G.R. No.

193007 July 19, 2011

RENATO V. DIAZ and AURORA MA. F. TIMBOL, Petitioners,

vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, Respondents.

DECISION

ABAD, J.:

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

The Facts and the Case

Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for
declaratory relief1 assailing the validity of the impending imposition of value-added tax
(VAT) by the Bureau of Internal Revenue (BIR) on the collections of tollway operators.

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

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

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

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

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

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

In their reply6 to the government’s comment, petitioners point out that tollway operators
cannot be regarded as franchise grantees under the NIRC since they do not hold legislative
franchises. Further, the BIR intends to collect the VAT by rounding off the toll rate and
putting any excess collection in an escrow account. But this would be illegal since only the
Congress can modify VAT rates and authorize its disbursement. Finally, BIR Revenue
Memorandum Circular 63-2010 (BIR RMC 63-2010), which directs toll companies to record
an accumulated input VAT of zero balance in their books as of August 16, 2010,
contravenes Section 111 of the NIRC which grants entities that first become liable to VAT
a transitional input tax credit of 2% on beginning inventory. For this reason, the VAT on
toll fees cannot be implemented.

The Issues Presented

The case presents two procedural issues:

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

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

The case also presents two substantive issues:

1. Whether or not the government is unlawfully expanding VAT coverage by

including tollway operators and tollway operations in the terms "franchise grantees"
and "sale of services" under Section 108 of the Code; and

2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax

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

The Court’s Rulings

A. On the Procedural Issues:

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

But there are precedents for treating a petition for declaratory relief as one for prohibition
if the case has far-reaching implications and raises questions that need to be resolved for
the public good.8 The Court has also held that a petition for prohibition is a proper remedy
to prohibit or nullify acts of executive officials that amount to usurpation of legislative
authority.9

Here, the imposition of VAT on toll fees has far-reaching implications. Its imposition would
impact, not only on the more than half a million motorists who use the tollways everyday,
but more so on the government’s effort to raise revenue for funding various projects and
for reducing budgetary deficits.

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

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

B. On the Substantive Issues:

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

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

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

Now, do tollway operators render services for a fee? Presidential Decree (P.D.) 1112 or
the Toll Operation Decree establishes the legal basis for the services that tollway operators
render. Essentially, tollway operators construct, maintain, and operate expressways, also
called tollways, at the operators’ expense. Tollways serve as alternatives to regular public
highways that meander through populated areas and branch out to local roads. Traffic in
the regular public highways is for this reason slow-moving. In consideration for
constructing tollways at their expense, the operators are allowed to collect government-
approved fees from motorists using the tollways until such operators could fully recover
their expenses and earn reasonable returns from their investments.
When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latter’s
use of the tollway facilities over which the operator enjoys private proprietary rights 12 that
its contract and the law recognize. In this sense, the tollway operator is no different from
the following service providers under Section 108 who allow others to use their properties
or facilities for a fee:

1. Lessors of property, whether personal or real;

2. Warehousing service operators;

3. Lessors or distributors of cinematographic films;

4. Proprietors, operators or keepers of hotels, motels, resthouses, pension houses,

inns, resorts;

5. Lending investors (for use of money);

6. Transportation contractors on their transport of goods or cargoes, including

persons who transport goods or cargoes for hire and other domestic common
carriers by land relative to their transport of goods or cargoes; and

7. Common carriers by air and sea relative to their transport of passengers, goods
or cargoes from one place in the Philippines to another place in the Philippines.

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

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

Tollway operators are franchise grantees and they do not belong to exceptions (the low-
income radio and/or television broadcasting companies with gross annual incomes of less
than ₱10 million and gas and water utilities) that Section 11913 spares from the payment
of VAT. The word "franchise" broadly covers government grants of a special right to do an
act or series of acts of public concern.14

Petitioners of course contend that tollway operators cannot be considered "franchise

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

Tollway operators are, owing to the nature and object of their business, "franchise
grantees." The construction, operation, and maintenance of toll facilities on public
improvements are activities of public consequence that necessarily require a special grant
of authority from the state. Indeed, Congress granted special franchise for the operation
of tollways to the Philippine National Construction Company, the former tollway
concessionaire for the North and South Luzon Expressways. Apart from Congress, tollway
franchises may also be granted by the TRB, pursuant to the exercise of its delegated
powers under P.D. 1112.17 The franchise in this case is evidenced by a "Toll Operation
Certificate."18

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

Nor can petitioners cite as binding on the Court statements made by certain lawmakers in
the course of congressional deliberations of the would-be law. As the Court said in South
African Airways v. Commissioner of Internal Revenue,20 "statements made by individual
members of Congress in the consideration of a bill do not necessarily reflect the sense of
that body and are, consequently, not controlling in the interpretation of law." The
congressional will is ultimately determined by the language of the law that the lawmakers
voted on. Consequently, the meaning and intention of the law must first be sought "in the
words of the statute itself, read and considered in their natural, ordinary, commonly
accepted and most obvious significations, according to good and approved usage and
without resorting to forced or subtle construction."

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

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

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

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

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

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

As can be seen, the discussion in the MIAA case on toll roads and toll fees was made, not
to establish a rule that tollway fees are user’s tax, but to make the point that airport lands
and buildings are properties of public dominion and that the collection of terminal fees for
their use does not make them private properties. Tollway fees are not taxes. Indeed, they
are not assessed and collected by the BIR and do not go to the general coffers of the
government.

It would of course be another matter if Congress enacts a law imposing a user’s tax,
collectible from motorists, for the construction and maintenance of certain roadways. The
tax in such a case goes directly to the government for the replenishment of resources it
spends for the roadways. This is not the case here. What the government seeks to tax
here are fees collected from tollways that are constructed, maintained, and operated by
private tollway operators at their own expense under the build, operate, and transfer
scheme that the government has adopted for expressways.26 Except for a fraction given
to the government, the toll fees essentially end up as earnings of the tollway operators.

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

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

Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer
bears its burden since the amount of VAT paid by the former is added to the selling price.
Once shifted, the VAT ceases to be a tax30 and simply becomes part of the cost that the
buyer must pay in order to purchase the good, property or service.

Consequently, VAT on tollway operations is not really a tax on the tollway user, but on
the tollway operator. Under Section 105 of the Code, 31 VAT is imposed on any person
who, in the course of trade or business, sells or renders services for a fee. In other words,
the seller of services, who in this case is the tollway operator, is the person liable for VAT.
The latter merely shifts the burden of VAT to the tollway user as part of the toll fees.

For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were
deemed as a "user’s tax." VAT is assessed against the tollway operator’s gross receipts
and not necessarily on the toll fees. Although the tollway operator may shift the VAT
burden to the tollway user, it will not make the latter directly liable for the VAT. The shifted
VAT burden simply becomes part of the toll fees that one has to pay in order to use the
tollways.32

Three. Petitioner Timbol has no personality to invoke the non-impairment of contract

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

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

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

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

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

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

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

Conclusion

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

If the legislative intent was to exempt tollway operations from VAT, as petitioners so
strongly allege, then it would have been well for the law to clearly say so. Tax exemptions
must be justified by clear statutory grant and based on language in the law too plain to
be mistaken.37 But as the law is written, no such exemption obtains for tollway operators.
The Court is thus duty-bound to simply apply the law as it is found.1avvphi1

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

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

WHEREFORE, the Court DENIES respondents Secretary of Finance and Commissioner of

Internal Revenue’s motion for reconsideration of its August 24, 2010 resolution,
DISMISSES the petitioners Renato V. Diaz and Aurora Ma. F. Timbol’s petition for lack of
merit, and SETS ASIDE the Court’s temporary restraining order dated August 13, 2010.

SO ORDERED.
G.R. No. 157594 March 9, 2010

TOSHIBA INFORMATION EQUIPMENT (PHILS.), INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

LEONARDO-DE CASTRO, J.:

In this Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, petitioner
Toshiba Information Equipment (Philippines), Inc. (Toshiba) seeks the reversal and setting
aside of (1) the Decision2 dated August 29, 2002 of the Court of Appeals in CA-G.R. SP
No. 63047, which found that Toshiba was not entitled to the credit/refund of its unutilized
input Value-Added Tax (VAT) payments attributable to its export sales, because it was a
tax-exempt entity and its export sales were VAT-exempt transactions; and (2) the
Resolution3 dated February 19, 2003 of the appellate court in the same case, which denied
the Motion for Reconsideration of Toshiba. The herein assailed judgment of the Court of
Appeals reversed and set aside the Decision4 dated October 16, 2000 of the Court of Tax
Appeals (CTA) in CTA Case No. 5762 granting the claim for credit/refund of Toshiba in the
amount of ₱1,385,282.08.

Toshiba is a domestic corporation principally engaged in the business of manufacturing

and exporting of electric machinery, equipment systems, accessories, parts, components,
materials and goods of all kinds, including those relating to office automation and
information technology and all types of computer hardware and software, such as but not
limited to HDD-CD-ROM and personal computer printed circuit board.5 It is registered with
the Philippine Economic Zone Authority (PEZA) as an Economic Zone (ECOZONE) export
enterprise in the Laguna Technopark, Inc., as evidenced by Certificate of Registration No.
95-99 dated September 27, 1995.6 It is also registered with Regional District Office No.
57 of the Bureau of Internal Revenue (BIR) in San Pedro, Laguna, as a VAT-taxpayer with
Taxpayer Identification No. (TIN) 004-739-137.7

In its VAT returns for the first and second quarters of 1997,8 filed on April 14, 1997 and
July 21, 1997, respectively, Toshiba declared input VAT payments on its domestic
purchases of taxable goods and services in the aggregate sum of ₱3,875,139.65, 9 with no
zero-rated sales. Toshiba subsequently submitted to the BIR on July 23, 1997 its amended
VAT returns for the first and second quarters of 1997,10 reporting the same amount of
input VAT payments but, this time, with zero-rated sales totaling ₱7,494,677,000.00.11

On March 30, 1999, Toshiba filed with the One-Stop Shop Inter-Agency Tax Credit and
Duty Drawback Center of the Department of Finance (DOF One-Stop Shop) two separate
applications for tax credit/refund12 of its unutilized input VAT payments for the first half
of 1997 in the total amount of ₱3,685,446.73.13

The next day, on March 31, 1999, Toshiba likewise filed with the CTA a Petition for
Review14 to toll the running of the two-year prescriptive period under Section 230 of the
Tax Code of 1977,15 as amended.16 In said Petition, docketed as CTA Case No. 5762,
Toshiba prayed that –

[A]fter due hearing, judgment be rendered ordering [herein respondent Commissioner of

Internal Revenue (CIR)] to refund or issue to [Toshiba] a tax refund/tax credit certificate
in the amount of P3,875,139.65 representing unutilized input taxes paid on its purchase
of taxable goods and services for the period January 1 to June 30, 1997.17

The Commissioner of Internal Revenue (CIR) opposed the claim for tax refund/credit of
Toshiba, setting up the following special and affirmative defenses in his Answer 18 –

5. [Toshiba’s] alleged claim for refund/tax credit is subject to administrative

routinary investigation/examination by [CIR’s] Bureau;
 6. [Toshiba] failed miserably to show that the total amount of ₱3,875,139.65
claimed as VAT input taxes, were erroneously or illegally collected, or that the same
are properly documented;

7. Taxes paid and collected are presumed to have been made in accordance with
law; hence, not refundable;

8. In an action for tax refund, the burden is on the taxpayer to establish its right to
refund, and failure to sustain the burden is fatal to the claim for refund;

9. It is incumbent upon [Toshiba] to show that it has complied with the provisions
of Section 204 in relation to Section 229 of the Tax Code;

10. Well-established is the rule that claims for refund/tax credit are construed
in strictissimi juris against the taxpayer as it partakes the nature of exemption from
tax.19

Upon being advised by the CTA,20 Toshiba and the CIR filed a Joint Stipulation of Facts
and Issues,21 wherein the opposing parties "agreed and admitted" that –

1. [Toshiba] is a duly registered value-added tax entity in accordance with Section

107 of the Tax Code, as amended.

2. [Toshiba] is subject to zero percent (0%) value-added tax on its export sales in
accordance with then Section 100(a)(2)(A) of the Tax Code, as amended.

3. [Toshiba] filed its quarterly VAT returns for the first two quarters of 1997 within
the legally prescribed period.

xxxx

7. [Toshiba] is subject to zero percent (0%) value-added tax on its export sales.

8. [Toshiba] has duly filed the instant Petition for Review within the two-year
prescriptive period prescribed by then Section 230 of the Tax Code.22

In the same pleading, Toshiba and the CIR jointly submitted the following issues for
determination by the CTA –

Whether or not [Toshiba] has incurred input taxes in the amount of ₱3,875,139.65 for the
period January 1 to June 30, 1997 which are directly attributable to its export sales[.]

Whether or not the input taxes incurred by [Toshiba] for the period January 1 to June 30,
1997 have not been carried over to the succeeding quarters[.]

Whether or not input taxes incurred by [Toshiba] for the first two quarters of 1997 have
not been offset against any output tax[.]

Whether or not input taxes incurred by [Toshiba] for the first two quarters of 1997 are
properly substantiated by official receipts and invoices.23

During the trial before the CTA, Toshiba presented documentary evidence in support of its
claim for tax credit/refund, while the CIR did not present any evidence at all.

With both parties waiving the right to submit their respective memoranda, the CTA
rendered its Decision in CTA Case No. 5762 on October 16, 2000 favoring Toshiba.
According to the CTA, the CIR himself admitted that the export sales of Toshiba were
subject to zero percent (0%) VAT based on Section 100(a)(2)(A)(i) of the Tax Code of
1977, as amended. Toshiba could then claim tax credit or refund of input VAT paid on its
purchases of goods, properties, or services, directly attributable to such zero-rated sales,
in accordance with Section 4.102-2 of Revenue Regulations No. 7-95. The CTA, though,
reduced the amount to be credited or refunded to Toshiba to ₱1,385,292.02.

The dispositive portion of the October 16, 2000 Decision of the CTA fully reads –

WHEREFORE, [Toshiba’s] claim for refund of unutilized input VAT payments is hereby
GRANTED but in a reduced amount of ₱1,385,282.08 computed as follows:

1st Quarter 2nd Quarter Total

Amount of claimed input

taxes filed with the DOF
One Stop Shop Center P3,268,682.34 P416,764.39 P3,685,446.73

Less: 1) Input taxes not

properly
supported by VAT
invoices and official
receipts
a. Per SGV’s verification
(Exh. I) ₱ 242,491.45 ₱154,391.13 ₱ 396,882.58

b. Per this court’s further

verification (Annex A) ₱1,852,437.65 ₱ 35,108.00 ₱1,887,545.65
₱189,499.13 ₱2,300,164.65

Amount Refundable ₱1,158,016.82 ₱227,265.26 ₱1,385,282.08

Respondent Commissioner of Internal Revenue is ORDERED to REFUND to [Toshiba] or in

the alternative, ISSUE a TAX CREDIT CERTIFICATE in the amount of ₱1,385,282.08
representing unutilized input taxes paid by [Toshiba] on its purchases of taxable goods
and services for the period January 1 to June 30, 1997.24

Both Toshiba and the CIR sought reconsideration of the foregoing CTA Decision.

Toshiba asserted in its Motion for Reconsideration25 that it had presented proper
substantiation for the ₱1,887,545.65 input VAT disallowed by the CTA.

The CIR, on the other hand, argued in his Motion for Reconsideration 26 that Toshiba was
not entitled to the credit/refund of its input VAT payments because as a PEZA-registered
ECOZONE export enterprise, Toshiba was not subject to VAT. The CIR invoked the
following statutory and regulatory provisions –

Section 24 of Republic Act No. 791627

SECTION 24. Exemption from Taxes Under the National Internal Revenue Code. – Any
provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes,
local and national, shall be imposed on business establishments operating within the
ECOZONE. In lieu of paying taxes, five percent (5%) of the gross income earned by all
businesses and enterprises within the ECOZONE shall be remitted to the national
government. x x x.

Section 103(q) of the Tax Code of 1977, as amended

Sec. 103. Exempt transactions. – The following shall be exempt from the value-added tax:

xxxx
(q) Transactions which are exempt under special laws, except those granted under
Presidential Decree Nos. 66, 529, 972, 1491, and 1950, and non-electric cooperatives
under Republic Act No. 6938, or international agreements to which the Philippines is a
signatory.

Section 4.103-1 of Revenue Regulations No. 7-95

SEC. 4.103-1. Exemptions. – (A) In general. – 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.

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.

The CIR contended that under Section 24 of Republic Act No. 7916, a special law, all
businesses and establishments within the ECOZONE were to remit to the government five
percent (5%) of their gross income earned within the zone, in lieu of all taxes, including
VAT. This placed Toshiba within the ambit of Section 103(q) of the Tax Code of 1977, as
amended, which exempted from VAT the transactions that were exempted under special
laws. Following Section 4.103-1(A) of Revenue Regulations No. 7-95, the VAT-exemption
of Toshiba meant that its sale of goods was not subject to output VAT and Toshiba as
seller was not allowed any tax credit on the input VAT it had previously paid.

On January 17, 2001, the CTA issued a Resolution 28 denying both Motions for
Reconsideration of Toshiba and the CIR.

The CTA took note that the pieces of evidence referred to by Toshiba in its Motion for
Reconsideration were insufficient substantiation, being mere schedules of input VAT
payments it had purportedly paid for the first and second quarters of 1997. While the CTA
gives credence to the report of its commissioned certified public accountant (CPA), it does
not render its decision based on the findings of the said CPA alone. The CTA has its own
CPA and the tax court itself conducts an investigation/examination of the documents
presented. The CTA stood by its earlier disallowance of the amount of ₱1,887,545.65 as
tax credit/refund because it was not supported by VAT invoices and/or official
receipts.1avvphi1

The CTA refused to consider the argument that Toshiba was not entitled to a tax
credit/refund under Section 24 of Republic Act No. 7916 because it was only raised by the
CIR for the first time in his Motion for Reconsideration. Also, contrary to the assertions of
the CIR, the CTA held that Section 23, and not Section 24, of Republic Act No. 7916,
applied to Toshiba. According to Section 23 of Republic Act No. 7916 –

SECTION 23. Fiscal Incentives. – Business establishments operating within the ECOZONES
shall be entitled to the fiscal incentives as provided for under Presidential Decree No. 66,
the law creating the Export Processing Zone Authority, or those provided under Book VI
of Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987.

Furthermore, tax credits for exporters using local materials as inputs shall enjoy the
benefits provided for in the Export Development Act of 1994.

Among the fiscal incentives granted to PEZA-registered enterprises by the Omnibus

Investments Code of 1987 was the income tax holiday, to wit –

Art. 39. Incentives to Registered Enterprises. – All registered enterprises shall be granted
the following incentives to the extent engaged in a preferred area of investment:

(a) Income Tax Holiday. —

 (1) For six (6) years from commercial operation for pioneer firms and four (4)
years for non-pioneer firms, new registered firms shall be fully exempt from
income taxes levied by the national government. Subject to such guidelines
as may be prescribed by the Board, the income tax exemption will be extended
for another year in each of the following cases:

(i) The project meets the prescribed ratio of capital equipment to

number of workers set by the Board;

(ii) Utilization of indigenous raw materials at rates set by the Board;

(iii) The net foreign exchange savings or earnings amount to at least

US$500,000.00 annually during the first three (3) years of operation.

The preceding paragraph notwithstanding, no registered pioneer firm may

avail of this incentive for a period exceeding eight (8) years.

(2) For a period of three (3) years from commercial operation, registered
expanding firms shall be entitled to an exemption from income taxes levied
by the National Government proportionate to their expansion under such
terms and conditions as the Board may determine: Provided, however, That
during the period within which this incentive is availed of by the expanding
firm it shall not be entitled to additional deduction for incremental labor
expense.

(3) The provision of Article 7(14) notwithstanding, registered firms shall not
be entitled to any extension of this incentive.

The CTA pointed out that Toshiba availed itself of the income tax holiday under the
Omnibus Investments Code of 1987, so Toshiba was exempt only from income tax but not
from other taxes such as VAT. As a result, Toshiba was liable for output VAT on its export
sales, but at zero percent (0%) rate, and entitled to the credit/refund of the input VAT
paid on its purchases of goods and services relative to such zero-rated export sales.

Unsatisfied, the CIR filed a Petition for Review29 with the Court of Appeals, docketed as
CA-G.R. SP No. 63047.

In its Decision dated August 29, 2002, the Court of Appeals granted the appeal of the CIR,
and reversed and set aside the Decision dated October 16, 2000 and the Resolution dated
January 17, 2001 of the CTA. The appellate court ruled that Toshiba was not entitled to
the refund of its alleged unused input VAT payments because it was a tax-exempt entity
under Section 24 of Republic Act No. 7916. As a PEZA-registered corporation, Toshiba was
liable for remitting to the national government the five percent (5%) preferential rate on
its gross income earned within the ECOZONE, in lieu of all other national and local taxes,
including VAT.

The Court of Appeals further adjudged that the export sales of Toshiba were VAT-exempt,
not zero-rated, transactions. The appellate court found that the Answer filed by the CIR
in CTA Case No. 5762 did not contain any admission that the export sales of Toshiba were
zero-rated transactions under Section 100(a)(2)(A) of the Tax Code of 1977, as amended.
At the least, what was admitted by the CIR in said Answer was that the Tax Code
provisions cited in the Petition for Review of Toshiba in CTA Case No. 5762 were correct.
As to the Joint Stipulation of Facts and Issues filed by the parties in CTA Case No. 5762,
which stated that Toshiba was subject to zero percent (0%) VAT on its export sales, the
appellate court declared that the CIR signed the said pleading through palpable mistake.
This palpable mistake in the stipulation of facts should not be taken against the CIR, for
to do otherwise would result in suppressing the truth through falsehood. In addition, the
State could not be put in estoppel by the mistakes or errors of its officials or agents.

Given that Toshiba was a tax-exempt entity under Republic Act No. 7916, a special law,
the Court of Appeals concluded that the export sales of Toshiba were VAT-exempt
transactions under Section 109(q) of the Tax Code of 1997, formerly Section 103(q) of
the Tax Code of 1977. Therefore, Toshiba could not claim refund of its input VAT payments
on its domestic purchases of goods and services.

The Court of Appeals decreed at the end of its August 29, 2002 Decision –

WHEREFORE, premises considered, the appealed decision of the Court of Tax Appeals in
CTA Case No. 5762, is hereby REVERSED and SET ASIDE, and a new one is hereby
rendered finding [Toshiba], being a tax exempt entity under R.A. No. 7916, not entitled
to refund the VAT payments made in its domestic purchases of goods and services.30

Toshiba filed a Motion for Reconsideration31 of the aforementioned Decision, anchored on

the following arguments: (a) the CIR never raised as an issue before the CTA that Toshiba
was tax-exempt under Section 24 of Republic Act No. 7916; (b) Section 24 of Republic
Act No. 7916, subjecting the gross income earned by a PEZA-registered enterprise within
the ECOZONE to a preferential rate of five percent (5%), in lieu of all taxes, did not apply
to Toshiba, which availed itself of the income tax holiday under Section 23 of the same
statute; (c) the conclusion of the CTA that the export sales of Toshiba were zero-rated
was supported by substantial evidence, other than the admission of the CIR in the Joint
Stipulation of Facts and Issues; and (d) the judgment of the CTA granting the refund of
the input VAT payments was supported by substantial evidence and should not have been
set aside by the Court of Appeals.

In a Resolution dated February 19, 2003, the Court of Appeals denied the Motion for
Reconsideration of Toshiba since the arguments presented therein were mere reiterations
of those already passed upon and found to be without merit by the appellate court in its
earlier Decision. The Court of Appeals, however, mentioned that it was incorrect for
Toshiba to say that the issue of the applicability of Section 24 of Republic Act No. 7916
was only raised for the first time on appeal before the appellate court. The said issue was
adequately raised by the CIR in his Motion for Reconsideration before the CTA, and was
even ruled upon by the tax court.

Hence, Toshiba filed the instant Petition for Review with the following assignment of errors
–

5.1 THE HONORABLE COURT OF APPEALS ERRED WHEN IT RULED THAT [TOSHIBA],
BEING A PEZA-REGISTERED ENTERPRISE, IS EXEMPT FROM VAT UNDER SECTION
24 OF R.A. 7916, AND FURTHER HOLDING THAT [TOSHIBA’S] EXPORT SALES ARE
EXEMPT TRANSACTIONS UNDER SECTION 109 OF THE TAX CODE.

5.2 THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED TO DISMISS

OUTRIGHT AND GAVE DUE COURSE TO [CIR’S] PETITION NOTWITHSTANDING
[CIR’S] FAILURE TO ADEQUATELY RAISE IN ISSUE DURING THE TRIAL IN THE
COURT OF TAX APPEALS THE APPLICABILITY OF SECTION 24 OF R.A. 7916 TO
[TOSHIBA’S] CLAIM FOR REFUND.

5.3 THE HONORABLE COURT OF APPEALS ERRED WHEN [IT] RULED THAT THE
COURT OF TAX APPEALS’ FINDINGS, WITH REGARD [TOSHIBA’S] EXPORT SALES
BEING ZERO RATED SALES FOR VAT PURPOSES, WERE BASED MERELY ON THE
ADMISSIONS MADE BY [CIR’S] COUNSEL AND NOT SUPPORTED BY SUBSTANTIAL
EVIDENCE.

5.4 THE HONORABLE COURT OF APPEALS ERRED WHEN IT REVERSED THE

DECISION OF THE COURT OF TAX APPEALS GRANTING [TOSHIBA’S] CLAIM FOR
REFUND[;]32

and the following prayer –

WHEREFORE, premises considered, Petitioner TOSHIBA INFORMATION EQUIPMENT

(PHILS.), INC. most respectfully prays that the decision and resolution of the Honorable
Court of Appeals, reversing the decision of the CTA in CTA Case No. 5762, be set aside
and further prays that a new one be rendered AFFIRMING AND UPHOLDING the Decision
of the CTA promulgated on October 16, 2000 in CTA Case No. 5762.

Other reliefs, which the Honorable Court may deem just and equitable under the
circumstances, are likewise prayed for.33

The Petition is impressed with merit.

The CIR did not timely raise before the CTA the issues on the VAT-exemptions of Toshiba
and its export sales.

Upon the failure of the CIR to timely plead and prove before the CTA the defenses or
objections that Toshiba was VAT-exempt under Section 24 of Republic Act No. 7916, and
that its export sales were VAT-exempt transactions under Section 103(q) of the Tax Code
of 1977, as amended, the CIR is deemed to have waived the same.

During the pendency of CTA Case No. 5762, the proceedings before the CTA were
governed by the Rules of the Court of Tax Appeals,34 while the Rules of Court were applied
suppletorily.35

Rule 9, Section 1 of the Rules of Court provides:

SECTION 1. Defenses and objections not pleaded. – Defenses and objections not pleaded
either in a motion to dismiss or in the answer are deemed waived. However, when it
appears from the pleadings or the evidence on record that the court has no jurisdiction
over the subject matter, that there is another action pending between the same parties
for the same cause, or that the action is barred by a prior judgment or by statute of
limitations, the court shall dismiss the claim.

The CIR did not argue straight away in his Answer in CTA Case No. 5762 that Toshiba had
no right to the credit/refund of its input VAT payments because the latter was VAT-exempt
and its export sales were VAT-exempt transactions. The Pre-Trial Brief36 of the CIR was
equally bereft of such allegations or arguments. The CIR passed up the opportunity to
prove the supposed VAT-exemptions of Toshiba and its export sales when the CIR chose
not to present any evidence at all during the trial before the CTA. 37 He missed another
opportunity to present the said issues before the CTA when he waived the submission of
a Memorandum.38 The CIR had waited until the CTA already rendered its Decision dated
October 16, 2000 in CTA Case No. 5762, which granted the claim for credit/refund of
Toshiba, before asserting in his Motion for Reconsideration that Toshiba was VAT-exempt
and its export sales were VAT-exempt transactions.

The CIR did not offer any explanation as to why he did not argue the VAT-exemptions of
Toshiba and its export sales before and during the trial held by the CTA, only doing so in
his Motion for Reconsideration of the adverse CTA judgment. Surely, said defenses or
objections were already available to the CIR when the CIR filed his Answer to the Petition
for Review of Toshiba in CTA Case No. 5762.

It is axiomatic in pleadings and practice that no new issue in a case can be raised in a
pleading which by due diligence could have been raised in previous pleadings.39 The Court
cannot simply grant the plea of the CIR that the procedural rules be relaxed based on the
general averment of the interest of substantive justice. It should not be forgotten that the
first and fundamental concern of the rules of procedure is to secure a just determination
of every action.40 Procedural rules are designed to facilitate the adjudication of cases.
Courts and litigants alike are enjoined to abide strictly by the rules. While in certain
instances, the Court allows a relaxation in the application of the rules, it never intends to
forge a weapon for erring litigants to violate the rules with impunity. The liberal
interpretation and application of rules apply only in proper cases of demonstrable merit
and under justifiable causes and circumstances. While it is true that litigation is not a
game of technicalities, it is equally true that every case must be prosecuted in accordance
with the prescribed procedure to ensure an orderly and speedy administration of justice.
Party litigants and their counsel are well advised to abide by, rather than flaunt, procedural
rules for these rules illumine the path of the law and rationalize the pursuit of justice.41

The CIR judicially admitted that Toshiba was VAT-registered and its export sales were
subject to VAT at zero percent (0%) rate.

More importantly, the arguments of the CIR that Toshiba was VAT-exempt and the latter’s
export sales were VAT-exempt transactions are inconsistent with the explicit admissions
of the CIR in the Joint Stipulation of Facts and Issues (Joint Stipulation) that Toshiba was
a registered VAT entity and that it was subject to zero percent (0%) VAT on its export
sales.

The Joint Stipulation was executed and submitted by Toshiba and the CIR upon being
advised to do so by the CTA at the end of the pre-trial conference held on June 23,
1999.42 The approval of the Joint Stipulation by the CTA, in its Resolution43 dated July 12,
1999, marked the culmination of the pre-trial process in CTA Case No. 5762.

Pre-trial is an answer to the clarion call for the speedy disposition of cases. Although it
was discretionary under the 1940 Rules of Court, it was made mandatory under the 1964
Rules and the subsequent amendments in 1997. It has been hailed as "the most important
procedural innovation in Anglo-Saxon justice in the nineteenth century."44

The nature and purpose of a pre-trial have been laid down in Rule 18, Section 2 of the
Rules of Court:

SECTION 2. Nature and purpose. – The pre-trial is mandatory. The court shall consider:

(a) The possibility of an amicable settlement or of a submission to alternative modes

of dispute resolution;

(b) The simplification of the issues;

(c) The necessity or desirability of amendments to the pleadings;

(d) The possibility of obtaining stipulations or admissions of facts and of documents

to avoid unnecessary proof;

(e) The limitation of the number of witnesses;

(f) The advisability of a preliminary reference of issues to a commissioner;

(g) The propriety of rendering judgment on the pleadings, or summary judgment,

or of dismissing the action should a valid ground therefor be found to exist;

(h) The advisability or necessity of suspending the proceedings; and

(i) Such other matters as may aid in the prompt disposition of the action. (Emphasis
ours.)

The admission having been made in a stipulation of facts at pre-trial by the parties, it
must be treated as a judicial admission.45 Under Section 4, Rule 129 of the Rules of Court,
a judicial admission requires no proof. The admission may be contradicted only by a
showing that it was made through palpable mistake or that no such admission was made.
The Court cannot lightly set aside a judicial admission especially when the opposing party
relied upon the same and accordingly dispensed with further proof of the fact already
admitted. An admission made by a party in the course of the proceedings does not require
proof.46

In the instant case, among the facts expressly admitted by the CIR and Toshiba in their
CTA-approved Joint Stipulation are that Toshiba "is a duly registered value-added tax
entity in accordance with Section 107 of the Tax Code, as amended[,]" 47 that "is subject
to zero percent (0%) value-added tax on its export sales in accordance with then Section
100(a)(2)(A) of the Tax Code, as amended."48 The CIR was bound by these admissions,
which he could not eventually contradict in his Motion for Reconsideration of the CTA
Decision dated October 16, 2000, by arguing that Toshiba was actually a VAT-exempt
entity and its export sales were VAT-exempt transactions. Obviously, Toshiba could not
have been subject to VAT and exempt from VAT at the same time. Similarly, the export
sales of Toshiba could not have been subject to zero percent (0%) VAT and exempt from
VAT as well.

The CIR cannot escape the binding effect of his judicial admissions.

The Court disagrees with the Court of Appeals when it ruled in its Decision dated August
29, 2002 that the CIR could not be bound by his admissions in the Joint Stipulation
because (1) the said admissions were "made through palpable mistake" 49 which, if
countenanced, "would result in falsehood, unfairness and injustice"; 50 and (2) the State
could not be put in estoppel by the mistakes of its officials or agents. This ruling of the
Court of Appeals is rooted in its conclusion that a "palpable mistake" had been committed
by the CIR in the signing of the Joint Stipulation. However, this Court finds no evidence of
the commission of a mistake, much more, of a palpable one.

The CIR does not deny that his counsel, Atty. Joselito F. Biazon, Revenue Attorney II of
the BIR, signed the Joint Stipulation, together with the counsel of Toshiba, Atty. Patricia
B. Bisda. Considering the presumption of regularity in the performance of official
duty,51 Atty. Biazon is presumed to have read, studied, and understood the contents of
the Joint Stipulation before he signed the same. It rests on the CIR to present evidence
to the contrary.

Yet, the Court observes that the CIR himself never alleged in his Motion for
Reconsideration of the CTA Decision dated October 16, 2000, nor in his Petition for Review
before the Court of Appeals, that Atty. Biazon committed a mistake in signing the Joint
Stipulation. Since the CIR did not make such an allegation, neither did he present any
proof in support thereof. The CIR began to aver the existence of a palpable mistake only
after the Court of Appeals made such a declaration in its Decision dated August 29, 2002.

Despite the absence of allegation and evidence by the CIR, the Court of Appeals, on its
own, concluded that the admissions of the CIR in the Joint Stipulation were due to a
palpable mistake based on the following deduction –

Scrutinizing the Answer filed by [the CIR], we rule that the Joint Stipulation of Facts and
Issues signed by [the CIR] was made through palpable mistake. Quoting paragraph 4 of
its Answer, [the CIR] states:

"4. He ADMITS the allegations contained in paragraph 5 of the petition only insofar as the
cited provisions of Tax Code is concerned, but SPECIFICALLY DENIES the rest of the
allegations therein for being mere opinions, arguments or gratuitous assertions on the
part of [Toshiba] and/or because they are mere erroneous conclusions or interpretations
of the quoted law involved, the truth of the matter being those stated hereunder

x x x x"

And paragraph 5 of the petition for review filed by [Toshiba] before the CTA states:

"5. Petitioner is subject to zero percent (0%) value-added tax on its export sales in
accordance with then Section 100(a)(2)(A) of the Tax Code x x x.

x x x x"

As we see it, nothing in said Answer did [the CIR] admit that the export sales of [Toshiba]
were indeed zero-rated transactions. At the least, what was admitted only by [the CIR]
concerning paragraph 4 of his Answer, is the fact that the provisions of the Tax Code, as
cited by [Toshiba] in its petition for review filed before the CTA were correct.52
The Court of Appeals provided no explanation as to why the admissions of the CIR in his
Answer in CTA Case No. 5762 deserved more weight and credence than those he made in
the Joint Stipulation. The appellate court failed to appreciate that the CIR, through
counsel, Atty. Biazon, also signed the Joint Stipulation; and that absent evidence to the
contrary, Atty. Biazon is presumed to have signed the Joint Stipulation willingly and
knowingly, in the regular performance of his official duties. Additionally, the Joint
Stipulation53 of Toshiba and the CIR was a more recent pleading than the Answer54 of the
CIR. It was submitted by the parties after the pre-trial conference held by the CTA, and
subsequently approved by the tax court. If there was any discrepancy between the
admissions of the CIR in his Answer and in the Joint Stipulation, the more logical and
reasonable explanation would be that the CIR changed his mind or conceded some points
to Toshiba during the pre-trial conference which immediately preceded the execution of
the Joint Stipulation. To automatically construe that the discrepancy was the result of a
palpable mistake is a wide leap which this Court is not prepared to take without substantial
basis.

The judicial admissions of the CIR in the Joint Stipulation are not intrinsically false, wrong,
or illegal, and are consistent with the ruling on the VAT treatment of PEZA-registered
enterprises in the previous Toshiba case.

There is no basis for believing that to bind the CIR to his judicial admissions in the Joint
Stipulation – that Toshiba was a VAT-registered entity and its export sales were zero-
rated VAT transactions – would result in "falsehood, unfairness and injustice." The judicial
admissions of the CIR are not intrinsically false, wrong, or illegal. On the contrary, they
are consistent with the ruling of this Court in a previous case involving the same parties,
Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.)
Inc.55 (Toshiba case), explaining the VAT treatment of PEZA-registered enterprises.

In the Toshiba case, Toshiba sought the refund of its unutilized input VAT on its purchase
of capital goods and services for the first and second quarters of 1996, based on Section
106(b) of the Tax Code of 1977, as amended.56In the Petition at bar, Toshiba is claiming
refund of its unutilized input VAT on its local purchase of goods and services which are
attributable to its export sales for the first and second quarters of 1997, pursuant to
Section 106(a), in relation to Section 100(a)(1)(A)(i) of the Tax Code of 1977, as
amended, which read –

SEC. 106. Refunds or tax credits of creditable input tax. – (a) 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
100(a)(2)(A)(i),(ii) and (b) and Section 102(b)(1) and (2), the acceptable foreign currency
exchange proceeds thereof has been duly accounted for in accordance with the regulations
of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is
engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of
goods or properties of services, and the amount of creditable input tax due or paid cannot
be directly and entirely attributed to any one of the transactions, it shall be allocated
proportionately on the basis of the volume sales.

SEC. 100. Value-added tax on sale of goods or properties. – (a) Rate and base of tax. – x
xx

xxxx

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

(A) Export sales. – The term "export sales" means:

(i) 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
Pilipnas (BSP).

Despite the difference in the legal bases for the claims for credit/refund in the Toshiba
case and the case at bar, the CIR raised the very same defense or objection in both – that
Toshiba and its transactions were VAT-exempt. Hence, the ruling of the Court in the former
case is relevant to the present case.

At the outset, the Court establishes that there is a basic distinction in the VAT-exemption
of a person and the VAT-exemption of a transaction –

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), 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 x x
x.57

In effect, the CIR is opposing the claim for credit/refund of input VAT of Toshiba on two
grounds: (1) that Toshiba was a VAT-exempt entity; and (2) that its export sales were
VAT-exempt transactions.

It is now a settled rule that based on the Cross Border Doctrine, PEZA-registered
enterprises, such as Toshiba, are VAT-exempt and no VAT can be passed on to them. The
Court explained in the Toshiba case that –

PEZA-registered enterprise, 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.

xxxx

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.

Applying said doctrine to the sale of goods, properties, and services to and from the
ECOZONES, 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 latter’s 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. x x x.58

The Court, nevertheless, noted in the Toshiba case that the rule which considers any sale
by a supplier from the Customs Territory to a PEZA-registered enterprise as export sale,
which should not be burdened by output VAT, was only clearly established on October 15,
1999, upon the issuance by the BIR of RMC No. 74-99. Prior to October 15, 1999, whether
a PEZA-registered enterprise was exempt or subject to VAT depended on the type of fiscal
incentives availed of by the said enterprise.59 The old rule, then followed by the BIR, and
recognized and affirmed by the CTA, the Court of Appeals, and this Court, was described
as follows –

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.

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. 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 latter’s type or class of PEZA registration; and, thus, affirming
the nature of a PEZA-registered or an ECOZONE enterprise as a VAT-exempt entity.60

To recall, Toshiba is herein claiming the refund of unutilized input VAT payments on its
local purchases of goods and services attributable to its export sales for the first and
second quarters of 1997. Such export sales took place before October 15, 1999, when the
old rule on the VAT treatment of PEZA-registered enterprises still applied. Under this old
rule, it was not only possible, but even acceptable, for Toshiba, availing itself of the income
tax holiday option under Section 23 of Republic Act No. 7916, in relation to Section 39 of
the Omnibus Investments Code of 1987, to be subject to VAT, both indirectly (as
purchaser to whom the seller shifts the VAT burden) and directly (as seller whose sales
were subject to VAT, either at ten percent [10%] or zero percent [0%]).

A VAT-registered seller of goods and/or services who made zero-rated sales can claim tax
credit or refund of the input VAT paid on its purchases of goods, properties, or services
relative to such zero-rated sales, in accordance with Section 4.102-2 of Revenue
Regulations No. 7-95, which provides –

Sec. 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.

The BIR, as late as July 15, 2003, when it issued RMC No. 42-2003, accepted applications
for credit/refund of input VAT on purchases prior to RMC No. 74-99, filed by PEZA-
registered enterprises which availed themselves of the income tax holiday. The BIR
answered Question Q-5(1) of RMC No. 42-2003 in this wise –

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?

xxxx

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. (Emphases ours.)

Consequently, the CIR cannot herein insist that all PEZA-registered enterprises are VAT-
exempt in every instance. RMC No. 42-2003 contains an express acknowledgement by the
BIR that prior to RMC No. 74-99, there were PEZA-registered enterprises liable for VAT
and entitled to credit/refund of input VAT paid under certain conditions.

This Court already rejected in the Toshiba case the argument that sale transactions of a
PEZA-registered enterprise were VAT-exempt under Section 103(q) of the Tax Code of
1977, as amended, ratiocinating that –

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, 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.61 (Emphasis ours.)

In light of the judicial admissions of Toshiba, the CTA correctly confined itself to the other
factual issues submitted for resolution by the parties.

In accord with the admitted facts – that Toshiba was a VAT-registered entity and that its
export sales were zero-rated transactions – the stated issues in the Joint Stipulation were
limited to other factual matters, particularly, on the compliance by Toshiba with the rest
of the requirements for credit/refund of input VAT on zero-rated transactions. Thus, during
trial, Toshiba concentrated on presenting evidence to establish that it incurred
₱3,875,139.65 of input VAT for the first and second quarters of 1997 which were directly
attributable to its export sales; that said amount of input VAT were not carried over to the
succeeding quarters; that said amount of input VAT has not been applied or offset against
any output VAT liability; and that said amount of input VAT was properly substantiated by
official receipts and invoices.

After what truly appears to be an exhaustive review of the evidence presented by Toshiba,
the CTA made the following findings –

(1) The amended quarterly VAT returns of Toshiba for 1997 showed that it made no
other sales, except zero-rated export sales, for the entire year, in the sum of
 ₱2,083,305,000.00 for the first quarter and ₱5,411,372,000.00 for the second
quarter. That being the case, all input VAT allegedly incurred by Toshiba for the first
two quarters of 1997, in the amount of ₱3,875,139.65, was directly attributable to
its zero-rated sales for the same period.

(2) Toshiba did carry-over the ₱3,875,139.65 input VAT it reportedly incurred during
the first two quarters of 1997 to succeeding quarters, until the first quarter of 1999.
Despite the carry-over of the subject input VAT of ₱3,875,139.65, the claim of
Toshiba was not affected because it later on deducted the said amount as "VAT
Refund/TCC Claimed" from its total available input VAT of ₱6,841,468.17 for the
first quarter of 1999.

(3) Still, the CTA could not allow the credit/refund of the total input VAT of
₱3,875,139.65 being claimed by Toshiba because not all of said amount was actually
incurred by the company and duly substantiated by invoices and official receipts.
From the ₱3,875,139.65 claim, the CTA deducted the amounts of (a) ₱189,692.92,
which was in excess of the ₱3,685,446.23 input VAT Toshiba originally claimed in
its application for credit/refund filed with the DOF One-Stop Shop; (b) ₱396,882.58,
which SGV & Co., the commissioned CPA, disallowed for being improperly
substantiated, i.e., supported only by provisional acknowledgement receipts, or by
documents other than official receipts, or not supported by TIN or TIN VAT or by
any document at all; (c) ₱1,887,545.65, which the CTA itself verified as not being
substantiated in accordance with Section 4.104-562 of Revenue Regulations No. 7-
95, in relation to Sections 10863 and 23864 of the Tax Code of 1977, as amended;
and (d) ₱15,736.42, which Toshiba already applied to its output VAT liability for the
fourth quarter of 1998.

(4) Ultimately, Toshiba was entitled to the credit/refund of unutilized input VAT
payments attributable to its zero-rated sales in the amounts of ₱1,158,016.82 and
₱227,265.26, for the first and second quarters of 1997, respectively, or in the total
amount of ₱1,385,282.08.

Since the aforementioned findings of fact of the CTA are borne by substantial evidence on
record, unrefuted by the CIR, and untouched by the Court of Appeals, they are given
utmost respect by this Court.

The Court will not lightly set aside 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.65 In Barcelon, Roxas Securities, Inc. (now known as
UBP Securities, Inc.) v. Commissioner of Internal Revenue,66 this Court more explicitly
pronounced –

Jurisprudence has consistently shown that this Court accords the findings of fact by the
CTA with the highest respect. In Sea-Land Service Inc. v. Court of Appeals [G.R. No.
122605, 30 April 2001, 357 SCRA 441, 445-446], this Court recognizes that the Court of
Tax Appeals, which by the very nature of its function is dedicated exclusively to the
consideration of tax problems, has necessarily developed an expertise on the subject, and
its conclusions will not be overturned unless there has been an abuse or improvident
exercise of authority. Such findings can only be disturbed on appeal if they are not
supported by substantial evidence or there is a showing of gross error or abuse on the
part of the Tax Court. In the absence of any clear and convincing proof to the contrary,
this Court must presume that the CTA rendered a decision which is valid in every respect.

WHEREFORE, the assailed Decision dated August 29, 2002 and the Resolution dated
February 19, 2003 of the Court of Appeals in CA-G.R. SP No. 63047 are REVERSED and
SET ASIDE, and the Decision dated October 16, 2000 of the Court of Tax Appeals in CTA
Case No. 5762 is REINSTATED. Respondent Commissioner of Internal Revenue is
ORDERED to REFUND or, in the alternative, to ISSUE a TAX CREDIT CERTIFICATE in favor
of petitioner Toshiba Information Equipment (Phils.), Inc. in the amount of ₱1,385,282.08,
representing the latter’s unutilized input VAT payments for the first and second quarters
of 1997. No pronouncement as to costs.

SO ORDERED.
 [G.R. No. 125355. March 30, 2000]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS

and COMMONWEALTH MANAGEMENT AND SERVICES
CORPORATION, respondents. Court

DECISION

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.

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:

"Taxable sale/receipt P1,679,155.00

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 P 351,831.01"[3]

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

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

On September 29,1992, COMASERCO filed with the Court of Tax Appeals[4] 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 id 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, 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: Lexj uris

"WHEREFORE, in view of the foregoing, judgment is hereby rendered

REVERSING and SETTING ASIDE the questioned Decision promulgated on 22
June 1995. The assessment for deficiency value-added tax for the taxable year
1988 inclusive of surcharge, interest and penalty charges are ordered
CANCELLED for lack of legal and factual basis."[6]

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

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

On August 7, 1996, we required respondent COMASERCO to file comment on the petition,

and on September 26, 1996, COMASERCO complied with the resolution.[8]

We give due course to the petition.

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

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

We agree with the Commissioner.

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

"Section 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. Jjj uris

"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" incorporated in the 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.

Section 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 of realizing profit, any income or profit generated by the entity in the conduct of
its activities was subject to income tax. lex

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.

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. Jksm

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.
COMMISSIONER OF G.R. No. 153205
INTERNAL REVENUE,
Petitioner,

- versus –

BURMEISTER AND WAIN

SCANDINAVIAN CONTRACTOR
MINDANAO, INC., Promulgated:
Respondent.
January 22, 2007

x----------------------------------------------------------------------------------------x
DECISION
CARPIO, J.:
The Case

This petition for review[1] seeks to set aside the 16 April 2002 Decision[2] of the Court of
Appeals in CA-G.R. SP No. 66341 affirming the 8 August 2001 Decision[3] 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 x[5]

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-
96[7] 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. 023-95[17] and VAT Ruling No.
003-99,[18] which held that respondents services are subject to 0% VAT and which
respondent invoked in applying for refund of the output VAT.

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

(b) Transactions subject to zero-rate. ― The following services performed in

the Philippines by VAT-registered persons shall be subject to 0%:

(1) Processing, manufacturing or repacking goods for other persons

doing business outside the Philippines which goods are subsequently
exported, where the services are paid for in acceptable 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 rules[20] to pay in acceptable foreign currency for their purchase of goods or
services from the Philippines. In a domestic transaction, where the provider and recipient
of services are both doing business in the Philippines, the BSP cannot require any party
to make payment in foreign currency.

Services covered by Section 102(b) (1) and (2) are in the nature of export sales
since the payer-recipient of services is doing business outside the Philippines. Under BSP
rules,[21] the proceeds of export sales must be reported to
the BangkoSentral 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 Express[26] 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 x[27] (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. 023-95[29] insofar as it held that the
services being rendered by BWSCMI is subject to VAT at zero percent (0%). Respondents
reliance on these BIR rulings binds petitioner.
Petitioners filing of his Answer before the CTA challenging respondents claim for refund
effectively serves as a revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95.
However, such revocation cannot be given retroactive effect since it will prejudice
respondent. Changing respondents status will deprive respondent of a refund of a
substantial amount representing excess output tax.[30] Section 246 of the Tax Code
provides that any revocation of a ruling by the Commissioner of Internal Revenue shall
not be given retroactive application if the revocation will prejudice the taxpayer. Further,
there is no showing of the existence of any of the exceptions enumerated in Section 246
of the Tax Code for the retroactive application of such revocation.
However, upon the filing of petitioners Answer dated 2 March 2000 before the CTA
contesting respondents claim for refund, respondents services shall be subject to the
regular 10% VAT.[31] Such filing is deemed a revocation of VAT Ruling No. 003-99 and BIR
Ruling No. 023-95.
WHEREFORE, the Court DENIES the petition. SO ORDERED.
COMMISSIONER OF G.R. No. 178697
INTERNAL REVENUE,
Petitioner,
Pre

- versus -

SONY PHILIPPINES, INC.,

Promulgated:
Respondent.
November 17, 2010

X ---------------------------------------------------------------------------------------X
DECISION
MENDOZA, J.:

This petition for review on certiorari seeks to set aside the May 17, 2007 Decision
and the July 5, 2007 Resolution of the Court of Tax Appeals En Banc[1] (CTA-EB), in C.T.A.
EB No. 90, affirming the October 26, 2004 Decision of the CTA-First Division[2] which, in
turn, partially granted the petition for review of respondent Sony Philippines,
Inc. (Sony). The CTA-First Division decision cancelled the deficiency assessment issued
by petitioner Commissioner of Internal Revenue (CIR)against Sony for Value Added
Tax (VAT) but upheld the deficiency assessment for expanded withholding tax (EWT) in
the amount of P1,035,879.70 and the penalties for late remittance of internal revenue
taxes in the amount of P1,269, 593.90.[3]

THE FACTS:

On November 24, 1998, the CIR issued Letter of Authority No. 000019734 (LOA
19734) authorizing certain revenue officers to examine Sonys books of accounts and other
accounting records regarding revenue taxes for the period 1997 and unverified prior
years. On December 6, 1999, a preliminary assessment for 1997 deficiency taxes and
penalties was issued by the CIR which Sony protested. Thereafter, acting on the protest,
the CIR issued final assessment notices, the formal letter of demand and the details of
discrepancies.[4] Said details of the deficiency taxes and penalties for late remittance of
internal revenue taxes are as follows:
DEFICIENCY VALUE -ADDED TAX
(VAT)
(Assessment No. ST-VAT-97-0124-
2000)
Basic Tax Due P 7,958,700.00
Add: Penalties
Interest up to 3-31-2000 P 3,157,314.41
Compromise 25,000.00 3,182,314.41
Deficiency VAT Due P 11,141,014.41
DEFICIENCY EXPANDED
WITHHOLDING TAX (EWT)
(Assessment No. ST-EWT-97-0125-
2000)
Basic Tax Due P 1,416,976.90
Add: Penalties
Interest up to 3-31-2000 P 550,485.82
Compromise 25,000.00 575,485.82
Deficiency EWT Due P 1,992,462.72

DEFICIENCY OF VAT ON ROYALTY

PAYMENTS
(Assessment No. ST-LR1-97-0126-
2000)
Basic Tax Due P
Add: Penalties
Surcharge P 359,177.80
Interest up to 3-31-2000 87,580.34
Compromise 16,000.00 462,758.14
Penalties Due P 462,758.14

LATE REMITTANCE OF FINAL

WITHHOLDING TAX
(Assessment No. ST-LR2-97-0127-
2000)
Basic Tax Due P
Add: Penalties
Surcharge P 1,729,690.71
Interest up to 3-31-2000 508,783.07
Compromise 50,000.00 2,288,473.78
Penalties Due P 2,288,473.78

LATE REMITTANCE OF INCOME

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

GRAND TOTAL P 15,895,632.65[5]

Sony sought re-evaluation of the aforementioned assessment by filing a protest on

February 2, 2000. Sony submitted relevant documents in support of its protest on the
16th of that same month.[6]

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

After trial, the CTA-First Division disallowed the deficiency VAT assessment because
the subsidized advertising expense paid by Sony which was duly covered by a VAT invoice
resulted in an input VAT credit. As regards the EWT, the CTA-First Division maintained the
deficiency EWT assessment on Sonys motor vehicles and on professional fees paid to
general professional partnerships. It also assessed the amounts paid to sales agents as
commissions with five percent (5%) EWT pursuant to Section 1(g) of Revenue Regulations
No. 6-85. The CTA-First Division, however, disallowed the EWT assessment on rental
expense since it found that the total rental deposit of P10,523,821.99 was incurred from
January to March 1998 which was again beyond the coverage of LOA 19734. Except for
the compromise penalties, the CTA-First Division also upheld the penalties for the late
payment of VAT on royalties, for late remittance of final withholding tax on royalty as of
December 1997 and for the late remittance of EWT by some of Sonys branches.[8] In sum,
the CTA-First Division partly granted Sonys petition by cancelling the deficiency VAT
assessment but upheld a modified deficiency EWT assessment as well as the
penalties. Thus, the dispositive portion reads:

WHEREFORE, the petition for review is hereby PARTIALLY GRANTED.

Respondent is ORDERED to CANCEL and WITHDRAW the deficiency
assessment for value-added tax for 1997 for lack of merit. However, the
deficiency assessments for expanded withholding tax and penalties for late
remittance of internal revenue taxes are UPHELD.
 Accordingly, petitioner is DIRECTED to PAY the respondent the
deficiency expanded withholding tax in the amount of P1,035,879.70 and the
following penalties for late remittance of internal revenue taxes in the sum
of P1,269,593.90:

1. VAT on Royalty P 429,242.07

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

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

SO ORDERED.[9]

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

A. The Honorable Court committed reversible error in holding that

petitioner is not liable for the deficiency VAT in the amount
of P11,141,014.41;

B. The Honorable court committed reversible error in holding that the

commission expense in the amount of P2,894,797.00 should be
subjected to 5% withholding tax instead of the 10% tax rate;

C. The Honorable Court committed a reversible error in holding that the

withholding tax assessment with respect to the 5% withholding tax on
rental deposit in the amount of P10,523,821.99 should be cancelled;
and

D. The Honorable Court committed reversible error in holding that the

remittance of final withholding tax on royalties covering the period
January to March 1998 was filed on time.[10]

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

1. Whether or not respondent (Sony) is liable for the deficiency VAT in

the amount of P11,141,014.41;
 2. Whether or not the commission expense in the amount
of P2,894,797.00 should be subjected to 10% withholding tax instead of
the 5% tax rate;

3. Whether or not the withholding assessment with respect to the 5%

withholding tax on rental deposit in the amount of P10,523,821.99 is
proper; and

4. Whether or not the remittance of final withholding tax on royalties

covering the period January to March 1998 was filed outside of time.[11]

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

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

GROUNDS FOR THE ALLOWANCE OF THE PETITION

THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS NOT

LIABLE FOR DEFICIENCY VAT IN THE AMOUNT OF PHP11,141,014.41.

II

AS TO RESPONDENTS DEFICIENCY EXPANDED WITHHOLDING

TAX IN THE AMOUNT OF PHP1,992,462.72:

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

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

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

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

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

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

The Court finds no merit in the petition.

The CIR insists that LOA 19734, although it states the period 1997 and unverified
prior years, should be understood to mean the fiscal year ending in March 31,
1998.[14] The Court cannot agree.

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

SEC. 6. Power of the Commissioner to Make Assessments

and Prescribe Additional Requirements for Tax Administration and
Enforcement.

(A)Examination of Returns and Determination of tax Due. After a return

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

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

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

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

3. A Letter of Authority should cover a taxable period not exceeding

one taxable year. The practice of issuing L/As covering audit of unverified
prior years is hereby prohibited. If the audit of a taxpayer shall include
more than one taxable period, the other periods or years shall be
specifically indicated in the L/A.[16] [Emphasis supplied]

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

The CIR contends that since Sonys advertising expense was reimbursed by SIS, the
former never incurred any advertising expense. As a result, Sony is not entitled to a tax
credit. At most, the CIR continues, the said advertising expense should be for the account
of SIS, and not Sony.[17]

The Court is not persuaded. As aptly found by the CTA-First Division and later
affirmed by the CTA-EB, Sonys deficiency VAT assessment stemmed from the CIRs
disallowance of the input VAT credits that should have been realized from the advertising
expense of the latter.[18] It is evident under Section 110[19] of the 1997 Tax Code that an
advertising expense duly covered by a VAT invoice is a legitimate business expense. This
is confirmed by no less than CIRs own witness, Revenue Officer Antonio Aluquin.[20] There
is also no denying that Sony incurred advertising expense. Aluquin testified that
advertising companies issued invoices in the name of Sony and the latter paid for the
same.[21] Indubitably, Sony incurred and paid for advertising expense/ services. Where
the money came from is another matter all together but will definitely not change said
fact.

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

The fact that due to adverse economic conditions, Sony-Singapore has

granted to our client a subsidy equivalent to the latters advertising expenses
will not affect the validity of the input taxes from such expenses. Thus, at the
most, this is an additional income of our client subject to income tax. We
submit further that our client is not subject to VAT on the subsidy income as
this was not derived from the sale of goods or services.[22]
 Insofar as the above-mentioned subsidy may be considered as income and,
therefore, subject to income tax, the Court agrees. However, the Court does not agree
that the same subsidy should be subject to the 10% VAT. To begin with, the said subsidy
termed by the CIR as reimbursement was not even exclusively earmarked for Sonys
advertising expense for it was but an assistance or aid in view of Sonys dire or adverse
economic conditions, and was only equivalent to the latters (Sonys) advertising expenses.

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

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

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

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

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

Regarding the deficiency EWT assessment, more particularly Sonys commission

expense, the CIR insists that said deficiency EWT assessment is subject to the ten percent
(10%) rate instead of the five percent (5%) citing Revenue Regulation No. 2-98 dated
April 17, 1998.[24] The said revenue regulation provides that the 10% rate is applied when
the recipient of the commission income is a natural person. According to the CIR, Sonys
schedule of Selling, General and Administrative expenses shows the commission expense
as commission/dealer salesman incentive, emphasizing the word salesman.

On the other hand, the application of the five percent (5%) rate by the CTA-First
Division is based on Section 1(g) of Revenue Regulations No. 6-85 which provides:
 (g) Amounts paid to certain Brokers and Agents. On gross payments to
customs, insurance, real estate and commercial brokers and agents of
professional entertainers five per centum (5%).[25]

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

x x x, commission expense is indeed subject to 10% withholding tax but

payments made to broker is subject to 5% withholding tax pursuant to Section
1(g) of Revenue Regulations No. 6-85. While the commission expense in the
schedule of Selling, General and Administrative expenses submitted by
petitioner (SPI) to the BIR is captioned as commission/dealer salesman
incentive the same does not justify the automatic imposition of flat 10% rate.
As itemized by petitioner, such expense is composed of Commission Expense
in the amount of P10,200.00 and Broker Dealer of P2,894,797.00.[26]

The Court agrees with the CTA-EB when it affirmed the CTA-First Division
decision. Indeed, the applicable rule is Revenue Regulations No. 6-85, as amended by
Revenue Regulations No. 12-94, which was the applicable rule during the subject period
of examination and assessment as specified in the LOA. Revenue Regulations No. 2-98,
cited by the CIR, was only adopted in April 1998 and, therefore, cannot be applied in the
present case. Besides, the withholding tax on brokers and agents was only increased to
10% much later or by the end of July 2001 under Revenue Regulations No. 6-
2001.[27] Until then, the rate was only 5%.

The Court also affirms the findings of both the CTA-First Division and the CTA-EB on
the deficiency EWT assessment on the rental deposit. According to their findings, Sony
incurred the subject rental deposit in the amount of P10,523,821.99 only from January to
March 1998. As stated earlier, in the absence of the appropriate LOA specifying the
coverage, the CIRs deficiency EWT assessment from January to March 1998, is not valid
and must be disallowed.

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

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

The CIR insists that under Section 3[28] of Revenue Regulations No. 5-82 and
Sections 2.57.4 and 2.58(A)(2)(a)[29] of Revenue Regulations No. 2-98, Sony should also
be made liable for the FWT on royalties from January to March of 1998. At the same time,
it downplays the relevance of the Manufacturing License Agreement (MLA) between Sony
and Sony-Japan, particularly in the payment of royalties.
 The above revenue regulations provide the manner of withholding remittance as
well as the payment of final tax on royalty. Based on the same, Sony is required to deduct
and withhold final taxes on royalty payments when the royalty is paid or is payable. After
which, the corresponding return and remittance must be made within 10 days after the
end of each month. The question now is when does the royalty become payable?

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

(5)Within two (2) months following each semi-annual period ending

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

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

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

WHEREFORE, the petition is DENIED.

SO ORDERED.
G.R. No. 158885 October 2, 2009

FORT BONIFACIO DEVELOPMENT CORPORATION Petitioner,

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

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

G.R. No. 170680

FORT BONIFACIO DEVELOPMENT CORPORATION Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, REVENUE DISTRICT OFFICER,
REVENUE DISTRICT NO. 44, TAGUIG and PATEROS, BUREAU OF INTERNAL
REVENUE. Respondents.

RESOLUTION

LEONARDO-DE CASTRO, J.:

Before us is respondents’ Motion for Reconsideration of our Decision dated April 2, 2009
which granted the consolidated petitions of petitioner Fort Bonifacio Development
Corporation, the dispositive portion of which reads:

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 ₱28,413,783.00 representing
the transitional input tax credit due it for the fourth quarter of 1996; and (2) directed to
refund to petitioner the amount of ₱347,741,695.74 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.

The Motion for Reconsideration raises the following arguments:

SECTION 100 OF THE OLD NATIONAL INTERNAL REVENUE CODE (OLD NIRC), AS
AMENDED BY REPUBLIC ACT (R.A.) NO. 7716, COULD NOT HAVE SUPPLIED THE
DISTINCTION BETWEEN THE TREATMENT OF REAL PROPERTIES OR REAL ESTATE
DEALERS ON THE ONE HAND, AND THE TREATMENT OF TRANSACTIONS INVOLVING
OTHER COMMERCIAL GOODS ON THE OTHER HAND, AS SAID DISTINCTION IS FOUND IN
SECTION 105 AND, SUBSEQUENTLY, REVENUE REGULATIONS NO. 7-95 WHICH DEFINES
THE INPUT TAX CREDITABLE TO A REAL ESTATE DEALER WHO BECOMES SUBJECT TO
VAT FOR THE FIRST TIME.

II

SECTION 4.105.1 AND PARAGRAPH (A) (III) OF THE TRANSITORY PROVISIONS OF

REVENUE REGULATIONS NO. 7-95 VALIDLY LIMIT THE 8% TRANSITIONAL INPUT TAX TO
THE IMPROVEMENTS ON REAL PROPERTIES.

III

REVENUE REGULATIONS NO. 6-97 DID NOT REPEAL REVENUE REGULATIONS NO. 7-95.

The instant motion for reconsideration lacks merit.

The first VAT law, found in Executive Order (EO) No. 273 [1987], took effect on January
1, 1988. It amended several provisions of the National Internal Revenue Code of 1986
(Old NIRC). EO 273 likewise accommodated the potential burdens of the shift to the VAT
system by allowing newly VAT-registered persons to avail of a transitional input tax credit
as provided for in Section 105 of the Old NIRC. Section 105 as amended by EO 273 reads:

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.

RA 7716 took effect on January 1, 1996. It amended Section 100 of the Old NIRC by
imposing for the first time value-added-tax on sale of real properties. The amendment
reads:

Sec. 100. Value-added-tax on sale of goods or properties. — (a) Rate and base of tax. —
There shall be levied, assessed and collected on every sale, barter or exchange of goods
or properties, a value-added tax 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.1avvph!1

(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; xxx

The provisions of Section 105 of the NIRC, on the transitional input tax credit, remain
intact despite the enactment of RA 7716. Section 105 however was amended with the
passage of the new National Internal Revenue Code of 1997 (New NIRC), also officially
known as Republic Act (RA) 8424. The provisions on the transitional input tax credit are
now embodied in Section 111(A) of the New NIRC, which reads:

Section 111. Transitional/Presumptive Input Tax Credits. –

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

The Commissioner of Internal Revenue (CIR) disallowed Fort Bonifacio Development

Corporation’s (FBDC) 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). Specifically, Section 4.105-1 of RR 7-95 provides:

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 ₱500,000.00 or who voluntarily register even if their turnover does not exceed
₱500,000.00 shall be entitled to a presumptive input tax on the inventory on hand as of
December 31, 1995 on the following: (a) goods purchased for 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 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.

In the April 2, 2009 Decision sought to be reconsidered, the Court struck down Section
4.105-1 of RR 7-95 for being in conflict with the law. It held that the CIR had no power to
limit the meaning and coverage of the term "goods" in Section 105 of the Old NIRC sans
statutory authority or basis and justification to make such limitation. This it did when it
restricted the application of Section 105 in the case of real estate dealers only to
improvements on the real property belonging to their beginning inventory.

A law must not be read in truncated parts; its provisions must be read in relation to the
whole law. It is the cardinal rule in statutory construction that a statute’s clauses and
phrases must not be taken as detached and isolated expressions, but the whole and every
part thereof must be considered in fixing the meaning of any of its parts in order to
produce a harmonious whole. Every part of the statute must be interpreted with reference
to the context, i.e., that every part of the statute must be considered together with other
parts of the statute and kept subservient to the general intent of the whole enactment.1

In construing a statute, courts have to take the thought conveyed by the statute as a
whole; construe the constituent parts together; ascertain the legislative intent from the
whole act; consider each and every provision thereof in the light of the general purpose
of the statute; and endeavor to make every part effective, harmonious and sensible.2

The statutory definition of the term "goods or properties" leaves no room for doubt. It
states:

Sec. 100. Value-added tax on sale of goods or properties. – (a) Rate and base of tax. –
xxx.

(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; xxx.

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.

The term "goods or properties" by the unambiguous terms of Section 100 includes "real
properties held primarily for sale to costumers or held for lease in the ordinary course of
business." Having been defined in Section 100 of the NIRC, the term "goods" as used in
Section 105 of the same code could not have a different meaning. This has been explained
in the Decision dated April 2, 2009, thus:

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.

Section 4.105-1 of RR 7-95 restricted the definition of "goods", viz:

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

As mandated by Article 7 of the Civil Code,3 an administrative rule or regulation cannot

contravene the law on which it is based. RR 7-95 is inconsistent with Section 105 insofar
as the definition of the term "goods" is concerned. This is a legislative act beyond the
authority of the CIR and the Secretary of Finance. The rules and regulations that
administrative agencies promulgate, which are the product of a delegated legislative
power to create new and additional legal provisions that have the effect of law, should be
within the scope of the statutory authority granted by the legislature to the objects and
purposes of the law, and should not be in contradiction to, but in conformity with, the
standards prescribed by law.

To be valid, an administrative rule or regulation must conform, not contradict, the

provisions of the enabling law. An implementing rule or regulation cannot modify, expand,
or subtract from the law it is intended to implement. Any rule that is not consistent with
the statute itself is null and void. 4

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. Indeed, a quasi-judicial body or an
administrative agency for that matter cannot amend an act of Congress. Hence, in case
of a discrepancy between the basic law and an interpretative or administrative ruling, the
basic law prevails.5

To recapitulate, RR 7-95, insofar as it restricts the definition of "goods" as basis of

transitional input tax credit under Section 105 is a nullity.

On January 1, 1997, RR 6-97 was issued by the Commissioner of Internal Revenue. RR 6-

97 was basically a reiteration of the same Section 4.105-1 of RR 7-95, except that the RR
6-97 deleted the following paragraph:

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

It is clear, therefore, that under RR 6-97, the allowable transitional input tax credit is not
limited to improvements on real properties. The particular provision of RR 7-95 has
effectively been repealed by RR 6-97 which is now in consonance with Section 100 of the
NIRC, insofar as the definition of real properties as goods is concerned. The failure to add
a specific repealing clause would not necessarily indicate that there was no intent to repeal
RR 7-95. The fact that the aforequoted paragraph was deleted created an irreconcilable
inconsistency and repugnancy between the provisions of RR 6-97 and RR 7-95.

We now address the points raised in the dissenting opinion of the Honorable Justice
Antonio T. Carpio.

At the outset, it must be stressed that FBDC sought the refund of the total amount of
₱347,741,695.74 which it had itself paid in cash to the BIR. It is argued that the
transitional input tax credit applies only when taxes were previously paid on the properties
in the beginning inventory and that there should be a law imposing the tax presumed to
have been paid. The thesis is anchored on the argument that without any VAT or other
input business tax imposed by law on the real properties at the time of the sale, the 8%
transitional input tax cannot be presumed to have been paid.

The language of Section 105 is explicit. It precludes reading into the law that the
transitional input tax credit is limited to the amount of VAT previously paid. When the
aforesaid section speaks of "eight percent (8%) of the value of such inventory" followed
by the clause "or the actual value-added tax paid on such goods, materials and supplies,"
the implication is clear that under the first clause, "eight percent (8%) of the value of such
inventory," the law does not contemplate the payment of any prior tax on such inventory.
This is distinguished from the second clause, "the actual value-added tax paid on the
goods, materials and supplies" where actual payment of VAT on the goods, materials and
supplies is assumed. Had the intention of the law been to limit the amount to the actual
VAT paid, there would have been no need to explicitly allow a claim based on 8% of the
value of such inventory.

The contention that the 8% transitional input tax credit in Section 105 presumes that a
previous tax was paid, whether or not it was actually paid, requires a transaction where a
tax has been imposed by law, is utterly without basis in law. The rationale behind the
provisions of Section 105 was aptly elucidated in the Decision sought to be reconsidered,
thus:

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 taxpayer’s income by
affording the opportunity to offset the losses incurred through the remittance of the output
VAT at a stage when the person is yet unable to credit input VAT payments.

As pointed out in Our Decision of April 2, 2009, to give Section 105 a restrictive
construction that transitional input tax credit applies only when taxes were previously paid
on the properties in the beginning inventory and there is a law imposing the tax which is
presumed to have been paid, is to impose conditions or requisites to the application of the
transitional tax input credit which are not found in the law. The courts must not read into
the law what is not there. To do so will violate the principle of separation of powers which
prohibits this Court from engaging in judicial legislation.6

WHEREFORE, premises considered, the Motion for Reconsideration is DENIED WITH

FINALITY for lack of merit.

SO ORDERED.
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 [respondent’s]
claim for VAT refund.

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

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

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

investigation/examination by [petitioner’s] Bureau;

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

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

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

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

5. Granting, without admitting, that [respondent] is a Philippine Economic Zone Authority

(PEZA) registered Ecozone Enterprise, then its business is not subject to VAT pursuant to
Section 24 of Republic Act No. ([RA]) 7916 in relation to Section 103 of the Tax Code, as
amended. As [respondent’s] business is not subject to VAT, the capital goods and services
it alleged to have purchased are considered not used in VAT taxable business. As such,
[respondent] is not entitled to refund of input taxes on such capital goods pursuant to
Section 4.106.1 of Revenue Regulations No. ([RR])7-95, and of input taxes on services
pursuant to Section 4.103 of said regulations.

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

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

Ruling of the Court of Appeals

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

The appellate court reasoned that respondent had availed itself only of the fiscal incentives
under Executive Order No. (EO) 226 (otherwise known as the Omnibus Investment Code
of 1987), not of those under both Presidential Decree No. (PD) 66, as amended, and
Section 24 of RA 7916. Respondent was, therefore, considered exempt only from the
payment of income tax when it opted for the income tax holiday in lieu of the 5 percent
preferential tax on gross income earned. As a VAT-registered entity, though, it was still
subject to the payment of other national internal revenue taxes, like the VAT.
Moreover, the CA held that neither Section 109 of the Tax Code nor Sections 4.106-1 and
4.103-1 of RR 7-95 were applicable. Having paid the input VAT on the capital goods it
purchased, respondent correctly filed the administrative and judicial claims for its refund
within the two-year prescriptive period. Such payments were -- to the extent of the
refundable value -- duly supported by VAT invoices or official receipts, and were not yet
offset against any output VAT liability.

Hence this Petition.5

Sole Issue

Petitioner submits this sole issue for our consideration:

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

The Court’s Ruling

The Petition is unmeritorious.

Sole Issue:

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

Input VAT

No doubt, as a PEZA-registered enterprise within a special economic zone,7 respondent is

entitled to the fiscal incentives and benefits8 provided for in either PD 669 or EO 226.10 It
shall, moreover, enjoy all privileges, benefits, advantages or exemptions under both
Republic Act Nos. (RA) 722711 and 7844.12

Preferential Tax Treatment Under Special Laws

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

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

A privilege available to respondent under the provision in RA 7227 on tax and duty-free
importation of raw materials, capital and equipment18 -- is, ipso facto, also accorded to
the zone19 under RA 7916. Furthermore, the latter law -- notwithstanding other existing
laws, rules and regulations to the contrary -- extends20 to that zone the provision stating
that no local or national taxes shall be imposed therein.21 No exchange control policy shall
be applied; and free markets for foreign exchange, gold, securities and future shall be
allowed and maintained.22 Banking and finance shall also be liberalized under minimum
Bangko Sentral regulation with the establishment of foreign currency depository units of
local commercial banks and offshore banking units of foreign banks.23
In the same vein, respondent benefits under RA 7844 from negotiable tax credits24 for
locally-produced materials used as inputs. Aside from the other incentives possibly already
granted to it by the Board of Investments, it also enjoys preferential credit facilities25 and
exemption from PD 1853.26

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

Nature of the VAT and the Tax Credit Method

Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent
levied on every importation of goods, whether or not in the course of trade or business,
or imposed on each sale, barter, exchange or lease of goods or properties or on each
rendition of services in the course of trade or business29 as they pass along the production
and distribution chain, the tax being limited only to the value added 30 to such goods,
properties or services by the seller, transferor or lessor.31 It is an indirect tax that may be
shifted or passed on to the buyer, transferee or lessee of the goods, properties or
services.32 As such, it should be understood not in the context of the person or entity that
is primarily, directly and legally liable for its payment, but in terms of its nature as a tax
on consumption.33 In either case, though, the same conclusion is arrived at.

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

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

Zero-Rated and Effectively Zero-Rated Transactions

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

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

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
law’s 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 66 83 -- the original
charter of PEZA (then EPZA) that was later amended by RA 7916.84 No provisions in the
latter law modify such exemption.

Although this exemption puts the government at an initial disadvantage, the reduced tax
collection ultimately redounds to the benefit of the national economy by enticing more
business investments and creating more employment opportunities.85
Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise --
except those prohibited by law -- "shall not be subject to x x x internal revenue laws and
regulations x x x"86 if brought to the ecozone’s restricted area87 for manufacturing by
registered export enterprises,88 of which respondent is one. These rules also apply to all
enterprises registered with the EPZA prior to the effectivity of such rules.89

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

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

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

Tax Refund as Tax Exemption

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

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

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

First, the contemporaneous construction of our tax laws by BIR authorities who are called
upon to execute or administer such laws109 will have to be adopted. Their prior tax
issuances have held inconsistent positions brought about by their probable failure to
comprehend and fully appreciate the nature of the VAT as a tax on consumption and the
application of the destination principle.110 Revenue Memorandum Circular No. (RMC) 74-
99, however, now clearly and correctly provides that any VAT-registered supplier’s sale of
goods, property or services from the customs territory to any registered enterprise
operating in the ecozone -- regardless of the class or type of the latter’s PEZA registration
-- is legally entitled to a zero rate.111

Second, the policies of the law should prevail. Ratio legis est anima. The reason for the
law is its very soul.
In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as the
establishment of export processing zones, seeks "to encourage and promote foreign
commerce as a means of x x x strengthening our export trade and foreign exchange
position, of hastening industrialization, of reducing domestic unemployment, and of
accelerating the development of the country."112

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

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

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

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

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

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

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

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

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. 133Petitioner
merely asserts that by virtue of the PEZA registration alone of respondent, the latter is
not subject to the VAT. Consequently, the capital goods and services respondent has
purchased are not considered used in the VAT business, and no VAT refund or credit is
due.134 This is a non sequitur. By the VAT’s very nature as a tax on consumption, the
capital goods and services respondent has purchased are subject to the VAT, although at
zero rate. Registration does not determine taxability under the VAT law.

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

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

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

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

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

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

A VAT-registered status, as well as compliance with the invoicing requirements,147 is

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

Tax Refund or Credit in Order

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

As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal
incentives in EO 226 over those in RA 7916 and PD 66. It opted for the income tax holiday
regime instead of the 5 percent preferential tax regime.
The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA
law,148 for EO 226149 also has provisions to contend with. These two regimes are in fact
incompatible and cannot be availed of simultaneously by the same entity. While EO 226
merely exempts it from income taxes, the PEZA law exempts it from all taxes.

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

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

Compliance with All Requisites for VAT Refund or Credit

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

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

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

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

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

xxxxxxxxx

"MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an
environment conducive for investors, the bill offers incentives such as the exemption from
local and national taxes, x x x tax credits for locally sourced inputs x x x."153

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. 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 respondent’s services meet these requirements, they are zero-rated. Petitioner’s
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 Taxable Output Zero-rated Domestic Input
1997 Sales VAT Sales Purchases VAT

I 1st ₱17,513,801.1
₱59,597.20 ₱5,959.72 ₱6,778,182.30 ₱677,818.23
qtr 1

J
2nd 67,517.20 6,751.72 17,937,361.51 9,333,242.90 933,324.29
qtr

K
3rd 51,936.60 5,193.66 19,627,245.36 8,438,357.00 843,835.70
qtr

L
4th 67,994.30 6,799.43 25,231,225.22 13,080,822.10 1,308,082.21
qtr

₱247,045.3 ₱24,704.5 ₱80,309,633.2 ₱37,630,604.3 ₱3,763,060.4

Total
0 3 0 0 3

"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 ₱3,751,067.04, which amount was arrived at
after deducting from its total input VAT paid of ₱3,763,060.43 its applied output VAT
liabilities only for the third and fourth quarters of 1997 amounting to ₱5,193.66 and
₱6,799.43, 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], [respondent’s] 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 ₱3,352,406.59 representing the latter’s excess input VAT paid
for the year 1997.’"8

Ruling of the Court of Appeals

In affirming the CTA, the CA held that respondent’s 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 respondent’s 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 ₱3,352,406.59 allegedly representing
excess input VAT for the year 1997."10

The Court’s 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 company’s 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;" 19and 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, respondent’s 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 petitioner’s 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 company’s 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 petitioner’s 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 performer’s 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 Respondent’s facilitation service has no physical existence, yet takes place
upon rendition, and therefore upon consumption, in the Philippines. Under the destination
principle, as petitioner asserts, such service is subject to VAT at the rate of 10 percent.

Respondent’s 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 petitioner’s stand, for the cost of respondent’s service to be zero-rated,
it need not be tacked in as part of the cost of goods exported. 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.61 Performed in the Philippines, such
service is necessarily subject to its jurisdiction,62 for the State necessarily has to have "a
substantial connection"63 to it, in order to enforce a zero rate.64 The place of payment is
immaterial;65 much less is the place where the output of the service will be further or
ultimately used.

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 respondent’s
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 ₱200,000,
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 former’s 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 respondent’s refund is
in order.

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

SO ORDERED.

G.R. No. 154028. July 29, 2005

PHILIPPINE GEOTHERMAL, INC., Petitioners,

vs.
THE COMMISSIONER OF INTERNAL REVENUE, Respondents.
 DECISION

QUISUMBING, J.:

The present petition for review on certiorari assails the September 14,
2001 Decision1 and June 14, 2002 Resolution2 of the Court of Appeals in CA-G.R. SP
No. 54730, which affirmed the April 21, 1999 Decision3 of the Court of Tax Appeals in
C.T.A. Case No. 5541.

The facts of the case as found by the Court of Appeals and Court of Tax Appeals are as
follows:

Petitioner is a resident foreign corporation licensed by the Securities and Exchange

Commission (SEC) to engage in the exploration, development and exploitation of
geothermal energy and resources in the Philippines. In September 1971, it entered into a
service contract with the National Power Corporation (NPC) to supply steam to the latter.

From September 1995 to February 1996, petitioner billed NPC, Value Added Tax (VAT)
computed at ten percent of the service fee charged on the supply of steam. NPC did not
pay the VAT. To avoid any possible tax deficiency, petitioner remitted VAT equivalent to
1/11 of the fees received from NPC or ₱39,328,775.41, broken down as follows:

Exhibit Period covered Payment Date VAT Paid

C 7/95 to 9/95 10/18/95 P 8,977,117.26
H 10/95 to 12/95 1/18/96 11,248,194.31
M 11/95 12/13/95 8,243,090.27
S 1/96 2/19/96 5,213,400.45
W 2/96 3/18/96 5,646,973.12
P 39,328,775.41

Petitioner filed an administrative claim for refund with the Bureau of Internal Revenue on
July 10, 1996. According to petitioner, the sale of steam to NPC is a VAT-exempt
transaction under Sec. 103 of the Tax Code.4 Petitioner claimed that Fiscal Incentives
Review Board (FIRB) Resolution No. 17-87, approved by President Aquino pursuant to
Executive Order No. 93,5 expressly exempted NPC from VAT.

Since respondent failed to act on the claim, on July 2, 1997, petitioner filed a petition to
toll the running of the two-year prescriptive period before the Court of Tax Appeals.

Respondent, in his Answer,6 averred:

...

4. The claim of petitioner Philippine Geothermal Incorporated (PGI for short) for Value-
Added Tax refund has no legal basis.

...

6. Fiscal Incentives Review Board (FIRB) Resolution 17-87 specifically restored the tax
and duty exemption privileges of the NPC, including those pertaining to its domestic
purchases of petroleum and petroleum products granted under the terms and conditions
of Commonwealth Act 120 as amended, effective March 10, 1987.

However, the restoration of the tax and duty exemption privileges does not apply to
importations of fuel oil (crude equivalents) and coal, commercially-funded importations
(i.e. importations which include but are not limited to those foreign-based private financial
institutions, etc.) and interest income derived from any source. Such exemption also does
not include purchases of goods and services. Hence, any contracting services of NPC is
not qualified for zero-rated VAT (VAT Ruling 250-89, October, 1989).
7. It is clear from the aforecited FIRB resolution that the tax exemption privilege granted
to NPC does not include purchases of goods and services, such as the supply of steam to
NPC.

...

10. The subject taxes have been paid and collected in accordance with law and regulation.

11. In a claim for refund, it is incumbent upon petitioner to show that it is indubitably
entitled thereto. Petitioner’s failure to establish the same is fatal to its claim for refund.

12. .The present case is no exception to the basic rule that claims for refund are construed
strictly against claimant for the same partake of the nature of exemption from taxation.

Simply put, the sole issue in this case is whether petitioner’s supply of steam to NPC is a
VAT-exempt transaction.

FIRB Resolution No. 17-87 dated June 24, 1987, on which petitioner anchors its claim for
tax exemption, provides as follows:

BE IT RESOLVED, AS IT IS HEREBY RESOLVED, That the tax and duty exemption privileges
of the National Power Corporation, including those pertaining to its domestic purchases of
petroleum and petroleum products, granted under the terms and conditions of
Commonwealth Act No. 120 (Creating the National Power Corporation, defining its powers,
objectives and functions, and for other purposes), as amended, are restored effective
March 10, 1987, subject to the following conditions:

1. The restoration of the tax and duty exemption privileges does not apply to the following:

1.1 Importation of fuel oil (crude equivalent) and coal;

1.2 Commercially-funded importations (i.e., importations which include but are not limited
to those financed by the NPC’s own internal funds, domestic borrowings from any source
whatsoever, borrowing from foreign-based private financial institutions, etc.); and

1.3 Interest income derived from any source.7

This Supreme Court has confirmed this exemption. In Maceda v. Macaraig, Jr.,8 this Court
ruled that Republic Act No. 3589 exempts the NPC from all taxes, duties, fees, imposts,
charges, and restrictions of the Republic of the Philippines, and its provinces, cities and
municipalities. This exemption is broad enough to include both direct and indirect taxes
the NPC may be required to pay. To limit the exemption granted the NPC to direct taxes,
notwithstanding the general and broad language of the statute, will be to thwart the
legislative intention in giving exemption from all forms of taxes and impositions, without
distinguishing between those that are direct and those that are not.

A chronological review of the NPC laws will show that it has been the lawmakers’ intention
that the NPC is to be completely tax exempt from all forms of taxes - both direct and
indirect.10

The ruling dated March 15, 1996, issued to petitioner by Assistant Commissioner Alicia P.
Clemeno of the Bureau of Internal Revenue, likewise confirms this exemption:

In view of the foregoing, this Office is of the opinion as it hereby holds, that the supply of
steam by your client, Philippine Geothermal, Inc. (PGI) to National Power Corporation
NPC/NAPOCOR to be used in generating electricity is exempt from the value-added tax.
(BIR Ruling No. 078-95 dated April 26, 1995)11

On April 21, 1999, the CTA ruled that the supply of steam to NPC by petitioner being a
VAT-exempt transaction, neither petitioner nor NPC is liable to pay VAT. Petitioner,
therefore, may rightfully claim for a refund of the value-added tax paid. The CTA held,
WHEREFORE, in the light of the foregoing, RESPONDENT is hereby ORDERED to REFUND
or in the alternative, ISSUE A TAX CREDIT CERTIFICATE to PETITIONER the sum of
P9,012,310.26 representing erroneously paid value added tax.

SO ORDERED.12

According to the CTA, based on the evidence presented by petitioner, out of the refund
claim of ₱39,328,775.41, only ₱9,012,310.2613 or that pertaining to output tax paid for
September 1995 and the interest on late payment on peso cash call, were not paid by
NPC. As to the rest of petitioner’s claim, it appears that the official receipts petitioner
issued to NPC included the VAT payable shown in the Summary of Payments Received
from NPC for each production period.

Petitioner raised the matter before the Court of Appeals praying that the respondent be
ordered to refund the sum of ₱39,328,775.41 or issue a tax credit certificate representing
erroneous payments of VAT from September 1995 to February 1996.

The Court of Appeals denied the petition and affirmed the assailed decision of the Court
of Tax Appeals.

Hence this appeal. Petitioner assigns the following errors to the appellate court:

THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN AFFIRMING IN TOTO THE

DECISION OF THE COURT OF TAX APPEALS, BECAUSE:

A). THE DECISION OF THE COURT OF TAX APPEALS WAS BASED ON A MISAPPREHENSION
OF FACTS, NAMELY, THAT THE NPC PAID ₱30,316,465.15 AS VAT;

B). THE PETITIONER HAD ESTABLISHED BY UNDISPUTABLE EVIDENCE THAT IT PAID THE
VAT ON THE SUPPLY OF STEAM TO NPC; ACCORDINGLY, IT IS ENTITLED TO THE
REIMBURSEMENT OF THE FULL AMOUNT OF VAT ERRONEOUSLY PAID.14

The CTA Decision stated categorically that the supply of steam to NPC is exempt from
VAT. However, it only granted a partial VAT refund of ₱9,012,310.26, believing that only
this amount was not reimbursed by NPC. The CTA ruled that petitioner was no longer
entitled to a refund of the remaining balance of ₱30,316,465.15, since it appears that the
official receipts petitioner issued to NPC included the VAT payable shown in the Summary
of Payments Received from NPC for each production period.

We disagree with the CTA. In this case, the only issue is the amount of refund to be
granted based on the amount of tax erroneously paid. Tax refunds are in the nature of
tax exemptions, and are to be construed strictissimi jurisagainst the entity claiming the
same.15 Thus, the burden of proof rests upon the taxpayer to establish by sufficient and
competent evidence, its entitlement to a claim for refund. In the Bureau of Internal
Revenue’s Ruling dated March 15, 1996, that the supply of steam by petitioner to NPC is
exempt from VAT, petitioner has indubitably established its basis for claiming a refund.

That NPC may have reimbursed petitioner the 10% VAT is not a ground for the denial of
the claim for refund. The CTA overlooked the fact that it was petitioner who paid the VAT
out of its own service fee. The erroneous payments of the VAT were only discontinued
when the BIR issued its Ruling No. DA-111-96 in favor of petitioner on March 15, 1996.
By then, petitioner had already remitted a sizeable amount of ₱39,328,775.41 to the
Government. The only recourse of petitioner is the complete restitution of the erroneous
payments of taxes.

The amount of refund should have been based on the VAT Returns filed by the taxpayer.
Whether NPC had reimbursed petitioner is not the concern of the CTA. It is solely a matter
between petitioner and NPC.16 For indirect taxes like VAT, the proper party to question or
seek a refund of the tax is the statutory taxpayer, the person on whom the tax is imposed
by law and who paid the same even when he shifts the burden thereof to another.17
Petitioner has the legal personality to apply for a refund since it is the one who made the
erroneous VAT payments and who will suffer financially by paying in good faith what it
had believed to be its potential VAT liability.

Under the principle of solutio indebiti,18 the government has to restore to petitioner the
sums representing erroneous payments of taxes.19 It is of no moment whether NPC had
already reimbursed petitioner or not because in this case, there should have been no VAT
paid at all.

The Summary of Payments and Official Receipts issued by a supplier is not a reliable basis
for determining the VAT payments of said supplier. The CTA grossly misappreciated the
evidence and erroneously concluded in this case that NPC paid the VAT. The CTA should
have relied on the VAT Returns filed by the taxpayer to determine the actual amount
remitted to the BIR for the purpose of ascertaining the refund due. The presentation of
the VAT Returns is considered sufficient to ascertain the amount of the refund. Thus, upon
finding that the supply of steam to NPC is exempt from VAT, the CTA should have ordered
respondent to reimburse petitioner the full amount of ₱39,328,775.41 as erroneously paid
VAT.

WHEREFORE, the petition is hereby GRANTED. Respondent is ORDERED to refund or in

the alternative, issue a Tax Credit Certificate to petitioner in the sum of ₱39,328,775.41
as erroneously paid VAT.

SO ORDERED.

G.R. No. 166732 April 27, 2007

INTEL TECHNOLOGY PHILIPPINES, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION
CALLEJO, SR., J.:

Before the Court is a Petition for Review on Certiorari filed by Intel Technology Philippines,
Inc. (petitioner) seeking to reverse and set aside the Decision1 dated August 12, 2004 of
the Court of Appeals (CA) in CA-G.R. SP No. 79327. The assailed decision affirmed that of
the Court of Tax Appeals denying petitioner’s claim for a refund or issuance of a tax credit
certificate in the amount of ₱11,770,181.70, allegedly representing the value-added input
taxes it had paid on domestic purchases of goods and services for the period of April 1,
1998 to June 30, 1998. Likewise sought to be reversed and set aside is the appellate
court’s Resolution2 dated January 14, 2005 denying petitioner’s Motion for
Reconsideration.

The Antecedents

Petitioner is a domestic corporation engaged primarily in the business of designing,

developing, manufacturing and exporting advanced and large- scale integrated circuit
components (ICs).3 It is registered with the Bureau of Internal Revenue (BIR) as a value-
added tax (VAT) entity in 1996 under Certificate of Registration RDO Control No. 96-540-
000713.4 It is likewise registered with the Philippine Economic Zone Authority (PEZA) as
an Ecozone export enterprise.5

As a VAT-registered entity, petitioner filed with the Commission of Internal Revenue its
Monthly VAT Declarations and Quarterly VAT Return for the second quarter of 1998
declaring zero-rated export sales of ₱2,538,906,840.16 and VAT input taxes from
domestic purchases of goods and services in the total amount of ₱11,770,181.70.
Petitioner alleged that its zero-rated export sales were paid for in acceptable foreign
currency and were inwardly remitted in accordance with the regulations of the Bangko
Sentral ng Pilipinas (BSP).

On May 18, 1999, petitioner filed with the Commission of Internal Revenue, through its
One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of
Finance, a claim for tax credit/refund of VAT input taxes on its domestic purchases of
goods and services directly used in its commercial operations. Petitioner’s claim for refund
amounted to ₱11,770,181.70 covering the period April 1, 1998 to June 30, 1998. 6

On June 30, 2000, when the two-year prescriptive period to file a refund was about to
lapse without any action by the Commission of Internal Revenue on its claim, petitioner
filed with the Court of Tax Appeals (CTA) a petition for review with the Commissioner of
Internal Revenue (Commissioner) as respondent.7 Petitioner alleged therein that:

3. Petitioner is engaged primarily in the business of designing, developing,

manufacturing and exporting advanced and large-scale integrated circuit
components, commonly referred to in the industry as Integrated Circuits or "ICs."
As such, [it] has registered itself as a value-added tax entity pursuant to Section
107 of the Tax Code effective January 30, 1996, pursuant to which it was issued
Certificate of Registration No. 96-540-000713. Being engaged in said business,
Petitioner registered itself with the Philippine Economic Zone Authority (PEZA) as an
export enterprise and was issued Certificate of Registration No. 95-133 by the
Philippine Economic Zone Authority. Photocopies of Petitioner’s Certificate of
Registration (BIR Form 1556) and PEZA Certificate of Registration are hereto
attached as Annexes "A" and "B," and made as integral parts hereof;

4. For the period covering April 01 to June 30, 1998, petitioner generated and
recorded zero-rated export sales in the amount of PhP2,538,906,840.16, Philippine
Currency;

5. The above amount of ₱2,538,906,840.16 was paid to petitioner in acceptable

foreign currency and was inwardly remitted in accordance with existing regulations
of the Central Bank of the Philippines pursuant to Sec. 106(A)(2)(a)(1) of the Tax
Code;
 6. For the period covering April 01, 1998 to June 30, 1998, petitioner paid VAT input
taxes amounting to PhP11,770,181.70 for domestic purchases of goods and services
which were attributable to petitioner’s zero-rated sales of PhP2,538,906,840.16.
Photocopies of petitioner’s quarterly VAT returns and monthly declarations for the
second taxable quarter of 1998 which was duly filed with the Respondent, and
received by Respondent’s collection agents, RCBC – Gateway Branch are hereto
attached as Annex "C," "D," "E" and "F" forming as integral parts hereof;

7. The above VAT input taxes were paid in connection with the Petitioner’s trade or
business and were duly supported by invoices and/or receipts showing the
information required under Sections 113 and 237 of the Tax Code, and had not been
applied against any VAT output tax liability of the Petitioner during the same period
from April 1, 1998 to June 30, 1998, or any succeeding period or periods;

xxxx

8. Being a VAT-registered entity, Petitioner is subject to the Value-Added Tax

imposed under Title IV of the Tax Code.

xxxx

9. The export sales of the petitioner are not subject to 10% value-added tax but are
zero-rated. Hence, such zero-rated sales will not result to any VAT output tax
pursuant to Sec. 106(A)(2)(a)(1) and Sec. 108(B)(1) of the Tax Code;

10. Petitioner, for the period covering April 01, 1998 to June 30, 1998, having
generated zero-rated sales and paid VAT input taxes in the course of its trade or
business, which VAT input taxes are attributable to the zero-rated sales and have
not been applied to any VAT output tax liability of the Petitioner for said period or
any succeeding quarter or quarters nor has been issued any tax credit certificate, it
follows that petitioner is entitled to the issuance of a tax credit certificate for VAT
input taxes in the amount of PhP11,770,181.70 x x x.

xxxx

11. On May 18, 1999, petitioner in compliance with the requisites provided for by
law for the issuance of a tax credit certificate filed a claim for tax credit in the total
amount of PhP11,770,181.70, with respondent through the One Stop Shop Inter-
Agency Tax Credit and Duty Drawback Center per BIR Form No. 2552 entitled
‘APPLICATION FOR TAX CREDIT/REFUND OR VALUE-ADDED TAX PAID’ and Claimant
Information Sheet No. 35418. x x x

12. Respondent, however, despite such application for the issuance of a tax credit
certificate above-mentioned and notwithstanding presentation of documentary
evidences in support of such application, failed to grant the tax credit applied for. x
x x8

Petitioner prayed that, after due proceedings, judgment be rendered in its favor, as
follows:

WHEREFORE, it is respectfully prayed that this Honorable Court after trial render
judgment:

1. Declaring Petitioner entitled to the issuance of tax credit certificate in the amount
of PhP11,770,181.70 representing VAT input taxes paid by it during the period from
April 01, 1998 to June 30, 1998, for which no tax credit certificate was issued;

2. Ordering respondent to issue the tax credit certificate in favor of petitioner in the
amount of PhP11,770,181.70 referred to above; and
 3. Granting petitioner such other reliefs as may be just and equitable under the
premises.9

The Commissioner, as respondent, opposed the petition and prayed for its dismissal.
The following special and affirmative defenses were raised:

4. Petitioner, being allegedly registered with the Philippine Economic Zone Authority,
is exempt from all taxes, including value-added tax, pursuant to Section 24 of
Republic Act No. 7916, in relation to Section 103 of the Tax Code, as amended by
RA 7716. Since its sales are not zero-rated but are exempt from VAT, petitioner is
not entitled to refund of input tax pursuant to Section 4.106-1 and 4.103-1 of
Revenue Regulations No. 7-95;

5. Petitioner’s alleged claim for refund is subject to administrative routinary

investigation/examination by the Bureau;

6. The amount of ₱47,582,813.72 being claimed by petitioner as alleged VAT input

taxes for the period of 01 July 1997 to 31 December 1997 was not properly
documented;

7. In an action for refund the burden of proof is on the taxpayer to establish its right
to refund, and failure to sustain the burden is fatal to the claim for refund/credit;

8. Petitioner must show that it has complied with the provisions of Sections 204(c)
and 229 of the Tax Code on the prescriptive period for claiming tax refund/credit;

9. Claims for refund are construed strictly against the claimant for the same partake
the nature of exemption from taxation.10

The CTA commissioned the services of an independent auditor, Eliseo Aurellado, to

conduct an audit and evaluate petitioner’s claim. On March 22, 2001, he submitted a
Report to the CTA with the following conclusion:

In performing the above procedures, except for the net effect of the Input VAT paid on its
purchases as compared to the results of my review of supporting documents, as shown in
Annex "B" no other matters came to my attention that cause me to believe that the
attached Schedule of Input VAT Paid should be adjusted. We believe that only the amounts
of ₱9,688,809.39 is a valid claim for tax credit. This report relates only to the application
of Intel Technology Philippines, Inc. for tax credit/refund specified on page 1 of this report
and does not extend to the Financial Statements, taken as a whole, for any period where
the aforementioned tax refund is present.11

Appended thereto were the summary of purchases, statements of input VAT exception,
and statements of zero-rated export sales.12

Petitioner adduced testimonial evidence and offered the following documents in evidence:

EXHIBIT DESCRIPTION PURPOSE

"A" A copy of Petitioner’s To prove that Intel

Certificate of Registration No.
95-133 issued by Philippine
Economic Zone Authority
(PEZA). This was already
subject of stipulation of facts.
"B" A copy of Petitioner’s BIR
Certificate of Registration
with RDO Control No. 96-
540-000713 issued on
January 30, 1996 by
Technology Philippines, Inc.
is registered with PEZA as
Ecozone Export Enterprise.
To prove that Petitioner is
duly registered with the
Bureau of Internal Revenue.
 Revenue District Office No.
54.
This was already subject of
stipulation of facts.
"C" & "D" Copies of the Monthly VAT
Returns for the month of
"C-1" & April and May of 1998. These
"D-1" were already subjects of
stipulation of facts.
Signature of Pablo V. Pablo.
"E" Copies of Petitioner’s
"E-1" Quarterly VAT Return for the
second quarter of 1998.
Signature of Pablo V. Pablo
This was already subject to
stipulation of facts
"F" & "F- Copies of Petitioner’s
2" Amended Quarterly VAT
"F-1" Return for the second
quarter of 1998.
Signature of Pablo V. Pablo
This was already subject to
stipulation of facts.
"F-3" Box No. 16A of the Amended
Quarterly VAT return for the
second quarter of 1998.
"F-4" Box No. 16B of the Amended
Quarterly VAT return for the
second quarter of 1998.
"F-5" Box No. 17 of the Amended
Quarter VAT return for the
second quarter of 1998
"F-6" Box No. 22B of the Amended
Quarterly VAT return for the
second quarter of 1998.
"G" to "L" Copies of Petitioner’s
and "H-2" Quarterly VAT Returns for
To prove that Petitioner is a
duly registered VAT entity.
To prove that Petitioner filed
its Monthly VAT Declaration
for the month of April and
May of 1998.
To prove that the monthly
VAT Returns was duly signed
by Petitioner’s authorized
agent.
To prove that Petitioner filed
its Quarterly VAT return for
the second quarter of 1998.
To prove that Petitioner’s
authorized agent properly
signed the Quarterly VAT
Return for the second quarter
of 1998.
To prove that Petitioner filed
its Amended Quarterly VAT
return for the second quarter
of 1998.
To prove that Petitioner’s
authorized agent properly
signed the Amended
Quarterly VAT Return for the
second quarter of 1998.
To prove that Petitioner
properly reported its sales
subject to zero-rated for the
second quarter of 1998.
To prove that petitioner paid
and remitted the output VAT
for the second quarter of
1998.
To prove that petitioner
property reported its export
sales subject to zero-rated
for the second quarter of
1998 in the amount of
₱2,538,906,840.160.
To prove that petitioner
incurred an input taxes on its
domestic purchases of goods
and services for the second
quarter of 1998 in the
amount of ₱11,770,181.70.
To prove that Petitioner filed
its Quarterly VAT Returns for
and "K- the third and fourth quarters
2" of 1998 and first and second
"G-1" to quarters of 1999 including
"L-1" the amended returns for the
third quarter and first
quarter of 1998 and 1999,
respectively.
Signature of Pablo V. Pablo.
These were already subject
of stipulation of facts.
"H-3," "I- Box No. 34 or 35 of the
2," "K3" & Quarterly VAT returns for the
"L-2" third and fourth quarters of
1998 and first and second
quarters of 1999.
"M" & "N" Copies of Petitioner’s
"M-1" & Claimant Information Sheet
"N-1" No. 35418 including BIR
Form No. 2552 for the period
April 1, 1998 to June 30,
1998 filed with the One-
Stop-Shop Inter-Agency Tax
Credit and Duty Drawback
Center of the Department of
Finance duly stamped
received last 05-18-99.
Signature of Pablo V. Pablo
These were already subject
of stipulation of facts.
"O" Certification of inward
"O-1" remittance dated March 08,
"O-2" 2000 issued by CITIBANK
Signature of Pepper M.
Lopez, CitiService Officer
Amount of inward remittance
in the amount of
US$98,000,000.00
"P" Certification of inward
"P-1" remittance dated March 09,
"P-2" 2000 issued by RCBC
Signture of Ms. Araceli V.
Dyoco, Head Export Dept.
the third and fourth quarters
of 1998 and first and second
quarters of 1999 including
the amended returns for the
third and first quarters of
1998 and 1999, respectively.
To prove that the Quarterly
VAT returns were properly
signed by Petitioner’s duly
authorized representative.
To prove that the Petitioner
always has excess input VAT
and the same was not
utilized in the succeeding
quarter or quarters.
To prove that Petitioner filed
a claim for refund of input
taxes in the total amount of
₱11,770,181.70 with the
One-Stop-Shop Inter-Agency
Tax Credit and Duty
Drawback Center of the
Department of Finance last
05-18-99.
To prove that the claimant
information sheet and BIR
form 2552 were signed by
Petitioner’s duly authorized
representative.
To prove that the proceeds of
export sales of petitioner
were properly remitted in US
dollars in accordance with the
regulations of the Bangko
Sentral ng Pilipinas.
To prove that the
Certification was properly
signed by Citibank’s
authorized representative.
To prove the amount of
inward remittance in the
amount of
US$98,000,000.00.
To prove that the proceeds of
export sales of petitioner
were properly remitted in US
dollars in accordance with the
regulations of the Bangko
Sentral ng Pilipinas.
To prove that the
Certification was properly
 Amount of inward remittance
in the amount of
US$102,499,965.00
"Q" Copy of the Certification
"Q-1" and issued by Mr. Eliseo A.
"Q- Aurellado, independent CPA
2" commissioned by the
Honorable Court of Tax
Appeals.
Signature and PTR No. of Mr.
Eliseo A. Aurellado.
"S" Copy of the summary of
purchases attached as Annex
"A" to the Certification
marked as "Annex "Q."
"T" Copy of schedule of input
"T-1" VAT paid with exception
attached as Annex "B" to the
Certification marked as
"Annex "Q."
The total amount of
exception is ₱2,081,372.31.
"U-1" to Copies of Petitioner’s supplier
"U-375," invoices and official receipts
"V-1" to for the second quarter of
V-665" 1998.
and "W-
1" to "W-
424"
Copies of Petitioner’s
summary of export sales,
"X" to "X- sales invoices, official
669" receipts, airway bills, export
declarations and certification
of inward remittances for the
second quarter of 1998.
"Y" Copy of the summary export
sales consisting of 13 pages
attached as Annex "C" to the
Certification marked as
Exhibit "Q."
On April 21, 2003, the CTA rendered judgment denying petitioner’s claim for refund or
issuance of a tax credit certificate. The tax court acknowledged that petitioner is legally
signed by RCBC’s authorized
representative.
To prove the amount of
inward remittance in the
amount of
US$102,499,965.00.
To prove that Mr. Eliseo A.
Aurellado has issued a
certification with regards to
the correctness of Petitioner’s
summary input VAT paid and
summary of zero-rated sales.
To prove that Mr. Eliseo A.
Aurellado is the one who
issued the above-mentioned
Certification and that he has
the authority to act as such.
To prove the correctness of
the input VAT paid on
domestic purchases of goods
and services for the second
quarter of 1998.
To prove the amount of input
VAT paid on domestic
purchases of goods and
services with exception.
To prove the total input VAT
with exception in the amount
of ₱2,081,372.31.
To prove that the input VAT
paid by Petitioner for the
second quarter of 1998
except those with exception
are property supported with
sales invoices and official
receipts.
To prove that Petitioner for
the second quarter of 1998
generated export sales in the
total amount of
₱2,538,906,840.16 and the
same were duly supported
with documents.
To prove [that] from April 1,
1998 to June 30, 1998,
Petitioner generated and
recorded an export sales in
the amount of
₱2,538,906,840.16.13
entitled to a refund or issuance of a tax credit certificate of its unutilized VAT input taxes
on domestic purchases of goods and service attributable to its zero-rated sales. However,
the export invoices adduced in evidence by petitioner could not be considered as
competent evidence to prove its zero-rated sales of goods for VAT purposes and for refund
or issuance of a tax credit certificate because no BIR authority to print said invoices was
indicated thereon. The CTA also observed that some of the invoices do not contain the
Taxpayer’s Identification Number-VAT (TIN-V) of petitioner as required in Section 113, in
conjunction with Section 237, of the Tax Code. The dispositive portion of the CTA decision
reads:

WHEREFORE, in view of the foregoing, petitioner’s claim for issuance of a tax credit
certificate in the amount of ₱11,770,181.70 allegedly representing its VAT input taxes on
domestic purchases of goods and services for the period April 1, 1998 to June 30, 1998 is
hereby DENIED.

SO ORDERED.14

Petitioner filed a Motion for Reconsideration15 alleging that it was able to prove its export
sales by the following documentary evidence:

(1) Certifications of inward remittances marked as Exhibits "O" and "P" for the
Petitioner.

(2) Airway bills.

(3) Export declarations.

(4) Certifications of Mr. Eliseo Aurellado (Exhibit "Q" for the Petitioner), the
independent CPA duly commissioned by this Honorable Court, to the effect that the
petitioner made export sales for the period covered in the amount of Php2,538,
906,840.16.16

Petitioner also alleged the following in its Supplemental Motion for Reconsideration:

The petitioner truly believes that although the invoicing requirements prescribed under
Section 113 (A)(1), in relation to Section 237 of the 1997 Tax Code, should be applied
strictly in the use of invoices or receipts for purposes of substantiating input VAT incurred,
the same stringent application is not called for when the invoices or receipts are used for
purposes of substantiating actual export sales.

While the invoices or receipts being used to substantiate claim for input VAT pertain to
domestic sales, the invoices or receipts presented by the petitioner, and which were
invalidated by this Honorable Court pertain to export sales. There should be a marked
difference because in domestic sales, there results a corresponding input VAT which may
be possibly claimed by the purchaser, whereas in export sales, such as those done by the
petitioner, the purchaser incurs no input VAT which it may eventually claim. Thus, for
purposes of substantiation in the claim for input VAT resulting from domestic sales the
stern application of the mentioned invoicing requirements is naturally demanded. But for
simple purposes of substantiating export sales, as in the case of petitioner, it should not
be as exacting especially considering that the petitioner still has to substantiate its input
VAT, which, this time, needs to hurdle the aforesaid invoicing requirements under the
1997 Tax Code.

Moreover, unlike in the substantiation of input VAT, which can only be done through the
submission of domestic sales invoices, there are other documents to show the fact of
export sales such as export declarations, inward remittances and airway bills. This gives
more plausible reason why invoices or receipts being used to prove input VAT need to
comply with the invoice requirements set forth under Section 113(A)(1), in relation to
Section 237, of the 1997 Tax Code.17
Petitioner appended thereto a letter-authority dated April 17, 1997 signed by BIR Regional
Director Sol Hubahib of Region No. 9 approving its request to use computerized sales
invoices.

On September 1, 2003, the CTA denied petitioner’s Motion for Reconsideration and
Supplemental Motion for Reconsideration.

Aggrieved, petitioner filed before the CA a petition for review of the tax court’s decision.
Petitioner averred that, under Sections 113(A)(1) and 237 of the 1997 Tax Code, the
following information is required to be indicated in the invoice or receipt: (1) a statement
that the seller is VAT-registered; (2) the seller’s TIN; and (3) the name, business style, if
any, and address of the purchaser, customer or client. However, petitioner averred, such
requirements apply only to domestic or local sales, considering that the output tax (the
input tax on the part of the local purchaser), may be claimed by the latter as a credit
against its output VAT. Thus, according to petitioner, the invoices or receipts being issued
by the local seller are required to indicate the information listed under the aforementioned
provisions of the Tax Code so that the local purchaser would have a valid basis in its claim
for the crediting of the input VAT. On the other hand, such requirements do not apply to
its export sales, since no input VAT may be claimed thereon. Petitioner further pointed out
that the transaction is subject to 0% rate; there is no input VAT to be claimed by its
foreign purchaser; and the latter is not a VAT-registered entity in the Philippines.
Considering that no refundable or creditable input VAT results from its export sales
transactions, it should not be subjected to strict compliance with the invoicing
requirements.

Petitioner also claimed that the absence of BIR authority to print its TIN-V in some of the
invoices is not fatal to its claim for refund or issuance of a tax credit certificate as to
invalidate the documents used to prove its export sales. It declared that it used
computerized accounting forms as sales invoices in its export sales based on the letter-
authority dated April 17, 1997 of the BIR. It was only through plain mistake and
inadvertence that the sales invoices it used had no authority to print. Such omission should
not allegedly render the said sales invoices altogether invalid or inadmissible for purposes
of substantiating petitioner’s actual export sales covering the period April 1, 1998 to June
30, 1998. Petitioner opined that its failure to adduce in evidence the said letter-authority
of the BIR was due to its honest belief that it had already adduced sufficient evidence to
prove its actual export sales.

Petitioner submitted that while the CTA ruled that the invoices which did not indicate TIN-
V were not sufficient proof of its export sales, this constituted only a small part of the
hundreds of invoices it had submitted. These defective invoices, therefore, relate to a
small chunk of the export sales it made for the covered period. If at all, the invalid invoices
could only mean that only a small part of its claim was being disallowed, not the entire
claim.

On August 12, 2004, the CA rendered its Decision18 affirming the CTA ruling. The CA ruled
that while under Section 106(A)(2)(a)(1) of the Tax Code, VAT-registered entities are
entitled to claim VAT refund on their input taxes if their export sales are zero-rated, the
claim is nevertheless subject to the invoicing and accounting requirements of VAT-
registered persons under Section 113 in relation to Section 237 of the Tax Code. It is
therefore clear, the appellate court concluded, that what should be proven are not only
the export sales but also compliance with the requirements under the aforesaid sections
of the Tax Code.19

The CA further ruled that Revenue Regulations (RR) No. 7-95 requires VAT-registered
persons to issue duly registered receipts, and enumerates the entries that should be
contained in the said duly registered receipts. Section 237 of the Tax Code further
mandates that persons required to issue receipts or invoices should register these
documents with the BIR. In fact, RR No. 2-90 restored the requirement to register and
stamp receipts and invoices prior to their use.20 Thus, VAT-registered persons are directed
to issue duly registered invoices for every sale or lease of goods, properties or services,
containing the required information under the law.21
According to the CA, since petitioner issued invoices with the BIR’s authority to print, it
must be concluded that these invoices were not registered as they did not comply with
the invoicing requirements under Section 113, and the requirements for issuance of
receipts or sales or commercial invoices under Section 237. The CA declared that an
unregistered receipt could not be used as supporting document for input tax.22 It further
explained that Revenue Memorandum Circular (RMC) No. 42-2003 already clarified that
failure to comply with invoicing requirements would result in the disallowance of the claim
for input tax by the purchaser-claimant. Hence, the CA ruled, if the claim for refund or
issuance of a tax credit certificate is based on the taxpayer’s zero-rated sales, but the
invoicing requirements in the issuance of sales invoices are not complied with, the claim
for tax credit/refund of VAT on its purchases shall be denied. This is because the invoices
issued to its customers failed to depict that the taxpayer is VAT-registered and that its
sales are classified as zero-rated. According to the appellate court, however, 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.23

The CA further declared that petitioner failed to establish that its computer-generated
sales invoices were duly stamped with the approval of the BIR as shown by the letter-
authority dated April 17, 1997, considering that the said letter-authority was not
presented during the trial of the case, much less attached to the petition filed before
it.24 The fallo of the CA decision reads:

WHEREFORE, in view of the foregoing, the instant petition is DENIED. The Decision of the
Court of Tax Appeals in CTA Case No. 6128 is hereby AFFIRMED. No pronouncement as
to costs.

SO ORDERED.25

Undaunted by the adverse ruling of the appellate court, petitioner now seeks recourse to
this Court on the following grounds:

I.

THE DECISION OF THE COURT OF APPEALS AFFIRMING THE DENIAL OF PETITIONER’S

CLAIM FOR TAX CREDIT/REFUND IS CONTRARY TO PROVISIONS OF THE TAX CODE AND
APPLICABLE REGULATIONS AND DECISIONS OF THE HONORABLE SUPREME COURT.

II.

SECTIONS 113 AND 237 OF THE TAX CODE DO NOT REQUIRE PETITIONER TO REFLECT
ITS AUTHORITY TO PRINT IN ITS INVOICES. PETITIONER IS NOT REQUIRED BY ANY LAW
OR REGULATION TO REFLECT ITS AUTHORITY TO PRINT UPON ITS INVOICES. NEITHER
IS THE FAILURE PENALIZED BY ANY LAW OR STATUTE SUCH THAT THE INVOICES ARE
RENDERED INADMISSIBLE.

III.

THE FAILURE TO STATE THE TIN-V IN PETITIONER’S EXPORT SALES INVOICES SHOULD
NOT INVALIDATE PETITIONER’S CLAIM. PETITIONER’S EXPORT SALES INVOICES, WHICH
ARE ADMISSIBLE, COMPETENT AND MATERIAL EVIDENCE, SUFFICIENTLY PROVE
PETITIONER’S EXPORT SALES.26

The Issues

The issues to be resolved in the instant case are (1) whether the absence of the BIR
authority to print or the absence of the TIN-V in petitioner’s export sales invoices operates
to forfeit its entitlement to a tax refund/credit of its unutilized input VAT attributable to its
zero-rated sales; and (2) whether petitioner’s failure to indicate "TIN-V" in its sales
invoices automatically invalidates its claim for a tax credit certification.

Petitioner’s Arguments

Petitioner contends that Sections 113 and 237 of the Tax Code, and even RR 7-95, do not
require the taxpayer to reflect its authority to print in its invoices.27 Failure to print such
authority is not even penalized by any law or statute such that the invoices which do not
contain the BIR authority for petitioner to print its sales are rendered inadmissible in
evidence.28 Further, the authority to print under Section 238 of the Tax Code is a
requirement that is separate from and independent of the information that ought to be
reflected in the invoice or official receipt as mandated by Section 113, in relation to Section
237 of the Tax Code.29 The BIR has even ruled, in BIR Ruling DA-375-03, that receipts
which do not reflect that the taxpayer is VAT-registered do not automatically invalidate
the claim for an input tax credit.30 Moreover, RR 2-90 (which the appellate court cited in
the assailed decision) does not state that failure to reflect the authority to print on the
face of a sales invoice or receipt results in the outright invalidation of such sales invoice
or of the claim for tax credit/refund.31 It insists that RMC No. 42-03, which the CA likewise
relied on in the assailed decision, does not apply, for it relates to non-compliance with
invoicing requirements; the authority to print is not among the information required by
law or any regulation to be reflected in petitioner’s invoices.32

Petitioner asserts that even if it were assumed for the sake of argument that the BIR has
issued a regulation to the effect that failure to indicate the authority to print on the face
of a sales invoice would render it invalid, such regulation cannot prevail over the law that
it seeks to implement. It insists that any additional requirement imposed by the BIR for a
valid claim other than those mandated by law is invalid,33 and that the provisions of a
taxing act are not to be extended by implication.34

Further, petitioner contends that it was authorized by the BIR to use a computerized
accounting system35 through the letter-authority dated April 17, 1997.36 It avers that even
if the letter-authority was not offered in evidence, the Court ought to take judicial notice
thereof as an official act of the Executive Branch.37 Petitioner asserts that since its export
sales invoices were computer-generated under an approved computerized accounting
system, it is no longer mandated to comply with the requirements under Section 19 of RR
No. 2-90 on the authentication and registration of books, registers or records, authority
to print receipts, sales or commercial invoices; and registration and stamping of receipts
and invoices. Such requirements apply only to manually generated receipts and invoices.
Even granting arguendo that it was still required by RR No. 7-95 to indicate its authority
to print in its invoices, it was not mandated to obtain an authority to print as the burden
of securing the same falls upon the printer of the receipts.38

Petitioner further contends that the invoicing requirement of stating the TIN-V applies only
to domestic or local sales, given that the output tax (the input tax on the part of the local
purchaser), may be claimed by the latter as a credit against its output VAT. In such a
case, the invoicing requirements should be complied with in order for the local purchaser
to have a valid basis in its claim for crediting of input VAT. This, however, does not apply
in the instant case for the following reasons: petitioner’s export sales with its foreign
purchaser is subject to zero-rated VAT; its foreign purchaser cannot claim input VAT as it
is governed by a foreign taxing jurisdiction; and the latter is not a VAT-registered entity
in the Philippines.39 To buttress its claim, petitioner cites the decision of the CA in Intel
Technology Philippines, Inc. v. CIR.40

In any case, petitioner argues, it sufficiently proved its export sales since, other than the
subject invoices, it also submitted in evidence the following: certifications of inward
remittances; airway bills; export declarations; certification by Eliseo Aurellado, the
independent CPA duly commissioned by the tax court, attesting that petitioner made
export sales of ₱2,538,906,840.16 during the second quarter of 1998.
Petitioner pleads that its application for tax credit/refund should be granted to serve the
higher interest of justice, equity and fairness, and claims that technicalities should give
way to its substantive rights.41 While it may be true that taxes are the lifeblood of the
government, technicalities and legalisms, however exalted, should not be misused by the
government to keep money not belonging to it and thereby enrich itself at the expense of
its law-abiding citizens.

The Respondent’s Counter-Arguments

For his part, respondent Commissioner, through the Office of the Solicitor General,
maintains that the absence of the BIR authority to print and the TIN-V in its export sales
invoices is fatal to petitioner’s claim for refund.42 Section 113 of the Tax Code enumerates
the invoicing requirements for VAT-registered persons, which include, among others, a
statement that the seller is VAT-registered and the seller’s TIN.43 Section 237 of the same
Code, and Section 4.108.1 of RR No. 7-95, further require the issuance of duly registered
receipts or invoices for every sale or transaction, indicating thereon the purchaser’s TIN.44

A VAT-registered person is, therefore, required to issue a receipt or invoice with a TIN for
every consummated sale, and which, following Section 19 of RR No. 2-90,45 must be duly
registered with the BIR as evidenced by a stamp of the taxpayer’s authority to
print.46 Respondent stresses that Section 238 of the Tax Code mandates all persons
engaged in business to secure an authority to print receipts or invoices from the
BIR.47 There is an additional requirement that such authority to print must be stamped on
every receipt or invoice of a VAT-registered person. While it is not explicitly enumerated
in Sections 113 and 237 of the Tax Code as one of the invoicing requirements, it can be
implied from said provisions that such information must be reflected on the receipt or
invoice, as the stamping of the said BIR authority to print is a proof of the invoice being
BIR-registered.48 Absent the said authority to print, therefore, petitioner’s invoices are
considered unregistered, and thus cannot be used as supporting documents to prove its
input tax and eventually, its claim for tax refund.49

Respondent Commissioner further emphasizes that tax refunds/ credits are in the nature
of tax exemptions; hence, laws relating to them call for a strict application against the
claimant.50 The burden to prove the entitlement to the refund also rests on the taxpayer,
which, in this case, was not proven by petitioner.51 Moreover, petitioner’s argument, that
it was authorized by the BIR to use a computerized accounting system and as such is no
longer required to secure an authority to print, has no leg to stand on because the April
17, 1997 letter-authority52 from the BIR was not formally offered in evidence.53 It insists
that since the letter-authority is a mere correspondence containing matters that are not
of public knowledge and incapable of unquestionable demonstration, the Court cannot
take judicial notice thereof.54 And even if petitioner was authorized to use computerized
invoices, it was not excused from complying with the stamping and invoicing
requirements.55

Lastly, respondent contends that it is incorrect for petitioner to state that the invoicing
requirement under the Tax Code finds relevance only in domestic or local sales. The
provisions of the law and the BIR regulations on invoicing do not distinguish whether the
transaction is an export or local sale.56

The Court’s Ruling

The petition is partially granted.

Since the issues are interrelated, the Court shall delve into and resolve them
simultaneously.

The pertinent provision of the Tax Code on VAT on the sale of goods or properties,
particularly with respect to export sales, is Section 106(A)(2)(a)(1).57 The provision reads:
Section 106. Value-added Tax on Sale of Goods or Properties.

(A) Rate and Base of Tax.-- xxx

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).

Based on the above provision, export sales, or sales outside the Philippines, are subject
to VAT at 0% rate if made by a VAT-registered person.58 When applied to the tax base,
the 0% rate obviously results in no tax chargeable against the purchaser. The seller of
such transactions charges no output tax, but can claim a refund or tax credit certificate
for the VAT previously charged by suppliers.59

In the instant case, petitioner, as a VAT-registered as well as PEZA-registered entity

engaged in the export of advanced and large-scale ICs, is claiming a refund or issuance
of a tax credit certificate in the amount of ₱11,770,181.70 for VAT input taxes it paid on
its domestic purchases of goods and services covering the period April 1, 1998 to June
30, 1998. For petitioner (or other VAT-registered persons or entities whose sales are zero-
rated or effectively zero-rated) to validly claim a refund or tax credit, Section 112(A) of
the Tax Code provides:

Section 112. Refunds or Tax Credits of Input Tax.-

(A) Zero-rated or Effectively Zero-rated Sales. - Any VAT-registered person, whose sales
are zero-rated or effectively zero-rated may within two (2) years after the close of the
taxable quarter when the sales were made, apply for the issuance of a tax credit certificate
or refund of creditable input tax due or paid attributable to such sales, except transitional
input tax, to the extent that such input tax has not been applied against output tax:
Provided, however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1),
(2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange
proceeds thereof had been duly accounted for in accordance with the rules and regulations
of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is
engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of
goods or properties or services, and the amount of creditable input tax due or paid cannot
be directly and entirely attributed to any one of the transactions, it shall be allocated
proportionately on the basis of the volume of sales.60

Under Sections 106 (A)(2)(a)(1) in relation to 112(A) of the Tax Code, a taxpayer engaged
in zero-rated or effectively zero-rated transactions may apply for a refund or issuance of
a tax credit certificate for input taxes paid attributable to such sales upon complying with
the following requisites: (1) the taxpayer is engaged in sales which are zero-rated (like
export sales) or effectively zero-rated; (2) the taxpayer is VAT-registered; (3) the claim
must be filed within two years after the close of the taxable quarter when such sales were
made; (4) the creditable input tax due or paid must be attributable to such sales, except
the transitional input tax, to the extent that such input tax has not been applied against
the output tax; and (5) in case of zero-rated sales under Section 106(A)(2)(a)(1) and (2),
Section 106(B), and Section 108(B)(1) and (2), the acceptable foreign currency exchange
proceeds thereof had been duly accounted for in accordance with BSP rules and
regulations. It is added that, "where the taxpayer is engaged in zero-rated or effectively
zero-rated sale and also in taxable or exempt sale of goods or properties or services, and
the amount of creditable input tax due or paid cannot be directly or entirely attributed to
any one of the transactions, it shall be allocated proportionately on the basis of the volume
of the sales."

In this connection, petitioner, in order to prove that it was engaged in export sales during
the second quarter of 1998, offered in evidence copies of summary of export sales, sales
invoices, official receipts, airway bills, export declarations and certification of inward
remittances during the said period.61 In addition, petitioner’s Certificate of Registration
with RDO Control No. 96-540-00071362 issued by the BIR and Certificate of Registration
No. 95-13363issued by the PEZA were likewise offered in evidence to prove that it is a
VAT-registered entity as well as an Ecozone export enterprise.

To the mind of the Court, these documentary evidence submitted by petitioner, e.g.,
summary of export sales, sales invoices, official receipts, airway bills and export
declarations, prove that it is engaged in the "sale and actual shipment of goods from the
Philippines to a foreign country." In short, petitioner is considered engaged in export sales
(a zero-rated transaction) if made by a VAT-registered entity. Moreover, the certification
of inward remittances attests to the fact of payment "in acceptable foreign currency or its
equivalent in goods or services, and accounted for in accordance with the rules and
regulations of the BSP." Thus, petitioner’s evidence, juxtaposed with the requirements of
Sections 106 (A)(2)(a)(1) and 112(A) of the Tax Code, as enumerated earlier, sufficiently
establish that it is entitled to a claim for refund or issuance of a tax credit certificate for
creditable input taxes.

Significantly, the CTA and the CA have similarly found petitioner to be legally entitled to
a claim for refund or issuance of tax credit certificate of its unutilized VAT input taxes on
domestic purchases of goods and services attributable to its zero-rated sales. They denied
petitioner’s claim, however, on the ground that it purportedly failed to comply with the
invoicing requirements under Sections 113 and 237 of the Tax Code since its sales invoices
do not bear the BIR authority to print, and several of the invoices do not indicate the TIN-
V.

On the latter point, the Court disagrees with the CTA and CA. As correctly argued by
petitioner, there is no law or BIR rule or regulation requiring petitioner’s authority from
the BIR to print its sales invoices (BIR authority to print) to be reflected or indicated
therein. Sections 113, 237 and 238 of the Tax Code provide:

Sec. 113. Invoicing and Accounting Requirements for VAT-Registered Persons. –

(A) Invoicing Requirements. – A VAT-registered person shall, for every sale, issue
an invoice or receipt. In addition to the information required under Section 237, the
following information shall be indicated in the invoice or receipt:

(1) A statement that the seller is a VAT-registered person, followed by his

taxpayer’s identification number; and

(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.

(B) Accounting Requirements. – Notwithstanding the provisions of Section 233, all

persons subject to the value-added tax under Sections 106 and 108 shall, in addition
to the regular accounting records required, maintain a subsidiary sales journal and
subsidiary purchase journal on which the daily sales and purchases are recorded.
The subsidiary journals shall contain such information as may be required by the
Secretary of Finance.64 (emphasis supplied)

Sec. 237. Issuance of Receipts or Sales or Commercial Invoices. – All persons subject to
an internal revenue tax shall, for each sale or transfer of merchandise or for services
rendered valued at Twenty-five pesos (P25.00) or more, issue duly registered receipts or
sales or commercial invoices, prepared at least in duplicate, showing the date of
transaction, quantity, unit cost and description of merchandise or nature of service:
Provided, however, That in the case of sales, receipts or transfers in the amount of One
Hundred Pesos (P100.00) or more, or regardless of amount, where the sale or transfer is
made by a person liable to value-added tax to another person also liable to value-added
tax; or where the receipt is issued to cover payment made as rentals, commissions,
compensations or fees, receipts or invoices shall be issued which shall show the name,
business style, if any, and address of the purchaser, customer or client; Provided, further,
That where the purchaser is a VAT-registered person, in addition to the information herein
required, the invoice or receipt shall further show the Taxpayer Identification Number
(TIN) of the purchaser.

The original of each receipt or invoice shall be issued to the purchaser, customer or client
at the time the transaction is effected, who, if engaged in business or in the exercise of
profession, shall keep and preserve the same in his place of business for a period of three
(3) years from the close of the taxable year in which such invoice or receipt was issued,
while the duplicate shall be kept and preserved by the issuer, also in his place of business,
for a like period.

The Commissioner may, in meritorious cases, exempt any person subject to an internal
revenue tax from compliance with the provisions of this Section.65 (emphasis supplied)

Sec. 238. Printing of Receipts or Sales or Commercial Invoices. – All persons who are
engaged in business shall secure from the Bureau of Internal Revenue an authority to
print receipts or sales or commercial invoices before a printer can print the same.

No authority to print receipts or sales or commercial invoices shall be granted unless the
receipts or invoices to be printed are serially numbered and shall show, among other
things, the name, business style, Taxpayer Identification Number (TIN) and business
address of the person or entity to use the same, and such other information that may be
required by rules and regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.

All persons who print receipt or sales or commercial invoices shall maintain a
logbook/register of taxpayer who availed of their printing services. The logbook/register
shall contain the following information:

(1) Names, Taxpayer Identification Numbers of the persons or entities for whom the
receipts or sales or commercial invoices are printed; and

(2) Number of booklets, number of sets per booklet, number of copies per set and
the serial numbers of the receipts or invoices in each booklet. (emphasis supplied)

RR 2-90, as cited by respondent Commissioner, also states in its Section 19(d) that:

Section 19. Authentication and registration of books, register, or records; authority to

print receipts, sales or commercial invoices; and registration and stamping of receipts and
invoices.

xxxx

(d) Registration and stamping of receipts and invoices

Before being used, the printed receipts, sales or commercial invoices shall be registered
with the revenue district officer where the principal place of business of the taxpayer is
located within thirty (30) days from the date of printing the same. The registration of the
printed receipts or invoices shall be evidenced by an appropriate stamp on the face of the
taxpayer’s copy of the authority to print as well as on the front cover, on the back of the
middle invoice or receipt and on the back of the last invoice or receipt of the registered
booklet or pad, authenticated by the signature of the officer authorized to place the stamp
thereon. (emphasis supplied)

RR 7-95, the Consolidated VAT Regulations, also states in Section 4.108-1 that:
Section 4.108-1. Invoicing Requirements. – All VAT-registered persons shall, for every
sale or lease of goods or properties or services, issue duly registered receipts or sales or
commercial invoices which must show:

1. the name, TIN and address of seller;

2. date of transaction;

3. quantity, unit cost and description of merchandise or nature of service;

4. the name, TIN, business style, if any, and address of the VAT-registered
purchaser, customer or client;

5. the word "zero-rated" imprinted on the invoice covering zero-rated sales; and

6. the invoice value or consideration.

In the case of sale of real property subject to VAT and where the zonal or market value is
higher than the actual consideration, the VAT shall be separately indicated in the invoice
or receipt.

Only VAT-registered persons are required to print their TIN followed by the word "VAT" in
their invoices or receipts and this shall be considered as a "VAT-invoice." All purchases
covered by invoices other than "VAT Invoice" shall not give rise to any input tax.

If the taxable person is also engaged in exempt operations, he should issue separate
invoices or receipts for the taxable and exempt operations. A "VAT-invoice" shall be issued
only for sales of goods, properties or services subject to VAT imposed in Sections 100 and
102 of the Code.

The invoice or receipt shall be prepared at least in duplicate, the original to be given to
the buyer and the duplicate to be retained by the seller as part of his accounting records.

It is clear from the foregoing that while entities engaged in business are required to secure
from the BIR an authority to print receipts or invoices and to issue duly registered receipts
or invoices, it is not required that the BIR authority to print be reflected or indicated
therein. Only the following items are required to be indicated in the receipts or invoices:
(1) a statement that the seller is a VAT-registered entity followed by its TIN-V; (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) date of the transaction; (4)
quantity of merchandise; (5) unit cost; (6) description of merchandise or nature of
service; (7) the name, business style, if any, and address of the purchaser, customer or
client in the case of sales, receipt or transfers in the amount of ₱100.00 or more, or
regardless of the amount, where the sale or transfer is made by a person liable to VAT to
another person also liable to VAT, or where the receipt is issued to cover payment made
as rentals, commissions, compensations or fees; and (8) the TIN of the purchaser where
the purchaser is a VAT-registered person.

It should be noted that petitioner is engaged in export sales, such that the purchasers of
its goods are foreign entities, which are, logically, not VAT-registered in our country or
liable to pay VAT in our jurisdiction. Items (7) and (8) in the above enumeration do not,
thus, apply to petitioner; that is, they need not be reflected or indicated in the invoices or
receipts, given that it is an entity engaged in export sales, and the purchasers of its goods
which are foreign entities are not VAT-registered in our country nor liable to pay VAT in
our jurisdiction.

In any case, the above cited provisions of law and revenue regulations do not provide that
failure to reflect or indicate in the invoices or receipts the BIR authority to print, as well
as the TIN-V, would result in the outright invalidation of these invoices or receipts. Neither
is it provided therein that such omission or failure would result in the outright denial of a
claim for tax credit/refund. Instead, Section 264 of the Tax Code imposes the penalty of
fine and imprisonment for, among others, invoices or receipts that do not truly reflect or
contain all the required information, to wit:

Section 264. Failure or Refusal to Issue Receipts or Sales or Commercial Invoices,

Violations Related to the Printing of such Receipts or Invoices or Other Violations. –

(a) Any person who, being required under Section 237 to issue receipts or sales or
commercial invoices, fails or refuses to issue such receipts or invoices, issues
receipts or invoices that do not truly reflect and/or contain all the informations
required to be shown therein or uses multiple or double receipts or invoices, shall,
upon conviction for each act or omission, be punished by a fine of not less than One
thousand pesos (P1,000) but not more than Fifty thousand pesos (P50,000) and
suffer imprisonment of not less than two (2) years but not more than four (4) years.

(b) Any person who commits any of the acts enumerated hereunder shall be
penalized in the same manner and to the same extent as provided for in this Section:

(1) Printing of receipts or sales or commercial invoices without authority from

the Bureau of Internal Revenue; or

(2) Printing of double or multiple sets of invoices or receipts;

(3) Printing of unnumbered receipts or sales or commercial invoices, not

bearing the name, business style, Taxpayer Identification Number, and
business address of the person or entity.

The appellate court’s reliance on RMC No. 42-2003 is misplaced. The said Circular clarified,
inter alia, that failure to comply with the invoicing requirements on the documents
supporting the sale of goods and services would result in the disallowance of the claim for
refund or issuance of a tax credit certificate of creditable input taxes. The said Circular
mentioned as an example the failure to state the TIN of the taxpayer in the invoice or
receipt. However, in petitioner’s case, the principal ground for the denial of its claim for
refund or issuance of a tax credit certificate is its failure to reflect or indicate in its invoices
the BIR authority to print. As earlier discussed, the BIR authority to print is not one of the
items required by law to be reflected or indicated in the invoices or receipts. In any case,
the said Circular was issued on July 15, 2003 by then Commissioner Guillermo L. Parayno,
Jr., while petitioner’s claim was filed on May 18, 1999. Hence, RMC No. 42-2003 cannot
be applied retroactively because to do so would be prejudicial to petitioner. In a long line
of cases,66 the Court has affirmed that the rulings, circulars, rules and regulations
promulgated by the Commissioner on Internal Revenue would have no retroactive
application if to so apply them would be prejudicial to the taxpayers.

It bears reiterating that while the pertinent provisions of the Tax Code and the rules and
regulations implementing them require entities engaged in business to secure a BIR
authority to print invoices or receipts and to issue duly registered invoices or receipts, it
is not specifically required that the BIR authority to print be reflected or indicated therein.
Indeed, what is important with respect to the BIR authority to print is that it has been
secured or obtained by the taxpayer, and that invoices or receipts are duly registered.

To stress, petitioner, as a VAT-registered entity, is engaged in export sales of advanced

and large-scale ICs and, as such, under Section 106 (A)(2)(a)(1) of the Tax Code, its sales
or transactions are subject to VAT at 0% rate. Further, subject to the requirements stated
in Section 112(A), it is entitled to claim refund or issuance of a tax credit certificate for
input VAT taxes attributable to its export sales. As the Court had the occasion to explain
since no output VAT was imposed on the zero-rated export sales, what the government
reimburses or refunds to the claimant is the input VAT paid – thus, the necessity for the
input VAT paid to be substantiated by purchase invoices or official receipts.67 These sales
invoices or receipts issued by the supplier are necessary to substantiate the actual amount
or quality of goods sold and their selling price, and, taken collectively, are the best means
to prove the input VAT payments of the claimant.68
In a claim for refund or issuance of a tax credit certificate attributable to zero-rated sales,
what is to be closely scrutinized is the documentary substantiation of the input VAT paid,
as may be proven by other export documents, rather than the supporting documents for
the zero-rated export sales. And since petitioner has established by sufficient evidence
that it is entitled to a refund or issuance of a tax credit certificate, in accordance with the
requirements of Sections 106 (A)(2)(a)(1) and 112(A) of the Tax Code, then its claim
should not be denied, notwithstanding its failure to state on the invoices the BIR authority
to print and the TIN-V. Worthy of mentioning again is the fact that even the CTA and the
CA have found petitioner to be legally entitled to a claim for refund or issuance of a tax
credit certificate of its unutilized VAT input taxes on domestic purchases of goods and
services attributable to its zero-rated sales.

What applies to petitioner, as a PEZA-registered export enterprise, is the Court’s

pronouncement that leniency in the implementation of the VAT is an imperative, precisely
to spur economic growth in the country and attain global competitiveness as envisioned
in our laws.69 The incentives offered to PEZA enterprises, among which are tax exemptions
and tax credits, ultimately redound to the benefit of the national economy, enticing as
they do more enterprises to invest and do business within the zones, thus creating more
employment opportunities and infusing more dynamism to the vibrant interplay of market
forces.70

Even as the Court now holds that petitioner is legally entitled to a refund or issuance of a
tax credit certificate of its unutilized VAT input taxes on domestic purchases of goods and
services attributable to its zero-rated sales, the case shall nevertheless be remanded to
the CTA for proper determination and computation of petitioner’s tax credit/refund,
considering that in the Report71 of the independent auditor, Eliseo Aurellado, only the
amount of ₱9,688,809.00 was deemed as petitioner’s valid claim for tax
credit.72 According to Aurellado, the difference of ₱2,081,372.32 from petitioner’s input
VAT claim of ₱11,770,181.70 was not supported by sufficient documentary proof.73 The
Court, not being a trier of facts, cannot certainly decide this factual circumstance.

WHEREFORE, premises considered, the petition is PARTIALLY GRANTED. The Decision

dated August 12, 2004 of the CA in CA-G.R. SP No. 79327 is REVERSED and SET ASIDE.
The instant case is REMANDED to the Court of Tax Appeals for the determination and
computation of petitioner’s tax credit/refund.

SO ORDERED.

G.R. No. 182364 August 3, 2010

AT&T COMMUNICATIONS SERVICES PHILIPPINES, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

CARPIO MORALES, J.:

AT&T Communications Services Philippines, Inc. (petitioner) is a domestic corporation
primarily engaged in the business of providing information, promotional, supportive and
liaison services to foreign corporations such as AT&T Communications Services
International Inc., AT&T Solutions, Inc., AT&T Singapore, Pte. Ltd.,, AT&T Global
Communications Services, Inc. and Acer, Inc., an enterprise registered with the Philippine
Economic Zone Authority (PEZA).

Under Service Agreements forged by petitioner with the above-named corporations,

remuneration is paid in U.S. Dollars and inwardly remitted in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas (BSP).

For the calendar year 2002, petitioner incurred input VAT when it generated and recorded
zero-rated sales in connection with its Service Agreements in the peso equivalent of
₱56,898,744.05. Petitioner also incurred input VAT from purchases of capital goods and
other taxable goods and services, and importation of capital goods.

Despite the application of petitioner’s input VAT against its output VAT, an excess of
unutilized input VAT in the amount of ₱2,050,736.69 remained. As petitioner’s unutilized
input VAT could not be directly and exclusively attributed to either of its zero-rated sales
or its domestic sales, an allocation of the input VAT was made which resulted in the
amount of ₱1,801,826.82 as petitioner’s claim attributable to its zero-rated sales.

On March 26, 2004, petitioner filed with the Commissioner of Internal Revenue
(respondent) an application for tax refund and/or tax credit of its excess/unutilized input
VAT from zero-rated sales in the said amount of ₱1,801,826.82.1

To prevent the running of the prescriptive period, petitioner subsequently filed a petition
for review with the Court of Tax Appeals (CTA) which was docketed as CTA Case No. 6907
and lodged before its First Division.

In support of its claim, petitioner presented documents including its Summary of Zero-
Rated Sales (Exhibit "DD") with corresponding supporting documents; VAT invoices on
which were stamped "zero-rated" and bank credit advices (Exhibits "EE-1" to "EE-56");
copies of Service Agreements (Exhibits "N" to "Q"); and report of the commissioned
certified public accountant (Exhibit "AA" to "AA-22").

After petitioner presented its evidence, respondent did not, despite notice, proffer any
opposition to it. He was eventually declared to have waived his right to present
evidence.1avvphi1

By Decision of February 23, 2007,2 the CTA First Division, conceding that petitioner’s
transactions fall under the classification of zero-rated sales, nevertheless denied
petitioner’s claim "for lack of substantiation," disposing as follows:

In reiteration, considering that the subject revenues pertain to gross receipts from
services rendered by petitioner, valid VAT official receipts and not mere sales invoices
should have been submitted in support thereof. Without proper VAT official receipts, the
foreign currency payments received by petitioner from services rendered for the four (4)
quarters of taxable year 2002 in the sum of US$1,102,315.48 with the peso equivalent of
₱56,898,744.05 cannot qualify for zero-rating for VAT purposes. Consequently, the
claimed input VAT payments allegedly attributable thereto in the amount of ₱1,801,826.82
cannot be granted. It is clear from the provisions of Section 112 (A) of the NIRC of 1997
that there must be zero-rated or effectively zero-rated sales in order that a refund of input
VAT could prosper.

x x x x3 (emphasis and underscoring supplied)

The CTA First Division, relying on Sections 1064 and 1085 of the Tax Code, held that since
petitioner is engaged in sale of services, VAT Official Receipts should have been presented
in order to substantiate its claim of zero-rated sales, not VAT invoices which pertain to
sale of goods or properties.
On petition for review, the CTA En Banc, by Decision of February 18, 2008,6 affirmed that
of the CTA First Division. Petitioner’s motion for reconsideration having been denied by
Resolution of April 2, 2008, the present petition for review was filed.

The petition is impressed with merit.

A taxpayer engaged in zero-rated transactions may apply for tax refund or issuance of tax
credit certificate for unutilized input VAT, subject to the following requirements: (1) the
taxpayer is engaged in sales which are zero-rated (i.e., export sales) or effectively zero-
rated; (2) the taxpayer is VAT-registered; (3) the claim must be filed within two years
after the close of the taxable quarter when such sales were made; (4) the creditable input
tax due or paid must be attributable to such sales, except the transitional input tax, to the
extent that such input tax has not been applied against the output tax; and (5) in case of
zero-rated sales under Section 106 (A) (2) (a) (1) and (2), Section 106 (B) and Section
108 (B) (1) and (2), the acceptable foreign currency exchange proceeds thereof have
been duly accounted for in accordance with BSP rules and regulations.7

Commissioner of Internal Revenue v. Seagate Technology (Philippines) 8 teaches that

petitioner, as zero-rated seller, hence, directly and legally liable for VAT, can claim a
refund or tax credit certificate.

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

Applying the destination principle to the exportation of goods, automatic zero rating 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. (emphasis and underscoring supplied)

Revenue Regulation No. 3-88 amending Revenue Regulation No. 5-87 provides the
requirements in claiming tax credits/refunds:

Sec. 2. Section 16 of Revenue Regulations 5-87 is hereby amended to read as follows: x

xx

(c) Claims for tax credits/refunds – Application for Tax Credit/Refund of Value-Added Tax
Paid (BIR Form No. 2552) shall be filed with the Revenue District Office of the city or
municipality where the principal place of business of the applicant is located or directly
with the Commissioner, Attention: VAT Division.

A photocopy of the purchase invoice or receipt evidencing the value added tax
paid shall be submitted together with the application. The original copy of the said
invoice/receipt, however shall be presented for cancellation prior to the issuance of the
Tax Credit Certificate or refund. x x x (emphasis and underscoring supplied)

Section 113 of the Tax Code does not create a distinction between a sales invoice and an
official receipt.

Sec. 113. Invoicing and Accounting Requirements for VAT-Registered Persons. –

(A) Invoicing Requirements. – A VAT-registered person shall, for every sale,

issue an invoice or receipt. In addition to the information required under Section
237, the following information shall be indicated in the invoice or receipt:

(1) A statement that the seller is a VAT-registered person, followed by his

taxpayer’s identification number (TIN); and
 (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.
(emphasis, italics and underscoring supplied)

Section 110 of the 1997 Tax Code in fact provides:

Section 110. Tax Credits –

A. Creditable Input Tax. –

(1) Any input tax evidenced by a VAT invoice or official receipt issued in
accordance with Section 113 hereof on the following transactions shall be creditable
against the output tax:

(b) Purchase of services on which a value-added tax has actually been paid. (emphasis,
italics and underscoring supplied)

Parenthetically, to determine the validity of petitioner’s claim as to unutilized input VAT,

an invoice would suffice provided the requirements under Sections 113 and 237 of the Tax
Code are met.1avvphi1

Sales invoices are recognized commercial documents to facilitate trade or credit

transactions. They are proofs that a business transaction has been concluded, hence,
should not be considered bereft of probative value.9 Only the preponderance of evidence
threshold as applied in ordinary civil cases is needed to substantiate a claim for tax refund
proper.10

IN FINE, the Court finds that petitioner has complied with the substantiation requirements
to prove entitlement to refund/tax credit. The Court is not a trier of facts, however, hence
the need to remand the case to the CTA for determination and computation of petitioner’s
refund/tax credit.

WHEREFORE, the petition is GRANTED. The Decision of February 18, 2008 of the Court
of Tax Appeals En Bancis REVERSED and SET ASIDE. Let the case be REMANDED to
the Court of Tax Appeals First Division for the determination of petitioner’s tax
credit/refund.

SO ORDERED.

G.R. No. 180043 July 14, 2009

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
PHILIPPINE AIRLINES, INC., Respondent.

DECISION

CHICO-NAZARIO, J.:
In this Petition for Review on Certiorari, under Rule 45 of the Revised Rules of Court,
petitioner Commissioner of Internal Revenue assails the Decision1 of the Court of Tax
Appeals (CTA) En Banc dated 9 August 2007 in CTA EB No. 221, affirming the
Decision2 dated 14 June 2006 of the CTA First Division in CTA Case No. 6735, which
granted the claim of respondent Philippine Airlines, Inc. (PAL) for the refund of its
Overseas Communications Tax (OCT) for the period April to December 2001.

Petitioner, as the Commissioner of the Bureau of Internal Revenue (BIR), is responsible

for the assessment and collection of all national internal revenue taxes, fees, and charges,
including the 10% Overseas Communications Tax (OCT), imposed by Section 120 of the
National Internal Revenue Code (NIRC) of 1997, which reads:

SEC. 120. Tax on Overseas Dispatch, Message or Conversation Originating from the
Philippines. -

(A) Persons Liable—There shall be collected upon every overseas dispatch, message or
conversation transmitted from the Philippines by telephone, telegraph, telewriter
exchange, wireless and other communication equipment service, a tax of ten percent
(10%) on the amount paid of [the transaction involving overseas dispatch, message or
conversation] such services. The tax imposed in this Section shall be payable by the
person paying for the services rendered and shall be paid to the person rendering the
services who is required to collect and pay the tax within twenty (20) days after the end
of each quarter.

On the other hand, respondent is a domestic corporation organized under the corporate
laws of the Republic of the Philippines; declared the national flag carrier of the country;
and the grantee under Presidential Decree No. 15903 of a franchise to establish, operate,
and maintain transport services for the carriage of passengers, mail, and property by air,
in and between any and all points and places throughout the Philippines, and between the
Philippines and other countries.41avvphi1

For the period January to December 2001, the Philippine Long Distance Telephone
Company (PLDT) collected from respondent the 10% OCT on the amount paid by the latter
for overseas telephone calls it had made through the former. In all, PLDT collected from
respondent the amount of ₱202,471.18 as OCT for 2001, summarized as follows5:

PERIOD AMOUNT

January to March 2001 ₱ 75,332.26

April to June 2001 50,271.43

July to September 2001 43,313.96

October to December 2001 33,553.53

Total ₱ 202,471.18

On 8 April 2003, respondent filed with the BIR an administrative claim for refund of the
₱202,471.18 OCT it alleged to have erroneously paid in 2001. In a letter 6 dated 4 April
2003, addressed to petitioner, Ma. Stella L. Diaz (Diaz), the Assistant Vice-President for
Financial Planning & Analysis of respondent, explained that the claim for refund of
respondent was based on its franchise, Section 13 of Presidential Decree No. 1590, which
granted it (1) the option to pay either the basic corporate income tax on its annual net
taxable income or the two percent franchise tax on its gross revenues, whichever was
lower; and (2) the exemption from all other taxes, duties, royalties, registration, license
and other fees and charges imposed by any municipal, city, provincial or national authority
or government agency, now or in the future, except only real property tax. Also invoking
BIR Ruling No. 97-947 dated 13 April 1994, Diaz maintained that, other than being liable
for basic corporate income tax or the franchise tax, whichever was lower, respondent was
clearly exempted from all other taxes, including OCT, by virtue of the "in lieu of all taxes"
clause in Section 13 of Presidential Decree No. 1590.

Petitioner failed to act on the request for refund of respondent, which prompted
respondent to file on 4 June 2003, with the CTA in Division, a Petition for Review, docketed
as CTA Case No. 6735. Respondent sought the refund of the amount ₱127,138.92,
representing OCT, which PLDT erroneously collected from respondent for the second, third
and fourth quarters of 2001.8 The claim of respondent for the refund of the OCT for the
first quarter of 2001, amounting to ₱75,323.26, had already prescribed after the passing
of more than two years since said amount was paid.

Respondent alleged in its Petition that per its computation, reflected in its annual income
tax return, it incurred a net loss in 2001 resulting in zero basic corporate income tax
liability, which was necessarily lower than the franchise tax due on its gross revenues.
Respondent argued that in opting for the basic corporate income tax, regardless of
whether or not it actually paid any amount as tax, it was already entitled to the exemption
from all other taxes granted to it by Section 13 of Presidential Decree No. 1590. 9

After a hearing on the merits, the CTA First Division rendered a Decision 10 dated 14 June
2006, the dispositive part of which reads:

WHEREFORE, the Petition for Review is hereby GRANTED. Respondent is ORDERED to

refund to the petitioner the substantiated amount of ₱126,243.80 representing the
erroneously collected 10% Overseas Communications Tax for the period April to December
2001.

The CTA First Division reasoned that under Section 13 of Presidential Decree No. 1590,
respondent had the option to choose between two alternatives: the basic corporate income
tax and the franchise tax, whichever would result in a lower amount of tax, and this would
be in lieu of all other taxes, with the exception only of tax on real property. In the event
that respondent incurred a net loss for the taxable year resulting in zero basic corporate
income tax liability, respondent could not be required to pay the franchise tax before it
could avail itself of the exemption from all other taxes under Section 13 of Presidential
Decree No. 1590. The possibility that respondent would incur a net loss for a given taxable
period and, thus, have zero liability for basic corporate income tax, was already anticipated
by Section 13 of Presidential Decree No. 1590, the very same section granting respondent
tax exemption, since it authorized respondent to carry over its excess net loss as a
deduction for the next five taxable years.

However, the CTA First Division held that out of the total amount of ₱127,138.92
respondent sought to refund, only the amount of ₱126,243.80 was supported by either
original or photocopied PLDT billing statements, original office receipts, and original copies
of check vouchers of respondent. Respondent was also able to prove, through testimonial
evidence, that the OCT collected by PLDT from it was included in the quarterly percentage
tax returns of PLDT for the second, third, and fourth quarters of 2001, which were
submitted to and received by an authorized agent bank of the BIR.11

Not satisfied with the foregoing Decision dated 14 June 2006, petitioner filed a Motion for
Reconsideration, which was denied by the CTA First Division in a Resolution dated 17
October 2006. 12

Petitioner filed an appeal with the CTA en banc, docketed as CTA EB No. 221. The latter
promulgated its Decision13on 9 August 2007 denying petitioner’s appeal. The CTA En Banc
found that Presidential Decree No. 1590 does not provide that only the actual payment of
basic corporate income tax or franchise tax by respondent would entitle it to the tax
exemption provided under Section 13 of the latter’s franchise. Like the CTA First Division,
the CTA en banc ruled that by providing for net loss carry-over, Presidential Decree No.
1590 recognized the possibility that respondent would end up with a net loss in the
computation of its taxable income, which would mean zero liability for basic corporate
income tax. The CTA En Banc further cited Commissioner of Internal Revenue v. Philippine
Airlines, Inc.14 (PAL case) to support its conclusions. In the said case, this Court declared
that despite the fact that respondent did not pay any basic corporate income tax, given
its net loss position for the taxable years concerned, it was still exempted from paying all
other taxes, including final withholding tax on interest income, pursuant to Section 13 of
Presidential Decree No. 1590. Lastly, the CTA en banc sustained the finding of the CTA
First Division that respondent was only able to establish its claim for OCT refund in the
amount of ₱126,243.80.

The CTA En Banc denied petitioner’s Motion for Reconsideration in a Resolution dated 11
October 2007.15

Hence, the present Petition for Review where the petitioner raises the following issues:

THE COURT OF TAX APPEALS EN BANC ERRED IN HOLDING THAT THE PHRASE "IN LIEU
OF ALL OTHER TAXES" IN SECTIONS 13 AND 14 OF PRESIDENTIAL DECREE NO. 1590
DOES NOT CONTEMPLATE THE FULFILLMENT OF A CONDITION BEFORE THE EXEMPTION
FROM ALL OTHER TAXES MAY BE APPLIED; AND

II

TAX REFUNDS ARE IN THE NATURE OF TAX EXEMPTIONS. AS SUCH, THEY SHOULD BE
CONSTRUED STRICTISSIMI JURIS AGAINST THE PERSON OR ENTITY CLAIMING THE
EXEMPTION.16

The present Petition is without merit.

Petitioner argues that the PAL case is not applicable to the case at bar, since the former
involves final withholding tax on interest income, while the latter concerns another type
of tax, the OCT.17

Petitioner’s argument is untenable.

Pertinent portions of Section 13 of Presidential Decree No. 1590 are quoted hereunder:

Section 13. In consideration of the franchise and rights hereby granted, the grantee shall
pay to the Philippine Government during the life of this franchise, whichever of subsections
(a) and (b) hereunder will result in a lower tax:

(a) The basic corporate income tax based on the grantee’s annual net taxable
income computed in accordance with the provisions of the National Internal Revenue
Code; or

(b) A franchise tax of two per cent (2%) of the gross revenues, derived by the
grantee from all sources, without distinction as to transport or non-transport
operations; provided, that with respect to international air-transport service, only
the gross passenger, mail and freight revenues from its outgoing flights shall be
subject to this tax.

The tax paid by grantee under either of the above alternatives shall be in lieu of all other
taxes, duties, royalties, registration, license, and other fees and charges of any kind,
nature, or description imposed, levied, established, assessed or collected by any
municipal, city, provincial, or national authority or government agency, now or in the
future x x x

xxxx

The grantee, shall, however, pay the tax on its real property in conformity with existing
law.
The language used in Section 13 of Presidential Decree No. 1590, granting respondent tax
exemption, is clearly all-inclusive. The basic corporate income tax or franchise tax paid by
respondent shall be "in lieu of all other taxes, duties, royalties, registration, license, and
other fees and charges of any kind, nature, or description imposed, levied, established,
assessed or collected by any municipal, city, provincial, or national authority or
government agency, now or in the future x x x," except only real property tax. Even a
meticulous examination of Presidential Decree No. 1590 will not reveal any provision
therein limiting the tax exemption of respondent to final withholding tax on interest income
or excluding from said exemption the OCT.

Moreover, although the PAL case may involve a different type of tax, certain
pronouncements made by the Court therein are still significant in the instant case.

In the PAL case, petitioner likewise opposed the claim for refund of respondent based on
the argument that the latter was not exempted from final withholding tax on interest
income, because said tax should be deemed part of the basic corporate income tax, which
respondent had opted to pay. This Court was unconvinced by petitioner’s argument,
ratiocinating that "basic corporate income tax," under Section 13(a) of Presidential Decree
No. 1590, relates to the general rate of 35% (reduced to 32% by the year 2000) imposed
on taxable income by Section 27(A) of the NIRC. Although the definition of "gross income"
is broad enough to include all passive incomes, the passive incomes already subjected to
different rates of final tax to be withheld at source shall no longer be included in the
computation of gross income, which shall be used in the determination of taxable income.
The interest income of respondent is already subject to final withholding tax of 20%, and
no longer to the basic corporate income tax of 35%. Having established that final tax on
interest income is not part of the basic corporate income tax, then the former is considered
as among "all other taxes" from which respondent is exempted under Section 13 of
Presidential Decree No. 1590.

It is true that the discussion in the PAL case on "gross income" is immaterial to the case
at bar. OCT is not even an income tax. It is a business tax, which the government imposes
on the gross annual sales of operators of communication equipment sending overseas
dispatches, messages or conversations from the Philippines. According to Section 120 of
the NIRC, the person paying for the services rendered (respondent, in this case) shall pay
the OCT to the person rendering the service (PLDT); the latter, in turn, shall remit the
amount to the BIR. If this Court deems that final tax on interest income – which is also
an income tax, but distinct from basic corporate income tax – is included among "all other
taxes" from which respondent is exempt, then with all the more reason should the Court
consider OCT, which is altogether a different type of tax, as also covered by the said
exemption.

Petitioner further avers that respondent cannot avail itself of the benefit of the "in lieu of
all other taxes" proviso in Section 13 of Presidential Decree No. 1590 when it made no
actual payment of either the basic corporate income tax or the franchise tax.

Petitioner made the same averment in the PAL case, which the Court rejected for the
following reasons:

A careful reading of Section 13 rebuts the argument of the CIR that the "in lieu of all other
taxes" proviso is a mere incentive that applies only when PAL actually pays something. It
is clear that PD 1590 intended to give respondent the option to avail itself of Subsection
(a) or (b) as consideration for its franchise. Either option excludes the payment of other
taxes and dues imposed or collected by the national or the local government. PAL has the
option to choose the alternative that results in lower taxes. It is not the fact of tax payment
that exempts it, but the exercise of its option.

Under Subsection (a), the basis for the tax rate is respondent’s annual net taxable income,
which (as earlier discussed) is computed by subtracting allowable deductions and
exemptions from gross income. By basing the tax rate on the annual net taxable income,
PD 1590 necessarily recognized the situation in which taxable income may result in a
negative amount and thus translate into a zero tax liability.
xxxx

The fallacy of the CIR’s argument is evident from the fact that the payment of a measly
sum of one peso would suffice to exempt PAL from other taxes, whereas a zero liability
arising from its losses would not. There is no substantial distinction between a zero tax
and a one-peso tax liability.18 (Emphases ours.)

In insisting that respondent needs to actually pay a certain amount as basic corporate
income tax or franchise tax, before it can enjoy the tax exemption granted to it, petitioner
places too much reliance on the use of the word "pay" in the first line of Section 13 of
Presidential Decree No. 1590.

It must do well for petitioner to remember that a statute’s clauses and phrases should not
be taken as detached and isolated expressions, but the whole and every part thereof must
be considered in fixing the meaning of any of its parts.19 A strict interpretation of the word
"pay" in Section 13 of Presidential Decree No. 1590 would effectively render nugatory the
other rights categorically conferred upon the respondent by its franchise.

Section 13 of Presidential Decree No. 1590 clearly gives respondent the option to "pay"
either basic corporate income tax on its net taxable income or franchise tax on its gross
revenues, whichever would result in lower tax. The rationale for giving respondent such
an option is explained in the PAL case, to wit:

Notably, PAL was owned and operated by the government at the time the franchise was
last amended. It can reasonably be contemplated that PD 1590 sought to assist the
finances of the government corporation in the form of lower taxes. When the respondent
operates at a loss (as in the instant case), no taxes are due; in this [sic] instances, it has
a lower tax liability than that provided by Subsection (b).20

In the event that respondent incurs a net loss, it shall have zero liability for basic corporate
income tax, the lowest possible tax liability. There being no qualification to the exercise
of its options under Section 13 of Presidential Decree No. 1590, then respondent is free
to choose basic corporate income tax, even if it would have zero liability for the same in
light of its net loss position for the taxable year. Additionally, a ruling by this Court
compelling respondent to pay a franchise tax when it incurs a net loss and is, thus, not
liable for any basic corporate income tax would be contrary to the evident intent of the
law to give respondent options and to make the latter liable for the least amount of tax.

Moreover, then President Ferdinand E. Marcos, the author of Presidential Decree No. 1590,
was mindful of the possibility that respondent would incur a net loss for a taxable year,
resulting in zero tax liability for basic corporate income tax, when he included in the
franchise of respondent the following provisions:

For the purposes of computing the basic corporate income tax as provided herein, the
grantee is authorized:

xxxx

(2) To carry over as a deduction from taxable income any net loss incurred in any year up
to five years following the year of such loss.

In allowing respondent to carry over its net loss for five consecutive years following the
year said loss was incurred, Presidential Decree No. 1590 takes into account the possibility
that respondent shall be in a net loss position for six years straight, during which it shall
have zero basic corporate income tax liability. The Court also notes that net loss carry-
over may only be used in the computation of basic corporate income tax. Hence, if
respondent is required to pay a franchise tax every time it has zero basic corporate income
tax liability due to net loss, then it shall never have the opportunity to avail itself of the
benefit of net loss carry-over.
Finally, petitioner contends that according to well-established doctrine, a tax refund, which
is in the nature of a tax exemption, should be construed strictissimi juris against the
taxpayer.21 However, when the claim for refund has clear legal basis and is sufficiently
supported by evidence, as in the present case, then the Court shall not hesitate to grant
the same.

In its previous discussion, the Court has already established that by merely exercising its
option to pay for basic corporate income tax – even if it had zero liability for the same due
to its net loss position in 2001 – respondent was already exempted from all other taxes,
including the OCT. Therefore, respondent is entitled to recover the amount of OCT
erroneously collected from it in 2001. Also, the CTA, both in Division and en banc, found
that respondent submitted ample evidence to prove its payment of OCT to PLDT during
the second, third, and fourth quarters of 2001, in the total amount of ₱126,243.80, which,
in turn, was paid by PLDT to the BIR. Said finding by the CTA, being factual in nature, is
already conclusively binding upon this Court. Under our tax system, the CTA acts as a
highly specialized body specifically created for the purpose of reviewing tax cases.
Accordingly, its findings of fact are generally regarded as final, binding, and conclusive on
this Court, and will not ordinarily be reviewed or disturbed on appeal when supported by
substantial evidence, in the absence of gross error or abuse on its part.22

WHEREFORE, the instant Petition for Review is DENIED. The Decision of the Court of Tax
Appeals En Banc dated 9 August 2007 in CTA EB No. 221, affirming the Decision dated 14
June 2006 of the CTA First Division in CTA Case No. 6735, which granted the claim of
Philippine Airlines, Inc. for a refund of Overseas Communications Tax erroneously
collected from it for the period April to December 2001, in the amount of ₱126,243.80, is
AFFIRMED. No costs.

SO ORDERED.

G.R. No. 180345 November 25, 2009

SAN ROQUE POWER CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

CHICO-NAZARIO, J.:

In this Petition for Review on Certiorari, under Rule 45 of the Revised Rules of Court,
petitioner San Roque Power Corporation assails the Decision1 of the Court of Tax Appeals
(CTA) En Banc dated 20 September 2007 in CTA EB No. 248, affirming the Decision2 dated
23 March 2006 of the CTA Second Division in CTA Case No. 6916, which dismissed the
claim of petitioner for the refund and/or issuance of a tax credit certificate in the amount
of Two Hundred Forty-Nine Million Three Hundred Ninety-Seven Thousand Six Hundred
Twenty Pesos and 18/100 (₱249,397,620.18) allegedly representing unutilized input Value
Added Tax (VAT) for the period covering January to December 2002.

Respondent, as the Commissioner of the Bureau of Internal Revenue (BIR), is responsible

for the assessment and collection of all national internal revenue taxes, fees, and charges,
including the Value Added Tax (VAT), imposed by Section 1083 of the National Internal
Revenue Code (NIRC) of 1997. Moreover, it is empowered to grant refunds or issue tax
credit certificates in accordance with Section 112 of the NIRC of 1997 for unutilized input
VAT paid on zero-rated or effectively zero-rated sales and purchases of capital goods, to
wit:

SEC. 112. Refunds or Tax Credits of Input Tax. -

(A) Zero-rated or Effectively Zero-rated Sales—Any VAT-registered person, whose

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

(B) Capital Goods—A VAT-registered person may apply for the issuance of a tax
credit certificate or refund of input taxes paid on capital goods imported or locally
purchased, to the extent the 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.

On the other hand, petitioner is a domestic corporation organized under the corporate
laws of the Republic of the Philippines. On 14 October 1997, it was incorporated for the
sole purpose of building and operating the San Roque Multipurpose Project in San Manuel,
Pangasinan, which is an indivisible project consisting of the power station, the dam,
spillway, and other related facilities.4 It is registered with the Board of Investments (BOI)
on a preferred pioneer status to engage in the design, construction, erection, assembly,
as well as own, commission, and operate electric power-generating plants and related
activities, for which it was issued the Certificate of Registration No. 97-356 dated 11
February 1998.5 As a seller of services, petitioner is registered with the BIR as a VAT
taxpayer under Certificate of Registration No. OCN-98-006-007394.6

On 11 October 1997, petitioner entered into a Power Purchase Agreement (PPA) with the
National Power Corporation (NPC) to develop the hydro potential of the Lower Agno River,
and to be able to generate additional power and energy for the Luzon Power Grid, by
developing and operating the San Roque Multipurpose Project. The PPA provides that
petitioner shall be responsible for the design, construction, installation, completion and
testing and commissioning of the Power Station and it shall operate and maintain the
same, subject to the instructions of the NPC. During the cooperation period of 25 years
commencing from the completion date of the Power Station, the NPC shall purchase all
the electricity generated by the Power Plant.7

Because of the exclusive nature of the PPA between petitioner and the NPC, petitioner
applied for and was granted five Certificates of Zero Rate by the BIR, through the Chief
Regulatory Operations Monitoring Division, now the Audit Information, Tax Exemption &
Incentive Division. Based on these certificates, the zero-rated status of petitioner
commenced on 27 September 1998 and continued throughout the year 2002.8

For the period January to December 2002, petitioner filed with the respondent its Monthly
VAT Declarations and Quarterly VAT Returns. Its Quarterly VAT Returns showed excess
input VAT payments on account of its importation and domestic purchases of goods and
services, as follows9 :

Period Date Particulars Amount

Covered Filed
1st April Tax Due for the Quarter (Box P 26,247.27
Quarter 20, 13C)
2002
Input Tax carried over from 296,124,429.21
(January
previous qtr (22B)
1, 2002 to
Input VAT on Domestic
March 31, Purchases for the Qtr
2002)
(22D) 95,003,348.91
Input VAT on Importation of
Goods for the Qtr
(22F) 20,758,668.00
Total Available Input tax (23) 411,886,446.12
VAT Refund/TCC Claimed 173,909,435.66
(24A)
Net Creditable Input Tax (25) 237,977,010.46
VAT payable (Excess Input (237,950,763.19)
Tax) (26)
Tax Payable (overpayment) (237,950,763.19)
(28)
2nd July 24, Tax Due for the Quarter (Box P blank
Quarter 2002 13C)
Input Tax carried over from 237,950,763.19
(April 1,
previous qtr (22B)
2002 to
Input VAT on Domestic
June 30, Purchases for the Qtr
2002)
(22D) 65,206,499.83
Input VAT on Importation of
Goods for the Qtr
(22F) 18,485,758.00
Total Available Input tax (23) 321,643,021.02
VAT Refund/TCC Claimed 237,950,763.19
(24A)
Net Creditable Input Tax (25) 83,692,257.83
VAT payable (Excess Input (83,692,257.83)
Tax) (26)
Tax Payable (overpayment) (83,692,257.83)
(28)
3rd Quarter Tax Due for the Quarter (Box P blank
13C)
 (July 1, Input Tax carried over from 199,428,027.47
2002 to previous qtr (22B)
Input VAT on Domestic
September Purchases for the Qtr
30, 2002) (22D) 28,924,020.79
Input VAT on Importation of
October Goods for the Qtr
25, (22F) 1,465,875.00
2002 Total Available Input tax (23) 229,817,923.26
VAT Refund/TCC Claimed (24A) Blank
Net Creditable Input Tax (25) 229,817,923.26
VAT payable (Excess Input Tax) (229,817,923.26)
(26)
Tax Payable (overpayment) (229,817,923.26)
(28)
4th Quarter January Tax Due for the Quarter (Box P 34,996.36
23, 13C)
(October 1, 2003 Input Tax carried over from 114,082,153.62
2002 to previous qtr (22B)
Input VAT on Domestic
December Purchases for the Qtr
31, 2002)
(22D) 18,166,330.54
Input VAT on Importation of
Goods for the Qtr
(22F) 2,308,837.00
Total Available Input tax (23) 134,557,321.16
VAT Refund/TCC Claimed (24A) 83,692,257.83
Net Creditable Input Tax (25) 50,865,063.33
VAT payable (Excess Input Tax) (50,830,066.97)
(26)
Tax Payable (overpayment) (50,830,066.97)
(28)

On 19 June 2002, 25 October 2002, 27 February 2003, and 29 May 2003, petitioner filed
with the BIR four separate administrative claims for refund of Unutilized Input VAT paid
for the period January to March 2002, April to June 2002, July to September 2002, and
October to December 2002, respectively. In these letters addressed to the BIR, Carlos
Echevarria (Echevarria), the Vice President and Director of Finance of petitioner, explained
that petitioner’s sale of power to NPC are subject to VAT at zero percent rate, in
accordance with Section 108(B)(3) of the NIRC.10Petitioner sought to recover the total
amount of ₱250,258,094.25, representing its unutilized excess VAT on its importation of
capital and other taxable goods and services for the year 2002, broken down as follows 11 :

Qtr Output Tax Input Tax

Involved
Domestic Importations Excess Input Tax
Purchases
(A) (B) (C) (D) = (B) + (C)
–(A)
1st P 26,247.27 P95,003,348.91 P20,758,668.00 P115,735,769.84
2nd - 65,206,499.83 18,485,758.00 83,692,257.83
3rd - 28,924,020.79 1,465,875.00 30,389,895.79
4th 34,996.36 18,166,330.54 2,308,837.00 20,440,171.18
 P61,243.63 P207,300,200.07 P43,019,138.00 P250,258,094.44

Petitioner amended its Quarterly VAT Returns, particularly the items on (1) Input VAT on
Domestic Purchases during the first quarter of 2002; (2) Input VAT on Domestic Purchases
for the fourth quarter of 2002; and (3) Input VAT on Importation of Goods for the fourth
quarter of 2002. The amendments read as follows12 :

Period Date Particulars Amount

Covered Filed
1st Quarter April Tax Due for the Quarter (Box P 26,247.27
24, 13C)
(January 1, 2003
Input Tax carried over from 297,719,296.25
2002 to
previous qtr (22B)
March 31, Input VAT on Domestic
2002) Purchases for the Qtr
(22D) 95,126,981.69

(22F) 20,758,668.00
Total Available Input tax (23) 413,604,945.94
VAT Refund/TCC Claimed 175,544,002.27
(24A)
Net Creditable Input Tax (25) 175,544,002.27
VAT payable (Excess Input (238,060,943.67)
Tax) (26)
Tax Payable (overpayment) (238,034,696.40)
(28)
2nd Quarter April 24, Tax Due for the Quarter (Box P blank
2003 13C)
(April 1,
Input Tax carried over from 238,034,696.40
2002 to
previous qtr (22B)
June 30, Input VAT on Domestic
2002) Purchases for the Qtr
(22D) 65,206,499.83
Input VAT on Importation of
Goods for the Qtr
(22F) 18,485,758.00
Total Available Input tax (23) 321,643,021.02
VAT Refund/TCC Claimed 237,950,763.19
(24A)
Net Creditable Input Tax (25) 83,692,257.83
VAT payable (Excess Input (83,692,257.83)
Tax) (26)
Tax Payable (overpayment) (83,692,257.83)
(28)
October Tax Due for the Quarter (Box P blank
25, 2002 13C)
 Input Tax carried over from 83,692,257.83
previous qtr (22B)
Input VAT on Domestic
Purchases for the Qtr
(22D) 28,924,020.79
Input VAT on Importation of
3rd Goods for the Qtr
Quarter
(22F) 1,465,875.00
(July 1, Total Available Input tax 114,082,153.62
2002 to (23)

September VAT Refund/TCC Claimed Blank

30, 2002) (24A)
Net Creditable Input Tax 114,082,153.62
(25)
VAT payable (Excess Input (114,082,153.62)
Tax) (26)
Tax Payable (overpayment) (114,082,153.62)
(28)
4th Quarter January 23, Tax Due for the Quarter (Box P 34,996.36
2003 13C)
(October 1, Input Tax carried over from 114,082,153.62
2002 to previous qtr (22B)
Input VAT on Domestic
December Purchases for the Qtr
31, 2002)
(22D) 17,918,056.50
Input VAT on Importation of
Goods for the Qtr
(22F) 1,573,004.00
Total Available Input tax (23) 133,573,214.12
VAT Refund/TCC Claimed (24A) 83,692,257.83
Net Creditable Input Tax (25) 49,880,956.29
VAT payable (Excess Input Tax) (49,845,959.93)
(26)
Tax Payable (overpayment) (49,845,959.93)
(28)

On 30 May 2003 and 31 July 2003, petitioner filed two letters with the BIR to amend its
claims for tax refund or credit for the first and fourth quarter of 2002, respectively.
Petitioner sought to recover a total amount of ₱249,397,620.18 representing its unutilized
excess VAT on its importation and domestic purchases of goods and services for the year
2002, broken down as follows13 :

Qtr Date Output Tax Input Tax

Filed
Involved
Domestic Importations Excess Input Tax
Purchases
(A) (B) (C) (D) = (B) + (C)
–(A)
1st 30- P26,247.27 P95,126,981.69 P20,758,668.00 P115,859,402.42
May-
03
 2nd 25- - 65,206,499.83 18,185,758.00 83,692,257.83
Oct-
02
3rd 27- - 28,924,920.79 1,465,875,00 30,389,895.79
Feb-
03
4th 31- 34,996.36 17,918,056.50 1,573,004.00 19,456,064.14
Jul-
03
P61,243.63 P207,175,558.81 P42,283,305.00 P249,397,620.18

Respondent failed to act on the request for tax refund or credit of petitioner, which
prompted the latter to file on 5 April 2004, with the CTA in Division, a Petition for Review,
docketed as CTA Case No. 6916 before it could be barred by the two-year prescriptive
period within which to file its claim. Petitioner sought the refund of the amount of
₱249,397,620.18 representing its unutilized excess VAT on its importation and local
purchases of various goods and services for the year 2002.14

During the proceedings before the CTA Second Division, petitioner presented the following
documents, among other pieces of evidence: (1) Petitioner’s Amended Quarterly VAT
return for the 4th Quarter of 2002 marked as Exhibit "A," showing the amount of
₱42,500,000.00 paid by NTC to petitioner for all the electricity produced during test runs;
(2) the special audit report, prepared by the CPA firm of Punongbayan and Araullo through
a partner, Angel A. Aguilar (Aguilar), and the attached schedules, marked as Exhibits "J-
2" to "J-21"; (3) Sales Invoices and Official Receipts and related documents issued to
petitioner for the year 2002, marked as Exhibits "J-4-A1" to "J-4-L265"; (4) Audited
Financial Statements of Petitioner for the year 2002, with comparative figures for 2001,
marked as Exhibit "K"; and (5) the Affidavit of Echevarria dated 9 February 2005, marked
as Exhibit "L".15

During the hearings, the parties jointly stipulated on the issues involved:

1. Whether or not petitioner’s sales are subject to value-added taxes at effectively

zero percent (0%) rate;

2. Whether or not petitioner incurred input taxes which are attributable to its
effectively zero-rated transactions;

3. Whether or not petitioner’s importation and purchases of capital goods and

related services are within the scope and meaning of "capital goods" under Revenue
Regulations No. 7-95;

4. Whether or not petitioner’s input taxes are sufficiently substantiated with VAT
invoices or official receipts;

5. Whether or not the VAT input taxes being claimed for refund/tax credit by
petitioner (had) been credited or utilized against any output taxes or (had) been
carried forward to the succeeding quarter or quarters; and

6. Whether or not petitioner is entitled to a refund of VAT input taxes it paid from
January 1, 2002 to December 31, 2002 in the total amount of Two Hundred Forty
Nine Million Three Hundred Ninety Seven Thousand Six Hundred Twenty and 18/100
Pesos (₱249,397,620.18).

Simply put, the issue is: whether or not petitioner is entitled to refund or tax credit in the
amount of ₱249,397,620.18 representing its unutilized input VAT paid on importation and
purchases of capital and other taxable goods and services from January 1 to December
31, 2002.
After a hearing on the merits, the CTA Second Division rendered a Decision16 dated 23
March 2006 denying petitioner’s claim for tax refund or credit. The CTA noted that
petitioner based its claim on creditable input VAT paid, which is attributable to (1) zero-
rated or effectively zero-rated sale, as provided under Section 112(A) of the NIRC, and
(2) purchases of capital goods, in accordance with Section 112(B) of the NIRC. The court
ruled that in order for petitioner to be entitled to the refund or issuance of a tax credit
certificate on the basis of Section 112(A) of the NIRC, it must establish that it had incurred
zero-rated sales or effectively zero-rated sales for the taxable year 2002. Since records
show that petitioner did not make any zero-rated or effectively-zero rated sales for the
taxable year 2002, the CTA reasoned that petitioner’s claim must be denied.
Parenthetically, the court declared that the claim for tax refund or credit based on Section
112(B) of the NIRC requires petitioner to prove that it paid input VAT on capital goods
purchased, based on the definition of capital goods provided under Section 4.112-1(b) of
Revenue Regulations No. 7-95—i.e., goods or properties which have an estimated useful
life of greater than one year, are treated as depreciable assets under Section 34(F) of the
NIRC, and are used directly or indirectly in the production or sale of taxable goods and
services. The CTA found that the evidence offered by petitioner—the suppliers’ invoices
and official receipts and Import Entries and Internal Revenue Declarations and the audit
report of the Court-commissioned Independent Certified Public Accountant (CPA) are
insufficient to prove that the importations and domestic purchases were classified as
capital goods and properties entered as part of the "Property, Plant and Equipment"
account of the petitioner. The dispositive part of the said Decision reads:

WHEREFORE, the instant Petition for Review is DENIED for lack of merit.17

Not satisfied with the foregoing Decision dated 23 March 2006, petitioner filed a Motion
for Reconsideration which was denied by the CTA Second Division in a Resolution dated 4
January 2007.18

Petitioner filed an appeal with the CTA En Banc, docketed as CTA EB No. 248. The CTA En
Banc promulgated its Decision19 on 20 September 2007 denying petitioner’s appeal. The
CTA En Banc reiterated the ruling of the Division that petitioner’s claim based on Section
112(A) of the NIRC should be denied since it did not present any records of any zero-rated
or effectively zero-rated transactions. It clarified that since petitioner failed to prove that
any sale of its electricity had transpired, petitioner may base its claim only on Section
112(B) of the NIRC, the provision governing the purchase of capital goods. The court
noted that the report of the Court-commissioned auditing firm, Punongbayan & Araullo,
dealt specifically with the unutilized input taxes paid or incurred by petitioner on its local
and foreign purchases of goods and services attributable to its zero-rated sales, and not
to purchases of capital goods. It decided that petitioner failed to prove that the purchases
evidenced by the invoices and receipts, which petitioner presented, were classified as
capital goods which formed part of its "Property, Plant and Equipment," especially since
petitioner failed to present its books of account. The dispositive part of the said Decision
reads:

WHEREFORE, premises considered, the instant petition is hereby DISMISSED. Accordingly,

the assailed Decision and Resolution are hereby AFFIRMED.20

The CTA En Banc denied petitioner’s Motion for Reconsideration in a Resolution dated 22
October 2007.21

Hence, the present Petition for Review where the petitioner raises the following errors
allegedly committed by the CTA En banc:

THE COURT OF TAX APPEALS EN BANC COMMITTED SERIOUS ERROR AND ACTED WITH
GRAVE ABUSE OF DISCRETION TANTAMOUNT TO LACK OR EXCESS OF JURISDICTION IN
FAILING OR REFUSING TO APPRECIATE THE OVERWHELMING AND UNCONTROVERTED
EVIDENCE SUBMITTED BY THE PETITIONER, THUS DEPRIVING PETITIONER OF ITS
PROPERTY WITHOUT DUE PROCESS; AND
 II

THE COURT OF TAX APPEALS COMMITTED SERIOUS ERROR AND ACTED WITH GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN RULING
THAT THE ABSENCE OF ZERO-RATED SALES BY PETITIONER DURING THE YEAR COVERED
BY THE CLAIM FOR REFUND DOES NOT ENTITLE PETITIONER TO A REFUND OF ITS
EXCESS VAT INPUT TAXES ATTRIBUTABLE TO ZERO-RATED SALES, CONTRARY TO
PROVISIONS OF LAW.22

The present Petition is meritorious.

The main issue in this case is whether or not petitioner may claim a tax refund or credit
in the amount of ₱249,397,620.18 for creditable input tax attributable to zero-rated or
effectively zero-rated sales pursuant to Section 112(A) of the NIRC or for input taxes paid
on capital goods as provided under Section 112(B) of the NIRC.

To resolve the issue, this Court must re-examine the facts and the evidence offered by
the parties. It is an accepted doctrine that this Court is not a trier of facts. It is not its
function to review, examine and evaluate or weigh the probative value of the evidence
presented. However, this rule does not apply where the judgment is premised on a
misapprehension of facts, or when the appellate court failed to notice certain relevant
facts which if considered would justify a different conclusion.23

After reviewing the records, this Court finds that petitioner’s claim for refund or credit is
justified under Section 112(A) of the NIRC which states that:

SEC. 112. Refunds or Tax Credits of Input Tax.—

(A) Zero-rated or Effectively Zero-rated Sales—Any VAT-registered person, whose sales

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

To claim refund or tax credit under Section 112(A), petitioner must comply with the
following criteria: (1) the taxpayer is VAT registered; (2) the taxpayer is engaged in zero-
rated or effectively zero-rated sales; (3) the input taxes are due or paid; (4) the input
taxes are not transitional input taxes; (5) the input taxes have not been applied against
output taxes during and in the succeeding quarters; (6) the input taxes claimed are
attributable to zero-rated or effectively zero-rated sales; (7) for zero-rated sales under
Section 106(A)(2)(1) and (2); 106(B); and 108(B)(1) and (2), the acceptable foreign
currency exchange proceeds have been duly accounted for in accordance with BSP rules
and regulations; (8) where there are both zero-rated or effectively zero-rated sales and
taxable or exempt sales, and the input taxes cannot be directly and entirely attributable
to any of these sales, the input taxes shall be proportionately allocated on the basis of
sales volume; and (9) the claim is filed within two years after the close of the taxable
quarter when such sales were made.24

Based on the evidence presented, petitioner complied with the abovementioned

requirements. Firstly, petitioner had adequately proved that it is a VAT registered taxpayer
when it presented Certificate of Registration No. OCN-98-006-007394, which it attached
to its Petition for Review dated 29 March 2004 filed before the CTA in Division. Secondly,
it is unquestioned that petitioner is engaged in providing electricity for NPC, an activity
which is subject to zero rate, under Section 108(B)(3) of the NIRC. Thirdly, petitioner
offered as evidence suppliers’ VAT invoices or official receipts, as well as Import Entries
and Internal Revenue Declarations (Exhibits "J-4-A1" to "J-4-L265"), which were
examined in the audit conducted by Aguilar, the Court-commissioned Independent CPA.
Significantly, Aguilar noted in his audit report (Exhibit "J-2") that of the ₱249,397,620.18
claimed by petitioner, he identified items with incomplete documentation and errors in
computation with a total amount of ₱3,266,009.78. Based on these findings, the remaining
input VAT of ₱246,131,610.40 was properly documented and recorded in the books. The
said report reads:

In performing the procedures referred under the Procedures Performed section of this
report, no matters came to our attention that cause us to believe that the amount of input
VAT applied for as tax credit certificate/refund of P249,397,620.18 for the period January
1, 2002 to December 31, 2002 should be adjusted except for input VAT claimed with
incomplete documentation, those with various and other exceptions on the supporting
documents and those with errors in computation totaling P3,266,009.78, as discussed in
the Findings and Results of the Agreed-Upon Audit Procedures Performed sections of this
report. We have also ascertained that the input VAT claimed are properly recorded in the
books and, except as specifically identified in the Findings and Results of the Agreed-Upon
Audit Procedures Performed sections of this report, are properly supported by original and
appropriate suppliers’ VAT invoices and/or official receipts.25

Fourthly, the input taxes claimed, which consisted of local purchases and importations
made in 2002, are not transitional input taxes, which Section 111 of the NIRC defines as
input taxes allowed on the beginning inventory of goods, materials and supplies. 26 Fifthly,
the audit report of Aguilar affirms that the input VAT being claimed for tax refund or credit
is net of the input VAT that was already offset against output VAT amounting to
₱26,247.27 for the first quarter of 2002 and ₱34,996.36 for the fourth quarter of
2002,27 as reflected in the Quarterly VAT Returns.28

The main dispute in this case is whether or not petitioner’s claim complied with the sixth
requirement—the existence of zero-rated or effectively zero-rated sales, to which
creditable input taxes may be attributed. The CTA in Division and en banc denied
petitioner’s claim solely on this ground. The tax courts based this conclusion on the audited
report, marked as Exhibit "J-2," stating that petitioner made no sale of electricity to NPC
in 2002.29 Moreover, the affidavit of Echevarria (Exhibit "L"), petitioner’s Vice President
and Director for Finance, contained an admission that no commercial sale of electricity
had been made in favor of NPC in 2002 since the project was still under construction at
that time.30

However, upon closer examination of the records, it appears that on 2002, petitioner
carried out a "sale" of electricity to NPC. The fourth quarter return for the year 2002,
which petitioner filed, reported a zero-rated sale in the amount of ₱42,500,000.00.31 In
the Affidavit of Echevarria dated 9 February 2005 (Exhibit "L"), which was uncontroverted
by respondent, the affiant stated that although no commercial sale was made in 2002,
petitioner produced and transferred electricity to NPC during the testing period in
exchange for the amount of ₱42,500,000.00, to wit:32

A: San Roque Power Corporation has had no sale yet during 2002. The ₱42,500,000.00
which was paid to us by Napocor was something similar to a more cost recovery scheme.
The pre-agreed amount would be about equal to our costs for producing the electricity
during the testing period and we just reflected this in our 4th quarter return as a zero-
rated sale. x x x.

The Court is not unmindful of the fact that the transaction described hereinabove was not
a commercial sale. In granting the tax benefit to VAT-registered zero-rated or effectively
zero-rated taxpayers, Section 112(A) of the NIRC does not limit the definition of "sale" to
commercial transactions in the normal course of business. Conspicuously, Section 106(B)
of the NIRC, which deals with the imposition of the VAT, does not limit the term "sale" to
commercial sales, rather it extends the term to transactions that are "deemed" sale, which
are thus enumerated:
SEC 106. Value-Added Tax on Sale of Goods or Properties.

xxxx

(B) Transactions Deemed Sale.—The following transactions shall be deemed sale:

(1) Transfer, use or consumption not in the course of business of goods or properties
originally intended for sale or for use in the course of business;

(2) Distribution or transfer to:

(a) Shareholders or investors as share in the profits of the VAT-registered

persons; or

(b) Creditors in payment of debt;

(3) Consignment of goods if actual sale is not made within sixty (60) days following
the date such goods were consigned; and

(4) Retirement from or cessation of business, with respect to inventories of taxable

goods existing as of such retirement or cessation. (Our emphasis.)

After carefully examining this provision, this Court finds it an equitable construction of the
law that when the term "sale" is made to include certain transactions for the purpose of
imposing a tax, these same transactions should be included in the term "sale" when
considering the availability of an exemption or tax benefit from the same revenue
measures. It is undisputed that during the fourth quarter of 2002, petitioner transferred
to NPC all the electricity that was produced during the trial period. The fact that it was not
transferred through a commercial sale or in the normal course of business does not deflect
from the fact that such transaction is deemed as a sale under the law.

The seventh requirement regarding foreign currency exchange proceeds is inapplicable

where petitioner’s zero-rated sale of electricity to NPC did not involve foreign exchange
and consisted only of a single transaction wherein NPC paid petitioner ₱42,500,000.00 in
exchange for the electricity transferred to it by petitioner. Similarly, the eighth
requirement is inapplicable to this case, where the only sale transaction consisted of an
effectively zero-rated sale and there are no exempt or taxable sales that transpired, which
will require the proportionate allocation of the creditable input tax paid.

The last requirement determines that the claim should be filed within two years after the
close of the taxable quarter when such sales were made. The sale of electricity to NPC
was reported at the fourth quarter of 2002, which closed on 31 December 2002. Petitioner
had until 30 December 2004 to file its claim for refund or credit. For the period January
to March 2002, petitioner filed an amended request for refund or tax credit on 30 May
2003; for the period July 2002 to September 2002, on 27 February 2003; and for the
period October 2002 to December 2002, on 31 July 2003.33 In these three quarters,
petitioners seasonably filed its requests for refund and tax credit. However, for the period
April 2002 to May 2002, the claim was filed prematurely on 25 October 2002, before the
last quarter had closed on 31 December 2002.34

Despite this lapse in procedure, this Court notes that petitioner was able to positively show
that it was able to accumulate excess input taxes on various importations and local
purchases in the amount of ₱246,131,610.40, which were attributable to a transfer of
electricity in favor of NPC. The fact that it had filed its claim for refund or credit during the
quarter when the transfer of electricity had taken place, instead of at the close of the said
quarter does not make petitioner any less entitled to its claim. Given the special
circumstances of this case, wherein petitioner was incorporated for the sole purpose of
constructing or operating a power plant that will transfer all the electricity it generates to
NPC, there is no danger that petitioner would try to fraudulently claim input tax paid on
purchases that will be attributed to sale transactions that are not zero-rated. Substantial
justice, equity and fair play are on the side of the petitioner. Technicalities and legalisms,
however, exalted, should not be misused by the government to keep money not belonging
to it, thereby enriching itself at the expense of its law abiding citizens.

Substantial justice, equity and fair play are on the side of petitioner. Technicalities and
legalisms, however exalted, should not be misused by the government to keep money not
belonging to it, thereby enriching itself at the expense of its law-abiding citizens. Under
the principle of solutio indebiti provided in Art. 2154, Civil Code, the BIR received
something "when there [was] no right to demand it," and thus, it has the obligation to
return it. Heavily militating against respondent Commissioner is the ancient principle that
no one, not even the State, shall enrich oneself at the expense of another. Indeed, simple
justice requires the speedy refund of the wrongly held taxes.35

It bears emphasis that effective zero-rating is not intended as a benefit to the person
legally liable to pay the tax, such as petitioner, but to relieve certain exempt entities, such
as the NPC, from the burden of indirect tax so as to encourage the development of
particular industries. Before, as well as after, the adoption of the VAT, certain special laws
were enacted for the benefit of various entities and international agreements were entered
into by the Philippines with foreign governments and institutions exempting sale of goods
or supply of services from indirect taxes at the level of their suppliers. Effective zero-
rating was intended to relieve the exempt entity from being burdened with the indirect
tax which is or which will be shifted to it had there been no exemption. In this case,
petitioner is being exempted from paying VAT on its purchases to relieve NPC of the
burden of additional costs that petitioner may shift to NPC by adding to the cost of the
electricity sold to the latter.36

Section 13 of Republic Act No. 6395, otherwise known as the NPC Charter, further clarifies
that it is the lawmakers’ intention that NPC be made completely exempt from all taxes,
both direct and indirect:

Sec. 13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees,
Imposts and Other Charges by Government and Governmental Instrumentalities. - The
corporation shall be non-profit and shall devote all its returns from its capital investment,
as well as excess revenues from its operation, for expansion. To enable the corporation to
pay its indebtedness and obligations and in furtherance and effective implementation of
the policy enunciated in Section 1 of this Act, the corporation is hereby declared exempt:

(a) From the payment of all taxes, duties, fees, imposts, charges, costs and service
fees in any court or administrative proceedings in which it may be a party,
restrictions and duties to the Republic of the Philippines, its provinces, cities,
municipalities, and other government agencies and instrumentalities;

(b) From all income taxes, franchise taxes, and realty taxes to be paid to the
National Government, its provinces, cities, municipalities and other government
agencies and instrumentalities;

(c) From all import duties, compensating taxes and advanced sales tax and wharfage
fees on import of foreign goods, required for its operations and projects; and

(d) From all taxes, duties, fees, imposts, and all other charges imposed by the
Republic of the Philippines, its provinces, cities, municipalities and other government
agencies and instrumentalities, on all petroleum products used by the corporation
in the generation, transmission, utilization, and sale of electric power.

To limit the exemption granted to the NPC to direct taxes, notwithstanding the general
and broad language of the statute will be to thwart the legislative intention in giving
exemption from all forms of taxes and impositions, without distinguishing between those
that are direct and those that are not.37

Congress granted NPC a comprehensive tax exemption because of the significant public
interest involved. This is enunciated in Section 1 of Republic Act No. 6395:
Section 1. Declaration of Policy. Congress hereby declares that (1) the comprehensive
development, utilization and conservation of Philippine water resources for all beneficial
uses, including power generation, and (2) the total electrification of the Philippines through
the development of power from all sources to meet the needs of industrial development
and dispersal and the needs of rural electrification are primary objectives of the nation
which shall be pursued coordinately and supported by all instrumentalities and agencies
of government, including its financial institutions.

The ability of the NPC to provide sufficient and affordable electricity throughout the
country greatly affects our industrial and rural development. Erroneously and unjustly
depriving industries that generate electrical power of tax benefits that the law clearly
grants will have an immediate effect on consumers of electricity and long term effects on
our economy.

In the same breath, we cannot lose sight of the fact that it is the declared policy of the
State, expressed in Section 2 of Republic Act No. 9136, otherwise known as the EPIRA
Law, "to ensure and accelerate the total electrification of the country;" "to enhance the
inflow of private capital and broaden the ownership base of the power generation,
transmission and distribution sectors;" and "to promote the utilization of indigenous and
new and renewable energy resources in power generation in order to reduce dependence
on imported energy." Further, Section 6 provides that "pursuant to the objective of
lowering electricity rates to end-users, sales of generated power by generation companies
shall be value-added tax zero-rated.

Section 75 of said law succinctly declares that "this Act shall, unless the context indicates
otherwise, be construed in favor of the establishment, promotion, preservation of
competition and power empowerment so that the widest participation of the people,
whether directly or indirectly is ensured."

The objectives as set forth in the EPIRA Law can only be achieved if government were to
allow petitioner and others similarly situated to obtain the input tax credits available under
the law. Denying petitioner such credits would go against the declared policies of the
EPIRA Law.1 a vv p h i 1

The legislative grant of tax relief (whether in the EPIRA Law or the Tax Code) constitutes
a sovereign commitment of Government to taxpayers that the latter can avail themselves
of certain tax reliefs and incentives in the course of their business activities here. Such a
commitment is particularly vital to foreign investors who have been enticed to invest
heavily in our country’s infrastructure, and who have done so on the firm assurance that
certain tax reliefs and incentives can be availed of in order to enable them to achieve their
projected returns on these very long-term and heavily funded investments. While the
government’s ability to keep its commitment is put in doubt, credit rating turns to worse;
the costs of borrowing becomes higher and the harder it will be to attract foreign investors.
The country’s earnest efforts to move forward will all be put to naught.

Having decided that petitioner is entitled to claim refund or tax credit under Section 112(A)
of the NIRC or on the basis of effectively zero-rated sales in the amount of
₱246,131,610.40, there is no more need to establish its right to make the same claim
under Section 112(B) of the NIRC or on the basis of purchase of capital goods.

Finally, respondent contends that according to well-established doctrine, a tax refund,

which is in the nature of a tax exemption, should be construed strictissimi juris against
the taxpayer.38 However, when the claim for refund has clear legal basis and is sufficiently
supported by evidence, as in the present case, then the Court shall not hesitate to grant
the same.39

WHEREFORE, the instant Petition for Review is GRANTED. The Decision of the Court of Tax
Appeals En Banc dated 20 September 2007 in CTA EB Case No. 248, affirming the Decision
dated 23 March 2006 of the CTA Second Division in CTA Case No. 6916, is REVERSED.
Respondent Commissioner of Internal Revenue is ordered to refund, or in the alternative,
to issue a tax credit certificate to petitioner San Roque Power Corporation in the amount
of Two Hundred Forty-Six Million One Hundred Thirty-One Thousand Six Hundred Ten
Pesos and 40/100 (₱246,131,610.40), representing unutilized input VAT for the period 1
January 2002 to 31 December 2002. No costs.

SO ORDERED.