CHAPTER XXX - PRESCRIPTION

3RD BATCH
283. Commissioner v Atlas Consolidated Mining & Development (not found)
284. Republic v Aquias

Facts: On June 12, 1954, the plaintiff, thru the Bureau of Internal Revenue, assessed and demanded of the
defendant the sum of P10,600.21, representing deficiency percentage taxes for the years 1952-1953,
inclusive of surcharge and penalty. The defendant thru counsel, requested a reinvestigation which was
granted by the plaintiff.

The plaintiff notified the defendant that the reinvestigation of his tax deficiencies will be conducted on
October 15, 1956, but neither the defendant nor his counsel appeared on the said date scheduled for the
reinvestigation. (Pars. 1, 2 and 3 page two of Annex :"C" of plaintiff's complaint);

Bureau of Internal Revenue issued a Warrant of Distraint and Levy in accordance with the provisions of
section 316 of the National Internal Revenue Code but was not executed due to the fact that the
defendant's counsel requested that the same be lifted on the ground that the plaintiff's right to collect taxes
thru civil remedies either by distraint and levy or by judicial action has prescribed and if not, a
reinvestigation be conducted. The plaintiff, thru BIR, denied the defendant's request for further
reinvestigation and reiterated its demand for P10,600.21 as deficiency percentage taxes, inclusive of
surcharge and penalty.

The defendant did not contest the demand nor the final decision of the plaintiff both of the plaintiff's
complaint, in the Court of Tax Appeals the defendant did not pay the percentage tax deficiencies in the
amount of P10,600.21 including surcharge and penalties.

Issue: Whether or not the present action for collection of the deficiency taxes had prescribed when it was
filed on May 2, 1962. The pertinent provisions of the National Internal Revenue Code

Ruling: No. The assessment of the deficiency taxes in question was made on June 12, 1954. From that
date the said taxes could be collected by a proceeding in court, and hence from that date the five-year
period fixed for the purpose stated. The time that had elapsed when the suit for collection was filed on
May 2, 1962 was 7 years, 10 months and 20 days. From this, however, should be deducted the period
during which prescription was interrupted. The interruption began on September 2, 1954, when the
appellant's request for reinvestigation was granted, since the grant in effect tied the hands of the appellee
from filing the action.

1. TAXATION; INTERNAL REVENUE CODE; ASSESSMENT AND COLLECTION OF TAXES;

PRESCRIPTIVE PERIOD REQUEST FOR REINVESTIGATION SUSPENDS RUNNING OF
PRESCRIPTIVE PERIOD. — Request for reinvestigation made by the taxpayer suspends the running of
the prescriptive period provided in Section 332 of the Tax Code, which provides that "where the
assessment of any internal revenue tax has been made within the period of limitation above prescribed
such tax may be collected by distraint and levy or by a proceeding in court but only if begun (1) within
five years after the assessment of the tax.

2. ID.; ID.; ID.; ID.; ID.; PRESCRIPTIVE PERIOD DEEMED TO START: INSTANT CASE. — Where
the reinvestigation requested by appellant was not conducted because neither the appellant nor his counsel
appeared. the prescriptive period remains suspended until the Bureau of Internal Revenue issued a
warrant of distraint and levy, which was the first clear and unequivocal act on the part of the Government
 which showed that as far as it was concerned the old assessment of the deficiency taxes was final, and
hence collection of the amount assessed would proceed.

BPI vs. Commissioner G.R NO. 139736, October 17, 2005 (DID NOT INCLUDE IN THE LIST OF
CASES)
On October 20, 1989, the Bureau of Internal Revenue (BIR) issued a formal assessment notice (FAN)
against the Bank of the Philippine Islands (BPI). The FAN demanded BPI to pay P28k in taxes. In
November 1989, BPI filed a protest however the protest did not specify if it was a request for
reconsideration or a reinvestigation. The BIR did not reply on the protest but on October 15, 1992 (four
days before the expiration of the period to collect – or 1095 days [3 years]after issuance of FAN on
10/20/1989), the Commissioner of Internal Revenue (CIR) issued a warrant of distraint/levy against BPI
for the satisfaction of the assessed tax. The warrant was served to BPI on October 23, 1992 (four days
after period has prescribed). In September 1997, the CIR finally sent a letter to BPI advising the latter that
its protest is denied.
ISSUE:
1. Whether or not the filing of the protest by BPI suspended the running of the prescriptive period.
2. Whether or not the government’s right to collect the assessed tax has prescribed.
RULING:

1. No. The protest did not indicate whether BPI was asking for a reconsideration or a reinvestigation
but since BPI did not adduce additional evidence, it should be treated as a request for reconsideration.
Under the tax code, a request for reconsideration does not suspend the running of the prescriptive period.
Even assuming that the protest is a request for reinvestigation, the same did not toll the running of the
prescriptive period because the CIR failed to show proof that the request has been granted and that a
reinvestigation has been actually conducted. In fact, BPI never heard from the BIR not until  the CIR
decided the protest in September 1997 – 5 years after the protest has been filed.
2. Yes. When it comes to collection, even though the warrant for distraint/levy was issued within the
prescriptive period, it is required that the same should be served upon the taxpayer within the prescriptive
period. This is because it is upon the service of the Warrant that the taxpayer is informed of the denial by
the BIR of any pending protest of the said taxpayer, and the resolute intention of the BIR to collect the tax
assessed. In the case at bar, BPI received the warrant 4 days after the expiration of the prescriptive period
hence, the right to collect has already prescribed.

285. People v Duque

FACTS: Appellant Napoleon Duque was charged with and convicted of violating Section 38 in relation to
Section 39 of P.D. No. 442, as amended, known as The Labor Code of the Philippines. The charge of illegal
recruitment was set out in the information where the accused well knowing that he is not licensed nor
authorized by the proper government agency (POEA) to engage in recruitment of workers abroad, exacted and
actually received money from the victims, to their damage and prejudice. Duque contends that the offense of
illegal recruitment had accordingly prescribed by May 1990.
ISSUE: Whether or not the criminal offense for which appellant was convicted has already prescribed.
RULING: No. The recruitment of persons for overseas employment without the necessary recruiting permit or
authority form the POEA constitutes a crime penalized, not by the Revised Penal Code, but rather by a special
law, i.e., Article 38 in relation to Article 290 of the Labor Code. Article 290 of the Labor Code provides, in
relevant part, that. Art. 290. Offenses penalized under this Code and the rules and regulations issued pursuant
thereto shall prescribe in three (3) years.
The Court agrees with the statement of the Solicitor General that Act No. 3326 supplied the applicable
norm.  Section 2 of Act No. 3326, provides that “Prescription shall begin to run from the day of the commission
of the violation of the law, and if the same be not known at the time, from the discovery thereof and institution
of judicial proceedings for its investigation and punishment.”
The court holds that the applicable prescriptive period in the case at bar began to run from the time the
recruitment activities of appellant Duque were ascertained by the complainants and by the POEA to have been
carried out without any license or authority from the government. The discovery by the complainants and by the
POEA was simultaneous in character and occurred sometime in December 1989 when the complainants went to
the POEA with the complaint for recovery of the placement fees and expenses they had paid to appellant
Duque, and the POEA, acting upon that complaint, discovered and informed the private complainants that
Duque had operated as a recruiter without the essential government license or authority. Accordingly, the
offense of illegal recruitment had not prescribed when the complaint was filed with the Provincial Prosecutor's
Office in April 1990 and when the information was filed in court in May 1990
286. Lim v CA
FACTS: Spouses Emilio Lim and Antonia Sun Lim were engaged in the dealership of various household
appliances. On October 5, 1959, a raid was conducted by virtue of a search warrant in their business address
in Manila and another in their address in Quezon City. Seized from the Lim couple were business and
accounting records. The Bureau of Internal Revenue, through the seized records, found that the income tax
returns filed by petitioners for the years 1958 and 1959 were false or fraudulent. The spouses claim that this
finding was made on October 15, 1964 (as declared by the Court of Appeals in its decision later on). On April
7, 1965, the BIR informed the petitioners what was due from them and required them to pay. The Lims
requested for a reinvestigation which the BIR was willing to give subject to certain conditions. The Lim
refused to comply with the conditions and reiterated their request for reinvestigation. On October 10, 1967,
the BIR rendered a final decision holding that there was no cause for reversal of the finding of the assessment
against petitioners, and on July 3, 1968, the final notice and demand for payment was served on petitioners
through their daughter‐ in‐law. Because the Lims still did nott pay, four (4) separate criminal informations
were filed against petitioners for violation of Sections 45 and 51 in relation to Section 73 of the National
Internal Revenue Code. Two criminal charges were filed against them involving their refusal to pay the
deficiency income taxes, and another two involving the filing of fraudulent consolidated income tax returns
with intent to evade the assessment decreed by law. The trial court found the Lim spouses guilty on all counts
and required them to pay the amounts corresponding to their deficiency income tax for the years 1958 and
1959 pursuant to Presidential Decree No. 69.
Issues:
1. Whether or not the five‐year period should be counted from July 3, 1968.
2. Whether or not the five‐year period should be counted from October 10, 1967.

Ruling:
RULING 1. YES. Inasmuch as the final notice and demand for payment of the deficiency taxes was served
on petitioners on July 3, 1968, it was only then that the cause of action on the part of the BIR accrued. This is
so because prior to the receipt of the letter‐ assessment, no violation has yet been committed by the taxpayers.

• The offense was committed only after receipt was coupled with the wilful refusal to pay the
taxes due within the alloted period.
• The two criminal informations, having been filed on June 23, 1970, are well ‐within the five ‐
year prescriptive period and are not time‐ barred.
RULING 2. YES. As Section 354 stands in the statute book (and to this day it has remained unchanged) it
would indeed seem that tax cases, such as the present ones, are practically imprescriptible for as long as the
period from the discovery and institution of judicial proceedings for its investigation and punishment, up to
the filing of the information in court does not exceed five (5) years.
Supreme Court ruled that the filing of charges was well within the five ‐year prescriptive period required
under Section 354 of the National Internal Revenue Code. The Court stated that prior to the receipt of the
letter‐assessment by the petitioners on July 3, 1968, no violation has yet been committed by the taxpayers.
“The offense was committed only after receipt was coupled with the wilful refusal to pay the taxes due within
the alloted period. The two criminal informations, having been filed on June 23, 1970, are well ‐within the
five‐year prescriptive period and are not time‐ barred.”
However, the Supreme Court stated that “the trial court had absolutely no jurisdiction in sentencing the Lim
couple to indemnify the Government for the taxes unpaid. The lower court erred in applying Presidential
Decree No. 69, particularly Section 316 thereof, which provides that "judgment in the criminal case shall not
only impose the penalty but shall order payment of the taxes subject of the criminal case", because that decree
took effect only on January 1, 1973 whereas the criminal cases subject of this appeal were instituted on June
23, 1970. Save in the two specific instances, Presidential Decree No. 69 has no retroactive application.” It
cited the cases of People vs. Tierra and People vs. Arnault which states that “while Section 73 of the National
Internal Revenue Code provides for the imposition of the penalty for refusal or neglect to pay income tax or
to make a return thereof, by imprisonment or fine, or both, it fails to provide for the collection of said tax in
criminal proceedings…It is a commonly accepted principle of law that the method prescribed by statute for
the collection of taxes is generally exclusive, and unless a contrary intent be gathered from the statute, it
should be followed strictly.” “Under the cited Tierra and Arnault cases, it is clear that criminal conviction for
a violation of any penal provision in the Tax Code does not amount at the same time to a decision for the
payment of the unpaid taxes inasmuch as there is no specific provision in the Tax Code to that effect.”
DOCTRINE: It is a commonly accepted principle of law that the method prescribed by statute for the
collection of taxes is generally exclusive, and unless a contrary intent be gathered from the statute, it should
be followed strictly.
287. Aguinaldo Industries v CIR
(The case does not talk about the main point as stated in the book. The case is about ordinary and necessary
expenses and the proper surcharges to be charged to Aguinaldo.)
Facts: An action for review of the decision and dissolution of the CTA holding the petitioner liable for
deficiency tax for 1957, plus 5% surcharge and 1% monthly interest for late payment from December 15,
1957 until full payment.
Aguinaldo Industries Corporation is a domestic corporation engaged in two lines of business, namely: (a) the
manufacture of fishing nets, a tax-exempt industry, and the manufacture of furniture.
Previously, Aguinaldo Industries acquired a parcel of land in Muntinglupa, Rizal, as site of the fishing net
factory. This transaction was entered in the books of the Fish Nets Division of the Company. Later, when
another parcel of land in Marikina Heights was found supposedly more suitable for the needs of Aguinaldo
Industries, it sold the Muntinglupa property, Aguinaldo Industries derived profit from this sale in the amount
of P244,416.70 which was entered in the books of the Fish Nets Division as miscellaneous income to
distinguish it from its tax-exempt income.
For the year 1957, Aguinaldo Industries filed two separate income tax returns one for its Fish Nets Division
and another for its Furniture Division. After investigation of these returns, the examiners of the BIR found
that the Fish Nets Division deducted from its gross income for that year the amount of 61,187.48 as
additional remuneration paid to the officers of Aguinaldo Industries. The examiner recommended the
 disallowance of the 61,187.48 deduction because he found that this amount was taken from the net profit of
an isolated transaction (sale of aforementioned land) not in the course of or carrying on of Aguinaldo
Industries 's trade or business. It appears from the books that such deduction was claimed as part of the
selling expenses of the land in Muntinglupa, Rizal. Aguinaldo Industries insists that said amount should be
allowed as deduction because it was paid to its officers as allowance or bonus pursuant to Section 3 of its by-
laws.
From the net profits of the business of the Company shall be deducted for allowance of the
President 3%, for the first Vice President 1%, for the second Vice President for the members of
the Board of Directors 10% they divided equally among themselves, for the Secretary of the
Board for the General Manager for two Assistant General Managers
Issues:
1. Whether the profit derived from the sale of its Muntinglupa land is not taxable for it is tax-exempt
income, considering that its Fish Nets Division enjoys tax exemption as a new and necessary
industry under Republic Act 901.
2. Whether the bonus given to the officers of Aguinaldo upon the sale of its Muntinglupa land is an
ordinary and necessary business expense deductible for income tax purposes?

Rulings:
1. It must be stressed however that at the administrative level, the petitioner implicitly admitted that
the profit it derived from the sale of its Muntinglupa land, a capital asset, was a taxable gain. In the
instant case, up to the time the questioned decision of the respondent Court was rendered, the
petitioner had always implicitly admitted that the disputed capital gain was taxable, although
subject to the deduction of the bonus paid to its corporate officers. It was only after the said
decision had been rendered and on a motion for reconsideration thereof, that the issue of tax
exemption was raised by the petitioner for the first time. It was thus not one of the issues raised by
petitioner in his petition and supporting memorandum in the Court of Tax Appeals. We therefore
hold that petitioners belated claim for tax exemption was properly rejected.
2. No.
Sec. 30 (a) (1) of the Tax Code which reads:
In computing net income there shall be allowed as deductions
(a) Expenses:
(1) In general. All the Ordinary and necessary expenses paid or incurred during the taxable year in
carrying on any trade or business, including a reasonable allowance for personal services actually
rendered x x

The bonus given to the officers of the Aguinaldo Industries as their share of the profit realized from the
sale of the land cannot be deemed a deductible expense for tax purposes, even if the aforesaid sale could
be considered as a transaction for Carrying on the trade or business of the Aguinaldo Industries and the
grant of the bonus to the corporate officers pursuant to Aguinaldo Industries' by laws could, as an intra-
corporate matter, be sustained. Evidence show that the sale was effected through a broker who was paid
by Aguinaldo Industries a commission for his services. On the other hand, there is absolutely no evidence
of any service actually rendered by Aguinaldo Industries' officers which could be the basis of a grant to
them of a bonus out of the profit derived from the sale. This being so, the payment of a bonus to them out
of the gain realized from the sale cannot be considered as a selling expense; nor can it be deemed
reasonable and necessary so as to make it deductible for tax purposes. Thus, the extraordinary and
unusual amounts paid by Aguinaldo to these directors in the guise and form of compensation for their
supposed services as such, without any relation to the measure of their actual services, cannot be regarded
as ordinary and necessary expenses within the meaning of the law.

288. Tupaz v Ulep

In April 1980, Petronila Tupaz and her husband filed, in behalf of their corporation, an income tax return.
On July 16, 1984, an assessment was issued against the spouses Tupaz demanding payment of P2.3
million in corporate tax deficiency (note: prescriptive period to issue assessment then was 5 years). No
protest was filed by Tupaz within the 30 day prescriptive period. In June 1989, a criminal complaint for
violation of the tax code was filed  by the Bureau of Internal Revenue (BIR) against Tupaz with the
Department of Justice (DOJ). Eventually, a special prosecutor filed an information against Tupaz. Judge
Benedicto Ulep heard the case. Tupaz opposed the said criminal complaint on the ground that it was filed
out of time. It was her theory that the crime alleged was committed in 1979 when they failed to pay the
correct corporate tax; that the prescriptive period for the government to file criminal proceedings for
violation of the tax code is 5 years, hence, the criminal proceeding filed in 1989 (ten years from 1979) is
already filed out of time.
ISSUE: Whether or not the criminal case was filed out of time.
RULING: No.  It was filed within the prescriptive period. The prescriptive period to file a criminal case
did not begin to run in 1979 or the time when Tupaz paid the deficient tax amount. It only begun to run
when the assessment became final and unappealable. The assessment was issued on July 16, 1984. Tupaz
did not protest so on August 16, 1984, the assessment became final and unappealable. The counting of the
5 year prescriptive period begun on August 16, 1984 and so the criminal complaint filed with the DOJ in
June 1989 is well within the 5 year prescriptive period. The rationale behind this is that there is no crime
to speak of in 1979 when Tupaz failed to pay the correct tax. The act only became criminal when in 1984,
despite demand, she willingly failed to pay the correct tax as assessed. Nonetheless, Tupaz got a favorable
judgment from the Supreme Court based on double jeopardy.
CHAPTER XXXI: TAX CREDIT OR REFUND
289. LISP-II LOCATORS VS. CIR
Petitioner LISP-II Locators' Association, Inc. is a non-stock and non-profit association duly organized and
existing under Philippine laws created to "advance and promote the commercial, economic, educational
and social interests and well-being of the members of LISP-II Industrial Park ('Science Park'). On April
13 , 2007, petitioner filed its Annual Income Tax Return (ITR)3 for calendar year 2006, reflecting no
income tax liability allegedly because its income was exempt from tax.4 It is petitioner's allegation that
after an internal audit, from late 2008 to early 2009, it learned that there were BIR Forms 2307 that were
not used and/or reflected in the 2006 ITR. It noted that one of its member-locators erroneously withheld
taxes from its revenues exempt from income tax.
Contending that it is exempt from income tax under Section 30(F) of the Tax Code, as amended, and that
it is not subject to withholding taxes as provided under Section 2.57.5 of Revenue Regulations (RR) No.
2-98, petitioner filed on March 4, 2009 an administrative claim for refund of the tax erroneously withheld
and remitted on its behalf to the Bureau of Internal Revenue for calendar year 2006 in the total amount
ofP218,425.20, citing as its legal bases Section s 76, 204, and 229 of the Tax Code, as amended, and
Section 2.58.3(B) of RR No. 2-98, as amended. Claiming inaction on respondent's part and that the
prescriptive period to seek judicial remedy was about to lapse, petitioner filed the instant Petition for
Review on April 13, 2009. In response to the summons 7 issued on April 14, 2009, respondent filed an
Answer8 on May 28, 2009, praying for the dismissal of the Petition for Review for lack of merit.
ISSUE: Whether petitioner is entitled to a claim for refund in the amount of P218,425 .20 allegedly
representing excess/unutilized withholding taxes for calendar year ending 31 December 2006. NO.
RULING : The purported erroneously withheld creditable tax may instead be refunded under Sections
204(C) and 229 of the NIRC, as amended, which provide:
"SEC. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. - The
Commissioner may - XXX XXX XXX
(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 the
payment of the tax or penalty: Provided, however, That a return filed showing an overpayment shall be
considered as a written claim for credit or refund."
"SEC. 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 filed after the expiration of two (2) years from the date of
payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided,
however, That the Commissioner may, even without a written claim therefor, refund or credit any tax,
where on the face of the return upon which payment was made, such payment appears clearly to have
been erroneously paid."
It is settled in this jurisdiction that Sections 204(C) and 229 (previously Sections 306 and 309) were
intended to govern all kinds of refund of internal revenue taxes - those taxes imposed and collected
pursuant to the NIRC.
Section 204(C) applies to administrative claims filed with the Commissioner of Internal Revenue;
while Section 229 refers to judicial actions for the recovery of tax erroneously or illegally collected.
However, both the claim for refund with the BIR and the subsequent appeal to the Court of Tax
Appeals must be filed within the two-year period from the date of payment of the tax. Considering
that the present claim pertains to creditable income tax alleged to have been erroneously withheld,
the reckoning of the two-year period prescribed under Sections 204(C) and 229 of the NIRC of 1997
must be read in conjunction with Section 2.58 of Revenue Regulations No. 2-98, as amended by
Section 5 of RR No. 17-2003, to wit:
Sec. 2.58. RETURNS AND PAYMENT OF TAXES WITHHELD AT SOURCE. (A) Monthly return and
payment of taxes withheld at source. –
(1) XXX
(2) WHEN TO FILE –
(a) For both large and non-large taxpayers, the withholding tax return, whether creditable or final
(including final withholding taxes on interest from any currency bank deposit and yield or any
 other monetary benefit from deposit substitutes and from trust funds and similar arrangements)
shall be filed and payments should be made, within ten (10) days after the end of each month,
except for taxes withheld for the month of December of each year, which shall be filed on or
before January 15 of the following year; xxx
(b) With respect, however, to taxpayers, whether large or non-large, who availed of the electronic
filing and payment system (EFPS), the deadline for electronically filing the applicable
withholding tax returns and paying the taxes due thereon via the EFPS shall be five (5) days later
than the deadlines set above, unless the EFPS regulations provide for different deadline dates and
except for the final capital gains tax on the sale, barter or exchange of real property where the law
fixes a definite deadline for the payment thereof." (
Based on the foregoing Regulations, the reckoning of the two-year prescriptive period
would be from the date of monthly remittance of the claimed creditable withholding taxes for
January to December 2006. The last month covered by the subject claim is December 2006, which
under the afore-quoted RR No. 2-98, as amended, must be paid on or before January 15, 2007 (or
not later than January 20, 2007 in case of availment of the EFPS). Consequently, petitioner had
until January 15, 2009 (or January 20, 2009 when it availed of the EFPS) within which to file its
claim for refund for the month of December 2006 both in the administrative and judicial levels.
Since the administrative claim for refund for the months of January to December 2006 was filed on
March 4, 2009 and the subsequent appeal before this Court was filed on April 13, 2009, petitioner's
entire claim for the months of January to December 2006 in the total amount of P218,425 .20 had
already prescribed. WHEREFORE, the instant Petition for Review is hereby DISMISSED due to
prescription.
280. CONTEX CORP. VS. CIR
1. Petitioner Contex Corporation: a domestic corporation engaged in the business of
manufacturing hospital textiles and garments and other hospital supplies for export.
- Place of business: Subic Bay Freeport Zone (SBFZ)
- Duly registered with the Subic Bay Metropolitan Authority (SBMA) as a Subic Bay Freeport
Enterprise (RA 7227)
- As an SBMA-registered firm, petitioner is exempt from all local and national internal revenue
taxes except for the preferential tax (Section 12c of RA 7227)
- Registered with the BIR as a NON-VAT TAXPAYER (Certificate of Registration RDO)

2. Jan 1, 1997 to Dec 31, 1998: petitioner purchased various supplies and materials necessary in the
conduct of its manufacturing business The suppliers of these goods SHIFTED UNTO
PETITIONER the 10% VAT on the purchased items, which led the petitioner to pay input taxes
(P539,411.88 and P504,057.49 for 1997 and 1998, resp.) Acting on the belief that it was exempt
from all national and local taxes, including VAT, petitioner filed two applications for tax refund
or tax credit of the VAT it paid Revenue District Officer of BIR RDO Mr. Carlos denied the 1 st
application letter. Petitioner filed another application for tax refund/credit directly with Regional
Director of BIR Region IV Atty. Pagabao. They sought a refund or issuance of a tax credit
certificate (P1,108,307.72), representing erroneously paid input VAT (Jan 1, 1997 to Nov 30,
1998)
3. No response from BIR Regional Director Petitioner elevated the matter to CTA in a petition
for review arguing under Section 112(A) if read in relation to Section 106(A)(2)(a) of NIRC
and Section 12(b) and (c) of RA 7227 would show that it was not liable in any way for any VAT
4. In opposing the claim for tax refund or tax credit, BIR asked CTA to apply the rule that claims
for refund are strictly construed against the taxpayers ince petitioner failed to establish both its
 right to a tax refund or tax credit and its compliance with the rules on tax refund (Sections 204
and 229 of Tax Code), its claim should be denied

5. CTA: petition partially granted; respondent is hereby ordered to refund or in the alternative to
issue a tax credit certificate in favor of petitioner (P683,061.90) representing erroneously paid
input VAT
- Petitioner misread Sections 106(A)(2)(a) and 112(A) of Tax Code  these provisions apply
only to those entities registered as VAT taxpayers whose sales are zero-rated
- Petitioner does not fall under this category, since it is a non-VAT taxpayer as evidenced by
the Certificate of Registration RDO
- Petitioner is exempt from the imposition of input VAT on its purchases of supplies and
materials
- Petitioner is required to pay as a SBFZ-registered enterprise is a 5% preferential tax
- Disallowed all refunds of input VAT paid by petitioner prior to June 29, 1997 for being
barred by the 2-yr prescriptive period (Section 229, Tax Code)
- Also limited the refund only to the input VAT paid by the petitioner on supplies and materials
directly used by the petitioner in the manufacture of goods
- Struck down all claims for charges, and all materials and supplies shipped or delivered to the
petitioner’s Makati and Pasay City offices

6. CIR filed a petition for review of the CTA decision by the CA

- The exemption of Contex Corporation under RA 7227 was limited only to DIRECT TAXES
and not to indirect taxes such as the input component of the VAT
- VAT is a burden passed on by a VAT-registered person to the end users; hence, the direct
liability for the tax lies with the suppliers and not Contex

7. CA: reversed CTA’s decision; in favor of CIR; Contex’s claim for refund of erroneously paid
taxes is denied
- The exemption from duties and taxes on the importation of raw materials, capital, and
equipment of SBFZ-registered enterprises under RA 7227 and its implementing rules covers
only “the VAT imposable under Section 107 of Tax Code, which is direct liability of the
importer, and in no way includes the VAT of the seller-exporter the burden of which was
passed on to the importer as an additional costs of the goods
- Exemption granted by RA 7227 relates to the act of importation (Section 107 specifically
imposes the VAT on importations
- Exemption of SBFZ-registered enterprises from internal revenue taxes is qualified as
pertaining only to those for which they may be directly liable (direct tax, and only in
connection with their importation of raw materials, capital, and equipment as well as the sale
of their goods and services)

8. Petitioner moved for reconsideration of CA decision; denied

9. Hence, this instant petition.

ISSUE: Whether or not petitioner may claim a refund on the Input VAT erroneously passed on to
it by its suppliers.

RULING: NO. Petitioner’s claim, however, for exemption from VAT for its purchases of supplies and
raw materials is incongruous with its claim that it is VAT-exempt, for only VAT-registered entities can
claim Input VAT Credit/Refund.
 While it is true that the petitioner should not have been liable for the VAT inadvertently passed on to
it by its supplier since such is a zero-rated sale on the part of the supplier, the petitioner is not the
 proper party to claim such VAT refund. Since the transaction is deemed a zero-rated sale, petitioner’s
supplier may claim an Input VAT credit with no corresponding Output VAT liability. Congruently,
no Output VAT may be passed on to the petitioner.
 As an exempt VAT taxpayer, it is not allowed any tax credit on VAT (input tax) previously paid.
 Rather, it is the petitioner’s suppliers who are the proper parties to claim the tax credit and
accordingly refund the petitioner of the VAT erroneously passed on to the latter.