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G.R. No.

180345 November 25, 2009

SAN ROQUE POWER CORPORATION, Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

CHICO-NAZARIO, J.:

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

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

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

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


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

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

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

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

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

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

Period Covered Date Filed Particulars Amount

1st Quarter April 20, Tax Due for the Quarter (Box 13C) P 26,247.27
2002
(January 1, Input Tax carried over from previous qtr 296,124,429.21
2002 to (22B)

Input VAT on Domestic Purchases for


March 31, the Qtr
2002)
(22D) 95,003,348.91

Input VAT on Importation of Goods for


the Qtr

(22F) 20,758,668.00

Total Available Input tax (23) 411,886,446.12

VAT Refund/TCC Claimed (24A) 173,909,435.66

Net Creditable Input Tax (25) 237,977,010.46

VAT payable (Excess Input Tax) (26) (237,950,763.19)

Tax Payable (overpayment) (28) (237,950,763.19)

Tax Due for the Quarter (Box 13C) P blank


Input Tax carried over from previous qtr 237,950,763.19
(22B)

Input VAT on Domestic Purchases for


the Qtr

(22D) 65,206,499.83
2nd Quarter Input VAT on Importation of Goods for
the Qtr
July 24,
(April 1, 2002 to
2002 (22F) 18,485,758.00
June 30, 2002) Total Available Input tax (23) 321,643,021.02

VAT Refund/TCC Claimed (24A) 237,950,763.19

Net Creditable Input Tax (25) 83,692,257.83

VAT payable (Excess Input Tax) (26) (83,692,257.83)

Tax Payable (overpayment) (28) (83,692,257.83)


3rd Quarter October 25, Tax Due for the Quarter (Box 13C) P blank
2002 Input Tax carried over from previous qtr 199,428,027.47
(July 1, 2002 to (22B)
Input VAT on Domestic Purchases for the
September 30, Qtr
2002) (22D) 28,924,020.79
Input VAT on Importation of Goods for the
Qtr
(22F) 1,465,875.00
Total Available Input tax (23) 229,817,923.26
VAT Refund/TCC Claimed (24A) Blank
Net Creditable Input Tax (25) 229,817,923.26
VAT payable (Excess Input Tax) (26) (229,817,923.26)
Tax Payable (overpayment) (28) (229,817,923.26)
4th Quarter January 23, Tax Due for the Quarter (Box 13C) P 34,996.36
2003 Input Tax carried over from previous qtr 114,082,153.62
(October 1, 2002 (22B)
to
Input VAT on Domestic Purchases for the
Qtr
December 31,
2002) (22D) 18,166,330.54
Input VAT on Importation of Goods for the
Qtr
(22F) 2,308,837.00
Total Available Input tax (23) 134,557,321.16
VAT Refund/TCC Claimed (24A) 83,692,257.83
Net Creditable Input Tax (25) 50,865,063.33
VAT payable (Excess Input Tax) (26) (50,830,066.97)
Tax Payable (overpayment) (28) (50,830,066.97)

On 19 June 2002, 25 October 2002, 27 February 2003, and 29 May 2003, petitioner filed with the
BIR four separate administrative claims for refund of Unutilized Input VAT paid for the period
January to March 2002, April to June 2002, July to September 2002, and October to December
2002, respectively. In these letters addressed to the BIR, Carlos Echevarria (Echevarria), the Vice
President and Director of Finance of petitioner, explained that petitioner’s sale of power to NPC are
subject to VAT at zero percent rate, in accordance with Section 108(B)(3) of the NIRC.10 Petitioner
sought to recover the total amount of ₱250,258,094.25, representing its unutilized excess VAT on its
importation of capital and other taxable goods and services for the year 2002, broken down as
follows11 :

Qtr Output Tax Input Tax

Involved

Domestic Purchases Importations Excess Input


Tax

(A) (B) (C) (D) = (B) + (C) –


(A)

1st P 26,247.27 P95,003,348.91 P20,758,668.00 P115,735,769.84

2nd - 65,206,499.83 18,485,758.00 83,692,257.83

3rd - 28,924,020.79 1,465,875.00 30,389,895.79

4th 34,996.36 18,166,330.54 2,308,837.00 20,440,171.18

P61,243.63 P207,300,200.07 P43,019,138.00 P250,258,094.44

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

Period Covered Date Filed Particulars Amount

1st Quarter April 24, Tax Due for the Quarter (Box 13C) P 26,247.27
2003
(January 1, 2002 Input Tax carried over from previous qtr 297,719,296.25
to (22B)

Input VAT on Domestic Purchases for


March 31, 2002) the Qtr

(22D) 95,126,981.69

(22F) 20,758,668.00

Total Available Input tax (23) 413,604,945.94


VAT Refund/TCC Claimed (24A) 175,544,002.27

Net Creditable Input Tax (25) 175,544,002.27

VAT payable (Excess Input Tax) (26) (238,060,943.67)

Tax Payable (overpayment) (28) (238,034,696.40)

2nd Quarter April 24, Tax Due for the Quarter (Box 13C) P blank
2003
(April 1, 2002 to Input Tax carried over from previous qtr 238,034,696.40
(22B)
June 30, 2002) Input VAT on Domestic Purchases for
the Qtr

(22D) 65,206,499.83

Input VAT on Importation of Goods for


the Qtr

(22F) 18,485,758.00

Total Available Input tax (23) 321,643,021.02

VAT Refund/TCC Claimed (24A) 237,950,763.19

Net Creditable Input Tax (25) 83,692,257.83

VAT payable (Excess Input Tax) (26) (83,692,257.83)

Tax Payable (overpayment) (28) (83,692,257.83)

3rd Quarter October 25, Tax Due for the Quarter (Box 13C) P blank
2002
(July 1, 2002 to Input Tax carried over from previous qtr 83,692,257.83
(22B)
September 30, Input VAT on Domestic Purchases for
2002) the Qtr

(22D) 28,924,020.79

Input VAT on Importation of Goods for


the Qtr

(22F) 1,465,875.00

Total Available Input tax (23) 114,082,153.62

VAT Refund/TCC Claimed (24A) Blank

Net Creditable Input Tax (25) 114,082,153.62

VAT payable (Excess Input Tax) (26) (114,082,153.62)

Tax Payable (overpayment) (28) (114,082,153.62)


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

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

Qtr Date Filed Output Tax Input Tax

Involved

Domestic Importations Excess Input Tax


Purchases

(A) (B) (C) (D) = (B) + (C) –(A)

1st 30-May-03 P P95,126,981.69 P20,758,668.00 P115,859,402.42


26,247.27

2nd 25-Oct-02 - 65,206,499.83 18,185,758.00 83,692,257.83

3rd 27-Feb-03 - 28,924,920.79 1,465,875,00 30,389,895.79

4th 31-Jul-03 34,996.36 17,918,056.50 1,573,004.00 19,456,064.14

P61,243.63 P207,175,558.81 P42,283,305.00 P249,397,620.18

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

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

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

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


zero percent (0%) rate;

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

3. Whether or not petitioner’s importation and purchases of capital goods and related
services are within the scope and meaning of "capital goods" under Revenue
Regulations No. 7-95;

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

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

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

Simply put, the issue is: whether or not petitioner is entitled to refund or tax credit in the amount of
₱249,397,620.18 representing its unutilized input VAT paid on importation and purchases of capital
and other taxable goods and services from January 1 to December 31, 2002.

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

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

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

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

WHEREFORE, premises considered, the instant petition is hereby DISMISSED. Accordingly, the
assailed Decision and Resolution are hereby AFFIRMED.20

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

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

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

II

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

The present Petition is meritorious.


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(2) Distribution or transfer to:

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


persons; or

(b) Creditors in payment of debt;

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

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


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

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

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

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

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

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

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

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

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

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

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

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

(d) From all taxes, duties, fees, imposts, and all other charges imposed by the
Republic of the Philippines, its provinces, cities, municipalities and other government
agencies and instrumentalities, on all petroleum products used by the corporation in
the generation, transmission, utilization, and sale of electric power.
To limit the exemption granted to the NPC to direct taxes, notwithstanding the general and broad
language of the statute will be to thwart the legislative intention in giving exemption from all forms of
taxes and impositions, without distinguishing between those that are direct and those that are not.37

Congress granted NPC a comprehensive tax exemption because of the significant public interest
involved. This is enunciated in Section 1 of Republic Act No. 6395:

Section 1. Declaration of Policy. Congress hereby declares that (1) the comprehensive development,
utilization and conservation of Philippine water resources for all beneficial uses, including power
generation, and (2) the total electrification of the Philippines through the development of power from
all sources to meet the needs of industrial development and dispersal and the needs of rural
electrification are primary objectives of the nation which shall be pursued coordinately and supported
by all instrumentalities and agencies of government, including its financial institutions.

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

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

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

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

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

Having decided that petitioner is entitled to claim refund or tax credit under Section 112(A) of the
NIRC or on the basis of effectively zero-rated sales in the amount of ₱246,131,610.40, there is no
more need to establish its right to make the same claim under Section 112(B) of the NIRC or on the
basis of purchase of capital goods.
Finally, respondent contends that according to well-established doctrine, a tax refund, which is in the
nature of a tax exemption, should be construed strictissimi juris against the taxpayer.38 However,
when the claim for refund has clear legal basis and is sufficiently supported by evidence, as in the
present case, then the Court shall not hesitate to grant the same.39

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

SO ORDERED.

MINITA V. CHICO-NAZARIO
Associate Justice
G.R. No. 178697 November 17, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,


vs.
SONY PHILIPPINES, INC., Respondent.

DECISION

MENDOZA, J.:

This petition for review on certiorari seeks to set aside the May 17, 2007 Decision and the July 5,
2007 Resolution of the Court of Tax Appeals – En Banc1 (CTA-EB), in C.T.A. EB No. 90, affirming
the October 26, 2004 Decision of the CTA-First Division2 which, in turn, partially granted the petition
for review of respondent Sony Philippines, Inc. (Sony). The CTA-First Division decision cancelled the
deficiency assessment issued by petitioner Commissioner of Internal Revenue (CIR) against Sony
for Value Added Tax (VAT) but upheld the deficiency assessment for expanded withholding tax
(EWT) in the amount of ₱1,035,879.70 and the penalties for late remittance of internal revenue taxes
in the amount of ₱1,269, 593.90.3

THE FACTS:

On November 24, 1998, the CIR issued Letter of Authority No. 000019734 (LOA 19734) authorizing
certain revenue officers to examine Sony’s books of accounts and other accounting records
regarding revenue taxes for "the period 1997 and unverified prior years." On December 6, 1999,
a preliminary assessment for 1997 deficiency taxes and penalties was issued by the CIR which Sony
protested. Thereafter, acting on the protest, the CIR issued final assessment notices, the formal
letter of demand and the details of discrepancies.4 Said details of the deficiency taxes and penalties
for late remittance of internal revenue taxes are as follows:

DEFICIENCY VALUE -ADDED TAX (VAT)


(Assessment No. ST-VAT-97-0124-2000)
Basic Tax Due P 7,958,700.00
Add: Penalties
Interest up to 3-31-2000 P 3,157,314.41
Compromise 25,000.00 3,182,314.41
Deficiency VAT Due P 11,141,014.41

DEFICIENCY EXPANDED WITHHOLDING TAX (EWT)


(Assessment No. ST-EWT-97-0125-2000)
Basic Tax Due P 1,416,976.90
Add: Penalties
Interest up to 3-31-2000 P 550,485.82
Compromise 25,000.00 575,485.82
Deficiency EWT Due P 1,992,462.72

DEFICIENCY OF VAT ON ROYALTY PAYMENTS


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

LATE REMITTANCE OF FINAL WITHHOLDING TAX


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

LATE REMITTANCE OF INCOME PAYMENTS


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

GRAND TOTAL P 15,895,632.655


Sony sought re-evaluation of the aforementioned assessment by filing a protest on February 2,
2000. Sony submitted relevant documents in support of its protest on the 16th of that same month.6

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

After trial, the CTA-First Division disallowed the deficiency VAT assessment because the subsidized
advertising expense paid by Sony which was duly covered by a VAT invoice resulted in an input VAT
credit. As regards the EWT, the CTA-First Division maintained the deficiency EWT assessment on
Sony’s motor vehicles and on professional fees paid to general professional partnerships. It also
assessed the amounts paid to sales agents as commissions with five percent (5%) EWT pursuant to
Section 1(g) of Revenue Regulations No. 6-85. The CTA-First Division, however, disallowed the
EWT assessment on rental expense since it found that the total rental deposit of ₱10,523,821.99
was incurred from January to March 1998 which was again beyond the coverage of LOA 19734.
Except for the compromise penalties, the CTA-First Division also upheld the penalties for the late
payment of VAT on royalties, for late remittance of final withholding tax on royalty as of December
1997 and for the late remittance of EWT by some of Sony’s branches.8 In sum, the CTA-First
Division partly granted Sony’s petition by cancelling the deficiency VAT assessment but upheld a
modified deficiency EWT assessment as well as the penalties. Thus, the dispositive portion reads:

WHEREFORE, the petition for review is hereby PARTIALLY GRANTED. Respondent is ORDERED
to CANCEL and WITHDRAW the deficiency assessment for value-added tax for 1997 for lack of
merit. However, the deficiency assessments for expanded withholding tax and penalties for late
remittance of internal revenue taxes are UPHELD.

Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency expanded withholding tax
in the amount of ₱1,035,879.70 and the following penalties for late remittance of internal revenue
taxes in the sum of ₱1,269,593.90:

1. VAT on Royalty P 429,242.07

2. Withholding Tax on Royalty 831,428.20

3. EWT of Petitioner's Branches 8,923.63

Total P 1,269,593.90

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

SO ORDERED.9

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

A. The Honorable Court committed reversible error in holding that petitioner is not
liable for the deficiency VAT in the amount of ₱11,141,014.41;

B. The Honorable court committed reversible error in holding that the commission
expense in the amount of P2,894,797.00 should be subjected to 5% withholding tax
instead of the 10% tax rate;
C. The Honorable Court committed a reversible error in holding that the withholding
tax assessment with respect to the 5% withholding tax on rental deposit in the
amount of ₱10,523,821.99 should be cancelled; and

D. The Honorable Court committed reversible error in holding that the remittance of
final withholding tax on royalties covering the period January to March 1998 was filed
on time.10

On April 28, 2005, the CTA-First Division denied the motion for reconsideration. Unfazed, the CIR
1avvphi1

filed a petition for review with the CTA-EB raising identical issues:

1. Whether or not respondent (Sony) is liable for the deficiency VAT in the amount of
P11,141,014.41;

2. Whether or not the commission expense in the amount of ₱2,894,797.00 should


be subjected to 10% withholding tax instead of the 5% tax rate;

3. Whether or not the withholding assessment with respect to the 5% withholding tax
on rental deposit in the amount of ₱10,523,821.99 is proper; and

4. Whether or not the remittance of final withholding tax on royalties covering the
period January to March 1998 was filed outside of time.11

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

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

GROUNDS FOR THE ALLOWANCE OF THE PETITION

THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS NOT LIABLE FOR
DEFICIENCY VAT IN THE AMOUNT OF PHP11,141,014.41.

II

AS TO RESPONDENT’S DEFICIENCY EXPANDED WITHHOLDING TAX IN THE AMOUNT OF


PHP1,992,462.72:

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


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

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


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

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

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

The Court finds no merit in the petition.

The CIR insists that LOA 19734, although it states "the period 1997 and unverified prior years,"
should be understood to mean the fiscal year ending in March 31, 1998.14 The Court cannot agree.

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

SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements
for Tax Administration and Enforcement. –

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

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

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

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

3. A Letter of Authority should cover a taxable period not exceeding one taxable year. The
practice of issuing L/As covering audit of "unverified prior years is hereby prohibited. If the audit of a
taxpayer shall include more than one taxable period, the other periods or years shall be specifically
indicated in the L/A.16 [Emphasis supplied]
On this point alone, the deficiency VAT assessment should have been disallowed. Be that as it may,
the CIR’s argument, that Sony’s advertising expense could not be considered as an input VAT credit
because the same was eventually reimbursed by Sony International Singapore (SIS), is also
erroneous.

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

The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed by the CTA-
EB, Sony’s deficiency VAT assessment stemmed from the CIR’s disallowance of the input VAT
credits that should have been realized from the advertising expense of the latter.18 It is evident under
Section 11019 of the 1997 Tax Code that an advertising expense duly covered by a VAT invoice is a
legitimate business expense. This is confirmed by no less than CIR’s own witness, Revenue Officer
Antonio Aluquin.20 There is also no denying that Sony incurred advertising expense. Aluquin testified
that advertising companies issued invoices in the name of Sony and the latter paid for the same.21
Indubitably, Sony incurred and paid for advertising expense/ services. Where the money came from
is another matter all together but will definitely not change said fact.

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

The fact that due to adverse economic conditions, Sony-Singapore has granted to our client a
subsidy equivalent to the latter’s advertising expenses will not affect the validity of the input taxes
from such expenses. Thus, at the most, this is an additional income of our client subject to income
tax. We submit further that our client is not subject to VAT on the subsidy income as this was not
derived from the sale of goods or services.22

Insofar as the above-mentioned subsidy may be considered as income and, therefore, subject to
income tax, the Court agrees. However, the Court does not agree that the same subsidy should be
subject to the 10% VAT. To begin with, the said subsidy termed by the CIR as reimbursement was
not even exclusively earmarked for Sony’s advertising expense for it was but an assistance or aid in
view of Sony’s dire or adverse economic conditions, and was only "equivalent to the latter’s (Sony’s)
advertising expenses."

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

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

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

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

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

Regarding the deficiency EWT assessment, more particularly Sony’s commission expense, the CIR
insists that said deficiency EWT assessment is subject to the ten percent (10%) rate instead of the
five percent (5%) citing Revenue Regulation No. 2-98 dated April 17, 1998.24 The said revenue
regulation provides that the 10% rate is applied when the recipient of the commission income is a
natural person. According to the CIR, Sony’s schedule of Selling, General and Administrative
expenses shows the commission expense as "commission/dealer salesman incentive," emphasizing
the word salesman.

On the other hand, the application of the five percent (5%) rate by the CTA-First Division is based on
Section 1(g) of Revenue Regulations No. 6-85 which provides:

(g) Amounts paid to certain Brokers and Agents. – On gross payments to customs, insurance, real
estate and commercial brokers and agents of professional entertainers – five per centum (5%).25

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

x x x, commission expense is indeed subject to 10% withholding tax but payments made to broker is
subject to 5% withholding tax pursuant to Section 1(g) of Revenue Regulations No. 6-85. While the
commission expense in the schedule of Selling, General and Administrative expenses submitted by
petitioner (SPI) to the BIR is captioned as "commission/dealer salesman incentive" the same does
not justify the automatic imposition of flat 10% rate. As itemized by petitioner, such expense is
composed of "Commission Expense" in the amount of P10,200.00 and ‘Broker Dealer’ of
P2,894,797.00.26

The Court agrees with the CTA-EB when it affirmed the CTA-First Division decision. Indeed, the
applicable rule is Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94,
which was the applicable rule during the subject period of examination and assessment as specified
in the LOA. Revenue Regulations No. 2-98, cited by the CIR, was only adopted in April 1998 and,
therefore, cannot be applied in the present case. Besides, the withholding tax on brokers and agents
was only increased to 10% much later or by the end of July 2001 under Revenue Regulations No. 6-
2001.27 Until then, the rate was only 5%.

The Court also affirms the findings of both the CTA-First Division and the CTA-EB on the deficiency
EWT assessment on the rental deposit. According to their findings, Sony incurred the subject rental
deposit in the amount of ₱10,523,821.99 only from January to March 1998. As stated earlier, in the
absence of the appropriate LOA specifying the coverage, the CIR’s deficiency EWT assessment
from January to March 1998, is not valid and must be disallowed.

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

The CIR initially assessed Sony to be liable for penalties for belated remittance of its FWT on
royalties (i) as of December 1997; and (ii) for the period from January to March 1998. Again, the
Court agrees with the CTA-First Division when it upheld the CIR with respect to the royalties for
December 1997 but cancelled that from January to March 1998.
The CIR insists that under Section 328 of Revenue Regulations No. 5-82 and Sections 2.57.4 and
2.58(A)(2)(a)29 of Revenue Regulations No. 2-98, Sony should also be made liable for the FWT on
royalties from January to March of 1998. At the same time, it downplays the relevance of the
Manufacturing License Agreement (MLA) between Sony and Sony-Japan, particularly in the
payment of royalties.

The above revenue regulations provide the manner of withholding remittance as well as the payment
of final tax on royalty. Based on the same, Sony is required to deduct and withhold final taxes on
royalty payments when the royalty is paid or is payable. After which, the corresponding return and
remittance must be made within 10 days after the end of each month. The question now is when
does the royalty become payable?

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

(5)Within two (2) months following each semi-annual period ending June 30 and December 31, the
LICENSEE shall furnish to the LICENSOR a statement, certified by an officer of the LICENSEE,
showing quantities of the MODELS sold, leased or otherwise disposed of by the LICENSEE during
such respective semi-annual period and amount of royalty due pursuant this ARTICLE X therefore,
and the LICENSEE shall pay the royalty hereunder to the LICENSOR concurrently with the
furnishing of the above statement.30

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

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

WHEREFORE, the petition is DENIED.

SO ORDERED.

JOSE CATRAL MENDOZA


Associate Justice
G.R. No. 183505 February 26, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,


vs.
SM PRIME HOLDINGS, INC. and FIRST ASIA REALTY DEVELOPMENT CORPORATION,
Respondents.

DECISION

DEL CASTILLO, J.:

When the intent of the law is not apparent as worded, or when the application of the law would lead
to absurdity or injustice, legislative history is all important. In such cases, courts may take judicial
notice of the origin and history of the law,1 the deliberations during the enactment,2 as well as prior
laws on the same subject matter3 to ascertain the true intent or spirit of the law.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court, in relation to Republic Act
(RA) No. 9282,4 seeks to set aside the April 30, 2008 Decision5 and the June 24, 2008 Resolution6 of
the Court of Tax Appeals (CTA).

Factual Antecedents

Respondents SM Prime Holdings, Inc. (SM Prime) and First Asia Realty Development Corporation
(First Asia) are domestic corporations duly organized and existing under the laws of the Republic of
the Philippines. Both are engaged in the business of operating cinema houses, among others.7

CTA Case No. 7079

On September 26, 2003, the Bureau of Internal Revenue (BIR) sent SM Prime a Preliminary
Assessment Notice (PAN) for value added tax (VAT) deficiency on cinema ticket sales in the amount
of ₱119,276,047.40 for taxable year 2000.8 In response, SM Prime filed a letter-protest dated
December 15, 2003.9

On December 12, 2003, the BIR sent SM Prime a Formal Letter of Demand for the alleged VAT
deficiency, which the latter protested in a letter dated January 14, 2004.10

On September 6, 2004, the BIR denied the protest filed by SM Prime and ordered it to pay the VAT
deficiency for taxable year 2000 in the amount of ₱124,035,874.12.11

On October 15, 2004, SM Prime filed a Petition for Review before the CTA docketed as CTA Case
No. 7079.12

CTA Case No. 7085

On May 15, 2002, the BIR sent First Asia a PAN for VAT deficiency on

cinema ticket sales for taxable year 1999 in the total amount of ₱35,823,680.93.13 First Asia
protested the PAN in a letter dated July 9, 2002.14

Subsequently, the BIR issued a Formal Letter of Demand for the alleged VAT deficiency which was
protested by First Asia in a letter dated December 12, 2002.15
On September 6, 2004, the BIR rendered a Decision denying the protest and ordering First Asia to
pay the amount of ₱35,823,680.93 for VAT deficiency for taxable year 1999.16

Accordingly, on October 20, 2004, First Asia filed a Petition for Review before the CTA, docketed as
CTA Case No. 7085.17

CTA Case No. 7111

On April 16, 2004, the BIR sent a PAN to First Asia for VAT deficiency on cinema ticket sales for
taxable year 2000 in the amount of ₱35,840,895.78. First Asia protested the PAN through a letter
dated April 22, 2004.18

Thereafter, the BIR issued a Formal Letter of Demand for alleged VAT deficiency.19 First Asia
protested the same in a letter dated July 9, 2004.20

On October 5, 2004, the BIR denied the protest and ordered First Asia to pay the VAT deficiency in
the amount of ₱35,840,895.78 for taxable year 2000.21

This prompted First Asia to file a Petition for Review before the CTA on December 16, 2004. The
case was docketed as CTA Case No. 7111.22

CTA Case No. 7272

Re: Assessment Notice No. 008-02

A PAN for VAT deficiency on cinema ticket sales for the taxable year 2002 in the total amount of
₱32,802,912.21 was issued against First Asia by the BIR. In response, First Asia filed a protest-letter
dated November 11, 2004. The BIR then sent a Formal Letter of Demand, which was protested by
First Asia on December 14, 2004.23

Re: Assessment Notice No. 003-03

A PAN for VAT deficiency on cinema ticket sales in the total amount of ₱28,196,376.46 for the
taxable year 2003 was issued by the BIR against First Asia. In a letter dated September 23, 2004,
First Asia protested the PAN. A Formal Letter of Demand was thereafter issued by the BIR to First
Asia, which the latter protested through a letter dated November 11, 2004. 24

On May 11, 2005, the BIR rendered a Decision denying the protests. It ordered First Asia to pay the
amounts of ₱33,610,202.91 and ₱28,590,826.50 for VAT deficiency for taxable years 2002 and
2003, respectively.25

Thus, on June 22, 2005, First Asia filed a Petition for Review before the CTA, docketed as CTA
Case No. 7272.26

Consolidated Petitions

The Commissioner of Internal Revenue (CIR) filed his Answers to the Petitions filed by SM Prime
and First Asia.27
On July 1, 2005, SM Prime filed a Motion to Consolidate CTA Case Nos. 7085, 7111 and 7272 with
CTA Case No. 7079 on the grounds that the issues raised therein are identical and that SM Prime is
a majority shareholder of First Asia. The motion was granted.28

Upon submission of the parties’ respective memoranda, the consolidated cases were submitted for
decision on the sole issue of whether gross receipts derived from admission tickets by
cinema/theater operators or proprietors are subject to VAT.29

Ruling of the CTA First Division

On September 22, 2006, the First Division of the CTA rendered a Decision granting the Petition for
Review. Resorting to the language used and the legislative history of the law, it ruled that the activity
of showing cinematographic films is not a service covered by VAT under the National Internal
Revenue Code (NIRC) of 1997, as amended, but an activity subject to amusement tax under RA
7160, otherwise known as the Local Government Code (LGC) of 1991. Citing House Joint
Resolution No. 13, entitled "Joint Resolution Expressing the True Intent of Congress with Respect to
the Prevailing Tax Regime in the Theater and Local Film Industry Consistent with the State’s Policy
to Have a Viable, Sustainable and Competitive Theater and Film Industry as One of its Partners in
National Development,"30 the CTA First Division held that the House of Representatives resolved
that there should only be one business tax applicable to theaters and movie houses, which is the
30% amusement tax imposed by cities and provinces under the LGC of 1991. Further, it held that
consistent with the State’s policy to have a viable, sustainable and competitive theater and film
industry, the national government should be precluded from imposing its own business tax in
addition to that already imposed and collected by local government units. The CTA First Division
likewise found that Revenue Memorandum Circular (RMC) No. 28-2001, which imposes VAT on
gross receipts from admission to cinema houses, cannot be given force and effect because it failed
to comply with the procedural due process for tax issuances under RMC No. 20-86.31 Thus, it
disposed of the case as follows:

IN VIEW OF ALL THE FOREGOING, this Court hereby GRANTS the Petitions for Review.
Respondent’s Decisions denying petitioners’ protests against deficiency value-added taxes are
hereby REVERSED. Accordingly, Assessment Notices Nos. VT-00-000098, VT-99-000057, VT-00-
000122, 003-03 and 008-02 are ORDERED cancelled and set aside.

SO ORDERED.32

Aggrieved, the CIR moved for reconsideration which was denied by the First Division in its
Resolution dated December 14, 2006.33

Ruling of the CTA En Banc

Thus, the CIR appealed to the CTA En Banc.34 The case was docketed as CTA EB No. 244.35 The
CTA En Banc however denied36 the Petition for Review and dismissed37 as well petitioner’s Motion
for Reconsideration.

The CTA En Banc held that Section 108 of the NIRC actually sets forth an exhaustive enumeration
of what services are intended to be subject to VAT. And since the showing or exhibition of motion
pictures, films or movies by cinema operators or proprietors is not among the enumerated activities
contemplated in the phrase "sale or exchange of services," then gross receipts derived by cinema/
theater operators or proprietors from admission tickets in showing motion pictures, film or movie are
not subject to VAT. It reiterated that the exhibition or showing of motion pictures, films, or movies is
instead subject to amusement tax under the LGC of 1991. As regards the validity of RMC No. 28-
2001, the CTA En Banc agreed with its First Division that the same cannot be given force and effect
for failure to comply with RMC No. 20-86.

Issue

Hence, the present recourse, where petitioner alleges that the CTA En Banc seriously erred:

(1) In not finding/holding that the gross receipts derived by operators/proprietors of cinema houses
from admission tickets [are] subject to the 10% VAT because:

(a) THE EXHIBITION OF MOVIES BY CINEMA


OPERATORS/PROPRIETORS TO THE PAYING PUBLIC IS A SALE OF
SERVICE;

(b) UNLESS EXEMPTED BY LAW, ALL SALES OF SERVICES ARE


EXPRESSLY SUBJECT TO VAT UNDER SECTION 108 OF THE NIRC OF
1997;

(c) SECTION 108 OF THE NIRC OF 1997 IS A CLEAR PROVISION OF


LAW AND THE APPLICATION OF RULES OF STATUTORY
CONSTRUCTION AND EXTRINSIC AIDS IS UNWARRANTED;

(d) GRANTING WITHOUT CONCEDING THAT RULES OF


CONSTRUCTION ARE APPLICABLE HEREIN, STILL THE HONORABLE
COURT ERRONEOUSLY APPLIED THE SAME AND PROMULGATED
DANGEROUS PRECEDENTS;

(e) THERE IS NO VALID, EXISTING PROVISION OF LAW EXEMPTING


RESPONDENTS’ SERVICES FROM THE VAT IMPOSED UNDER
SECTION 108 OF THE NIRC OF 1997;

(f) QUESTIONS ON THE WISDOM OF THE LAW ARE NOT PROPER


ISSUES TO BE TRIED BY THE HONORABLE COURT; and

(g) RESPONDENTS WERE TAXED BASED ON THE PROVISION OF


SECTION 108 OF THE NIRC.

(2) In ruling that the enumeration in Section 108 of the NIRC of 1997 is exhaustive in coverage;

(3) In misconstruing the NIRC of 1997 to conclude that the showing of motion pictures is merely
subject to the amusement tax imposed by the Local Government Code; and

(4) In invalidating Revenue Memorandum Circular (RMC) No. 28-2001.38

Simply put, the issue in this case is whether the gross receipts derived by operators or proprietors of
cinema/theater houses from admission tickets are subject to VAT.

Petitioner’s Arguments

Petitioner argues that the enumeration of services subject to VAT in Section 108 of the NIRC is not
exhaustive because it covers all sales of services unless exempted by law. He claims that the CTA
erred in applying the rules on statutory construction and in using extrinsic aids in interpreting Section
108 because the provision is clear and unambiguous. Thus, he maintains that the exhibition of
movies by cinema operators or proprietors to the paying public, being a sale of service, is subject to
VAT.

Respondents’ Arguments

Respondents, on the other hand, argue that a plain reading of Section 108 of the NIRC of 1997
shows that the gross receipts of proprietors or operators of cinemas/theaters derived from public
admission are not among the services subject to VAT. Respondents insist that gross receipts from
cinema/theater admission tickets were never intended to be subject to any tax imposed by the
national government. According to them, the absence of gross receipts from cinema/theater
admission tickets from the list of services which are subject to the national amusement tax under
Section 125 of the NIRC of 1997 reinforces this legislative intent. Respondents also highlight the fact
that RMC No. 28-2001 on which the deficiency assessments were based is an unpublished
administrative ruling.

Our Ruling

The petition is bereft of merit.

The enumeration of services subject to VAT under Section 108 of the NIRC is not exhaustive

Section 108 of the NIRC of the 1997 reads:

SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. —

(A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax
equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services,
including the use or lease of properties.

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

(1) The lease or the use of or the right or privilege to use any copyright, patent, design or model,
plan, secret formula or process, goodwill, trademark, trade brand or other like property or right;
xxxx

(7) The lease of motion picture films, films, tapes and discs; and

(8) The lease or the use of or the right to use radio, television, satellite transmission and cable
television time.

x x x x (Emphasis supplied)

A cursory reading of the foregoing provision clearly shows that the enumeration of the "sale or
exchange of services" subject to VAT is not exhaustive. The words, "including," "similar services,"
and "shall likewise include," indicate that the enumeration is by way of example only.39

Among those included in the enumeration is the "lease of motion picture films, films, tapes and
discs." This, however, is not the same as the showing or exhibition of motion pictures or films. As
pointed out by the CTA En Banc:

"Exhibition" in Black’s Law Dictionary is defined as "To show or display. x x x To produce anything in
public so that it may be taken into possession" (6th ed., p. 573). While the word "lease" is defined as
"a contract by which one owning such property grants to another the right to possess, use and enjoy
it on specified period of time in exchange for periodic payment of a stipulated price, referred to as
rent (Black’s Law Dictionary, 6th ed., p. 889). x x x40

Since the activity of showing motion pictures, films or movies by cinema/ theater operators or
proprietors is not included in the enumeration, it is incumbent upon the court to the determine
whether such activity falls under the phrase "similar services." The intent of the legislature must
therefore be ascertained.

The legislature never intended operators

or proprietors of cinema/theater houses to be covered by VAT

Under the NIRC of 1939,41 the national government imposed amusement tax on proprietors, lessees,
or operators of theaters, cinematographs, concert halls, circuses, boxing exhibitions, and other
places of amusement, including cockpits, race tracks, and cabaret.42 In the case of theaters or
cinematographs, the taxes were first deducted, withheld, and paid by the proprietors, lessees, or
operators of such theaters or cinematographs before the gross receipts were divided between the
proprietors, lessees, or operators of the theaters or cinematographs and the distributors of the
cinematographic films. Section 1143 of the Local Tax Code,44 however, amended this provision by
transferring the power to impose amusement tax45 on admission from theaters, cinematographs,
concert halls, circuses and other places of amusements exclusively to the local government. Thus,
when the NIRC of 197746 was enacted, the national government imposed amusement tax only on
proprietors, lessees or operators of cabarets, day and night clubs, Jai-Alai and race tracks.47

On January 1, 1988, the VAT Law48 was promulgated. It amended certain provisions of the NIRC of
1977 by imposing a multi-stage VAT to replace the tax on original and subsequent sales tax and
percentage tax on certain services. It imposed VAT on sales of services under Section 102 thereof,
which provides:

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

(1) Processing manufacturing or repacking goods for other persons doing business
outside the Philippines which goods are subsequently exported, x x x

xxxx

"Gross receipts" means the total amount of money or its equivalent


representing the contract price, compensation or service fee, including the
amount charged for materials supplied with the services and deposits or
advance payments actually or constructively received during the taxable
quarter for the service performed or to be performed for another person,
excluding value-added tax.

(b) Determination of the tax. — (1) Tax billed as a separate item in the
invoice. — If the tax is billed as a separate item in the invoice, the tax shall
be based on the gross receipts, excluding the tax.

(2) Tax not billed separately or is billed erroneously in the invoice. — If the tax is not
billed separately or is billed erroneously in the invoice, the tax shall be determined by
multiplying the gross receipts (including the amount intended to cover the tax or the
tax billed erroneously) by 1/11. (Emphasis supplied)

Persons subject to amusement tax under the NIRC of 1977, as amended, however, were exempted
from the coverage of VAT.49

On February 19, 1988, then Commissioner Bienvenido A. Tan, Jr. issued RMC 8-88, which clarified
that the power to impose amusement tax on gross receipts derived from admission tickets was
exclusive with the local government units and that only the gross receipts of amusement places
derived from sources other than from admission tickets were subject to amusement tax under the
NIRC of 1977, as amended. Pertinent portions of RMC 8-88 read:

Under the Local Tax Code (P.D. 231, as amended), the jurisdiction to levy amusement tax on gross
receipts arising from admission to places of amusement has been transferred to the local
governments to the exclusion of the national government.

xxxx

Since the promulgation of the Local Tax Code which took effect on June 28, 1973 none of the
amendatory laws which amended the National Internal Revenue Code, including the value added tax
law under Executive Order No. 273, has amended the provisions of Section 11 of the Local Tax
Code. Accordingly, the sole jurisdiction for collection of amusement tax on admission receipts in
places of amusement rests exclusively on the local government, to the exclusion of the national
government. Since the Bureau of Internal Revenue is an agency of the national government, then it
follows that it has no legal mandate to levy amusement tax on admission receipts in the said places
of amusement.

Considering the foregoing legal background, the provisions under Section 123 of the National
Internal Revenue Code as renumbered by Executive Order No. 273 (Sec. 228, old NIRC) pertaining
to amusement taxes on places of amusement shall be implemented in accordance with BIR
RULING, dated December 4, 1973 and BIR RULING NO. 231-86 dated November 5, 1986 to wit:

"x x x Accordingly, only the gross receipts of the amusement places derived from sources
other than from admission tickets shall be subject to x x x amusement tax prescribed under
Section 228 of the Tax Code, as amended (now Section 123, NIRC, as amended by E.O. 273).
The tax on gross receipts derived from admission tickets shall be levied and collected by the
city government pursuant to Section 23 of Presidential Decree No. 231, as amended x x x" or
by the provincial government, pursuant to Section 11 of P.D. 231, otherwise known as the
Local Tax Code. (Emphasis supplied)

On October 10, 1991, the LGC of 1991 was passed into law. The local government retained the
power to impose amusement tax on proprietors, lessees, or operators of theaters, cinemas, concert
halls, circuses, boxing stadia, and other places of amusement at a rate of not more than thirty
percent (30%) of the gross receipts from admission fees under Section 140 thereof.50 In the case of
theaters or cinemas, the tax shall first be deducted and withheld by their proprietors, lessees, or
operators and paid to the local government before the gross receipts are divided between said
proprietors, lessees, or operators and the distributors of the cinematographic films. However, the
provision in the Local Tax Code expressly excluding the national government from collecting tax
from the proprietors, lessees, or operators of theaters, cinematographs, concert halls, circuses and
other places of amusements was no longer included.

In 1994, RA 7716 restructured the VAT system by widening its tax base and enhancing its
administration. Three years later, RA 7716 was amended by RA 8241. Shortly thereafter, the NIRC
of 199751 was signed into law. Several amendments52 were made to expand the coverage of VAT.
However, none pertain to cinema/theater operators or proprietors. At present, only lessors or
distributors of cinematographic films are subject to VAT. While persons subject to amusement tax53
under the NIRC of 1997 are exempt from the coverage of VAT.54

Based on the foregoing, the following facts can be established:

(1) Historically, the activity of showing motion pictures, films or movies by


cinema/theater operators or proprietors has always been considered as a form of
entertainment subject to amusement tax.

(2) Prior to the Local Tax Code, all forms of amusement tax were imposed by the
national government.

(3) When the Local Tax Code was enacted, amusement tax on admission tickets
from theaters, cinematographs, concert halls, circuses and other places of
amusements were transferred to the local government.

(4) Under the NIRC of 1977, the national government imposed amusement tax only
on proprietors, lessees or operators of cabarets, day and night clubs, Jai-Alai and
race tracks.
(5) The VAT law was enacted to replace the tax on original and subsequent sales tax
and percentage tax on certain services.

(6) When the VAT law was implemented, it exempted persons subject to amusement
tax under the NIRC from the coverage of VAT. 1auuphil

(7) When the Local Tax Code was repealed by the LGC of 1991, the local
government continued to impose amusement tax on admission tickets from theaters,
cinematographs, concert halls, circuses and other places of amusements.

(8) Amendments to the VAT law have been consistent in exempting persons subject
to amusement tax under the NIRC from the coverage of VAT.

(9) Only lessors or distributors of cinematographic films are included in the coverage
of VAT.

These reveal the legislative intent not to impose VAT on persons already covered by the amusement
tax. This holds true even in the case of cinema/theater operators taxed under the LGC of 1991
precisely because the VAT law was intended to replace the percentage tax on certain services. The
mere fact that they are taxed by the local government unit and not by the national government is
immaterial. The Local Tax Code, in transferring the power to tax gross receipts derived by
cinema/theater operators or proprietor from admission tickets to the local government, did not intend
to treat cinema/theater houses as a separate class. No distinction must, therefore, be made between
the places of amusement taxed by the national government and those taxed by the local
government.

To hold otherwise would impose an unreasonable burden on cinema/theater houses operators or


proprietors, who would be paying an additional 10%55 VAT on top of the 30% amusement tax
imposed by Section 140 of the LGC of 1991, or a total of 40% tax. Such imposition would result in
injustice, as persons taxed under the NIRC of 1997 would be in a better position than those taxed
under the LGC of 1991. We need not belabor that a literal application of a law must be rejected if it
will operate unjustly or lead to absurd results.56 Thus, we are convinced that the legislature never
intended to include cinema/theater operators or proprietors in the coverage of VAT.

On this point, it is apropos to quote the case of Roxas v. Court of Tax Appeals,57 to wit:

The power of taxation is sometimes called also the power to destroy. Therefore, it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised
fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg." And, in order
to maintain the general public's trust and confidence in the Government this power must be used
justly and not treacherously.

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT

Petitioner, in issuing the assessment notices for deficiency VAT against respondents, ratiocinated
that:

Basically, it was acknowledged that a cinema/theater operator was then subject to amusement tax
under Section 260 of Commonwealth Act No. 466, otherwise known as the National Internal
Revenue Code of 1939, computed on the amount paid for admission. With the enactment of the
Local Tax Code under Presidential Decree (PD) No. 231, dated June 28, 1973, the power of
imposing taxes on gross receipts from admission of persons to cinema/theater and other places of
amusement had, thereafter, been transferred to the provincial government, to the exclusion of the
national or municipal government (Sections 11 & 13, Local Tax Code). However, the said provision
containing the exclusive power of the provincial government to impose amusement tax, had also
been repealed and/or deleted by Republic Act (RA) No. 7160, otherwise known as the Local
Government Code of 1991, enacted into law on October 10, 1991. Accordingly, the enactment of RA
No. 7160, thus, eliminating the statutory prohibition on the national government to impose business
tax on gross receipts from admission of persons to places of amusement, led the way to the valid
imposition of the VAT pursuant to Section 102 (now Section 108) of the old Tax Code, as amended
by the Expanded VAT Law (RA No. 7716) and which was implemented beginning January 1, 1996.58
(Emphasis supplied)

We disagree.

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT
on the gross receipts of cinema/theater operators or proprietors derived from admission tickets. The
removal of the prohibition under the Local Tax Code did not grant nor restore to the national
government the power to impose amusement tax on cinema/theater operators or proprietors. Neither
did it expand the coverage of VAT. Since the imposition of a tax is a burden on the taxpayer, it
cannot be presumed nor can it be extended by implication. A law will not be construed as imposing a
tax unless it does so clearly, expressly, and unambiguously.59 As it is, the power to impose
amusement tax on cinema/theater operators or proprietors remains with the local government.

Revenue Memorandum Circular No. 28-2001 is invalid

Considering that there is no provision of law imposing VAT on the gross receipts of cinema/theater
operators or proprietors derived from admission tickets, RMC No. 28-2001 which imposes VAT on
the gross receipts from admission to cinema houses must be struck down. We cannot
overemphasize that RMCs must not override, supplant, or modify the law, but must remain
consistent and in harmony with, the law they seek to apply and implement.60

In view of the foregoing, there is no need to discuss whether RMC No. 28-2001 complied with the
procedural due process for tax issuances as prescribed under RMC No. 20-86.

Rule on tax exemption does not apply

Moreover, contrary to the view of petitioner, respondents need not prove their entitlement to an
exemption from the coverage of VAT. The rule that tax exemptions should be construed strictly
against the taxpayer presupposes that the taxpayer is clearly subject to the tax being levied against
him.61 The reason is obvious: it is both illogical and impractical to determine who are exempted
without first determining who are covered by the provision.62 Thus, unless a statute imposes a tax
clearly, expressly and unambiguously, what applies is the equally well-settled rule that the imposition
of a tax cannot be presumed.63 In fact, in case of doubt, tax laws must be construed strictly against
the government and in favor of the taxpayer.64

WHEREFORE, the Petition is hereby DENIED. The assailed April 30, 2008 Decision of the Court of
Tax Appeals En Banc holding that gross receipts derived by respondents from admission tickets in
showing motion pictures, films or movies are not subject to value-added tax under Section 108 of the
National Internal Revenue Code of 1997, as amended, and its June 24, 2008 Resolution denying the
motion for reconsideration are AFFIRMED.
G.R. No. 150154. August 9, 2005

COMMISSIONER OF INTERNAL REVENUE, Petitioners,


vs.
TOSHIBA INFORMATION EQUIPMENT (PHILS.), INC., Respondent.

DECISION

CHICO-NAZARIO, J.:

In this Petition for Review under Rule 45 of the Rules of Court, petitioner Commissioner of Internal
Revenue (CIR) prays for the reversal of the decision of the Court of Appeals in CA-G.R. SP No.
59106,1 affirming the order of the Court of Tax Appeals (CTA) in CTA Case No. 5593,2 which ordered
said petitioner CIR to refund or, in the alternative, to issue a tax credit certificate to respondent
Toshiba Information Equipment (Phils.), Inc. (Toshiba), in the amount of ₱16,188,045.44,
representing unutilized input value-added tax (VAT) payments for the first and second quarters of
1996.

There is hardly any dispute as to the facts giving rise to the present Petition.

Respondent Toshiba was organized and established as a domestic corporation, duly-registered with
the Securities and Exchange Commission on 07 July 1995,3 with the primary purpose of engaging in
the business of manufacturing and exporting of electrical and mechanical machinery, equipment,
systems, accessories, parts, components, materials and goods of all kinds, including, without
limitation, to those relating to office automation and information technology, and all types of
computer hardware and software, such as HDD, CD-ROM and personal computer printed circuit
boards.4

On 27 September 1995, respondent Toshiba also registered with the Philippine Economic Zone
Authority (PEZA) as an ECOZONE Export Enterprise, with principal office in Laguna Technopark,
Biñan, Laguna.5 Finally, on 29 December 1995, it registered with the Bureau of Internal Revenue
(BIR) as a VAT taxpayer and a withholding agent.6

Respondent Toshiba filed its VAT returns for the first and second quarters of taxable year 1996,
reporting input VAT in the amount of ₱13,118,542.007 and ₱5,128,761.94,8 respectively, or a total of
₱18,247,303.94. It alleged that the said input VAT was from its purchases of capital goods and
services which remained unutilized since it had not yet engaged in any business activity or
transaction for which it may be liable for any output VAT.9 Consequently, on 27 March 1998,
respondent Toshiba filed with the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback
Center of the Department of Finance (DOF) applications for tax credit/refund of its unutilized input
VAT for 01 January to 31 March 1996 in the amount of ₱14,176,601.28,10 and for 01 April to 30 June
1996 in the amount of ₱5,161,820.79,11 for a total of ₱19,338,422.07. To toll the running of the two-
year prescriptive period for judicially claiming a tax credit/refund, respondent Toshiba, on 31 March
1998, filed with the CTA a Petition for Review. It would subsequently file an Amended Petition for
Review on 10 November 1998 so as to conform to the evidence presented before the CTA during
the hearings.

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

5. Assuming without admitting that petitioner filed a claim for refund/tax credit, the same is subject to
investigation by the Bureau of Internal Revenue.
6. Taxes are presumed to have been collected in accordance with law. Hence, petitioner must prove
that the taxes sought to be refunded were erroneously or illegally collected.

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

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

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

After evaluating the evidence submitted by respondent Toshiba,13 the CTA, in its Decision dated 10
March 2000, ordered petitioner CIR to refund, or in the alternative, to issue a tax credit certificate to
respondent Toshiba in the amount of ₱16,188,045.44.14

In a Resolution, dated 24 May 2000, the CTA denied petitioner CIR’s Motion for Reconsideration for
lack of merit.15

The Court of Appeals, in its Decision dated 27 September 2001, dismissed petitioner CIR’s Petition
for Review and affirmed the CTA Decision dated 10 March 2000.

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

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

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

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

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

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

An ECOZONE enterprise is a VAT-exempt entity. Sales of goods, properties, and services by


persons from the Customs Territory to ECOZONE enterprises shall be subject to VAT at zero
percent (0%).
Respondent Toshiba bases its claim for tax credit/refund on Section 106(b) of the Tax Code of 1977,
as amended, which reads:

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

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

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

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

...

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

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

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

Petitioner CIR argues that although respondent Toshiba may be a VAT-registered taxpayer, it is not
engaged in a VAT-taxable business. According to petitioner CIR, respondent Toshiba is actually
VAT-exempt, invoking the following provision of the Tax Code of 1977, as amended –

SEC. 103. Exempt transactions. – The following shall be exempt from value-added tax.

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

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

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

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

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

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

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

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

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

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

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

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

Given the preceding discussion, what would be the VAT implication of sales made by a supplier from
the Customs Territory to an ECOZONE enterprise?

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

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

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

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

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

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

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

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

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

(3) In the final analysis, any sale of goods, property or services made by a VAT registered supplier
from the Customs Territory to any registered enterprise operating in the ecozone, regardless of the
class or type of the 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. The VAT treatment of sales to it, however, varies depending on whether the supplier from the
Customs Territory is VAT-registered or not.

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

Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or unregistered supplier would


only be exempt from VAT and the supplier shall not be able to claim credit/refund of its input VAT.

Even conceding, however, that respondent Toshiba, as a PEZA-registered enterprise, is a VAT-


exempt entity that could not have engaged in a VAT-taxable business, this Court still believes, given
the particular circumstances of the present case, that it is entitled to a credit/refund of its input VAT.

II

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

a. The taxpayer-claimant is VAT-registered;

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

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

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

III

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

Finally, petitioner CIR, in a last desperate attempt to block respondent Toshiba’s claim for tax
credit/refund, challenges the allegation of said respondent that it availed of the income tax holiday
under Exec. Order No. 226, as amended, rather than the five percent (5%) preferential tax rate
under Rep. Act No. 7916, as amended. Undoubtedly, this is a factual matter that should have been
raised and threshed out in the lower courts. Giving it credence would belie petitioner CIR’s assertion
that it is raising only issues of law in its Petition that may be resolved without need for reception of
additional evidences. Once more, this Court respects and adopts the finding of the CTA, affirmed by
the Court of Appeals, that respondent Toshiba had indeed availed of the income tax holiday under
Exec. Order No. 226, as amended.

WHEREFORE, based on the foregoing, this Court AFFIRMS the decision of the Court of Appeals in
CA-G.R. SP. No. 59106, and the order of the CTA in CTA Case No. 5593, ordering said petitioner
CIR to refund or, in the alternative, to issue a tax credit certificate to respondent Toshiba, in the
amount of ₱16,188,045.44, representing unutilized input VAT for the first and second quarters of
1996.
G.R. No. 182364 August 3, 2010

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


vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

CARPIO MORALES, J.:

AT&T Communications Services Philippines, Inc. (petitioner) is a domestic corporation primarily


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

Under Service Agreements forged by petitioner with the above-named corporations, remuneration is
paid in U.S. Dollars and inwardly remitted in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP).

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

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

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

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

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

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

By Decision of February 23, 2007,2 the CTA First Division, conceding that petitioner’s transactions
fall under the classification of zero-rated sales, nevertheless denied petitioner’s claim "for lack of
substantiation," disposing as follows:
In reiteration, considering that the subject revenues pertain to gross receipts from services rendered
by petitioner, valid VAT official receipts and not mere sales invoices should have been submitted in
support thereof. Without proper VAT official receipts, the foreign currency payments received by
petitioner from services rendered for the four (4) quarters of taxable year 2002 in the sum of
US$1,102,315.48 with the peso equivalent of ₱56,898,744.05 cannot qualify for zero-rating for VAT
purposes. Consequently, the claimed input VAT payments allegedly attributable thereto in the
amount of ₱1,801,826.82 cannot be granted. It is clear from the provisions of Section 112 (A) of the
NIRC of 1997 that there must be zero-rated or effectively zero-rated sales in order that a refund of
input VAT could prosper.

x x x x3 (emphasis and underscoring supplied)

The CTA First Division, relying on Sections 1064 and 1085 of the Tax Code, held that since petitioner
is engaged in sale of services, VAT Official Receipts should have been presented in order to
substantiate its claim of zero-rated sales, not VAT invoices which pertain to sale of goods or
properties.

On petition for review, the CTA En Banc, by Decision of February 18, 2008,6 affirmed that of the CTA
First Division. Petitioner’s motion for reconsideration having been denied by Resolution of April 2,
2008, the present petition for review was filed.

The petition is impressed with merit.

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

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


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

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

Applying the destination principle to the exportation of goods, automatic zero rating is primarily
intended to be enjoyed by the seller who is directly and legally liable for the VAT, making such seller
internationally competitive by allowing the refund or credit of input taxes that are attributable to
export sales. (emphasis and underscoring supplied)

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

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


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

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

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

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

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


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

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


taxpayer’s identification number (TIN); and

(2) The total amount which the purchaser pays or is obligated to pay to the
seller with the indication that such amount includes the value-added tax.
(emphasis, italics and underscoring supplied)

Section 110 of the 1997 Tax Code in fact provides:

Section 110. Tax Credits –

A. Creditable Input Tax. –

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

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

Parenthetically, to determine the validity of petitioner’s claim as to unutilized input VAT, an invoice
would suffice provided the requirements under Sections 113 and 237 of the Tax Code are met. 1avvphi1

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

IN FINE, the Court finds that petitioner has complied with the substantiation requirements to prove
entitlement to refund/tax credit. The Court is not a trier of facts, however, hence the need to remand
the case to the CTA for determination and computation of petitioner’s refund/tax credit.
WHEREFORE, the petition is GRANTED. The Decision of February 18, 2008 of the Court of Tax
Appeals En Banc is REVERSED and SET ASIDE. Let the case be REMANDED to the Court of Tax
Appeals First Division for the determination of petitioner’s tax credit/refund.
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 as its
coordination manager.

BWSC-Denmark established [respondent] which subcontracted the actual 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.

NAPOCOR paid capacity and energy fees to the Consortium in a mixture of currencies (Mark, Yen,
and Peso). The freely convertible non-Peso component is deposited directly to the Consortium’s
bank accounts in Denmark and Japan, while the Peso-denominated component is deposited in a
separate and special designated bank account in the Philippines. On the other hand, the Consortium
pays [respondent] in foreign currency inwardly remitted to the Philippines through the banking
system.

In order to ascertain the tax implications of the above transactions, [respondent] sought a ruling from
the BIR which responded with BIR Ruling No. 023-95 dated February 14, 1995, declaring therein
that if [respondent] chooses to register as a VAT person and the consideration for its services is paid
for in acceptable foreign currency and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas, the aforesaid services shall be subject to VAT at zero-rate.
[Respondent] chose to register as a VAT taxpayer. On May 26, 1995, the Certificate of Registration
bearing RDO Control No. 95-113-007556 was issued in favor of [respondent] by the Revenue
District Office No. 113 of Davao City.

For the year 1996, [respondent] seasonably filed its quarterly Value-Added Tax Returns reflecting,
among others, a total zero-rated sales of P147,317,189.62 with VAT input taxes of P3,361,174.14,
detailed as follows:

Qtr. Exh. Date Filed Zero-Rated Sales VAT Input Tax

1st E 04-18-96 P 33,019,651.07 P608,953.48

2nd F 07-16-96 37,108,863.33 756,802.66

3rd G 10-14-96 34,196,372.35 930,279.14

4th H 01-20-97 42,992,302.87 1,065,138.86

Totals P147,317,189.62 P3,361,174.14

On December 29, 1997, [respondent] availed of the Voluntary Assessment Program (VAP) of the
BIR. It allegedly misinterpreted Revenue Regulations No. 5-96 dated February 20, 1996 to be
applicable to its case. Revenue Regulations No. 5-96 provides in part thus:

SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-95 are hereby amended
to read as follows:

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

x x x x x x x x x x.

In [conformity] with the aforecited Revenue Regulations, [respondent] subjected its sale of services
to the Consortium to the 10% VAT in the total amount of P103,558,338.11 representing April to
December 1996 sales since said Revenue Regulations No. 5-96 became effective only on April
1996. The sum of P43,893,951.07, representing January to March 1996 sales was subjected to zero
rate. Consequently, [respondent] filed its 1996 amended VAT return consolidating therein the VAT
output and input taxes for the four calendar quarters of 1996. It paid the amount of P6,994,659.67
through BIR’s collecting agent, PCIBank, as its output tax liability for the year 1996, computed as
follows:

Amount subject to 10% VAT P103,558,338.11

Multiply by 10%
VAT Output Tax P 10,355,833.81

Less: 1996 Input VAT P 3,361,174.14

VAT Output Tax Payable P 6,994,659.67

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

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

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

The Ruling of the Court of Tax Appeals

In its 8 August 2001 Decision, the CTA ordered petitioner to issue a tax credit certificate for
P6,994,659.67 in favor of respondent. The 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 rules20 to pay in
acceptable foreign currency for their purchase of goods or services from the Philippines. In a
domestic transaction, where the provider and recipient of services are both doing business in the
Philippines, the BSP cannot require any party to make payment in foreign currency.

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

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

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

Significantly, the amended Section 108(b)22 [previously Section 102(b)] of the present Tax Code
clarifies this legislative intent. Expressly included among the transactions subject to 0% VAT are
"[s]ervices other than those mentioned in the [first] paragraph [of Section 108(b)] rendered to a
person engaged in business conducted outside the Philippines or to a nonresident person not
engaged in business who is outside the Philippines when the services are performed, the
consideration for which is paid for in acceptable foreign currency and accounted for in accordance
with the rules and regulations of the BSP."
In this case, the payer-recipient of 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 Express26 is misplaced. That case involved a
recipient of services, specifically American Express International, Inc. (Hongkong Branch), doing
business outside the Philippines. There, the Court stated:

Respondent [American Express International, Inc. (Philippine Branch)] is a VAT-registered person


that facilitates the collection and payment of receivables belonging to its non-resident foreign client
[American Express International, Inc. (Hongkong Branch)], for which it gets paid in acceptable
foreign currency inwardly remitted and accounted for in accordance with BSP rules and regulations.
x x x x27 (Emphasis supplied)
In contrast, this case involves a recipient of services – the Consortium – which is doing business in
the Philippines. Hence, American Express’ services were subject to 0% VAT, while 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. 190102 July 11, 2012

ACCENTURE, INC., Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

SERENO, J.:

This is a Petition filed under Rule 45 of the 1997 Rules of Civil Procedure, praying for the reversal of
the Decision of the Court of Tax Appeals En Banc (CTA En Banc ) dated 22 September 2009 and its
subsequent Resolution dated 23 October 2009.1

Accenture, Inc. (Accenture) is a corporation engaged in the business of providing management


consulting, business strategies development, and selling and/or licensing of software.2 It is duly
registered with the Bureau of Internal Revenue (BIR) as a Value Added Tax (VAT) taxpayer or
enterprise in accordance with Section 236 of the National Internal Revenue Code (Tax Code).3

On 9 August 2002, Accenture filed its Monthly VAT Return for the period 1 July 2002 to 31 August
2002 (1st period). Its Quarterly VAT Return for the fourth quarter of 2002, which covers the 1st
period, was filed on 17 September 2002; and an Amended Quarterly VAT Return, on 21 June 2004.4
The following are reflected in Accenture’s VAT Return for the fourth quarter of 2002:5
1âwphi1

Purchases Amount Input VAT

Domestic Purchases- Capital Goods ₱12,312,722.00 ₱1,231,272.20

Domestic Purchases- Goods other than capital


₱64,789,507.90 ₱6,478,950.79
Goods

Domestic Purchases- Services ₱16,455,868.10 ₱1,645,586.81

Total Input Tax ₱9,355,809.80

Zero-rated Sales ₱316,113,513.34

Total Sales ₱335,640,544.74

Accenture filed its Monthly VAT Return for the month of September 2002 on 24 October 2002; and
that for October 2002, on 12 November 2002. These returns were amended on 9 January 2003.
Accenture’s Quarterly VAT Return for the first quarter of 2003, which included the period 1
September 2002 to 30 November 2002 (2nd period), was filed on 17 December 2002; and the
Amended Quarterly VAT Return, on 18 June 2004. The latter contains the following information:6

Purchases Amount Input VAT

Domestic Purchases- Capital Goods ₱80,765,294.10 ₱8,076,529.41


Domestic Purchases- Goods other than capital
₱132,820,541.70 ₱13,282,054.17
Goods

Domestic Purchases-Services ₱63,238,758.00 ₱6,323,875.80

Total Input Tax ₱27,682,459.38

Zero-rated Sales ₱545,686,639.18

Total Sales ₱ ₱572,880,982.68

The monthly and quarterly VAT returns of Accenture show that, notwithstanding its application of the
input VAT credits earned from its zero-rated transactions against its output VAT liabilities, it still had
excess or unutilized input VAT credits. These VAT credits are in the amounts of P9,355,809.80 for
the 1st period and P27,682,459.38 for the 2nd period, or a total of P37,038,269.18.7

Out of the P37,038,269.18, only P35,178,844.21 pertained to the allocated input VAT on Accenture’s
"domestic purchases of taxable goods which cannot be directly attributed to its zero-rated sale of
services."8 This allocated input VAT was broken down to P8,811,301.66 for the 1st period and
P26,367,542.55 for the 2nd period.9

The excess input VAT was not applied to any output VAT that Accenture was liable for in the same
quarter when the amount was earned—or to any of the succeeding quarters. Instead, it was carried
forward to petitioner’s 2nd Quarterly VAT Return for 2003.10

Thus, on 1 July 2004, Accenture filed with the Department of Finance (DoF) an administrative claim
for the refund or the issuance of a Tax Credit Certificate (TCC). The DoF did not act on the claim of
Accenture. Hence, on 31 August 2004, the latter filed a Petition for Review with the First Division of
the Court of Tax Appeals (Division), praying for the issuance of a TCC in its favor in the amount of
P35,178,844.21.

The Commissioner of Internal Revenue (CIR), in its Answer,11 argued thus:

1. The sale by Accenture of goods and services to its clients are not zero-rated
transactions.

2. Claims for refund are construed strictly against the claimant, and Accenture has
failed to prove that it is entitled to a refund, because its claim has not been fully
substantiated or documented.

In a 13 November 2008 Decision,12 the Division denied the Petition of Accenture for failing to prove
that the latter’s sale of services to the alleged foreign clients qualified for zero percent VAT.13

In resolving the sole issue of whether or not Accenture was entitled to a refund or an issuance of a
TCC in the amount of P35,178,844.21,14 the Division ruled that Accenture had failed to present
evidence to prove that the foreign clients to which the former rendered services did business outside
the Philippines.15 Ruling that Accenture’s services would qualify for zero-rating under the 1997
National Internal Revenue Code of the Philippines (Tax Code) only if the recipient of the services
was doing business outside of the Philippines,16 the Division cited Commissioner of Internal Revenue
v. Burmeister and Wain Scandinavian Contractor Mindanao, Inc. (Burmeister)17 as basis.
Accenture appealed the Division’s Decision through a Motion for Reconsideration (MR).18 In its MR, it
argued that the reliance of the Division on Burmeister was misplaced19 for the following reasons:

1. The issue involved in Burmeister was the entitlement of the applicant to a refund,
given that the recipient of its service was doing business in the Philippines; it was not
an issue of failure of the applicant to present evidence to prove the fact that the
recipient of its services was a foreign corporation doing business outside the
Philippines.20

2. Burmeister emphasized that, to qualify for zero-rating, the recipient of the services
should be doing business outside the Philippines, and Accenture had successfully
established that.21

3. Having been promulgated on 22 January 2007 or after Accenture filed its Petition
with the Division, Burmeister cannot be made to apply to this case.22

Accenture also cited Commissioner of Internal Revenue v. American Express (Amex)23 in support of
its position. The MR was denied by the Division in its 12 March 2009 Resolution.24

Accenture appealed to the CTA En Banc. There it argued that prior to the amendment introduced by
Republic Act No. (R.A.) 9337, 25 there was no requirement that the services must be rendered to a
person engaged in business conducted outside the Philippines to qualify for zero-rating. The CTA En
Banc agreed that because the case pertained to the third and the fourth quarters of taxable year
2002, the applicable law was the 1997 Tax Code, and not R.A. 9337.26 Still, it ruled that even though
the provision used in Burmeister was Section 102(b)(2) of the earlier 1977 Tax Code, the
pronouncement therein requiring recipients of services to be engaged in business outside the
Philippines to qualify for zero-rating was applicable to the case at bar, because Section 108(B)(2) of
the 1997 Tax Code was a mere reenactment of Section 102(b)(2) of the 1977 Tax Code.

The CTA En Banc concluded that Accenture failed to discharge the burden of proving the latter’s
allegation that its clients were foreign-based.27

Resolute, Accenture filed a Petition for Review with the CTA En Banc, but the latter affirmed the
Division’s Decision and Resolution.28 A subsequent MR was also denied in a Resolution dated 23
October 2009.

Hence, the present Petition for Review29 under Rule 45.

In a Joint Stipulation of Facts and Issues, the parties and the Division have agreed to submit the
following issues for resolution:

1. Whether or not Petitioner’s sales of goods and services are zero-rated for VAT
purposes under Section 108(B)(2)(3) of the 1997 Tax Code.

2. Whether or not petitioner’s claim for refund/tax credit in the amount of


P35,178,884.21 represents unutilized input VAT paid on its domestic purchases of
goods and services for the period commencing from 1 July 2002 until 30 November
2002.

3. Whether or not Petitioner has carried over to the succeeding taxable quarter(s) or
year(s) the alleged unutilized input VAT paid on its domestic purchases of goods and
services for the period commencing from 1 July 2002 until 30 November 2002, and
applied the same fully to its output VAT liability for the said period.

4. Whether or not Petitioner is entitled to the refund of the amount of


P35,178,884.21, representing the unutilized input VAT on domestic purchases of
goods and services for the period commencing from 1 July 2002 until 30 November
2002, from its sales of services to various foreign clients.

5. Whether or not Petitioner’s claim for refund/tax credit in the amount of


P35,178,884.21, as alleged unutilized input VAT on domestic purchases of goods
and services for the period covering 1 July 2002 until 30 November 2002 are duly
substantiated by proper documents.30

For consideration in the present Petition are the following issues:

1. Should the recipient of the services be "doing business outside the Philippines" for
the transaction to be zero-rated under Section 108(B)(2) of the 1997 Tax Code?

2. Has Accenture successfully proven that its clients are entities doing business
outside the Philippines?

Recipient of services must be doing business outside the Philippines for the transactions to qualify
as zero-rated.

Accenture anchors its refund claim on Section 112(A) of the 1997 Tax Code, which allows the refund
of unutilized input VAT earned from zero-rated or effectively zero-rated sales. The provision reads:

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 of
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. Section 108(B) referred to in the foregoing provision was first seen when
Presidential Decree No. (P.D.) 199431 amended Title IV of P.D. 1158,32 which is also known as the
National Internal Revenue Code of 1977. Several Decisions have referred to this as the 1986 Tax
Code, even though it merely amended Title IV of the 1977 Tax Code.

Two years thereafter, or on 1 January 1988, Executive Order No. (E.O.) 27333 further amended
provisions of Title IV. E.O. 273 by transferring the old Title IV provisions to Title VI and filling in the
former title with new provisions that imposed a VAT.

The VAT system introduced in E.O. 273 was restructured through Republic Act No. (R.A.) 7716.34
This law, which was approved on 5 May 1994, widened the tax base. Section 3 thereof reads:
SECTION 3. Section 102 of the National Internal Revenue Code, as amended, is hereby further
amended to read as follows:

"SEC. 102. Value-added tax on sale of services and use or lease of properties. x x x

xxx xxx xxx

"(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)."

Essentially, Section 102(b) of the 1977 Tax Code—as amended by P.D. 1994, E.O. 273, and R.A.
7716—provides that if the consideration for the services provided by a VAT-registered person is in a
foreign currency, then this transaction shall be subjected to zero percent rate.

The 1997 Tax Code reproduced Section 102(b) of the 1977 Tax Code in its Section 108(B), to wit:

(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 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); x x x.

On 1 November 2005, Section 6 of R.A. 9337, which amended the foregoing provision, became
effective. It reads:

SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows:

"SEC. 108. Value-added Tax on Sale of Services and Use or Lease of

Properties. -

(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 paragraph 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 Bangko Sentral ng
Pilipinas (BSP); x x x." (Emphasis supplied)

The meat of Accenture’s argument is that nowhere does Section 108(B) of the 1997 Tax Code state
that services, to be zero-rated, should be rendered to clients doing business outside the Philippines,
the requirement introduced by R.A. 9337.35 Required by Section 108(B), prior to the amendment, is
that the consideration for the services rendered be in foreign currency and in accordance with the
rules of the Bangko Sentral ng Pilipinas (BSP). Since Accenture has complied with all the conditions
imposed in Section 108(B), it is entitled to the refund prayed for.

In support of its claim, Accenture cites Amex, in which this Court supposedly ruled that Section
108(B) reveals a clear intent on the part of the legislators not to impose the condition of being
"consumed abroad" in order for the services performed in the Philippines to be zero-rated.36

The Division ruled that this Court, in Amex and Burmeister, did not declare that the requirement—
that the client must be doing business outside the Philippines—can be disregarded, because this
requirement is expressly provided in Article 108(2) of the Tax Code.37

Accenture questions the Division’s application to this case of the pronouncements made in
Burmeister. According to petitioner, the provision applied to the present case was Section 102(b) of
the 1977 Tax Code, and not Section 108(B) of the 1997 Tax Code, which was the law effective when
the subject transactions were entered into and a refund was applied for.

In refuting Accenture’s theory, the CTA En Banc ruled that since Section 108(B) of the 1997 Tax
Code was a mere reproduction of Section 102(b) of the 1977 Tax Code, this Court’s interpretation of
the latter may be used in interpreting the former, viz:

In the Burmeister case, the Supreme Court harmonized both Sections 102(b)(1) and 102(b)(2) of the
1977 Tax Code, as amended, pertaining to zero-rated transactions. A parallel approach should be
accorded to the renumbered provisions of Sections 108(B)(2) and 108(B)(1) of the 1997 NIRC. This
means that Section 108(B)(2) must be read in conjunction with Section 108(B)(1). Section 108(B)(2)
requires as follows: a) services other than processing, manufacturing or repacking rendered by VAT
registered persons in the Philippines; and b) the transaction paid for in acceptable foreign currency
duly accounted for in accordance with BSP rules and regulations. The same provision made
reference to Section 108(B)(1) further imposing the requisite c) that the recipient of services must be
performing business outside of Philippines. Otherwise, if both the provider and recipient of service
are doing business in the Philippines, the sale transaction is subject to regular VAT as explained in
the Burmeister case x x x.

xxx xxx xxx


Clearly, the Supreme Court’s pronouncements in the Burmeister case requiring that the recipient of
the services must be doing business outside the Philippines as mandated by law govern the instant
case.38

Assuming that the foregoing is true, Accenture still argues that the tax appeals courts cannot be
allowed to apply to Burmeister this Court’s interpretation of Section 102(b) of the 1977 Tax Code,
because the Petition of Accenture had already been filed before the case was even promulgated on
22 January 2007,39 to wit:

x x x. While the Burmeister case forms part of the legal system and assumes the same authority as
the statute itself, however, the same cannot be applied retroactively against the Petitioner because
to do so will be prejudicial to the latter.40

The CTA en banc is of the opinion that Accenture cannot invoke the non-retroactivity of the rulings of
the Supreme Court, whose interpretation of the law is part of that law as of the date of its
enactment.41

We rule that the recipient of the service must be doing business outside the Philippines for the
transaction to qualify for zero-rating under Section 108(B) of the Tax Code.

This Court upholds the position of the CTA en banc that, because Section 108(B) of the 1997 Tax
Code is a verbatim copy of Section 102(b) of the 1977 Tax Code, any interpretation of the latter
holds true for the former.

Moreover, even though Accenture’s Petition was filed before Burmeister was promulgated, the
pronouncements made in that case may be applied to the present one without violating the rule
against retroactive application. When this Court decides a case, it does not pass a new law, but
merely interprets a preexisting one.42 When this Court interpreted Section 102(b) of the 1977 Tax
Code in Burmeister, this interpretation became part of the law from the moment it became effective.
It is elementary that the interpretation of a law by this Court constitutes part of that law from the date
it was originally passed, since this Court's construction merely establishes the contemporaneous
legislative intent that the interpreted law carried into effect.43

Accenture questions the CTA’s application of Burmeister, because the provision interpreted therein
was Section 102(b) of the 1977 Tax Code. In support of its position that Section 108 of the 1997 Tax
Code does not require that the services be rendered to an entity doing business outside the
Philippines, Accenture invokes this Court’s pronouncements in Amex. However, a reading of that
case will readily reveal that the provision applied was Section 102(b) of the 1977 Tax Code, and not
Section 108 of the 1997 Tax Code. As previously mentioned, an interpretation of Section 102(b) of
the 1977 Tax Code is an interpretation of Section 108 of the 1997 Tax Code, the latter being a mere
reproduction of the former.

This Court further finds that Accenture’s reliance on Amex is misplaced.

We ruled in Amex that Section 102 of the 1977 Tax Code does not require that the services be
consumed abroad to be zero-rated. However, nowhere in that case did this Court discuss the
necessary qualification of the recipient of the service, as this matter was never put in question. In
fact, the recipient of the service in Amex is a nonresident foreign client.

The aforementioned case explains how the credit card system works. The issuance of a credit card
allows the holder thereof to obtain, on credit, goods and services from certain establishments. As
proof that this credit is extended by the establishment, a credit card draft is issued. Thereafter, the
company issuing the credit card will pay for the purchases of the credit card holders by redeeming
the drafts. The obligation to collect from the card holders and to bear the loss—in case they do not
pay—rests on the issuer of the credit card.

The service provided by respondent in Amex consisted of gathering the bills and credit card drafts
from establishments located in the Philippines and forwarding them to its parent company's regional
operating centers outside the country. It facilitated in the Philippines the collection and payment of
receivables belonging to its Hong Kong-based foreign client.

The Court explained how the services rendered in Amex were considered to have been performed
and consumed in the Philippines, to wit:

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.44

The effect of the place of consumption on the zero-rating of the transaction was not the issue in
Burmeister. Instead, this Court addressed the squarely raised issue of whether the recipient of
1âwphi1

services should be doing business outside the Philippines for the transaction to qualify for zero-
rating. We ruled that it should. Thus, another essential condition for qualification for zero-rating
under Section 102(b)(2) of the 1977 Tax Code is that the recipient of the business be doing that
business outside the Philippines. In clarifying that there is no conflict between this pronouncement
and that laid down in Amex, we ruled thus:

x x x. As the Court held in Commissioner of Internal Revenue v. American Express International, Inc.
(Philippine Branch), 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. (Emphasis in the original)45

In Amex we ruled that the place of performance and/or consumption of the service is immaterial. In
Burmeister, the Court found that, although the place of the consumption of the service does not
affect the entitlement of a transaction to zero-rating, the place where the recipient conducts its
business does.

Amex does not conflict with Burmeister. In fact, to fully understand how Section 102(b)(2) of the
1977 Tax Code—and consequently Section 108(B)(2) of the 1997 Tax Code—was intended to
operate, the two aforementioned cases should be taken together. The zero-rating of the services
performed by respondent in Amex was affirmed by the Court, because although the services
rendered were both performed and consumed in the Philippines, the recipient of the service was still
an entity doing business outside the Philippines as required in Burmeister.

That the recipient of the service should be doing business outside the Philippines to qualify for zero-
rating is the only logical interpretation of Section 102(b)(2) of the 1977 Tax Code, as we explained in
Burmeister:
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.

xxx xxx xxx

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 "services 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.
(Emphasis in the original)46

Lastly, it is worth mentioning that prior to the promulgation of Burmeister, Congress had already
clarified the intent behind Sections 102(b)(2) of the 1977 Tax Code and 108(B)(2) of the 1997 Tax
Code amending the earlier provision. R.A. 9337 added the following phrase: "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."

Accenture has failed to establish that the recipients of its services do business outside the
Philippines.

Accenture argues that based on the documentary evidence it presented,47 it was able to establish the
following circumstances:

1. The records of the Securities and Exchange Commission (SEC) show that
Accenture’s clients have not established any branch office in which to do business in
the Philippines.

2. For these services, Accenture bills another corporation, Accenture Participations


B.V. (APB), which is likewise a foreign corporation with no "presence in the
Philippines."

3. Only those not doing business in the Philippines can be required under BSP rules
to pay in acceptable currency for their purchase of goods and services from the
Philippines. Thus, 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.48

Accenture claims that these documentary pieces of evidence are supported by the Report of
Emmanuel Mendoza, the Court-commissioned Independent Certified Public Accountant. He
ascertained that Accenture’s gross billings pertaining to zero-rated sales were all supported by zero-
rated Official Receipts and Billing Statements. These documents show that these zero-rated sales
were paid in foreign exchange currency and duly accounted for in the rules and regulations of the
BSP.49

In the CTA’s opinion, however, the documents presented by Accenture merely substantiate the
existence of the sales, receipt of foreign currency payments, and inward remittance of the proceeds
of these sales duly accounted for in accordance with BSP rules. Petitioner presented no evidence
whatsoever that these clients were doing business outside the Philippines.50

Accenture insists, however, that it was able to establish that it had rendered services to foreign
corporations doing business outside the Philippines, unlike in Burmeister, which allegedly involved a
foreign corporation doing business in the Philippines.51

We deny Accenture’s Petition for a tax refund.

The evidence presented by Accenture may have established that its clients are foreign. This fact
1âwphi1

does not automatically mean, however, that these clients were doing business outside the
Philippines. After all, the Tax Code itself has provisions for a foreign corporation engaged in
business within the Philippines and vice versa, to wit:

SEC. 22. Definitions - When used in this Title:

xxx xxx xxx

(H) The term "resident foreign corporation" applies to a foreign corporation engaged
in trade or business within the Philippines.

(I) The term ‘nonresident foreign corporation’ applies to a foreign corporation not
engaged in trade or business within the Philippines. (Emphasis in the original)

Consequently, to come within the purview of Section 108(B)(2), it is not enough that the recipient of
the service be proven to be a foreign corporation; rather, it must be specifically proven to be a
nonresident foreign corporation.

There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting"


business. We ruled thus in Commissioner of Internal Revenue v. British Overseas Airways
Corporation:52

x x x. There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting"


business. Each case must be judged in the light of its peculiar environmental circumstances. The
term implies a continuity of commercial dealings and arrangements, and contemplates, to that
extent, the performance of acts or works or the exercise of some of the functions normally incident
to, and in progressive prosecution of commercial gain or for the purpose and object of the business
organization. "In order that a foreign corporation may be regarded as doing business within a State,
there must be continuity of conduct and intention to establish a continuous business, such as the
appointment of a local agent, and not one of a temporary character."53

A taxpayer claiming a tax credit or refund has the burden of proof to establish the factual basis of
that claim. Tax refunds, like tax exemptions, are construed strictly against the taxpayer.54
1âwphi1
Accenture failed to discharge this burden. It alleged and presented evidence to prove only that its
clients were foreign entities. However, as found by both the CTA Division and the CTA En Banc, no
evidence was presented by Accenture to prove the fact that the foreign clients to whom petitioner
rendered its services were clients doing business outside the Philippines.

As ruled by the CTA En Banc, the Official Receipts, Intercompany Payment Requests, Billing
Statements, Memo Invoices-Receivable, Memo Invoices-Payable, and Bank Statements presented
by Accenture merely substantiated the existence of sales, receipt of foreign currency payments, and
inward remittance of the proceeds of such sales duly accounted for in accordance with BSP rules, all
of these were devoid of any evidence that the clients were doing business outside of the
Philippines.55

WHEREFORE, the instant Petition is DENIED. The 22 September 2009 Decision and the 23
October 2009 Resolution of the Court of Tax Appeals En Banc in C.T.A. EB No. 477, dismissing the
Petition for the refund of the excess or unutilized input VAT credits of Accenture, Inc., are
AFFIRMED.

SO ORDERED.
G.R. No. 152609 June 29, 2005

COMMISSIONER OF INTERNAL REVENUE, Petitioner,


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

DECISION

PANGANIBAN, J.:

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

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the February 28,
2002 Decision2 of the Court of Appeals (CA) in CA-GR SP No. 62727. The assailed Decision
disposed as follows:

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

The Facts

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

"[Respondent] is a Philippine branch of American Express International, Inc., a corporation duly


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

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

Exhibit Period Covered Date Filed


D 1997 1st Qtr. April 18, 1997
F 2nd Qtr. July 21, 1997
G 3rd Qtr. October 2, 1997
H 4th Qtr. January 20, 1998

"On March 23, 1999, however, [respondent] amended the aforesaid returns and declared the
following:

Exh 1997 Taxable Sales Output Zero-rated Domestic Input


VAT Sales Purchases VAT
I 1st qtr ₱59,597.20 ₱5,959.72 ₱17,513,801.11 ₱6,778,182.30 ₱677,818.23
J 2nd qtr 67,517.20 6,751.72 17,937,361.51 9,333,242.90 933,324.29
K 3rd qtr 51,936.60 5,193.66 19,627,245.36 8,438,357.00 843,835.70
L 4th qtr 67,994.30 6,799.43 25,231,225.22 13,080,822.10 1,308,082.21

Total ₱247,045.30 ₱24,704.53 ₱80,309,633.20 ₱37,630,604.30 ₱3,763,060.43

"On April 13, 1999, [respondent] filed with the BIR a letter-request for the refund of its 1997 excess
input taxes in the amount of ₱3,751,067.04, which amount was arrived at after deducting from its
total input VAT paid of ₱3,763,060.43 its applied output VAT liabilities only for the third and fourth
quarters of 1997 amounting to ₱5,193.66 and ₱6,799.43, respectively. [Respondent] cites as basis
therefor, Section 110 (B) of the 1997 Tax Code, to state:

‘Section 110. Tax Credits. -

xxxxxxxxx

‘(B) Excess Output or Input Tax. - If at the end of any taxable quarter the output tax exceeds the
input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output
tax, the excess shall be carried over to the succeeding quarter or quarters. Any input tax attributable
to the purchase of capital goods or to zero-rated sales by a VAT-registered person may at his option
be refunded or credited against other internal revenue taxes, subject to the provisions of Section
112.’

"There being no immediate action on the part of the [petitioner], [respondent’s] petition was filed on
April 15, 1999.

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

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

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

(1) x x x

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

‘WHEREFORE, in view of all the foregoing, this Court finds the [petition] meritorious and in
accordance with law. Accordingly, [petitioner] is hereby ORDERED to REFUND to [respondent] the
amount of ₱3,352,406.59 representing the latter’s excess input VAT paid for the year 1997.’"8

Ruling of the Court of Appeals

In affirming the CTA, the CA held that respondent’s services fell under the first type enumerated in
Section 4.102-2(b)(2) of RR 7-95, as amended by RR 5-96. More particularly, its "services were not
of the same class or of the same nature as project studies, information, or engineering and
architectural designs" for non-resident foreign clients; rather, they were "services other than the
processing, manufacturing or repacking of goods for persons doing business outside the
Philippines." The consideration in both types of service, however, was paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas.
Furthermore, the CA reasoned that reliance on VAT Ruling No. 040-98 was unwarranted. By
requiring that respondent’s services be consumed abroad in order to be zero-rated, petitioner went
beyond the sphere of interpretation and into that of legislation. Even granting that it is valid, the
ruling cannot be given retroactive effect, for it will be harsh and oppressive to respondent, which has
already relied upon VAT Ruling No. 080-89 for zero rating.

Hence, this Petition.9

The Issue

Petitioner raises this sole issue for our consideration:

"Whether or not the Court of Appeals committed reversible error in holding that respondent is entitled
to the refund of the amount of ₱3,352,406.59 allegedly representing excess input VAT for the year
1997."10

The Court’s Ruling

The Petition is unmeritorious.

Sole Issue:

Entitlement to Tax Refund

Section 102 of the Tax Code11 provides:

"Sec. 102. Value-added tax on sale of services and use or lease of properties. -- (a) Rate and base
of tax. -- There shall be levied, assessed and collected, a value-added tax equivalent to ten percent
(10%) of gross receipts derived from the sale or exchange of services x x x.

"The phrase 'sale or exchange of services' means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or
rendered by x x x persons engaged in milling, processing, manufacturing or repacking goods for
others; x x x services of banks, non-bank financial intermediaries and finance companies; x x x and
similar services regardless of whether or not the performance thereof calls for the exercise or use of
the physical or mental faculties. The phrase 'sale or exchange of services' shall likewise include:

xxxxxxxxx

‘(3) The supply of x x x commercial knowledge or information;

‘(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of
enabling the application or enjoyment of x x x any such knowledge or information as is mentioned in
subparagraph (3);

xxxxxxxxx

‘(6) The supply of technical advice, assistance or services rendered in connection with technical
management or administration of any x x x commercial undertaking, venture, project or scheme;
xxxxxxxxx

"The term 'gross receipts’ means the total amount of money or its equivalent representing the
contract price, compensation, service fee, rental or royalty, including the amount charged for
materials supplied with the services and deposits and advanced payments actually or constructively
received during the taxable quarter for the services performed or to be performed for another
person, excluding value-added tax.

"(b) Transactions subject to zero percent (0%) rate. -- The following services performed in the
Philippines by VAT-registered persons shall be subject to zero percent (0%) rate[:]

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

‘(2) Services other than those mentioned in the preceding subparagraph, the consideration for which
is paid for in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the [BSP];’"

xxxxxxxxx

Zero Rating of "Other" Services

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

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

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

The Credit Card System and Its Components

For sure, the ancillary business of facilitating the said collection is different from the main business of
issuing credit cards.16 Under the credit card system, the credit card company extends credit
accommodations to its card holders for the purchase of goods and services from its member
establishments, to be reimbursed by them later on upon proper billing. Given the complexities of
present-day business transactions, the components of this system can certainly function as separate
billable services.

Under RA 8484,17 the credit card that is issued by banks18 in general, or by non-banks in particular,
refers to "any card x x x or other credit device existing for the purpose of obtaining x x x goods x x x
or services x x x on credit;"19 and is being used "usually on a revolving basis."20 This means that the
consumer-credit arrangement that exists between the issuer and the holder of the credit card
enables the latter to procure goods or services "on a continuing basis as long as the outstanding
balance does not exceed a specified limit."21 The card holder is, therefore, given "the power to obtain
present control of goods or service on a promise to pay for them in the future."22

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

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

In the present case, 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.37 Furthermore, 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"42 purchased by the producer or taxpayer.43 As an indirect tax44 on services,45 its main object
is the transaction46 itself or, more concretely, the performance of all kinds of services47 conducted in
the course of trade or business in the Philippines.48 These services must be regularly conducted in
this country; undertaken in "pursuit of a commercial or an economic activity;"49 for a valuable
consideration; and not exempt under the Tax Code, other special laws, or any international
agreement.50

Without doubt, the transactions respondent entered into with its Hong Kong-based client meet all
these requirements.

First, respondent regularly renders in the Philippines the service of facilitating the
collection and payment of receivables belonging to a foreign company that is a
clearly separate and distinct entity.

Second, such service is commercial in nature; carried on over a sustained period of


time; on a significant scale; with a reasonable degree of frequency; and not at
random, fortuitous or attenuated.

Third, for this service, respondent definitely receives consideration in foreign


currency that is accounted for in conformity with law.

Finally, respondent is not an entity exempt under any of our laws or international
agreements.

Services Subject to Zero VAT

As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional
reach of the tax.51 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,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,75 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"76 in order to qualify for zero rating, it contravenes both the
law and the regulations issued pursuant to it.77 This portion of VAT Ruling No. 040-98 is clearly ultra
vires and invalid.78

Although "[i]t is widely accepted that the interpretation placed upon a statute by the executive
officers, whose duty is to enforce it, is entitled to great respect by the courts,"79 this interpretation is
not conclusive and will have to be "ignored if judicially found to be erroneous"80 and "clearly absurd x
x x or improper."81 An administrative issuance that overrides the law it merely seeks to interpret,
instead of remaining consistent and in harmony with it, will not be countenanced by this Court.82

In the present case, respondent has relied upon VAT Ruling No. 080-89, which clearly recognizes its
zero rating. Changing this status will certainly deprive respondent of a refund of the substantial
amount of excess input taxes to which it is entitled.

Again, assuming arguendo that VAT Ruling No. 040-98 revoked VAT Ruling No. 080-89, such
revocation could not be given retroactive effect if the application of the latter ruling would only be
prejudicial to respondent.83 Section 246 of the Tax Code categorically declares that "[a]ny revocation
x x x of x x x any of the rulings x x x promulgated by the Commissioner shall not be given retroactive
application if the revocation x x x will be prejudicial to the taxpayers."84

It is also basic in law that "no x x x rule x x x shall be given retrospective effect85 unless explicitly
stated."86 No indication of such retroactive application to respondent does the Court find in VAT
Ruling No. 040-98. Neither do the exceptions enumerated in Section 24687 of the Tax Code apply.
Though vested with the power to interpret the provisions of the Tax Code88 and not bound by
predecessors’ acts or rulings, the BIR commissioner may render a different construction to a
statute89 only if the new interpretation is in congruence with the law. Otherwise, no amount of
interpretation can ever revoke, repeal or modify what the law says.

"Consumed Abroad" Not Required by Legislature

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

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

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

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

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

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

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

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

"Senator Maceda: I am referring to the second paragraph, in the same Section 102. The first
paragraph is when one manufactures or packages something here and he sends it abroad and they
pay him, that is covered. That is clear to me. The second paragraph says ‘Services other than those
mentioned in the preceding subparagraph, the consideration of which is paid for in acceptable
foreign currency…’

"One example I could immediately think of -- I do not know why this comes to my mind tonight -- is
for tourism or escort services. For example, the services of the tour operator or tour escort -- just a
good name for all kinds of activities -- is made here at the Midtown Ramada Hotel or at the
Philippine Plaza, but the payment is made from outside and remitted into the country.

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

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

"Senator Herrera: I guess it can be interpreted that way, although this tourist guide should also be
considered as among the professionals. If they earn more than ₱200,000, they should be covered.

xxxxxxxxx

Senator Maceda: So, the services by Filipino citizens outside the Philippines are subject to VAT,
and I am talking of all services. Do big contractual engineers in Saudi Arabia pay VAT?

"Senator Herrera: This provision applies to a VAT-registered person. When he performs services in
the Philippines, that is zero-rated.

"Senator Maceda: That is right."90

Legislative Approval By Reenactment

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

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

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

Furthermore, under a zero-rating scheme, the sale or exchange of a particular service is completely
freed from the VAT, because the seller is entitled to recover, by way of a refund or as an input tax
credit, the tax that is included in the cost of purchases attributable to the sale or exchange.94 "[T]he
tax paid or withheld is not deducted from the tax base."95 Having been applied for within the
reglementary period,96 respondent’s refund is in order.
WHEREFORE, the Petition is hereby DENIED, and the assailed Decision AFFIRMED. No
pronouncement as to costs.

SO ORDERED.
G.R. No. 153204 August 31, 2005

COMMISSIONER OF INTERNAL REVENUE, Petitioners,


vs.
MANILA MINING CORPORATION, Respondent.

DECISION

CARPIO MORALES, J.:

Being assailed via petition for review on certiorari is the April 12, 2002 Decision1 of the Court of
Appeals reversing that of the Court of Tax Appeals (CTA)2 which granted the claim of respondent,
Manila Mining Corporation, in consolidated CTA Case Nos. 4968 and 4991, for refund or issuance of
tax credit certificates in the amounts of ₱5,683,035.04 and ₱8,173,789.60 representing its input
value added tax (VAT) payments for taxable year 1991.

Respondent, a mining corporation duly organized and existing under Philippines laws, is registered
with the Bureau of Internal Revenue (BIR) as a VAT-registered enterprise under VAT Registration
Certificate No. 32-6-00632.3

In 1991, respondent’s sales of gold to the Central Bank (now Bangko Sentral ng Pilipinas) amounted
to ₱200,832,364.70.4 On April 22, 1991, July 23, 1991, October 21, 1991 and January 20, 1992, it
filed its VAT Returns for the 1st, 2nd, 3rd and 4th quarters of 1991, respectively, with the BIR
through the VAT Unit at Revenue District Office No. 47 in East Makati.5

Respondent, relying on a letter dated October 10, 1988 from then BIR Deputy Commissioner Victor
Deoferio that:

xxx under Sec. 2 of E.O. 581 as amended, gold sold to the Central Bank is considered an export
sale which under Section 100(a)(1) of the NIRC, as amended by E.O. 273, is subject to zero-rated if
such sale is made by a VAT-registered person[,]6 (Underscoring supplied)

filed on April 7, 1992 with the Commissioner of Internal Revenue (CIR), through the BIR-VAT
Division (BIR-VAT), an application for tax refund/credit of the input VAT it paid from July 1-
December 31, 1999 in the amount of ₱8,173,789.60.

Petitioner subsequently filed on March 5, 1991 another application for tax refund/credit of input VAT
it paid the amount of ₱5,683,035.04 from January 1 – June 30, 1991. As the CIR failed to act upon
respondent’s application within sixty (60) days from the dates of filing,7 it filed on March 22, 1993 a
Petition for Review against the CIR before the CTA which docketed it as CTA Case No. 4968,8
seeking the issuance of tax credit certificate or refund in the amount of ₱5,683,035.04 covering its
input VAT payments for the 1st and 2nd quarters of 1991. And it filed on May 24, 1993 another
Petition for Review, docketed as CTA Case No. 4991, seeking the issuance of tax credit certificates
in the amount of ₱8,173,789.60 covering its input VAT payments for the 3rd and 4th quarters of
1991.9

To the petition in CTA Case No. 4968 the CIR filed its Answer10 admitting that respondent filed its
VAT returns for the 1st and 2nd quarters of 1991 and an application for credit/refund of input VAT
payment. It, however, specifically denied the veracity of the amounts stated in respondent’s VAT
returns and application for credit/refund as the same continued to be under investigation.
On May 26, 1993, respondent filed in CTA Case No. 4968 a "Request for Admissions"11 of, among
other facts, the following:

xxx

5. That the original copies of the Official Receipts and Sales Invoices, reflected in Annex "C"
([Schedule of VAT INPUT on Domestic Purchase of Goods and Services for the quarter ending
March 31, 1991] consisting of 24 pages) and Annex C-1 (Summary of Importation, 2 pages) were
submitted to BIR-VAT, as required, for domestic purchases of goods and services (1st semester,
1991) for a total net claimable of ₱5,268,401.90; while its VAT input tax paid for importation was
₱679,853.00; (Emphasis and underscoring supplied)

xxx

By Reply12 of August 11, 1993, the CIR specifically denied the veracity and accuracy of the amounts
indicated in respondent’s Request for Admissions,13 among other things.

The CIR’s Reply, however, was not verified, prompting respondent to file on August 30, 1993 a
"SUPPLEMENT (To Annotation of Admission)" alleging that as the reply was not under oath, "an
implied admission of [its requests] ar[ose]" as a consequence thereof.14

On September 27, 1993, the CIR filed a Motion to Admit Reply, which Reply was verified and
attached to the motion, alleging that its Reply of August 11, 1993 was "submitted within the period
for submission thereof, but, however, was incomplete [due to oversight] as to the signature of the
administering officer in the verification."15

By Resolution16 of February 28, 1994, the CTA, finding that the matters subject of respondent’s
Request for Admissions are "relevant to the facts stated in the petition for review" and there being an
implied admission by the CIR under Section 2 of Rule 26 of the then Revised Rules of Court reading:

Section 2. Implied Admission. – Each of the matters of which an admission is requested shall be
deemed admitted unless xxx the party to whom the request is directed serves upon the party
requesting the admission a sworn statement either denying specifically the matters of which an
admission is requested xxx. (Emphasis and underscoring supplied),

granted respondent’s Request for Admissions and denied the CIR’s Motion to Admit Reply.

With respect to CTA Case No. 4991, respondent also filed a "Request for Admissions" dated May
27, 1993 of the following facts:

xxx

2. Petitioner’s 3rd and 4th Quarters 1991 VAT Returns were submitted and filed with the BIR-VAT
Divisions on October 21, 1991 and January 20, 1991, respectively and subsequently, on April 7,
1993 petitioner filed and submitted its application for tax credit on VAT paid for the 2nd semester of
1990;

xxx

4. That attached to the transmittal letter [forwarded petitioner’s application for tax refund credit] of
March 31, 1992 (Annex "B") are the following documents:
a. Copies of invoices and other supporting documents;

b. VAT Registration Certificate;

c. VAT returns for the third and fourth quarters of 1990;

d. Beginning and ending inventories of raw materials, work-in process, finished goods and materials
and supplies;

e. Zero-rated sales to Central Bank of the Philippines;

f. Certification that the Company will not file any tax credit with the Board of Investments and Bureau
of Customs.

which completely documented the petitioner’s claim for refund as required.

5. That the original copies of the Official Receipts and Sales Invoices, reflected in Annex "C"
(consisting of 35 pages) and Annex C-1 (Summary of Importation, 2 pages) were submitted to BIR-
VAT, as required, to show domestic purchases of goods and services (2nd semester, 1991) which
established that the total net claimable of ₱7,953,816.38; while its VAT input tax paid for importation
was ₱563,503.00;

x x x17

To the Request for Admission the CIR filed a Manifestation and Motion alleging that as the issues
had not yet been joined, respondent’s request is baseless and premature18 under Section 1, Rule 26
of the Revised Rules of Court.19

In the meantime, the CIR filed on August 16, 1993 its Answer,20 it averring that sales of gold to the
Central Bank may not be legally considered export sales for purposes of Section 100(a) in relation to
Section 100(a)(1)21 of the Tax Code; and that assuming that a refund is proper, respondent must
demonstrate that it complied with the provisions of Section 204(3) in relation to Section 230 of the
Tax Code.22

The CIR subsequently filed on March 25, 1992 its Reply to respondent’s Request for Admission in
CTA No. 4991, it admitting that respondent filed its VAT returns and VAT applications for tax credit
for the 3rd and 4th quarters of 1991, but specifically denying the correctness and veracity of the
amounts indicated in the schedules and summary of importations, VAT services and goods, the total
input and output taxes, including the amount of refund claimed.23

By Resolution24 of February 22, 1994, the CTA, in CTA Case No. 4991, admitted the matters covered
by respondent’s Request for Admission except those specifically denied by the CIR. In the same
Resolution, the CTA consolidated Case Nos. 4968 and 4991, they involving the same parties and
substantially the same factual and legal issues.

Joint hearings of CTA Case Nos. 4968 and 4991 were thus conducted.

Through its Chief Accountant Danilo Bautista, respondent claimed that in 1991, it sold a total of
20,288.676 ounces of gold to the Central Bank valued at ₱200,832,364.70, as certified by the
Director of the Mint and Refinery Department of the Central Bank25 and that in support of its
application for refund filed with the BIR, it submitted copies of all invoices and official receipts
covering its input VAT payments to the VAT Division of the BIR, "the summary and schedules" of
which were certified by its external auditor, the Joaquin Cunanan & Co.26

Senior Audit Manager of Joaquin Cunanan & Co., Irene Ballesteros, who was also presented by
respondent, declared that she conducted a special audit work for respondent for the purpose of
determining its actual input VAT payments for the second semester of 1991 and examined every
original supplier’s invoice, official receipts, and other documents supporting the payments;27 and that
there were no discrepancies or errors between the summaries and schedules of suppliers’ invoices
prepared by respondent and the VAT invoices she examined.28

Following the filing by respondent of its formal offer of evidence in both cases,29 the CTA, by
Resolution30 of July 18, 1995, admitted the same.

Upon the issue of whether respondent’s sales of gold to the BSP during the four quarters of 1991
are subject to 10% VAT under Section 100 of the Tax Code or should be considered zero-rated
under paragraph a(2) of said Section 100, the CTA held that said sales are not subject to 10%
output VAT, citing Atlas Consolidated Mining and Development Corporation v. Court of Appeals,31
Manila Mining Corporation v. Commissioner of Internal Revenue,32 and Benguet Corporation v.
Commissioner of Internal Revenue.33

Nonetheless, the CTA denied respondent’s claim for refund of input VAT for failure to prove that it
paid the amounts claimed as such for the year 1991, no sales invoices, receipts or other documents
as required under Section 2(c)(1) of Revenue Regulations No. 3-88 having been presented.34 The
CTA explained that a mere listing of VAT invoices and receipts, even if certified to have been
previously examined by an independent certified public accountant, would not suffice to establish the
truthfulness and accuracy of the contents of such invoices and receipts unless offered and actually
verified by it (CTA) in accordance with CTA Circular No. 1-95, as amended by CTA Circular No. 10-
97, which requires that photocopies of invoices, receipts and other documents covering said
accounts of payments be pre-marked by the party concerned and submitted to the court.35

Respondent’s motion for reconsideration36 of the CTA decision having been denied by Resolution37 of
February 11, 1999, respondent brought the case to the Court of Appeals before which it contended
that the CTA erred in denying the refund for insufficiency of evidence, it arguing that in light of the
admissions by the CIR of the matters subject of it Requests for Admissions, it was relieved of the
burden of submitting the purchase invoices and/or receipts to support its claims.38

By Decision39 of April 12, 2002, the Court of Appeals reversed the decision of the CTA and granted
respondent’s claim for refund or issuance of tax credit certificates in the amounts of ₱5,683,035.04
for CTA Case No. 4968 and ₱8,173,789.60 for CTA Case No. 4991.

In granting the refund, the appellate court held that there was no need for respondent to present the
photocopies of the purchase invoices or receipts evidencing the VAT paid in view of Rule 26,
Section 2 of the Revised Rules of Court40 and the Resolutions of the CTA holding that the matters
requested in respondent’s Request for Admissions in CTA No. 4968 were deemed admitted by the
CIR41 in light of its failure to file a verified reply thereto.

The appellate court further held that the CIR’s reliance on the best evidence rule is misplaced since
this rule does not apply to matters which have been judicially admitted.42

Hence, the present petition for review,43 the CIR arguing that respondent’s failure to submit
documentary evidence to confirm the veracity of its claims is fatal; and that the CTA, being a court of
record, is not expected to go out of its way and dig into the records of the BIR to supply the
insufficient evidence presented by a party, and in fact it may set a definite rule that only evidence
formally presented will be considered in deciding cases before it.44

Respondent, in its Comment,45 avers that it complied with the provisions of Section 2(c)(1) of
Revenue Regulation No. 3-88 when it submitted the original receipts and invoices to the BIR, which
fact of submission had been deemed admitted by petitioner, as confirmed by the CTA in its
Resolutions in both cases granting respondent’s Requests for Admissions therein.

To respondent’s Comment the Office of the Solicitor General (OSG), on behalf of petitioner, filed its
Reply,46 arguing that the documents required to be submitted to the BIR under Revenue Regulation
No. 3-88 should likewise be presented to the CTA to prove entitlement to input tax credit.47 In
addition, it argues that, contrary to respondent’s position, a certification by an independent Certified
Public Accountant (CPA) as provided under CTA Circulars 1-95 and 10-97 does not relieve
respondent of the onus of adducing in evidence the invoices, receipts and other documents to show
the input VAT paid on its purchase of goods and services.48

The pivotal issue then is whether respondent adduced sufficient evidence to prove its claim for
refund of its input VAT for taxable year 1991 in the amounts of ₱5,683,035.04 and ₱8,173,789.60.

The petition is impressed with merit.

In Commissioner of Internal Revenue v. Benguet Corporation,49 this Court had the occasion to note
that as early as 1988, the BIR issued several VAT rulings to the effect that sales of gold to the
Central Bank by a VAT-registered person or entity are considered export sales.

The transactions in question occurred during the period from 1988 and 1991. Under Sec. 99 of the
National Internal Revenue Code (NIRC), as amended by Executive Order (E.O.) No. 273 s. 1987,
then in effect, any person who, in the course of trade or business, sells, barters or exchanges goods,
renders services, or engages in similar transactions and any person who imports goods is liable for
output VAT at rates of either 10% or 0% ("zero rated") depending on the classification of the
transaction under Sec. 100 of the NIRC. xxx

xxx

In January of 1988, respondent applied for and was granted by the BIR zero-rated status on its sale
of gold to the Central Bank. On 28 August 1988, Deputy Commissioner of Internal Revenue Eufracio
D. Santos issued VAT Ruling No. 3788-88, which declared that "[t]he sale of gold to Central Bank is
considered as export sale subject to zero-rate pursuant to Section 100 of the Tax Code, as amended
by Executive Order No. 273." The BIR came out with at least six (6) other issuances, reiterating the
zero-rating of sale of gold to the Central Bank, the latest of which is VAT Ruling No. 036-90 dated 14
February 1990.

x x x50 (Italics in the original; underscoring supplied)

As export sales, the sale of gold to the Central Bank is zero-rated, hence, no tax is chargeable to it
as purchaser. Zero rating is primarily intended to be enjoyed by the seller – respondent herein,
which charges no output VAT but can claim a refund of or a tax credit certificate for the input VAT
previously charged to it by suppliers.51
For a judicial claim for refund to prosper, however, respondent must not only prove that it is a VAT
registered entity and that it filed its claims within the prescriptive period. It must substantiate the
input VAT paid by purchase invoices or official receipts.52

This respondent failed to do.

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

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

Sec. 16. Refunds or tax credits of input tax. -

(a) Zero-rated sales of goods and services – Only a VAT-registered person may be granted a tax
credit or refund of value-added taxes paid corresponding to the zero-rated sales of goods and
services, to the extent that such taxes have not been applied against output taxes, upon showing of
proof of compliance with the conditions stated in Section 8 of these Regulations.

For export sales, the application should be filed with the Bureau of Internal Revenue within two years
from the date of exportation. For other zero-rated sales, the application should be filed within two
years after the close of the quarter when the transaction took place.

xxx

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

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

Under Section 8 of RA 1125,53 the CTA is described as a court of record. As cases filed before it are
litigated de novo, party litigants should prove every minute aspect of their cases. No evidentiary
value can be given the purchase invoices or receipts submitted to the BIR as the rules on
documentary evidence require that these documents must be formally offered before the CTA.54

This Court thus notes with approval the following findings of the CTA:

xxx [S]ale of gold to the Central Bank should not be subject to the 10% VAT-output tax but this does
not ipso facto mean that [the seller] is entitled to the amount of refund sought as it is required by law
to present evidence showing the input taxes it paid during the year in question. What is being
claimed in the instant petition is the refund of the input taxes paid by the herein petitioner on its
purchase of goods and services. Hence, it is necessary for the Petitioner to show proof that it had
indeed paid the said input taxes during the year 1991. In the case at bar, Petitioner failed to
discharge this duty. It did not adduce in evidence the sales invoice, receipts or other documents
showing the input value added tax on the purchase of goods and services. 55

xxx
Section 8 of Republic Act 1125 (An Act Creating the Court of Tax Appeals) provides categorically
that the Court of Tax Appeals shall be a court of record and as such it is required to conduct a
formal trial (trial de novo) where the parties must present their evidence accordingly if they
desire the Court to take such evidence into consideration.56 (Emphasis and underscoring supplied)

A "sales or commercial invoice" is a written account of goods sold or services rendered indicating the
prices charged therefor or a list by whatever name it is known which is used in the ordinary course of
business evidencing sale and transfer or agreement to sell or transfer goods and services.57

A "receipt" on the other hand is a written acknowledgment of the fact of payment in money or other
settlement between seller and buyer of goods, debtor or creditor, or person rendering services and
client or customer.58

These sales invoices or receipts issued by the supplier are necessary to substantiate the actual
amount or quantity of goods sold and their selling price,59 and taken collectively are the best means to
prove the input VAT payments.

Respondent contends, however, that the certification of the independent CPA attesting to the
correctness of the contents of the summary of suppliers’ invoices or receipts which were examined,
evaluated and audited by said CPA in accordance with CTA Circular No. 1-95 as amended by CTA
Circular No. 10-97 should substantiate its claims.

There is nothing, however, in CTA Circular No. 1-95, as amended by CTA Circular No. 10-97, which
either expressly or impliedly suggests that summaries and schedules of input VAT payments, even if
certified by an independent CPA, suffice as evidence of input VAT payments.

Thus CTA Circular No. 1-95 provides:

1. The party who desires to introduce as evidence such voluminous documents must present: (a) a
Summary containing the total amount/s of the tax account or tax paid for the period involved and a
chronological or numerical list of the numbers, dates and amounts covered by the invoices or
receipts; and (b) a Certification of an independent Certified Public Accountant attesting to the
correctness of the contents of the summary after making an examination and evaluation of the
voluminous receipts and invoices. Such summary and certification must properly be identified by a
competent witness from the accounting firm.

2. The method of individual presentation of each and every receipt or invoice or other documents for
marking, identification and comparison with the originals thereof need not be done before the Court
or the Commissioner anymore after the introduction of the summary and CPA certification. It is
enough that the receipts, invoices and other documents covering the said accounts or payments
must be pre-marked by the party concerned and submitted to the Court in order to be made
accessible to the adverse party whenever he/she desires to check and verify the correctness of the
summary and CPA certification. However, the originals of the said receipts, invoices or documents
should be ready for verification and comparison in case of doubt on the authenticity of the particular
documents presented is raised during the hearing of the case.60 (Underscoring supplied)

The circular, in the interest of speedy administration of justice, was promulgated to avoid the time-
consuming procedure of presenting, identifying and marking of documents before the Court. It does
not relieve respondent of its imperative task of pre-marking photocopies of sales receipts and
invoices and submitting the same to the court after the independent CPA shall have examined and
compared them with the originals. Without presenting these pre-marked documents as evidence –
from which the summary and schedules were based, the court cannot verify the authenticity and
veracity of the independent auditor’s conclusions.61

There is, moreover, a need to subject these invoices or receipts to examination by the CTA in order
to confirm whether they are VAT invoices. Under Section 21 of Revenue Regulation No. 5-87,62 all
purchases covered by invoices other than a VAT invoice shall not be entitled to a refund of input
VAT.

The CTA disposition of the matter is thus in order.

Mere listing of VAT invoices and receipts, even if certified to have been previously examined by an
independent certified public accountant, would not suffice to establish the truthfulness and accuracy
of the contents thereof unless offered and actually verified by this Court. CTA Circular No. 1-95, as
amended by CTA Circular No. 10-97, requires that the photocopies of invoices, receipts and other
documents covering said accounts or payments must be pre-marked by the party and submitted to
this Court.63 (Underscoring supplied)

There being then no showing of abuse or improvident exercise of the CTA’s authority, this Court is
not inclined to set aside the conclusions reached by it, which, by the very nature of its functions, is
dedicated exclusively to the study and consideration of tax problems and has necessarily developed
an expertise on the subject.64

While the CTA is not governed strictly by technical rules of evidence,65 as rules of procedure are not
ends in themselves but are primarily intended as tools in the administration of justice, the
presentation of the purchase receipts and/or invoices is not mere procedural technicality which may
be disregarded considering that it is the only means by which the CTA may ascertain and verify the
truth of respondent’s claims.

The records further show that respondent miserably failed to substantiate its claim for input VAT
refund for the first semester of 1991. Except for the summary and schedules of input VAT payments
prepared by respondent itself, no other evidence was adduced in support of its claim.

As for respondent’s claim for input VAT refund for the second semester of 1991, it employed the
services of Joaquin Cunanan & Co. on account of which it (Joaquin Cunanan & Co.) executed a
certification that:

We have examined the information shown below concerning the input tax payments made by the
Makati Office of Manila Mining Corporation for the period from July 1 to December 31, 1991. Our
examination included inspection of the pertinent suppliers’ invoices and official receipts and such
other auditing procedures as we considered necessary in the circumstances. xxx66

As the certification merely stated that it used "auditing procedures considered necessary" and not
auditing procedures which are in accordance with generally accepted auditing principles and
standards, and that the examination was made on "input tax payments by the Manila Mining
Corporation," without specifying that the said input tax payments are attributable to the sales of gold
to the Central Bank, this Court cannot rely thereon and regard it as sufficient proof of respondent’s
input VAT payments for the second semester.

Finally, respecting respondent’s argument that it need not prove the amount of input VAT it paid for
the first semester of taxable year 1991 as the same was proven by the implied admission of the CIR,
which was confirmed by the CTA when it admitted its Request for Admission,67 the same does not lie.
Respondent’s Requests for Admission do not fall within Section 2 Rule 26 of the Revised Rules of
Court.68 What respondent sought the CIR to admit are the total amount of input VAT payments it paid
for the first and second semesters of taxable year 1991, which matters have already been previously
alleged in respondent’s petition and specifically denied by the CIR in its Answers dated May 10,
1993 and August 16, 1993 filed in CTA Case Nos. 4869 and 4991, respectively.

As Concrete Aggregates Corporation v. Court of Appeals69 holds, admissions by an adverse party as


a mode of discovery contemplates of interrogatories that would clarify and tend to shed light on the
truth or falsity of the allegations in a pleading, and does not refer to a mere reiteration of what has
already been alleged in the pleadings; otherwise, it constitutes an utter redundancy and will be a
useless, pointless process which petitioner should not be subjected to.70

Petitioner controverted in its Answers the matters set forth in respondent’s Petitions for Review
before the CTA – the requests for admission being mere reproductions of the matters already stated
in the petitions. Thus, petitioner should not be required to make a second denial of those matters it
already denied in its Answers.71

As observed by the CTA, petitioner did in fact file its reply to the Request for Admissions in CTA
Case No. 4869 and specifically denied the veracity and accuracy of the figures indicated in
respondent’s summary. The Motion to Admit Reply was, however, denied by the CTA as the original
Reply was not made under oath.

That the Reply was not made under oath is merely a formal and not a substantive defect and may be
dispensed with.72 Although not under oath, petitioner’s reply to the request readily showed that its
intent was to deny the matters set forth in the Request for Admissions.

As for respondent’s Request for Admission in CTA Case No. 4991, petitioner timely filed its reply
and specifically denied the accuracy and veracity of the contents of the schedules and summaries
which listed the input VAT payments allegedly paid by respondent for the second semester of 1991.

For failure of respondent then not only to strictly comply with the rules of procedure but also to
establish the factual basis of its claim for refund, this Court has to deny its claim. A claim for refund
is in the nature of a claim for exemption and should be construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority.73

WHEREFORE, the petition is hereby GRANTED. The assailed Decision of the Court of Appeals
dated April 12, 2002 is hereby REVERSED and SET ASIDE. The Court of Tax Appeals Decision
dated November 24, 1998 is hereby REINSTATED.
G.R. No. 180173 April 6, 2011

MICROSOFT PHILIPPINES, INC., Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

CARPIO, J.:

The Case

Before the Court is a petition1 for review on certiorari assailing the Decision2 dated 24 October 2007
of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 258, which affirmed the Decision3 dated
31 August 2006 and Resolution4 dated 8 January 2007 of the CTA Second Division in CTA Case No.
6681.

The Facts

Petitioner Microsoft Philippines, Inc. (Microsoft) is a value-added tax (VAT) taxpayer duly registered
with the Bureau of Internal Revenue (BIR). Microsoft renders marketing services to Microsoft
Operations Pte Ltd. (MOP) and Microsoft Licensing, Inc. (MLI), both affiliated non-resident foreign
corporations. The services are paid for in acceptable foreign currency and qualify as zero-rated
sales for VAT purposes under Section 108(B)(2) of the National Internal Revenue Code (NIRC) of
1997,5 as amended. Section 108(B)(2) states:

SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. –

(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 x x x;

(2) Services other than those mentioned in the preceding 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); x x x

For the year 2001, Microsoft yielded total sales in the amount of ₱261,901,858.99. Of this amount,
₱235,724,614.68 pertain to sales derived from services rendered to MOP and MLI while
₱26,177,244.31 refer to sales to various local customers. Microsoft paid VAT input taxes in the
amount of ₱11,449,814.99 on its domestic purchases of taxable goods and services.

On 27 December 2002, Microsoft filed an administrative claim for tax credit of VAT input taxes in the
amount of ₱11,449,814.99 with the BIR. The administrative claim for tax credit was filed within two
years from the close of the taxable quarters when the zero-rated sales were made.

On 23 April 2003, due to the BIR's inaction, Microsoft filed a petition for review with the CTA.6
Microsoft claimed to be entitled to a refund of unutilized input VAT attributable to its zero-rated sales
and prayed that judgment be rendered directing the claim for tax credit or refund of VAT input taxes
for taxable year 2001.

On 16 June 2003, respondent Commissioner of Internal Revenue (CIR) filed his answer and prayed
for the dismissal of the petition for review.

In a Decision dated 31 August 2006, the CTA Second Division denied the claim for tax credit of VAT
input taxes. The CTA explained that Microsoft failed to comply with the invoicing requirements of
Sections 113 and 237 of the NIRC as well as Section 4.108-1 of Revenue Regulations No. 7-957 (RR
7-95). The CTA stated that Microsoft's official receipts do not bear the imprinted word "zero-rated" on
its face, thus, the official receipts cannot be considered as valid evidence to prove zero-rated sales
for VAT purposes.

Microsoft filed a motion for reconsideration which was denied by the CTA Second Division in a
Resolution dated 8 January 2007.

Microsoft then filed a petition for review with the CTA En Banc.8 In a Decision dated 24 October
2007, the CTA En Banc denied the petition for review and affirmed in toto the Decision dated 31
August 2006 and Resolution dated 8 January 2007 of the CTA Second Division. The CTA En Banc
found no new matters that have not been considered and passed upon by the CTA Second Division
and stated that the petition had only been a mere rehash of the arguments earlier raised.

Hence, this petition.

The Issue

The main issue is whether Microsoft is entitled to a claim for a tax credit or refund of VAT input taxes
on domestic purchases of goods or services attributable to zero-rated sales for the year 2001 even if
the word "zero-rated" is not imprinted on Microsoft's official receipts.

The Court’s Ruling

The petition lacks merit.

Microsoft insists that Sections 113 and 237 of the NIRC and Section 4.108-1 of RR 7-95 do not
provide that failure to indicate the word "zero-rated" in the invoices or receipts would result in the
outright invalidation of these invoices or receipts and the disallowance of a claim for tax credit or
refund.

At the outset, a tax credit or refund, like tax exemption, is strictly construed against the taxpayer.9
The taxpayer claiming the tax credit or refund has the burden of proving that he is entitled to the
refund or credit, in this case VAT input tax, by submitting evidence that he has complied with the
requirements laid down in the tax code and the BIR's revenue regulations under which such privilege
of credit or refund is accorded.

Sections 113(A) and 237 of the NIRC which provide for the invoicing requirements for VAT-
registered persons state:

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


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

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

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

SEC. 237. Issuance of Receipts or Sales or Commercial Invoices. – All persons subject to an
internal revenue tax shall, for each sale or transfer of merchandise or for services rendered valued at
Twenty-five pesos (P25.00) or more, issue duly registered receipts or sales or commercial invoices,
prepared at least in duplicate, showing the date of transaction, quantity, unit cost and description of
merchandise or nature of service: Provided, however, That in the case of sales, receipts or transfers
in the amount of One hundred pesos (₱100.00) or more, or regardless of the amount, where the sale
or transfer is made by a person liable to value-added tax to another person also liable to value-
added tax; or where the receipt is issued to cover payment made as rentals, commissions,
compensations or fees, receipts or invoices shall be issued which shall show the name, business
style, if any, and address of the purchaser, customer or client: Provided, further, That where the
purchaser is a VAT-registered person, in addition to the information herein required, the invoice or
receipt shall further show the Taxpayer Identification Number (TIN) of the purchaser.

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

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

Related to these provisions, Section 4.108-1 of RR 7-95 enumerates the information which must
appear on the face of the official receipts or invoices for every sale of goods by VAT-registered
persons. At the time Microsoft filed its claim for credit of VAT input tax, RR 7-95 was already in
effect. The provision states:

Sec. 4.108-1. Invoicing Requirements. – All VAT-registered persons shall, for every sale or lease
of goods or properties or services, issue duly registered receipts or sales or commercial invoices
which must show:

1. the name, TIN and address of seller;

2. date of transaction;

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

4. the name, TIN, business style, if any, and address of the VAT-registered
purchaser, customer or client;
5. the word "zero-rated" imprinted on the invoice covering zero-rated sales;
and

6. the invoice value or consideration.

xxx

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

The invoicing requirements for a VAT-registered taxpayer as provided in the NIRC and revenue
regulations are clear. A VAT-registered taxpayer is required to comply with all the VAT invoicing
requirements to be able to file a claim for input taxes on domestic purchases for goods or services
attributable to zero-rated sales. A "VAT invoice" is an invoice that meets the requirements of Section
4.108-1 of RR 7-95. Contrary to Microsoft's claim, RR 7-95 expressly states that "[A]ll purchases
covered by invoices other than a VAT invoice shall not give rise to any input tax." Microsoft's
invoice, lacking the word "zero-rated," is not a "VAT invoice," and thus cannot give rise to any input
tax.

The subsequent enactment of Republic Act No. 933710 on 1 November 2005 elevating provisions of
RR 7-95 into law merely codified into law administrative regulations that already had the force and
effect of law. Such codification does not mean that prior to the codification the administrative
regulations were not enforceable.

We have ruled in several cases11 that the printing of the word "zero-rated" is required to be placed on
VAT invoices or receipts covering zero-rated sales in order to be entitled to claim for tax credit or
refund. In Panasonic v. Commissioner of Internal Revenue,12 we held that 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 is actually paid. Absent such word, the
government may be refunding taxes it did not collect.

Here, both the CTA Second Division and CTA En Banc found that Microsoft's receipts did not
indicate the word "zero-rated" on its official receipts. The findings of fact of the CTA are not to be
disturbed unless clearly shown to be unsupported by substantial evidence.13 We see no reason to
disturb the CTA's findings. Indisputably, Microsoft failed to comply with the invoicing requirements of
the NIRC and its implementing revenue regulation to claim a tax credit or refund of VAT input tax for
taxable year 2001.

WHEREFORE, we DENY the petition. We AFFIRM the Decision dated 24 October 2007 of the Court
of Tax Appeals En Banc in CTA EB No. 258.

SO ORDERED.

ANTONIO T. CARPIO
Associate Justice

WE CONCUR:
G.R. No. 179961 January 31, 2011

KEPCO PHILIPPINES CORPORATION, Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

MENDOZA, J.:

This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure assailing
the May 17, 2007 Decision1 of the Court of Tax Appeals En Banc (CTA), in C.T.A. E.B. No. 186
entitled "KEPCO Philippines Corporation v. Commissioner of Internal Revenue," which denied
petitioner’s claim for refund or issuance of tax credit certificate for the unapplied input value-added
taxes attributable to zero-rated sales of services for taxable year 1999, as well as its Resolution,
dated September 28, 2007, which denied the motion for reconsideration of the said decision.

THE FACTS

Petitioner Kepco Philippines Corporation (Kepco) is a domestic corporation duly organized and
existing under and by virtue of the laws of the Republic of the Philippines. It is a value-added tax
(VAT) registered taxpayer engaged in the production and sale of electricity as an independent power
producer. It sells its electricity to the National Power Corporation (NPC). Kepco filed with respondent
Commissioner of Internal Revenue (CIR) an application for effective zero-rating of its sales of
electricity to the NPC.

Kepco alleged that for the taxable year 1999, it incurred input VAT in the amount of ₱10,527,202.54
on its domestic purchases of goods and services that were used in its production and sale of
electricity to NPC for the same period. In its 1999 quarterly VAT returns filed with the Bureau of
Internal Revenue (BIR) on March 30, 2000, Kepco declared the said input VAT as follows:

INPUT TAX

Exhibit 1999 Carried-over from This quarter Carried over previous quarter to next quarter

A 1st qtr 100,564,209.14 4,804,974.70 105,369,183.84

B 2nd qtr 105,369,183.84 1,461,960.38 106,831,144.22

C 3rd qtr 106,831,144.22 2,563,288.00 109,394,432.22

D 4th qtr 109,394,432.22 1,696,979.46 111,091,411.68

TOTAL
₱10,527,202.54:2

Thus, on January 29, 2001, Kepco filed an administrative claim for refund corresponding to its
reported unutilized input VAT for the four quarters of 1999 in the amount of ₱10,527,202.54.
Thereafter, on April 24, 2001, Kepco filed a petition for review before the CTA pursuant to Section
112(A) of the 1997 National Internal Revenue Code (NIRC), which grants refund of unutilized input
taxes attributable to zero-rated or effectively zero-rated sales. This was docketed as CTA Case No.
6287.
On August 31, 2005, the CTA Second Division rendered a decision3 denying Kepco’s claim for
refund for failure to properly substantiate its effectively zero-rated sales for the taxable year 1999 in
the total amount of ₱860,340,488.96, with the alleged input VAT of ₱10,527,202.54 directly
attributable thereto. The tax court held that Kepco failed to comply with the invoicing requirements in
clear violation of Section 4.108-1 of Revenue Regulations (R.R.) No. 7-95, implementing Section
108(B)(3) in conjunction with Section 113 of the 1997 NIRC.

In view of the denial of its motion for reconsideration, Kepco filed an appeal via petition for review
before the CTA En Banc, on the ground that the CTA Second Division erred in not considering the
amount of ₱10,514,023.92 as refundable tax credit and in failing to appreciate that it was exclusively
selling electricity to NPC, a tax exempt entity.

On May 17, 2007, the CTA En Banc dismissed the petition, reasoning out that Kepco’s failure to
comply with the requirement of imprinting the words "zero-rated" on its official receipts resulted in
non-entitlement to the benefit of VAT zero-rating and denial of its claim for refund of input tax. The
decision reads in part:

In sum, the Court En Banc finds no cogent justification to disturb the findings and conclusion spelled
out in the assailed August 31, 2005 Decision and May 4, 2006 Resolution of the CTA Second
Division. What the instant petition seeks is for the Court En Banc to view and appreciate the
evidence in their own perspective of things, which unfortunately had already been considered and
passed upon.

WHEREFORE, the instant Petition is hereby DENIED DUE COURSE and DISMISSED for lack of
merit.

SO ORDERED.4

Presiding Justice Ernesto D. Acosta agreed with the majority that services rendered by a VAT-
registered entity to the NPC, a tax-exempt entity, were effectively zero-rated. He was likewise of the
view that Kepco’s claim could not be granted because it presented official receipts which were not in
sequence indicating, that it might have sold electricity to entities other than NPC. But, he strongly
dissented on the outright rejection of Kepco’s refund claim for failure to comply with the imprinting
requirements. His dissenting opinion states in part:

However, I dissent to the majority’s finding that imprinting the term "zero-rated" as well as the BIR
authority to print or BIR Permit marker on duly registered Value Added Tax (VAT) official
receipts/invoices is necessary such that non-compliance would result to the outright denial of
petitioner’s claim.

Xxxx

Clearly, the applicable provisions of the Tax Code does not require the word "zero-rated" or the other
information required by the majority in the invoice/official receipt. The "requirement" of imprinting the
questioned information on the VAT invoice or receipt can be found in Section 4.108-1 of Revenue
Regulations No. 7-95 (The Implementing Rules and Regulations of the VAT law). Then again, the
said provision is merely a regulation created for the sole and limited purpose of implementing an
otherwise very exact law.

Moreover, granting for the sake of argument that the Revenue Regulations above cited may validly
impose such requirements, no provision allows the outright rejection of a refund claim as penalty for
a tax-payer’s failure to abide by the requirements laid down in the said regulations.5
Kepco filed a motion for reconsideration of the decision but it was denied for lack of merit by the CTA
En Banc in its Resolution6 dated September 28, 2007.

Hence, Kepco interposes this petition praying for the reversal and setting aside of the May 17, 2007
CTA Decision anchored on the following

GROUNDS:

(I)

THE COURT OF TAX APPEALS EN BANC COMMITTED SERIOUS ERROR OF LAW WHEN IT
RULED THAT PETITIONER’S FAILURE TO IMPRINT THE WORDS "ZERO-RATED" ON ITS VAT
OFFICIAL RECEIPTS ISSUED TO NPC IS FATAL TO ITS CLAIM FOR REFUND OF UNUTILIZED
INPUT TAX CREDITS.

(II)

PETITIONER HAS SUFFICIENTLY PROVEN THAT IT IS RIGHTFULLY ENTITLED TO A REFUND


OR ISSUANCE OF TAX CREDIT CERTIFICATE IN THE AMOUNT OF PHP10,514,023.92.7

From the foregoing arguments, the principal issue to be resolved is whether Kepco’s failure to
imprint the words "zero-rated" on its official receipts issued to NPC justifies an outright denial of its
claim for refund of unutilized input tax credits.

Kepco contends that the provisions of the 1997 Tax Code, specifically Section 113 in relation to
Section 237, do not mention the mandatory requirement of imprinting the words "zero-rated" to
purchases covering zero-rated transactions. The only provision which requires the imprinting of the
word "zero-rated" on VAT invoice or official receipt is Section 4.108-1 of R.R. No. 7-95. Kepco
argues that the condition imposed by the said administrative issuance should not be controlling over
Section 113 of the 1997 Tax Code, "considering the long-settled rule that administrative rules and
regulations cannot expand the letter and spirit of the law they seek to enforce."

Kepco further argues that there is no law or regulation which imposes automatic denial of taxpayer’s
refund claim for failure to comply with the invoicing requirements. No jurisprudence sanctions the
same, not even the Atlas case,8 cited by the CTA En Banc. According to Kepco, although it agrees
with the CTA ruling that administrative issuances, like BIR regulations, requiring an imprinting of
"zero-rated" on zero-rating transactions should be strictly complied with, it opposes the outright
denial of refund claim for non-compliance thereof. It insists that such automatic denial is too harsh a
penalty and runs counter to the doctrine of solutio indebiti under Article 2154 of the New Civil Code.

The CIR, in his Comment,9 counters that Kepco is not entitled to a tax refund because it was not able
to substantiate the amount of ₱10,514,023.92 representing zero-rated transactions for failure to
submit VAT official receipts and invoices imprinted with the wordings "zero-rated" in violation of
Section 4.108-1 of R.R. 7-95.

The petition is bereft of merit.

The pertinent laws governing the present case is Section 108(B)(3) of the NIRC of 1997 in relation to
Section 13 of Republic Act (R.A.) No. 6395 (The Revised NPC Charter), as amended by Presidential
Decree (P.D.) Nos. 380 and 938, which provide as follows:
Sec. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. –

(A) Rate and Base of Tax. – 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:

xxx

(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 percent (0%) rate;

xxx

Sec. 13. Non-profit Character of the Corporation; Exemption from All Taxes, Duties, Fees,
Imposts and Other Charges by the Government and Government Instrumentalities. The
Corporation shall be non-profit and shall devote all its return from its capital investment as well as
excess revenues from its operation, for expansion. To enable the Corporation to pay its
indebtedness and obligations and in furtherance and effective implementation of the policy
enunciated in Section One of this Act, the Corporation, including its subsidiaries, is hereby declared
exempt from the payment of all forms of taxes, duties, fees, imposts as well as costs and service
fees including filing fees, appeal bonds, supersedeas bonds, in any court or administrative
proceedings.

Based on the afore-quoted provisions, there is no doubt that NPC is an entity with a special charter
and exempt from payment of all forms of taxes, including VAT. As such, services rendered by any
VAT-registered person/entity, like Kepco, to NPC are effectively subject to zero percent (0%) rate.

For the effective zero rating of such services, however, the VAT-registered taxpayer must comply
with invoicing requirements under Sections 113 and 237 of the 1997 NIRC as implemented by
Section 4.108-1 of R.R. No. 7-95, thus:

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

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

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


taxpayer’s identification number; and

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

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


persons subject to the value-added tax under Sections 106 and 108 shall, in addition
to the regular accounting records required, maintain a subsidiary sales journal and
subsidiary purchase journal on which the daily sales and purchases are recorded. 1âwphi1
The subsidiary journals shall contain such information as may be required by the
Secretary of Finance.10 (Emphasis supplied)

Sec. 237. Issuance of Receipts or Sales or Commercial Invoices. – All persons subject to an
internal revenue tax shall, for each sale or transfer of merchandise or for services rendered valued at
Twenty-five pesos (₱25.00) or more, issue duly registered receipts or sales or commercial invoices,
prepared at least in duplicate, showing the date of transaction, quantity, unit cost and description of
merchandise or nature of service: Provided, however, That in the case of sales, receipts or transfers
in the amount of One Hundred Pesos (₱100.00) or more, or regardless of amount, where the sale or
transfer is made by a person liable to value-added tax to another person also liable to value-added
tax; or where the receipt is issued to cover payment made as rentals, commissions, compensations
or fees, receipts or invoices shall be issued which shall show the name, business style, if any, and
address of the purchaser, customer or client; Provided, further, That where the purchaser is a VAT-
registered person, in addition to the information herein required, the invoice or receipt shall further
show the Taxpayer Identification Number (TIN) of the purchaser.

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

The Commissioner may, in meritorious cases, exempt any person subject to an internal revenue tax
from compliance with the provisions of this Section.11

Section 4.108-1. Invoicing Requirements. – All VAT-registered persons shall, for every sale or
lease of goods or properties or services, issue duly registered receipts or sales or commercial
invoices which must show:

1. The name, TIN and address of seller;

2. Date of transaction;

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

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

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

6. The invoice value or consideration.

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

Only VAT-registered persons are required to print their TIN followed by the word "VAT" in
their invoices or receipts and this shall be considered as "VAT Invoice." All purchases covered
by invoices other than "VAT Invoice" shall not give rise to any input tax.
If the taxable person is also engaged in exempt operations, he should issue separate invoices or
receipts for the taxable and exempt operations. A "VAT Invoice" shall be issued only for sales of
goods, properties or services subject to VAT imposed in Sections 100 and 102 of the code.

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

Also, as correctly noted by the CTA En Banc, in Kepco’s approved Application/Certificate for Zero
Rate issued by the CIR on January 19, 1999, the imprinting requirement was likewise specified, viz:

Valid only for sale of services from Jan. 19, 1999 up to December 31, 1999 unless sooner revoked.

Note: Zero-Rated Sales must be indicated in the invoice/receipt.12

Indeed, it is the duty of Kepco to comply with the requirements, including the imprinting of the words
"zero-rated" in its VAT official receipts and invoices in order for its sales of electricity to NPC to
qualify for zero-rating.

It must be emphasized that the requirement of imprinting the word "zero-rated" on the invoices or
receipts under Section 4.108-1 of R.R. No. 7-95 is mandatory as ruled by the CTA En Banc, citing
Tropitek International, Inc. v. Commissioner of Internal Revenue.13 In Kepco Philippines Corporation
v. Commissioner of Internal Revenue,14 the CTA En Banc explained the rationale behind such
requirement in this wise:

The imprinting of "zero-rated" is necessary to distinguish sales subject to 10% VAT, those that are
subject to 0% VAT (zero-rated) and exempt sales, to enable the Bureau of Internal Revenue to
properly implement and enforce the other provisions of the 1997 NIRC on VAT, namely:

1. Zero-rated sales [Sec. 106(A)(2) and Sec. 108(B)];

2. Exempt transactions [Sec. 109] in relation to Sec. 112(A);

3. Tax Credits [Sec. 110]; and

4. Refunds or tax credits of input tax [Sec. 112]

xxx

Records disclose, as correctly found by the CTA that Kepco failed to substantiate the claimed zero-
rated sales of ₱10,514,023.92. The wordings "zero-rated sales" were not imprinted on the VAT
official receipts presented by Kepco (marked as Exhibits S to S-11) for taxable year 1999, in clear
violation of Section 4.108-1 of R.R. No. 7-95 and the condition imposed under its approved
Application/Certificate for Zero-rate as well.

Kepco’s claim that Section 4.108-1 of R.R. 7-95 expanded the letter and spirit of Section 113 of 1997
Tax Code, is unavailing. Indubitably, said revenue regulation is merely a precautionary measure to
ensure the effective implementation of the Tax Code. It was not used by the CTA to expound the
meaning of Sections 113 and 237 of the NIRC. As a matter of fact, the provision of Section 4.108-1
of R.R. 7-95 was incorporated in Section 113 (B)(2)(c) of R.A. No. 9337,15 which states that "if the
sale is subject to zero percent (0%) value-added tax, the term ‘zero-rated sale’ shall be written or
printed prominently on the invoice or receipt." This, in effect, and as correctly concluded by the CIR,
confirms the validity of the imprinting requirement on VAT invoices or official receipts even prior to
the enactment of R.A. No. 9337 under the principle of legislative approval of administrative
interpretation by reenactment.

Quite significant is the ruling handed down in the case of Panasonic Communications Imaging
Corporation of the Philippines v. Commissioner of Internal Revenue, 16 to wit:

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. 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.

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. Unable to submit the proper invoices,
petitioner Panasonic has been unable to substantiate its claim for refund.

To bolster its claim for tax refund or credit, Kepco cites the case of Intel Technology Philippines, Inc.
v. Commissioner of Internal Revenue.17 Kepco’s reliance on the said case is misplaced because the
factual milieu there is quite different from that of the case at bench. In the Intel case, the claim for tax
refund or issuance of a tax credit certificate was denied due to the taxpayer’s failure to reflect or
indicate in the sales invoices the BIR authority to print. The Court held that the BIR authority to print
was not one of the items required by law or BIR regulation to be indicated or reflected in the invoices
or receipts, hence, the BIR erred in denying the claim for refund. In the present case, however, the
principal ground for the denial was the absence of the word "zero-rated" on the invoices, in clear
violation of the invoicing requirements under Section 108(B)(3) of the 1997 NIRC, in conjunction with
Section 4.108-1 of R.R. No. 7-95.

Regarding Kepco’s contention, that non-compliance with the requirement of invoicing would only
subject the non-complying taxpayer to penalties of fine and imprisonment under Section 264 of the
Tax Code, and not to the outright denial of the claim for tax refund or credit, must likewise fail.
Section 264 categorically provides for penalties in case of "Failure or Refusal to Issue Receipts or
Sales or Commercial Invoices, Violations related to the Printing of such Receipts or Invoices and
Other Violations," but not to penalties for failure to comply with the requirement of invoicing. As
recently held in Kepco Philippines Corporation v. Commissioner of Internal Revenue,18 "Section 264
of the 1997 NIRC was not intended to excuse the compliance of the substantive invoicing
requirement needed to justify a claim for refund on input VAT payments."

Thus, for Kepco’s failure to substantiate its effectively zero-rated sales for the taxable year 1999, the
claimed ₱10,527,202.54 input VAT cannot be refunded.

Indeed, in a string of recent decisions on this matter, to wit: Panasonic Communications Imaging
Corporation of the Philippines v. Commissioner of Internal Revenue,19 J.R.A. Philippines, Inc. v.
Commissioner of Internal Revenue,20 Hitachi Global Storage Technologies Philippines Corp.
(formerly Hitachi Computer Products (Asia) Corporations) v. Commissioner of Internal Revenue,21
and Kepco Philippines Corporation v. Commissioner of Internal Revenue,22 this Court has
consistently held that failure to print the word "zero-rated" on the invoices or receipts is fatal to a
claim for refund or credit of input VAT on zero-rated sales.
Contrary to Kepco’s view, the denial of its claim for refund of input tax is not a harsh penalty. The
1âwphi1

invoicing requirement is reasonable and must be strictly complied with, as it is the only way to
determine the veracity of its claim.

Well-settled in this jurisdiction is the fact that actions for tax refund, as in this case, are in the nature
of a claim for exemption and the law is construed in strictissimi juris against the taxpayer. The pieces
of evidence presented entitling a taxpayer to an exemption are also strictissimi scrutinized and must
be duly proven.23

WHEREFORE, the petition is DENIED.

SO ORDERED.
G.R. No. 178090 February 8, 2010

PANASONIC COMMUNICATIONS IMAGING CORPORATION OF THE PHILIPPINES (formerly


MATSUSHITA BUSINESS MACHINE CORPORATION OF THE PHILIPPINES), Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

ABAD, J.:

This petition for review puts in issue the May 23, 2007 Decision1 of the Court of Tax Appeals (CTA)
en banc in CTA EB 239, entitled "Panasonic Communications Imaging Corporation of the
Philippines v. Commissioner of Internal Revenue," which affirmed the denial of 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 taxes8 that 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. 9337.12 Panasonic 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.

Costs against petitioner.

SO ORDERED.

ROBERTO A. ABAD
Associate Justice
G.R. No. 182737, March 02, 2016

SILICON PHILIPPINES, INC. (FORMERLY INTEL PHILIPPINES MANUFACTURING, INC.), Petitioner,


v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

SERENO, C.J.:

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the Court of Tax
Appeals (CTA) En Banc Decision1 dated 18 January 2008 and Resolution2 dated 30 April 2008 in CTA EB No.
298.

The CTA En Banc affirmed the CTA Second Division Decision3 dated 5 February 2007 and Resolution4 dated
29 June 2007 in CTA Case Nos. 6741, 6800 & 6841. That Decision denied the claim for tax refund or
issuance of tax credit certificates corresponding to petitioner's excess/unutilized input value-added tax (VAT)
for the 2nd, 3rd and 4th quarters of taxable year 2001. The CTA En Banc Resolution denied petitioner's motion
for reconsideration.

FACTS

Petitioner is a corporation engaged in the business of designing, developing, manufacturing and exporting
integrated circuit components.5 It is a preferred pioneer enterprise registered with the Board of
Investments.6 It is likewise registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer by
virtue of its sale of goods and services7 with a permit to print accounting documents like sales invoices and
official receipts.8

On 24 July 2001, petitioner filed its 2nd Quarter VAT Return reporting the amount of P765,696,325.68 as its
zero-rated sales.9

Its 3rd Quarter VAT Return filed on 23 October 2001 indicated zero-rated sales in the amount of
P571,812,011.26.10 This amount was increased to P678,418,432.83 in the Amended 3rd Quarter VAT Return
filed on 29 October 2001.11

The 4th Quarter VAT Return filed on 15 January 2002 reported zero-rated sales in the amount of
P1,000,052,659.89.12 This amount remained unchanged in the Amended 4th Quarter VAT Return filed on 22
May 2002.13

Petitioner sought to recover the VAT it paid on imported capital goods for the 2nd quarter of 2001. On 16
October 2001, it filed with the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center,
Department of Finance, an application for a tax credit/refund in the amount of P9,038,279.56.14

On 4 September 2002, petitioner also filed for a tax credit/refund of the VAT it had paid on imported capital
goods for the 3rd and 4th quarters of 2001 in the amounts of P1,420,813.0415 and P14,582,023.62,16
respectively.

Because of the continuous inaction by respondent on the administrative claims of petitioner for a tax
credit/refund in the total amount of P25,041,116.22,17 the latter filed separate petitions for review before
the CTA.

CTA Case No. 6741 filed on 30 July 2003 sought to recover P9,038,279.56 for the 2nd quarter of 2001;18 CTA
Case No. 6800 filed on 20 October 2003, the amount of P1,420,813.04 for the 3rd quarter of 2001;19 and
CTA Case No. 6841 filed on 30 December 2003, P14,582,023.62 for the 4th quarter of 2001.20

The three cases were consolidated by the CTA Second Division in a Resolution dated 20 February 2004.21
Trial on the merits ensued, and the case was submitted for decision on 23 August 2007.22

RULING OF THE CTA SECOND DIVISION

In a Decision23 dated 5 February 2007, the CTA Second Division dismissed the petitions for lack of merit.
It ruled that pursuant to Section 112 of the National Internal Revenue Code (NIRC), the refund/tax credit of
unutilized input VAT is allowed (a) when the excess input VAT is attributable to zero-rated or effectively
zero-rated sales; and (b) when the excess input VAT is attributable to capital goods purchased by a VAT-
registered person.24

In order to prove zero-rated export sales,25 a VAT-registered person must present the following: (1) the
sales invoice as proof of the sale of goods; (2) the export declaration or bill of lading/airway bill as proof of
actual shipment of the goods from the Philippines to a foreign country; and (3) bank credit advice or
certificate of remittance or any other document proving payment for the goods in acceptable foreign
currency or its equivalent in goods and services.26

The CTA Second Division found that petitioner presented nothing more than a certificate of inward
remittances for the entire year 2001, in compliance with the third requirement only.27 That being the case,
petitioner's reported export sales in the total amount of P2,444,167,418.4028 cannot qualify as VAT zero-
rated sales.29

On the other hand, a taxpayer claiming a refund/tax credit of input VAT paid on purchased capital goods
must prove all of the following: (1) that it is a VAT-registered entity; (2) that it paid input VAT on capital
goods purchased; (3) that its input VAT payments on capital goods were duly supported by VAT invoices or
official receipts; (4) that it did not offset or apply the claimed input VAT payments on capital goods against
any output VAT liability; and (5) that the administrative and judicial claims for a refund were filed within the
two-year prescriptive period.30

The CTA Second Division found that petitioner was able to prove the first and the fifth requisites for the
pertinent quarters of the year 2001.31

However, petitioner was not able to prove the fourth requisite with regard to the claimed input VAT
payments for the 3rd and the 4th quarters of 2001. The evidence purportedly showing that it had not offset or
applied the claimed input VAT payment against any output VAT liability was denied admission as evidence
for being a mere photocopy.32

Petitioner also failed to prove the second and the third requisite with regard to the claimed input VAT
payment for the 2nd quarter of 2001. Specifically, it failed to prove that the purchases were capital goods.33

For purchases to fall under the definition of capital goods or properties, the following conditions must be
present: (1) the goods or properties have an estimated useful life of more than one year; (2) they are
treated as depreciable assets under Section 29(f) of Revenue Regulations No. 7-95; and (3) they are used
directly or indirectly in the production or sale of taxable goods or services.34

The CTA Second Division perused the Summary List of Importations on Capital Goods for the 2nd quarter of
2001 presented by petitioner and found items therein that could not be considered as depreciable assets.35
As to the rest of the items, petitioner failed to present the detailed general ledgers and audited financial
statements to show that those goods were capitalized in the books of accounts and subjected to
depreciation.36

Petitioner filed a Motion for Reconsideration, which was denied in the Resolution dated 29 June 2007.37 It
then filed before the CTA En Banc a petition for review challenging the CTA Second Division Decision and
Resolution.

RULING OF THE CTA EN BANC

The CTA En Banc issued the assailed Decision38 dated 18 January 2008 dismissing the petition for lack of
merit.

It affirmed the finding of the CTA Second Division that petitioner had failed to prove its capital goods
purchases for the 2nd quarter of the year 2001.39 The CTA En Banc emphasized the evidentiary nature of a
claim that a VAT-registered person made capital goods purchases.40 It is necessary to ascertain the
treatment of the purported capital goods as depreciable assets, which can only be determined through the
examination of the detailed general ledgers and audited financial statements, including the person's income
tax return.41 In view of petitioner's lack of evidence on this point, the claim for the refund or the issuance of
tax credit certificates must be denied.
Petitioner's Motion for Reconsideration was denied in the challenged Resolution dated 30 April 2008.42

Issues

Petitioner now comes before us raising the following issues for our consideration:
chanRoblesvirtualLawlibrary

I.

[WHETHER] THE COURT OF TAX APPEALS ERRED IN DENYING [PETITIONER'S] CLAIM FOR REFUND OF ITS
EXCESS / UNUTILIZED INPUT VAT DERIVED FROM IMPORTATION OF CAPITAL GOODS DUE TO ITS FAILURE
TO PROVE THE EXISTENCE OF ZERO-RATED EXPORT SALES.

II.

[WHETHER] THE COURT OF TAX APPEALS ERRED IN FINDING THAT [PETITIONER] FAILED TO COMPLY WITH
THE REQUIREMENTS OF A VALID CLAIM FOR REFUND / TAX CREDIT OF INPUT VAT PAID ON ITS
IMPORTATION OF CAPITAL GOODS.

III.

[WHETHER] THE COURT OF TAX APPEALS ERRED IN RULING THAT [PETITIONER] FAILED TO PROVE THAT
THE GOODS IMPORTED ARE CAPITAL GOODS

IV.

[WHETHER] THE INPUT VAT ON THE ALLEGED NON-CAPITAL GOODS ARE STILL REFUNDABLE BECAUSE
THEY ARE ATTRIBUTABLE TO THE ZERO RATED SALES OF [PETITIONER, A 100% EXPORT ENTERPRISE]43 ChanRoblesVirtualawlibrary

In the Resolution dated 30 July 2008, we required respondent to comment on the petition. The Comment
44

dated 21 January 200945 was filed by the Office of the Solicitor General as counsel.

OUR RULING

The applicable provision of the NIRC, as amended, is Section 112,46 which provides:
chanRoblesvirtualLawlibrary

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

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

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

(C) Cancellation of VAT Registration. — A person whose registration has been cancelled due to retirement
from or cessation of business, or due to changes in or cessation of status under Section 106(C) of this Code
may, within two (2) years from the date of cancellation, apply for the issuance of a tax credit certificate for
any unused input tax which may be used in payment of his other internal revenue taxes.

(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 in accordance with [Subsections] (A) [and (B)] hereof.
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.

(E) Manner of Giving Refund. — Refunds shall be made upon warrants drawn by the Commissioner or by his
duly authorized representative without the necessity of being countersigned by the Chairman, Commission
on Audit, the provisions of the Administrative Code of 1987 to the contrary notwithstanding: Provided, That
refunds under this paragraph shall be subject to post audit by the Commission on Audit. (Emphases
supplied)
Under the foregoing provision, the administrative claim of a VAT-registered person for the issuance by
respondent of tax credit certificates or the refund of input taxes paid on zero-rated sales or capital goods
imported may be made within two years after the close of the taxable quarter when the sale or
importation/purchase was made.

In the case of petitioner, its administrative claim for the 2nd quarter of the year 2001 was filed on 16
October 2001, well within the two-year period provided by law. The same is true with regard to the
administrative claims for the 3rd and the 4th quarters of 2001, both of which were filed on 4 September
2002.

Upon the filing of an administrative claim, respondent is given a period of 120 days within which to (1) grant
a refund or issue the tax credit certificate for creditable input taxes; or (2) make a full or partial denial of
the claim for a tax refund or tax credit. Failure on the part of respondent to act on the application within the
120-day period shall be deemed a denial.

Note that the 120-day period begins to run from the date of submission of complete documents supporting
the administrative claim. If there is no evidence showing that the taxpayer was required to submit47 - or
actually submitted - additional documents after the filing of the administrative claim, it is presumed that the
complete documents accompanied the claim when it was filed.48

Considering that there is no evidence in this case showing that petitioner made later submissions of
documents in support of its administrative claims, the 120-day period within which respondent is allowed to
act on the claims shall be reckoned from 16 October 2001 and 4 September 2002.

Whether respondent rules in favor of or against the taxpayer - or does not act at all on the administrative
claim - within the period of 120 days from the submission of complete documents, the taxpayer may resort
to a judicial claim before the CTA.

Section 7 of Republic Act No. (R.A.) 1125 (An Act Creating the Court of Tax Appeals), as amended,
provides:
chanRoblesvirtualLawlibrary

SECTION 7. Jurisdiction. — The CTA shall exercise:

a. Exclusive appellate jurisdiction to review by appeal, as herein provided:

1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,


refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters
arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal
Revenue;

2. Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds
of internal revenue taxes, fees or other charges, penalties in relations thereto, or other matters arising
under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue,
where the National Internal Revenue Code provides a specific period of action, in which case the
inaction shall be deemed a denial; (Emphasis supplied)
The judicial claim shall be filed within a period of 30 days after the receipt of respondent's decision or ruling
or after the expiration of the 120-day period, whichever is sooner.49

Aside from a specific exception to the mandatory and jurisdictional nature of the periods provided by the
law,50 any claim filed in a period less than or beyond the 120+30 days provided by the NIRC is outside the
jurisdiction of the CTA.51

As shown by the table below, the judicial claims of petitioner were filed beyond the 120+30 day period:
chanRoblesvirtualLawlibrary

End of End of
Taxable Judicial Number
Administrative the 120- the 30-
Quarter Claim of Days
Claim Filed day day
of 2001 Filed Late
Period Period

13
15 March 30 July
2nd 16 October 2001 February 502 days
2002 2003
2002

2 1 20
4 September
3rd January February October 261 days
2002
2003 2003 2003

2 1 30
4 September
4th January February December 332 days
2002
2003 2003 2003
The judicial claim for the 4th quarter of 2001, while filed within the period 10 December 2003 up to 6
October 2010, cannot find solace in BIR Ruling No. DA-489-03. The general interpretative rule allowed the
premature filing of judicial claims by providing 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."52 The rule
certainly did not allow the filing of a judicial claim long after the expiration of the 120+30 day period.53

As things stood, the CTA had no jurisdiction to act upon, take cognizance of, and render judgment upon the
petitions for review filed by petitioner. For having been rendered without jurisdiction, the decision of the CTA
Second Division in this case - and consequently, the decision of the CTA En Banc - is a total nullity that
creates no rights and produces no effect.54

Section 19 of R.A. 1125 provides that parties adversely affected by a decision or ruling of the CTA En Banc
may file before us a verified petition for review on certiorari pursuant to Rule 45 of the 1997 Rules of Civil
Procedure. In this case, the assailed CTA rulings are not decisions in contemplation of law55 that can serve
as the subject of this Court's exercise of its power of review.

Given the foregoing, there is no reason for this Court to rule upon the issues raised by petitioner in the
instant petition. chanrobleslaw

WHEREFORE, this Court hereby SETS ASIDE the assailed Court of Tax Appeals En Banc Decision dated 18
January 2008 and Resolution dated 30 April 2008 in CTA EB No. 298; and the Court of Tax Appeals Second
Division Decision dated 5 February 2007 and Resolution dated 29 June 2007 in CTA CaseNos. 6741, 6800 &
6841.

The judicial claims filed by petitioner with the Court of Tax Appeals for the refund of the input value-added
tax paid on imported capital goods for the 2nd, 3rd and 4th quarters of 2001 are DISMISSED for lack of
jurisdiction.

SO ORDERED. cralawlawlibrary