently, petitioner is not entitled to a refund or credit of any transitional input tax.

Accordingly, I vote to deny the petitions and affirm the 15 November 2002 Decision and 1 July 2003 Resolution of the
Court of Appeals in CA-G.R. SP No. 60477 and the 30 October 2003 Decision and 12 December 2005 Resolution of the
Court of Appeals in CA-G.R. SP No. 61517.

ANTONIO T. CARPIO
Associate Justice

CONCURRING OPINION

YNARES-SANTIAGO, J.:

After a careful review of the actual effects of the tax measures involved herein, and with due regard to the intent of the
framers of the law and the real benefits thereof on the taxpayer, I vote to grant the herein consolidated petitions.

It is an undisputed fact that when petitioner acquired the lands within the Fort Bonifacio military reservation from the
national government, the latter did not have to pay any tax, be it sales or value-added. This notwithstanding, my
reading of the applicable tax laws is that petitioner may still claim transitional input tax credit.

Prior to January 1, 1996, sales of real properties were not subject to VAT. On the said date, Republic Act No. 7716 took
effect amending portions of the National Internal Revenue Code. It was only then that the value-added tax was
imposed on the sale of real properties. Section 100 of the NIRC was amended to read:

"Sec. 100. Value-added tax on sale of goods or properties. (a) Rate and base of tax. - There shall be levied, assessed
and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to 10% of the
gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid
by the seller or transferor.

"(1) The term goods or properties shall mean all tangible and intangible objects which are capable of pecuniary
estimation and shall include:

"(A) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business; x
x x."

As can be seen, any sale that petitioner entered into before the effectivity of RA 7716 was not subject to VAT.
Beginning January 1, 1996, petitioners transactions became subject to VAT in the full amount of 10% of the gross
selling price. This imposed an unexpected burden on petitioner, and other real property developers for that matter.
Petitioner would not be able to claim creditable input tax since its purchase of the lands from the national government
was not subject to VAT. This is not in accord with the spirit and intent of the law as will be demonstrated hereunder.

The amendatory provision of Section 105 of the NIRC, as introduced by RA 7716, states:

"Sec. 105. 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 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."

To reiterate, the rate of the input tax shall be "8% of the value of such inventory or the actual value-added tax paid on
such goods, materials and supplies, whichever is higher."1 If the intent of the law were to limit the input tax to cases
where actual VAT was paid, it could have simply said that the tax base shall be the actual value-added tax paid.
Instead, the law as framed contemplates a situation where a transitional input tax credit is claimed even if there was
no actual payment of VAT in the underlying transaction. In such cases, the tax base used shall be the value of the
beginning inventory of goods, materials and supplies.

More importantly, the benefits of Section 105 are made available to "a person who becomes liable to value-added tax
or any person who elects to be a VAT-registered person." In other words, the provision is made to apply to persons not
theretofore subject to VAT. In this manner, the law seeks to alleviate the situation where a taxpayer who becomes
liable to value-added tax may not claim the input tax credit available to other taxpayers who are subject to the value-
added tax. In other words, Section 105 was not meant to give credit for taxes previously paid, if any, on a taxpayers
inventory, but to mitigate the burden of paying value-added tax when he sells the goods in his inventory in the future
without the benefit of an input tax.

The transitional input tax credit provided for by the above Section 105, as the name implies, was intended to apply to
a situation where a taxpayer, in the course of trade or business, transits from a non-VAT status to a VAT status. The
provision of a transitional input tax credit, even to those whose transactions were not previously subject to VAT, was
meant to soften the blow, so to speak, of having to pay the new tax to the full extent of 10% of the gross selling price.

Pertinently, Section 104 of the NIRC, as amended by RA 7716, defines input tax in this wise:

"The term input tax means the value-added tax due from or paid by a VAT-registered persons in the course of his
trade or business on importation of goods or local purchase of goods or services, including lease or use of property,
from a VAT-registered person. It shall also include the transitional input tax determined in accordance with Section 135
of this Code."2

On the basis of the foregoing considerations, I submit that petitioner may avail of the transitional input tax credit
provided by law notwithstanding that its purchase of the lands within Fort Bonifacio from the government was not
subject to value-added tax.

I come now to the issue of whether the inventory on which to base the transitional input tax credit includes lands or
only the improvements on lands.

Here, a plain reading of the law, specifically the statutory definition of the term "goods", is all that is necessary to see
the merit in petitioners position.

"Sec. 100. Value-added-tax on sale of goods or properties. - (a) Rate and base of tax. - There shall be levied, assessed
and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to 10% of the
gross selling price or gross value in money of the goods, or properties sold, bartered or exchanged, such tax to be paid
by the seller or transferor.

"(1) The term goods or properties shall mean all tangible and intangible objects which are capable of pecuniary
estimation and shall include:

"(A) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business; x
x x."

In this connection, petitioner cites the case of Victorias Milling Company, Inc. vs. Social Security Commission,3where it
was held:

"While it is true that terms or words are to be interpreted in accordance with their well-accepted meaning in law,
nevertheless, when such term or word is specifically defined in a particular law, such interpretation must be adopted in
enforcing that particular law, for it can not be gainsaid that a particular phrase or term may have one meaning for one
purpose and another meaning for some other purpose."4

Hence, petitioner maintains that the term "goods" as used in the above-quoted Section 105 must include "[R]eal
properties (not "improvements") held primarily for sale to customers," as defined in Section 100.
On December 9, 1995, the Commissioner of Internal Revenue issued Revenue Regulations No. 7-95. Section 4.105-1
thereof states, in pertinent part:

"Sec. 4.105-1. Transitional input tax on beginning inventories. Taxpayers who became VAT-registered persons upon
effectivity of RA No. 7716 who have exceeded the minimum turnover of P500,000.00 or who voluntarily register even if
their turnover does not exceed P500,000.00 shall be entitled to a presumptive input tax on the inventory on hand as of
December 31, 1995 on the following: (a) goods purchased for resale in their present condition; (b) materials purchased
for further processing, but which have not yet undergone processing; (c) goods which have been manufactured by the
taxpayer; (d) goods in process and supplies, all of which are for sale or for use in the course of the taxpayers trade or
business as a VAT-registered person.

"However, in the case of real estate dealers, the basis of the presumptive input tax shall be the improvements , such as
buildings, roads, drainage systems, and other similar structures, constructed on or after the effectivity of EO 273
(January 1, 1988).

"The transitional input tax shall be 8% of the value of the inventory or actual VAT paid, whichever is higher, which
amount may be allowed as tax credit against the output tax of the VAT-registered person. x x x."

Petitioner assails the validity of the Revenue Regulations insofar as it runs counter to the statutory definition of
"goods" discussed above.

Article 7 of the Civil Code provides that "[a]dministrative or executive acts, orders and regulations shall be valid only
when they are not contrary to the laws or the Constitution." Simply put, an administrative rule or regulation cannot
contravene the law on which it is based. Thus, Rev. Regs. 7-95 cannot distinguish between land and improvements in
regard to the computation of the transitional input tax credit which a taxpayer may claim under Section 105. Where
the law does not distinguish, courts should not distinguish.5

Rules and regulations issued by administrative agencies in the implementation of laws they administer shall not in any
way modify, or be inconsistent with, explicit provisions of the law. 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 its terms, or in any way modify explicit
provisions of the law.6 Where there is a discrepancy between the basic law and a rule or regulation issued to
implement said law, what prevails is the basic law.7

Rev. Regs. 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 Commissioner of Internal Revenue 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 administrative agency. It is required that the regulation be germane to the
objects and purposes of the law, and be not in contradiction to, but in conformity with, the standards prescribed by
law. They must conform to and be consistent with the provisions of the enabling statute in order for such rule or
regulation to be valid. Constitutional and statutory provisions control with respect to what rules and regulations may
be promulgated by an administrative body, as well as with respect to what fields are subject to regulation by it. It may
not make rules and regulations which are inconsistent with the provisions of the Constitution or a statute, particularly
the statute it is administering or which created it, or which are in derogation of, or defeat, the purpose of a statute. In
case of conflict between a statute and an administrative order, the former must prevail.8

Furthermore, it is significant to note that, on January 1, 1997, Revenue Regulations No. 6-97 was issued by the
Commissioner of Internal Revenue. Pertinently, Section 4.105-1 of Rev. Regs. 6-97 is a basic reiteration of the same
Section 4.105-1 of Rev. Regs. 7-95, except that the later issuance 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 Rev. Regs. 6-97, the allowable transitional input tax credit is no longer limited to
improvements on real properties. The particular provision of Rev. Regs. 7-95, on which respondent Commissioner as
well as the CTA and the CA relied in denying petitioners claim for transitional input tax credit, has effectively been
repealed by Rev. Regs. 6-97. In a sense, the new regulation is now in consonance with Section 100 of the NIRC, insofar
as the definition of real properties as goods is concerned.

While the events subject of G.R. No. 158885 took place before the issuance of Rev. Regs. 6 -97, this regulation must be
given retroactive application, it being beneficial to the taxpayer. This is more in keeping with fairness and equity, which
this Court is bound to observe in its decision. Conversely, it is important to note that rulings or circulars promulgated
by the Commissioner of Internal Revenue which are prejudicial to taxpayers are not given retroactive effect.9

On the other hand, the transactions involved in G.R. No. 170680, occurred within the third quarter of 1997, when Rev.
Reg. 6-97 was already in effect.

In sum, petitioner should be allowed to base the computation of its transitional input tax credit on the value of its lands
and improvements; and not only on the improvements.

To grant petitioner the full benefits of the transitional input tax credit would not only inure to its own benefit. As
petitioner points out in its Memorandum, it will also benefit the general buying public, who will then enjoy lower prices
for properties sold within the Global City.

Likewise, it must be borne in mind that petitioner is a partner of government in the implementation of the national
policy of converting idle or non-productive government lands into effective instruments of economic
development.10 Moreover, investments in the construction and real estate industry have catalyzed the Philippine
economy and put it in high gear. They have created thousands of job opportunities. Petitioner plays an important role
in this area.

ACCORDINGLY, I vote to GRANT both petitions in these consolidated cases.

CONSUELO YNARES-SANTIAGO/ Associate Justice