G.R. No.
153866 February 11, 2005 principal office address at the new Cebu Township One, Special Economic
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
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 equipment 18 -- is, ipso facto,
also accorded to the zone19 under RA 7916. Furthermore, the latter law --
notwithstanding other existing laws, rules and regulations to the contrary --
extends20 to that zone the provision stating that no local or national taxes shall be
imposed therein.21 No exchange control policy shall be applied; and free markets
for foreign exchange, gold, securities and future shall be allowed and
maintained.22 Banking and finance shall also be liberalized under minimum
Bangko Sentral regulation with the establishment of foreign currency depository
units of local commercial banks and offshore banking units of foreign banks.23
In the same vein, respondent benefits under RA 7844 from negotiable tax
credits24 for locally-produced materials used as inputs. Aside from the other
incentives possibly already granted to it by the Board of Investments, it also
enjoys preferential credit facilities25 and exemption from PD 1853.26
From the above-cited laws, it is immediately clear that petitioner enjoys
preferential tax treatment.27 It is not subject to internal revenue laws and
regulations and is even entitled to tax credits. The VAT on capital goods is an
internal revenue tax from which petitioner as an entity is exempt. Although
the transactions involving such tax are not exempt, petitioner as a VAT-
registered person,28 however, is entitled to their credits.
Nature of the VAT and the Tax Credit Method
Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to
10 percent levied on every importation of goods, whether or not in the course of
trade or business, or imposed on each sale, barter, exchange or lease of goods
or properties or on each rendition of services in the course of trade or
business29 as they pass along the production and distribution chain, the tax being
limited only to the value added30 to such goods, properties or services by the
seller, transferor or lessor.31 It is an indirect tax that may be shifted or passed on
to the buyer, transferee or lessee of the goods, properties or services. 32 As such,
it should be understood not in the context of the person or entity that is primarily,
directly and legally liable for its payment, but in terms of its nature as a tax on
consumption.33 In either case, though, the same conclusion is arrived at.
The law34 that originally imposed the VAT in the country, as well as the
subsequent amendments of that law, has been drawn from the tax credit
method.35 Such method adopted the mechanics and self-enforcement features of
the VAT as first implemented and practiced in Europe and subsequently adopted
in New Zealand and Canada.36 Under the present method that relies on invoices,
an entity can credit against or subtract from the VAT charged on its sales or
outputs the VAT paid on its purchases, inputs and imports.37
If at the end of a taxable quarter the output taxes 38 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
6683 -- the original charter of PEZA (then EPZA) that was later amended by RA
7916.84 No provisions in the latter law modify such exemption.
Although this exemption puts the government at an initial disadvantage, the
reduced tax collection ultimately redounds to the benefit of the national economy
by enticing more business investments and creating more employment
opportunities.85
Fourth, even the rules implementing the PEZA law clearly reiterate that
merchandise -- except those prohibited by law -- "shall not be subject to x x x
internal revenue laws and regulations x x x"86 if brought to the ecozone’s
restricted area87 for manufacturing by registered export enterprises, 88 of which
respondent is one. These rules also apply to all enterprises registered with the
EPZA prior to the effectivity of such rules. 89
Fifth, export processing zone enterprises registered90 with the Board of
Investments (BOI) under EO 226 patently enjoy exemption from national internal
revenue taxes on imported capital equipment reasonably needed and
exclusively used for the manufacture of their products; 91 on required supplies and
spare part for consigned equipment;92 and on foreign and domestic merchandise,
raw materials, equipment and the like -- except those prohibited by law --
brought into the zone for manufacturing. 93 In addition, they are given credits for
the value of the national internal revenue taxes imposed on domestic capital
equipment also reasonably needed and exclusively used for the manufacture of
their products,94 as well as for the value of such taxes imposed on domestic raw
materials and supplies that are used in the manufacture of their export products
and that form part thereof.95
Sixth, the exemption from local and national taxes granted under RA 722796 are
ipso facto accorded to ecozones.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. Accordingly, the claimants of
105
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 laws 109 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.

Sandoval-Gutierrez, Corona, Carpio-Morales and Garcia, JJ., concur.

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
"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.’

F 2nd Qtr. July 21, 1997 "There being no immediate action on the part of the [petitioner], [respondent’s]
G 3rd Qtr. October 2, 1997 petition was filed on April 15, 1999.

H 4th Qtr. January 20, 1998 "In support of its Petition for Review, the following arguments were raised by
[respondent]:
"On March 23, 1999, however, [respondent] amended the aforesaid returns and
declared the following: 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
Exh 1997 Taxable Sales Output Zero-rated Domestic Input
Pilipinas, are subject to [VAT] at zero percent (0%). According to [respondent],
VAT Sales Purchases VAT
being a VAT-registered entity, it is subject to the VAT imposed under Title IV of
I 1st qtr ₱59,597.20 ₱5,959.72 ₱17,513,801.11 ₱6,778,182.30
the Tax₱677,818.23
Code, to wit:
J 2nd qtr 67,517.20 6,751.72 17,937,361.51 9,333,242.90
‘Section 933,324.29
102.(sic) Value-added tax on sale of services.- (a) Rate and base of
K 3rd qtr 51,936.60 5,193.66 19,627,245.36 tax.
8,438,357.00 - There shall be levied, assessed and collected, a value-added tax
843,835.70
equivalent to 10% percent of gross receipts derived by any person engaged in
L 4th qtr 67,994.30 6,799.43 25,231,225.22 13,080,822.10 1,308,082.21
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
Total those performed or rendered by construction and service contractors: stock, real
₱247,045.30 ₱24,704.53 ₱80,309,633.20 ₱37,630,604.30 ₱3,763,060.43
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 banks 18 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 services 47 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.74 1avvphi1.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 Code 88 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 ANGELINA SANDOVAL-
RENATO C. CORONA
Code, the principle of legislative approval of administrative interpretation by GUTIERREZ
Associate Justice
reenactment clearly obtains. This principle means that "the reenactment of a Associate Justice
statute substantially unchanged is persuasive indication of the adoption by
Congress of a prior executive construction." 91 CONCHITA CARPIO
CANCIO C. GARCIA
MORALES
Associate Justice
The legislature is presumed to have reenacted the law with full knowledge of the Associate Justice
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 ATTESTATION
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 I attest that the conclusions in the above Decision had been reached in
the [l]egislature thereafter [reenacts] the provisions [without] substantial change, consultation before the case was assigned to the writer of the opinion of the
such action is to some extent confirmatory that the ruling carries out the Court’s Division.
legislative purpose."92
ARTEMIO V. PANGANIBAN
In sum, having resolved that transactions of respondent are zero-rated, the Associate Justice
Court upholds the former’s entitlement to the refund as determined by the Chairman, Third Division
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 CERTIFICATION
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 Pursuant to Section 13, Article VIII of the Constitution, and the Division
expertise on the subject."93 Chairman’s Attestation, it is hereby certified that the conclusions in the above
Decision had been reached in consultation before the case was assigned to the
Furthermore, under a zero-rating scheme, the sale or exchange of a particular writer of the opinion of the Court’s Division.
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 HILARIO G. DAVIDE, JR.
the cost of purchases attributable to the sale or exchange. 94 "[T]he tax paid or Chief Justice
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.

ARTEMIO V. PANGANIBAN
Associate Justice
Chairman, Third Division

WE CONCUR:

G.R. No. 164365 June 8, 2007
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
PLACER DOME TECHNICAL SERVICES (PHILS.), INC., respondent.
DECISION
TINGA, J.:
Two years ago, the Court in Commissioner of Internal Revenue v. American
Express International, Inc. (Philippine Branch) 1 definitively ruled that under the
National Internal Revenue Code of 1986, as amended,2 "services performed by
VAT-registered persons in the Philippines (other than the processing,
manufacturing or repacking of goods for persons doing business outside the
Philippines), when paid in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the [Bangko Sentral ng Pilipinas],
are zero-rated."3 The grant of the present petition entails the extreme step of
rejecting American Express as precedent, a recourse which the Court is
unwilling to take.
The facts, as culled from the recital in the assailed Decision4 dated 30 June
2004 of the Court of Appeals, follow.
On 24 March 1996, at the San Antonio Mines in Marinduque owned by
Marcopper Mining Corporation (Marcopper), mine tailings from the Taipan Pit
started to escape through the Makulapnit Tunnel and Boac Rivers, causing the
cessation of mining and milling operations, and causing potential environmental
damage to the rivers and the immediate area. To contain the damage and
prevent the further spread of the tailing leak, Placer Dome, Inc. (PDI), the owner
of 39.9% of Marcopper, undertook to perform the clean-up and rehabilitation of
the Makalupnit and Boac Rivers, through a subsidiary. To accomplish this, PDI
engaged Placer Dome Technical Services Limited (PDTSL), a non-resident
foreign corporation with office in Canada, to carry out the project. In turn, PDTSL
engaged the services of Placer Dome Technical Services (Philippines), Inc.
(respondent), a domestic corporation and registered Value-Added Tax (VAT)
entity, to implement the project in the Philippines.
PDTSL and respondent thus entered into an Implementation Agreement signed
on 15 November 1996. Due to the urgency and potentially significant damage to
the environment, respondent had agreed to immediately implement the project,
and the Implementation Agreement stipulated that all implementation services
rendered by respondent even prior to the agreement’s signing shall be deemed
to have been provided pursuant to the said Agreement. The Agreement further
stipulated that PDTSL was to pay respondent "an amount of money, in U.S.
funds, equal to all Costs incurred for Implementation Services performed under
the Agreement,"5 as well as "a fee agreed to one percent (1%) of such Costs." 6
In August of 1998, respondent amended its quarterly VAT returns for the last two
quarters of 1996, and for the four quarters of 1997. In the amended returns,
respondent declared a total input VAT payment of P43,015,461.98 for the said
quarters, and P42,837,933.60 as its total excess input VAT for the same period.
Then on 11 September 1998, respondent filed an administrative claim for the
refund of its reported total input VAT payments in relation to the project it had
contracted from PDTSL, amounting to P43,015,461.98. In support of this claim
for refund, respondent argued that the revenues it derived from services
rendered to PDTSL, pursuant to the Agreement, qualified as zero-rated sales
under Section 102(b)(2) of the then Tax Code, since it was paid in foreign
currency inwardly remitted to the Philippines. When the Commissioner of
Internal Revenue (CIR) did not act on this claim, respondent duly filed a Petition
for Review with the Court of Tax Appeals (CTA), praying for the refund of its total
reported excess input VAT totaling P42,837,933.60. In its Answer to the Petition,
the CIR merely invoked the presumption that taxes are collected in accordance
with law, and that claims for refund of taxes are construed strictly against
claimants, as the same was in the nature of an exemption from taxation. 7
In its Decision dated 19 March 2002,8 the CTA supported respondent’s legal
position that its sale of services to PDTSL constituted a zero-rated transaction
under the Tax Code, as these services were paid for in acceptable foreign
currency which had been inwardly remitted to the Philippines in accordance with
the rules and regulations of the Bangko Sentral ng Pilipinas (BSP). At the same
time, the CTA pointed out that of the US$27,544,707.00 paid by PDTSL to
respondent, only US$14,750,473.00 was inwardly remitted and accounted for in
accordance with the BSP.9 The CTA also noted that not all the reported total
input VAT payments of respondent were properly supported by VAT invoices
and/or official receipts,10 and that not all of the allowable input VAT of the
respondent could be directly attributed to its zero-rated sales.11 In the end, the
CTA found that only the resulting input VAT of P17,178,373.12 could be
refunded the respondent.12
The CIR filed a Motion for Reconsideration where he invoked Section 4.102-
2(b)(2) of Revenue Regulation No. 5-96,13 and especially VAT Ruling No. 040-98
dated 23 November 1998, which had interpreted the aforecited provision.
The CTA remained unpersuaded despite the cited issuances. In fact, the CTA
Resolution14 dated 20 June 2002, denying the CIR’s motion for reconsideration,
noted that petitioner’s argument was not novel as it had debunked the same
when first raised before it, referring to its decision dated 19 April 2002 in CTA
Case No. 6099, American Express International, Inc. – Philippine Branch v.
Commissioner of Internal Revenue.15 The CTA reiterated its pronouncement in
said case, thus: "x x x it is very clear that VAT Ruling No. 040-98 not only
expands the language of Section (108)(B)(2) but also of Revenue Regulation
No. 5-96 which interprets the said statute. The same cannot be countenanced. It
is a settled rule of legal hermeneutics that the implementing rules and
regulations cannot amend the act of Congress x x x for administrative rules and
regulations are intended to carry out, not supplant or modify, the law." 16
The rulings of the CTA were elevated by petitioner to the Court of Appeals on
Petition for Review. In a Decision17dated 30 June 2004, the appellate court
affirmed the CTA rulings. As a consequence, the present petition is now before
us.
Our evaluation of the petition must begin with the statutory scope of the
"services performed in the Philippines by VAT-registered persons,"18 referred to
in the law applicable at the time of the subject incidents, the National Internal
Revenue Code of 1986, as amended19 (1986 NIRC). Section 102(b) of the 1986
NIRC reads:
Section 102. Value-Added Tax on Sale of Services and Use or Lease of
Properties.
(a) x x x
(b) Transactions Subject to Zero Percent (0%) Rate. ─ The following
services performed in the Philippines by VAT-registered persons shall be
subject to zero percent (0%) rate:
(1) Processing, manufacturing or repacking goods for other
persons doing business outside the Philippines which goods are
subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance
with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP);
(2) Services other than those mentioned in the preceding
subparagraph, the consideration for which is paid for in
acceptable foreign currency and accounted for in accordance
with the rules and regulations of the [BSP].
x x x 20
It is Section 102(b)(2) which finds special relevance to this case. As explicitly
provided in the law, a zero-rated VAT transaction includes services by VAT-
registered persons other than processing, manufacturing or repacking goods for
other persons doing business outside the Philippines, which goods are
subsequently exported, the consideration for which is paid in foreign currency
and accounted for in accordance with the rules and regulations of the BSP.
Still, this provision was interpreted by the Bureau of Internal Revenue through
Revenue Regulation No. 5-96, Section 4.102-2(b)(2) of which states:
Section 4.102(b)(2)- Services other than processing, manufacturing or
repacking for other persons doing business outside the Philippines for
goods which are subsequently exported, as well as services by a
resident to a non-resident foreign client such as project studies,
information services, engineering and architectural designs and other
similar services, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules and
regulations of the BSP.
Although there is nothing in Section 4.102-2(b)(2) that is expressly fatal to
respondent’s claim, VAT Ruling No. 040-98 interpreted the provision in such
fashion. The relevant portion of the ruling reads:
The sales of services subject to zero percent (0%) VAT under Section
108(B)(2), of the Tax Code of 1997, are limited to such sales which are
destined for consumption outside of the Philippines in that such services
are tacked-in as part of the cost of goods exported. The zero-rating also
extends to project studies, information services, engineering and
 architectural designs and other similar services sold by a resident of the
Philippines to a non-resident foreign client because these services are
likewise destined to be consumed abroad. The phrase ‘project studies,
information services, engineering and architectural designs and other
similar services’ does not include services rendered by travel agents to
foreign tourists in the Philippines following the doctrine of ejusdem
generis, since such services by travel agents are not of the same class
or of the same nature as those enumerated under the aforesaid section.
Considering that the services by your client to foreign tourists are
basically and substantially rendered within the Philippines, it follows that
the onus of taxation of the revenue arising therefrom, for VAT purposes,
is also within the Philippines. For this reason, it is our considered opinion
that the tour package services of your client to foreign tourists in the
Philippines cannot legally qualify for zero-rated (0%) VAT but rather
subject to the regular VAT rate of 10%.
Petitioner argues that following Section 4.102-2(b)(2) of Revenue Regulation No.
5-96, there are only two categories of services that are subject to zero percent
VAT, namely: services other than processing, manufacturing or repacking for
other persons doing business outside the Philippines for goods which are
subsequently exported; and services by a resident to a non-resident foreign
client, such as project studies, information services, engineering and
architectural designs and other similar services. 21 Petitioner explains that the
services rendered by respondent were not for goods which were subsequently
exported. Likewise, it is argued that the services rendered by respondent were
not similar to "project studies, information services, engineering and architectural
designs" which were destined to be consumed abroad by non-resident foreign
clients.
These views, petitioner points out, were reiterated in VAT Ruling No. 040-98. It
is clear from that issuance that the location or "destination" where the services
were destined for consumption was determinative of whether the zero-rating
availed when such services were sold by a resident of the Philippines to a non-
resident foreign client. VAT Ruling No. 040-98 expresses that the zero-rating
may apply only when the services are destined for consumption abroad. This
view aligns with the theoretical principle that the VAT is ultimately levied on
consumption.22 If the service were destined for consumption in the Philippines,
the service provider would have the faculty to pass on its VAT liability to the end-
user, thus avoiding having to shoulder the tax itself.
Unfortunately for petitioner, his arguments are no longer fresh. The Court
spurned them in Commissioner of Internal Revenue v. American Express.23
American Express involved transactions invoked as "zero-rated" by a "VAT-
registered person that facilitates the collection and payment of receivables
belonging to its non-resident foreign client, for which it gets paid in acceptable
foreign currency inwardly remitted and accounted for in conformity with BSP
rules and regulations."24 The CIR in that case relied extensively on the same
VAT Ruling No. 040-98 now cited before us. However, the Court would conclude
in American Express that the opinion therein that the service must be destined
for consumption outside of the Philippines was "clearly ultra vires and invalid."25
The discussion of the issues in American Express was comprehensive enough
as to address each issue now presently raised before us.
American Express explained the nature of VAT imposed on services in this
manner:
The VAT is a tax on consumption "expressed as a percentage of the
value added to goods or services" purchased by the producer or
taxpayer. As an indirect tax on services, its main object is the transaction
itself or, more concretely, the performance of all kinds of services
conducted in the course of trade or business in the Philippines. These
services must be regularly conducted in this country; undertaken in
"pursuit of a commercial or an economic activity;" for a valuable
consideration; and not exempt under the Tax Code, other special laws,
or any international agreement.26
Yet even as services may be subject to VAT, our tax laws extend the benefit of
zero-rating the VAT due on certain services. The aforementioned Section 102(b)
of the 1986 NIRC activates such zero-rating on two categories of transactions:
(1) Processing, manufacturing or repacking goods for other persons doing
business outside the Philippines which goods are subsequently exported, where
the services are paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP; and (2) services other
than those mentioned in the preceding subparagraph, the consideration for
which is paid for in acceptable foreign currency and accounted for in accordance
with the rules and regulations of the BSP. 27
Obviously, it is the second category that begs for further explication, owing to its
apparently broad scope, covering as it does "services other than those
mentioned in the preceding subparagraph." Yet, as found by the Court
in American Express, such broad scope did not mean that Section 102(b) is
vague, thus:
The law is very clear. Under the last paragraph [of Section 102(b)],
services performed by VAT-registered persons in the Philippines (other
than the processing, manufacturing or repacking of goods for persons
doing business outside the Philippines), when paid in acceptable foreign
currency and accounted for in accordance with the rules and regulations
of the BSP, are zero-rated.28
Since Section 102(b) is, in fact, "very clear," the Court declared that any resort to
statutory construction or interpretation was unnecessary.
As mentioned at the outset, Section 102(b)(2) of the Tax Code is very
clear. Therefore, no statutory construction or interpretation is needed.
Neither can conditions or limitations be introduced where none is
provided for. Rewriting the law is a forbidden ground that only Congress
may tread upon.
The Court may not construe a statute that is free from doubt. "[W]here
the law speaks in clear and categorical language, there is no room for
interpretation. There is only room for application." The Court has no
choice but to "see to it that its mandate is obeyed." 29
It was from the awareness that Section 102(b) is free from ambiguity in providing
so broad an extension of the zero-rated benefit on VAT-registered persons
performing services that the Court in American Express proceeded to consider
the same Section 4.102-2(b)(2) of Revenue Regulation No. 5-96 now cited by
petitioner. The Court in American Express explained that Revenue Regulation
No. 5-96 had amended Revenue Regulation No. 7-95, Section 4.102-2 of which
had retained the broad language of Section 102(b) in defining "transactions
subject to zero-rate," adding only, by way of specific example, the phrase "those
[services] rendered by hotels and other service establishments." 30 However, the
amendatory Revenue Regulation No. 5-96 opted for a more specific approach,
providing, by way of example, an enumeration of those services contemplated
as zero-rated.31 In the present case, it is because of such enumeration that
petitioner now argues that "respondent’s services likewise do not fall under the
second category mentioned in Section 4.102-2(b)(2) [as amended by Revenue
Regulation No. 5-96], because they are not similar to ‘project studies,
information services, engineering and architectural designs’ which are destined
to be consumed abroad by non-resident foreign clients."32
However, the Court in American Express clearly rebuffed a similar contention.
Aside from the already scopious coverage of services in Section 4.102-
2(b)(2) of RR 7-95, the amendment introduced by RR 5-96 further
enumerates specific services entitled to zero rating. Although
superfluous, these sample services are meant to be merely
illustrative. In this provision, the use of the term "as well as" is not
restrictive. As a prepositional phrase with an adverbial relation to
some other word, it simply means "in addition to, besides, also or
too."
Neither the law nor any of the implementing revenue regulations
aforequoted categorically defines or limits the services that may be
sold or exchanged for a fee, remuneration or consideration. Rather,
both merely enumerate the items of service that fall under the term "sale
or exchange of services."
xxxx
The canon of statutory construction known as ejusdem generis or "of the
same kind or specie" does not apply to Section 4.102-2(b)(2) of RR 7-95
as amended by RR 5-96.
First, although the regulatory provision contains an enumeration of
particular or specific words, followed by the general phrase "and
other similar services," such words do not constitute a readily
discernible class and are patently not of the same kind. Project
studies involve investments or marketing; information services focus on
data technology; engineering and architectural designs require creativity.
Aside from calling for the exercise or use of mental faculties or perhaps
producing written technical outputs, no common denominator to the
exclusion of all others characterizes these three services. Nothing sets
them apart from other and similar general services that may involve
advertising, computers, consultancy, health care, management,
messengerial work — to name only a few.
Second, there is the regulatory intent to give the general phrase "and
other similar services" a broader meaning. Clearly, the preceding
phrase "as well as" is not meant to limit the effect of "and other
similar services."
 Third, and most important, the statutory provision upon which this
regulation is based is by itself not restrictive. The scope of the
word "services" in Section 102(b)(2) of the [1986 NIRC] is broad; it
is not susceptible of narrow interpretation. (Emphasis supplied)33
The Court in American Express recognized the existence of the contrary holding
in VAT Ruling No. 040-98, now relied upon by petitioner especially as he states
that the zero-rating applied only when the services are destined for consumption
abroad. American Express minced no words in criticizing said ruling.
VAT Ruling No. 040-98 relied upon by petitioner is a less general
interpretation at the administrative level, rendered by the BIR
commissioner upon request of a taxpayer to clarify certain provisions of
the VAT law. As correctly held by the CA, when this ruling states that
the service must be "destined for consumption outside of the
Philippines" in order to qualify for zero rating, it contravenes both
the law and the regulations issued pursuant to it. This portion of
VAT Ruling No. 040-98 is clearly ultra vires and invalid.
Although "[i]t is widely accepted that the interpretation placed upon
a statute by the executive officers, whose duty is to enforce it, is
entitled to great respect by the courts," this interpretation is not
conclusive and will have to be "ignored if judicially found to be
erroneous" and "clearly absurd x x x or improper." An
administrative issuance that overrides the law it merely seeks to
interpret, instead of remaining consistent and in harmony with it,
will not be countenanced by this Court.(Emphasis supplied)34
Petitioner presently invokes the "destination principle," citing that [r]espondent’s
services, while rendered to a non-resident foreign corporation, are not destined
to be consumed abroad. Hence, the onus of taxation of the revenue arising
therefrom, for VAT purposes, is also within the Philippines. Yet the Court
in American Express debunked this argument when it rebutted the theoretical
underpinnings of VAT Ruling No. 040-98, particularly its reliance on the
"destination principle" in taxation:
As a general rule, the VAT system uses the destination principle as
a basis for the jurisdictional reach of the tax. Goods and services are
taxed only in the country where they are consumed. Thus, exports are
zero-rated, while imports are taxed.
Confusion in zero rating arises because petitioner equates the
performance of a particular type of service with the consumption of
its output abroad. In the present case, the facilitation of the collection of
receivables is different from the utilization or consumption of the
outcome of such service. While the facilitation is done in the Philippines,
the consumption is not. Respondent renders assistance to its foreign
clients — the ROCs outside the country — by receiving the bills of
service establishments located here in the country and forwarding them
to the ROCs abroad. The consumption contemplated by law,
contrary to petitioner's administrative interpretation, does not imply
that the service be done abroad in order to be zero-rated.
Consumption is "the use of a thing in a way that thereby exhausts
it." Applied to services, the term means the performance or
"successful completion of a contractual duty, usually resulting in
the performer's release from any past or future liability x x x" The
services rendered by respondent are performed or successfully
completed upon its sending to its foreign client the drafts and bills it has
gathered from service establishments here. Its services, having been
performed in the Philippines, are therefore also consumed in the
Philippines.
Unlike goods, services cannot be physically used in or bound for a
specific place when their destination is determined. Instead, there
can only be a "predetermined end of a course" when determining
the service "location or position x x x for legal
purposes." Respondent's facilitation service has no physical existence,
yet takes place upon rendition, and therefore upon consumption, in the
Philippines. Under the destination principle, as petitioner asserts, such
service is subject to VAT at the rate of 10 percent.
xxxx
However, the law clearly provides for an exception to the
destination principle; that is, for a zero percent VAT rate for
services that are performed in the Philippines, "paid for in
acceptable foreign currency and accounted for in accordance with
the rules and regulations of the [BSP]." Thus, for the supply of service
to be zero-rated as an exception, the law merely requires that first, the
service be performed in the Philippines; second, the service fall under
any of the categories in Section 102(b) of the Tax Code; and, third, it be
 paid in acceptable foreign currency accounted for in accordance with
BSP rules and regulations. (Emphasis supplied) 35
xxxx
Again, contrary to petitioner's stand, for the cost of respondent's
service to be zero-rated, it need not be tacked in as part of the cost
of goods exported. The law neither imposes such requirement nor
associates services with exported goods. It simply states that the
services performed by VAT-registered persons in the Philippines —
services other than the processing, manufacturing or repacking of
goods for persons doing business outside this country — if paid in
acceptable foreign currency and accounted for in accordance with
the rules and regulations of the BSP, are zero-rated. The service
rendered by respondent is clearly different from the product that
arises from the rendition of such service. The activity that creates the
income must not be confused with the main business in the course of
which that income is realized. (Emphasis supplied) 36
xxxx
The law neither makes a qualification nor adds a condition in
determining the tax situs of a zero-rated service. Under this criterion, the
place where the service is rendered determines the jurisdiction to impose
the VAT. Performed in the Philippines, such service is necessarily
subject to its jurisdiction, for the State necessarily has to have "a
substantial connection" to it, in order to enforce a zero rate. The
place of payment is immaterial; much less is the place where the
output of the service will be further or ultimately used.37
Finally, the Court in American Express found support from the legislative record
that revealed that consumption abroad is not a pertinent factor to imbue the
zero-rating on services by VAT-registered persons performed in the Philippines.
Interpellations on the subject in the halls of the Senate also reveal a
clear intent on the part of the legislators not to impose the condition of
being "consumed abroad" in order for services performed in the
Philippines by a VAT-registered person to be zero-rated. We quote the
relevant portions of the proceedings:
"Senator Maceda: Going back to Section 102 just for the
moment. Will the Gentleman kindly explain to me — I am
referring to the lower part of the first paragraph with the
'Provided'. Section 102. 'Provided that the following services
performed in the Philippines by VAT registered persons shall be
subject to zero percent.' There are three here. What is the
difference between the three here which is subject to zero
percent and Section 103 which is exempt transactions, to being
with?
"Senator Herrera: Mr. President, in the case of processing and
manufacturing or repacking goods for persons doing business
outside the Philippines which are subsequently exported, and
where the services are paid for in acceptable foreign currencies
inwardly remitted, this is considered as subject to 0%. But if
these conditions are not complied with, they are subject to the
VAT.
"In the case of No. 2, again, as the Gentleman pointed out, these
three are zero-rated and the other one that he indicated are
exempted from the very beginning. These three enumerations
under Section 102 are zero-rated provided that these conditions
indicated in these three paragraphs are also complied with. If
they are not complied with, then they are not entitled to the zero
ratings. Just like in the export of minerals, if these are not
exported, then they cannot qualify under this provision of zero
rating.
"Senator Maceda: Mr. President, just one small item so we can
leave this. Under the proviso, it is required that the following
services be performed in the Philippines.
"Under No. 2, services other than those mentioned above
includes, let us say, manufacturing computers and computer
chips or repacking goods for persons doing business outside the
Philippines. Meaning to say, we ship the goods to them in
Chicago or Washington and they send the payment inwardly to
the Philippines in foreign currency, and that is, of course, zero-
rated.
"Now, when we say 'services other than those mentioned in the
preceding subsection[,'] may I have some examples of these?
"Senator Herrera: Which portion is the Gentleman referring to?
"Senator Maceda: I am referring to the second paragraph, in the
same Section 102. The first paragraph is when one
manufactures or packages something here and he sends it
abroad and they pay him, that is covered. That is clear to me.
The second paragraph says 'Services other than those
mentioned in the preceding subparagraph, the consideration of
which is paid for in acceptable foreign currency. . . .'
"One example I could immediately think of—I do not know why
this comes to my mind tonight—is for tourism or escort services.
For example, the services of the tour operator or tour escort—
just a good name for all kinds of activities—is made here at the
Midtown Ramada Hotel or at the Philippine Plaza, but the
payment is made from outside and remitted into the country.
"Senator Herrera: What is important here is that these services
are paid in acceptable foreign currency remitted inwardly to the
Philippines.
"Senator Maceda: Yes, Mr. President. Like those Japanese tours
which include $50 for the services of a woman or a tourist guide,
it is zero-rated when it is remitted here.
"Senator Herrera: I guess it can be interpreted that way, although
this tourist guide should also be considered as among the
professionals. If they earn more than P200,000, they should be
covered.
xxxx
Senator Maceda: So, the services by Filipino citizens outside the
Philippines are subject to VAT, and I am talking of all services.
Do big contractual engineers in Saudi Arabia pay VAT?
"Senator Herrera: This provision applies to a VAT-registered
person. When he performs services in the Philippines, that is
zero-rated.
"Senator Maceda: That is right."38
It is indubitable that petitioner’s arguments cannot withstand the Court’s ruling
in American Express, a precedent warranting stare decisis application and one
which, in any event, we are disinclined to revisit at this juncture.
WHEREFORE, the petition is DENIED. No pronouncement as to costs.
SO ORDERED.
Quisumbing, Chairperson, Carpio, Carpio-Morales, Velasco, Jr., JJ., concur.
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 Answer18 –
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- 1st Quarter 2nd Quarter Total
year prescriptive period prescribed by then Section 230 of the Tax
Code.22 Amount of claimed input taxes
filed with the DOF One Stop
In the same pleading, Toshiba and the CIR jointly submitted the following issues Shop Center P3,268,682.34 P416,764.39 P3,685,446.73
for determination by the CTA –
Less: 1) Input taxes not
Whether or not [Toshiba] has incurred input taxes in the amount of properly
₱3,875,139.65 for the period January 1 to June 30, 1997 which are directly supported by VAT invoices
attributable to its export sales[.] and official receipts
a. Per SGV’s verification
(Exh. I) ₱ 242,491.45 ₱154,391.13 ₱ 396,882.58
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[.] b. Per this court’s further
verification (Annex A)
Whether or not input taxes incurred by [Toshiba] for the first two quarters of ₱1,852,437.65 ₱ 35,108.00 ₱1,887,545.65
1997 have not been offset against any output tax[.] ₱189,499.13 ₱2,300,164.65

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 –
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 Reconsideration26 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 –

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:
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 Resolution28 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 Answer 54 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 x x
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.
TERESITA J. LEONARDO-DE CASTRO
Associate Justice
WE CONCUR:
REYNATO S. PUNO
Chief Justice
Chairperson
CONCHITA CARPIO MORALES LUCAS P. BERSAMIN
Associate Justice Associate Justice
MARTIN S. VILLARAMA, JR.
Associate Justice
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, I certify that the
conclusions in the above Decision had been reached in consultation before the
case was assigned to the writer of the opinion of the Court’s Division.

G.R. No. 153205 January 22, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

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

DECISION

CARPIO, J.:

The Case

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

The Antecedents

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

[Respondent] is a domestic corporation duly organized and existing under and

by virtue of the laws of the Philippines with principal address located at Daruma
Building, Jose P. Laurel Avenue, Lanang, Davao City.

It is represented that a foreign consortium composed of Burmeister and Wain

Scandinavian Contractor A/S (BWSC-Denmark), Mitsui Engineering and
Shipbuilding, Ltd., and Mitsui and Co., Ltd. entered into a contract with the
National Power Corporation (NAPOCOR) for the operation and maintenance of
[NAPOCOR’s] two power barges. The Consortium appointed BWSC-Denmark 4th H 01-20-97 42,992,302.87 1,065,138.86
as its coordination manager.

BWSC-Denmark established [respondent] which subcontracted the actual Totals P147,317,189.62 P3,361,174.14
operation and maintenance of NAPOCOR’s two power barges as well as the
performance of other duties and acts which necessarily have to be done in the
Philippines.
On December 29, 1997, [respondent] availed of the Voluntary Assessment
Program (VAP) of the BIR. It allegedly misinterpreted Revenue Regulations No.
NAPOCOR paid capacity and energy fees to the Consortium in a mixture of 5-96 dated February 20, 1996 to be applicable to its case. Revenue Regulations
currencies (Mark, Yen, and Peso). The freely convertible non-Peso component No. 5-96 provides in part thus:
is deposited directly to the Consortium’s bank accounts in Denmark and Japan,
while the Peso-denominated component is deposited in a separate and special
SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-95
designated bank account in the Philippines. On the other hand, the Consortium
are hereby amended to read as follows:
pays [respondent] in foreign currency inwardly remitted to the Philippines
through the banking system.
Section 4.102-2(b)(2) – "Services other than processing, manufacturing or
repacking for other persons doing business outside the Philippines for goods
In order to ascertain the tax implications of the above transactions, [respondent]
which are subsequently exported, as well as services by a resident to a non-
sought a ruling from the BIR which responded with BIR Ruling No. 023-95 dated
resident foreign client such as project studies, information services, engineering
February 14, 1995, declaring therein that if [respondent] chooses to register as a
and architectural designs and other similar services, the consideration for which
VAT person and the consideration for its services is paid for in acceptable
is paid for in acceptable foreign currency and accounted for in accordance with
foreign currency and accounted for in accordance with the rules and regulations
the rules and regulations of the BSP."
of the Bangko Sentral ng Pilipinas, the aforesaid services shall be subject to
VAT at zero-rate.
x x x x x x x x x x.
[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 [conformity] with the aforecited Revenue Regulations, [respondent] subjected
in favor of [respondent] by the Revenue District Office No. 113 of Davao City. 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
For the year 1996, [respondent] seasonably filed its quarterly Value-Added Tax
of P43,893,951.07, representing January to March 1996 sales was subjected to
Returns reflecting, among others, a total zero-rated sales of P147,317,189.62
zero rate. Consequently, [respondent] filed its 1996 amended VAT return
with VAT input taxes of P3,361,174.14, detailed as follows:
consolidating therein the VAT output and input taxes for the four calendar
quarters of 1996. It paid the amount of P6,994,659.67 through BIR’s collecting
Qtr. Exh. Date Filed Zero-Rated Sales VAT Input Tax agent, PCIBank, as its output tax liability for the year 1996, computed as follows:

Amount subject to 10% VAT P103,558,338.11

1st E 04-18-96 P 33,019,651.07 P608,953.48
Multiply by 10%
2nd F 07-16-96 37,108,863.33 756,802.66
VAT Output Tax P 10,355,833.81
3rd G 10-14-96 34,196,372.35 930,279.14
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 CTA’s ruling stated:
[Respondent’s] sale of services to the Consortium [was] paid for in acceptable
foreign currency inwardly remitted to the Philippines and accounted for in
accordance with the rules and regulations of Bangko Sentral ng Pilipinas. These
were established by various BPI Credit Memos showing remittances in Danish
Kroner (DKK) and US dollars (US$) as payments for the specific invoices billed
by [respondent] to the consortium. These remittances were further certified by
the Branch Manager x x x of BPI-Davao Lanang Branch to represent payments
for sub-contract fees that came from Den Danske Aktieselskab Bank-Denmark
for the account of [respondent]. Clearly, [respondent’s] sale of services to the
Consortium is subject to VAT at 0% pursuant to Section 108(B)(2) of the Tax
Code.
xxxx
The zero-rating of [respondent’s] sale of services to the Consortium was even
confirmed by the [petitioner] in BIR Ruling No. 023-95 dated February 15, 1995,
and later by VAT Ruling No. 003-99 dated January 7,1999, x x x.
Since it is apparent that the payments for the services rendered by [respondent]
were indeed subject to VAT at zero percent, it follows that it mistakenly availed
of the Voluntary Assessment Program by paying output tax for its sale of
services. x x x
x x x Considering the principle of solutio indebiti which requires the return of
what has been delivered by mistake, the [petitioner] is obligated to issue the tax
credit certificate prayed for by [respondent]. x x x5
Petitioner filed a petition for review with the Court of Appeals, which dismissed
the petition for lack of merit and affirmed the CTA decision.6
Hence, this petition.
The Court of Appeals’ Ruling
In affirming the CTA, the Court of Appeals rejected petitioner’s view that since
respondent’s services are not destined for consumption abroad, they are not of
the same nature as project studies, information services, engineering and
architectural designs, and other similar services mentioned in Section 4.102-
2(b)(2) of Revenue Regulations No. 5-967 as subject to 0% VAT. Thus,
according to petitioner, respondent’s services cannot legally qualify for 0% VAT
but are subject to the regular 10% VAT.8
The Court of Appeals found untenable petitioner’s contention that under VAT
Ruling No. 040-98, respondent’s services should be destined for consumption
abroad to enjoy zero-rating. Contrary to petitioner’s interpretation, there are two
kinds of transactions or services subject to zero percent VAT under VAT Ruling
No. 040-98. These are (a) services other than repacking goods for other persons
doing business outside the Philippines which goods are subsequently exported;
and (b) services by a resident to a non-resident foreign client, such as project
studies, information services, engineering and architectural designs and other
similar services, the consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP).9
The Court of Appeals stated that "only the first classification is required by the
provision to be consumed abroad in order to be taxed at zero rate. In x x x the
absence of such express or implied stipulation in the statute, the second
classification need not be consumed abroad."10
The Court of Appeals further held that assuming petitioner’s interpretation of
Section 4.102-2(b)(2) of Revenue Regulations No. 5-96 is correct, such
administrative provision is void being an amendment to the Tax Code. Petitioner
went beyond merely providing the implementing details by adding another
requirement to zero-rating. "This is indicated by the additional phrase ‘as well as
services by a resident to a non-resident foreign client, such as project studies,
information services and engineering and architectural designs and other similar
services.’ In effect, this phrase adds not just one but two requisites: (a) services
must be rendered by a resident to a non-resident; and (b) these must be in the
nature of project studies, information services, etc." 11
The Court of Appeals explained that under Section 108(b)(2) of the Tax
Code,12 for services which were performed in the Philippines to enjoy zero-
rating, these must comply only with two requisites, to wit: (1) payment in
acceptable foreign currency and (2) accounted for in accordance with the rules
of the BSP. Section 108(b)(2) of the Tax Code does not provide that services
must be "destined for consumption abroad" in order to be VAT zero-rated.13
The Court of Appeals disagreed with petitioner’s argument that our VAT law
generally follows the destination principle (i.e., exports exempt, imports
taxable).14 The Court of Appeals stated that "if indeed the ‘destination principle’
underlies and is the basis of the VAT laws, then petitioner’s proper remedy
would be to recommend an amendment of Section 108(b)(2) to Congress.
Without such amendment, however, petitioner should apply the terms of the
basic law. Petitioner could not resort to administrative legislation, as what [he]
had done in this case."15
The Issue
The lone issue for resolution is whether respondent is entitled to the refund
of P6,994,659.67 as erroneously paid output VAT for the year 1996. 16
The Ruling of the Court
We deny the petition.
At the outset, the Court declares that the denial of the instant petition is not on
the ground that respondent’s services are subject to 0% VAT. Rather, it is based
on the non-retroactivity of the prejudicial revocation of BIR Ruling No. 023-
9517 and VAT Ruling No. 003-99,18 which held that respondent’s services are
subject to 0% VAT and which respondent invoked in applying for refund of the
output VAT.
Section 102(b) of the Tax Code,19 the applicable provision in 1996 when
respondent rendered the services and paid the VAT in question, enumerates
which services are zero-rated, thus:
(b) Transactions subject to zero-rate. ― The following services performed in the
Philippines by VAT-registered persons shall be subject to 0%:
(1) Processing, manufacturing or repacking goods for other persons
doing business outside the Philippines which goods are subsequently
exported, where the services are paid for in acceptable foreign currency
and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas(BSP);
(2) Services other than those mentioned in the preceding sub-
paragraph, the consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations
of the Bangko Sentral ng Pilipinas (BSP);
(3) Services rendered to persons or entities whose exemption under
special laws or international agreements to which the Philippines is a
signatory effectively subjects the supply of such services to zero rate;
(4) Services rendered to vessels engaged exclusively in international
shipping; and
(5) Services performed by subcontractors and/or contractors in
processing, converting, or manufacturing goods for an enterprise whose
export sales exceed seventy percent (70%) of total annual production.
(Emphasis supplied)
In insisting that its services should be zero-rated, respondent claims that it
complied with the requirements of the Tax Code for zero rating under the second
paragraph of Section 102(b). Respondent asserts that (1) the payment of its
service fees was in acceptable foreign currency, (2) there was inward remittance
of the foreign currency into the Philippines, and (3) accounting of such
remittance was in accordance with BSP rules. Moreover, respondent contends
that its services which "constitute the actual operation and management of two
(2) power barges in Mindanao" are not "even remotely similar to project studies,
information services and engineering and architectural designs under Section
4.102-2(b)(2) of Revenue Regulations No. 5-96." As such, respondent’s services
need not be "destined to be consumed abroad in order to be VAT zero-rated."
Respondent is mistaken.
The Tax Code not only requires that the services be other than "processing,
manufacturing or repacking of goods" and that payment for such services be in
acceptable foreign currency accounted for in accordance with BSP rules.
Another essential condition for qualification to zero-rating under Section
102(b)(2) is that the recipient of such services is doing business outside the
Philippines. While this requirement is not expressly stated in the second
paragraph of Section 102(b), this is clearly provided in the first paragraph of
Section 102(b) where the listed services must be "for other persons doing
business outside the Philippines." The phrase "for other persons doing business
outside the Philippines" not only refers to the services enumerated in the first
paragraph of Section 102(b), but also pertains to the general term "services"
appearing in the second paragraph of Section 102(b). In short, services other
than processing, manufacturing, or repacking of goods must likewise be
performed for persons doing business outside the Philippines.
This can only be the logical interpretation of Section 102(b)(2). If the provider
and recipient of the "other services" are both doing business in the Philippines,
the payment of foreign currency is irrelevant. Otherwise, those subject to the
regular VAT under Section 102(a) can avoid paying the VAT by simply
stipulating payment in foreign currency inwardly remitted by the recipient of
services. To interpret Section 102(b)(2) to apply to a payer-recipient of services
doing business in the Philippines is to make the payment of the regular VAT
under Section 102(a) dependent on the generosity of the taxpayer. The provider
of services can choose to pay the regular VAT or avoid it by stipulating payment
in foreign currency inwardly remitted by the payer-recipient. Such interpretation
removes Section 102(a) as a tax measure in the Tax Code, an interpretation this
Court cannot sanction. A tax is a mandatory exaction, not a voluntary
contribution.
When Section 102(b)(2) stipulates payment in "acceptable foreign currency"
under BSP rules, the law clearly envisions the payer-recipient of services to be
doing business outside the Philippines. Only those not doing business in the
Philippines can be required under BSP rules 20 to pay in acceptable foreign
currency for their purchase of goods or services from the Philippines. In a
domestic transaction, where the provider and recipient of services are both
doing business in the Philippines, the BSP cannot require any party to make
payment in foreign currency.
Services covered by Section 102(b) (1) and (2) are in the nature of export sales
since the payer-recipient of services is doing business outside the Philippines.
Under BSP rules,21 the proceeds of export sales must be reported to the Bangko
Sentral ng Pilipinas. Thus, there is reason to require the provider of services
under Section 102(b) (1) and (2) to account for the foreign currency proceeds to
the BSP. The same rationale does not apply if the provider and recipient of the
services are both doing business in the Philippines since their transaction is not
in the nature of an export sale even if payment is denominated in foreign
currency.
Further, when the provider and recipient of services are both doing business in
the Philippines, their transaction falls squarely under Section 102(a) governing
domestic sale or exchange of services. Indeed, this is a purely local sale or
exchange of services subject to the regular VAT, unless of course the
transaction falls under the other provisions of Section 102(b).
Thus, when Section 102(b)(2) speaks of "[s]ervices other than those
mentioned in the preceding subparagraph," the legislative intent is that only
the services are different between subparagraphs 1 and 2. The requirements for
zero-rating, including the essential condition that the recipient of services is
doing business outside the Philippines, remain the same under both
subparagraphs.
Significantly, the amended Section 108(b) 22 [previously Section 102(b)] of the
present Tax Code clarifies this legislative intent. Expressly included among the
transactions subject to 0% VAT are "[s]ervices other than those mentioned in
the [first] paragraph [of Section 108(b)] rendered to a person engaged in
business conducted outside the Philippines or to a nonresident person not
engaged in business who is outside the Philippines when the services are
performed, the consideration for which is paid for in acceptable foreign currency
and accounted for in accordance with the rules and regulations of the BSP."
In this case, the payer-recipient of respondent’s services is the Consortium
which is a joint-venture doing business in the Philippines. While the
Consortium’s principal members are non-resident foreign corporations, the
Consortium itself is doing business in the Philippines. This is shown clearly in
BIR Ruling No. 023-95 which states that the contract between the Consortium
and NAPOCOR is for a 15-year term, thus:
This refers to your letter dated January 14, 1994 requesting for a clarification of
the tax implications of a contract between a consortium composed of Burmeister
& Wain Scandinavian Contractor A/S ("BWSC"), Mitsui Engineering &
Shipbuilding, Ltd. (MES), and Mitsui & Co., Ltd. ("MITSUI"), all referred to
hereinafter as the "Consortium", and the National Power Corporation
("NAPOCOR") for the operation and maintenance of two 100-Megawatt
power barges ("Power Barges") acquired by NAPOCOR for a 15-year
term.23 (Emphasis supplied)
Considering this length of time, the Consortium’s operation and maintenance of
NAPOCOR’s power barges cannot be classified as a single or isolated
transaction. The Consortium does not fall under Section 102(b)(2) which
requires that the recipient of the services must be a person doing business
outside the Philippines. Therefore, respondent’s services to the Consortium, not
being supplied to a person doing business outside the Philippines, cannot legally
qualify for 0% VAT.
Respondent, as subcontractor of the Consortium, operates and maintains
NAPOCOR’s power barges in the Philippines. NAPOCOR pays the Consortium,
through its non-resident partners, partly in foreign currency outwardly remitted.
In turn, the Consortium pays respondent also in foreign currency inwardly
remitted and accounted for in accordance with BSP rules. This payment scheme
does not entitle respondent to 0% VAT. As the Court held in Commissioner of
Internal Revenue v. American Express International, Inc. (Philippine
Branch),24 the place of payment is immaterial, much less is the place where the
output of the service is ultimately used. An essential condition for entitlement to
0% VAT under Section 102(b)(1) and (2) is that the recipient of the services is a
person doing business outside the Philippines. In this case, the recipient of the
services is the Consortium, which is doing business not outside, but within the
Philippines because it has a 15-year contract to operate and maintain
NAPOCOR’s two 100-megawatt power barges in Mindanao.
The Court recognizes the rule that the VAT system generally follows the
"destination principle" (exports are zero-rated whereas imports are taxed).
However, as the Court stated in American Express, there is an exception to this
rule.25 This exception refers to the 0% VAT on services enumerated in Section
102 and performed in the Philippines. For services covered by Section 102(b)(1)
and (2), the recipient of the services must be a person doing business outside
the Philippines. Thus, to be exempt from the destination principle under Section
102(b)(1) and (2), the services must be (a) performed in the Philippines; (b) for a
person doing business outside the Philippines; and (c) paid in acceptable foreign
currency accounted for in accordance with BSP rules.
Respondent’s reliance on the ruling in American 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 x27 (Emphasis supplied)
In contrast, this case involves a recipient of services – the Consortium – which is
doing business in the Philippines. Hence, American Express’ services were
subject to 0% VAT, while respondent’s services should be subject to 10% VAT.
Nevertheless, in seeking a refund of its excess output tax, respondent relied on
VAT Ruling No. 003-99,28 which reconfirmed BIR Ruling No. 023-9529 "insofar as
it held that the services being rendered by BWSCMI is subject to VAT at zero
percent (0%)." Respondent’s reliance on these BIR rulings binds petitioner.
Petitioner’s filing of his Answer before the CTA challenging respondent’s claim
for refund effectively serves as a revocation of VAT Ruling No. 003-99 and BIR
Ruling No. 023-95. However, such revocation cannot be given retroactive effect
since it will prejudice respondent. Changing respondent’s status will deprive
respondent of a refund of a substantial amount representing excess output
tax.30 Section 246 of the Tax Code provides that any revocation of a ruling by the
Commissioner of Internal Revenue shall not be given retroactive application if
the revocation will prejudice the taxpayer. Further, there is no showing of the
existence of any of the exceptions enumerated in Section 246 of the Tax Code
for the retroactive application of such revocation.
However, upon the filing of petitioner’s Answer dated 2 March 2000 before the
CTA contesting respondent’s claim for refund, respondent’s services shall be
subject to the regular 10% VAT.31 Such filing is deemed a revocation of VAT
Ruling No. 003-99 and BIR Ruling No. 023-95.
WHEREFORE, the Court DENIES the petition.

G.R. No. 151135 July 2, 2004
CONTEX CORPORATION, petitioner,
vs.
HON. COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
QUISUMBING, J.:
For review is the Decision1 dated September 3, 2001, of the Court of Appeals, in
CA-G.R. SP No. 62823, which reversed and set aside the decision2 dated
October 13, 2000, of the Court of Tax Appeals (CTA). The CTA had ordered the
Commissioner of Internal Revenue (CIR) to refund the sum of P683,061.90 to
petitioner as erroneously paid input value-added tax (VAT) or in the alternative,
to issue a tax credit certificate for said amount. Petitioner also assails the
appellate court’s Resolution,3 dated December 19, 2001, denying the motion for
reconsideration.
Petitioner is a domestic corporation engaged in the business of manufacturing
hospital textiles and garments and other hospital supplies for export. Petitioner’s
place of business is at the Subic Bay Freeport Zone (SBFZ). It is duly registered
with the Subic Bay Metropolitan Authority (SBMA) as a Subic Bay Freeport
Enterprise, pursuant to the provisions of Republic Act No. 7227.4 As an SBMA-
registered firm, petitioner is exempt from all local and national internal revenue
taxes except for the preferential tax provided for in Section 12 (c)5 of Rep. Act
No. 7227. Petitioner also registered with the Bureau of Internal Revenue (BIR)
as a non-VAT taxpayer under Certificate of Registration RDO Control No. 95-
180-000133.
From January 1, 1997 to December 31, 1998, petitioner purchased various
supplies and materials necessary in the conduct of its manufacturing
business. The suppliers of these goods shifted unto petitioner the 10% VAT on
the purchased items, which led the petitioner to pay input taxes in the amounts
of P539,411.88 and P504,057.49 for 1997 and 1998, respectively.6
Acting on the belief that it was exempt from all national and local taxes, including
VAT, pursuant to Rep. Act No. 7227, petitioner filed two applications for tax
refund or tax credit of the VAT it paid. Mr. Edilberto Carlos, revenue district
officer of BIR RDO No. 19, denied the first application letter, dated December
29, 1998.
Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax
refund/credit, this time directly with Atty. Alberto Pagabao, the regional director
of BIR Revenue Region No. 4. The second letter sought a refund or issuance of
a tax credit certificate in the amount of P1,108,307.72, representing erroneously
paid input VAT for the period January 1, 1997 to November 30, 1998.
When no response was forthcoming from the BIR Regional Director, petitioner
then elevated the matter to the Court of Tax Appeals, in a petition for review
docketed as CTA Case No. 5895. Petitioner stressed that Section 112(A) 7 if read
in relation to Section 106(A)(2)(a)8 of the National Internal Revenue Code, as
amended and Section 12(b)9 and (c) of Rep. Act No. 7227 would show that it was
not liable in any way for any value-added tax.
In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply
the rule that claims for refund are strictly construed against the taxpayer. Since
petitioner failed to establish both its right to a tax refund or tax credit and its
compliance with the rules on tax refund as provided for in Sections 20410 and
22911 of the Tax Code, its claim should be denied, according to the BIR.
On October 13, 2000, the CTA decided CTA Case No. 5895 as follows:
WHEREFORE, in view of the foregoing, the Petition for Review is hereby
PARTIALLY GRANTED. Respondent is hereby ORDERED to REFUND
or in the alternative to ISSUE A TAX CREDIT CERTIFICATE in favor of
Petitioner the sum of P683,061.90, representing erroneously paid input
VAT.
SO ORDERED. 12
In granting a partial refund, the CTA ruled that petitioner misread Sections
106(A)(2)(a) and 112(A) of the Tax Code. The tax court stressed that these
provisions apply only to those entities registered as VAT taxpayers whose sales
are zero-rated. Petitioner does not fall under this category, since it is a non-VAT
taxpayer as evidenced by the Certificate of Registration RDO Control No. 95-
180-000133 issued by RDO Rosemarie Ragasa of BIR RDO No. 18 of the Subic
Bay Freeport Zone and thus it is exempt from VAT, pursuant to Rep. Act No.
7227, said the CTA.
Nonetheless, the CTA held that the petitioner is exempt from the imposition of
input VAT on its purchases of supplies and materials. It pointed out that under
Section 12(c) of Rep. Act No. 7227 and the Implementing Rules and Regulations
of the Bases Conversion and Development Act of 1992, all that petitioner is
required to pay as a SBFZ-registered enterprise is a 5% preferential tax.
The CTA also disallowed all refunds of input VAT paid by the petitioner prior to
June 29, 1997 for being barred by the two-year prescriptive period under Section
229 of the Tax Code. The tax court also limited the refund only to the input VAT
paid by the petitioner on the supplies and materials directly used by the
petitioner in the manufacture of its goods. It struck down all claims for input VAT
paid on maintenance, office supplies, freight charges, and all materials and
supplies shipped or delivered to the petitioner’s Makati and Pasay City offices.
Respondent CIR then filed a petition, docketed as CA-G.R. SP No. 62823, for
review of the CTA decision by the Court of Appeals. Respondent maintained that
the exemption of Contex Corp. under Rep. Act No. 7227 was limited only to
direct taxes and not to indirect taxes such as the input component of the VAT.
The Commissioner pointed out that from its very nature, the value-added tax is a
burden passed on by a VAT registered person to the end users; hence, the
direct liability for the tax lies with the suppliers and not Contex.
Finding merit in the CIR’s arguments, the appellate court decided CA-G.R. SP
No. 62823 in his favor, thus:
WHEREFORE, premises considered, the appealed decision is hereby
REVERSED AND SET ASIDE. Contex’s claim for refund of erroneously
paid taxes is DENIED accordingly.
SO ORDERED.13
In reversing the CTA, the Court of Appeals held that the exemption from duties
and taxes on the importation of raw materials, capital, and equipment of SBFZ-
registered enterprises under Rep. Act No. 7227 and its implementing rules
covers only "the VAT imposable under Section 107 of the [Tax Code], which is a
direct liability of the importer, and in no way includes the value-added tax of the
seller-exporter the burden of which was passed on to the importer as an
additional costs of the goods."14 This was because the exemption granted by
Rep. Act No. 7227 relates to the act of importation and Section 107 15 of the Tax
Code specifically imposes the VAT on importations. The appellate court applied
the principle that tax exemptions are strictly construed against the taxpayer. The
Court of Appeals pointed out that under the implementing rules of Rep. Act No.
7227, the exemption of SBFZ-registered enterprises from internal revenue taxes
is qualified as pertaining only to those for which they may be directly liable. It
then stated that apparently, the legislative intent behind Rep. Act No. 7227 was
to grant exemptions only to direct taxes, which SBFZ-registered enterprise may
be liable for and only in connection with their importation of raw materials,
capital, and equipment as well as the sale of their goods and services.
Petitioner timely moved for reconsideration of the Court of Appeals decision, but
the motion was denied.
Hence, the instant petition raising as issues for our resolution the following:
A. WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL AND
NATIONAL INTERNAL REVENUE TAXES PROVIDED IN REPUBLIC
ACT NO. 7227 COVERS THE VALUE ADDED TAX PAID BY
PETITIONER, A SUBIC BAY FREEPORT ENTERPRISE ON ITS
PURCHASES OF SUPPLIES AND MATERIALS.
 B. WHETHER OR NOT THE COURT OF TAX APPEALS CORRECTLY
HELD THAT PETITIONER IS ENTITLED TO A TAX CREDIT OR
REFUND OF THE VAT PAID ON ITS PURCHASES OF SUPPLIES AND
RAW MATERIALS FOR THE YEARS 1997 AND 1998.16
Simply stated, we shall resolve now the issues concerning: (1) the correctness
of the finding of the Court of Appeals that the VAT exemption embodied in Rep.
Act No. 7227 does not apply to petitioner as a purchaser; and (2) the entitlement
of the petitioner to a tax refund on its purchases of supplies and raw materials
for 1997 and 1998.
On the first issue, petitioner argues that the appellate court’s restrictive
interpretation of petitioner’s VAT exemption as limited to those covered by
Section 107 of the Tax Code is erroneous and devoid of legal basis. It contends
that the provisions of Rep. Act No. 7227 clearly and unambiguously mandate
that no local and national taxes shall be imposed upon SBFZ-registered firms
and hence, said law should govern the case. Petitioner calls our attention to
regulations issued by both the SBMA and BIR clearly and categorically providing
that the tax exemption provided for by Rep. Act No. 7227 includes exemption
from the imposition of VAT on purchases of supplies and materials.
The respondent takes the diametrically opposite view that while Rep. Act No.
7227 does grant tax exemptions, such grant is not all-encompassing but is
limited only to those taxes for which a SBFZ-registered business may be directly
liable. Hence, SBFZ locators are not relieved from the indirect taxes that may be
shifted to them by a VAT-registered seller.
At this juncture, it must be stressed that the VAT is an indirect tax. As such, the
amount of tax paid on the goods, properties or services bought, transferred, or
leased may be shifted or passed on by the seller, transferor, or lessor to the
buyer, transferee or lessee.17 Unlike a direct tax, such as the income tax, which
primarily taxes an individual’s ability to pay based on his income or net wealth,
an indirect tax, such as the VAT, is a tax on consumption of goods, services, or
certain transactions involving the same. The VAT, thus, forms a substantial
portion of consumer expenditures.
Further, in indirect taxation, there is a need to distinguish between the liability for
the tax and the burden of the tax. As earlier pointed out, the amount of tax paid
may be shifted or passed on by the seller to the buyer. What is transferred in
such instances is not the liability for the tax, but the tax burden. In adding or
including the VAT due to the selling price, the seller remains the person primarily
and legally liable for the payment of the tax. What is shifted only to the
intermediate buyer and ultimately to the final purchaser is the burden of the
tax.18 Stated differently, a seller who is directly and legally liable for payment of
an indirect tax, such as the VAT on goods or services is not necessarily the
person who ultimately bears the burden of the same tax. It is the final purchaser
or consumer of such goods or services who, although not directly and legally
liable for the payment thereof, ultimately bears the burden of the tax. 19
Exemptions from VAT are granted by express provision of the Tax Code or
special laws. Under VAT, the transaction can have preferential treatment in the
following ways:
(a) VAT Exemption. An exemption means that the sale of goods or
properties and/or services and the use or lease of properties is not
subject to VAT (output tax) and the seller is not allowed any tax credit on
VAT (input tax) previously paid.20 This is a case wherein the VAT is
removed at the exempt stage (i.e., at the point of the sale, barter or
exchange of the goods or properties).
The person making the exempt sale of goods, properties or services
shall not bill any output tax to his customers because the said
transaction is not subject to VAT. On the other hand, a VAT-registered
purchaser of VAT-exempt goods/properties or services which are
exempt from VAT is not entitled to any input tax on such purchase
despite the issuance of a VAT invoice or receipt.21
(b) Zero-rated Sales. These are sales by VAT-registered persons which
are subject to 0% rate, meaning the tax burden is not passed on to the
purchaser. A zero-rated sale by a VAT-registered person, which is a
taxable transaction for VAT purposes, shall not result in any output tax.
However, the input tax on his purchases of goods, properties or services
related to such zero-rated sale shall be available as tax credit or refund
in accordance with these regulations. 22
Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm.
In contrast, exemption only removes the VAT at the exempt stage, and it will
actually increase, rather than reduce the total taxes paid by the exempt firm’s
business or non-retail customers. It is for this reason that a sharp distinction
must be made between zero-rating and exemption in designating a value-added
tax.23
Apropos, the petitioner’s claim to VAT exemption in the instant case for its
purchases of supplies and raw materials is founded mainly on Section 12 (b)
and (c) of Rep. Act No. 7227, which basically exempts them from all national
and local internal revenue taxes, including VAT and Section 4 (A)(a) of BIR
Revenue Regulations No. 1-95.24
On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact
is not controverted by the respondent. In fact, petitioner is registered as a NON-
VAT taxpayer per Certificate of Registration25 issued by the BIR. As such, it is
exempt from VAT on all its sales and importations of goods and services.
Petitioner’s claim, however, for exemption from VAT for its purchases of supplies
and raw materials is incongruous with its claim that it is VAT-Exempt, for only
VAT-Registered entities can claim Input VAT Credit/Refund.
The point of contention here is whether or not the petitioner may claim a refund
on the Input VAT erroneously passed on to it by its suppliers.
While it is true that the petitioner should not have been liable for the VAT
inadvertently passed on to it by its supplier since such is a zero-rated sale on the
part of the supplier, the petitioner is not the proper party to claim such VAT
refund.
Section 4.100-2 of BIR’s Revenue Regulations 7-95, as amended, or the
"Consolidated Value-Added Tax Regulations" provide:
Sec. 4.100-2. Zero-rated Sales. A zero-rated sale by a VAT-registered
person, which is a taxable transaction for VAT purposes, shall not result
in any output tax. However, the input tax on his purchases of goods,
properties or services related to such zero-rated sale shall be available
as tax credit or refund in accordance with these regulations.
The following sales by VAT-registered persons shall be subject to 0%:
(a) Export Sales
"Export Sales" shall mean
...
(5) Those considered export sales under Articles 23 and 77 of
Executive Order No. 226, otherwise known as the Omnibus
Investments Code of 1987, and other special laws, e.g. Republic
Act No. 7227, otherwise known as the Bases Conversion and
Development Act of 1992.
...
(c) Sales to persons or entities whose exemption under special laws, e.g.
R.A. No. 7227 duly registered and accredited enterprises with Subic Bay
Metropolitan Authority (SBMA) and Clark Development Authority (CDA),
R. A. No. 7916, Philippine Economic Zone Authority (PEZA), or
international agreements, e.g. Asian Development Bank (ADB),
International Rice Research Institute (IRRI), etc. to which the Philippines
is a signatory effectively subject such sales to zero-rate."
Since the transaction is deemed a zero-rated sale, petitioner’s supplier may
claim an Input VAT credit with no corresponding Output VAT liability.
Congruently, no Output VAT may be passed on to the petitioner.
On the second issue, it may not be amiss to re-emphasize that the petitioner is
registered as a NON-VAT taxpayer and thus, is exempt from VAT. As an exempt
VAT taxpayer, it is not allowed any tax credit on VAT (input tax) previously paid.
In fine, even if we are to assume that exemption from the burden of VAT on
petitioner’s purchases did exist, petitioner is still not entitled to any tax credit or
refund on the input tax previously paid as petitioner is an exempt VAT taxpayer.
Rather, it is the petitioner’s suppliers who are the proper parties to claim the tax
credit and accordingly refund the petitioner of the VAT erroneously passed on to
the latter.
Accordingly, we find that the Court of Appeals did not commit any reversible
error of law in holding that petitioner’s VAT exemption under Rep. Act No. 7227
is limited to the VAT on which it is directly liable as a seller and hence, it cannot
claim any refund or exemption for any input VAT it paid, if any, on its purchases
of raw materials and supplies.
WHEREFORE, the petition is DENIED for lack of merit. The Decision dated
September 3, 2001, of the Court of Appeals in CA-G.R. SP No. 62823, as well
as its Resolution of December 19, 2001 are AFFIRMED. No pronouncement as
to costs.
SO ORDERED.
Puno, (Chairman), Callejo, Sr., and Tinga, JJ., concur.
Austria-Martinez, J., on leave.
G.R. No. 178090 February 8, 2010
PANASONIC COMMUNICATIONS IMAGING CORPORATION OF THE
PHILIPPINES (formerly MATSUSHITA BUSINESS MACHINE
CORPORATION OF THE PHILIPPINES), Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
ABAD, J.:
This petition for review puts in issue the May 23, 2007 Decision1 of the Court of
Tax Appeals (CTA) en banc in CTA EB 239, entitled "Panasonic
Communications Imaging Corporation of the Philippines v. Commissioner of
Internal Revenue," which affirmed the denial of petitioner’s claim for refund.
The Facts and the Case
Petitioner Panasonic Communications Imaging Corporation of the Philippines
(Panasonic) produces and exports plain paper copiers and their sub-assemblies,
parts, and components. It is registered with the Board of Investments as a
preferred pioneer enterprise under the Omnibus Investments Code of 1987. It is
also a registered value-added tax (VAT) enterprise.
From April 1 to September 30, 1998 and from October 1, 1998 to March 31,
1999, petitioner Panasonic generated export sales amounting to
US$12,819,475.15 and US$11,859,489.78, respectively, for a total of
US$24,678,964.93. Believing that these export sales were zero-rated for VAT
under Section 106(A)(2)(a)(1) of the 1997 National Internal Revenue Code as
amended by Republic Act (R.A.) 8424 (1997 NIRC),2 Panasonic paid input VAT
of ₱4,980,254.26 and ₱4,388,228.14 for the two periods or a total of
₱9,368,482.40 attributable to its zero-rated sales.
Claiming that the input VAT it paid remained unutilized or unapplied, on March
12, 1999 and July 20, 1999 petitioner Panasonic filed with the Bureau of Internal
Revenue (BIR) two separate applications for refund or tax credit of what it paid.
When the BIR did not act on the same, Panasonic filed on December 16, 1999 a
petition for review with the CTA, averring the inaction of the respondent
Commissioner of Internal Revenue (CIR) on its applications.
After trial or on August 22, 2006 the CTA’s First Division rendered
judgment,3 denying the petition for lack of merit. The First Division said that,
while petitioner Panasonic’s export sales were subject to 0% VAT under Section
106(A)(2)(a)(1) of the 1997 NIRC, the same did not qualify for zero-rating
because the word "zero-rated" was not printed on Panasonic’s export invoices.
This omission, said the First Division, violates the invoicing requirements of
Section 4.108-1 of Revenue Regulations (RR) 7-95.4
Its motion for reconsideration having been denied, on January 5, 2007 petitioner
Panasonic appealed the First Division’s decision to the CTA en banc. On May
23, 2007 the CTA en banc upheld the First Division’s decision and resolution
and dismissed the petition. Panasonic filed a motion for reconsideration of the
en banc decision but this was denied. Thus, petitioner filed the present petition
in accordance with R.A. 9282.5
The Issue Presented
The sole issue presented in this case is whether or not the CTA en banc
correctly denied petitioner Panasonic’s claim for refund of the VAT it paid as a
zero-rated taxpayer on the ground that its sales invoices did not state on their
faces that its sales were "zero-rated."
 The Court’s Ruling
The VAT is a tax on consumption, an indirect tax that the provider of goods or
services may pass on to his customers. Under the VAT method of taxation,
which is invoice-based, an entity can subtract from the VAT charged on its
sales or outputs the VAT it paid on its purchases, inputs and imports. 6 For
example, when a seller charges VAT on its sale, it issues an invoice to the
buyer, indicating the amount of VAT he charged. For his part, if the buyer is also
a seller subjected to the payment of VAT on his sales, he can use the invoice
issued to him by his supplier to get a reduction of his own VAT liability. The
difference in tax shown on invoices passed and invoices received is the tax paid
to the government. In case the tax on invoices received exceeds that on invoices
passed, a tax refund may be claimed.
Under the 1997 NIRC, if at the end of a taxable quarter the seller charges output
taxes7 equal to the input taxes8that his suppliers passed on to him, no payment
is required of him. It is when his output taxes exceed his input taxes that he has
to pay the excess to the BIR. If the input taxes exceed the output taxes,
however, the excess payment shall be carried over to the succeeding quarter or
quarters. Should the input taxes result from zero-rated or effectively zero-rated
transactions or from the acquisition of capital goods, any excess over the output
taxes shall instead be refunded to the taxpayer. 9
Zero-rated transactions generally refer to the export sale of goods and services.
The tax rate in this case is set at zero. When applied to the tax base or the
selling price of the goods or services sold, such zero rate results in no tax
chargeable against the foreign buyer or customer. But, although the seller in
such transactions charges no output tax, he can claim a refund of the VAT that
his suppliers charged him. The seller thus enjoys automatic zero rating, which
allows him to recover the input taxes he paid relating to the export sales, making
him internationally competitive.10
For the effective zero rating of such transactions, however, the taxpayer has to
be VAT-registered and must comply with invoicing requirements. 11 Interpreting
these requirements, respondent CIR ruled that under Revenue Memorandum
Circular (RMC) 42-2003, the taxpayer’s failure to comply with invoicing
requirements will result in the disallowance of his claim for refund. RMC 42-2003
provides:
A-13. Failure by the supplier to comply with the invoicing requirements on the
documents supporting the sale of goods and services will result to the
disallowance of the claim for input tax by the purchaser-claimant.1avvphi1
If the claim for refund/TCC is based on the existence of zero-rated sales by the
taxpayer but it fails to comply with the invoicing requirements in the issuance of
sales invoices (e.g., failure to indicate the TIN), its claim for tax credit/refund of
VAT on its purchases shall be denied considering that the invoice it is issuing to
its customers does not depict its being a VAT-registered taxpayer whose sales
are classified as zero-rated sales. Nonetheless, this treatment is without
prejudice to the right of the taxpayer to charge the input taxes to the appropriate
expense account or asset account subject to depreciation, whichever is
applicable. Moreover, the case shall be referred by the processing office to the
concerned BIR office for verification of other tax liabilities of the taxpayer.
Petitioner Panasonic points out, however, that in requiring the printing on its
sales invoices of the word "zero-rated," the Secretary of Finance unduly
expanded, amended, and modified by a mere regulation (Section 4.108-1 of RR
7-95) the letter and spirit of Sections 113 and 237 of the 1997 NIRC, prior to
their amendment by R.A. 9337.12Panasonic argues that the 1997 NIRC, which
applied to its payments—specifically Sections 113 and 237—required the VAT-
registered taxpayer’s receipts or invoices to indicate only the following
information:
(1) A statement that the seller is a VAT-registered person, followed by
his taxpayer's identification number (TIN);
(2) The total amount which the purchaser pays or is obligated to pay to
the seller with the indication that such amount includes the value-added
tax;
(3) The date of transaction, quantity, unit cost and description of the
goods or properties or nature of the service; and
(4) The name, business style, if any, address and taxpayer’s
identification number (TIN) of the purchaser, customer or client.
Petitioner Panasonic points out that Sections 113 and 237 did not require the
inclusion of the word "zero-rated" for zero-rated sales covered by its receipts or
invoices. The BIR incorporated this requirement only after the enactment of R.A.
9337 on November 1, 2005, a law that did not yet exist at the time it issued its
invoices.
But when petitioner Panasonic made the export sales subject of this case, i.e.,
from April 1998 to March 1999, the rule that applied was Section 4.108-1 of RR
7-95, otherwise known as the Consolidated Value-Added Tax Regulations,
which the Secretary of Finance issued on December 9, 1995 and took effect on
January 1, 1996. It already required the printing of the word "zero-rated" on the
invoices covering zero-rated sales. When R.A. 9337 amended the 1997 NIRC
on November 1, 2005, it made this particular revenue regulation a part of the tax
code. This conversion from regulation to law did not diminish the binding force of
such regulation with respect to acts committed prior to the enactment of that law.
Section 4.108-1 of RR 7-95 proceeds from the rule-making authority granted to
the Secretary of Finance under Section 245 of the 1977 NIRC (Presidential
Decree 1158) for the efficient enforcement of the tax code and of course its
amendments.13 The requirement is reasonable and is in accord with the efficient
collection of VAT from the covered sales of goods and services. As aptly
explained by the CTA’s First Division, the appearance of the word "zero-rated"
on the face of invoices covering zero-rated sales prevents buyers from falsely
claiming input VAT from their purchases when no VAT was actually paid. If,
absent such word, a successful claim for input VAT is made, the government
would be refunding money it did not collect. 14
Further, the printing of the word "zero-rated" on the invoice helps segregate
sales that are subject to 10% (now 12%) VAT from those sales that are zero-
rated.15 Unable to submit the proper invoices, petitioner Panasonic has been
unable to substantiate its claim for refund.
Petitioner Panasonic’s citation of Intel Technology Philippines, Inc. v.
Commissioner of Internal Revenue16 is misplaced. Quite the contrary, it
strengthens the position taken by respondent CIR. In that case, the CIR denied
the claim for tax refund on the ground of the taxpayer’s failure to indicate on its
invoices the "BIR authority to print." But Sec. 4.108-1 required only the following
to be reflected on the invoice:
1. The name, taxpayer’s identification number (TIN) and address of
seller;
2. Date of transaction;
3. Quantity, unit cost and description of merchandise or nature of
service;
4. The name, TIN, business style, if any, and address of the VAT-
registered purchaser, customer or client;
5. The word "zero-rated" imprinted on the invoice covering zero-rated
sales; and
6. The invoice value or consideration.
This Court held that, since the "BIR authority to print" is not one of the items
required to be indicated on the invoices or receipts, the BIR erred in denying the
claim for refund. Here, however, the ground for denial of petitioner Panasonic’s
claim for tax refund—the absence of the word "zero-rated" on its invoices—is
one which is specifically and precisely included in the above enumeration.
Consequently, the BIR correctly denied Panasonic’s claim for tax refund.
This Court will not set aside lightly the conclusions reached by the CTA which,
by the very nature of its functions, is dedicated exclusively to the resolution of
tax problems and has accordingly developed an expertise on the subject, unless
there has been an abuse or improvident exercise of authority. 17 Besides, statutes
that grant tax exemptions are construed strictissimi juris against the taxpayer
and liberally in favor of the taxing authority. Tax refunds in relation to the VAT
are in the nature of such exemptions. The general rule is that claimants of tax
refunds bear the burden of proving the factual basis of their claims. Taxes are
the lifeblood of the nation. Therefore, statutes that allow exemptions are
construed strictly against the grantee and liberally in favor of the government. 18
WHEREFORE, the petition is DENIED for lack of merit.
G.R. No. 193301 March 11, 2013
MINDANAO II GEOTHERMAL PARTNERSHIP, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
x-----------------------x
G.R. No. 194637
MINDANAO I GEOTHERMAL PARTNERSHIP, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
 DECISION
CARPIO, J.:
G.R. No. 193301 is a petition for review1 assailing the Decision2 promulgated on
10 March 2010 as well as the Resolution3 promulgated on 28 July 2010 by the
Court of Tax Appeals En Banc (CTA En Banc) in CTA EB No. 513. The CTA En
Banc affirmed the 22 September 2008 Decision4 as well as the 26 June 2009
Amended Decision5 of the First Division of the Court of Tax Appeals (CTA First
Division) in CTA Case Nos. 7227, 7287, and 7317. The CTA First Division
denied Mindanao II Geothermal Partnership’s (Mindanao II) claims for refund or
tax credit for the first and second quarters of taxable year 2003 for being filed
out of time (CTA Case Nos. 7227 and 7287). The CTA First Division, however,
ordered the
Commissioner of Internal Revenue (CIR) to refund or credit to Mindanao II
unutilized input value-added tax (VAT) for the third and fourth quarters of taxable
year 2003 (CTA Case No. 7317).
G.R. No. 194637 is a petition for review6 assailing the Decision7 promulgated on
31 May 2010 as well as the Amended Decision8 promulgated on 24 November
2010 by the CTA En Banc in CTA EB Nos. 476 and 483. In its Amended
Decision, the CTA En Banc reversed its 31 May 2010 Decision and granted the
CIR’s petition for review in CTA Case No. 476. The CTA En Banc denied
Mindanao I Geothermal Partnership’s (Mindanao I) claims for refund or tax credit
for the first (CTA Case No. 7228), second (CTA Case No. 7286), third, and
fourth quarters (CTA Case No. 7318) of 2003.
Both Mindanao I and II are partnerships registered with the Securities and
Exchange Commission, value added taxpayers registered with the Bureau of
Internal Revenue (BIR), and Block Power Production Facilities accredited by the
Department of Energy. Republic Act No. 9136, or the Electric Power Industry
Reform Act of 2000 (EPIRA), effectively amended Republic Act No. 8424, or the
Tax Reform Act of 1997 (1997 Tax Code),9 when it decreed that sales of power
by generation companies shall be subjected to a zero rate of VAT.10 Pursuant to
EPIRA, Mindanao I and II filed with the CIR claims for refund or tax credit of
accumulated unutilized and/or excess input taxes due to VAT zero-rated sales in
2003. Mindanao I and II filed their claims in 2005.
G.R. No. 193301
Mindanao II v. CIR
The Facts
G.R. No. 193301 covers three CTA First Division cases, CTA Case Nos. 7227,
7287, and 7317, which were consolidated as CTA EB No. 513. CTA Case Nos.
7227, 7287, and 7317 claim a tax refund or credit of Mindanao II’s alleged
excess or unutilized input taxes due to VAT zero-rated sales. In CTA Case No.
7227, Mindanao II claims a tax refund or credit of ₱3,160,984.69 for the first
quarter of 2003. In CTA Case No. 7287, Mindanao II claims a tax refund or
credit of ₱1,562,085.33 for the second quarter of 2003. In CTA Case No. 7317,
Mindanao II claims a tax refund or credit of ₱3,521,129.50 for the third and
fourth quarters of 2003.
The CTA First Division’s narration of the pertinent facts is as follows:
xxxx
On March 11, 1997, [Mindanao II] allegedly entered into a Built (sic)-Operate-
Transfer (BOT) contract with the Philippine National Oil Corporation – Energy
Development Company (PNOC-EDC) for finance, engineering, supply,
installation, testing, commissioning, operation, and maintenance of a 48.25
megawatt geothermal power plant, provided that PNOC-EDC shall supply and
deliver steam to Mindanao II at no cost. In turn, Mindanao II shall convert the
steam into electric capacity and energy for PNOC-EDC and shall deliver the
same to the National Power Corporation (NPC) for and in behalf of PNOC-EDC.
Mindanao II alleges that its sale of generated power and delivery of electric
capacity and energy of Mindanao II to NPC for and in behalf of PNOC-EDC is its
only revenue-generating activity which is in the ambit of VAT zero-rated sales
under the EPIRA Law, x x x.
xxxx
Hence, the amendment of the NIRC of 1997 modified the VAT rate applicable to
sales of generated power by generation companies from ten (10%) percent to
zero (0%) percent.
In the course of its operation, Mindanao II makes domestic purchases of goods
and services and accumulates therefrom creditable input taxes. Pursuant to the
provisions of the National Internal Revenue Code (NIRC), Mindanao II alleges
that it can use its accumulated input tax credits to offset its output tax liability.
Considering, however that its only revenue-generating activity is VAT zero-rated
under RA No. 9136, Mindanao II’s input tax credits remain unutilized.
Thus, on the belief that its sales qualify for VAT zero-rating, Mindanao II adopted 3. That such input VAT payments are directly attributable to zero-rated
the VAT zero-rating of the EPIRA in computing for its VAT payable when it filed sales or effectively zero-rated sales;
its Quarterly VAT Returns on the following dates:
4. That the input VAT payments were not applied against any output
CTA Case No. Period Covered Date of Filing VAT liability; and
(2003)
Original Return Amended Return 5. That the claim for refund was filed within the two-year prescriptive
7227 1st Quarter April 23, 2003 July 3, 2002 (sic), period.13
April 1, 2004 &
October 22, 2004 With respect to the fifth requirement, the CTA First Division tabulated the dates
of filing of Mindanao II’s return as well as its administrative and judicial claims,
7287 2nd Quarter July 22, 2003 April 1, 2004 and concluded that Mindanao II’s administrative and judicial claims were timely
filed in compliance with this Court’s ruling in Atlas Consolidated Mining and
7317 3rd Quarter Oct. 27, 2003 April 1, 2004
Development Corporation v. Commissioner of Internal Revenue (Atlas). 14 The
7317 4th Quarter Jan. 26, 2004 April 1, 2204 CTA First Division declared that the two-year prescriptive period for filing a VAT
refund claim should not be counted from the close of the quarter but from the
date of the filing of the VAT return. As ruled in Atlas, VAT liability or entitlement
Considering that it has accumulated unutilized creditable input taxes from its to a refund can only be determined upon the filing of the quarterly VAT return.
only income-generating activity, Mindanao II filed an application for refund
and/or issuance of tax credit certificate with the BIR’s Revenue District Office at
Kidapawan City on April 13, 2005 for the four quarters of 2003. CTA Period Date Filing
Case Covered
No. (2003) Original Amended Administrative Judicial
To date (September 22, 2008), the application for refund by Mindanao II remains Return Return Return Claim
unacted upon by the CIR. Hence, these three petitions filed on April 22, 2005
covering the 1st quarter of 2003; July 7, 2005 for the 2nd quarter of 2003; and 7227 1st Quarter 23 April 1 April 13 April 2005 22 April
September 9, 2005 for the 3rd and 4th quarters of 2003. At the instance of 2003 2004 2005
Mindanao II, these petitions were consolidated on March 15, 2006 as they
involve the same parties and the same subject matter. The only difference lies 7287 2nd 22 July 1 April 13 April 2005 7 July 2005
with the taxable periods involved in each petition. 11 Quarter 2003 2004
7317 3rd 25 Oct. 1 April 13 April 2005 9 Sept. 2005
The Court of Tax Appeals’ Ruling: Division Quarter 2003 2004
7317 4th 26 Jan. 1 April 13 April 2005 9 Sept.
In its 22 September 2008 Decision,12 the CTA First Division found that Mindanao
Quarter 2004 2004 200515
II satisfied the twin requirements for VAT zero rating under EPIRA: (1) it is a
generation company, and (2) it derived sales from power generation. The CTA
First Division also stated that Mindanao II complied with five requirements to be Thus, counting from 23 April 2003, 22 July 2003, 25 October 2003, and 26
entitled to a refund: January 2004, when Mindanao II filed its VAT returns, its administrative claim
filed on 13 April 2005 and judicial claims filed on 22 April 2005, 7 July 2005, and
1. There must be zero-rated or effectively zero-rated sales; 9 September 2005 were timely filed in accordance with Atlas.

2. That input taxes were incurred or paid; The CTA First Division found that Mindanao II is entitled to a refund in the
modified amount of ₱7,703,957.79, after disallowing ₱522,059.91 from input
VAT16 and deducting ₱18,181.82 from Mindanao II’s sale of a fully depreciated
₱200,000.00 Nissan Patrol. The input taxes amounting to ₱522,059.91 were
disallowed for failure to meet invoicing requirements, while the input VAT on the
sale of the Nissan Patrol was reduced by ₱18,181.82 because the output VAT
for the sale was not included in the VAT declarations.
The dispositive portion of the CTA First Division’s 22 September 2008 Decision
reads:
WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED.
Accordingly, the CIR is hereby ORDERED to REFUND or to ISSUE A TAX
CREDIT CERTIFICATE in the modified amount of SEVEN MILLION SEVEN
HUNDRED THREE THOUSAND NINE HUNDRED FIFTY SEVEN AND 79/100
PESOS (₱7,703,957.79) representing its unutilized input VAT for the four (4)
quarters of the taxable year 2003.
SO ORDERED. 17
Mindanao II filed a motion for partial reconsideration. 18 It stated that the sale of
the fully depreciated Nissan Patrol is a one-time transaction and is not incidental
to its VAT zero-rated operations. Moreover, the disallowed input taxes
substantially complied with the requirements for refund or tax credit.
The CIR also filed a motion for partial reconsideration. It argued that the judicial
claims for the first and second quarters of 2003 were filed beyond the period
allowed by law, as stated in Section 112(A) of the 1997 Tax Code. The CIR
further stated that Section 229 is a general provision, and governs cases not
covered by Section 112(A). The CIR countered the CTA First Division’s 22
September 2008 decision by citing this Court’s ruling in Commisioner of Internal
Revenue v. Mirant Pagbilao Corporation (Mirant), 19 which stated that unutilized
input VAT payments must be claimed within two years reckoned from the close
of the taxable quarter when the relevant sales were made regardless of whether
said tax was paid.
The CTA First Division denied Mindanao II’s motion for partial reconsideration,
found the CIR’s motion for partial reconsideration partly meritorious, and
rendered an Amended Decision20 on 26 June 2009. The CTA First Division
stated that the claim for refund or credit with the BIR and the subsequent appeal
to the CTA must be filed within the two-year period prescribed under Section
229. The two-year prescriptive period in Section 229 was denominated as a
mandatory statute of limitations. Therefore, Mindanao II’s claims for refund for
the first and second quarters of 2003 had already prescribed.
The CTA First Division found that the records of Mindanao II’s case are bereft of
evidence that the sale of the Nissan Patrol is not incidental to Mindanao II’s VAT
zero-rated operations. Moreover, Mindanao II’s submitted documents failed to
substantiate the requisites for the refund or credit claims.
The CTA First Division modified its 22 September 2008 Decision to read as
follows:
WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED.
Accordingly, the CIR is hereby ORDERED to REFUND or to ISSUE A TAX
CREDIT CERTIFICATE to Mindanao II Geothermal Partnership in the modified
amount of TWO MILLION NINE HUNDRED EIGHTY THOUSAND EIGHT
HUNDRED EIGHTY SEVEN AND 77/100 PESOS (₱2,980,887.77) representing
its unutilized input VAT for the third and fourth quarters of the taxable year 2003.
SO ORDERED.21
Mindanao II filed a Petition for Review,22 docketed as CTA EB No. 513, before
the CTA En Banc.
The Court of Tax Appeals’ Ruling: En Banc
On 10 March 2010, the CTA En Banc rendered its Decision23 in CTA EB No. 513
and denied Mindanao II’s petition. The CTA En Banc ruled that (1) Section
112(A) clearly provides that the reckoning of the two-year prescriptive period for
filing the application for refund or credit of input VAT attributable to zero-rated
sales or effectively zero-rated sales shall be counted from the close of the
taxable quarter when the sales were made; (2) the Atlas and Mirant cases
applied different tax codes: Atlas applied the 1977 Tax Code while Mirant
applied the 1997 Tax Code; (3) the sale of the fully-depreciated Nissan Patrol is
incidental to Mindanao II’s VAT zero-rated transactions pursuant to Section 105;
(4) Mindanao II failed to comply with the substantiation requirements provided
under Section 113(A) in relation to Section 237 of the 1997 Tax Code as
implemented by Section 4.104-1, 4.104-5, and 4.108-1 of Revenue Regulation
No. 7-95; and (5) the doctrine of strictissimi juris on tax exemptions cannot be
relaxed in the present case.
The dispositive portion of the CTA En Banc’s 10 March 2010 Decision reads:
WHEREFORE, on the basis of the foregoing considerations, the Petition for
Review en banc is DISMISSED for lack of merit. Accordingly, the Decision dated
September 22, 2008 and the Amended Decision dated June 26, 2009 issued by
the First Division are AFFIRMED.
SO ORDERED.24
The CTA En Banc issued a Resolution25 on 28 July 2010 denying for lack of
merit Mindanao II’s Motion for Reconsideration. 26 The CTA En Banc highlighted
the following bases of their previous ruling:
1. The Supreme Court has long decided that the claim for refund of
unutilized input VAT must be filed within two (2) years after the close of
the taxable quarter when such sales were made.
2. The Supreme Court is the ultimate arbiter whose decisions all other
courts should take bearings.
3. The words of the law are clear, plain, and free from ambiguity; hence,
it must be given its literal meaning and applied without any
interpretation.27
G.R. No. 194637
Mindanao I v. CIR
The Facts
G.R. No. 194637 covers two cases consolidated by the CTA EB: CTA EB Case
Nos. 476 and 483. Both CTA EB cases consolidate three cases from the CTA
Second Division: CTA Case Nos. 7228, 7286, and 7318. CTA Case Nos. 7228,
7286, and 7318 claim a tax refund or credit of Mindanao I’s accumulated
unutilized and/or excess input taxes due to VAT zero-rated sales. In CTA Case
No. 7228, Mindanao I claims a tax refund or credit of ₱3,893,566.14 for the first
quarter of 2003. In CTA Case No. 7286, Mindanao I claims a tax refund or credit
of ₱2,351,000.83 for the second quarter of 2003. In CTA Case No. 7318,
Mindanao I claims a tax refund or credit of ₱7,940,727.83 for the third and fourth
quarters of 2003.
Mindanao I is similarly situated as Mindanao II. The CTA Second Division’s
narration of the pertinent facts is as follows:
xxxx
In December 1994, Mindanao I entered into a contract of Build-Operate-Transfer
(BOT) with the Philippine National Oil Corporation – Energy Development
Corporation (PNOC-EDC) for the finance, design, construction, testing,
commissioning, operation, maintenance and repair of a 47-megawatt geothermal
power plant. Under the said BOT contract, PNOC-EDC shall supply and deliver
steam to Mindanao I at no cost. In turn, Mindanao I will convert the steam into
electric capacity and energy for PNOC-EDC and shall subsequently supply and
deliver the same to the National Power Corporation (NPC), for and in behalf of
PNOC-EDC.
Mindanao I’s 47-megawatt geothermal power plant project has been accredited
by the Department of Energy (DOE) as a Private Sector Generation Facility,
pursuant to the provision of Executive Order No. 215, wherein Certificate of
Accreditation No. 95-037 was issued.
On June 26, 2001, Republic Act (R.A.) No. 9136 took effect, and the relevant
provisions of the National Internal Revenue Code (NIRC) of 1997 were deemed
modified. R.A. No. 9136, also known as the "Electric Power Industry Reform Act
of 2001 (EPIRA), was enacted by Congress to ordain reforms in the electric
power industry, highlighting, among others, the importance of ensuring the
reliability, security and affordability of the supply of electric power to end users.
Under the provisions of this Republic Act and its implementing rules and
regulations, the delivery and supply of electric energy by generation companies
became VAT zero-rated, which previously were subject to ten percent (10%)
VAT.
xxxx
The amendment of the NIRC of 1997 modified the VAT rate applicable to sales
of generated power by generation companies from ten (10%) percent to zero
percent (0%). Thus, Mindanao I adopted the VAT zero-rating of the EPIRA in
computing for its VAT payable when it filed its VAT Returns, on the belief that its
sales qualify for VAT zero-rating.
Mindanao I reported its unutilized or excess creditable input taxes in its
Quarterly VAT Returns for the first, second, third, and fourth quarters of taxable
year 2003, which were subsequently amended and filed with the BIR.
On April 4, 2005, Mindanao I filed with the BIR separate administrative claims for
the issuance of tax credit certificate on its alleged unutilized or excess input
taxes for taxable year 2003, in the accumulated amount of ₱14,185, 294.80.
Alleging inaction on the part of CIR, Mindanao I elevated its claims before this
Court on April 22, 2005, July 7, 2005, and September 9, 2005 docketed as CTA
Case Nos. 7228, 7286, and 7318, respectively. However, on October 10, 2005,
Mindanao I received a copy of the letter dated September 30, 2003 (sic) of the
BIR denying its application for tax credit/refund. 28
The Court of Tax Appeals’ Ruling: Division
On 24 October 2008, the CTA Second Division rendered its Decision29 in CTA
Case Nos. 7228, 7286, and 7318. The CTA Second Division found that (1)
pursuant to Section 112(A), Mindanao I can only claim 90.27% of the amount of
substantiated excess input VAT because a portion was not reported in its
quarterly VAT returns; (2) out of the ₱14,185,294.80 excess input VAT applied
for refund, only ₱11,657,447.14 can be considered substantiated excess input
VAT due to disallowances by the Independent Certified Public Accountant,
adjustment on the disallowances per the CTA Second Division’s further
verification, and additional disallowances per the CTA Second Division’s further
verification;
(3) Mindanao I’s accumulated excess input VAT for the second quarter of 2003
that was carried over to the third quarter of 2003 is net of the claimed input VAT
for the first quarter of 2003, and the same procedure was done for the second,
third, and fourth quarters of 2003; and (4) Mindanao I’s administrative claims
were filed within the two-year prescriptive period reckoned from the respective
dates of filing of the quarterly VAT returns.
The dispositive portion of the CTA Second Division’s 24 October 2008 Decision
reads:
WHEREFORE, premises considered, the consolidated Petitions for Review are
hereby PARTIALLY GRANTED. Accordingly, the CIR is hereby ORDERED TO
ISSUE A TAX CREDIT CERTIFICATE in favor of Mindanao I in the reduced
amount of TEN MILLION FIVE HUNDRED TWENTY THREE THOUSAND ONE
HUNDRED SEVENTY SEVEN PESOS AND 53/100 (₱10,523,177.53)
representing Mindanao I’s unutilized input VAT for the four quarters of the
taxable year 2003.
SO ORDERED.30
Mindanao I filed a motion for partial reconsideration with motion for
Clarification31 on 11 November 2008. It claimed that the CTA Second Division
should not have allocated proportionately Mindanao I’s unutilized creditable
input taxes for the taxable year 2003, because the proportionate allocation of the
amount of creditable taxes in Section 112(A) applies only when the creditable
input taxes due cannot be directly and entirely attributed to any of the zero-rated
or effectively zero-rated sales. Mindanao I claims that its unreported collection is
directly attributable to its VAT zero-rated sales. The CTA Second Division
denied Mindanao I’s motion and maintained the proportionate allocation
because there was a portion of the gross receipts that was undeclared in
Mindanao I’s gross receipts.
The CIR also filed a motion for partial reconsideration32 on 11 November 2008. It
claimed that Mindanao I failed to exhaust administrative remedies before it filed
its petition for review. The CTA Second Division denied the CIR’s motion, and
cited Atlas33 as the basis for ruling that it is more practical and reasonable to
count the two-year prescriptive period for filing a claim for refund or credit of
input VAT on zero-rated sales from the date of filing of the return and payment of
the tax due.
The dispositive portion of the CTA Second Division’s 10 March 2009 Resolution
reads:
WHEREFORE, premises considered, the CIR’s Motion for Partial
Reconsideration and Mindanao I’s Motion for Partial Reconsideration with
Motion for Clarification are hereby DENIED for lack of merit.
SO ORDERED.34
The Ruling of the Court of Tax Appeals: En Banc
On 31 May 2010, the CTA En Banc rendered its Decision35 in CTA EB Case
Nos. 476 and 483 and denied the petitions filed by the CIR and Mindanao I. The
CTA En Banc found no new matters which have not yet been considered and
passed upon by the CTA Second Division in its assailed decision and resolution.
The dispositive portion of the CTA En Banc’s 31 May 2010 Decision reads:
WHEREFORE, premises considered, the Petitions for Review are hereby
DISMISSED for lack of merit. Accordingly, the October 24, 2008 Decision and
March 10, 2009 Resolution of the CTA Former Second Division in CTA Case
Nos. 7228, 7286, and 7318, entitled "Mindanao I Geothermal Partnership vs.
Commissioner of Internal Revenue" are hereby AFFIRMED in toto.
SO ORDERED.36
Both the CIR and Mindanao I filed Motions for Reconsideration of the CTA En
Banc’s 31 May 2010 Decision. In an Amended Decision promulgated on 24
November 2010, the CTA En Banc agreed with the CIR’s claim that Section 229
of the NIRC of 1997 is inapplicable in light of this Court’s ruling in Mirant. The
CTA En Banc also ruled that the procedure prescribed under Section 112(D)
now 112(C)37 of the 1997 Tax Code should be followed first before the CTA En
Banc can act on Mindanao I’s claim. The CTA En Banc reconsidered its 31 May
2010 Decision in light of this Court’s ruling in Commissioner of Internal Revenue
v. Aichi Forging Company of Asia, Inc. (Aichi). 38
The pertinent portions of the CTA En Banc’s 24 November 2010 Amended
Decision read:
C.T.A. Case No. 7228:
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly
VAT Returns for the First Quarter of 2003. Pursuant to Section 112(A) of
the NIRC of 1997, as amended, Mindanao I has two years from March
31, 2003 or until March 31, 2005 within which to file its administrative
claim for refund;
(2) On April 4, 2005, Mindanao I applied for an administrative claim for
refund of unutilized input VAT for the first quarter of taxable year 2003
with the BIR, which is beyond the two-year prescriptive period mentioned
above.
C.T.A. Case No. 7286:
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly
VAT Returns for the second quarter of 2003. Pursuant to
Section 112(A) of the NIRC of 1997, as amended, Mindanao I has two
years from June 30, 2003, within which to file its administrative claim for
refund for the second quarter of 2003, or until June 30, 2005;
(2) On April 4, 2005, Mindanao I applied an administrative claim for
refund of unutilized input VAT for the second quarter of taxable year
2003 with the BIR, which is within the two-year prescriptive period,
provided under Section 112 (A) of the NIRC of 1997, as amended;
(3) The CIR has 120 days from April 4, 2005 (presumably the date
Mindanao I submitted the supporting documents together with the
application for refund) or until August 2, 2005, to decide the
administrative claim for refund;
(4) Within 30 days from the lapse of the 120-day period or from August
3, 2005 to September 1, 2005, Mindanao I should have elevated its
claim for refund to the CTA in Division;
(5) However, on July 7, 2005, Mindanao I filed its Petition for Review
with this Court, docketed as CTA Case No. 7286, even before the 120-
day period for the CIR to decide the claim for refund had lapsed on
August 2, 2005. The Petition for Review was, therefore, prematurely filed
and there was failure to exhaust administrative remedies;
xxxx
C.T.A. Case No. 7318:
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly
VAT Returns for the third and fourth quarters of 2003. Pursuant to
Section 112(A) of the NIRC of 1997, as amended, Mindanao I therefore,
has two years from September 30, 2003 and December 31, 2003, or
until September 30, 2005 and December 31, 2005, respectively, within
which to file its administrative claim for the third and fourth quarters of
2003;
(2) On April 4, 2005, Mindanao I applied an administrative claim for
refund of unutilized input VAT for the third and fourth quarters of taxable
year 2003 with the BIR, which is well within the two-year prescriptive
period, provided under Section 112(A) of the NIRC of 1997, as
amended;
(3) From April 4, 2005, which is also presumably the date Mindanao I
submitted supporting documents, together with the aforesaid application
for refund, the CIR has 120 days or until August 2, 2005, to decide the
claim;
(4) Within thirty (30) days from the lapse of the 120-day period or from
August 3, 2005 until September 1, 2005 Mindanao I should have
elevated its claim for refund to the CTA;
 (5) However, Mindanao I filed its Petition for Review with the CTA in
Division only on September 9, 2005, which is 8 days beyond the 30-day
period to appeal to the CTA.
Evidently, the Petition for Review was filed way beyond the 30-day prescribed
period. Thus, the Petition for Review should have been dismissed for being filed
late.
In recapitulation:
(1) C.T.A. Case No. 7228
Claim for the first quarter of 2003 had already prescribed for having been
filed beyond the two-year prescriptive period;
(2) C.T.A. Case No. 7286
Claim for the second quarter of 2003 should be dismissed for Mindanao
I’s failure to comply with a condition precedent when it failed to exhaust
administrative remedies by filing its Petition for Review even before the
lapse of the 120-day period for the CIR to decide the administrative
claim;
(3) C.T.A. Case No. 7318
Petition for Review was filed beyond the 30-day prescribed period to
appeal to the CTA.
xxxx
IN VIEW OF THE FOREGOING, the Commissioner of Internal Revenue’s
Motion for Reconsideration is hereby GRANTED; Mindanao I’s Motion for Partial
Reconsideration is hereby DENIED for lack of merit.
The May 31, 2010 Decision of this Court En Banc is hereby REVERSED.
Accordingly, the Petition for Review of the Commissioner of Internal Revenue in
CTA EB No. 476 is hereby GRANTED and the entire claim of Mindanao I
Geothermal Partnership for the first, second, third and fourth quarters of 2003 is
hereby DENIED.
SO ORDERED.39
The Issues
G.R. No. 193301
Mindanao II v. CIR
Mindanao II raised the following grounds in its Petition for Review:
I. The Honorable Court of Tax Appeals erred in holding that the claim of
Mindanao II for the 1st and 2nd quarters of year 2003 has already
prescribed pursuant to the Mirant case.
A. The Atlas case and Mirant case have conflicting
interpretations of the law as to the reckoning date of the two year
prescriptive period for filing claims for VAT refund.
B. The Atlas case was not and cannot be superseded by the
Mirant case in light of Section 4(3), Article VIII of the 1987
Constitution.
C. The ruling of the Mirant case, which uses the close of the
taxable quarter when the sales were made as the reckoning date
in counting the two-year prescriptive period cannot be applied
retroactively in the case of Mindanao II.
II. The Honorable Court of Tax Appeals erred in interpreting Section 105
of the 1997 Tax Code, as amended in that the sale of the fully
depreciated Nissan Patrol is a one-time transaction and is not incidental
to the VAT zero-rated operation of Mindanao II.
III. The Honorable Court of Tax Appeals erred in denying the amount
disallowed by the Independent Certified Public Accountant as Mindanao
II substantially complied with the requisites of the 1997 Tax Code, as
amended, for refund/tax credit.
A. The amount of ₱2,090.16 was brought about by the timing
difference in the recording of the foreign currency deposit
transaction.
 B. The amount of ₱2,752.00 arose from the out-of-pocket
expenses reimbursed to SGV & Company which is substantially
suppoerted [sic] by an official receipt.
C. The amount of ₱487,355.93 was unapplied and/or was not
included in Mindanao II’s claim for refund or tax credit for the
year 2004 subject matter of CTA Case No. 7507.
IV. The doctrine of strictissimi juris on tax exemptions should be relaxed
in the present case.40
G.R. No. 194637
Mindanao I v. CIR
Mindanao I raised the following grounds in its Petition for Review:
I. The administrative claim and judicial claim in CTA Case No. 7228 were
timely filed pursuant to the case of Atlas Consolidated Mining and
Development Corporation vs. Commissioner of Internal Revenue, which
was then the controlling ruling at the time of filing.
A. The recent ruling in the Commissioner of Internal Revenue vs.
Mirant Pagbilao Corporation, which uses the end of the taxable
quarter when the sales were made as the reckoning date in
counting the two-year prescriptive period, cannot be applied
retroactively in the case of Mindanao I.
B. The Atlas case promulgated by the Third Division of this
Honorable Court on June 8, 2007 was not and cannot be
superseded by the Mirant Pagbilao case promulgated by the
Second Division of this Honorable Court on September 12, 2008
in light of the explicit provision of Section 4(3), Article VIII of the
1987 Constitution.
II. Likewise, the recent ruling of this Honorable Court in Commissioner of
Internal Revenue vs. Aichi Forging Company of Asia, Inc., cannot be
applied retroactively to Mindanao I in the present case. 41
In a Resolution dated 14 December 2011, this Court resolved to consolidate
42
G.R. Nos. 193301 and 194637 to avoid conflicting rulings in related cases.
The Court’s Ruling
Determination of Prescriptive Period
G.R. Nos. 193301 and 194637 both raise the question of the determination of
the prescriptive period, or the interpretation of Section 112 of the 1997 Tax
Code, in light of our rulings in Atlas and Mirant.
Mindanao II’s unutilized input VAT tax credit for the first and second quarters of
2003, in the amounts of ₱3,160,984.69 and ₱1,562,085.33, respectively, are
covered by G.R. No. 193301, while Mindanao I’s unutilized input VAT tax credit
for the first, second, third, and fourth quarters of 2003, in the amounts of
₱3,893,566.14, ₱2,351,000.83, and ₱7,940,727.83, respectively, are covered by
G.R. No. 194637.
Section 112 of the 1997 Tax Code
The pertinent sections of the 1997 Tax Code, the law applicable at the time of
Mindanao II’s and Mindanao I’s administrative and judicial claims, provide:
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.
xxxx
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In
proper cases, the Commissioner shall grant a refund or issue the tax credit
certificate for creditable input taxes within one hundred twenty (120) days from
 the date of submission of complete documents in support of the application filed The relevant dates for G.R. No. 194637 (Minadanao I) are:
in accordance with Subsections (A) and (B) hereof.
CTA Period Close of Last day Actual date of Last day for Actual Date
In case of full or partial denial of the claim for tax refund or tax credit, or the Case covered by quarter for filing filing filing case of filing case
failure on the part of the Commissioner to act on the application within the period No. VAT Sales in when sales application application for with CTA47 with CTA
prescribed above, the taxpayer affected may, within thirty (30) days from the 2003 and were of tax tax refund/ (judicial
receipt of the decision denying the claim or after the expiration of the one amount made refund/tax credit with the claim)
hundred twenty day-period, appeal the decision or the unacted claim with the credit CIR
Court of Tax Appeals. certificate (administrative
with the claim)46
x x x x 43 (Underscoring supplied) CIR

The relevant dates for G.R. No. 193301 (Mindanao II) are: 7227 1st Quarter, 31 March 31 March 4 April 2005 1 September 22 April 2005
₱3,893,566.14 2003 2005 2005

CTA Period Close of Last day Actual date of Last day for 7287Date
Actual 2nd Quarter, 30 June 30 June 4 April 2005 1 September 7 July 2005
Case covered by quarter for filing filing filing case of filing₱2,351,000.83 2003 2005 2005
No. VAT Sales in when application application for with CTA45 case 3rd
7317 30 30 4 April 2005 1 September 9 September
2003 and sales of tax tax refund/ with CTA and 4th September September 2005 2005
amount were refund/tax credit with the (judicialQuarters, 2003 2005
made credit CIR claim)₱7,940,727.83
certificate (administrative 31 2 January
with the claim)44 December 2006
CIR 2003 (31
December
7227 1st Quarter, 31 March 31 March 13 April 2005 12 22 April 2005 being
₱3,160,984.69 2003 2005 September 2005 a Saturday)
2005
7287 2nd Quarter, 30 June 30 June 13 April 2005 12 7 July 2005
When Mindanao II and Mindanao I filed their respective administrative and
₱1,562,085.33 2003 2005 September judicial claims in 2005, neither Atlas nor Mirant has been promulgated. Atlas was
2005 promulgated on 8 June 2007, while Mirant was promulgated on 12 September
7317 3rd and 4th 30 30 13 April 2005 12 9 2008. It is therefore misleading to state that Atlas was the controlling doctrine at
Quarters, September September September Septemberthe time of filing of the claims. The 1997 Tax Code, which took effect on 1
₱3,521,129.50 2003 2005 2005 2005 January 1998, was the applicable law at the time of filing of the claims in issue.
As this Court explained in the recent consolidated cases of Commissioner of
31 2 January Internal Revenue v. San Roque Power Corporation, Taganito Mining
December 2006 Corporation v. Commissioner of Internal Revenue, and Philex Mining
2003 (31 Corporation v. Commissioner of Internal Revenue (San Roque): 48
December
2005 being Clearly, San Roque failed to comply with the 120-day waiting period, the time
a expressly given by law to the Commissioner to decide whether to grant or deny
Saturday) San Roque’s application for tax refund or credit. It is indisputable that
compliance with the 120-day waiting period is mandatory and jurisdictional. The
waiting period, originally fixed at 60 days only, was part of the provisions of the
first VAT law, Executive Order No. 273, which took effect on 1 January 1988.
The waiting period was extended to 120 days effective 1 January 1998 under
RA 8424 or the Tax Reform Act of 1997. Thus, the waiting period has been in
our statute books for more than fifteen (15) years before San Roque filed its
judicial claim.
Failure to comply with the 120-day waiting period violates a mandatory provision
of law. It violates the doctrine of exhaustion of administrative remedies and
renders the petition premature and thus without a cause of action, with the effect
that the CTA does not acquire jurisdiction over the taxpayer’s petition. Philippine
jurisprudence is replete with cases upholding and reiterating these doctrinal
principles.
The charter of the CTA expressly provides that its jurisdiction is to review on
appeal "decisions of the Commissioner of Internal Revenue in cases involving x
x x refunds of internal revenue taxes." When a taxpayer prematurely files a
judicial claim for tax refund or credit with the CTA without waiting for the decision
of the Commissioner, there is no "decision" of the Commissioner to review and
thus the CTA as a court of special jurisdiction has no jurisdiction over the
appeal. The charter of the CTA also expressly provides that if the Commissioner
fails to decide within "a specific period" required by law, such "inaction shall be
deemed a denial" of the application for tax refund or credit. It is the
Commissioner’s decision, or inaction "deemed a denial," that the taxpayer can
take to the CTA for review. Without a decision or an "inaction x x x deemed a
denial" of the Commissioner, the CTA has no jurisdiction over a petition for
review.
San Roque’s failure to comply with the 120-day mandatory period renders its
petition for review with the CTA void. Article 5 of the Civil Code provides, "Acts
executed against provisions of mandatory or prohibitory laws shall be void,
except when the law itself authorizes their validity." San Roque’s void petition for
review cannot be legitimized by the CTA or this Court because Article 5 of the
Civil Code states that such void petition cannot be legitimized "except when the
law itself authorizes its validity." There is no law authorizing the petition’s validity.
It is hornbook doctrine that a person committing a void act contrary to a
mandatory provision of law cannot claim or acquire any right from his void act. A
right cannot spring in favor of a person from his own void or illegal act. This
doctrine is repeated in Article 2254 of the Civil Code, which states, "No vested or
acquired right can arise from acts or omissions which are against the law or
which infringe upon the rights of others." For violating a mandatory provision of
law in filing its petition with the CTA, San Roque cannot claim any right arising
from such void petition. Thus, San Roque’s petition with the CTA is a mere scrap
of paper.
This Court cannot brush aside the grave issue of the mandatory and
jurisdictional nature of the 120-day period just because the Commissioner
merely asserts that the case was prematurely filed with the CTA and does not
question the entitlement of San Roque to the refund. The mere fact that a
taxpayer has undisputed excess input VAT, or that the tax was admittedly
illegally, erroneously or excessively collected from him, does not entitle him as a
matter of right to a tax refund or credit. Strict compliance with the mandatory and
jurisdictional conditions prescribed by law to claim such tax refund or credit is
essential and necessary for such claim to prosper. Well-settled is the rule that
tax refunds or credits, just like tax exemptions, are strictly construed against the
taxpayer.
The burden is on the taxpayer to show that he has strictly complied with the
conditions for the grant of the tax refund or credit.
This Court cannot disregard mandatory and jurisdictional conditions mandated
by law simply because the Commissioner chose not to contest the numerical
correctness of the claim for tax refund or credit of the taxpayer. Non-compliance
with mandatory periods, non-observance of prescriptive periods, and non-
adherence to exhaustion of administrative remedies bar a taxpayer’s claim for
tax refund or credit, whether or not the Commissioner questions the numerical
correctness of the claim of the taxpayer. This Court should not establish the
precedent that non-compliance with mandatory and jurisdictional conditions can
be excused if the claim is otherwise meritorious, particularly in claims for tax
refunds or credit. Such precedent will render meaningless compliance with
mandatory and jurisdictional requirements, for then every tax refund case will
have to be decided on the numerical correctness of the amounts claimed,
regardless of non-compliance with mandatory and jurisdictional conditions.
San Roque cannot also claim being misled, misguided or confused by the Atlas
doctrine because San Roque filed its petition for review with the CTA more than
four years before Atlas was promulgated. The Atlas doctrine did not exist at the
time San Roque failed to comply with the 120-day period. Thus, San Roque
cannot invoke the Atlas doctrine as an excuse for its failure to wait for the 120-
day period to lapse. In any event, the Atlas doctrine merely stated that the two-
year prescriptive period should be counted from the date of payment of the
output VAT, not from the close of the taxable quarter when the sales involving
the input VAT were made. The Atlas doctrine does not interpret, expressly or
impliedly, the 120+30 day periods.49 (Emphases in the original; citations omitted)
Prescriptive Period for
the Filing of Administrative Claims
In determining whether the administrative claims of Mindanao I and Mindanao II
for 2003 have prescribed, we see no need to rely on either Atlas or Mirant.
Section 112(A) of the 1997 Tax Code is clear: "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 x x x."
We rule on Mindanao I and II’s administrative claims for the first, second, third,
and fourth quarters of 2003 as follows:
(1) The last day for filing an application for tax refund or credit with the
CIR for the first quarter of 2003 was on 31 March 2005. Mindanao II filed
its administrative claim before the CIR on 13 April 2005, while Mindanao
I filed its administrative claim before the CIR on 4 April 2005. Both claims
have prescribed, pursuant to Section 112(A) of the 1997 Tax Code.
(2) The last day for filing an application for tax refund or credit with the
CIR for the second quarter of 2003 was on 30 June 2005. Mindanao II
filed its administrative claim before the CIR on 13 April 2005, while
Mindanao I filed its administrative claim before the CIR on 4 April 2005.
Both claims were filed on time, pursuant to Section 112(A) of the 1997
Tax Code.
(3) The last day for filing an application for tax refund or credit with the
CIR for the third quarter of 2003 was on 30 September 2005. Mindanao
II filed its administrative claim before the CIR on 13 April 2005, while
Mindanao I filed its administrative claim before the CIR on 4 April 2005.
Both claims were filed on time, pursuant to Section 112(A) of the 1997
Tax Code.
(4) The last day for filing an application for tax refund or credit with the
CIR for the fourth quarter of 2003 was on 2 January 2006. Mindanao II
filed its administrative claim before the CIR on 13 April 2005, while
Mindanao I filed its administrative claim before the CIR on 4 April 2005.
Both claims were filed on time, pursuant to Section 112(A) of the 1997
Tax Code.
Prescriptive Period for
the Filing of Judicial Claims
In determining whether the claims for the second, third and fourth quarters of
2003 have been properly appealed, we still see no need to refer to either Atlas
or Mirant, or even to Section 229 of the 1997 Tax Code. The second paragraph
of Section 112(C) of the 1997 Tax Code is clear: "In case of full or partial denial
of the claim for tax refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the period prescribed above, the
taxpayer affected may, within thirty (30) days from the receipt of the decision
denying the claim or after the expiration of the one hundred twenty day-period,
appeal the decision or the unacted claim with the Court of Tax Appeals."
The mandatory and jurisdictional nature of the 120+30 day periods was
explained in San Roque:
At the time San Roque filed its petition for review with the CTA, the 120+30 day
mandatory periods were already in the law. Section 112(C) expressly grants the
Commissioner 120 days within which to decide the taxpayer’s claim. The law is
clear, plain, and unequivocal: "x x x the Commissioner shall grant a refund or
issue the tax credit certificate for creditable input taxes within one hundred
twenty (120) days from the date of submission of complete documents."
Following the verba legis doctrine, this law must be applied exactly as worded
since it is clear, plain, and unequivocal. The taxpayer cannot simply file a
petition with the CTA without waiting for the Commissioner’s decision within the
120-day mandatory and jurisdictional period. The CTA will have no jurisdiction
because there will be no "decision" or "deemed a denial" decision of the
Commissioner for the CTA to review. In San Roque’s case, it filed its petition
with the CTA a mere 13 days after it filed its administrative claim with the
Commissioner. Indisputably, San Roque knowingly violated the mandatory 120-
day period, and it cannot blame anyone but itself.
Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to
the CTA the decision or inaction of the Commissioner, thus:
x x x the taxpayer affected may, within thirty (30) days from the receipt of the
decision denying the claim or after the expiration of the one hundred twenty day-
period, appeal the decision or the unacted claim with the Court of Tax Appeals.
(Emphasis supplied)
This law is clear, plain, and unequivocal. Following the well-settled verba legis
doctrine, this law should be applied exactly as worded since it is clear, plain, and
unequivocal. As this law states, the taxpayer may, if he wishes, appeal the
decision of the Commissioner to the CTA within 30 days from receipt of the
Commissioner’s decision, or if the Commissioner does not act on the taxpayer’s
claim within the 120-day period, the taxpayer may appeal to the CTA within 30
days from the expiration of the 120-day period.
xxxx
There are three compelling reasons why the 30-day period need not necessarily
fall within the two-year prescriptive period, as long as the administrative claim is
filed within the two-year prescriptive period.
First, Section 112(A) clearly, plainly, and unequivocally provides that the
taxpayer "may, within two (2) years after the close of the taxable quarter when
the sales were made, apply for the issuance of a tax credit certificate or refund
of the creditable input tax due or paid to such sales." In short, the law states that
the taxpayer may apply with the Commissioner for a refund or credit "within two
(2) years," which means at anytime within two years. Thus, the application for
refund or credit may be filed by the taxpayer with the Commissioner on the last
day of the two-year prescriptive period and it will still strictly comply with the law.
The two-year prescriptive period is a grace period in favor of the taxpayer and
he can avail of the full period before his right to apply for a tax refund or credit is
barred by prescription.
Second, Section 112(C) provides that the Commissioner shall decide the
application for refund or credit "within one hundred twenty (120) days from the
date of submission of complete documents in support of the application filed in
accordance with Subsection (A)." The reference in Section 112(C) of the
submission of documents "in support of the application filed in accordance with
Subsection A" means that the application in Section 112(A) is the administrative
claim that the Commissioner must decide within the 120-day period. In short, the
two-year prescriptive period in Section 112(A) refers to the period within which
the taxpayer can file an administrative claim for tax refund or credit. Stated
otherwise, the two-year prescriptive period does not refer to the filing of the
judicial claim with the CTA but to the filing of the administrative claim with the
Commissioner. As held in Aichi, the "phrase ‘within two years x x x apply for the
issuance of a tax credit or refund’ refers to applications for refund/credit with the
CIR and not to appeals made to the CTA."
Third, if the 30-day period, or any part of it, is required to fall within the two-year
prescriptive period (equivalent to 730 days), then the taxpayer must file his
administrative claim for refund or credit within the first 610 days of the two-year
prescriptive period. Otherwise, the filing of the administrative claim beyond the
first 610 days will result in the appeal to the CTA being filed beyond the two-year
prescriptive period. Thus, if the taxpayer files his administrative claim on the
611th day, the Commissioner, with his 120-day period, will have until the 731st
day to decide the claim. If the Commissioner decides only on the 731st day, or
does not decide at all, the taxpayer can no longer file his judicial claim with the
CTA because the two-year prescriptive period (equivalent to 730 days) has
lapsed. The 30-day period granted by law to the taxpayer to file an appeal
before the CTA becomes utterly useless, even if the taxpayer complied with the
law by filing his administrative claim within the two-year prescriptive period.
The theory that the 30-day period must fall within the two-year prescriptive
period adds a condition that is not found in the law. It results in truncating 120
days from the 730 days that the law grants the taxpayer for filing his
administrative claim with the Commissioner. This Court cannot interpret a law to
defeat, wholly or even partly, a remedy that the law expressly grants in clear,
plain, and unequivocal language.
Section 112(A) and (C) must be interpreted according to its clear, plain, and
unequivocal language. The taxpayer can file his administrative claim for refund
or credit at anytime within the two-year prescriptive period. If he files his claim on
the last day of the two-year prescriptive
period, his claim is still filed on time. The Commissioner will have 120 days from
such filing to decide the claim. If the Commissioner decides the claim on the
120th day, or does not decide it on that day, the taxpayer still has 30 days to file
his judicial claim with the CTA. This is not only the plain meaning but also the
only logical interpretation of Section 112(A) and (C).50 (Emphases in the original;
citations omitted)
In San Roque, this Court ruled that "all taxpayers can rely on BIR Ruling No. DA-
489-03 from the time of its issuance on 10 December 2003 up to its reversal in
Aichi on 6 October 2010, where this Court held that the 120+30 day periods are
mandatory and jurisdictional."51 We shall discuss later the effect of San Roque’s
recognition of BIR Ruling No. DA-489-03 on claims filed between 10 December
2003 and 6 October 2010. Mindanao I and II filed their claims within this period.
We rule on Mindanao I and II’s judicial claims for the second, third, and fourth
quarters of 2003 as follows:
G.R. No. 193301
Mindanao II v. CIR
Mindanao II filed its administrative claims for the second, third, and fourth
quarters of 2003 on 13 April 2005. Counting 120 days after filing of the
administrative claim with the CIR (11 August 2005) and 30 days after the CIR’s
denial by inaction, the last day for filing a judicial claim with the CTA for the
second, third, and fourth quarters of 2003 was on 12 September 2005. However,
the judicial claim cannot be filed earlier than 11 August 2005, which is the
expiration of the 120-day period for the Commissioner to act on the claim.
(1) Mindanao II filed its judicial claim for the second quarter of 2003
before the CTA on 7 July 2005, before the expiration of the 120-day
period. Pursuant to Section 112(C) of the 1997 Tax Code, Mindanao II’s
judicial claim for the second quarter of 2003 was prematurely filed.
However, pursuant to San Roque’s recognition of the effect of BIR
Ruling No. DA-489-03, we rule that Mindanao II’s judicial claim for the
second quarter of 2003 qualifies under the exception to the strict
application of the 120+30 day periods.
(2) Mindanao II filed its judicial claim for the third quarter of 2003 before
the CTA on 9 September 2005. Mindanao II’s judicial claim for the third
quarter of 2003 was thus filed on time, pursuant to Section 112(C) of the
1997 Tax Code.
(3) Mindanao II filed its judicial claim for the fourth quarter of 2003 before
the CTA on 9 September 2005. Mindanao II’s judicial claim for the fourth
quarter of 2003 was thus filed on time, pursuant to Section 112(C) of the
1997 Tax Code.
G.R. No. 194637
Mindanao I v. CIR
Mindanao I filed its administrative claims for the second, third, and fourth
quarters of 2003 on 4 April 2005. Counting 120 days after filing of the
administrative claim with the CIR (2 August 2005) and 30 days after the CIR’s
denial by inaction,52 the last day for filing a judicial claim with the CTA for the
second, third, and fourth quarters of 2003 was on 1 September 2005. However,
the judicial claim cannot be filed earlier than 2 August 2005, which is the
expiration of the 120-day period for the Commissioner to act on the claim.
(1) Mindanao I filed its judicial claim for the second quarter of 2003
before the CTA on 7 July 2005, before the expiration of the 120-day
period. Pursuant to Section 112(C) of the 1997 Tax Code, Mindanao I’s
judicial claim for the second quarter of 2003 was prematurely filed.
However, pursuant to San Roque’s recognition of the effect of BIR
Ruling No. DA-489-03, we rule that Mindanao I’s judicial claim for the
second quarter of 2003 qualifies under the exception to the strict
application of the 120+30 day periods.
(2) Mindanao I filed its judicial claim for the third quarter of 2003 before
the CTA on 9 September 2005. Mindanao I’s judicial claim for the third
quarter of 2003 was thus filed after the prescriptive period, pursuant to
Section 112(C) of the 1997 Tax Code.
(3) Mindanao I filed its judicial claim for the fourth quarter of 2003 before
the CTA on 9 September 2005. Mindanao I’s judicial claim for the fourth
quarter of 2003 was thus filed after the prescriptive period, pursuant to
Section 112(C) of the 1997 Tax Code.
San Roque: Recognition of BIR Ruling No. DA-489-03
In the consolidated cases of San Roque, the Court En Banc 53 examined and
ruled on the different claims for tax refund or credit of three different companies.
In San Roque, we reiterated that "following the verba legis doctrine, Section
112(C) must be applied exactly as worded since it is clear, plain, and
unequivocal. The taxpayer cannot simply file a petition with the CTA without
waiting for the Commissioner’s decision within the 120-day mandatory and
jurisdictional period. The CTA will have no jurisdiction because there will be no
‘decision’ or ‘deemed a denial decision’ of the Commissioner for the CTA to
review."
Notwithstanding a strict construction of any claim for tax exemption or refund,
the Court in San Roque recognized that BIR Ruling No. DA-489-03 constitutes
equitable estoppel54 in favor of taxpayers. BIR Ruling No. DA-489-03 expressly
states that the "taxpayer-claimant need not wait for the lapse of the 120-day
period before it could seek judicial relief with the CTA by way of Petition for
Review." This Court discussed BIR Ruling No. DA-489-03 and its effect on
taxpayers, thus:
Taxpayers should not be prejudiced by an erroneous interpretation by the
Commissioner, particularly on a difficult question of law. The abandonment of
the Atlas doctrine by Mirant and Aichi is proof that the reckoning of the
prescriptive periods for input VAT tax refund or credit is a difficult question of G.R. No. 193301
law. The abandonment of the Atlas doctrine did not result in Atlas, or other Mindanao II v. CIR
taxpayers similarly situated, being made to return the tax refund or credit they
received or could have received under Atlas prior to its abandonment. This Court
Administrative Judicial Claim Action on Claim
is applying Mirant and Aichi prospectively. Absent fraud, bad faith or
Claim
misrepresentation, the reversal by this Court of a general interpretative rule
issued by the Commissioner, like the reversal of a specific BIR ruling under 1st Quarter, 2003 Filed late -- Deny, pursuant to
Section 246, should also apply prospectively. x x x. Section 112(A) of the
1997 Tax Code
xxxx
2nd Quarter, 2003 Filed on time Prematurely filed Grant, pursuant to
BIR Ruling No. DA-489-03
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general
interpretative rule applicable to all taxpayers or a specific ruling applicable only3rd Quarter, 2003 Filed on time Filed on time Grant, pursuant to
to a particular taxpayer. Section 112(C) of the
1997 Tax Code
BIR Ruling No. DA-489-03 is a general interpretative rule because it was a
4th Quarter, 2003 Filed on time Filed on time Grant, pursuant to
response to a query made, not by a particular taxpayer, but by a government
Section 112(C) of the
agency tasked with processing tax refunds and credits, that is, the One Stop
1997 Tax Code
Shop Inter-Agency Tax Credit and Drawback Center of the Department of
Finance. This government agency is also the addressee, or the entity responded
to, in BIR Ruling No. DA-489-03. Thus, while this government agency mentions G.R. No. 194637
in its query to the Commissioner the administrative claim of Lazi Bay Resources Mindanao I v. CIR
Development, Inc., the agency was in fact asking the Commissioner what to do
in cases like the tax claim of Lazi Bay Resources Development, Inc., where the Administrative Judicial Claim Action on Claim
taxpayer did not wait for the lapse of the 120-day period. Claim
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all 1st Quarter, 2003 Filed late -- Deny, pursuant to
taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its issuance on Section 112(A) of the
10 December 2003 up to its reversal by this Court in Aichi on 6 October 2010, 1997 Tax Code
where this Court held that the 120+30 day periods are mandatory and
2nd Quarter, 2003 Filed on time Prematurely filed Grant, pursuant to
jurisdictional.
BIR Ruling No. DA-489-03
xxxx 3rd Quarter, 2003 Filed on time Filed late Grant, pursuant to
Section 112(C) of the
Taganito, however, filed its judicial claim with the CTA on 14 February 2007, 1997 Tax Code
after the issuance of BIR Ruling No. DA-489-03 on 10 December 2003. Truly, 4th Quarter, 2003 Filed on time Filed late Grant, pursuant to
Taganito can claim that in filing its judicial claim prematurely without waiting for Section 112(C) of the
the 120-day period to expire, it was misled by BIR Ruling No. DA-489-03. Thus, 1997 Tax Code
Taganito can claim the benefit of BIR Ruling No. DA-489-03, which shields the
filing of its judicial claim from the vice of prematurity. (Emphasis in the original)
Summary of Rules on Prescriptive Periods Involving VAT
Summary of Administrative and Judicial Claims
We summarize the rules on the determination of the prescriptive period for filing
a tax refund or credit of unutilized input VAT as provided in Section 112 of the
1997 Tax Code, as follows:
(1) An administrative claim must be filed with the CIR within two years
after the close of the taxable quarter when the zero-rated or effectively
zero-rated sales were made.
(2) The CIR has 120 days from the date of submission of complete
documents in support of the administrative claim within which to decide
whether to grant a refund or issue a tax credit certificate. The 120-day
period may extend beyond the two-year period from the filing of the
administrative claim if the claim is filed in the later part of the two-year
period. If the 120-day period expires without any decision from the CIR,
then the administrative claim may be considered to be denied by
inaction.
(3) A judicial claim must be filed with the CTA within 30 days from the
receipt of the CIR’s decision denying the administrative claim or from the
expiration of the 120-day period without any action from the CIR.
(4) All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from
the time of its issuance on 10 December 2003 up to its reversal by this
Court in Aichi on 6 October 2010, as an exception to the mandatory and
jurisdictional 120+30 day periods.
"Incidental" Transaction
Mindanao II asserts that the sale of a fully depreciated Nissan Patrol is not an
incidental transaction in the course of its business; hence, it is an isolated
transaction that should not have been subject to 10% VAT.
Section 105 of the 1997 Tax Code does not support Mindanao II’s position:
SEC. 105. Persons Liable. - Any person who, in the course of trade or business,
sells barters, exchanges, leases goods or properties, renders services, and any
person who imports goods shall be subject to the value-added tax (VAT)
imposed in Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted or
passed on to the buyer, transferee or lessee of the goods, properties or
services. This rule shall likewise apply to existing contracts of sale or lease of
goods, properties or services at the time of the effectivity of Republic Act No.
7716.
The phrase "in the course of trade or business" means the regular conduct or
pursuit of a commercial or an economic activity, including transactions incidental
thereto, by any person regardless of whether or not the person engaged therein
is a nonstock, nonprofit private organization (irrespective of the disposition of its
net income and whether or not it sells exclusively to members or their guests), or
government entity.
The rule of regularity, to the contrary notwithstanding, services as defined in this
Code rendered in the Philippines by nonresident foreign persons shall be
considered as being rendered in the course of trade or business. (Emphasis
supplied)
Mindanao II relies on Commissioner of Internal Revenue v. Magsaysay Lines,
Inc. (Magsaysay)55 and Imperial v. Collector of Internal Revenue (Imperial) 56 to
justify its position. Magsaysay, decided under the NIRC of 1986, involved the
sale of vessels of the National Development Company (NDC) to Magsaysay
Lines, Inc. We ruled that the sale of vessels was not in the course of NDC’s
trade or business as it was involuntary and made pursuant to the Government’s
policy for privatization. Magsaysay, in quoting from the CTA’s decision, imputed
upon Imperial the definition of "carrying on business." Imperial, however, is an
unreported case that merely stated that "‘to engage’ is to embark in a business
or to employ oneself therein."57
Mindanao II’s sale of the Nissan Patrol is said to be an isolated
transaction. However, it does not follow that an isolated transaction cannot be
1âwphi1
an incidental transaction for purposes of VAT liability. Indeed, a reading of
Section 105 of the 1997 Tax Code would show that a transaction "in the course
of trade or business" includes "transactions incidental thereto."
Mindanao II’s business is to convert the steam supplied to it by PNOC-EDC into
electricity and to deliver the electricity to NPC. In the course of its business,
Mindanao II bought and eventually sold a Nissan Patrol. Prior to the sale, the
Nissan Patrol was part of Mindanao II’s property, plant, and equipment.
Therefore, the sale of the Nissan Patrol is an incidental transaction made in the
course of Mindanao II’s business which should be liable for VAT.
Substantiation Requirements
Mindanao II claims that the CTA’s disallowance of a total amount of
₱492,198.09 is improper as it has substantially complied with the substantiation
requirements of Section 113(A)58 in relation to Section 23759 of the 1997 Tax
Code, as implemented by Section 4.104-1, 4.104-5 and 4.108-1 of Revenue
Regulation No. 7-95.60
We are constrained to state that Mindanao II’s compliance with the
substantiation requirements is a finding of fact. The CTA En Banc evaluated the
records of the case and found that the transactions in question are purchases for
services and that Mindanao II failed to comply with the substantiation
requirements. We affirm the CTA En Banc’s finding of fact, which in turn affirmed
the finding of the CTA First Division. We see no reason to overturn their findings.
WHEREFORE, we PARTIALLY GRANT the petitions. The Decision of the Court
of Tax Appeals En Bane in CT A EB No. 513 promulgated on 10 March 2010, as
well as the Resolution promulgated on 28 July 2010, and the Decision of the
Court of Tax Appeals En Bane in CTA EB Nos. 476 and 483 promulgated on 31
May 2010, as well as the Amended Decision promulgated on 24 November
2010, are AFFIRMED with MODIFICATION.
For G.R. No. 193301, the claim of Mindanao II Geothermal Partnership for the
first quarter of 2003 is DENIED while its claims for the second, third, and fourth
quarters of 2003 are GRANTED. For G.R. No. 19463 7, the claims of Mindanao I
Geothermal Partnership for the first, third, and fourth quarters of 2003 are
DENIED while its claim for the second quarter of 2003 is GRANTED.
SO ORDERED.
G.R. No. 198146
POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT
CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent
DECISION
CARPIO, J.:
The Case
This petition for review1 assails the 27 September 2010 Decision2 and the 3
August 2011 Resolution3 of the Court of Appeals in CA-G.R. SP No. 108156.
The Court of Appeals nullified the Decisions dated 13 March 2008 and 14
January 2009 of the Secretary of Justice in OSJ Case No. 2007- 3 for lack of
jurisdiction.
The Facts
Petitioner Power Sector Assets and Liabilities Management Corporation
(PSALM) is a government-owned and controlled corporation created under
Republic Act No. 9136 (RA 9136), also known as the Electric Power Industry
Reform Act of 2001 (EPIRA).4 Section 50 of RA 9136 states that the principal
purpose of PSALM is to manage the orderly sale, disposition, and privatization
of the National Power Corporation (NPC) generation assets, real estate and
other disposable assets, and Independent Power Producer (IPP) contracts with
the objective of liquidating all NPC financial obligations and stranded contract
costs in an optimal manner.
PSALM conducted public biddings for the privatization of the Pantabangan-
Masiway Hydroelectric Power Plant (Pantabangan-Masiway Plant) and Magat
Hydroelectric Power Plant (Magat Plant) on 8 September 2006 and 14
December 2006, respectively. First Gen Hydropower Corporation with its $129
Million bid and SN Aboitiz Power Corporation with its $530 Million bid were the
winning bidders for the PantabanganMasiway Plant and Magat Plant,
respectively.
On 28 August 2007, the NPC received a letter 5 dated 14 August 2007 from the
Bureau of Internal Revenue (BIR) demanding immediate payment of
₱3,813,080,4726 deficiency value-added tax (VAT) for the sale of the
Pantabangan-Masiway Plant and Magat Plant. The NPC indorsed BIR's demand
letter to PSALM.
On 30 August 2007, the BIR, NPC, and PSALM executed a Memorandum of
Agreement (MOA),7 wherein they agreed that:
A) NPC/PSALM shall remit under protest to the BIR the amount of Php
3,813,080,472.00, representing basic VAT as shown in the BIR letter dated
August 14, 2007, upon execution of this Memorandum of Agreement (MOA).
B) This remittance shall be without prejudice to the outcome of the resolution of
the Issues before the appropriate courts or body.
C) NPC/PSALM and BIR mutually undertake to seek final resolution of the
Issues by the appropriate courts or body.
D) BIR shall waive any and all interests and surcharges on the aforesaid BIR
letter, except when the case is elevated by the BIR before an appellate court.
E) Nothing contained in this MOA shall be claimed or construed to be an
admission against interest as to any party or evidence of any liability or
wrongdoing whatsoever nor an abandonment of any position taken by
NPC/PSALM in connection with the Issues.
F) Each Party to this MOA hereto expressly represents that the authorized
signatory hereto has the legal authority to bind [the] party to all the terms of this
MOA.
G) Any resolution by the appropriate courts or body in favor of the BIR, other
than a decision by the Supreme Court, shall not constitute as precedent and
sufficient legal basis as to the taxability of NPC/PSALM's transactions pursuant
to the privatization of NPC's assets as mandated by the EPIRA Law.
H) Any resolution in favor of NPC/PSALM by any appropriate court or body shall
be immediately executory without necessity of notice or demand from
NPC/PSALM. A ruling from the Department of Justice (DOJ) that is favorable to
NPC/PSALM shall be tantamount to the filing of an application for refund (in
cash)/tax credit certificate (TCC), at the option of NPC/PSALM. BIR undertakes
to immediately process and approve the application, and release the tax
refund/TCC within fifteen (15) working days from issuance of the DOJ ruling that
is favorable to NPC/PSALM.
I) Either party has the right to appeal any adverse decision against it before any
appropriate court or body.
J) In the event of failure by the BIR to fulfill the undertaking referred to in (H)
above, NPC/PSALM shall assign to DOF its right to the refund of the subject
remittance, and the DOF shall offset such amount against any liability of
NPC/PSALM to the National Government pursuant to the objectives of the
EPIRA on the application of the privatization proceeds. 8
In compliance with the MOA, PSALM remitted under protest to the BIR the
amount of ₱3, 813, 080, 472, representing the total basic VAT due.
On 21 September 2007, PSALM filed with the Department of Justice (DOJ) a
petition for the adjudication of the dispute with the BIR to resolve the issue of
whether the sale of the power plants should be subject to VAT. The case was
docketed as OSJ Case No. 2007-3.
On 13 March 2008, the DOJ ruled in favor of PSALM, thus:
In cases involving purely question[s] of law, such as in the instant case, between
and among the government-owned and controlled corporation and government
bureau, the issue is best settled in this Department. In the final analysis, there is
but one party in interest, the Government itself in this litigation.
xxxx
The instant petition is an original petition involving only [a] question of law on
whether or not the sale of the Pantabangan-Masiway and Magat Power Plants to
private entities under the mandate of the EPIRA is subject to VAT. It is to be
stressed that this is not an appeal from the decision of the Commissioner of
Internal Revenue involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, or other matters arising under the National Internal
Revenue Code or other law.
xxxx
Moreover, it must be noted that respondent already invoked this Office's
jurisdiction over it by praying in respondent's Motion for Extension of Time to File
Comment (On Petitioner's Petition dated 21 September 2007) and later,
Omnibus Motion To Lift Order dated 22 October 2007 and To Admit Attached
Comment. The Court has held that the filing of motions seeking affirmative relief,
such as, to admit answer, for additional time to answer, for reconsideration of a
default judgment, and to lift order of default with motion for reconsideration, are
considered voluntary submission to the jurisdiction of the court. Having sought
this Office to grant extension of time to file answer or comment to the instant
petition, thereby submitting to the jurisdiction of this Court [sic], respondent
cannot now repudiate the very same authority it sought.
xxxx
When petitioner was created under Section 49 of R.A. No. 9136, for the principal
purpose to manage the orderly sale, disposition, and privatization of NPC
generation assets, real estate and other disposable assets, IPP contracts with
the objective of liquidating all NPC financial obligations and stranded contract
costs in an optimal manner, there was, by operation of law, the transfer of
ownership of NPC assets. Such transfer of ownership was not carried out in the
ordinary course of transfer which must be accorded with the required elements
present for a valid transfer, but in this case, in accordance with the mandate of
the law, that is, EPIRA. Thus, respondent cannot assert that it was NPC who
was the actual seller of the Pantabangan-Masiway :md Magat Power Plants,
because at the time of selling the aforesaid power plants, the owner then was
already the petitioner and not the NPC. Consequently, petitioner cannot also be
considered a successor-in-· interest of NPC.
Since it was petitioner who sold the Pantabangan-Masiway and Magat Power
Plants and not the NPC, through a competitive and public bidding to the private
entities, Section 24(A) of R.A. No. 9337 cannot be applied to the instant case.
Neither the grant of exemption and revocation of the tax exemption accorded to
the NPC, be also affected to petitioner.
xxxx
Clearly, the disposition of Pantabangan-Masiway and Magat Power Plants was
not in the regular conduct or pursuit of a commercial or an economic activity, but
was effected by the mandate of the EPIRA upon petitioner to direct the orderly
sale, disposition, and privatization of NPC generation assets, real estate and
other disposable assets, and IPP contracts, and afterward, to liquidate the
outstanding obligations of the NPC.
xxxx
Verily, to subject the sale of generation assets in accordance with a privatization
plan submitted to and approved by the President, which is a one time sale, to
VAT would run counter to the purpose of obtaining optimal proceeds since
potential bidders would necessarily have to take into account such extra cost of
VAT.
WHEREFORE, premises considered, the imposition by respondent Bureau of
lnternal Revenue of deficiency Value-Added Tax in the amount of
₱3,813,080,472.00 on the privatization sale of the Pantabangan Masiway and
Magat Power Plants, done in accordance with the mandate of the Electric Power
Industry Reform Act of 2001, is hereby declared NULL and VOID. Respondent is
directed to refund the amount of ₱3,813,080,472.00 remitted under protest by
petitioner to respondent.9
The BIR moved for reconsideration, alleging that the DOJ had no jurisdiction
since the dispute involved tax laws administered by the BIR and therefore within
the jurisdiction of the Court of Tax Appeals (CTA). Furthermore, the BIR stated
that the sale of the subject power plants by PSALM to private entities is in the
course of trade or business, as contemplated under Section 105 of the National
Internal Revenue Code (NIRC) of 1997, which covers incidental transactions.
Thus, the sale is subject to VAT. On 14 January 2009, the DOJ denied BIR's
Motion for Reconsideration.10
On 7 April 2009,11 the BIR Commissioner (Commissioner of Internal Revenue)
filed with the Court of Appeals a petition for certiorari, seeking to set aside the
DOJ's decision for lack of jurisdiction. In a Resolution dated 23 April 2009, the
Court of Appeals dismissed the petition for failure to attach the relevant
pleadings and documents.12 Upon motion for reconsideration, the Court of
Appeals reinstated the petition in its Resolution dated 10 July 2009. 13
The Ruling of the Court of Appeals
The Court of Appeals held that the petition filed by PSALM with the DOJ was
really a protest against the assessment of deficiency VAT, which under Section
20414 of the NIRC of 1997 is within the authority of the Commissioner of Internal
Revenue (CIR) to resolve. In fact, PSALM's objective in filing the petition was to
recover the ₱3,813,080,472 VAT which was allegedly assessed erroneously and
which PSALM paid under protest to the BIR.
Quoting paragraph H15 of the MOA among the BIR, NPC, and PSALM, the Court
of Appeals stated that the parties in effect agreed to consider a DOJ ruling
favorable to PSALM as the latter's application for refund.
Citing Section 416 of the NIRC of 1997, as amended by Section 3 of Republic Act
No. 8424 (RA 8424)17 and Section 718 of Republic Act No. 9282 (RA 9282),19 the
Court of Appeals ruled that the CIR is the proper body to resolve cases involving
disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other matters arising under the NIRC or
other laws administered by the BIR. The Court of Appeals stressed that
jurisdiction is conferred by law or by the Constitution; the parties, such as in this
case, cannot agree or stipulate on it by conferring jurisdiction in a body that has
none. Jurisdiction over the person can be waived but not the jurisdiction over the
subject matter which is neither subject to agreement nor conferred by consent of
the parties. The Court of Appeals held that the DOJ Secretary erred in ruling that
the CIR is estopped from assailing the jurisdiction of the DOJ after having
agreed to submit to its jurisdiction. As a general rule, estoppel does not confer
jurisdiction over a cause of action to a tribunal where none, by law, exists.
In conclusion, the Court of Appeals found that the DOJ Secretary gravely
abused his discretion amounting to lack of jurisdiction when he assumed
jurisdiction over OSJ Case No. 2007-3. The dispositive portion of the Court of
Appeals' 27 September 2010 Decision reads:
WHEREFORE, premises considered, we hereby GRANT the petition.
Accordingly: (1) the [D]ecision dated March 13, 2008, and the Decision dated
January 14, 2009 both issued by the public respondent Secretary of Justice in
[OSJ Case No.] 2007-3 are declared NULL and VOID for having been issued
without jurisdiction.
No costs.
SO ORDERED.20
PSALM moved for reconsideration, which the Court of Appeals denied in its 3
August 2011 Resolution. Hence, this petition.
The Issues
Petitioner PSALM raises the following issues:
I. DID THE COURT OF APPEALS MISAPPLY THE LAW IN GIVING DUE
COURSE TO THE PETITION FOR CERTIORARI IN CA-G.R. SP NO. 108156?
II. DID THE SECRETARY OF JUSTICE ACT IN ACCORDANCE WITH THE
LAW IN ASSUMING JURISDICTION AND SETTLING THE DISPUTE BY AND
BETWEEN THE BIR AND PSALM?
III. DID THE SECRETARY OF JUSTICE ACT IN ACCORDANCE WITH THE
LAW AND JURISPRUDENCE IN RENDERING JUDGMENT THAT THERE
SHOULD BE·NO VAT ON THE PRIVATIZATION, SALE OR DISPOSAL OF
GENERATION ASSETS?
IV. DOES PUBLIC RESPONDENT DESERVE THE RELIEF OF CERTIORARI?21
The Ruling of the Court
We find the petition meritorious.
I. Whether the Secretary of Justice has jurisdiction over the case.
The primary issue in this case is whether the DOJ Secretary has jurisdiction over
OSJ Case No. 2007-3 which involves the resolution of whether the sale of the
Pantabangan-Masiway Plant and Magat Plant is subject to VAT.
We agree with the Court of Appeals that jurisdiction over the subject matter is
vested by the Constitution or by law, and not by the parties to an
action.22 Jurisdiction cannot be conferred by consent or acquiescence of the
parties23 or by erroneous belief of the court, quasi-judicial office or government
agency that it exists.
However, contrary to the ruling of the Court of Appeals, we find that the DOJ is
vested by law with jurisdiction over this case. This case involves a dispute
between PSALM and NPC, which are both wholly government owned
corporations, and the BIR, a government office, over the imposition of VAT on
the sale of the two power plants. There is no question that original jurisdiction is
with the CIR, who issues the preliminary and the final tax assessments.
However, if the government entity disputes the tax assessment, the dispute is
already between the BIR (represented by the CIR) and another government
entity, in this case, the petitioner PSALM. Under Presidential Decree No.
24224 (PD 242), all disputes and claims solely between government
agencies and offices, including government-owned or controlled·
corporations, shall be administratively settled or adjudicated by the
Secretary of Justice, the Solicitor General, or the Government Corporate
Counsel, depending on the issues and government agencies involved. As
regards cases involving only questions of law, it is the Secretary of Justice who
has jurisdiction. Sections 1, 2, and 3 of PD 242 read:
Section 1. Provisions of law to the contrary notwithstanding, all disputes,
claims and controversies solely between or among the departments,
bureaus, offices, agencies and instrumentalities of the National
Government, including constitutional offices or agencies, arising from the
interpretation and application of statutes, contracts or
agreements, shallhenceforth be administratively settled or adjudicated as
provided hereinafter: Provided, That, this shall not apply to cases already
pending in court at the time of the effectivity of this decree.
Section 2. In all cases involving only questions of law, the same shall be
submitted to and settled or adjudicated by the Secretary of Justice, as
Attorney General and ex officio adviser of all government owned or controlled
corporations and entities, in consonance with Section 83 of the Revised
Administrative Code. His ruling or determination of the question in each
case shall be conclusive and binding upon all the parties concerned.
Section 3. Cases involving mixed questions of law and of fact or only factual
issues shall be submitted to and settled or adjudicated by:
(a) The Solicitor General, with respect to disputes or claims [or]
controversies between or among the departments, bureaus,
offices and other agencies of the National Government;
(b) The Government Corporate Counsel, with respect to disputes
or claims or controversies between or among the government-
owned or controlled corporations or entities being served by the
Office of the Government Corporate Counsel; and
(c) The Secretary of Justice, with respect to all other disputes or
claims or controversies which do not fall under the categories
mentioned in paragraphs (a) and (b). (Emphasis supplied)
The use of the word "shall" in a statute connotes a mandatory order or an
imperative obligation.25 Its use rendered the provisions mandatory and not
merely permissive, and unless PD 242 is declared unconstitutional, its
provisions must be followed. The use of the word "shall" means that
administrative settlement or adjudication of disputes and claims between
government agencies and offices, including government-owned or controlled
corporations, is not merely permissive but mandatory and imperative. Thus,
under PD 242, it is mandatory that disputes and claims "solely" between
government agencies and offices, including government-owned or controlled
corporations, involving only questions of law, be submitted to and settled or
adjudicated by the Secretary of Justice.
The law is clear and covers "all disputes, claims and controversies
solely between or among the departments, bureaus, offices, agencies and
instrumentalities of the National Government, including constitutional
offices or agencies arising from the interpretation and application of
statutes, contracts or agreements." When the law says "all disputes, claims
and controversies solely" among government agencies, the law means all,
without exception. Only those cases already pending in court at the time of the
effectivity of PD 242 are not covered by the law.
The purpose of PD 242 is to provide for a speedy and efficient administrative
settlement or adjudication of disputes between government offices or
agencies under the Executive branch, as well as to filter cases to lessen
the clogged dockets of the courts. As explained by the Court in Philippine
Veterans Investment Development Corp. (PHIVIDEC) v. Judge Velez:26
Contrary to the opinion of the lower court, P.D. No. 242 is not unconstitutional. It
does not diminish the jurisdiction of [the] courts but only prescribes an
administrative procedure for the settlement of certain types of disputes between
or among departments, bureaus, offices, agencies, and instrumentalities of the
National Government, including government-owned or controlled corporations,
so that they need not always repair to the courts for the settlement of
controversies arising from the interpretation and application of statutes,
contracts or agreements. The procedure is not much different, and no less
desirable, than the arbitration procedures provided in Republic Act No. 876
(Arbitration Law) and in Section 26, R.A. 6715 (The Labor Code). It is an
alternative to, or a substitute for, traditional litigation in court with the added
advantage of avoiding the delays, vexations and expense of court proceedings.
Or, as P.D. No. 242 itself explains, its purpose is "the elimination of needless
clogging of court dockets to prevent the waste of time and energies not only of
the government lawyers but also of the courts, and eliminates expenses incurred
in the filing and prosecution of judicial actions." 27
PD 242 is only applicable to disputes, claims, and controversies solely between
or among the departments, bureaus, offices, agencies and instrumentalities of
the National Government, including government-owned or controlled
corporations, and where no private party is involved. In other words, PD 242
will only apply when all the parties involved are purely government offices
and government-owned or controlled corporations.28Since this case is a
dispute between PSALM arid NPC, both government owned and controlled
corporations, and the BIR, a National Government office, PD 242 clearly applies
and the Secretary of Justice has jurisdiction over this case. In fact, the MOA
executed by the BIR, NPC, and PSALM explicitly provides that "[a] ruling from
the Department of Justice (DOJ) that is favorable to NPC/PSALM shall be
tantamount to the filing of an application for refund (in cash)/tax credit certificate
(TCC), at the option of NPC/PSALM."29 Such provision indicates that the BIR and
petitioner PSALM and the NPC acknowledged that the Secretary of Justice
indeed has jurisdiction to resolve their dispute.
This case is different from the case of Philippine National Oil Company v. Court
of Appeals,30 (PNOC v. CA) which involves not only the BIR (a government
bureau) and the PNOC and PNB (both government-owned or controlled
corporations), but also respondent Tirso Savellano, a private citizen. Clearly,
PD 242 is not applicable to the case of PNOCv.CA. Even the ponencia in PNOC
v. CA stated that the dispute in that case is not covered by PD 242, thus:
Even if, for the sake of argument, that P.D. No. 242 should prevail over Rep. Act
No. 1125, the present dispute would still not be covered by P.D. No. 242.
Section 1 of P.D. No. 242 explicitly provides that only disputes, claims and
controversies solely between or among departments, bureaus, offices, agencies,
and instrumentalities of the National Government, including constitutional offices
or agencies, as well as government-owned and controlled corporations, shall be
administratively settled or adjudicated. While the BIR is obviously a
government bureau, and both PNOC and PNB are government-owned and
controlled corporations, respondent Savellano is a private. citizen. His
standing in the controversy could not be lightly brushed aside. It was private
respondent Savellano who gave the BIR the information that resulted in the
investigation of PNOC and PNB; who requested the BIR Commissioner to
reconsider the compromise agreement in question; and who initiated the CTA
Case No. 4249 by filing a Petition for Review. 31 (Emphasis supplied)
In contrast, since this case is a dispute solely between PSALM and NPC, both
government-owned and controlled corporations, and the BIR, a National
Government office, PD 242 clearly applies and the Secretary of Justice has
jurisdiction over this case.
It is only proper that intra-governmental disputes be settled administratively
since the opposing government offices, agencies and instrumentalities are
all under the President's executive control and supervision.Section 17,
Article VII of the Constitution states unequivocally that: "The President shall
have control of all the executive departments, bureaus and offices. He shall
ensure that the laws be faithfully executed." In Carpio v. Executive
Secretary,32 the Court expounded on the President's control over all the
executive departments, bureaus and offices, thus:
This presidential power of control over the executive branch of government
extends over all executive officers from Cabinet Secretary to the lowliest clerk
and has been held by us, in the landmark case of Mondano vs. Silvosa, to mean
"the power of [the President] to alter or modify or nullify or set aside what a
subordinate officer had done in the performance of his duties and to substitute
the judgment of the former with that of the latter." It is said to be at the very
"heart of the meaning of Chief Executive."
Equally well accepted, as a corollary rule to the control powers of the President,
is the "Doctrine of Qualified Political Agency." As the President cannot be
expected to exercise his control powers all at the same time and in person, he
will have to delegate some of them to his Cabinet members.
Under this doctrine, which recognizes the establishment of a single executive,
"all executive and administrative organizations are adjuncts of the Executive
Department, the heads of the various executive departments are assistants and
agents of the Chief Executive, and, except in cases where the Chief Executive is
required by the Constitution or law to act in person on the exigencies of the
situation demand that he act personally, the multifarious executive and
administrative functions of the Chief Executive are performed by and through the
executive departments, and the acts of the Secretaries of such departments,
performed and promulgated in the regular course of business, are, unless
disapproved or reprobated by the Chief Executive presumptively the acts of the
Chief Executive."
Thus, and in short, "the President's power of control is directly exercised by him
over the members of the Cabinet who, in turn, and by his authority, control the
bureaus and other offices under their respective jurisdictions in the executive
department. "33
This power of control vested by the Constitution in the President cannot be
diminished by law. As held in Rufino v. Endriga,34 Congress cannot by law
deprive the President of his power of control, thus:
The Legislature cannot validly enact a law· that puts a government office in the
Executive branch outside the control of the President in the guise of insulating
that office from politics or making it independent. If the office is part of the
Executive branch, it must remain subject to the control of the President.
Otherwise, the Legislature can deprive the President of his constitutional
power of control over "all the executive x x x offices." If the Legislature
can do this with the Executive branch, then the Legislature can also deal a
similar blow to the Judicial branch by enacting a law putting decisions of
certain lower courts beyond the review power of the Supreme Court.This
will destroy the system of checks and balances finely structured in the 1987
Constitution among the Executive, Legislative, and Judicial
branches.35 (Emphasis supplied)
Clearly, the President's constitutional power of control over all the executive
departments, bureaus and offices cannot be curtailed or diminished by law.
"Since the Constitution has given the President the power of control, with all its
awesome implications, it is the Constitution alone which can curtail such
power."36 This. constitutional power of control of the President cannot be
diminished by the CTA. Thus, if two executive offices or agencies cannot
agree, it is only proper and logical that the President, as the sole Executive
who under the Constitution has control over both offices or agencies in
dispute, should resolve the dispute instead of the courts. The judiciary
should not intrude in this executive function of determining which is
correct between the opposing government offices or agencies, which are
both under the sole control of the President. Under his constitutional
power of control, the President decides the dispute between the two
executive offices. The judiciary cannot substitute its decision over that of
the President. Only after the President has decided or settled the dispute can
the courts' jurisdiction be invoked. Until such time, the judiciary should not
interfere since the issue is not yet ripe for judicial adjudication. Otherwise, the
judiciary would infringe on the President's exercise of his constitutional power of
control over all the executive departments, bureaus, and offices.
Furthermore, under the doctrine of exhaustion of administrative remedies,
it is mandated that where a remedy before an administrative body is
provided by statute, relief must be sought by exhausting this remedy prior
to bringing an action in court in order to give the administrative body
every opportunity to decide a matter that comes within its jurisdiction.37 A
litigant cannot go to court without first pursuing his administrative remedies;
otherwise, his action is premature and his case is not ripe for judicial
determination.38 PD 242 (now Chapter 14, Book IV of Executive Order No. 292),
provides for such administrative remedy. Thus, only after the President has
decided the dispute between government offices and agencies can the losing
party resort to the courts, if it so desires. Otherwise, a resort to the courts would
be premature for failure to exhaust administrative remedies. Non-observance of
the doctrine of exhaustion of administrative remedies would result in lack of
cause of action,39 which is one of the grounds for the dismissal of a complaint.
The rationale of the doctrine of exhaustion. of administrative remedies was aptly
explained by the Court in Universal Robina Corp. (Corn Division) v. Laguna Lake
Development Authority:40
The doctrine of exhaustion of administrative remedies is a cornerstone of our
judicial system. The thrust of the rule is that courts must allow administrative
agencies to carry out their functions and discharge their responsibilities within
the specialized areas of their respective competence. The rationale for this
doctrine is obvious. It entails lesser expenses and provides for the speedier
resolution of the controversies. Comity and convenience also impel courts of
justice to shy away from a dispute until the system of administrative redress has
been completed.41
In requiring parties to exhaust administrative remedies before pursuing action in
a court, the doctrine prevents overworked courts from considering issues when
remedies are available through administrative channels.42Furthermore, the
doctrine endorses a more economical and less formal means of resolving
disputes,43 and promotes efficiency since disputes and claims are generally
resolved more quickly and economically through administrative proceedings
rather than through court litigations.44
The Court of Appeals ruled that under the 1997 NIRC, the dispute between the
parties is within the authority of the CIR to resolve. Section 4 of the 1997 NIRC
reads:
SEC 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax
Cases. - The power to interpret the provisions of this Code and other tax laws
shall be under the exclusive and original jurisdiction of the
Commissioner, subject to review by the Secretary of Finance.
The power to decide disputed assessments, refunds in internal revenue taxes,
fees or other charges. penalties imposed in relation thereto, or other matters
arising under this Code or other laws or portions thereof administered by the
Bureau of Internal Revenue is vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals. (Emphasis supplied)
The first paragraph of Section 4 of the 1997 NIRC provides that the power of the
CIR to interpret the NIRC provisions and other tax laws is subject to review by
the Secretary of Finance, who is the alter ego of the President. Thus, the
constitutional power of control of the President over all the executive
departments, bureaus, and offices45 is still preserved. The President's power of
control, which cannot be limited or withdrawn by Congress, means the power of
the President to alter, modify, nullify, or set aside the judgment or action of a
subordinate in the performance of his duties. 46
The second paragraph of Section 4 of the 1997 NIRC, providing for the
exclusive appellate jurisdiction of the CTA as regards the CIR's decisions on
matters involving disputed assessments, refunds in internal revenue taxes, fees
or other charges, penalties imposed in relation thereto, or other matters arising
under NIRC, is in conflict with PD 242. Under PD 242, all disputes and
claims solely between government agencies and offices, including government-
owned or controlled corporations, shall be administratively settled or adjudicated
by the Secretary of Justice, the Solicitor General, or the Government Corporate
Counsel, depending on the issues and government agencies involved.
To harmonize Section 4 of the 1997 NIRC with PD 242, the following
interpretation should be adopted: (1) As regards private entities and the
BIR, the power to decide disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties in relation thereto, or other matters
arising under the NIRC or other laws administered by the. BIR is vested in the
CIR subject to the exclusive appellate jurisdiction of the CTA, in accordance with
Section 4 of the NIRC; and (2) Where the disputing parties are all public
entities (covers disputes between the BIR and other government entities), the
case shall be governed by PD 242.
Furthermore, it should be noted that the 1997 NIRC is a general law governing
the imposition of national internal revenue taxes, fees, and charges. 47 On the
other hand, PD 242 is a special law that applies only to disputes involving
solely government offices, agencies, or instrumentalities. The difference
between a special law and a general law was clarified in Vinzons-Chato v.
Fortune Tobacco Corporation:48
A general statute is one which embraces a class of subjects or places and does
not omit any subject or place naturally belonging to such class. A special statute,
as the term is generally understood, is one which relates to particular persons or
things of a class or to a particular portion or section of the state only.
A general law and a special law on the same subject are statutes in pari
materia and should, accordingly, be read together and harmonized, if possible,
with a view to giving effect to both. The rule is that where there are two acts, one
of which is special and particular and the other general which, if standing alone,
would include the same matter and thus conflict with the special act, the special
law must prevail since it evinces the legislative intent more clearly than that of a
general statute and must not be taken as intended to affect the more particular
and specific provisions of the earlier act, unless it is absolutely necessary so to
construe it in order to give its words any meaning at all.
The circumstance that the special law is passed before or after the general act
does not change the principle. Where the special law is later, it will be regarded
as an exception to, or a qualification of, the prior general act; and where the
general act is later, the special statute will be construed as remaining an
exception to its terms, unless repealed expressly or by necessary implication. 49
Thus, even if the 1997 NIRC, a general statute, is a later act, PD 242, which
is a special law, will still prevail and is treated as an exception to the terms
of the 1997 NIRC with regard solely to intragovernmental disputes. PD 242
is a special law while the 1997 NIRC is a general law, insofar as disputes solely
between or among government agencies are concerned. Necessarily, such
disputes must be resolved under PD 242 and not under the NIRC, precisely
because PD 242 specifically mandates the settlement of such disputes in
accordance with PD 242. PD 242 is a valid law prescribing the procedure for
administrative settlement or adjudication of disputes among government offices,
agencies, and instrumentalities under the executive control and supervision of
the President.50
Even the BIR, through its authorized representative, then OIC-Commissioner of
Internal Revenue Lilian B. Hefti, acknowledged in the MOA executed by the BIR,
NPC, and PSALM, that the Secretary of Justice has jurisdiction to resolve its
dispute with petitioner PSALM and the NPC. This is clear from the provision in
the MOA which states:
H) Any resolution in favor of NPC/PSALM by any appropriate court or body shall
be immediately executory without necessity of notice or demand from
NPC/PSALM. A ruling from the Department of Justice (DOJ) that is
favorable to NPC/PSALM shall be tantamount to the filing of an application
for refund (in cash)/tax credit certificate (TCC), at the option of
NPC/PSALM. BIR undertakes to immediately process and approve the
application, and release the tax refund/TCC within fifteen (15) working
days from issuance of the DOJ ruling that is favorable to
NPC/PSALM. (Emphasis supplied)
PD 242 is now embodied in Chapter 14, Book IV of Executive Order No. 292
(EO 292), otherwise known as the Administrative Code of 1987, which took
effect on 24 November 1989.51 The pertinent provisions read:
Chapter 14- Controversies Among Government
Offices and Corporations
SEC. 66. How Settled. - All disputes, claims and controversies, solely between
or among the departments, bureaus, offices, agencies and instrumentalities of
the National Government, including government-owned or controlled
corporations, such as those arising from the interpretation and application of
statutes, contracts or agreements, shall be administratively settled or
adjudicated in the manner provided in this Chapter. This Chapter shall, however,
not apply to disputes involving the Congress, the Supreme Court, the
Constitutional Commissions, and local governments.
SEC. 67. Disputes Involving Questions of Law. - All cases involving only
questions of law shall be submitted to and settled or adjudicated by the
Secretary of Justice as Attorney-General of the National Government and as ex
officio legal adviser of all government-owned or controlled corporations. His
ruling or decision thereon shall be conclusive and binding on all the parties
concerned.
SEC. 68. Disputes Involving Questions of Fact and Law. - Cases involving mixed
questions of law and of fact or only factual issues shall be submitted to and
settled or adjudicated by:
(1) The Solicitor General, if the dispute, claim or controversy
involves only departments, bureaus, offices and other agencies
of the National Government as well as government-owned or
controlled corporations or entities of whom he is the principal law
officer or general counsel; and
(2) The Secretary of Justice, in all other cases not falling under
paragraph (1).
SEC. 69. Arbitration. - The determination of factual issues may be referred to an
arbitration panel composed of one representative each of the parties involved
and presided over by a representative of the Secretary of Justice or the Solicitor
General, as the case may be.
SEC. 70. Appeals. - The decision of the Secretary of Justice as well as that of
the Solicitor General, when approved by the Secretary of Justice, shall be final
and binding upon the parties involved. Appeals may, however, be taken to the
President where the amount of the claim or the value of the property exceeds
one million pesos. The decision of the President shall be final.
SEC. 71. Rules and Regulations. - The Secretary of Justice shall promulgate the
rules and regulations necessary to carry out the provisions of this Chapter.
Since the amount involved in this case is more than one million pesos, the DOJ
Secretary's decision may be appealed to the Office of the President in
accordance with Section 70, Chapter 14, Book IV of EO 292 and Section 552 of
PD 242. If the appeal to the Office of the President is denied, the aggrieved
party can still appeal to the Court of Appeals under Section 1, Rule 43 of the
1997 Rules of Civil Procedure.53 However, in order not to further delay the
disposition of this case, the Court resolves to decide the substantive issue raised
in the petition.54
II. Whether the sale of the power plants is subject to VAT.
To resolve the issue of whether the sale of the Pantabangan-Masiway and
Magat Power Plants by petitioner PSALM to private entities is subject to VAT,
the Court must determine whether the sale is "in the course of trade or business"
as contemplated under Section 105 of the NIRC, which reads:
SEC 105. Persons Liable. - Any person who, in the course of trade or
business, sells, barters, exchanges, leases goods or properties, renders
services, and any person who imports .goods shall be subject to the value-
added tax (VAT) imposed in Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted or
passed on to the buyer, transferee or lessee of the goods, properties or
services. This rule shall likewise apply to existing contracts of sale or lease of
goods, properties or services at the time of the effectivity of Republic Act 7716.
The phrase 'in the course of trade or business' means the regular conduct
or pursuit of a commercial or an economic activity, including transactions
incidental thereto, by any person regardless of whether or not the person
engaged therein is a nonstock, nonprofit private organization (irrespective
of the disposition of its net income and whether or not it sells exclusively
to members or their guests), or government entity.
The rule of regularity, to the contrary notwithstanding, services as defined in this
Code rendered in the Philippines by nonresident foreign persons shall be
considered as being rendered in the course of trade or business. (Emphasis
supplied)
Under Section 50 of the EPIRA law, PSALM's principal purpose is to manage
the orderly sale, disposition, and privatization of the NPC generation assets, real
estate and other disposable assets, and IPP contracts with the objective of
liquidating all NPC financial obligations and stranded contract costs in an optimal
manner.
PSALM asserts that the privatization of NPC assets, such as the sale of the
Pantabangan-Masiway and Magat Power Plants, is pursuant to PSALM's
mandate under the EPIRA law and is not conducted in the course of trade or
business. PSALM cited the 13 May 2002 BIR Ruling No. 020- 02, that PSALM' s
sale of assets is not conducted in pursuit of any commercial or profitable activity
as to fall within the ambit of a VAT-able transaction under Sections 105 and 106
of the NIRC. The pertinent portion of the ruling adverted to states:
2. Privatization of assets by PSALM is not subject to VAT
Pursuant to Section 105 in relation to Section 106, both of the Tax Code of
1997, a value-added tax equivalent to ten percent (10%) of the gross selling
price or gross value in money of the goods, is collected from any person, who, in
the course of trade or business, sells, barters, exchanges, leases goods or
properties, which tax shall be paid by the seller or transferor.
The phrase "in the course of trade or business" means the regular conduct or
pursuit of a commercial activity, including transactions incidental thereto.
Since the disposition or sale of the assets is a consequence of PSALM's
mandate to ensure the orderly sale or disposition of' the property and thereafter
to liquidate the outstanding loans and obligations of NPC, utilizing the proceeds
from sales and other property contributed to it, including the proceeds from the
Universal Charge, and not conducted in pursuit of any commercial or profitable
activity, including transactions incidental thereto, the same will be considered
an isolated ,transaction, which will therefore not be subject to VAT. (BIR
Ruling No. 113-98 dated July 23, 1998)55 (Emphasis supplied)
On the other hand, the CIR argues that the previous exemption of NPC from
VAT under Section 13 of Republic Act No. 639556 (RA 6395) was expressly
repealed by Section 24 of Republic Act No. 933757 (RA 9337), which reads:
SEC. 24. Repealing Clause. - The following laws or provisions of laws are
hereby repealed and the persons and/or transactions affected herein are made
subject to the value-added tax subject to the provisions of Title IV of the National
Internal Revenue Code of 1997, as amended:
(A) Section 13 of R.A. No. 6395 on the exemption from value-
added tax of National Power Corporation (NPC);
(B) Section 6, fifth paragraph of R.A. No. 9136 on the zero VAT
rate imposed on the sale of generated power by generation
companies; and
(C) All other laws, acts, decrees, executive orders, issuances
and rules and regulations or parts thereof which are contrary to
and inconsistent with any provisions of this Act are hereby
repealed, amended or modified accordingly.
As a consequence, the CIR posits that the VAT exemption accorded to PSALM
under BIR Ruling No. 020-02 is also deemed revoked since PSALM is a
successor-in-interest of NPC. Furthermore, the CIR avers that prior to the sale,
NPC still owned the power plants and not PSALM, which is just considered as
the trustee of the NPC properties. Thus, the sale made by NPC or its
successors-in-interest of its power plants should be subject to the 10% VAT
beginning 1 November 2005 and 12% VAT beginning 1 February 2007.
We do not agree with the CIR's position, which is anchored on the wrong
premise that PSALM is a successor-in-interest of NPC. PSALM is not a
successor-in-interest of NPC. Under its charter, NPC is mandated to "undertake
the development of hydroelectric generation of power and the production of
electricity from nuclear, geothermal and other sources, as well as the
transmission of electric power on a nationwide basis."58 With the passage of the
EPIRA law which restructured the electric power industry into generation,
transmission, distribution, and supply sectors, the NPC is now primarily
mandated to perform missionary electrification function through the Small Power
Utilities Group (SPUG) and is responsible for providing power generation and
associated power delivery systems in areas that are not connected to the
transmission system.59 On the other hand, PSALM, a government-owned and
controlled corporation, was created under the EPIRA law to manage the orderly
sale and privatization of NPC assets with the objective of liquidating all of NPC's
financial obligations in an optimal manner. Clearly, NPC and PSALM have
different functions. Since PSALM is not a successor-in-interest of NPC, the
repeal by RA 9337 of NPC's VAT exemption does not affect PSALM.
In any event, even if PSALM is deemed a successor-in-interest of NPC, still the
sale of the power plants is not "in the course of trade or business" as
contemplated under Section 105 of the NIRC, and thus, not subject to VAT. The
sale of the power plants is not in pursuit of a commercial or economic
activity but a governmental function mandated by law to privatize NPC
generation assets. PSALM was created primarily to liquidate all NPC financial
obligations and stranded contract costs in an optimal manner. The purpose and
objective of PSALM are explicitly stated in Section 50 of the EPIRA law, thus:
SEC. 50. Purpose and Objective, Domicile and Term of Existence. - The
principal purpose of the PSALM Corp. is to manage the orderly sale,
disposition, and privatization of NPC generation assets, real estate and
other disposable assets, and IPP contracts with the objective of liquidating
all NPC financial obligations and stranded contract costs in an optimal
manner.
The PSALM Corp. shall have its principal office and place of business within
Metro Manila.
The PSALM Corp. shall exist for a period of twenty-five (25) years from the
effectivity of this Act, unless otherwise provided by law, and all assets held by it,
all moneys and properties belonging to it, and all its liabilities outstanding upon
the expiration of its term of existence shall revert to and be assumed by the
National Government. (Emphasis supplied)
PSALM is limited to selling only NPC assets and IPP contracts of NPC. The sale
of NPC assets by PSALM is not "in the course of trade or business" but purely
for the specific purpose of privatizing NPC assets in order to liquidate all NPC
financial obligations. PSALM is tasked to sell and privatize the NPC assets
within the term of its existence.60The EPIRA law even requires PSALM to submit
a plan for the endorsement by the Joint Congressional Power Commission and
the approval of the President of the total privatization of the NPC assets and IPP
contracts. Section 47 of the EPIRA law provides:
SEC 47. NPC Privatization. - Except for the assets of SPUG, the generation
assets, real estate, and other disposable assets as well as IPP contracts of NPC
shall be privatized in accordance with this Act. Within six (6) months from the
effectivity of this Act, the PSALM Corp. shall submit a plan for the endorsement
by the Joint Congressional Power Commission and the approval of the President
of the Philippines, on the total privatization of the generation assets, real estate,
other disposable assets as well as existing IPP contracts of NPC and thereafter,
implement the same, in accordance with the following guidelines, except as
provided for in Paragraph (f) herein:
(a) The privatization value to the National Government of the
NPC generation assets, real estate, other disposable assets as
well as IPP contracts shall be optimized;
(b) The participation by Filipino citizens and corporations in the
purchase of NPC assets shall be encouraged. In the case of
foreign investors, at least seventy-five percent (75%) of the funds
used to acquire NPC-generation assets and IPP contracts shall
be inwardly remitted and registered with the Bangko Sentral ng
Pilipinas;
(c) The NPC plants and/or its IPP contracts assigned to IPP
Administrators, its related assets and assigned liabilities, if any,
shall be grouped in a manner which shall promote the viability of
the resulting generation companies (gencos), ensure economic
efficiency, encourage competition, foster reasonable electricity
rates and create market appeal to optimize returns to the
government from the sale and disposition of such assets in a
manner consistent with the objectives of this Act. In the grouping
of the generation assets and IPP contracts of NPC, the following
criteria shall be considered:
(1) A sufficient scale of operations and balance sheet
strength to promote the financial viability of the
restructured units;
(2) Broad geographical groupings to ensure efficiency of
operations but without the formation of regional
companies or consolidation of market power;
(3) Portfolio of plants and IPP contracts to achieve
management and operational synergy without dominating
any part of the market or the load curve; and
(4) Such other factors as may be deemed beneficial to
the best interest of the National Government while
ensuring attractiveness to potential investors.
(d) All assets of NPC shall be sold in open and transparent
manner through public bidding, and the same shall apply to the
disposition of IPP contracts;
(e) In cases of transfer of possession, control, operation or
privatization of multi-purpose hydro facilities, safeguards shall be
prescribed to ensure that the national government may direct
water usage in cases of shortage to protect potable water,
irrigation, and all other requirements imbued with public interest;
(f) The Agus and Pulangi complexes in Mindanao shall be
excluded from an1ong the generation companies that will be
initially privatized. Their ownership shall be transferred to the
PSALM Corp. and both shall continue to be operated by the
NPC. Said complexes may be privatized not earlier than ten (10)
years from the effectivity of this Act, and, except for Agus Ill, shall
not be subject to BuildOperate-Transfer (B-0-T), Build-
Rehabilitate-OperateTransfer (B-R-0-T) and other variations
thereof pursuant to Republic Act No. 6957. as amended by
Republic Act No. 7718. The privatization of Agus and Pulangi
complexes hall be left to the discretion of PSALM Corp. in
consultation with Congress;
(g) The steamfield assets and generating plants of each
geothermal complex shall not be sold separately. They shall be
combined and each geothermal complex shall be sold as one
package through public bidding. The geothermal complexes
covered by this requirement include, but are not limited to, Tiwi-
Makban, Leyte A and B (Tongonan), Palinpinon, and Mt. Apo;
(h) The ownership of the Caliraya-Botokan-Kalayaan (CBK)
pump storage complex shall be transferred to the PSALM
Corporation;
(i) Not later than three (3) years from the effectivity of this Act,
and in no case later than the initial implementation of open
access, at least seventy percent (70%) of the total capacity of
generating assets of NPC and of the total capacity of the power
plants under contract with NPC located in Luzon and Visayas
spall have been privatized: Provided, That any unsold capacity
shall be privatized not later than eight (8) years from the
effectivity of this Act; and
(j) NPC may generate and sell electricity only from the
undisposed generating assets and IPP contracts of PSALM
Corp. and shall not incur any new obligations to purchase power
through bilateral contracts with generation companies or other
suppliers.
Thus, it is very clear that the sale of the power plants was an exercise of a
governmental function mandated by law for the primary purpose of
privatizing NPC assets in accordance with the guidelines imposed by the
EPIRA law.
In the 2006 case of Commissioner of Internal Revenue v. Magsaysay Lines, Inc.
(Magsaysay),61 the Court ruled that the sale of the vessels of the National
Development Company (NDC) to Magsaysay Lines, Inc. is not subject to VAT
since it was not in the course of trade or business, as it was involuntary and
made pursuant to the government's policy of privatization. The Court cited the
CT A ruling that the phrase "course of business" or "doing business" connotes
regularity of activity. Thus, since the sale of the vessels was an isolated
transaction, made pursuant to the government's privatization policy, and which
transaction could no longer be repeated or carried on with regularity, such sale
was not in the course of trade or business and was not subject to VAT.
Similarly, the sale of the power plants in this case is not subject to VAT since the
sale was made pursuant to PSALM' s mandate to privatize NPC assets, and was
not undertaken in the course of trade or business. In selling the power plants,
PSALM was merely exercising a governmental function for which it was created
under the EPIRA law.
The CIR argues that the Magsaysay case, which involved the sale in 1988 of
NDC vessels, is not applicable in this case since it was decided under the 1986
NIRC. The CIR maintains that under Section 105 of the 1997 NIRC, which
amended Section 9962 of the 1986 NIRC, the phrase "in the course of trade or
business" was expanded, and now covers incidental transactions. Since NPC
still owns the power plants and PSALM may only be considered as trustee of the
NPC assets, the sale of the power plants is considered an incidental transaction
which is subject to VAT.
We disagree with the CIR's position. PSALM owned the power plants which
were sold. PSALM's ownership of the NPC assets is clearly stated under
Sections 49, 51, and 55 of the EPIRA law. The pertinent provisions read:
SEC. 49. Creation of Power Sector Assets and Liabilities Management
Corporation. - There is hereby created a government-owned and -controlled
corporation to be known as the "Power Sector Assets and Liabilities
Management Corporation," hereinafter referred to as "PSALM Corp.,"
which shall take ownership of all existing NPC generation assets,
liabilities, IPP contracts, real estate and all other disposable assets. All
outstanding obligations of the NPC arising from loans, issuances of bonds,
securities and other instruments of indebtedness shall be transferred to and
assumed by the PSALM Corp. within one hundred eighty (180) days from the
approval of this Act.
SEC 51. Powers. - The Corporation shall, in the performance of its functions and
for the attainment of its objectives, have the following powers:
(a) To formulate and implement a program for the sale and
privatization of the NPC assets and IPP contracts and the
liquidation of the NPC debts and stranded costs, such liquidation
to be completed within the term of existence of the PSALM
Corp.;
(b) To take title to and possession of, administer and
conserve the assets transferred to it;to sell or dispose of the
same at such price and under such terms and conditions as it
may deem necessary or proper, subject to applicable laws, rules
and regulations;
xxxx
SEC. 55. Property of PSALM Corp. -The following funds, assets,
contributions and other property shall constitute the property of PSALM
Corp.:
(a) The generation assets, real estate, IPP contracts, other
disposable assets of NPC,proceeds from the sale or disposition
of such assets and residual assets from B-0-T, R-0-T, and other
variations thereof;
(b) Transfers from the National Government;
(c) Proceeds from loans incurred to restructure or refinance
NPC's transferred liabilities: Provided, however, That all
borrowings shall be fully paid for by the end of the life of the
PSALM Corp.;
(d) Proceeds from the universal charge allocated for stranded
contract costs and the stranded debts of the NPC;
(e) Net profit of NPC;
(f) Net profit of TRANSCO;
(g) Official assistance, grants, and donations from external
sources; and
(h) Other sources of funds as may be determined by PSALM
Corp. necessary for the above-mentioned purposes. (Emphasis
supplied)
Under the EPIRA law, the ownership of the generation assets, real estate, IPP
contracts, and other disposable assets of the NPC was transferred to PSALM.
Clearly, PSALM is not a mere trustee of the NPC assets but is the owner
thereof. Precisely, PSALM, as the owner of the NPC assets, is the government
entity tasked under the EPIRA law to privatize such NPC assets.
In the more recent case of Mindanao II Geothermal Partnership v.
Commissioner of Internal Revenue (Mindanao 11),63 which was decided under
the 1997 NIRC, the Court held that the sale of a fully depreciated vehicle that
had been used in Mindanao II's business was subject to VAT, even if such sale
may be considered isolated. The Court ruled that it does not follow that an
isolated transaction cannot be an incidental transaction for VAT purposes. The
Court then cited Section 105 of the 1997 NIRC which shows that a transaction
"in the course of trade or business" includes "transactions incidental thereto."
Thus, the Court held that the sale of the vehicle is an incidental transaction
made in the course of Mindanao II's business which should be subject to VAT.
The CIR alleges that the sale made by NPC and/or its successors-in-interest of
the power plants is an incidental transaction which should be subject to VAT.
This is erroneous. As previously discussed, the power plants are already owned
by PSALM, not NPC. Under the EPIRA law, the ownership of these power plants
was transferred to PSALM for sale, disposition, and privatization in order to
liquidate all NPC financial obligations. Unlike the Mindanao II case, the power
plants in this case were not previously used in PSALM's business. The power
plants, which were previously owned by NPC were transferred to PSALM for the
specific purpose of privatizing such assets. The sale of the power plants cannot
be considered as an incidental transaction made in the course of NPC's or
PSALM's business. Therefore, the sale of the power plants should not be subject
to VAT.
Hence, we agree with the Decisions dated 13 March 2008 and 14 January 2009
of the Secretary of Justice in OSJ Case No. 2007-3 that it was erroneous for the
BIR to hold PSALM liable for deficiency VAT in the amount of ₱3,813,080,472
for the sale of the Pantabangan-Masiway and Magat Power Plants. The
₱3,813,080,472 deficiency VAT remitted by PSALM under protest should
therefore be refunded to PSALM.
However, to give effect to Section 70, Chapter 14, Book IV of the Administrative
Code of 1987 on appeals from decisions of the Secretary of Justice, the BIR is
given an opportunity to appeal the Decisions dated 13 March 2008 and 14
January 2009 of the Secretary of Justice to the Office of the President within 10
days from finality of this Decision.64
WHEREFORE, we GRANT the petition. We SETASIDE the 27 September 2010
Decision and the 3 August 2011 Resolution of the Court of Appeals in CA-G.R.
SP No. 108156. The Decisions dated 13 March 2008 and 14 January 2009 of
the Secretary of Justice in OSJ Case No. 2007- 3 are REINSTATED. No costs.
G.R. No. 146984 July 28, 2006
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM LIMITED OF
THE MARDEN GROUP (HK) and NATIONAL DEVELOPMENT
COMPANY, respondents.
DECISION
TINGA, J.:
The issue in this present petition is whether the sale by the National
Development Company (NDC) of five (5) of its vessels to the private
respondents is subject to value-added tax (VAT) under the National Internal
Revenue Code of 1986 (Tax Code) then prevailing at the time of the sale. The
Court of Tax Appeals (CTA) and the Court of Appeals commonly ruled that the
sale is not subject to VAT. We affirm, though on a more unequivocal rationale
than that utilized by the rulings under review. The fact that the sale was not in
the course of the trade or business of NDC is sufficient in itself to declare the
sale as outside the coverage of VAT.
The facts are culled primarily from the ruling of the CTA.
Pursuant to a government program of privatization, NDC decided to sell to
private enterprise all of its shares in its wholly-owned subsidiary the National
Marine Corporation (NMC). The NDC decided to sell in one lot its NMC shares
and five (5) of its ships, which are 3,700 DWT Tween-Decker, "Kloeckner" type
vessels.1 The vessels were constructed for the NDC between 1981 and 1984,
then initially leased to Luzon Stevedoring Company, also its wholly-owned
subsidiary. Subsequently, the vessels were transferred and leased, on a
bareboat basis, to the NMC.2
The NMC shares and the vessels were offered for public bidding. Among the
stipulated terms and conditions for the public auction was that the winning bidder
was to pay "a value added tax of 10% on the value of the vessels." 3 On 3 June
1988, private respondent Magsaysay Lines, Inc. (Magsaysay Lines) offered to
buy the shares and the vessels for P168,000,000.00. The bid was made by
Magsaysay Lines, purportedly for a new company still to be formed composed of
itself, Baliwag Navigation, Inc., and FIM Limited of the Marden Group based in
Hongkong (collectively, private respondents). 4 The bid was approved by the
Committee on Privatization, and a Notice of Award dated 1 July 1988 was
issued to Magsaysay Lines.
On 28 September 1988, the implementing Contract of Sale was executed
between NDC, on one hand, and Magsaysay Lines, Baliwag Navigation, and
FIM Limited, on the other. Paragraph 11.02 of the contract stipulated that
"[v]alue-added tax, if any, shall be for the account of the PURCHASER."5 Per
arrangement, an irrevocable confirmed Letter of Credit previously filed as
bidders bond was accepted by NDC as security for the payment of VAT, if any.
By this time, a formal request for a ruling on whether or not the sale of the
vessels was subject to VAT had already been filed with the Bureau of Internal
Revenue (BIR) by the law firm of Sycip Salazar Hernandez & Gatmaitan,
presumably in behalf of private respondents. Thus, the parties agreed that
should no favorable ruling be received from the BIR, NDC was authorized to
draw on the Letter of Credit upon written demand the amount needed for the
payment of the VAT on the stipulated due date, 20 December 1988. 6
In January of 1989, private respondents through counsel received VAT Ruling
No. 568-88 dated 14 December 1988 from the BIR, holding that the sale of the
vessels was subject to the 10% VAT. The ruling cited the fact that NDC was a
VAT-registered enterprise, and thus its "transactions incident to its normal VAT
registered activity of leasing out personal property including sale of its own
assets that are movable, tangible objects which are appropriable or transferable
are subject to the 10% [VAT]."7
Private respondents moved for the reconsideration of VAT Ruling No. 568-88, as
well as VAT Ruling No. 395-88 (dated 18 August 1988), which made a similar
ruling on the sale of the same vessels in response to an inquiry from the
Chairman of the Senate Blue Ribbon Committee. Their motion was denied when
the BIR issued VAT Ruling Nos. 007-89 dated 24 February 1989, reiterating the
earlier VAT rulings. At this point, NDC drew on the Letter of Credit to pay for the
VAT, and the amount of P15,120,000.00 in taxes was paid on 16 March 1989.
On 10 April 1989, private respondents filed an Appeal and Petition for Refund
with the CTA, followed by a Supplemental Petition for Review on 14 July 1989.
They prayed for the reversal of VAT Rulings No. 395-88, 568-88 and 007-89, as
well as the refund of the VAT payment made amounting
to P15,120,000.00.8 The Commissioner of Internal Revenue (CIR) opposed the
petition, first arguing that private respondents were not the real parties in interest
as they were not the transferors or sellers as contemplated in Sections 99 and
100 of the then Tax Code. The CIR also squarely defended the VAT rulings
holding the sale of the vessels liable for VAT, especially citing Section 3 of
Revenue Regulation No. 5-87 (R.R. No. 5-87), which provided that "[VAT] is
imposed on any sale or transactions ‘deemed sale’ of taxable goods (including
capital goods, irrespective of the date of acquisition)." The CIR argued that the
sale of the vessels were among those transactions "deemed sale," as
enumerated in Section 4 of R.R. No. 5-87. It seems that the CIR particularly
emphasized Section 4(E)(i) of the Regulation, which classified "change of
ownership of business" as a circumstance that gave rise to a transaction
"deemed sale."
In a Decision dated 27 April 1992, the CTA rejected the CIR’s arguments and
granted the petition.9 The CTA ruled that the sale of a vessel was an "isolated
transaction," not done in the ordinary course of NDC’s business, and was thus
not subject to VAT, which under Section 99 of the Tax Code, was applied only to
sales in the course of trade or business. The CTA further held that the sale of
the vessels could not be "deemed sale," and thus subject to VAT, as the
transaction did not fall under the enumeration of transactions deemed sale as
listed either in Section 100(b) of the Tax Code, or Section 4 of R.R. No. 5-87.
Finally, the CTA ruled that any case of doubt should be resolved in favor of
private respondents since Section 99 of the Tax Code which implemented VAT
is not an exemption provision, but a classification provision which warranted the
resolution of doubts in favor of the taxpayer.
The CIR appealed the CTA Decision to the Court of Appeals, 10 which on 11
March 1997, rendered a Decision reversing the CTA. 11 While the appellate court
agreed that the sale was an isolated transaction, not made in the course of
NDC’s regular trade or business, it nonetheless found that the transaction fell
within the classification of those "deemed sale" under R.R. No. 5-87, since the
sale of the vessels together with the NMC shares brought about a change of
ownership in NMC. The Court of Appeals also applied the principle governing
tax exemptions that such should be strictly construed against the taxpayer, and
liberally in favor of the government. 12
However, the Court of Appeals reversed itself upon reconsidering the case,
through a Resolution dated 5 February 2001. 13 This time, the appellate court
ruled that the "change of ownership of business" as contemplated in R.R. No. 5-
87 must be a consequence of the "retirement from or cessation of business" by
the owner of the goods, as provided for in Section 100 of the Tax Code. The
Court of Appeals also agreed with the CTA that the classification of transactions
"deemed sale" was a classification statute, and not an exemption statute, thus
warranting the resolution of any doubt in favor of the taxpayer. 14
To the mind of the Court, the arguments raised in the present petition have
already been adequately discussed and refuted in the rulings assailed before us.
Evidently, the petition should be denied. Yet the Court finds that Section 99 of
the Tax Code is sufficient reason for upholding the refund of VAT payments, and
the subsequent disquisitions by the lower courts on the applicability of Section
100 of the Tax Code and Section 4 of R.R. No. 5-87 are ultimately irrelevant.
A brief reiteration of the basic principles governing VAT is in order. VAT is
ultimately a tax on consumption, even though it is assessed on many levels of
transactions on the basis of a fixed percentage. 15 It is the end user of consumer
goods or services which ultimately shoulders the tax, as the liability therefrom is
passed on to the end users by the providers of these goods or services 16 who in
turn may credit their own VAT liability (or input VAT) from the VAT payments
they receive from the final consumer (or output VAT).17 The final purchase by the
end consumer represents the final link in a production chain that itself involves
several transactions and several acts of consumption. The VAT system assures
fiscal adequacy through the collection of taxes on every level of
consumption,18 yet assuages the manufacturers or providers of goods and
services by enabling them to pass on their respective VAT liabilities to the next
link of the chain until finally the end consumer shoulders the entire tax liability.
Yet VAT is not a singular-minded tax on every transactional level. Its
assessment bears direct relevance to the taxpayer’s role or link in the production
chain. Hence, as affirmed by Section 99 of the Tax Code and its subsequent
incarnations,19 the tax is levied only on the sale, barter or exchange of goods or
services by persons who engage in such activities, in the course of trade or
business. These transactions outside the course of trade or business may
invariably contribute to the production chain, but they do so only as a matter of
accident or incident. As the sales of goods or services do not occur within the
course of trade or business, the providers of such goods or services would
hardly, if at all, have the opportunity to appropriately credit any VAT liability as
against their own accumulated VAT collections since the accumulation of output
VAT arises in the first place only through the ordinary course of trade or
business.
That the sale of the vessels was not in the ordinary course of trade or business
of NDC was appreciated by both the CTA and the Court of Appeals, the latter
doing so even in its first decision which it eventually reconsidered. 20 We cite with
approval the CTA’s explanation on this point:
In Imperial v. Collector of Internal Revenue, G.R. No. L-7924,
September 30, 1955 (97 Phil. 992), the term "carrying on business" does
not mean the performance of a single disconnected act, but means
conducting, prosecuting and continuing business by performing
progressively all the acts normally incident thereof; while "doing
business" conveys the idea of business being done, not from time to
time, but all the time. [J. Aranas, UPDATED NATIONAL INTERNAL
REVENUE CODE (WITH ANNOTATIONS), p. 608-9 (1988)]. "Course of
business" is what is usually done in the management of trade or
business. [Idmi v. Weeks & Russel, 99 So. 761, 764, 135 Miss. 65,
cited in Words & Phrases, Vol. 10, (1984)].
What is clear therefore, based on the aforecited jurisprudence, is that
"course of business" or "doing business" connotes regularity of activity.
In the instant case, the sale was an isolated transaction. The sale which
was involuntary and made pursuant to the declared policy of
Government for privatization could no longer be repeated or carried on
with regularity. It should be emphasized that the normal VAT-registered
activity of NDC is leasing personal property.21
This finding is confirmed by the Revised Charter 22 of the NDC which bears no
indication that the NDC was created for the primary purpose of selling real
property.23
The conclusion that the sale was not in the course of trade or business, which
the CIR does not dispute before this Court, 24 should have definitively settled the
matter. Any sale, barter or exchange of goods or services not in the course of
trade or business is not subject to VAT.
Section 100 of the Tax Code, which is implemented by Section 4(E)(i) of R.R.
No. 5-87 now relied upon by the CIR, is captioned "Value-added tax on sale of
goods," and it expressly states that "[t]here shall be levied, assessed and
collected on every sale, barter or exchange of goods, a value added tax x x x."
Section 100 should be read in light of Section 99, which lays down the general
rule on which persons are liable for VAT in the first place and on what
transaction if at all. It may even be noted that Section 99 is the very first
provision in Title IV of the Tax Code, the Title that covers VAT in the law. Before
any portion of Section 100, or the rest of the law for that matter, may be applied
in order to subject a transaction to VAT, it must first be satisfied that the
taxpayer and transaction involved is liable for VAT in the first place under
Section 99.
It would have been a different matter if Section 100 purported to define the
phrase "in the course of trade or business" as expressed in Section 99. If that
were so, reference to Section 100 would have been necessary as a means of
ascertaining whether the sale of the vessels was "in the course of trade or
business," and thus subject to
VAT. But that is not the case. What Section 100 and Section 4(E)(i) of R.R. No.
5-87 elaborate on is not the meaning of "in the course of trade or business," but
instead the identification of the transactions which may be deemed as sale. It
would become necessary to ascertain whether under those two provisions the
transaction may be deemed a sale, only if it is settled that the transaction
occurred in the course of trade or business in the first place. If the transaction
transpired outside the course of trade or business, it would be irrelevant for the
purpose of determining VAT liability whether the transaction may be deemed
sale, since it anyway is not subject to VAT.
Accordingly, the Court rules that given the undisputed finding that the
transaction in question was not made in the course of trade or business of the
seller, NDC that is, the sale is not subject to VAT pursuant to Section 99 of the
Tax Code, no matter how the said sale may hew to those transactions deemed
sale as defined under Section 100.
In any event, even if Section 100 or Section 4 of R.R. No. 5-87 were to find
application in this case, the Court finds the discussions offered on this point by
the CTA and the Court of Appeals (in its subsequent Resolution) essentially
correct. Section 4 (E)(i) of R.R. No. 5-87 does classify as among the
transactions deemed sale those involving "change of ownership of business."
However, Section 4(E) of R.R. No. 5-87, reflecting Section 100 of the Tax Code,
clarifies that such "change of ownership" is only an attending circumstance to
"retirement from or cessation of business[, ] with respect to all goods on hand
[as] of the date of such retirement or cessation." 25 Indeed, Section 4(E) of R.R.
No. 5-87 expressly characterizes the "change of ownership of business" as only
a "circumstance" that attends those transactions "deemed sale," which are
otherwise stated in the same section.26
WHEREFORE, the petition is DENIED. No costs.
SO ORDERED.
Quisumbing, Chairman, Carpio, Carpio-Morales, Velasco, Jr., J.J., concur.
G.R. No. 149073 February 16, 2005
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
CEBU TOYO CORPORATION, respondent.
DECISION
QUISUMBING, J.:
In its Decision1 dated July 6, 2001, the Court of Appeals, in CA-G.R. SP No.
60304, affirmed the Resolutionsdated May 31, 20002 and August 2, 2000,3 of the
Court of Tax Appeals (CTA) ordering the Commissioner of Internal Revenue
(CIR) to allow a partial refund or, alternatively, to issue a tax credit certificate in
favor of Cebu Toyo Corporation in the sum of ₱2,158,714.46, representing the
unutilized input value-added tax (VAT) payments.
The facts, as culled from the records, are as follows:
Respondent Cebu Toyo Corporation is a domestic corporation engaged in the
manufacture of lenses and various optical components used in television sets,
cameras, compact discs and other similar devices. Its principal office is located
at the Mactan Export Processing Zone (MEPZ) in Lapu-Lapu City, Cebu. It is a
subsidiary of Toyo Lens Corporation, a non-resident corporation organized
under the laws of Japan. Respondent is a zone export enterprise registered with
the Philippine Economic Zone Authority (PEZA), pursuant to the provisions of
Presidential Decree No. 66.4 It is also registered with the Bureau of Internal
Revenue (BIR) as a VAT taxpayer.5
As an export enterprise, respondent sells 80% of its products to its mother
corporation, the Japan-based Toyo Lens Corporation, pursuant to an Agreement
of Offsetting. The rest are sold to various enterprises doing business in the
MEPZ. Inasmuch as both sales are considered export sales subject to Value-
Added Tax (VAT) at 0% rate under Section 106(A)(2)(a)6 of the National Internal
Revenue Code, as amended, respondent filed its quarterly VAT returns from
April 1, 1996 to December 31, 1997 showing a total input VAT of ₱4,462,412.63.
On March 30, 1998, respondent filed with the Tax and Revenue Group of the
One-Stop Inter-Agency Tax Credit and Duty Drawback Center of the Department
of Finance, an application for tax credit/refund of VAT paid for the period April 1,
1996 to December 31, 1997 amounting to ₱4,439,827.21 representing excess
VAT input payments.
Respondent, however, did not bother to wait for the Resolution of its claim by the
CIR. Instead, on June 26, 1998, it filed a Petition for Review with the CTA to toll
the running of the two-year prescriptive period pursuant to Section 2307 of the
Tax Code.
Before the CTA, the respondent posits that as a VAT-registered exporter of
goods, it is subject to VAT at the rate of 0% on its export sales that do not result
in any output tax. Hence, the unutilized VAT input taxes on its purchases of
goods and services related to such zero-rated activities are available as tax
credits or refunds.
The petitioner’s position is that respondent was not entitled to a refund or tax
credit since: (1) it failed to show that the tax was erroneously or illegally
collected; (2) the taxes paid and collected are presumed to have been made in
accordance with law; and (3) claims for refund are strictly construed against the
claimant as these partake of the nature of tax exemption.
Initially, the CTA denied the petition for insufficiency of evidence. 8 The tax court
sustained respondent’s argument that it was a VAT-registered entity. It also
found that the petition was timely, as it was filed within the prescription period.
The CTA also ruled that the respondent’s sales to Toyo Lens Corporation and to
certain establishments in the Mactan Export Processing Zone were export sales
subject to VAT at 0% rate. It found that the input VAT covered by respondent’s
claim was not applied against any output VAT. However, the tax court decreed
that the petition should nonetheless be denied because of the respondent’s
failure to present documentary evidence to show that there were foreign
currency exchange proceeds from its export sales. The CTA also observed that
respondent failed to submit the approval by Bangko Sentral ng Pilipinas (BSP) of
its Agreement of Offsetting with Toyo Lens Corporation and the certification of
constructive inward remittance.
Undaunted, respondent filed on February 21, 2000, a Motion for
Reconsideration arguing that: (1) proof of its inward remittance was not
required by law; (2) BSP and BIR regulations do not require BSP approval on its
Agreement of Offsetting nor do they require certification on the amount
constructively remitted; (3) it was not legally required to prove foreign currency
payments on the remaining sales to MEPZ enterprises; and (4) it had complied
with the substantiation requirements under Section 106(A)(2)(a) of the Tax
Code. Hence, it was entitled to a refund of unutilized VAT input tax.
On May 31, 2000, the tax court partly granted the motion for reconsideration in
a Resolution, to wit:
WHEREFORE, finding the motion of petitioner to be meritorious, the same is
hereby partially granted. Accordingly, the Court hereby MODIFIES its decision in
the above-entitled case, the dispositive portion of which shall now read as
follows:
WHEREFORE, finding the petition for review partially meritorious, respondent is
hereby ORDERED to REFUND or, in the alternative, to ISSUE a TAX CREDIT
CERTIFICATE in favor of Petitioner in the amount of ₱2,158,714.46
representing unutilized input tax payments.
SO ORDERED.9
In granting partial reconsideration, the tax court found that there was no need for
BSP approval of the Agreement of Offsetting since the same may be
categorized as an inter-company open account offset arrangement. Hence, the
respondent need not present proof of foreign currency exchange proceeds from
its sales to MEPZ enterprises pursuant to Section 106(A)(2)(a)10 of the Tax Code.
However, the CTA stressed that respondent must still prove that there was an
actual offsetting of accounts to prove that constructive foreign currency
exchange proceeds were inwardly remitted as required under Section
106(A)(2)(a).
The CTA found that only the amount of Y274,043,858.00 covering respondent’s
sales to Toyo Lens Corporation and purchases from said mother company for
the period August 7, 1996 to August 26, 1997 were actually offset against
respondent’s related accounts receivable and accounts payable as shown by the
Agreement for Offsetting dated August 30, 1997. Resort to the respondent’s
Accounts Receivable and Accounts Payable subsidiary ledgers corroborated the
amount. The tax court also found that out of the total export sales for the period
April 1, 1996 to December 31, 1997 amounting to Y700,654,606.15,
respondent’s sales to MEPZ enterprises amounted only to Y136,473,908.05 of
said total. Thus, allocating the input taxes supported by receipts to the export
sales, the CTA determined that the refund/credit amounted to only
₱2,158,714.46,11 computed as follows:
Total Input Taxes Claimed by
₱4,439,827.21
respondent
Less: Exceptions made by SGV
a.) 1996 ₱651,256.17
 b.) 1997 104,129.13 755,385.30 respondent has availed of the income tax holiday incentive under Executive
Order No. 226 or the Omnibus Investment Code of 1987 pursuant to Section
Validly Supported Input Taxes ₱3,684,441.91 2318 of Rep. Act No. 7916. The tax court pointed out that E.O. No. 226 granted
PEZA-registered enterprises an exemption from payment of income taxes for 4
Allocation: or 6 years depending on whether the registration was as a pioneer or as a non-
pioneer enterprise, but subject to other national taxes including VAT.
Verified Zero-Rated Sales

a.) Toyo Lens Corporation
b.) MEPZ Enterprises
Divided by Total Zero-Rated
Sales
Quotient
Y274,043,858.00 The petitioner then filed a Petition for Review with the Court of Appeals (CA),
docketed as CA-G.R. SP No. 60304, praying for the reversal of the CTA
136,473,908.05 Y410,517,766.05 Resolutions dated May 31, 2000 and August 2, 2000, and reiterating its claim
that respondent is not entitled to a refund of input taxes since it is VAT-exempt.
Y700,654,606.15
On July 6, 2001, the appellate court decided CA-G.R. SP No. 60304 in
0.5859 respondent’s favor, thus:

Multiply by Allowable Input Tax ₱3,684,441.91 WHEREFORE, finding no merit in the petition, this Court DISMISSES it and
AFFIRMS the Resolutions dated May 31, 2000 and August 2, 2000 . . . of the
Amount Refundable ₱2,158,714.[52]12 Court of Tax Appeals.

On June 21, 2000, petitioner Commissioner filed a Motion for SO ORDERED.19

Reconsideration arguing that respondent was not entitled to a refund because
as a PEZA-registered enterprise, it was not subject to VAT pursuant to Section
2413 of Republic Act No. 7916,14 as amended by Rep. Act No. 8748.15 Thus, since
respondent was not subject to VAT, the Commissioner contended that the
capital goods it purchased must be deemed not used in VAT taxable business
and therefore it was not entitled to refund of input taxes on such capital goods
pursuant to Section 4.106-1 of Revenue Regulations No. 7-95.16
Petitioner filed a Motion for Reconsideration on June 21, 2000 based on the
following theories: (1) that respondent being registered with the PEZA as an
ecozone enterprise is not subject to VAT pursuant to Sec. 24 of Rep. Act No.
7916; and (2) since respondent’s business is not subject to VAT, the capital
goods it purchased are considered not used in a VAT taxable business and
The Court of Appeals found no reason to set aside the conclusions of the Court
of Tax Appeals. The appellate court held as untenable herein petitioner’s
argument that respondent is not entitled to a refund because it is VAT-exempt
since the evidence showed that it is a VAT-registered enterprise subject to VAT
at the rate of 0%. It agreed with the ruling of the tax court that respondent had
two options under Section 23 of Rep. Act No. 7916, namely: (1) to avail of an
income tax holiday under E.O. No. 226 and be subject to VAT at the rate of 0%;
or (2) to avail of the 5% preferential tax under P.D. No. 66 and enjoy VAT
exemption. Since respondent availed of the incentives under E.O. No. 226, then
the 0% VAT rate would be applicable to it and any unutilized input VAT should
be refunded to respondent upon proper application with and substantiation by
the BIR.1awphi1.nét

therefore is not entitled to a refund of input taxes. 17

The respondent opposed the Commissioner’s Motion for Reconsideration and
prayed that the CTA resolution be modified so as to grant it the entire amount of
tax refund or credit it was seeking.
On August 2, 2000, the Court of Tax Appeals denied the petitioner’s motion for
reconsideration. It held that the grounds relied upon were only raised for the first
time and that Section 24 of Rep. Act No. 7916 was not applicable since
Hence, the instant petition for review now before us, with herein petitioner
alleging that:
I. RESPONDENT BEING REGISTERED WITH THE PHILIPPINE ECONOMIC
ZONE AUTHORITY (PEZA) AS AN ECOZONE EXPORT ENTERPRISE, ITS
BUSINESS IS NOT SUBJECT TO VAT PURSUANT TO SECTION 24 OF
REPUBLIC ACT NO. 7916 IN RELATION TO SECTION 103 OF THE TAX
CODE, AS AMENDED BY RA NO. 7716.
II. SINCE RESPONDENT’S BUSINESS IS NOT SUBJECT TO VAT, IT IS NOT
ENTITLED TO REFUND OF INPUT TAXES PURSUANT TO SECTION 4.103-1
OF REVENUE REGULATIONS NO. 7-95.20
In our view, the main issue for our resolution is whether the Court of Appeals
erred in affirming the Court of Tax Appeals resolution granting a refund in the
amount of ₱2,158,714.46 representing unutilized input VAT on goods and
services for the period April 1, 1996 to December 31, 1997.
Both the Commissioner of Internal Revenue and the Office of the Solicitor
General argue that respondent Cebu Toyo Corporation, as a PEZA-registered
enterprise, is exempt from national and local taxes, including VAT, under
Section 24 of Rep. Act No. 7916 and Section 10921 of the NIRC. Thus, they
contend that respondent Cebu Toyo Corporation is not entitled to any refund or
credit on input taxes it previously paid as provided under Section 4.103-122 of
Revenue Regulations No. 7-95, notwithstanding its registration as a VAT
taxpayer. For petitioner claims that said registration was erroneous and did not
confer upon the respondent any right to claim recognition of the input tax credit.
The respondent counters that it availed of the income tax holiday under E.O. No.
226 for four years from August 7, 1995 making it exempt from income tax but not
from other taxes such as VAT. Hence, according to respondent, its export sales
are not exempt from VAT, contrary to petitioner’s claim, but its export sales is
subject to 0% VAT. Moreover, it argues that it was able to establish through a
report certified by an independent Certified Public Accountant that the input
taxes it incurred from April 1, 1996 to December 31, 1997 were directly
attributable to its export sales. Since it did not have any output tax against which
said input taxes may be offset, it had the option to file a claim for refund/tax
credit of its unutilized input taxes.
Considering the submission of the parties and the evidence on record, we find
the petition bereft of merit.
Petitioner’s contention that respondent is not entitled to refund for being exempt
from VAT is untenable. This argument turns a blind eye to the fiscal incentives
granted to PEZA-registered enterprises under Section 23 of Rep. Act No. 7916.
Note that under said statute, the respondent had two options with respect to its
tax burden. It could avail of an income tax holiday pursuant to provisions of E.O.
No. 226, thus exempt it from income taxes for a number of years but not from
other internal revenue taxes such as VAT; or it could avail of the tax exemptions
on all taxes, including VAT under P.D. No. 66 and pay only the preferential tax
rate of 5% under Rep. Act No. 7916. Both the Court of Appeals and the Court of
Tax Appeals found that respondent availed of the income tax holiday for four (4)
years starting from August 7, 1995, as clearly reflected in its 1996 and 1997
Annual Corporate Income Tax Returns, where respondent specified that it was
availing of the tax relief under E.O. No. 226. Hence, respondent is not exempt
from VAT and it correctly registered itself as a VAT taxpayer. In fine, it is
engaged in taxable rather than exempt transactions.
Taxable transactions are those transactions which are subject to value-added
tax either at the rate of ten percent (10%) or zero percent (0%). In taxable
transactions, the seller shall be entitled to tax credit for the value-added tax paid
on purchases and leases of goods, properties or services. 23
An exemption means that the sale of goods, properties or services and the use
or lease of properties is not subject to VAT (output tax) and the seller is not
allowed any tax credit on VAT (input tax) previously paid. The person making the
exempt sale of goods, properties or services shall not bill any output tax to his
customers because the said transaction is not subject to VAT. Thus, a VAT-
registered purchaser of goods, properties or services that are VAT-exempt, is
not entitled to any input tax on such purchases despite the issuance of a VAT
invoice or receipt.24
Now, having determined that respondent is engaged in taxable transactions
subject to VAT, let us then proceed to determine whether it is subject to 10% or
zero (0%) rate of VAT. To begin with, it must be recalled that generally, sale of
goods and supply of services performed in the Philippines are taxable at the rate
of 10%. However, export sales, or sales outside the Philippines, shall be subject
to value-added tax at 0% if made by a VAT-registered person.25Under the value-
added tax system, a zero-rated sale by a VAT-registered person, which is a
taxable transaction for VAT purposes, shall not result in any output tax.
However, the input tax on his purchase of goods, properties or services related
to such zero-rated sale shall be available as tax credit or refund. 26
1awphi1.nét
In principle, the purpose of applying a zero percent (0%) rate on a taxable
transaction is to exempt the transaction completely from VAT previously
collected on inputs. It is thus the only true way to ensure that goods are provided
free of VAT. While the zero rating and the exemption are computationally the
same, they actually differ in several aspects, to wit:
(a) A zero-rated sale is a taxable transaction but does not result in an
output tax while an exempted transaction is not subject to the output tax;
 (b) The input VAT on the purchases of a VAT-registered person with
zero-rated sales may be allowed as tax credits or refunded while the
seller in an exempt transaction is not entitled to any input tax on his
purchases despite the issuance of a VAT invoice or receipt.

(c) Persons engaged in transactions which are zero-rated, being subject

to VAT, are required to register while registration is optional for VAT-
exempt persons.

In this case, it is undisputed that respondent is engaged in the export business

and is registered as a VAT taxpayer per Certificate of Registration of the
BIR.27 Further, the records show that the respondent is subject to VAT as it
availed of the income tax holiday under E.O. No. 226. Perforce, respondent is
subject to VAT at 0% rate and is entitled to a refund or credit of the unutilized
input taxes, which the Court of Tax Appeals computed at ₱2,158,714.46, but
which we find—after recomputation—should be ₱2,158,714.52.

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

WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision
l^vvphi1.net

dated July 6, 2001 of the Court of Appeals, in CA-G.R. SP No. 60304 is

AFFIRMED with very slight modification. Petitioner is hereby ORDERED to
REFUND or, in the alternative, to ISSUE a TAX CREDIT CERTIFICATE in favor
of respondent in the amount of ₱2,158,714.52 representing unutilized input tax
payments. No pronouncement as to costs.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concur.