Sta. 160 + 480.00.

With LVM as the Contractor and the Joint Venture as SubContractor, the 27 November 1996 Sub-Contract Agreement5 executed by the
parties pertinently provided as follows:

VAT DEFINITION
Republic of the Philippines
SUPREME COURT
Manila

3) That payment to the SUB-CONTRACTOR shall be on item of work

accomplished in the sub-contracted portion of the project at awarded unit cost
of the project less NINE PERCENT (9%). The SUB-CONTRACTOR shall issue a
BIR registered receipt to the CONTRACTOR.

SECOND DIVISION
G.R. No. 181961

December 5, 2011

LVM CONSTRUCTION CORPORATION, represented by its Managing Director,

ANDRES CHUA LAO, Petitioner, vs. F.T. SANCHEZ/SOCOR/KIMWA (JOINT
VENTURE), F.T. SANCHEZ CONSTRUCTION CORPORATION, SOCOR
CONSTRUCTION CORPORATION AND KIMWA CONSTRUCTION AND
DEVELOPMENT CORPORATION all represented by FORTUNATO O. SANCHEZ,
JR., Respondents.
PEREZ, J.:
Filed pursuant to Rule 45 of the 1997 Rules of Civil Procedure, the petition for
review on certiorari at bench seeks the reversal of the 28 September 2007
Decision1 rendered by the then Thirteenth Division of the Court of Appeals
(CA) in CA-G.R. SP No. 94849,2 the decretal portion of which states:
WHEREFORE, premises considered, the assailed Decision dated April 26, 2006
of the Construction Industry Arbitration Commission in CIAC Case No. 25-2005
is hereby AFFIRMED.
SO ORDERED.3
The Facts
Petitioner LVM Construction Corporation (LVM) is a duly licensed construction
firm primarily engaged in the construction of roads and bridges for the
Department of Public Works and Highways (DPWH). Awarded the construction
of the Arterial Road Link Development Project in Southern Leyte (the Project),
LVM sub-contracted approximately 30% of the contract amount with the Joint
Venture composed of respondents F.T. Sanchez Corporation (FTSC), Socor
Construction Corporation (SCC) and Kimwa Construction Development
Corporation (KCDC). For the contract price of P90,061,917.25 which was later
on reduced to P86,318,478.38,4 the Joint Venture agreed to undertake
construction of the portion of the Project starting from Sta. 154 + 210.20 to

4) Ten percent (10%) retention to be deducted for every billing of subcontractor as prescribed under the Tender Documents.
xxxx
13) The payment to the SUB-CONTRACTOR shall be made within seven (7)
days after the check issued by DPWH to CONTRACTOR has already been made
good.6
For work rendered in the premises, there is no dispute regarding the fact that
the Joint Venture sent LVM a total of 27 Billings. For Billing Nos. 1 to 26, LVM
paid the Joint Venture the total sum of P80,414,697.12 and retained the sum
of P8,041,469.79 by way of the 10% retention stipulated in the Sub-Contract
Agreement.7 For Billing No. 27 in the sum of P5,903,780.96, on the other
hand, LVM paid the Joint Venture the partial sum of P2,544,934.99 on 31 May
2001,8 claiming that it had not yet been fully paid by the DPWH.9 Having
completed the sub-contracted works, the Joint Venture subsequently
demanded from LVM the settlement of its unpaid claims as well as the release
of money retained by the latter in accordance with the Sub-Contract
Agreement. In a letter dated 16 May 2001, however, LVM apprised the Joint
Venture of the fact that its auditors have belatedly discovered that no
deductions for E-VAT had been made from its payments on Billing Nos. 1 to
26 and that it was, as a consequence, going to deduct the 8.5% payments for
said tax from the amount still due in the premises.10 In its 14 June 2001
Reply, the Joint Venture claimed that, having issued Official Receipts for every
payment it received, it was liable to pay 10% VAT thereon and that LVM can,
in turn, claim therefrom an equivalent input tax of 10%.11
With its claims still unpaid despite the lapse of more than four (4) years from
the completion of the sub-contracted works, the Joint Venture, thru its
Managing Director, Fortunato O. Sanchez, Jr., filed against LVM the 30 June
2005 complaint for sum of money and damages which was docketed before
the Construction Industry Arbitration Commission (CIAC) as CIAC Case No. 25-

Page 1 of 98

2005.12 Having submitted a Bill of Particulars in response to LVMs motion

therefor,13 the Joint Venture went on to file an Amended Complaint dated 23
December 2005 specifying its claims as follows: (a) P8,041,469.73 as retention
monies for Billing Nos. 1 to 26; (b) P3,358,845.97 as unpaid balance on Billing
No. 27; (c) P6,186,570.71 as interest on unpaid retention money computed at
12% per annum reckoned from 6 August 1999 up to 1 January 2006; and (d)
P5,365,677.70 as interest at 12% per annum on delayed payment of monies
collected from DPWH on Billing Nos. 1 to 26. In addition, the Joint Venture
sought indemnity for attorneys fees equivalent to 10% of the amount
collected and/or in a sum not less than P1,000,000.00.14

receipts it issued. Finding that the delays incurred by the Joint Venture were
justified, the CIAC likewise denied LVMs counterclaim for liquidated damages
for lack of contractual basis.18

In its 21 October 2005 Answer with Compulsory Counterclaim, LVM maintained

that it did not release the 10% retention for Billing Nos. 1 to 26 on the ground
that it had yet to make the corresponding 8.5% deductions for E-VAT which
the Joint Venture should have paid to the Bureau of Internal Revenue (BIR)
and that there is, as a consequence, a need to offset the sums corresponding
thereto from the retention money still in its possession. Moreover, LVM alleged
that the Joint Ventures claims failed to take into consideration its own
outstanding obligation in the total amount of P21,737,094.05, representing
the liquidated damages it incurred as a consequence of its delays in the
completion of the project. In addition to said liquidated damages, LVM prayed
for the grant of its counterclaims for exemplary damages and attorneys
fees.15 In its 2 January 2006 supplemental answer, LVM likewise argued that
the Joint Ventures prayer for imposition of 12% interest on the retention
money and the balance of Billing No. 27 is bereft of factual and legal bases
since no interest was stipulated in the parties agreement and it was justified
in refusing the release of said sums claimed.16

Clearly, there was no provision in the Sub-Contract Agreement that would hold
Sanchez liable for EVAT on the amounts paid to it by LVM. As pointed out by
the CIAC in its Award, the contract documents provide only for the payment
of the awarded cost of the project less 9%. Any other deduction must be
clearly stated in the provisions of the contract or upon agreement of the
parties. xxx The tribunal finds no provision that EVAT will be deducted from
the sub-contractor. xxx If [the Joint Venture] should pay or share in the
payment of the EVAT, it must be clearly defined in the sub-contract
agreement.

With the parties assent to the 19 December 2005 Terms of Reference which
identified, among other matters, the issues to be resolved in the case,17 the
CIAC proceeded to receive the parties evidence in support of their respective
causes. On 26 April 2006, the CIAC rendered its decision granting the Joint
Ventures claims for the payment of the retention money for Billing Nos. 1 to
26 as well as the interest thereon and the unpaid balance billing from 6 August
1999 to 1 January 2006 in the aggregate sum of P11,307,646.68. Discounting
the contractual and legal bases for LVMs claim that it had the right to offset
its E-VAT payments from the retention money still in its possession, the CIAC
ruled that the VAT deductions the DPWH made from its payments to LVM were
for the whole project and already included all its supplies and subcontractors.
Instead of withholding said retention money, LVM was determined to have
to its credit and for its use the input VAT corresponding to the 10%
equivalent VAT paid by the Joint Venture based on the BIR-registered official

Elevated by LVM to the CA through a petition for review filed pursuant to Rule
43 of the 1997 Rules of Civil Procedure,19 the CIACs decision was affirmed in
toto in the herein assailed Decision dated 28 September 2007 rendered by said
courts Thirteenth Division in CA-G.R. SP No. 94849.20 In upholding the CIACs
rejection of LVMs insistence on the offsetting of E-VAT payments from the
retention money, the CA ruled as follows:

Elucidating further, CIAC pointed out that Sanchez, under the contract was
required to issue official receipts registered with the BIR for every payment
LVM makes for the progress billings, which it did. For these official receipts
issued by Sanchez to LVM, Sanchez already paid 10% VAT to the BIR, thus:
The VAT Law is very clear. Everyone must pay 10% VAT based on their issued
official receipts. These receipts must be official receipts and registered with
the BIR. Respondent (LVM) must pay its output Vat based on its receipts.
Complainant (Sanchez) must also pay output VAT based on its receipts. The
law however allow each entity to deduct the input VAT based on the official
receipts issued to it. Clearly, therefore, respondent [LVM], has to its credit the
10% output VAT paid by claimant [Joint Venture] based on the official receipts
issued to it. Respondent [LVM] can use this input VAT to offset any output
VAT respondent [LVM] must pay for any of its other projects."21
LVMs motion for reconsideration of the foregoing decision was denied for lack
of merit in the CAs 26 February 2008 Resolution,22 hence, this Rule 45
petition for review on certiorari.

Page 2 of 98

The Issues
LVM urges the grant of its petition for review upon the following errors imputed
against the CA, to wit:
I
CONTRARY TO THE FINDING OF THE COURT OF APPEALS, RESPONDENTS
LIABILITY TO PAY VALUE ADDED TAX NEED NOT BE STATED IN THE SUBCONTRACT AGREEMENT DATED 27 NOVEMBER 1996 AS THE PROVISIONS OF
REPUBLIC ACT 8424, OTHERWISE KNOWN AS THE NATIONAL INTERNAL
REVENUE CODE OF THE PHILIPPINES, FORM PART OF, AND ARE DEEMED
INCORPORATED AND READ INTO SAID AGREEMENT.
II
THE COURT OF APPEALS ERRED WHEN IT RULED THAT RESPONDENTS ARE
DEEMED TO HAVE ALREADY PAID VALUE ADDED TAX MERELY BECAUSE
RESPONDENTS HAD ALLEGEDLY ISSUED RECEIPTS FOR SERVICES
RENDERED.23

If you would recall, during our last meeting with Deputy Project Manager of
the DPWH-PJHL, Eng. Jimmy T. Chan, last March 2001 at the PJHL Office in
Palo, Leyte, our company made a commitment to pay up to 99%
accomplishment and release the retention money up to the 23rd partial billing
after receipt by our company of the 27th partial billing from JBIC and GOP
relative to the above mentioned project.
Much as our company wants to comply with said commitment, our auditors
recently discovered that all payments made by us to your Joint Venture,
relative to the above mentioned project were made without the corresponding
deduction of the E-VAT of 8.50% x 10/11, which your Joint Venture should
have paid to the BIR. Records would show that from billing number 1 up to
26, no deductions for E-VAT were made. As a matter of fact, our company was
the one who shouldered all payments due for the E-VAT which should have
been deducted from the payments made by us to your Joint Venture. Copy of
the payments made by our company to the BIR relative to the E-VAT is hereto
attached as Annex "1" for your perusal and ready reference.1avvphi1

The petition is bereft of merit.

This being the case and to offset the advances made by our company, we
would like to inform you that our company would deduct the payments made
for E-VAT to the amount due to your Joint Venture. Only by doing so, would
our advances be settled and liquidated. We hope that our auditor and your
auditor can discuss this matter to avoid any possible conflict regarding this
matter.

For lack of any stipulation regarding the same in the parties Sub-Contract
Agreement, we find that the CA correctly brushed aside LVMs insistence on
deducting its supposed E-VAT payments from the retention money demanded
by the Joint Venture. Indeed, a contract constitutes the law between the
parties who are, therefore, bound by its stipulations24 which, when couched
in clear and plain language, should be applied according to their literal tenor.25
That there was no agreement regarding the offsetting urged by LVM may
likewise be readily gleaned from the parties contemporaneous and
subsequent acts which are given primordial consideration in determining their
intention.26 The record shows that, except for deducting sums corresponding
to the 10% retention agreed upon, 9% as contingency on sub-contract, 1%
withholding tax and such other itemized miscellaneous expenses, LVM settled
the Joint Ventures Billing Nos. 1 to 26 without any mention of deductions for
the E-VAT payments it claims to have advanced.27 It was, in fact, only on 16
May 2001 that LVMs Managing Director, Andres C. Lao, apprised the Joint
Venture in writing of its intention to deduct said payments,28 to wit:

From the foregoing letter, it is evident that LVM unilaterally broached its
intention of deducting the subject E-VAT payments only on 15 May 2001 or
long after the projects completion on 9 July 1999.29 In the absence of any
stipulation thereon, however, the CA correctly disallowed the offsetting of said
sums from the retention money undoubtedly due the Joint Venture. Courts are
obliged to give effect to the parties agreement and enforce the contract to
the letter.30 The rule is settled that they have no authority to alter a contract
by construction or to make a new contract for the parties; their duty is confined
to the interpretation of the one which the parties have made for themselves,
without regard to its wisdom or folly. Courts cannot supply material
stipulations, read into the contract words it does not contain31 or, for that
matter, read into it any other intention that would contradict its plain import.32
This is particularly true in this case where, in addition to the dearth of a
meeting of minds between the parties, their contemporaneous and subsequent
acts fail to yield any intention to offset the said E-VAT payments from the
retention money still in LVMs possession.lawphi1

The Courts Ruling

Page 3 of 98

In taking exception to the CAs affirmance of the CIACs rejection of its position
for lack of contractual basis, LVM argues that the Joint Ventures liability for
E-VAT as an entity that renders services in the course of trade or business
need not be stated in the Sub-Contract Agreement considering that it is an
obligation imposed by law which forms part of, and is read into, every
contract.33 As correctly argued by the Joint Venture, however, there are two
(2) contracts under the factual milieu of the case: the main contract DPWH
entered into with LVM for the construction of the Arterial Road Link
Development Project in Southern Leyte and the Sub-Contract Agreement the
latter in turn concluded with the Joint Venture over 30% of said projects
contract amount. As the entity which directly dealt with the government
insofar as the main contract was concerned, LVM was itself required by law to
pay the 8.5% VAT which was withheld by the DPWH in accordance with
Republic Act No. 842434 or the Tax Reform Act of 1997 as well as the National
Internal Revenue Code of 1997 (NIRC). Section 114 (C) of said law provides
as follows:
"Section 114. Return and Payment of Value-Added Tax.
xxxx
(C) Withholding of Creditable Value-added Tax. - The Government or any of
its political subdivisions, instrumentalities or agencies, including governmentowned or -controlled corporations (GOCCs) shall, before making payment on
account of each purchase of goods from sellers and services rendered by
contractors which are subject to the value-added tax imposed in Sections 106
and 108 of this Code, deduct and withhold the value-added tax due at the rate
of three percent (3%) of the gross payment for the purchase of goods and six
percent (6%) on gross receipts for services rendered by contractors on every
sale or installment payment which shall be creditable against the value-added
tax liability of the seller or contractor: Provided, however, That in the case of
government public works contractors, the withholding rate shall be eight and
one-half percent (8.5%): Provided, further, That the payment for lease or use
of properties or property rights to nonresident owners shall be subject to ten
percent (10%) withholding tax at the time of payment. For this purpose, the
payor or person in control of the payment shall be considered as the
withholding agent."
For the Sub-Contract Agreement, on the other hand, respondent F. Sanchez
Construction, acting on behalf of the Joint Venture, issued BIR-registered
receipts for the sums paid by LVM for Billing Nos. 1 to 26, indicating the total
amount paid by the latter, the retention fee deducted therefrom and the tax

due thereon.35 These were in consonance with paragraph 3 of the SubContract Agreement which, after stating that LVMs payment shall "be on item
of work accomplished in the sub-contracted portion of the project awarded
unit cost of the project less NINE PERCENT (9%)," simply provided, that "(t)he
SUB-CONTRACTOR shall issue a BIR registered receipt to the
CONTRACTOR."36 As the VAT-registered person, on the other hand, Fortunato
T. Sanchez, Sr.37 also filed the corresponding Monthly VAT Declarations38
with the BIR which, by themselves, are evidence of the Joint Ventures VAT
liability for LVMs payments on its billings. In fixing the base of the tax, the
first paragraph A Section 108 of the NIRC provides that "(t)here 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."
In the absence of any stipulation regarding the Joint Ventures sharing in the
VAT deducted and withheld by the DPWH from its payment on the main
contract, the CIAC and the CA correctly ruled that LVM has no basis in
offsetting the amounts of said tax from the retention still in its possession.
VAT is a uniform tax levied on every importation of goods, whether or not in
the course of trade or business, or imposed on each sale, barter, exchange or
lease of goods or properties or on each rendition of services in the course of
trade or business.39 It is a tax on transactions, imposed at every stage of the
distribution process on the sale, barter, exchange of goods or property, and
on the performance of services, even in the absence of profit attributable
thereto.40 As an indirect tax that may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services, VAT should be
understood not in the context of the person or entity that is primarily, directly
and legally liable for its payment, but in terms of its nature as a tax on
consumption.41
Neither do we find merit in LVMs harping over the lack of showing in the
record that the Joint Venture has actually paid its liability for VAT. For this
purpose, LVM insists that the Official Receipts for its payments on the Joint
Ventures billing were issued by respondent F. Sanchez Construction and that
the Monthly VAT Declarations were, in fact, filed by Fortunato Sanchez, Sr.
However, the evidence on record is to the effect that, failing to register with
the Securities and Exchange Commission (SEC) and to obtain a Mayors Permit
and authorization from the BIR to print its official receipts, the Joint Venture
apprised LVM of its intention to use respondent F. Sanchez Constructions BIRregistered receipts.42 Aside from being indicative of its knowledge of the
foregoing circumstances, LVMs previous unqualified acceptance of said official
receipts should, clearly, bar the belated exceptions it now takes with respect

Page 4 of 98

thereto. A party, having performed affirmative acts upon which another person
based his subsequent actions, cannot thereafter refute his acts or renege on
the effects of the same, to the prejudice of the latter.43
To recapitulate, LVM, as Contractor for the Project, was liable for the 8.5%
VAT which was withheld by the DPWH from its payments, pursuant to Section
114 (C) of the NIRC. Absent any agreement to that effect, LVM cannot deduct
the amounts thus withheld from the sums it still owed the Joint Venture which,
as Sub-Contractor of 30% of the Project, had its own liability for 10% VAT
insofar as the sums paid for the sub-contracted works were concerned.
Although the burden to pay an indirect tax like VAT can, admittedly, be passed
on to the purchaser of the goods or services, it bears emphasizing that the
liability to pay the same remains with the manufacturer or seller like LVM and
the Joint Venture. In the same manner that LVM is liable for the VAT due on
the payments made by the DPWH pursuant to the contract on the Project, the
Joint Venture is, consequently, liable for the VAT due on the payments made
by LVM pursuant to the parties Sub-Contract.
WHEREFORE, premises considered, the petition is DENIED for lack of merit
and the CAs 28 September 2007 Decision is, accordingly, AFFIRMED in toto.

c. Nature and Concept

in the course of business
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 146984

July 28, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MAGSAYSAY LINES,

INC., BALIWAG NAVIGATION, INC., FIM LIMITED OF THE MARDEN GROUP
(HK) and NATIONAL DEVELOPMENT COMPANY, respondents.
TINGA, J.:
The issue in this present petition is whether the sale by the National
Development Company (NDC) of five (5) of its vessels to the private
respondents is subject to value-added tax (VAT) under the National Internal
Revenue Code of 1986 (Tax Code) then prevailing at the time of the sale. The
Court of Tax Appeals (CTA) and the Court of Appeals commonly ruled that the
sale is not subject to VAT. We affirm, though on a more unequivocal rationale
than that utilized by the rulings under review. The fact that the sale was not
in the course of the trade or business of NDC is sufficient in itself to declare
the sale as outside the coverage of VAT.
The facts are culled primarily from the ruling of the CTA.
Pursuant to a government program of privatization, NDC decided to sell to
private enterprise all of its shares in its wholly-owned subsidiary the National
Marine Corporation (NMC). The NDC decided to sell in one lot its NMC shares
and five (5) of its ships, which are 3,700 DWT Tween-Decker, "Kloeckner" type
vessels.1 The vessels were constructed for the NDC between 1981 and 1984,
then initially leased to Luzon Stevedoring Company, also its wholly-owned
subsidiary. Subsequently, the vessels were transferred and leased, on a
bareboat basis, to the NMC.2
The NMC shares and the vessels were offered for public bidding. Among the
stipulated terms and conditions for the public auction was that the winning
bidder was to pay "a value added tax of 10% on the value of the vessels."3
On 3 June 1988, private respondent Magsaysay Lines, Inc. (Magsaysay Lines)

Page 5 of 98

offered to buy the shares and the vessels for P168,000,000.00. The bid was
made by Magsaysay Lines, purportedly for a new company still to be formed
composed of itself, Baliwag Navigation, Inc., and FIM Limited of the Marden
Group based in Hongkong (collectively, private respondents).4 The bid was
approved by the Committee on Privatization, and a Notice of Award dated 1
July 1988 was issued to Magsaysay Lines.
On 28 September 1988, the implementing Contract of Sale was executed
between NDC, on one hand, and Magsaysay Lines, Baliwag Navigation, and
FIM Limited, on the other. Paragraph 11.02 of the contract stipulated that
"[v]alue-added tax, if any, shall be for the account of the PURCHASER."5 Per
arrangement, an irrevocable confirmed Letter of Credit previously filed as
bidders bond was accepted by NDC as security for the payment of VAT, if any.
By this time, a formal request for a ruling on whether or not the sale of the
vessels was subject to VAT had already been filed with the Bureau of Internal
Revenue (BIR) by the law firm of Sycip Salazar Hernandez & Gatmaitan,
presumably in behalf of private respondents. Thus, the parties agreed that
should no favorable ruling be received from the BIR, NDC was authorized to
draw on the Letter of Credit upon written demand the amount needed for the
payment of the VAT on the stipulated due date, 20 December 1988.6
In January of 1989, private respondents through counsel received VAT Ruling
No. 568-88 dated 14 December 1988 from the BIR, holding that the sale of
the vessels was subject to the 10% VAT. The ruling cited the fact that NDC
was a VAT-registered enterprise, and thus its "transactions incident to its
normal VAT registered activity of leasing out personal property including sale
of its own assets that are movable, tangible objects which are appropriable or
transferable are subject to the 10% [VAT]."7
Private respondents moved for the reconsideration of VAT Ruling No. 568-88,
as well as VAT Ruling No. 395-88 (dated 18 August 1988), which made a
similar ruling on the sale of the same vessels in response to an inquiry from
the Chairman of the Senate Blue Ribbon Committee. Their motion was denied
when the BIR issued VAT Ruling Nos. 007-89 dated 24 February 1989,
reiterating the earlier VAT rulings. At this point, NDC drew on the Letter of
Credit to pay for the VAT, and the amount of P15,120,000.00 in taxes was
paid on 16 March 1989.
On 10 April 1989, private respondents filed an Appeal and Petition for Refund
with the CTA, followed by a Supplemental Petition for Review on 14 July 1989.
They prayed for the reversal of VAT Rulings No. 395-88, 568-88 and 007-89,
as well as the refund of the VAT payment made amounting to

P15,120,000.00.8 The Commissioner of Internal Revenue (CIR) opposed the

petition, first arguing that private respondents were not the real parties in
interest as they were not the transferors or sellers as contemplated in Sections
99 and 100 of the then Tax Code. The CIR also squarely defended the VAT
rulings holding the sale of the vessels liable for VAT, especially citing Section
3 of Revenue Regulation No. 5-87 (R.R. No. 5-87), which provided that "[VAT]
is imposed on any sale or transactions deemed sale of taxable goods
(including capital goods, irrespective of the date of acquisition)." The CIR
argued that the sale of the vessels were among those transactions "deemed
sale," as enumerated in Section 4 of R.R. No. 5-87. It seems that the CIR
particularly emphasized Section 4(E)(i) of the Regulation, which classified
"change of ownership of business" as a circumstance that gave rise to a
transaction "deemed sale."
In a Decision dated 27 April 1992, the CTA rejected the CIRs arguments and
granted the petition.9 The CTA ruled that the sale of a vessel was an "isolated
transaction," not done in the ordinary course of NDCs business, and was thus
not subject to VAT, which under Section 99 of the Tax Code, was applied only
to sales in the course of trade or business. The CTA further held that the sale
of the vessels could not be "deemed sale," and thus subject to VAT, as the
transaction did not fall under the enumeration of transactions deemed sale as
listed either in Section 100(b) of the Tax Code, or Section 4 of R.R. No. 5-87.
Finally, the CTA ruled that any case of doubt should be resolved in favor of
private respondents since Section 99 of the Tax Code which implemented VAT
is not an exemption provision, but a classification provision which warranted
the resolution of doubts in favor of the taxpayer.
The CIR appealed the CTA Decision to the Court of Appeals,10 which on 11
March 1997, rendered a Decision reversing the CTA.11 While the appellate
court agreed that the sale was an isolated transaction, not made in the course
of NDCs regular trade or business, it nonetheless found that the transaction
fell within the classification of those "deemed sale" under R.R. No. 5-87, since
the sale of the vessels together with the NMC shares brought about a change
of ownership in NMC. The Court of Appeals also applied the principle governing
tax exemptions that such should be strictly construed against the taxpayer,
and liberally in favor of the government.12
However, the Court of Appeals reversed itself upon reconsidering the case,
through a Resolution dated 5 February 2001.13 This time, the appellate court
ruled that the "change of ownership of business" as contemplated in R.R. No.
5-87 must be a consequence of the "retirement from or cessation of business"
by the owner of the goods, as provided for in Section 100 of the Tax Code.

Page 6 of 98

The Court of Appeals also agreed with the CTA that the classification of
transactions "deemed sale" was a classification statute, and not an exemption
statute, thus warranting the resolution of any doubt in favor of the taxpayer.14
To the mind of the Court, the arguments raised in the present petition have
already been adequately discussed and refuted in the rulings assailed before
us. Evidently, the petition should be denied. Yet the Court finds that Section
99 of the Tax Code is sufficient reason for upholding the refund of VAT
payments, and the subsequent disquisitions by the lower courts on the
applicability of Section 100 of the Tax Code and Section 4 of R.R. No. 5-87 are
ultimately irrelevant.
A brief reiteration of the basic principles governing VAT is in order. VAT is
ultimately a tax on consumption, even though it is assessed on many levels of
transactions on the basis of a fixed percentage.15 It is the end user of
consumer goods or services which ultimately shoulders the tax, as the liability
therefrom is passed on to the end users by the providers of these goods or
services16 who in turn may credit their own VAT liability (or input VAT) from
the VAT payments they receive from the final consumer (or output VAT).17
The final purchase by the end consumer represents the final link in a
production chain that itself involves several transactions and several acts of
consumption. The VAT system assures fiscal adequacy through the collection
of taxes on every level of consumption,18 yet assuages the manufacturers or
providers of goods and services by enabling them to pass on their respective
VAT liabilities to the next link of the chain until finally the end consumer
shoulders the entire tax liability.
Yet VAT is not a singular-minded tax on every transactional level. Its
assessment bears direct relevance to the taxpayers role or link in the
production chain. Hence, as affirmed by Section 99 of the Tax Code and its
subsequent incarnations,19 the tax is levied only on the sale, barter or
exchange of goods or services by persons who engage in such activities, in
the course of trade or business. These transactions outside the course of trade
or business may invariably contribute to the production chain, but they do so
only as a matter of accident or incident. As the sales of goods or services do
not occur within the course of trade or business, the providers of such goods
or services would hardly, if at all, have the opportunity to appropriately credit
any VAT liability as against their own accumulated VAT collections since the
accumulation of output VAT arises in the first place only through the ordinary
course of trade or business.

That the sale of the vessels was not in the ordinary course of trade or business
of NDC was appreciated by both the CTA and the Court of Appeals, the latter
doing so even in its first decision which it eventually reconsidered.20 We cite
with approval the CTAs explanation on this point:
In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30,
1955 (97 Phil. 992), the term "carrying on business" does not mean the
performance of a single disconnected act, but means conducting, prosecuting
and continuing business by performing progressively all the acts normally
incident thereof; while "doing business" conveys the idea of business being
done, not from time to time, but all the time. [J. Aranas, UPDATED NATIONAL
INTERNAL REVENUE CODE (WITH ANNOTATIONS), p. 608-9 (1988)]. "Course
of business" is what is usually done in the management of trade or business.
[Idmi v. Weeks & Russel, 99 So. 761, 764, 135 Miss. 65, cited in Words &
Phrases, Vol. 10, (1984)].
What is clear therefore, based on the aforecited jurisprudence, is that "course
of business" or "doing business" connotes regularity of activity. In the instant
case, the sale was an isolated transaction. The sale which was involuntary and
made pursuant to the declared policy of Government for privatization could no
longer be repeated or carried on with regularity. It should be emphasized that
the normal VAT-registered activity of NDC is leasing personal property.21
This finding is confirmed by the Revised Charter22 of the NDC which bears no
indication that the NDC was created for the primary purpose of selling real
property.23
The conclusion that the sale was not in the course of trade or business, which
the CIR does not dispute before this Court,24 should have definitively settled
the matter. Any sale, barter or exchange of goods or services not in the course
of trade or business is not subject to VAT.
Section 100 of the Tax Code, which is implemented by Section 4(E)(i) of R.R.
No. 5-87 now relied upon by the CIR, is captioned "Value-added tax on sale
of goods," and it expressly states that "[t]here shall be levied, assessed and
collected on every sale, barter or exchange of goods, a value added tax x x
x." Section 100 should be read in light of Section 99, which lays down the
general rule on which persons are liable for VAT in the first place and on what
transaction if at all. It may even be noted that Section 99 is the very first
provision in Title IV of the Tax Code, the Title that covers VAT in the law.
Before any portion of Section 100, or the rest of the law for that matter, may
be applied in order to subject a transaction to VAT, it must first be satisfied

Page 7 of 98

that the taxpayer and transaction involved is liable for VAT in the first place
under Section 99.
It would have been a different matter if Section 100 purported to define the
phrase "in the course of trade or business" as expressed in Section 99. If that
were so, reference to Section 100 would have been necessary as a means of
ascertaining whether the sale of the vessels was "in the course of trade or
business," and thus subject to
VAT. But that is not the case. What Section 100 and Section 4(E)(i) of R.R.
No. 5-87 elaborate on is not the meaning of "in the course of trade or
business," but instead the identification of the transactions which may be
deemed as sale. It would become necessary to ascertain whether under those
two provisions the transaction may be deemed a sale, only if it is settled that
the transaction occurred in the course of trade or business in the first place.
If the transaction transpired outside the course of trade or business, it would
be irrelevant for the purpose of determining VAT liability whether the
transaction may be deemed sale, since it anyway is not subject to VAT.
Accordingly, the Court rules that given the undisputed finding that the
transaction in question was not made in the course of trade or business of the
seller, NDC that is, the sale is not subject to VAT pursuant to Section 99 of the
Tax Code, no matter how the said sale may hew to those transactions deemed
sale as defined under Section 100.
In any event, even if Section 100 or Section 4 of R.R. No. 5-87 were to find
application in this case, the Court finds the discussions offered on this point
by the CTA and the Court of Appeals (in its subsequent Resolution) essentially
correct. Section 4 (E)(i) of R.R. No. 5-87 does classify as among the
transactions deemed sale those involving "change of ownership of business."
However, Section 4(E) of R.R. No. 5-87, reflecting Section 100 of the Tax Code,
clarifies that such "change of ownership" is only an attending circumstance to
"retirement from or cessation of business[, ] with respect to all goods on hand
[as] of the date of such retirement or cessation."25 Indeed, Section 4(E) of
R.R. No. 5-87 expressly characterizes the "change of ownership of business"
as only a "circumstance" that attends those transactions "deemed sale," which
are otherwise stated in the same section.26
WHEREFORE, the petition is DENIED. No costs.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 193301
March 11, 2013
MINDANAO II GEOTHERMAL PARTNERSHIP, Petitioner, vs. COMMISSIONER
OF INTERNAL REVENUE, Respondent.
x-----------------------x
G.R. No. 194637
MINDANAO I GEOTHERMAL PARTNERSHIP, Petitioner, vs. COMMISSIONER
OF INTERNAL REVENUE, Respondent.
CARPIO, J.:
G.R. No. 193301 is a petition for review1 assailing the Decision2 promulgated
on 10 March 2010 as well as the Resolution3 promulgated on 28 July 2010 by
the Court of Tax Appeals En Banc (CTA En Banc) in CTA EB No. 513. The CTA
En Banc affirmed the 22 September 2008 Decision4 as well as the 26 June
2009 Amended Decision5 of the First Division of the Court of Tax Appeals (CTA
First Division) in CTA Case Nos. 7227, 7287, and 7317. The CTA First Division
denied Mindanao II Geothermal Partnerships (Mindanao II) claims for refund
or tax credit for the first and second quarters of taxable year 2003 for being
filed out of time (CTA Case Nos. 7227 and 7287). The CTA First Division,
however, ordered the
Commissioner of Internal Revenue (CIR) to refund or credit to Mindanao II
unutilized input value-added tax (VAT) for the third and fourth quarters of
taxable year 2003 (CTA Case No. 7317).
G.R. No. 194637 is a petition for review6 assailing the Decision7 promulgated
on 31 May 2010 as well as the Amended Decision8 promulgated on 24
November 2010 by the CTA En Banc in CTA EB Nos. 476 and 483. In its
Amended Decision, the CTA En Banc reversed its 31 May 2010 Decision and
granted the CIRs petition for review in CTA Case No. 476. The CTA En Banc
denied Mindanao I Geothermal Partnerships (Mindanao I) claims for refund or
tax credit for the first (CTA Case No. 7228), second (CTA Case No. 7286),
third, and fourth quarters (CTA Case No. 7318) of 2003.
Both Mindanao I and II are partnerships registered with the Securities and
Exchange Commission, value added taxpayers registered with the Bureau of

Page 8 of 98

Internal Revenue (BIR), and Block Power Production Facilities accredited by

the Department of Energy. Republic Act No. 9136, or the Electric Power
Industry Reform Act of 2000 (EPIRA), effectively amended Republic Act No.
8424, or the Tax Reform Act of 1997 (1997 Tax Code),9 when it decreed that
sales of power by generation companies shall be subjected to a zero rate of
VAT.10 Pursuant to EPIRA, Mindanao I and II filed with the CIR claims for
refund or tax credit of accumulated unutilized and/or excess input taxes due
to VAT zero-rated sales in 2003. Mindanao I and II filed their claims in 2005.
G.R. No. 193301
Mindanao II v. CIR
The Facts
G.R. No. 193301 covers three CTA First Division cases, CTA Case Nos. 7227,
7287, and 7317, which were consolidated as CTA EB No. 513. CTA Case Nos.
7227, 7287, and 7317 claim a tax refund or credit of Mindanao IIs alleged
excess or unutilized input taxes due to VAT zero-rated sales. In CTA Case No.
7227, Mindanao II claims a tax refund or credit of P3,160,984.69 for the first
quarter of 2003. In CTA Case No. 7287, Mindanao II claims a tax refund or
credit of P1,562,085.33 for the second quarter of 2003. In CTA Case No. 7317,
Mindanao II claims a tax refund or credit of P3,521,129.50 for the third and
fourth quarters of 2003.
The CTA First Divisions narration of the pertinent facts is as follows:
xxxx
On March 11, 1997, [Mindanao II] allegedly entered into a Built (sic)-OperateTransfer (BOT) contract with the Philippine National Oil Corporation Energy
Development Company (PNOC-EDC) for finance, engineering, supply,
installation, testing, commissioning, operation, and maintenance of a 48.25
megawatt geothermal power plant, provided that PNOC-EDC shall supply and
deliver steam to Mindanao II at no cost. In turn, Mindanao II shall convert the
steam into electric capacity and energy for PNOC-EDC and shall deliver the
same to the National Power Corporation (NPC) for and in behalf of PNOC-EDC.
Mindanao II alleges that its sale of generated power and delivery of electric
capacity and energy of Mindanao II to NPC for and in behalf of PNOC-EDC is
its only revenue-generating activity which is in the ambit of VAT zero-rated
sales under the EPIRA Law, x x x.
xxxx

Hence, the amendment of the NIRC of 1997 modified the VAT rate applicable
to sales of generated power by generation companies from ten (10%) percent
to zero (0%) percent.
In the course of its operation, Mindanao II makes domestic purchases of goods
and services and accumulates therefrom creditable input taxes. Pursuant to
the provisions of the National Internal Revenue Code (NIRC), Mindanao II
alleges that it can use its accumulated input tax credits to offset its output tax
liability. Considering, however that its only revenue-generating activity is VAT
zero-rated under RA No. 9136, Mindanao IIs input tax credits remain
unutilized.
Thus, on the belief that its sales qualify for VAT zero-rating, Mindanao II
adopted the VAT zero-rating of the EPIRA in computing for its VAT payable
when it filed its Quarterly VAT Returns on the following dates:
CTA Case No.
7227

Period Covered
(2003)
1st Quarter

7287
7317
7317

2nd Quarter
3rd Quarter
4th Quarter

Date of Filing
Original Return
Amended Return
April 23, 2003
July 3, 2002 (sic),
April 1, 2004 &
October 22, 2004
July 22, 2003
April 1, 2004
Oct. 27, 2003
April 1, 2004
Jan. 26, 2004
April 1, 2204

Considering that it has accumulated unutilized creditable input taxes from its
only income-generating activity, Mindanao II filed an application for refund
and/or issuance of tax credit certificate with the BIRs Revenue District Office
at Kidapawan City on April 13, 2005 for the four quarters of 2003.
To date (September 22, 2008), the application for refund by Mindanao II
remains unacted upon by the CIR. Hence, these three petitions filed on April
22, 2005 covering the 1st quarter of 2003; July 7, 2005 for the 2nd quarter of
2003; and September 9, 2005 for the 3rd and 4th quarters of 2003. At the
instance of Mindanao II, these petitions were consolidated on March 15, 2006
as they involve the same parties and the same subject matter. The only
difference lies with the taxable periods involved in each petition.11
The Court of Tax Appeals Ruling: Division
In its 22 September 2008 Decision,12 the CTA First Division found that
Mindanao II satisfied the twin requirements for VAT zero rating under EPIRA:

Page 9 of 98

(1) it is a generation company, and (2) it derived sales from power generation.
The CTA First Division also stated that Mindanao II complied with five
requirements to be entitled to a refund:

filed on 13 April 2005 and judicial claims filed on 22 April 2005, 7 July 2005,
and 9 September 2005 were timely filed in accordance with Atlas.

3. That such input VAT payments are directly attributable to zero-rated sales
or effectively zero-rated sales;

The CTA First Division found that Mindanao II is entitled to a refund in the
modified amount of P7,703,957.79, after disallowing P522,059.91 from input
VAT16 and deducting P18,181.82 from Mindanao IIs sale of a fully
depreciated P200,000.00 Nissan Patrol. The input taxes amounting to
P522,059.91 were disallowed for failure to meet invoicing requirements, while
the input VAT on the sale of the Nissan Patrol was reduced by P18,181.82
because the output VAT for the sale was not included in the VAT declarations.

4. That the input VAT payments were not applied against any output VAT
liability; and

The dispositive portion of the CTA First Divisions 22 September 2008 Decision
reads:

5. That the claim for refund was filed within the two-year prescriptive
period.13

WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED.

Accordingly, the CIR is hereby ORDERED to REFUND or to ISSUE A TAX
CREDIT CERTIFICATE in the modified amount of SEVEN MILLION SEVEN
HUNDRED THREE THOUSAND NINE HUNDRED FIFTY SEVEN AND 79/100
PESOS (P7,703,957.79) representing its unutilized input VAT for the four (4)
quarters of the taxable year 2003.

1. There must be zero-rated or effectively zero-rated sales;

2. That input taxes were incurred or paid;

With respect to the fifth requirement, the CTA First Division tabulated the
dates of filing of Mindanao IIs return as well as its administrative and judicial
claims, and concluded that Mindanao IIs administrative and judicial claims
were timely filed in compliance with this Courts ruling in Atlas Consolidated
Mining and Development Corporation v. Commissioner of Internal Revenue
(Atlas).14 The CTA First Division declared that the two-year prescriptive period
for filing a VAT refund claim should not be counted from the close of the
quarter but from the date of the filing of the VAT return. As ruled in Atlas, VAT
liability or entitlement to a refund can only be determined upon the filing of
the quarterly VAT return.
CTA
Case No.

Period
Covered
(2003)

Date Filing
Original
Return

Amended
Return

Administrative
Return

Judicial Claim

7227

1st Quarter

23 April 2003

1 April 2004

13 April 2005

22 April 2005

7287

2nd Quarter

22 July 2003

1 April 2004

13 April 2005

7 July 2005

7317

3rd Quarter

25 Oct. 2003

1 April 2004

13 April 2005

9 Sept. 2005

7317

4th Quarter

26 Jan. 2004

1 April 2004

13 April 2005

9 Sept. 2005

Thus, counting from 23 April 2003, 22 July 2003, 25 October 2003, and 26
January 2004, when Mindanao II filed its VAT returns, its administrative claim

SO ORDERED.17
Mindanao II filed a motion for partial reconsideration.18 It stated that the sale
of the fully depreciated Nissan Patrol is a one-time transaction and is not
incidental to its VAT zero-rated operations. Moreover, the disallowed input
taxes substantially complied with the requirements for refund or tax credit.
The CIR also filed a motion for partial reconsideration. It argued that the
judicial claims for the first and second quarters of 2003 were filed beyond the
period allowed by law, as stated in Section 112(A) of the 1997 Tax Code. The
CIR further stated that Section 229 is a general provision, and governs cases
not covered by Section 112(A). The CIR countered the CTA First Divisions 22
September 2008 decision by citing this Courts ruling in Commisioner of
Internal Revenue v. Mirant Pagbilao Corporation (Mirant),19 which stated that
unutilized input VAT payments must be claimed within two years reckoned
from the close of the taxable quarter when the relevant sales were made
regardless of whether said tax was paid.
The CTA First Division denied Mindanao IIs motion for partial reconsideration,
found the CIRs motion for partial reconsideration partly meritorious, and
rendered an Amended Decision20 on 26 June 2009. The CTA First Division

Page 10 of 98

stated that the claim for refund or credit with the BIR and the subsequent
appeal to the CTA must be filed within the two-year period prescribed under
Section 229. The two-year prescriptive period in Section 229 was denominated
as a mandatory statute of limitations. Therefore, Mindanao IIs claims for
refund for the first and second quarters of 2003 had already prescribed.
The CTA First Division found that the records of Mindanao IIs case are bereft
of evidence that the sale of the Nissan Patrol is not incidental to Mindanao IIs
VAT zero-rated operations. Moreover, Mindanao IIs submitted documents
failed to substantiate the requisites for the refund or credit claims.
The CTA First Division modified its 22 September 2008 Decision to read as
follows:
WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED.
Accordingly, the CIR is hereby ORDERED to REFUND or to ISSUE A TAX
CREDIT CERTIFICATE to Mindanao II Geothermal Partnership in the modified
amount of TWO MILLION NINE HUNDRED EIGHTY THOUSAND EIGHT
HUNDRED EIGHTY SEVEN AND 77/100 PESOS (P2,980,887.77) representing
its unutilized input VAT for the third and fourth quarters of the taxable year
2003.
SO ORDERED.
Mindanao II filed a Petition for Review,22 docketed as CTA EB No. 513, before
the CTA En Banc.

Regulation No. 7-95; and (5) the doctrine of strictissimi juris on tax exemptions
cannot be relaxed in the present case.
The dispositive portion of the CTA En Bancs 10 March 2010 Decision reads:
WHEREFORE, on the basis of the foregoing considerations, the Petition for
Review en banc is DISMISSED for lack of merit. Accordingly, the Decision
dated September 22, 2008 and the Amended Decision dated June 26, 2009
issued by the First Division are AFFIRMED.
SO ORDERED.
The CTA En Banc issued a Resolution on 28 July 2010 denying for lack of merit
Mindanao IIs Motion for Reconsideration. The CTA En Banc highlighted the
following bases of their previous ruling:
1. The Supreme Court has long decided that the claim for refund of unutilized
input VAT must be filed within two (2) years after the close of the taxable
quarter when such sales were made.
2. The Supreme Court is the ultimate arbiter whose decisions all other courts
should take bearings.
3. The words of the law are clear, plain, and free from ambiguity; hence, it
must be given its literal meaning and applied without any interpretation.
G.R. No. 194637
Mindanao I v. CIR

The Court of Tax Appeals Ruling: En Banc

On 10 March 2010, the CTA En Banc rendered its Decision23 in CTA EB No.
513 and denied Mindanao IIs petition. The CTA En Banc ruled that (1) Section
112(A) clearly provides that the reckoning of the two-year prescriptive period
for filing the application for refund or credit of input VAT attributable to zerorated sales or effectively zero-rated sales shall be counted from the close of
the taxable quarter when the sales were made; (2) the Atlas and Mirant cases
applied different tax codes: Atlas applied the 1977 Tax Code while Mirant
applied the 1997 Tax Code; (3) the sale of the fully-depreciated Nissan Patrol
is incidental to Mindanao IIs VAT zero-rated transactions pursuant to Section
105; (4) Mindanao II failed to comply with the substantiation requirements
provided under Section 113(A) in relation to Section 237 of the 1997 Tax Code
as implemented by Section 4.104-1, 4.104-5, and 4.108-1 of Revenue

The Facts
G.R. No. 194637 covers two cases consolidated by the CTA EB: CTA EB Case
Nos. 476 and 483. Both CTA EB cases consolidate three cases from the CTA
Second Division: CTA Case Nos. 7228, 7286, and 7318. CTA Case Nos. 7228,
7286, and 7318 claim a tax refund or credit of Mindanao Is accumulated
unutilized and/or excess input taxes due to VAT zero-rated sales. In CTA Case
No. 7228, Mindanao I claims a tax refund or credit of P3,893,566.14 for the
first quarter of 2003. In CTA Case No. 7286, Mindanao I claims a tax refund
or credit of P2,351,000.83 for the second quarter of 2003. In CTA Case No.
7318, Mindanao I claims a tax refund or credit of P7,940,727.83 for the third
and fourth quarters of 2003.

Page 11 of 98

Mindanao I is similarly situated as Mindanao II. The CTA Second Divisions

narration of the pertinent facts is as follows:
xxxx
In December 1994, Mindanao I entered into a contract of Build-OperateTransfer (BOT) with the Philippine National Oil Corporation Energy
Development Corporation (PNOC-EDC) for the finance, design, construction,
testing, commissioning, operation, maintenance and repair of a 47-megawatt
geothermal power plant. Under the said BOT contract, PNOC-EDC shall supply
and deliver steam to Mindanao I at no cost. In turn, Mindanao I will convert
the steam into electric capacity and energy for PNOC-EDC and shall
subsequently supply and deliver the same to the National Power Corporation
(NPC), for and in behalf of PNOC-EDC.
Mindanao Is 47-megawatt geothermal power plant project has been
accredited by the Department of Energy (DOE) as a Private Sector Generation
Facility, pursuant to the provision of Executive Order No. 215, wherein
Certificate of Accreditation No. 95-037 was issued.
On June 26, 2001, Republic Act (R.A.) No. 9136 took effect, and the relevant
provisions of the National Internal Revenue Code (NIRC) of 1997 were deemed
modified. R.A. No. 9136, also known as the "Electric Power Industry Reform
Act of 2001 (EPIRA), was enacted by Congress to ordain reforms in the electric
power industry, highlighting, among others, the importance of ensuring the
reliability, security and affordability of the supply of electric power to end
users. Under the provisions of this Republic Act and its implementing rules and
regulations, the delivery and supply of electric energy by generation
companies became VAT zero-rated, which previously were subject to ten
percent (10%) VAT.
xxxx
The amendment of the NIRC of 1997 modified the VAT rate applicable to sales
of generated power by generation companies from ten (10%) percent to zero
percent (0%). Thus, Mindanao I adopted the VAT zero-rating of the EPIRA in
computing for its VAT payable when it filed its VAT Returns, on the belief that
its sales qualify for VAT zero-rating.
Mindanao I reported its unutilized or excess creditable input taxes in its
Quarterly VAT Returns for the first, second, third, and fourth quarters of
taxable year 2003, which were subsequently amended and filed with the BIR.

On April 4, 2005, Mindanao I filed with the BIR separate administrative claims
for the issuance of tax credit certificate on its alleged unutilized or excess input
taxes for taxable year 2003, in the accumulated amount of P14,185, 294.80.
Alleging inaction on the part of CIR, Mindanao I elevated its claims before this
Court on April 22, 2005, July 7, 2005, and September 9, 2005 docketed as
CTA Case Nos. 7228, 7286, and 7318, respectively. However, on October 10,
2005, Mindanao I received a copy of the letter dated September 30, 2003 (sic)
of the BIR denying its application for tax credit/refund.28
The Court of Tax Appeals Ruling: Division
On 24 October 2008, the CTA Second Division rendered its Decision29 in CTA
Case Nos. 7228, 7286, and 7318. The CTA Second Division found that (1)
pursuant to Section 112(A), Mindanao I can only claim 90.27% of the amount
of substantiated excess input VAT because a portion was not reported in its
quarterly VAT returns; (2) out of the P14,185,294.80 excess input VAT applied
for refund, only P11,657,447.14 can be considered substantiated excess input
VAT due to disallowances by the Independent Certified Public Accountant,
adjustment on the disallowances per the CTA Second Divisions further
verification, and additional disallowances per the CTA Second Divisions further
verification;
(3) Mindanao Is accumulated excess input VAT for the second quarter of 2003
that was carried over to the third quarter of 2003 is net of the claimed input
VAT for the first quarter of 2003, and the same procedure was done for the
second, third, and fourth quarters of 2003; and (4) Mindanao Is administrative
claims were filed within the two-year prescriptive period reckoned from the
respective dates of filing of the quarterly VAT returns.
The dispositive portion of the CTA Second Divisions 24 October 2008 Decision
reads:
WHEREFORE, premises considered, the consolidated Petitions for Review are
hereby PARTIALLY GRANTED. Accordingly, the CIR is hereby ORDERED TO
ISSUE A TAX CREDIT CERTIFICATE in favor of Mindanao I in the reduced
amount of TEN MILLION FIVE HUNDRED TWENTY THREE THOUSAND ONE
HUNDRED SEVENTY SEVEN PESOS AND 53/100 (P10,523,177.53)
representing Mindanao Is unutilized input VAT for the four quarters of the
taxable year 2003.
SO ORDERED.

Page 12 of 98

Mindanao I filed a motion for partial reconsideration with motion for

Clarification31 on 11 November 2008. It claimed that the CTA Second Division
should not have allocated proportionately Mindanao Is unutilized creditable
input taxes for the taxable year 2003, because the proportionate allocation of
the amount of creditable taxes in Section 112(A) applies only when the
creditable input taxes due cannot be directly and entirely attributed to any of
the zero-rated or effectively zero-rated sales. Mindanao I claims that its
unreported collection is directly attributable to its VAT zero-rated sales. The
CTA Second Division denied Mindanao Is motion and maintained the
proportionate allocation because there was a portion of the gross receipts that
was undeclared in Mindanao Is gross receipts.
The CIR also filed a motion for partial reconsideration on 11 November 2008.
It claimed that Mindanao I failed to exhaust administrative remedies before it
filed its petition for review. The CTA Second Division denied the CIRs motion,
and cited Atlas as the basis for ruling that it is more practical and reasonable
to count the two-year prescriptive period for filing a claim for refund or credit
of input VAT on zero-rated sales from the date of filing of the return and
payment of the tax due.
The dispositive portion of the CTA Second Divisions 10 March 2009 Resolution
reads:
WHEREFORE, premises considered, the CIRs Motion for Partial
Reconsideration and Mindanao Is Motion for Partial Reconsideration with
Motion for Clarification are hereby DENIED for lack of merit.
SO ORDERED.

Nos. 7228, 7286, and 7318, entitled "Mindanao I Geothermal Partnership vs.
Commissioner of Internal Revenue" are hereby AFFIRMED in toto.
SO ORDERED.
Both the CIR and Mindanao I filed Motions for Reconsideration of the CTA En
Bancs 31 May 2010 Decision. In an Amended Decision promulgated on 24
November 2010, the CTA En Banc agreed with the CIRs claim that Section
229 of the NIRC of 1997 is inapplicable in light of this Courts ruling in Mirant.
The CTA En Banc also ruled that the procedure prescribed under Section
112(D) now 112(C) of the 1997 Tax Code should be followed first before the
CTA En Banc can act on Mindanao Is claim. The CTA En Banc reconsidered its
31 May 2010 Decision in light of this Courts ruling in Commissioner of Internal
Revenue v. Aichi Forging Company of Asia, Inc. (Aichi).
The pertinent portions of the CTA En Bancs 24 November 2010 Amended
Decision read:
C.T.A. Case No. 7228:
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT
Returns for the First Quarter of 2003. Pursuant to Section 112(A) of the NIRC
of 1997, as amended, Mindanao I has two years from March 31, 2003 or until
March 31, 2005 within which to file its administrative claim for refund;
(2) On April 4, 2005, Mindanao I applied for an administrative claim for refund
of unutilized input VAT for the first quarter of taxable year 2003 with the BIR,
which is beyond the two-year prescriptive period mentioned above.
C.T.A. Case No. 7286:

The Ruling of the Court of Tax Appeals: En Banc

On 31 May 2010, the CTA En Banc rendered its Decision in CTA EB Case Nos.
476 and 483 and denied the petitions filed by the CIR and Mindanao I. The
CTA En Banc found no new matters which have not yet been considered and
passed upon by the CTA Second Division in its assailed decision and resolution.
The dispositive portion of the CTA En Bancs 31 May 2010 Decision reads:
WHEREFORE, premises considered, the Petitions for Review are hereby
DISMISSED for lack of merit. Accordingly, the October 24, 2008 Decision and
March 10, 2009 Resolution of the CTA Former Second Division in CTA Case

(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT
Returns for the second quarter of 2003. Pursuant to
Section 112(A) of the NIRC of 1997, as amended, Mindanao I has two years
from June 30, 2003, within which to file its administrative claim for refund for
the second quarter of 2003, or until June 30, 2005;
(2) On April 4, 2005, Mindanao I applied an administrative claim for refund of
unutilized input VAT for the second quarter of taxable year 2003 with the BIR,
which is within the two-year prescriptive period, provided under Section 112
(A) of the NIRC of 1997, as amended;

Page 13 of 98

(3) The CIR has 120 days from April 4, 2005 (presumably the date Mindanao
I submitted the supporting documents together with the application for
refund) or until August 2, 2005, to decide the administrative claim for refund;

Evidently, the Petition for Review was filed way beyond the 30-day prescribed
period. Thus, the Petition for Review should have been dismissed for being
filed late.

(4) Within 30 days from the lapse of the 120-day period or from August 3,
2005 to September 1, 2005, Mindanao I should have elevated its claim for
refund to the CTA in Division;

In recapitulation:

(5) However, on July 7, 2005, Mindanao I filed its Petition for Review with this
Court, docketed as CTA Case No. 7286, even before the 120-day period for
the CIR to decide the claim for refund had lapsed on August 2, 2005. The
Petition for Review was, therefore, prematurely filed and there was failure to
exhaust administrative remedies;

Claim for the first quarter of 2003 had already prescribed for having been filed
beyond the two-year prescriptive period;

xxxx
C.T.A. Case No. 7318:

(1) C.T.A. Case No. 7228

(2) C.T.A. Case No. 7286

Claim for the second quarter of 2003 should be dismissed for Mindanao Is
failure to comply with a condition precedent when it failed to exhaust
administrative remedies by filing its Petition for Review even before the lapse
of the 120-day period for the CIR to decide the administrative claim;

(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT
Returns for the third and fourth quarters of 2003. Pursuant to Section 112(A)
of the NIRC of 1997, as amended, Mindanao I therefore, has two years from
September 30, 2003 and December 31, 2003, or until September 30, 2005
and December 31, 2005, respectively, within which to file its administrative
claim for the third and fourth quarters of 2003;

(3) C.T.A. Case No. 7318

(2) On April 4, 2005, Mindanao I applied an administrative claim for refund of

unutilized input VAT for the third and fourth quarters of taxable year 2003 with
the BIR, which is well within the two-year prescriptive period, provided under
Section 112(A) of the NIRC of 1997, as amended;

IN VIEW OF THE FOREGOING, the Commissioner of Internal Revenues Motion

for Reconsideration is hereby GRANTED; Mindanao Is Motion for Partial
Reconsideration is hereby DENIED for lack of merit.

(3) From April 4, 2005, which is also presumably the date Mindanao I
submitted supporting documents, together with the aforesaid application for
refund, the CIR has 120 days or until August 2, 2005, to decide the claim;
(4) Within thirty (30) days from the lapse of the 120-day period or from August
3, 2005 until September 1, 2005 Mindanao I should have elevated its claim for
refund to the CTA;

Petition for Review was filed beyond the 30-day prescribed period to appeal
to the CTA.
xxxx

The May 31, 2010 Decision of this Court En Banc is hereby REVERSED.
Accordingly, the Petition for Review of the Commissioner of Internal Revenue
in CTA EB No. 476 is hereby GRANTED and the entire claim of Mindanao I
Geothermal Partnership for the first, second, third and fourth quarters of 2003
is hereby DENIED.
SO ORDERED.

(5) However, Mindanao I filed its Petition for Review with the CTA in Division
only on September 9, 2005, which is 8 days beyond the 30-day period to
appeal to the CTA.
Page 14 of 98

The Issues

IV. The doctrine of strictissimi juris on tax exemptions should be relaxed in the
present case.

G.R. No. 193301

Mindanao II v. CIR

G.R. No. 194637

Mindanao I v. CIR

Mindanao II raised the following grounds in its Petition for Review:

I. The Honorable Court of Tax Appeals erred in holding that the claim of
Mindanao II for the 1st and 2nd quarters of year 2003 has already prescribed
pursuant to the Mirant case.
A. The Atlas case and Mirant case have conflicting interpretations of the law
as to the reckoning date of the two year prescriptive period for filing claims
for VAT refund.
B. The Atlas case was not and cannot be superseded by the Mirant case in
light of Section 4(3), Article VIII of the 1987 Constitution.
C. The ruling of the Mirant case, which uses the close of the taxable quarter
when the sales were made as the reckoning date in counting the two-year
prescriptive period cannot be applied retroactively in the case of Mindanao II.
II. The Honorable Court of Tax Appeals erred in interpreting Section 105 of
the 1997 Tax Code, as amended in that the sale of the fully depreciated Nissan
Patrol is a one-time transaction and is not incidental to the VAT zero-rated
operation of Mindanao II.
III. The Honorable Court of Tax Appeals erred in denying the amount
disallowed by the Independent Certified Public Accountant as Mindanao II
substantially complied with the requisites of the 1997 Tax Code, as amended,
for refund/tax credit.
A. The amount of P2,090.16 was brought about by the timing difference in the
recording of the foreign currency deposit transaction.
B. The amount of P2,752.00 arose from the out-of-pocket expenses
reimbursed to SGV & Company which is substantially suppoerted [sic] by an
official receipt.
C. The amount of P487,355.93 was unapplied and/or was not included in
Mindanao IIs claim for refund or tax credit for the year 2004 subject matter
of CTA Case No. 7507.

Mindanao I raised the following grounds in its Petition for Review:

I. The administrative claim and judicial claim in CTA Case No. 7228 were timely
filed pursuant to the case of Atlas Consolidated Mining and Development
Corporation vs. Commissioner of Internal Revenue, which was then the
controlling ruling at the time of filing.
A. The recent ruling in the Commissioner of Internal Revenue vs. Mirant
Pagbilao Corporation, which uses the end of the taxable quarter when the
sales were made as the reckoning date in counting the two-year prescriptive
period, cannot be applied retroactively in the case of Mindanao I.
B. The Atlas case promulgated by the Third Division of this Honorable Court
on June 8, 2007 was not and cannot be superseded by the Mirant Pagbilao
case promulgated by the Second Division of this Honorable Court on
September 12, 2008 in light of the explicit provision of Section 4(3), Article
VIII of the 1987 Constitution.
II. Likewise, the recent ruling of this Honorable Court in Commissioner of
Internal Revenue vs. Aichi Forging Company of Asia, Inc., cannot be applied
retroactively to Mindanao I in the present case.
In a Resolution dated 14 December 2011, this Court resolved to consolidate
G.R. Nos. 193301 and 194637 to avoid conflicting rulings in related cases.
The Courts Ruling
Determination of Prescriptive Period
G.R. Nos. 193301 and 194637 both raise the question of the determination of
the prescriptive period, or the interpretation of Section 112 of the 1997 Tax
Code, in light of our rulings in Atlas and Mirant.
Mindanao IIs unutilized input VAT tax credit for the first and second quarters
of 2003, in the amounts of P3,160,984.69 and P1,562,085.33, respectively,

Page 15 of 98

are covered by G.R. No. 193301, while Mindanao Is unutilized input VAT tax
credit for the first, second, third, and fourth quarters of 2003, in the amounts
of P3,893,566.14, P2,351,000.83, and P7,940,727.83, respectively, are
covered by G.R. No. 194637.

x x x x 43 (Underscoring supplied)
The relevant dates for G.R. No. 193301 (Mindanao II) are:

Section 112 of the 1997 Tax Code

CTA
Case
No.

Period
covered by
VAT Sales in
2003 and
amount

Close of
quarter
when sales
were
made

Last day
for filing
application
of tax
refund/tax
credit
certificate
with the
CIR

Actual date of
filing
application for
tax refund/
credit with the
CIR
(administrative
claim)44

7227

1st Quarter,
P3,160,984.69

31 March
2003

31 March
2005

7287

2nd Quarter,
P1,562,085.33

30 June
2003

7317

3rd and 4th

Quarters,
P3,521,129.50

The pertinent sections of the 1997 Tax Code, the law applicable at the time of
Mindanao IIs and Mindanao Is administrative and judicial claims, provide:
SEC. 112. Refunds or Tax Credits of Input Tax. -(A) Zero-rated or Effectively
Zero-rated Sales. - Any VAT-registered person, whose sales are zero-rated or
effectively zero-rated may, within two (2) years after the close of the taxable
quarter when the sales were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable to such
sales, except transitional input tax, to the extent that such input tax has not
been applied against output tax: Provided, however, That in the case of zerorated 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.

Last day for

filing case
with CTA45

Actual Date
of filing case
with CTA
(judicial
claim)

13 April 2005

12 September
2005

22 April 2005

30 June
2005

13 April 2005

12 September
2005

7 July 2005

30
September
2003

30
September
2005

13 April 2005

12 September
2005

9 September
2005

31
December
2003

2 January
2006
(31
December
2005 being
a Saturday)

The relevant dates for G.R. No. 194637 (Minadanao I) are:

xxxx
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. In proper cases, the Commissioner shall grant a refund or issue the tax credit
certificate for creditable input taxes within one hundred twenty (120) days
from the date of submission of complete documents in support of the
application filed 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.
Page 16 of 98

CTA
Case
No.

Period
covered by
VAT Sales in
2003 and
amount

Close of
quarter
when sales
were
made

Last day
for filing
application
of tax
refund/tax
credit
certificate
with the
CIR

Actual date of
filing
application for
tax refund/
credit with the
CIR
(administrative
claim)46

Last day for

filing case
with CTA47

Actual Date
of filing case
with CTA
(judicial
claim)

7227

1st Quarter,
P3,893,566.14

31 March
2003

31 March
2005

4 April 2005

1 September
2005

22 April 2005

7287

2nd Quarter,
P2,351,000.83

30 June
2003

30 June
2005

4 April 2005

1 September
2005

7 July 2005

7317

3rd
and 4th

30
September
2003

30
September
2005

4 April 2005

1 September
2005

9 September
2005

Quarters,
P7,940,727.83

31
December
2003

2 January
2006
(31
December
2005 being
a Saturday)

When Mindanao II and Mindanao I filed their respective administrative and

judicial claims in 2005, neither Atlas nor Mirant has been promulgated. Atlas
was promulgated on 8 June 2007, while Mirant was promulgated on 12
September 2008. It is therefore misleading to state that Atlas was the
controlling doctrine at the time of filing of the claims. The 1997 Tax Code,
which took effect on 1 January 1998, was the applicable law at the time of
filing of the claims in issue. As this Court explained in the recent consolidated
cases of Commissioner of Internal Revenue v. San Roque Power Corporation,
Taganito Mining Corporation v. Commissioner of Internal Revenue, and Philex
Mining Corporation v. Commissioner of Internal Revenue (San Roque):
Clearly, San Roque failed to comply with the 120-day waiting period, the time
expressly given by law to the Commissioner to decide whether to grant or
deny San Roques application for tax refund or credit. It is indisputable that
compliance with the 120-day waiting period is mandatory and jurisdictional.
The waiting period, originally fixed at 60 days only, was part of the provisions
of the first VAT law, Executive Order No. 273, which took effect on 1 January
1988. The waiting period was extended to 120 days effective 1 January 1998
under RA 8424 or the Tax Reform Act of 1997. Thus, the waiting period has
been in our statute books for more than fifteen (15) years before San Roque
filed its judicial claim.
Failure to comply with the 120-day waiting period violates a mandatory
provision of law. It violates the doctrine of exhaustion of administrative
remedies and renders the petition premature and thus without a cause of
action, with the effect that the CTA does not acquire jurisdiction over the
taxpayers petition. Philippine jurisprudence is replete with cases upholding
and reiterating these doctrinal principles.
The charter of the CTA expressly provides that its jurisdiction is to review on
appeal "decisions of the Commissioner of Internal Revenue in cases involving
x x x refunds of internal revenue taxes." When a taxpayer prematurely files a
judicial claim for tax refund or credit with the CTA without waiting for the
decision of the Commissioner, there is no "decision" of the Commissioner to
review and thus the CTA as a court of special jurisdiction has no jurisdiction
over the appeal. The charter of the CTA also expressly provides that if the

Commissioner fails to decide within "a specific period" required by law, such
"inaction shall be deemed a denial" of the application for tax refund or credit.
It is the Commissioners decision, or inaction "deemed a denial," that the
taxpayer can take to the CTA for review. Without a decision or an "inaction x
x x deemed a denial" of the Commissioner, the CTA has no jurisdiction over a
petition for review.
San Roques failure to comply with the 120-day mandatory period renders its
petition for review with the CTA void. Article 5 of the Civil Code provides, "Acts
executed against provisions of mandatory or prohibitory laws shall be void,
except when the law itself authorizes their validity." San Roques void petition
for review cannot be legitimized by the CTA or this Court because Article 5 of
the Civil Code states that such void petition cannot be legitimized "except when
the law itself authorizes its validity." There is no law authorizing the petitions
validity.
It is hornbook doctrine that a person committing a void act contrary to a
mandatory provision of law cannot claim or acquire any right from his void act.
A right cannot spring in favor of a person from his own void or illegal act. This
doctrine is repeated in Article 2254 of the Civil Code, which states, "No vested
or acquired right can arise from acts or omissions which are against the law
or which infringe upon the rights of others." For violating a mandatory
provision of law in filing its petition with the CTA, San Roque cannot claim any
right arising from such void petition. Thus, San Roques petition with the CTA
is a mere scrap of paper.
This Court cannot brush aside the grave issue of the mandatory and
jurisdictional nature of the 120-day period just because the Commissioner
merely asserts that the case was prematurely filed with the CTA and does not
question the entitlement of San Roque to the refund. The mere fact that a
taxpayer has undisputed excess input VAT, or that the tax was admittedly
illegally, erroneously or excessively collected from him, does not entitle him as
a matter of right to a tax refund or credit. Strict compliance with the mandatory
and jurisdictional conditions prescribed by law to claim such tax refund or
credit is essential and necessary for such claim to prosper. Well-settled is the
rule that tax refunds or credits, just like tax exemptions, are strictly construed
against the taxpayer.
The burden is on the taxpayer to show that he has strictly complied with the
conditions for the grant of the tax refund or credit.

Page 17 of 98

This Court cannot disregard mandatory and jurisdictional conditions mandated

by law simply because the Commissioner chose not to contest the numerical
correctness of the claim for tax refund or credit of the taxpayer. Noncompliance with mandatory periods, non-observance of prescriptive periods,
and non-adherence to exhaustion of administrative remedies bar a taxpayers
claim for tax refund or credit, whether or not the Commissioner questions the
numerical correctness of the claim of the taxpayer. This Court should not
establish the precedent that non-compliance with mandatory and jurisdictional
conditions can be excused if the claim is otherwise meritorious, particularly in
claims for tax refunds or credit. Such precedent will render meaningless
compliance with mandatory and jurisdictional requirements, for then every tax
refund case will have to be decided on the numerical correctness of the
amounts claimed, regardless of non-compliance with mandatory and
jurisdictional conditions.
San Roque cannot also claim being misled, misguided or confused by the Atlas
doctrine because San Roque filed its petition for review with the CTA more
than four years before Atlas was promulgated. The Atlas doctrine did not exist
at the time San Roque failed to comply with the 120-day period. Thus, San
Roque cannot invoke the Atlas doctrine as an excuse for its failure to wait for
the 120-day period to lapse. In any event, the Atlas doctrine merely stated
that the two-year prescriptive period should be counted from the date of
payment of the output VAT, not from the close of the taxable quarter when
the sales involving the input VAT were made. The Atlas doctrine does not
interpret, expressly or impliedly, the 120+30 day periods.49 (Emphases in the
original; citations omitted)
Prescriptive Period for
the Filing of Administrative Claims

(1) The last day for filing an application for tax refund or credit with the CIR
for the first quarter of 2003 was on 31 March 2005. Mindanao II filed its
administrative claim before the CIR on 13 April 2005, while Mindanao I filed
its administrative claim before the CIR on 4 April 2005. Both claims have
prescribed, pursuant to Section 112(A) of the 1997 Tax Code.
(2) The last day for filing an application for tax refund or credit with the CIR
for the second quarter of 2003 was on 30 June 2005. Mindanao II filed its
administrative claim before the CIR on 13 April 2005, while Mindanao I filed
its administrative claim before the CIR on 4 April 2005. Both claims were filed
on time, pursuant to Section 112(A) of the 1997 Tax Code.
(3) The last day for filing an application for tax refund or credit with the CIR
for the third quarter of 2003 was on 30 September 2005. Mindanao II filed its
administrative claim before the CIR on 13 April 2005, while Mindanao I filed
its administrative claim before the CIR on 4 April 2005. Both claims were filed
on time, pursuant to Section 112(A) of the 1997 Tax Code.
(4) The last day for filing an application for tax refund or credit with the CIR
for the fourth quarter of 2003 was on 2 January 2006. Mindanao II filed its
administrative claim before the CIR on 13 April 2005, while Mindanao I filed
its administrative claim before the CIR on 4 April 2005. Both claims were filed
on time, pursuant to Section 112(A) of the 1997 Tax Code.
Prescriptive Period for
the Filing of Judicial Claims

In determining whether the administrative claims of Mindanao I and Mindanao

II for 2003 have prescribed, we see no need to rely on either Atlas or Mirant.
Section 112(A) of the 1997 Tax Code is clear: "Any VAT-registered person,
whose sales are zero-rated or effectively zero-rated may, within two (2) years
after the close of the taxable quarter when the sales were made, apply for the
issuance of a tax credit certificate or refund of creditable input tax due or paid
attributable to such sales x x x."

In determining whether the claims for the second, third and fourth quarters of
2003 have been properly appealed, we still see no need to refer to either Atlas
or Mirant, or even to Section 229 of the 1997 Tax Code. The second paragraph
of Section 112(C) of the 1997 Tax Code is clear: "In case of full or partial
denial of the claim for tax refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the period prescribed above,
the taxpayer affected may, within thirty (30) days from the receipt of the
decision denying the claim or after the expiration of the one hundred twenty
day-period, appeal the decision or the unacted claim with the Court of Tax
Appeals."

We rule on Mindanao I and IIs administrative claims for the first, second,
third, and fourth quarters of 2003 as follows:

The mandatory and jurisdictional nature of the 120+30 day periods was
explained in San Roque:

Page 18 of 98

At the time San Roque filed its petition for review with the CTA, the 120+30
day mandatory periods were already in the law. Section 112(C) expressly
grants the Commissioner 120 days within which to decide the taxpayers claim.
The law is clear, plain, and unequivocal: "x x x the Commissioner shall grant
a refund or issue the tax credit certificate for creditable input taxes within one
hundred twenty (120) days from the date of submission of complete
documents." Following the verba legis doctrine, this law must be applied
exactly as worded since it is clear, plain, and unequivocal. The taxpayer cannot
simply file a petition with the CTA without waiting for the Commissioners
decision within the 120-day mandatory and jurisdictional period. The CTA will
have no jurisdiction because there will be no "decision" or "deemed a denial"
decision of the Commissioner for the CTA to review. In San Roques case, it
filed its petition with the CTA a mere 13 days after it filed its administrative
claim with the Commissioner. Indisputably, San Roque knowingly violated the
mandatory 120-day period, and it cannot blame anyone but itself.
Section 112(C) also expressly grants the taxpayer a 30-day period to appeal
to the CTA the decision or inaction of the Commissioner, thus:
x x x the taxpayer affected may, within thirty (30) days from the receipt of the
decision denying the claim or after the expiration of the one hundred twenty
day-period, appeal the decision or the unacted claim with the Court of Tax
Appeals. (Emphasis supplied)
This law is clear, plain, and unequivocal. Following the well-settled verba legis
doctrine, this law should be applied exactly as worded since it is clear, plain,
and unequivocal. As this law states, the taxpayer may, if he wishes, appeal
the decision of the Commissioner to the CTA within 30 days from receipt of
the Commissioners decision, or if the Commissioner does not act on the
taxpayers claim within the 120-day period, the taxpayer may appeal to the
CTA within 30 days from the expiration of the 120-day period.
xxxx
There are three compelling reasons why the 30-day period need not
necessarily fall within the two-year prescriptive period, as long as the
administrative claim is filed within the two-year prescriptive period.
First, Section 112(A) clearly, plainly, and unequivocally provides that the
taxpayer "may, within two (2) years after the close of the taxable quarter when
the sales were made, apply for the issuance of a tax credit certificate or refund
of the creditable input tax due or paid to such sales." In short, the law states

that the taxpayer may apply with the Commissioner for a refund or credit
"within two (2) years," which means at anytime within two years. Thus, the
application for refund or credit may be filed by the taxpayer with the
Commissioner on the last day of the two-year prescriptive period and it will
still strictly comply with the law. The two-year prescriptive period is a grace
period in favor of the taxpayer and he can avail of the full period before his
right to apply for a tax refund or credit is barred by prescription.
Second, Section 112(C) provides that the Commissioner shall decide the
application for refund or credit "within one hundred twenty (120) days from
the date of submission of complete documents in support of the application
filed in accordance with Subsection (A)." The reference in Section 112(C) of
the submission of documents "in support of the application filed in accordance
with Subsection A" means that the application in Section 112(A) is the
administrative claim that the Commissioner must decide within the 120-day
period. In short, the two-year prescriptive period in Section 112(A) refers to
the period within which the taxpayer can file an administrative claim for tax
refund or credit. Stated otherwise, the two-year prescriptive period does not
refer to the filing of the judicial claim with the CTA but to the filing of the
administrative claim with the Commissioner. As held in Aichi, the "phrase
within two years x x x apply for the issuance of a tax credit or refund refers
to applications for refund/credit with the CIR and not to appeals made to the
CTA."
Third, if the 30-day period, or any part of it, is required to fall within the twoyear prescriptive period (equivalent to 730 days), then the taxpayer must file
his administrative claim for refund or credit within the first 610 days of the
two-year prescriptive period. Otherwise, the filing of the administrative claim
beyond the first 610 days will result in the appeal to the CTA being filed beyond
the two-year prescriptive period. Thus, if the taxpayer files his administrative
claim on the 611th day, the Commissioner, with his 120-day period, will have
until the 731st day to decide the claim. If the Commissioner decides only on
the 731st day, or does not decide at all, the taxpayer can no longer file his
judicial claim with the CTA because the two-year prescriptive period
(equivalent to 730 days) has lapsed. The 30-day period granted by law to the
taxpayer to file an appeal before the CTA becomes utterly useless, even if the
taxpayer complied with the law by filing his administrative claim within the
two-year prescriptive period.
The theory that the 30-day period must fall within the two-year prescriptive
period adds a condition that is not found in the law. It results in truncating
120 days from the 730 days that the law grants the taxpayer for filing his

Page 19 of 98

administrative claim with the Commissioner. This Court cannot interpret a law
to defeat, wholly or even partly, a remedy that the law expressly grants in
clear, plain, and unequivocal language.
Section 112(A) and (C) must be interpreted according to its clear, plain, and
unequivocal language. The taxpayer can file his administrative claim for refund
or credit at anytime within the two-year prescriptive period. If he files his claim
on the last day of the two-year prescriptive
period, his claim is still filed on time. The Commissioner will have 120 days
from such filing to decide the claim. If the Commissioner decides the claim on
the 120th day, or does not decide it on that day, the taxpayer still has 30 days
to file his judicial claim with the CTA. This is not only the plain meaning but
also the only logical interpretation of Section 112(A) and (C).50 (Emphases in
the original; citations omitted)
In San Roque, this Court ruled that "all taxpayers can rely on BIR Ruling No.
DA-489-03 from the time of its issuance on 10 December 2003 up to its
reversal in Aichi on 6 October 2010, where this Court held that the 120+30
day periods are mandatory and jurisdictional."51 We shall discuss later the
effect of San Roques recognition of BIR Ruling No. DA-489-03 on claims filed
between 10 December 2003 and 6 October 2010. Mindanao I and II filed their
claims within this period.
We rule on Mindanao I and IIs judicial claims for the second, third, and fourth
quarters of 2003 as follows:
G.R. No. 193301
Mindanao II v. CIR
Mindanao II filed its administrative claims for the second, third, and fourth
quarters of 2003 on 13 April 2005. Counting 120 days after filing of the
administrative claim with the CIR (11 August 2005) and 30 days after the CIRs
denial by inaction, the last day for filing a judicial claim with the CTA for the
second, third, and fourth quarters of 2003 was on 12 September 2005.
However, the judicial claim cannot be filed earlier than 11 August 2005, which
is the expiration of the 120-day period for the Commissioner to act on the
claim.
(1) Mindanao II filed its judicial claim for the second quarter of 2003 before
the CTA on 7 July 2005, before the expiration of the 120-day period. Pursuant

to Section 112(C) of the 1997 Tax Code, Mindanao IIs judicial claim for the
second quarter of 2003 was prematurely filed.
However, pursuant to San Roques recognition of the effect of BIR Ruling No.
DA-489-03, we rule that Mindanao IIs judicial claim for the second quarter of
2003 qualifies under the exception to the strict application of the 120+30 day
periods.
(2) Mindanao II filed its judicial claim for the third quarter of 2003 before the
CTA on 9 September 2005. Mindanao IIs judicial claim for the third quarter of
2003 was thus filed on time, pursuant to Section 112(C) of the 1997 Tax Code.
(3) Mindanao II filed its judicial claim for the fourth quarter of 2003 before the
CTA on 9 September 2005. Mindanao IIs judicial claim for the fourth quarter
of 2003 was thus filed on time, pursuant to Section 112(C) of the 1997 Tax
Code.
G.R. No. 194637
Mindanao I v. CIR
Mindanao I filed its administrative claims for the second, third, and fourth
quarters of 2003 on 4 April 2005. Counting 120 days after filing of the
administrative claim with the CIR (2 August 2005) and 30 days after the CIRs
denial by inaction,52 the last day for filing a judicial claim with the CTA for the
second, third, and fourth quarters of 2003 was on 1 September 2005.
However, the judicial claim cannot be filed earlier than 2 August 2005, which
is the expiration of the 120-day period for the Commissioner to act on the
claim.
(1) Mindanao I filed its judicial claim for the second quarter of 2003 before the
CTA on 7 July 2005, before the expiration of the 120-day period. Pursuant to
Section 112(C) of the 1997 Tax Code, Mindanao Is judicial claim for the
second quarter of 2003 was prematurely filed. However, pursuant to San
Roques recognition of the effect of BIR Ruling No. DA-489-03, we rule that
Mindanao Is judicial claim for the second quarter of 2003 qualifies under the
exception to the strict application of the 120+30 day periods.
(2) Mindanao I filed its judicial claim for the third quarter of 2003 before the
CTA on 9 September 2005. Mindanao Is judicial claim for the third quarter of
2003 was thus filed after the prescriptive period, pursuant to Section 112(C)
of the 1997 Tax Code.

Page 20 of 98

(3) Mindanao I filed its judicial claim for the fourth quarter of 2003 before the
CTA on 9 September 2005. Mindanao Is judicial claim for the fourth quarter
of 2003 was thus filed after the prescriptive period, pursuant to Section 112(C)
of the 1997 Tax Code.
San Roque: Recognition of BIR Ruling No. DA-489-03
In the consolidated cases of San Roque, the Court En Banc53 examined and
ruled on the different claims for tax refund or credit of three different
companies. In San Roque, we reiterated that "following the verba legis
doctrine, Section 112(C) must be applied exactly as worded since it is clear,
plain, and unequivocal. The taxpayer cannot simply file a petition with the CTA
without waiting for the Commissioners decision within the 120-day mandatory
and jurisdictional period. The CTA will have no jurisdiction because there will
be no decision or deemed a denial decision of the Commissioner for the CTA
to review."
Notwithstanding a strict construction of any claim for tax exemption or refund,
the Court in San Roque recognized that BIR Ruling No. DA-489-03 constitutes
equitable estoppel54 in favor of taxpayers. BIR Ruling No. DA-489-03
expressly states that the "taxpayer-claimant need not wait for the lapse of the
120-day period before it could seek judicial relief with the CTA by way of
Petition for Review." This Court discussed BIR Ruling No. DA-489-03 and its
effect on taxpayers, thus:
Taxpayers should not be prejudiced by an erroneous interpretation by the
Commissioner, particularly on a difficult question of law. The abandonment of
the Atlas doctrine by Mirant and Aichi is proof that the reckoning of the
prescriptive periods for input VAT tax refund or credit is a difficult question of
law. The abandonment of the Atlas doctrine did not result in Atlas, or other
taxpayers similarly situated, being made to return the tax refund or credit they
received or could have received under Atlas prior to its abandonment. This
Court is applying Mirant and Aichi prospectively. Absent fraud, bad faith or
misrepresentation, the reversal by this Court of a general interpretative rule
issued by the Commissioner, like the reversal of a specific BIR ruling under
Section 246, should also apply prospectively. x x x.
xxxx
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general
interpretative rule applicable to all taxpayers or a specific ruling applicable only
to a particular taxpayer.

BIR Ruling No. DA-489-03 is a general interpretative rule because it was a

response to a query made, not by a particular taxpayer, but by a government
agency tasked with processing tax refunds and credits, that is, the One Stop
Shop Inter-Agency Tax Credit and Drawback Center of the Department of
Finance. This government agency is also the addressee, or the entity
responded to, in BIR Ruling No. DA-489-03. Thus, while this government
agency mentions in its query to the Commissioner the administrative claim of
Lazi Bay Resources Development, Inc., the agency was in fact asking the
Commissioner what to do in cases like the tax claim of Lazi Bay Resources
Development, Inc., where the taxpayer did not wait for the lapse of the 120day period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all
taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its issuance
on 10 December 2003 up to its reversal by this Court in Aichi on 6 October
2010, where this Court held that the 120+30 day periods are mandatory and
jurisdictional.
xxxx
Taganito, however, filed its judicial claim with the CTA on 14 February 2007,
after the issuance of BIR Ruling No. DA-489-03 on 10 December 2003. Truly,
Taganito can claim that in filing its judicial claim prematurely without waiting
for the 120-day period to expire, it was misled by BIR Ruling No. DA-489-03.
Thus, Taganito can claim the benefit of BIR Ruling No. DA-489-03, which
shields the filing of its judicial claim from the vice of prematurity. (Emphasis
in the original)
Summary of Administrative and Judicial Claims
G.R. No. 193301
Mindanao II v. CIR
Administrative
Claim

Judicial Claim

Action on Claim

1st
Quarter,
2003

Filed late

--

Deny, pursuant to
Section 112(A) of the
1997 Tax Code

2nd
Quarter,
2003

Filed on time

Prematurely filed

Grant, pursuant to
BIR Ruling No. DA-489-03

Page 21 of 98

3rd
Quarter,
2003

Filed on time

Filed on time

Grant, pursuant to
Section 112(C) of the
1997 Tax Code

4th
Quarter,
2003

Filed on time

Filed on time

Grant, pursuant to
Section 112(C) of the
1997 Tax Code

(3) A judicial claim must be filed with the CTA within 30 days from the receipt
of the CIRs decision denying the administrative claim or from the expiration
of the 120-day period without any action from the CIR.
(4) All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from the
time of its issuance on 10 December 2003 up to its reversal by this Court in
Aichi on 6 October 2010, as an exception to the mandatory and jurisdictional
120+30 day periods.

G.R. No. 194637

Mindanao I v. CIR

"Incidental" Transaction
Administrative
Claim

Judicial Claim

Action on Claim

1st Quarter,
2003

Filed late

--

Deny, pursuant to
Section 112(A) of the
1997 Tax Code

2nd Quarter,
2003

Filed on time

Prematurely filed

Grant, pursuant to
BIR Ruling No. DA-489-03

Section 105 of the 1997 Tax Code does not support Mindanao IIs position:

3rd Quarter,
2003

Filed on time

Filed late

Grant, pursuant to
Section 112(C) of the
1997 Tax Code

4th Quarter,
2003

Filed on time

Filed late

Grant, pursuant to
Section 112(C) of the
1997 Tax Code

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

Mindanao II asserts that the sale of a fully depreciated Nissan Patrol is not an
incidental transaction in the course of its business; hence, it is an isolated
transaction that should not have been subject to 10% VAT.

Summary of Rules on Prescriptive Periods Involving VAT

We summarize the rules on the determination of the prescriptive period for
filing a tax refund or credit of unutilized input VAT as provided in Section 112
of the 1997 Tax Code, as follows:
(1) An administrative claim must be filed with the CIR within two years after
the close of the taxable quarter when the zero-rated or effectively zero-rated
sales were made.
(2) The CIR has 120 days from the date of submission of complete documents
in support of the administrative claim within which to decide whether to grant
a refund or issue a tax credit certificate. The 120-day period may extend
beyond the two-year period from the filing of the administrative claim if the
claim is filed in the later part of the two-year period. If the 120-day period
expires without any decision from the CIR, then the administrative claim may
be considered to be denied by inaction.

The value-added tax is an indirect tax and the amount of tax may be shifted
or passed on to the buyer, transferee or lessee of the goods, properties or
services. This rule shall likewise apply to existing contracts of sale or lease of
goods, properties or services at the time of the effectivity of Republic Act No.
7716.
The phrase "in the course of trade or business" means the regular conduct or
pursuit of a commercial or an economic activity, including transactions
incidental thereto, by any person regardless of whether or not the person
engaged therein is a nonstock, nonprofit private organization (irrespective of
the disposition of its net income and whether or not it sells exclusively to
members or their guests), or government entity.
The rule of regularity, to the contrary notwithstanding, services as defined in
this Code rendered in the Philippines by nonresident foreign persons shall be
considered as being rendered in the course of trade or business. (Emphasis
supplied)
Mindanao II relies on Commissioner of Internal Revenue v. Magsaysay Lines,
Inc. (Magsaysay)55 and Imperial v. Collector of Internal Revenue (Imperial)56

Page 22 of 98

to justify its position. Magsaysay, decided under the NIRC of 1986, involved
the sale of vessels of the National Development Company (NDC) to Magsaysay
Lines, Inc. We ruled that the sale of vessels was not in the course of NDCs
trade or business as it was involuntary and made pursuant to the
Governments policy for privatization. Magsaysay, in quoting from the CTAs
decision, imputed upon Imperial the definition of "carrying on business."
Imperial, however, is an unreported case that merely stated that "to engage
is to embark in a business or to employ oneself therein."57

on 31 May 2010, as well as the Amended Decision promulgated on 24

November 2010, are AFFIRMED with MODIFICATION.

Mindanao IIs sale of the Nissan Patrol is said to be an isolated

transaction.1wphi1 However, it does not follow that an isolated transaction
cannot be an incidental transaction for purposes of VAT liability. Indeed, a
reading of Section 105 of the 1997 Tax Code would show that a transaction
"in the course of trade or business" includes "transactions incidental thereto."

SO ORDERED.

For G.R. No. 193301, the claim of Mindanao II Geothermal Partnership for the
first quarter of 2003 is DENIED while its claims for the second, third, and fourth
quarters of 2003 are GRANTED. For G.R. No. 19463 7, the claims of Mindanao
I Geothermal Partnership for the first, third, and fourth quarters of 2003 are
DENIED while its claim for the second quarter of 2003 is GRANTED.

Mindanao IIs business is to convert the steam supplied to it by PNOC-EDC

into electricity and to deliver the electricity to NPC. In the course of its
business, Mindanao II bought and eventually sold a Nissan Patrol. Prior to the
sale, the Nissan Patrol was part of Mindanao IIs property, plant, and
equipment. Therefore, the sale of the Nissan Patrol is an incidental transaction
made in the course of Mindanao IIs business which should be liable for VAT.
Substantiation Requirements
Mindanao II claims that the CTAs disallowance of a total amount of
P492,198.09 is improper as it has substantially complied with the
substantiation requirements of Section 113(A)58 in relation to Section 23759
of the 1997 Tax Code, as implemented by Section 4.104-1, 4.104-5 and 4.1081 of Revenue Regulation No. 7-95.60
We are constrained to state that Mindanao IIs compliance with the
substantiation requirements is a finding of fact. The CTA En Banc evaluated
the records of the case and found that the transactions in question are
purchases for services and that Mindanao II failed to comply with the
substantiation requirements. We affirm the CTA En Bancs finding of fact,
which in turn affirmed the finding of the CTA First Division. We see no reason
to overturn their findings.
WHEREFORE, we PARTIALLY GRANT the petitions. The Decision of the Court
of Tax Appeals En Bane in CT A EB No. 513 promulgated on 10 March 2010,
as well as the Resolution promulgated on 28 July 2010, and the Decision of
the Court of Tax Appeals En Bane in CTA EB Nos. 476 and 483 promulgated
Page 23 of 98

Republic of the Philippines

SUPREME COURT
Manila

On February 10, 1992, COMASERCO filed with the BIR, a letter-protest

objecting to the latter's finding of deficiency VAT. On August 20, 1992, the
Commissioner of Internal Revenue sent a collection letter to COMASERCO
demanding payment of the deficiency VAT.

FIRST DIVISION
G.R. No. 125355

March 30, 2000

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

and COMMONWEALTH MANAGEMENT AND SERVICES CORPORATION,
respondents.
PARDO, J.:
What is before the Court is a petition for review on certiorari of the decision
of the Court of Appeals,1 reversing that of the Court of Tax Appeals,2 which
affirmed with modification the decision of the Commissioner of Internal
Revenue ruling that Commonwealth Management and Services Corporation, is
liable for value added tax for services to clients during taxable year 1988.
Commonwealth Management and Services Corporation (COMASERCO, for
brevity), is a corporation duly organized and existing under the laws of the
Philippines. It is an affiliate of Philippine American Life Insurance Co.
(Philamlife), organized by the letter to perform collection, consultative and
other technical services, including functioning as an internal auditor, of
Philamlife and its other affiliates.1wphi1.nt
On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an
assessment to private respondent COMASERCO for deficiency value-added tax
(VAT) amounting to P351,851.01, for taxable year 1988, computed as follows:
Taxable sale/receipt
10% tax due thereon
25% surcharge
20% interest per annum
Compromise penalty for late payment
TOTAL AMOUNT DUE AND COLLECTIBLE

P1,679,155.00
============
167,915.50
41,978.88
125,936.63
16,000.00
P351,831.01
============

On September 29, 1992, COMASERCO filed with the Court of Tax Appeals4 a
petition for review contesting the Commissioner's assessment. COMASERCO
asserted that the services it rendered to Philamlife and its affiliates, relating to
collections, consultative and other technical assistance, including functioning
as an internal auditor, were on a "no-profit, reimbursement-of-cost-only"
basis. It averred that it was not engaged in the business of providing services
to Philamlife and its affiliates. COMASERCO was established to ensure
operational orderliness and administrative efficiency of Philamlife and its
affiliates, and not in the sale of services. COMASERCO stressed that it was not
profit-motivated, thus not engaged in business. In fact, it did not generate
profit but suffered a net loss in taxable year 1988. COMASERCO averred that
since it was not engaged in business, it was not liable to pay VAT.
On June 22, 1995, the Court of Tax Appeals rendered decision in favor of the
Commissioner of Internal Revenue, the dispositive portion of which reads:
WHEREFORE, the decision of the Commissioner of Internal Revenue assessing
petitioner deficiency value-added tax for the taxable year 1988 is AFFIRMED
with slight modifications. Accordingly, petitioner is ordered to pay respondent
Commissioner of Internal Revenue the amount of P335,831.01 inclusive of the
25% surcharge and interest plus 20% interest from January 24, 1992 until
fully paid pursuant to Section 248 and 249 of the Tax Code.
The compromise penalty of P16,000.00 imposed by the respondent in her
assessment letter shall not be included in the payment as there was no
compromise agreement entered into between petitioner and respondent with
respect to the value-added tax deficiency.
On July 26, 1995, respondent filed with the Court of Appeals, a petition for
review of the decision of the Court of Appeals.
After due proceedings, on May 13, 1996, the Court of Appeals rendered
decision reversing that of the Court of Tax Appeals, the dispositive portion of
which reads:

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

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

REVERSING and SETTING ASIDE the questioned Decision promulgated on 22

Page 24 of 98

June 1995. The assessment for deficiency value-added tax for the taxable year
1988 inclusive of surcharge, interest and penalty charges are ordered
CANCELLED for lack of legal and factual basis. 6
The Court of Appeals anchored its decision on the ratiocination in another tax
case involving the same parties,7 where it was held that COMASERCO was not
liable to pay fixed and contractor's tax for services rendered to Philamlife and
its affiliates. The Court of Appeals, in that case, reasoned that COMASERCO
was not engaged in business of providing services to Philamlife and its
affiliates. In the same manner, the Court of Appeals held that COMASERCO
was not liable to pay VAT for it was not engaged in the business of selling
services.
On July 16, 1996, the Commissioner of Internal Revenue filed with this Court
a petition for review on certiorari assailing the decision of the Court of Appeals.
On August 7, 1996, we required respondent COMASERCO to file comment on
the petition, and on September 26, 1996, COMASERCO complied with the
resolution.8
We give due course to the petition.
At issue in this case is whether COMASERCO was engaged in the sale of
services, and thus liable to pay VAT thereon.
Petitioner avers that to "engage in business" and to "engage in the sale of
services" are two different things. Petitioner maintains that the services
rendered by COMASERCO to Philamlife and its affiliates, for a fee or
consideration, are subject to VAT. VAT is a tax on the value added by the
performance of the service. It is immaterial whether profit is derived from
rendering the service.
We agree with the Commissioner.
Sec. 99 of the National Internal Revenue Code of 1986, as amended by
Executive Order (E. O.) No. 273 in 1988, provides that:
Sec. 99. Persons liable. Any person who, in the course of trade or business,
sells, barters or exchanges goods, renders services, or engages in similar
transactions and any person who, imports goods shall be subject to the valueadded tax (VAT) imposed in Sections 100 to 102 of this Code. 9

COMASERCO contends that the term "in the course of trade or business"
requires that the "business" is carried on with a view to profit or livelihood. It
avers that the activities of the entity must be profit-oriented. COMASERCO
submits that it is not motivated by profit, as defined by its primary purpose in
the articles of incorporation, stating that it is operating "only on
reimbursement-of-cost basis, without any profit." Private respondent argues
that profit motive is material in ascertaining who to tax for purposes of
determining liability for VAT.
We disagree.
On May 28, 1994, Congress enacted Republic Act No. 7716, the Expanded VAT
Law (EVAT), amending among other sections, Section 99 of the Tax Code. On
January 1, 1998, Republic Act 8424, the National Internal Revenue Code of
1997, took effect. The amended law provides that:
Sec. 105. Persons Liable. Any person who, in the course of trade or
business, sells, barters, exchanges, leases goods or properties, renders
services, and any person who imports goods shall be subject to the valueadded tax (VAT) imposed in Sections 106 and 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted
or passed on to the buyer, transferee or lessee of the goods, properties or
services. This rule shall likewise apply to existing sale or lease of goods,
properties or services at the time of the effectivity of Republic Act No. 7716.
The phrase "in the course of trade or business" means the regular conduct or
pursuit of a commercial or an economic activity, including transactions
incidental thereto, by any person regardless of whether or not the person
engaged therein is a nonstock, nonprofit organization (irrespective of the
disposition of its net income and whether or not it sells exclusively to members
of their guests), or government entity.
The rule of regularity, to the contrary notwithstanding, services as defined in
this Code rendered in the Philippines by nonresident foreign persons shall be
considered as being rendered in the course of trade or business.
Contrary to COMASERCO's contention the above provision clarifies that even
a non-stock, non-profit, organization or government entity, is liable to pay VAT
on the sale of goods or services. VAT is a tax on transactions, imposed at every
stage of the distribution process on the sale, barter, exchange of goods or
property, and on the performance of services, even in the absence of profit

Page 25 of 98

attributable thereto. The term "in the course of trade or business" requires the
regular conduct or pursuit of a commercial or an economic activity regardless
of whether or not the entity is profit-oriented.
The definition of the term "in the course of trade or business" present law
applies to all transactions even to those made prior to its enactment. Executive
Order No. 273 stated that any person who, in the course of trade or business,
sells, barters or exchanges goods and services, was already liable to pay VAT.
The present law merely stresses that even a nonstock, nonprofit organization
or government entity is liable to pay VAT for the sale of goods and services.
Sec. 108 of the National Internal Revenue Code of 1997 10 defines the phrase
"sale of services" as the "performance of all kinds of services for others for a
fee, remuneration or consideration." It includes "the supply of technical advice,
assistance or services rendered in connection with technical management or
administration of any scientific, industrial or commercial undertaking or
project." 11
On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling
No. 010-98 12 emphasizing that a domestic corporation that provided
technical, research, management and technical assistance to its affiliated
companies and received payments on a reimbursement-of-cost basis, without
any intention of realizing profit, was subject to VAT on services rendered. In
fact, even if such corporation was organized without any intention realizing
profit, any income or profit generated by the entity in the conduct of its
activities was subject to income tax.

Both the Commissioner of Internal Revenue and the Court of Tax Appeals
correctly ruled that the services rendered by COMASERCO to Philamlife and its
affiliates are subject to VAT. As pointed out by the Commissioner, the
performance of all kinds of services for others for a fee, remuneration or
consideration is considered as sale of services subject to VAT. As the
government agency charged with the enforcement of the law, the opinion of
the Commissioner of Internal Revenue, in the absence of any showing that it
is plainly wrong, is entitled to great weight. 14 Also, it has been the long
standing policy and practice of this Court to respect the conclusions of quasijudicial agencies, such as the Court of Tax Appeals which, by the nature of its
functions, is dedicated exclusively to the study and consideration of tax cases
and has necessarily developed an expertise on the subject, unless there has
been an abuse or improvident exercise of its authority. 15
There is no merit to respondent's contention that the Court of Appeals' decision
in CA-G.R. No. 34042, declaring the COMASERCO as not engaged in business
and not liable for the payment of fixed and percentage taxes, binds petitioner.
The issue in CA-G.R. No. 34042 is different from the present case, which
involves COMASERCO's liability for VAT. As heretofore stated, every person
who sells, barters, or exchanges goods and services, in the course of trade or
business, as defined by law, is subject to VAT.
WHEREFORE, the Court GRANTS the petition and REVERSES the decision of
the Court of Appeals in CA-G.R. SP No. 37930. The Court hereby REINSTATES
the decision of the Court of Tax Appeals in C. T. A. Case No. 4853.

Hence, it is immaterial whether the primary purpose of a corporation indicates

that it receives payments for services rendered to its affiliates on a
reimbursement-on-cost basis only, without realizing profit, for purposes of
determining liability for VAT on services rendered. As long as the entity
provides service for a fee, remuneration or consideration, then the service
rendered is subject to VAT.
At any rate, it is a rule that because taxes are the lifeblood of the nation,
statutes that allow exemptions are construed strictly against the grantee and
liberally in favor of the government. Otherwise stated, any exemption from
the payment of a tax must be clearly stated in the language of the law; it
cannot be merely implied therefrom. 13 In the case of VAT, Section 109,
Republic Act 8424 clearly enumerates the transactions exempted from VAT.
The services rendered by COMASERCO do not fall within the exemptions.
Page 26 of 98

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.

Indirect Tax
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 152609

June 29, 2005

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. AMERICAN EXPRESS

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

"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
D
F
G
H

Exh 1997

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 CAGR SP No. 62727. The assailed Decision disposed as follows:

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

Taxable Sales

Output
VAT

Zero-rated
Sales

Domestic
Purchases

Input
VAT

I 1st qtr

P59,597.20

P5,959.72

P17,513,801.11

P6,778,182.30

P677,818.23

J 2nd qtr

67,517.20

6,751.72

17,937,361.51

9,333,242.90

933,324.29

K 3rd qtr

51,936.60

5,193.66

19,627,245.36

8,438,357.00

843,835.70

L 4th qtr

67,994.30

6,799.43

25,231,225.22

13,080,822.10

1,308,082.21

P247,045.30

P24,704.53

P80,309,633.20

P37,630,604.30

P3,763,060.43

Total

The Facts

Date Filed
April 18, 1997
July 21, 1997
October 2, 1997
January 20, 1998

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

The Case

"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

Period Covered
1997 1st Qtr.
2nd Qtr.
3rd Qtr.
4th Qtr.

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

Page 27 of 98

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 VATregistered person. If the input tax exceeds the output tax, the excess shall be
carried over to the succeeding quarter or quarters. Any input tax attributable
to the purchase of capital goods or to zero-rated sales by a VAT-registered
person may at his option be refunded or credited against other internal
revenue taxes, subject to the provisions of Section 112.
"There being no immediate action on the part of the [petitioner],
[respondents] petition was filed on April 15, 1999.
"In support of its Petition for Review, the following arguments were raised by
[respondent]:
A. Export sales by a VAT-registered person, the consideration for which is paid
for in acceptable foreign currency inwardly remitted to the Philippines and
accounted for in accordance with existing regulations of the Bangko Sentral
ng Pilipinas, are subject to [VAT] at zero percent (0%). According to
[respondent], being a VAT-registered entity, it is subject to the VAT imposed
under Title IV of the Tax Code, to wit:
Section 102.(sic) Value-added tax on sale of services.- (a) Rate and base of
tax. - There shall be levied, assessed and collected, a value-added tax
equivalent to 10% percent of gross receipts derived by any person engaged
in the sale of services. The phrase "sale of services" means the performance
of all kinds of services for others for a fee, remuneration or consideration,
including those performed or rendered by construction and service
contractors: stock, real estate, commercial, customs and immigration brokers;
lessors of personal property; lessors or distributors of cinematographic films;
persons engaged in milling, processing, manufacturing or repacking goods for
others; and similar services regardless of whether o[r] not the performance
thereof calls for the exercise or use of the physical or mental faculties:
Provided That the following services performed in the Philippines by VATregistered 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;

Page 28 of 98

8. Taxes paid and collected are presumed to have been made in accordance
with laws and regulations, hence, not refundable. Claims for tax refund are
construed strictly against the claimant as they partake of the nature of tax
exemption from tax and it is incumbent upon the [respondent] to prove that
it is entitled thereto under the law and he who claims exemption must be able
to justify his claim by the clearest grant of organic or statu[t]e law. An
exemption from the common burden [cannot] be permitted to exist upon
vague implications;
9. Moreover, [respondent] must prove that it has complied with the governing
rules with reference to tax recovery or refund, which are found in Sections
204(c) and 229 of the Tax Code, as amended, which are quoted as follows:
Section 204. Authority of the Commissioner to Compromise, Abate and Refund
or Credit Taxes. - The Commissioner may - x x x.
(C) Credit or refund taxes erroneously or illegally received or penalties imposed
without authority, refund the value of internal revenue stamps when they are
returned in good condition by the purchaser, and, in his discretion, redeem or
change unused stamps that have been rendered unfit for use and refund their
value upon proof of destruction. No credit or refund of taxes or penalties shall
be allowed unless the taxpayer files in writing with the Commissioner a claim
for credit or refund within two (2) years after payment of the tax or penalty:
Provided, however, That a return filed with an overpayment shall be
considered a written claim for credit or refund.
Section 229. Recovery of tax erroneously or illegally collected.- No suit or
proceeding shall be maintained in any court for the recovery of any national
internal revenue tax hereafter alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have been collected without
authority, or of any sum alleged to have been excessively or in any manner
wrongfully collected, until a claim for refund or credit has been duly filed with
the Commissioner; but such suit or proceeding may be maintained, whether
or not such tax, penalty or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be begun (sic) after the expiration
of two (2) years from the date of payment of the tax or penalty regardless of
any supervening cause that may arise after payment: Provided, however, That
the Commissioner may, even without written claim therefor, refund or credit
any tax, where on the face of the return upon which payment was made, such
payment appears clearly to have been erroneously paid.

"From the foregoing, the [CTA], through the Presiding Judge Ernesto D. Acosta
rendered a decision7 in favor of the herein respondent holding that its services
are subject to zero-rate pursuant to Section 108(b) of the Tax Reform Act of
1997 and Section 4.102-2 (b)(2) of Revenue Regulations 5-96, the decretal
portion of which reads as follows:
WHEREFORE, in view of all the foregoing, this Court finds the [petition]
meritorious and in accordance with law. Accordingly, [petitioner] is hereby
ORDERED to REFUND to [respondent] the amount of P3,352,406.59
representing the latters excess input VAT paid for the year 1997."8
Ruling of the Court of Appeals
In affirming the CTA, the CA held that respondents services fell under the first
type enumerated in Section 4.102-2(b)(2) of RR 7-95, as amended by RR 596. More particularly, its "services were not of the same class or of the same
nature as project studies, information, or engineering and architectural
designs" for non-resident foreign clients; rather, they were "services other
than the processing, manufacturing or repacking of goods for persons doing
business outside the Philippines." The consideration in both types of service,
however, was paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas.
Furthermore, the CA reasoned that reliance on VAT Ruling No. 040-98 was
unwarranted. By requiring that respondents services be consumed abroad in
order to be zero-rated, petitioner went beyond the sphere of interpretation
and into that of legislation. Even granting that it is valid, the ruling cannot be
given retroactive effect, for it will be harsh and oppressive to respondent,
which has already relied upon VAT Ruling No. 080-89 for zero rating.
Hence, this Petition.
The Issue
Petitioner raises this sole issue for our consideration:
"Whether or not the Court of Appeals committed reversible error in holding
that respondent is entitled to the refund of the amount of P3,352,406.59
allegedly representing excess input VAT for the year 1997."10

Page 29 of 98

The Courts Ruling

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.

The Petition is unmeritorious.

Sole Issue:

"(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[:]

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);

(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.

xxxxxxxxx

Respondent is a VAT-registered person that facilitates the collection and

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

"The term 'gross receipts means the total amount of money or its equivalent
representing the contract price, compensation, service fee, rental or royalty,

Service has been defined as "the art of doing something useful for a person
or company for a fee" or "useful labor or work rendered or to be rendered by

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;

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one person to another." 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.
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, 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. At the end of each month, it then bills its credit
card holders for their respective drafts redeemed during the previous month.
If the holders fail to pay the amounts owed, the company sustains the loss.25

In the present case, respondents role in the consumer credit26 process

described above primarily consists of gathering the bills and credit card drafts
of different service establishments located in the Philippines and forwarding
them to the ROCs outside the country. Servicing the bill is not the same as
billing. For the former type of service alone, respondent already gets paid.
The parent company -- to which the ROCs and respondent belong -- takes
charge not only of redeeming the drafts from the ROCs and sending the checks
to the service establishments, but also of billing the credit card holders for
their respective drafts that it has redeemed. While it usually imposes finance
charges 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" located at some distance from the home office 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.
The extent of accounting activity at any of these branches depends upon
company policy, 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. Reciprocal accounts are reconciled or eliminated, because they
lose all significance when the branches and home office are viewed as a single
entity. In like manner, intra-company profits or losses must be offset against
each other for accounting purposes.
Contrary to petitioners assertion, respondent can sell its services to another
branch of the same parent company. 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. 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. 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.
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

Page 31 of 98

company abroad, and that the parent companys subsequent redemption of

these drafts and billings of credit card holders is also attributable to
respondent, then with greater reason should the service rendered by
respondent be zero-rated under our VAT system. The service partakes of the
nature of export sales as applied to goods, 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 Kongbased 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 petitioners administrative interpretation,52 does not imply that the
service be done abroad in order to be zero-rated.
Consumption is "the use of a thing in a way that thereby exhausts it."53
Applied to services, the term means the performance or "successful completion
of a contractual duty, usually resulting in the performers release from any
past or future liability x x x."54 The services rendered by respondent are
performed or successfully completed upon its sending to its foreign client the
drafts and bills it has gathered from service establishments here. Its services,
having been performed in the Philippines, are therefore also consumed in the
Philippines.
Unlike goods, services cannot be physically used in or bound for a specific
place when their destination is determined. Instead, there can only be a
"predetermined end of a course"55 when determining the service "location or
position x x x for legal purposes."56 Respondents facilitation service has no
physical existence, yet takes place upon rendition, and therefore upon
consumption, in the Philippines. Under the destination principle, as petitioner
asserts, such service is subject to VAT at the rate of 10 percent.
Respondents Services Exempt from the Destination Principle
However, the law clearly provides for an exception to the destination principle;
that is, for a zero percent VAT rate for services that are performed in the
Philippines, "paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the [BSP]."57 Thus, for the supply
of service to be zero-rated as an exception, the law merely requires that first,
the service be performed in the Philippines; second, the service fall under any
of the categories in Section 102(b) of the Tax Code; and, third, it be paid in
acceptable foreign currency accounted for in accordance with BSP rules and
regulations.
Indeed, these three requirements for exemption from the destination principle
are met by respondent. Its facilitation service is performed in the Philippines.

Page 32 of 98

It falls under the second category found in Section 102(b) of the Tax Code,
because it is a service other than "processing, manufacturing or repacking of
goods" as mentioned in the provision. Undisputed is the fact that such service
meets the statutory condition that it be paid in acceptable foreign currency
duly accounted for in accordance with BSP rules. Thus, it should be zero-rated.
Performance of Service versus Product Arising from Performance
Again, contrary to petitioners stand, for the cost of respondents service to be
zero-rated, it need not be tacked in as part of the cost of goods exported.58
The law neither imposes such requirement nor associates services with
exported goods. It simply states that the services performed by VAT-registered
persons in the Philippines -- services other than the processing, manufacturing
or repacking of goods for persons doing business outside this country -- if paid
in acceptable foreign currency and accounted for in accordance with the rules
and regulations of the BSP, are zero-rated. The service rendered by
respondent is clearly different from the product that arises from the rendition
of such service. The activity that creates the income must not be confused
with the main business in the course of which that income is realized.59
Tax Situs of a Zero-Rated Service
The law neither makes a qualification nor adds a condition in determining the
tax situs of a zero-rated service. Under this criterion, the place where the
service is rendered determines the jurisdiction60 to impose the VAT.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 VATregistered 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

Page 33 of 98

performed in the Philippines by VAT-registered hotels and other service

establishments. Again, the condition remains that these services must be paid
in acceptable foreign currency inwardly remitted and accounted for in
accordance with the rules and regulations of the BSP. The term "other service
establishments" is obviously broad enough to cover respondents facilitation
service. Section 4.102-2 of RR 7-95 provides thus:

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

"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.

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

"(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 nonresident 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."

Ejusdem Generis
Inapplicable
The canon of statutory construction known as ejusdem generis or "of the same
kind or specie" does not apply to Section 4.102-2(b)(2) of RR 7-95 as amended
by RR 5-96.
First, although the regulatory provision contains an enumeration of particular
or specific words, followed by the general phrase "and other similar services,"
such words do not constitute a readily discernible class and are patently not
of the same kind.72 Project studies involve investments or marketing;
information services focus on data technology; engineering and architectural
designs require creativity. Aside from calling for the exercise or use of mental
faculties or perhaps producing written technical outputs, no common
denominator to the exclusion of all others characterizes these three services.
Nothing sets them apart from other and similar general services that may
involve advertising, computers, consultancy, health care, management,
messengerial work -- to name only a few.
Second, there is the regulatory intent to give the general phrase "and other
similar services" a broader meaning.73 Clearly, the preceding phrase "as well
as" is not meant to limit the effect of "and other similar services."
Third, and most important, the statutory provision upon which this regulation
is based is by itself not restrictive. The scope of the word "services" in Section
102(b)(2) of the Tax Code is broad; it is not susceptible of narrow
interpretation.741avvphi1.zw+
VAT Ruling Nos. 040-98 and 080-89

Page 34 of 98

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?

Page 35 of 98

"Senator Maceda: I am referring to the second paragraph, in the same Section

102. The first paragraph is when one manufactures or packages something
here and he sends it abroad and they pay him, that is covered. That is clear
to me. The second paragraph says Services other than those mentioned in
the preceding subparagraph, the consideration of which is paid for in
acceptable foreign currency
"One example I could immediately think of -- I do not know why this comes
to my mind tonight -- is for tourism or escort services. For example, the
services of the tour operator or tour escort -- just a good name for all kinds of
activities -- is made here at the Midtown Ramada Hotel or at the Philippine
Plaza, but the payment is made from outside and remitted into the country.
"Senator Herrera: What is important here is that these services are paid in
acceptable foreign currency remitted inwardly to the Philippines.
"Senator Maceda: Yes, Mr. President. Like those Japanese tours which include
$50 for the services of a woman or a tourist guide, it is zero-rated when it is
remitted here.
"Senator Herrera: I guess it can be interpreted that way, although this tourist
guide should also be considered as among the professionals. If they earn more
than P200,000, they should be covered.
xxxxxxxxx
Senator Maceda: So, the services by Filipino citizens outside the Philippines
are subject to VAT, and I am talking of all services. Do big contractual
engineers in Saudi Arabia pay VAT?
"Senator Herrera: This provision applies to a VAT-registered person. When he
performs services in the Philippines, that is zero-rated.

statute substantially unchanged is persuasive indication of the adoption by

Congress of a prior executive construction."91
The legislature is presumed to have reenacted the law with full knowledge of
the contents of the revenue regulations then in force regarding the VAT, and
to have approved or confirmed them because they would carry out the
legislative purpose. The particular provisions of the regulations we have
mentioned earlier are, therefore, re-enforced. "When a statute is susceptible
of the meaning placed upon it by a ruling of the government agency charged
with its enforcement and the [l]egislature thereafter [reenacts] the provisions
[without] substantial change, such action is to some extent confirmatory that
the ruling carries out the legislative purpose."92
In sum, having resolved that transactions of respondent are zero-rated, the
Court upholds the formers entitlement to the refund as determined by the
appellate court. Moreover, there is no conflict between the decisions of the
CTA and CA. This Court respects the findings and conclusions of a specialized
court like the CTA "which, by the nature of its functions, is dedicated
exclusively to the study and consideration of tax cases and has necessarily
developed an expertise on the subject."93
Furthermore, under a zero-rating scheme, the sale or exchange of a particular
service is completely freed from the VAT, because the seller is entitled to
recover, by way of a refund or as an input tax credit, the tax that is included
in the cost of purchases attributable to the sale or exchange.94 "[T]he tax
paid or withheld is not deducted from the tax base."95 Having been applied
for within the reglementary period,96 respondents refund is in order.
WHEREFORE, the Petition is hereby DENIED, and the assailed Decision
AFFIRMED. No pronouncement as to costs.

"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
Page 36 of 98

Republic of the Philippines

SUPREME COURT
Manila

district officer of BIR RDO No. 19, denied the first application letter, dated
December 29, 1998.

SECOND DIVISION
G.R. No. 151135

July 2, 2004

CONTEX CORPORATION, petitioner, vs. HON. COMMISSIONER OF INTERNAL

REVENUE, respondent.
QUISUMBING, J.:
For review is the Decision1 dated September 3, 2001, of the Court of Appeals,
in CA-G.R. SP No. 62823, which reversed and set aside the decision2 dated
October 13, 2000, of the Court of Tax Appeals (CTA). The CTA had ordered
the Commissioner of Internal Revenue (CIR) to refund the sum of P683,061.90
to petitioner as erroneously paid input value-added tax (VAT) or in the
alternative, to issue a tax credit certificate for said amount. Petitioner also
assails the appellate courts Resolution,3 dated December 19, 2001, denying
the motion for reconsideration.
Petitioner is a domestic corporation engaged in the business of manufacturing
hospital textiles and garments and other hospital supplies for export.
Petitioners place of business is at the Subic Bay Freeport Zone (SBFZ). It is
duly registered with the Subic Bay Metropolitan Authority (SBMA) as a Subic
Bay Freeport Enterprise, pursuant to the provisions of Republic Act No. 7227.4
As an SBMA-registered firm, petitioner is exempt from all local and national
internal revenue taxes except for the preferential tax provided for in Section
12 (c)5 of Rep. Act No. 7227. Petitioner also registered with the Bureau of
Internal Revenue (BIR) as a non-VAT taxpayer under Certificate of
Registration RDO Control No. 95-180-000133.
From January 1, 1997 to December 31, 1998, petitioner purchased various
supplies and materials necessary in the conduct of its manufacturing business.
The suppliers of these goods shifted unto petitioner the 10% VAT on the
purchased items, which led the petitioner to pay input taxes in the amounts
of P539,411.88 and P504,057.49 for 1997 and 1998, respectively.6
Acting on the belief that it was exempt from all national and local taxes,
including VAT, pursuant to Rep. Act No. 7227, petitioner filed two applications
for tax refund or tax credit of the VAT it paid. Mr. Edilberto Carlos, revenue

Unfazed by the denial, petitioner on May 4, 1999, filed another application for
tax refund/credit, this time directly with Atty. Alberto Pagabao, the regional
director of BIR Revenue Region No. 4. The second letter sought a refund or
issuance of a tax credit certificate in the amount of P1,108,307.72,
representing erroneously paid input VAT for the period January 1, 1997 to
November 30, 1998.
When no response was forthcoming from the BIR Regional Director, petitioner
then elevated the matter to the Court of Tax Appeals, in a petition for review
docketed as CTA Case No. 5895. Petitioner stressed that Section 112(A)7 if
read in relation to Section 106(A)(2)(a)8 of the National Internal Revenue
Code, as amended and Section 12(b)9 and (c) of Rep. Act No. 7227 would
show that it was not liable in any way for any value-added tax.
In opposing the claim for tax refund or tax credit, the BIR asked the CTA to
apply the rule that claims for refund are strictly construed against the taxpayer.
Since petitioner failed to establish both its right to a tax refund or tax credit
and its compliance with the rules on tax refund as provided for in Sections
20410 and 22911 of the Tax Code, its claim should be denied, according to
the BIR.
On October 13, 2000, the CTA decided CTA Case No. 5895 as follows:
WHEREFORE, in view of the foregoing, the Petition for Review is hereby
PARTIALLY GRANTED. Respondent is hereby ORDERED to REFUND or in the
alternative to ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner the
sum of P683,061.90, representing erroneously paid input VAT.
SO ORDERED.12
In granting a partial refund, the CTA ruled that petitioner misread Sections
106(A)(2)(a) and 112(A) of the Tax Code. The tax court stressed that these
provisions apply only to those entities registered as VAT taxpayers whose sales
are zero-rated. Petitioner does not fall under this category, since it is a nonVAT taxpayer as evidenced by the Certificate of Registration RDO Control No.
95-180-000133 issued by RDO Rosemarie Ragasa of BIR RDO No. 18 of the
Subic Bay Freeport Zone and thus it is exempt from VAT, pursuant to Rep. Act
No. 7227, said the CTA.

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Nonetheless, the CTA held that the petitioner is exempt from the imposition
of input VAT on its purchases of supplies and materials. It pointed out that
under Section 12(c) of Rep. Act No. 7227 and the Implementing Rules and
Regulations of the Bases Conversion and Development Act of 1992, all that
petitioner is required to pay as a SBFZ-registered enterprise is a 5%
preferential tax.
The CTA also disallowed all refunds of input VAT paid by the petitioner prior
to June 29, 1997 for being barred by the two-year prescriptive period under
Section 229 of the Tax Code. The tax court also limited the refund only to the
input VAT paid by the petitioner on the supplies and materials directly used by
the petitioner in the manufacture of its goods. It struck down all claims for
input VAT paid on maintenance, office supplies, freight charges, and all
materials and supplies shipped or delivered to the petitioners Makati and
Pasay City offices.
Respondent CIR then filed a petition, docketed as CA-G.R. SP No. 62823, for
review of the CTA decision by the Court of Appeals. Respondent maintained
that the exemption of Contex Corp. under Rep. Act No. 7227 was limited only
to direct taxes and not to indirect taxes such as the input component of the
VAT. The Commissioner pointed out that from its very nature, the value-added
tax is a burden passed on by a VAT registered person to the end users; hence,
the direct liability for the tax lies with the suppliers and not Contex.
Finding merit in the CIRs arguments, the appellate court decided CA-G.R. SP
No. 62823 in his favor, thus:
WHEREFORE, premises considered, the appealed decision is hereby
REVERSED AND SET ASIDE. Contexs claim for refund of erroneously paid
taxes is DENIED accordingly.
SO ORDERED.13
In reversing the CTA, the Court of Appeals held that the exemption from duties
and taxes on the importation of raw materials, capital, and equipment of SBFZregistered enterprises under Rep. Act No. 7227 and its implementing rules
covers only "the VAT imposable under Section 107 of the [Tax Code], which
is a direct liability of the importer, and in no way includes the value-added tax
of the seller-exporter the burden of which was passed on to the importer as
an additional costs of the goods."14 This was because the exemption granted
by Rep. Act No. 7227 relates to the act of importation and Section 10715 of
the Tax Code specifically imposes the VAT on importations. The appellate court

applied the principle that tax exemptions are strictly construed against the
taxpayer. The Court of Appeals pointed out that under the implementing rules
of Rep. Act No. 7227, the exemption of SBFZ-registered enterprises from
internal revenue taxes is qualified as pertaining only to those for which they
may be directly liable. It then stated that apparently, the legislative intent
behind Rep. Act No. 7227 was to grant exemptions only to direct taxes, which
SBFZ-registered enterprise may be liable for and only in connection with their
importation of raw materials, capital, and equipment as well as the sale of
their goods and services.
Petitioner timely moved for reconsideration of the Court of Appeals decision,
but the motion was denied.
Hence, the instant petition raising as issues for our resolution the following:
A. WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL AND NATIONAL
INTERNAL REVENUE TAXES PROVIDED IN REPUBLIC ACT NO. 7227 COVERS
THE VALUE ADDED TAX PAID BY PETITIONER, A SUBIC BAY FREEPORT
ENTERPRISE ON ITS PURCHASES OF SUPPLIES AND MATERIALS.
B. WHETHER OR NOT THE COURT OF TAX APPEALS CORRECTLY HELD THAT
PETITIONER IS ENTITLED TO A TAX CREDIT OR REFUND OF THE VAT PAID
ON ITS PURCHASES OF SUPPLIES AND RAW MATERIALS FOR THE YEARS
1997 AND 1998.16
Simply stated, we shall resolve now the issues concerning: (1) the correctness
of the finding of the Court of Appeals that the VAT exemption embodied in
Rep. Act No. 7227 does not apply to petitioner as a purchaser; and (2) the
entitlement of the petitioner to a tax refund on its purchases of supplies and
raw materials for 1997 and 1998.
On the first issue, petitioner argues that the appellate courts restrictive
interpretation of petitioners VAT exemption as limited to those covered by
Section 107 of the Tax Code is erroneous and devoid of legal basis. It contends
that the provisions of Rep. Act No. 7227 clearly and unambiguously mandate
that no local and national taxes shall be imposed upon SBFZ-registered firms
and hence, said law should govern the case. Petitioner calls our attention to
regulations issued by both the SBMA and BIR clearly and categorically
providing that the tax exemption provided for by Rep. Act No. 7227 includes
exemption from the imposition of VAT on purchases of supplies and materials.

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The respondent takes the diametrically opposite view that while Rep. Act No.
7227 does grant tax exemptions, such grant is not all-encompassing but is
limited only to those taxes for which a SBFZ-registered business may be
directly liable. Hence, SBFZ locators are not relieved from the indirect taxes
that may be shifted to them by a VAT-registered seller.
At this juncture, it must be stressed that the VAT is an indirect tax. As such,
the amount of tax paid on the goods, properties or services bought,
transferred, or leased may be shifted or passed on by the seller, transferor, or
lessor to the buyer, transferee or lessee.17 Unlike a direct tax, such as the
income tax, which primarily taxes an individuals ability to pay based on his
income or net wealth, an indirect tax, such as the VAT, is a tax on consumption
of goods, services, or certain transactions involving the same. The VAT, thus,
forms a substantial portion of consumer expenditures.
Further, in indirect taxation, there is a need to distinguish between the liability
for the tax and the burden of the tax. As earlier pointed out, the amount of
tax paid may be shifted or passed on by the seller to the buyer. What is
transferred in such instances is not the liability for the tax, but the tax burden.
In adding or including the VAT due to the selling price, the seller remains the
person primarily and legally liable for the payment of the tax. What is shifted
only to the intermediate buyer and ultimately to the final purchaser is the
burden of the tax.18 Stated differently, a seller who is directly and legally liable
for payment of an indirect tax, such as the VAT on goods or services is not
necessarily the person who ultimately bears the burden of the same tax. It is
the final purchaser or consumer of such goods or services who, although not
directly and legally liable for the payment thereof, ultimately bears the burden
of the tax.19
Exemptions from VAT are granted by express provision of the Tax Code or
special laws. Under VAT, the transaction can have preferential treatment in
the following ways:
(a) VAT Exemption. An exemption means that the sale of goods or properties
and/or services and the use or lease of properties is not subject to VAT (output
tax) and the seller is not allowed any tax credit on VAT (input tax) previously
paid.20 This is a case wherein the VAT is removed at the exempt stage (i.e.,
at the point of the sale, barter or exchange of the goods or properties).
The person making the exempt sale of goods, properties or services shall not
bill any output tax to his customers because the said transaction is not subject
to VAT. On the other hand, a VAT-registered purchaser of VAT-exempt

goods/properties or services which are exempt from VAT is not entitled to any
input tax on such purchase despite the issuance of a VAT invoice or receipt.21
(b) Zero-rated Sales. These are sales by VAT-registered persons which are
subject to 0% rate, meaning the tax burden is not passed on to the purchaser.
A zero-rated sale by a VAT-registered person, which is a taxable transaction
for VAT purposes, shall not result in any output tax. However, the input tax
on his purchases of goods, properties or services related to such zero-rated
sale shall be available as tax credit or refund in accordance with these
regulations.22
Under Zero-rating, all VAT is removed from the zero-rated goods, activity or
firm. In contrast, exemption only removes the VAT at the exempt stage, and
it will actually increase, rather than reduce the total taxes paid by the exempt
firms business or non-retail customers. It is for this reason that a sharp
distinction must be made between zero-rating and exemption in designating a
value-added tax.23
Apropos, the petitioners claim to VAT exemption in the instant case for its
purchases of supplies and raw materials is founded mainly on Section 12 (b)
and (c) of Rep. Act No. 7227, which basically exempts them from all national
and local internal revenue taxes, including VAT and Section 4 (A)(a) of BIR
Revenue Regulations No. 1-95.24
On this point, petitioner rightly claims that it is indeed VAT-Exempt and this
fact is not controverted by the respondent. In fact, petitioner is registered as
a NON-VAT taxpayer per Certificate of Registration25 issued by the BIR. As
such, it is exempt from VAT on all its sales and importations of goods and
services.
Petitioners claim, however, for exemption from VAT for its purchases of
supplies and raw materials is incongruous with its claim that it is VAT-Exempt,
for only VAT-Registered entities can claim Input VAT Credit/Refund.
The point of contention here is whether or not the petitioner may claim a
refund on the Input VAT erroneously passed on to it by its suppliers.
While it is true that the petitioner should not have been liable for the VAT
inadvertently passed on to it by its supplier since such is a zero-rated sale on
the part of the supplier, the petitioner is not the proper party to claim such
VAT refund.

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Section 4.100-2 of BIRs Revenue Regulations 7-95, as amended, or the

"Consolidated Value-Added Tax Regulations" provide:

to any tax credit or refund on the input tax previously paid as petitioner is an
exempt VAT taxpayer.

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.

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

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

(a) Export Sales
"Export Sales" shall mean
...
(5) Those considered export sales under Articles 23 and 77 of Executive Order
No. 226, otherwise known as the Omnibus Investments Code of 1987, and
other special laws, e.g. Republic Act No. 7227, otherwise known as the Bases
Conversion and Development Act of 1992.

Accordingly, we find that the Court of Appeals did not commit any reversible
error of law in holding that petitioners VAT exemption under Rep. Act No.
7227 is limited to the VAT on which it is directly liable as a seller and hence, it
cannot claim any refund or exemption for any input VAT it paid, if any, on its
purchases of raw materials and supplies.
WHEREFORE, the petition is DENIED for lack of merit. The Decision dated
September 3, 2001, of the Court of Appeals in CA-G.R. SP No. 62823, as well
as its Resolution of December 19, 2001 are AFFIRMED. No pronouncement as
to costs.

...
(c) Sales to persons or entities whose exemption under special laws, e.g. R.A.
No. 7227 duly registered and accredited enterprises with Subic Bay
Metropolitan Authority (SBMA) and Clark Development Authority (CDA), R. A.
No. 7916, Philippine Economic Zone Authority (PEZA), or international
agreements, e.g. Asian Development Bank (ADB), International Rice Research
Institute (IRRI), etc. to which the Philippines is a signatory effectively subject
such sales to zero-rate."
Since the transaction is deemed a zero-rated sale, petitioners supplier may
claim an Input VAT credit with no corresponding Output VAT liability.
Congruently, no Output VAT may be passed on to the petitioner.
On the second issue, it may not be amiss to re-emphasize that the petitioner
is registered as a NON-VAT taxpayer and thus, is exempt from VAT. As an
exempt VAT taxpayer, it is not allowed any tax credit on VAT (input tax)
previously paid. In fine, even if we are to assume that exemption from the
burden of VAT on petitioners purchases did exist, petitioner is still not entitled
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Republic of the Philippines

SUPREME COURT
Manila

1. [Respondent] is a resident foreign corporation duly registered with the

Securities and Exchange Commission to do business in the Philippines, with
principal office address at the new Cebu Township One, Special Economic
Zone, Barangay Cantao-an, Naga, Cebu;

THIRD DIVISION
G.R. No. 153866

February 11, 2005

COMMISSIONER OF INTERNAL REVENUE,

TECHNOLOGY (PHILIPPINES), respondent.

petitioner,

vs.

SEAGATE

PANGANIBAN, J.:
Business companies registered in and operating from the Special Economic
Zone in Naga, Cebu -- like herein respondent -- are entities exempt from all
internal revenue taxes and the implementing rules relevant thereto, including
the value-added taxes or VAT. Although export sales are not deemed exempt
transactions, they are nonetheless zero-rated. Hence, in the present case, the
distinction between exempt entities and exempt transactions has little
significance, because the net result is that the taxpayer is not liable for the
VAT. Respondent, a VAT-registered enterprise, has complied with all requisites
for claiming a tax refund of or credit for the input VAT it paid on capital goods
it purchased. Thus, the Court of Tax Appeals and the Court of Appeals did not
err in ruling that it is entitled to such refund or credit.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking
to set aside the May 27, 2002 Decision2 of the Court of Appeals (CA) in CAGR SP No. 66093. The decretal portion of the Decision reads as follows:
"WHEREFORE, foregoing premises considered, the petition for review is
DENIED for lack of merit."3
The Facts
The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as
follows:
"As jointly stipulated by the parties, the pertinent facts x x x involved in this
case are as follows:

2. [Petitioner] is sued in his official capacity, having been duly appointed and
empowered to perform the duties of his office, including, among others, the
duty to act and approve claims for refund or tax credit;
3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA)
and has been issued PEZA Certificate No. 97-044 pursuant to Presidential
Decree No. 66, as amended, to engage in the manufacture of recording
components primarily used in computers for export. Such registration was
made on 6 June 1997;
4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by
VAT Registration Certification No. 97-083-000600-V issued on 2 April 1997;
5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by
[respondent];
6. An administrative claim for refund of VAT input taxes in the amount of
P28,369,226.38 with supporting documents (inclusive of the P12,267,981.04
VAT input taxes subject of this Petition for Review), was filed on 4 October
1999 with Revenue District Office No. 83, Talisay Cebu;
7. No final action has been received by [respondent] from [petitioner] on
[respondents] claim for VAT refund.
"The administrative claim for refund by the [respondent] on October 4, 1999
was not acted upon by the [petitioner] prompting the [respondent] to elevate
the case to [the CTA] on July 21, 2000 by way of Petition for Review in order
to toll the running of the two-year prescriptive period.
"For his part, [petitioner] x x x raised the following Special and Affirmative
Defenses, to wit:
1. [Respondents] alleged claim for tax refund/credit is subject to
administrative routinary investigation/examination by [petitioners] Bureau;

Page 41 of 98

2. Since taxes are presumed to have been collected in accordance with laws
and regulations, the [respondent] has the burden of proof that the taxes
sought to be refunded were erroneously or illegally collected x x x;
3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme
Court ruled that:
"A claimant has the burden of proof to establish the factual basis of his or her
claim for tax credit/refund."
4. Claims for tax refund/tax credit are construed in strictissimi juris against
the taxpayer. This is due to the fact that claims for refund/credit [partake of]
the nature of an exemption from tax. Thus, it is incumbent upon the
[respondent] to prove that it is indeed entitled to the refund/credit sought.
Failure on the part of the [respondent] to prove the same is fatal to its claim
for tax credit. He who claims exemption must be able to justify his claim by
the clearest grant of organic or statutory law. An exemption from the common
burden cannot be permitted to exist upon vague implications;
5. Granting, without admitting, that [respondent] is a Philippine Economic
Zone Authority (PEZA) registered Ecozone Enterprise, then its business is not
subject to VAT pursuant to Section 24 of Republic Act No. ([RA]) 7916 in
relation to Section 103 of the Tax Code, as amended. As [respondents]
business is not subject to VAT, the capital goods and services it alleged to
have purchased are considered not used in VAT taxable business. As such,
[respondent] is not entitled to refund of input taxes on such capital goods
pursuant to Section 4.106.1 of Revenue Regulations No. ([RR])7-95, and of
input taxes on services pursuant to Section 4.103 of said regulations.
6. [Respondent] must show compliance with the provisions of Section 204 (C)
and 229 of the 1997 Tax Code on filing of a written claim for refund within
two (2) years from the date of payment of tax.
"On July 19, 2001, the Tax Court rendered a decision granting the claim for
refund."
Ruling of the Court of Appeals
The CA affirmed the Decision of the CTA granting the claim for refund or
issuance of a tax credit certificate (TCC) in favor of respondent in the reduced
amount of P12,122,922.66. This sum represented the unutilized but

substantiated input VAT paid on capital goods purchased for the period
covering April 1, 1998 to June 30, 1999.
The appellate court reasoned that respondent had availed itself only of the
fiscal incentives under Executive Order No. (EO) 226 (otherwise known as the
Omnibus Investment Code of 1987), not of those under both Presidential
Decree No. (PD) 66, as amended, and Section 24 of RA 7916. Respondent
was, therefore, considered exempt only from the payment of income tax when
it opted for the income tax holiday in lieu of the 5 percent preferential tax on
gross income earned. As a VAT-registered entity, though, it was still subject
to the payment of other national internal revenue taxes, like the VAT.
Moreover, the CA held that neither Section 109 of the Tax Code nor Sections
4.106-1 and 4.103-1 of RR 7-95 were applicable. Having paid the input VAT
on the capital goods it purchased, respondent correctly filed the administrative
and judicial claims for its refund within the two-year prescriptive period. Such
payments were -- to the extent of the refundable value -- duly supported by
VAT invoices or official receipts, and were not yet offset against any output
VAT liability.
Hence this Petition.
Sole Issue
Petitioner submits this sole issue for our consideration:
"Whether or not respondent is entitled to the refund or issuance of Tax Credit
Certificate in the amount of P12,122,922.66 representing alleged unutilized
input VAT paid on capital goods purchased for the period April 1, 1998 to June
30, 1999."
The Courts Ruling
The Petition is unmeritorious.
Sole Issue:
Entitlement of a VAT-Registered PEZA Enterprise to a Refund of or Credit for
Input VAT
No doubt, as a PEZA-registered enterprise within a special economic zone,
respondent is entitled to the fiscal incentives and benefits8 provided for in

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either PD 669 or EO 226.10 It shall, moreover, enjoy all privileges, benefits,

advantages or exemptions under both Republic Act Nos. (RA) 722711 and
7844.12
Preferential Tax Treatment Under Special Laws
If it avails itself of PD 66, notwithstanding the provisions of other laws to the
contrary, respondent shall not be subject to internal revenue laws and
regulations for raw materials, supplies, articles, equipment, machineries, spare
parts and wares, except those prohibited by law, brought into the zone to be
stored, broken up, repacked, assembled, installed, sorted, cleaned, graded or
otherwise processed, manipulated, manufactured, mixed or used directly or
indirectly in such activities.13 Even so, respondent would enjoy a netoperating loss carry over; accelerated depreciation; foreign exchange and
financial assistance; and exemption from export taxes, local taxes and
licenses.14
Comparatively, the same exemption from internal revenue laws and
regulations applies if EO 22615 is chosen. Under this law, respondent shall
further be entitled to an income tax holiday; additional deduction for labor
expense; simplification of customs procedure; unrestricted use of consigned
equipment; access to a bonded manufacturing warehouse system; privileges
for foreign nationals employed; tax credits on domestic capital equipment, as
well as for taxes and duties on raw materials; and exemption from contractors
taxes, wharfage dues, taxes and duties on imported capital equipment and
spare parts, export taxes, duties, imposts and fees,16 local taxes and licenses,
and real property taxes.17
A privilege available to respondent under the provision in RA 7227 on tax and
duty-free importation of raw materials, capital and equipment18 -- is, ipso
facto, also accorded to the zone19 under RA 7916. Furthermore, the latter law
-- notwithstanding other existing laws, rules and regulations to the contrary - extends20 to that zone the provision stating that no local or national taxes
shall be imposed therein.21 No exchange control policy shall be applied; and
free markets for foreign exchange, gold, securities and future shall be allowed
and maintained.22 Banking and finance shall also be liberalized under
minimum Bangko Sentral regulation with the establishment of foreign currency
depository units of local commercial banks and offshore banking units of
foreign banks.23
In the same vein, respondent benefits under RA 7844 from negotiable tax
credits24 for locally-produced materials used as inputs. Aside from the other

incentives possibly already granted to it by the Board of Investments, it also

enjoys preferential credit facilities25 and exemption from PD 1853.26
From the above-cited laws, it is immediately clear that petitioner enjoys
preferential tax treatment. It is not subject to internal revenue laws and
regulations and is even entitled to tax credits. The VAT on capital goods is an
internal revenue tax from which petitioner as an entity is exempt. Although
the transactions involving such tax are not exempt, petitioner as a VATregistered person, however, is entitled to their credits.
Nature of the VAT and the Tax Credit Method
Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent
to 10 percent levied on every importation of goods, whether or not in the
course of trade or business, or imposed on each sale, barter, exchange or
lease of goods or properties or on each rendition of services in the course of
trade or business29 as they pass along the production and distribution chain,
the tax being limited only to the value added30 to such goods, properties or
services by the seller, transferor or lessor. It is an indirect tax that may be
shifted or passed on to the buyer, transferee or lessee of the goods, properties
or services. As such, it should be understood not in the context of the person
or entity that is primarily, directly and legally liable for its payment, but in
terms of its nature as a tax on consumption. In either case, though, the same
conclusion is arrived at.
The law that originally imposed the VAT in the country, as well as the
subsequent amendments of that law, has been drawn from the tax credit
method. Such method adopted the mechanics and self-enforcement features
of the VAT as first implemented and practiced in Europe and subsequently
adopted in New Zealand and Canada.36 Under the present method that relies
on invoices, an entity can credit against or subtract from the VAT charged on
its sales or outputs the VAT paid on its purchases, inputs and imports.
If at the end of a taxable quarter the output taxes charged by a seller are
equal to the input taxes passed on by the suppliers, no payment is required.
It is when the output taxes exceed the input taxes that the excess has to be
paid. If, however, the input taxes exceed the output taxes, the excess 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 or credited against other internal revenue taxes.

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Zero-Rated and Effectively Zero-Rated Transactions

Although both are taxable and similar in effect, zero-rated transactions differ
from effectively zero-rated transactions as to their source.
Zero-rated transactions generally refer to the export sale of goods and supply
of services. 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 of or a tax
credit certificate for the VAT previously charged by suppliers.
Effectively zero-rated transactions, however, refer to the sale of goods or
supply of services to persons or entities whose exemption under special laws
or international agreements to which the Philippines is a signatory effectively
subjects such transactions to a zero rate. Again, as applied to the tax base,
such rate does not yield any tax chargeable against the purchaser. The seller
who charges zero output tax on such transactions can also claim a refund of
or a tax credit certificate for the VAT previously charged by suppliers.
Zero Rating and Exemption
In terms of the VAT computation, zero rating and exemption are the same,
but the extent of relief that results from either one of them is not.
Applying the destination 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.
Effective zero rating, on the contrary, is intended to benefit the purchaser who,
not being directly and legally liable for the payment of the VAT, will ultimately
bear the burden of the tax shifted by the suppliers.
In both instances of zero rating, there is total relief for the purchaser from the
burden of the tax. But in an exemption there is only partial relief, because the
purchaser is not allowed any tax refund of or credit for input taxes paid.
Exempt Transaction >and Exempt Party
The object of exemption from the VAT may either be the transaction itself or
any of the parties to the transaction.59

An exempt transaction, on the one hand, involves goods or services which, by

their nature, are specifically listed in and expressly exempted from the VAT
under the Tax Code, without regard to the tax status -- VAT-exempt or not -of the party to the transaction. Indeed, such transaction is not subject to the
VAT, but the seller is not allowed any tax refund of or credit for any input taxes
paid.
An exempt party, on the other hand, is a person or entity granted VAT
exemption under the Tax Code, a special law or an international agreement to
which the Philippines is a signatory, and by virtue of which its taxable
transactions become exempt from the VAT. Such party is also not subject to
the VAT, but may be allowed a tax refund of or credit for input taxes paid,
depending on its registration as a VAT or non-VAT taxpayer.
As mentioned earlier, the VAT is a tax on consumption, the amount of which
may be shifted or passed on by the seller to the purchaser of the goods,
properties or services. While the liability is imposed on one person, the burden
may be passed on to another. Therefore, if a special law merely exempts a
party as a seller from its direct liability for payment of the VAT, but does not
relieve the same party as a purchaser from its indirect burden of the VAT
shifted to it by its VAT-registered suppliers, the purchase transaction is not
exempt. Applying this principle to the case at bar, the purchase transactions
entered into by respondent are not VAT-exempt.
Special laws may certainly exempt transactions from the VAT. However, the
Tax Code provides that those falling under PD 66 are not. PD 66 is the
precursor of RA 7916 -- the special law under which respondent was
registered. The purchase transactions it entered into are, therefore, not VATexempt. These are subject to the VAT; respondent is required to register.
Its sales transactions, however, will either be zero-rated or taxed at the
standard rate of 10 percent, depending again on the application of the
destination principle.
If respondent enters into such sales transactions with a purchaser -- usually
in a foreign country -- for use or consumption outside the Philippines, these
shall be subject to 0 percent. If entered into with a purchaser for use or
consumption in the Philippines, then these shall be subject to 10 percent,
unless the purchaser is exempt from the indirect burden of the VAT, in which
case it shall also be zero-rated.

Page 44 of 98

Since the purchases of respondent are not exempt from the VAT, the rate to
be applied is zero. Its exemption under both PD 66 and RA 7916 effectively
subjects such transactions to a zero rate, because the ecozone within which it
is registered is managed and operated by the PEZA as a separate customs
territory. This means that in such zone is created the legal fiction of foreign
territory. Under the cross-border principle of the VAT system being enforced
by the Bureau of Internal Revenue (BIR), no VAT shall be imposed to form
part of the cost of goods destined for consumption outside of the territorial
border of the taxing authority. If exports of goods and services from the
Philippines to a foreign country are free of the VAT, then the same rule holds
for such exports from the national territory -- except specifically declared areas
-- to an ecozone.
Sales made by a VAT-registered person in the customs territory to a PEZAregistered entity are considered exports to a foreign country; conversely, sales
by a PEZA-registered entity to a VAT-registered person in the customs territory
are deemed imports from a foreign country. An ecozone -- indubitably a
geographical territory of the Philippines -- is, however, regarded in law as
foreign soil. This legal fiction is necessary to give meaningful effect to the
policies of the special law creating the zone. If respondent is located in an
export processing zone77 within that ecozone, sales to the export processing
zone, even without being actually exported, shall in fact be viewed as
constructively exported under EO 226. Considered as export sales, such
purchase transactions by respondent would indeed be subject to a zero rate.
Tax Exemptions Broad and Express
Applying the special laws we have earlier discussed, respondent as an entity
is exempt from internal revenue laws and regulations.
This exemption covers both direct and indirect taxes, stemming from the very
nature of the VAT as a tax on consumption, for which the direct liability is
imposed on one person but the indirect burden is passed on to another.
Respondent, as an exempt entity, can neither be directly charged for the VAT
on its sales nor indirectly made to bear, as added cost to such sales, the
equivalent VAT on its purchases. Ubi lex non distinguit, nec nos distinguere
debemus. Where the law does not distinguish, we ought not to distinguish.
Moreover, the exemption is both express and pervasive for the following
reasons:

First, RA 7916 states that "no taxes, local and national, shall be imposed on
business establishments operating within the ecozone."81 Since this law does
not exclude the VAT from the prohibition, it is deemed included. Exceptio
firmat regulam in casibus non exceptis. An exception confirms the rule in cases
not excepted; that is, a thing not being excepted must be regarded as coming
within the purview of the general rule.
Moreover, even though the VAT is not imposed on the entity but on the
transaction, it may still be passed on and, therefore, indirectly imposed on the
same entity -- a patent circumvention of the law. That no VAT shall be imposed
directly upon business establishments operating within the ecozone under RA
7916 also means that no VAT may be passed on and imposed indirectly.
Quando aliquid prohibetur ex directo prohibetur et per obliquum. When
anything is prohibited directly, it is also prohibited indirectly.
Second, when RA 8748 was enacted to amend RA 7916, the same prohibition
applied, except for real property taxes that presently are imposed on land
owned by developers.82 This similar and repeated prohibition is an
unambiguous ratification of the laws intent in not imposing local or national
taxes on business enterprises within the ecozone.
Third, foreign and domestic merchandise, raw materials, equipment and the
like "shall not be subject to x x x internal revenue laws and regulations" under
PD 6683 -- the original charter of PEZA (then EPZA) that was later amended
by RA 7916.84 No provisions in the latter law modify such exemption.
Although this exemption puts the government at an initial disadvantage, the
reduced tax collection ultimately redounds to the benefit of the national
economy by enticing more business investments and creating more
employment opportunities.85
Fourth, even the rules implementing the PEZA law clearly reiterate that
merchandise -- except those prohibited by law -- "shall not be subject to x x x
internal revenue laws and regulations x x x"86 if brought to the ecozones
restricted area87 for manufacturing by registered export enterprises,88 of
which respondent is one. These rules also apply to all enterprises registered
with the EPZA prior to the effectivity of such rules.89
Fifth, export processing zone enterprises registered90 with the Board of
Investments (BOI) under EO 226 patently enjoy exemption from national
internal revenue taxes on imported capital equipment reasonably needed and
exclusively used for the manufacture of their products;91 on required supplies

Page 45 of 98

and spare part for consigned equipment;92 and on foreign and domestic
merchandise, raw materials, equipment and the like -- except those prohibited
by law -- brought into the zone for manufacturing.93 In addition, they are
given credits for the value of the national internal revenue taxes imposed on
domestic capital equipment also reasonably needed and exclusively used for
the manufacture of their products,94 as well as for the value of such taxes
imposed on domestic raw materials and supplies that are used in the
manufacture of their export products and that form part thereof.95

adopted. Their prior tax issuances have held inconsistent positions brought
about by their probable failure to comprehend and fully appreciate the nature
of the VAT as a tax on consumption and the application of the destination
principle.110 Revenue Memorandum Circular No. (RMC) 74-99, however, now
clearly and correctly provides that any VAT-registered suppliers sale of goods,
property or services from the customs territory to any registered enterprise
operating in the ecozone -- regardless of the class or type of the latters PEZA
registration -- is legally entitled to a zero rate.111

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

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

And seventh, the tax credits under RA 7844 -- given for imported raw materials
primarily used in the production of export goods,99 and for locally produced
raw materials, capital equipment and spare parts used by exporters of nontraditional products100 -- shall also be continuously enjoyed by similar
exporters within the ecozone.101 Indeed, the latter exporters are likewise
entitled to such tax exemptions and credits.
Tax Refund as Tax Exemption
To be sure, statutes that grant tax exemptions are construed strictissimi juris
against the taxpayer and liberally in favor of the taxing authority.
Tax refunds are in the nature of such exemptions. Accordingly, the claimants
of those refunds bear the burden of proving the factual basis of their claims;
and of showing, by words too plain to be mistaken, that the legislature
intended to exempt them. In the present case, all the cited legal provisions
are teeming with life with respect to the grant of tax exemptions too vivid to
pass unnoticed. In addition, respondent easily meets the challenge.
Respondent, which as an entity is exempt, is different from its transactions
which are not exempt. The end result, however, is that it is not subject to the
VAT. The non-taxability of transactions that are otherwise taxable is merely a
necessary incident to the tax exemption conferred by law upon it as an entity,
not upon the transactions themselves.108 Nonetheless, its exemption as an
entity and the non-exemption of its transactions lead to the same result for
the following considerations:
First, the contemporaneous construction of our tax laws by BIR authorities
who are called upon to execute or administer such laws109 will have to be

In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well
as the establishment of export processing zones, seeks "to encourage and
promote foreign commerce as a means of x x x strengthening our export trade
and foreign exchange position, of hastening industrialization, of reducing
domestic unemployment, and of accelerating the development of the
country."112
RA 7916, as amended by RA 8748, declared that by creating the PEZA and
integrating the special economic zones, "the government shall actively
encourage, promote, induce and accelerate a sound and balanced industrial,
economic and social development of the country x x x through the
establishment, among others, of special economic zones x x x that shall
effectively attract legitimate and productive foreign investments."113
Under EO 226, the "State shall encourage x x x foreign investments in industry
x x x which shall x x x meet the tests of international competitiveness[,]
accelerate development of less developed regions of the country[,] and result
in increased volume and value of exports for the economy."114 Fiscal
incentives that are cost-efficient and simple to administer shall be devised and
extended to significant projects "to compensate for market imperfections, to
reward performance contributing to economic development,"115 and "to
stimulate the establishment and assist initial operations of the enterprise."116
Wisely accorded to ecozones created under RA 7916 was the governments
policy -- spelled out earlier in RA 7227 -- of converting into alternative
productive uses the former military reservations and their extensions, as well
as of providing them incentives to enhance the benefits that would be derived
from them in promoting economic and social development.

Page 46 of 98

Finally, under RA 7844, the State declares the need "to evolve export
development into a national effort" in order to win international markets. By
providing many export and tax incentives, the State is able to drive home the
point that exporting is indeed "the key to national survival and the means
through which the economic goals of increased employment and enhanced
incomes can most expeditiously be achieved."
The Tax Code itself seeks to "promote sustainable economic growth x x x; x x
x increase economic activity; and x x x create a robust environment for
business to enable firms to compete better in the regional as well as the global
market." After all, international competitiveness requires economic and tax
incentives to lower the cost of goods produced for export. State actions that
affect global competition need to be specific and selective in the pricing of
particular goods or services.
All these statutory policies are congruent to the constitutional mandates of
providing incentives to needed investments, as well as of promoting the
preferential use of domestic materials and locally produced goods and
adopting measures to help make these competitive. Tax credits for domestic
inputs strengthen backward linkages. Rightly so, "the rule of law and the
existence of credible and efficient public institutions are essential prerequisites
for sustainable economic development."
VAT Registration, Not Application for Effective Zero Rating, Indispensable to
VAT Refund
Registration is an indispensable requirement under our VAT law. Petitioner
alleges that respondent did register for VAT purposes with the appropriate
Revenue District Office. However, it is now too late in the day for petitioner to
challenge the VAT-registered status of respondent, given the latters prior
representation before the lower courts and the mode of appeal taken by
petitioner before this Court.
The PEZA law, which carried over the provisions of the EPZA law, is clear in
exempting from internal revenue laws and regulations the equipment -including capital goods -- that registered enterprises will use, directly or
indirectly, in manufacturing. EO 226 even reiterates this privilege among the
incentives it gives to such enterprises. Petitioner merely asserts that by virtue
of the PEZA registration alone of respondent, the latter is not subject to the
VAT. Consequently, the capital goods and services respondent has purchased
are not considered used in the VAT business, and no VAT refund or credit is
due. This is a non sequitur. By the VATs very nature as a tax on consumption,

the capital goods and services respondent has purchased are subject to the
VAT, although at zero rate. Registration does not determine taxability under
the VAT law.
Moreover, the facts have already been determined by the lower courts. Having
failed to present evidence to support its contentions against the income tax
holiday privilege of respondent, petitioner is deemed to have conceded. It is a
cardinal rule that "issues and arguments not adequately and seriously brought
below cannot be raised for the first time on appeal." This is a "matter of
procedure" and a "question of fairness." Failure to assert "within a reasonable
time warrants a presumption that the party entitled to assert it either has
abandoned or declined to assert it."
The BIR regulations additionally requiring an approved prior application for
effective zero rating cannot prevail over the clear VAT nature of respondents
transactions. The scope of such regulations is not "within the statutory
authority x x x granted by the legislature.
First, a mere administrative issuance, like a BIR regulation, cannot amend the
law; the former cannot purport to do any more than interpret the latter. The
courts will not countenance one that overrides the statute it seeks to apply
and implement.
Other than the general registration of a taxpayer the VAT status of which is
aptly determined, no provision under our VAT law requires an additional
application to be made for such taxpayers transactions to be considered
effectively zero-rated. An effectively zero-rated transaction does not and
cannot become exempt simply because an application therefor was not made
or, if made, was denied. To allow the additional requirement is to give
unfettered discretion to those officials or agents who, without fluid
consideration, are bent on denying a valid application. Moreover, the State can
never be estopped by the omissions, mistakes or errors of its officials or
agents.
Second, grantia argumenti that such an application is required by law, there
is still the presumption of regularity in the performance of official duty.145
Respondents registration carries with it the presumption that, in the absence
of contradictory evidence, an application for effective zero rating was also filed
and approval thereof given. Besides, it is also presumed that the law has been
obeyed146 by both the administrative officials and the applicant.

Page 47 of 98

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

taxes imposed on business. To repeat, the VAT is a tax imposed on

consumption, not on business. Although respondent as an entity is exempt,
the transactions it enters into are not necessarily so. The VAT payments made
in excess of the zero rate that is imposable may certainly be refunded or
credited.

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

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

Compliance with All Requisites for VAT Refund or Credit

Tax Refund or Credit in Order

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

Having determined that respondents purchase transactions are subject to a

zero VAT rate, the tax refund or credit is in order.
As correctly held by both the CA and the Tax Court, respondent had chosen
the fiscal incentives in EO 226 over those in RA 7916 and PD 66. It opted for
the income tax holiday regime instead of the 5 percent preferential tax regime.
The latter scheme is not a perfunctory aftermath of a simple registration under
the PEZA law, for EO 226149 also has provisions to contend with. These two
regimes are in fact incompatible and cannot be availed of simultaneously by
the same entity. While EO 226 merely exempts it from income taxes, the PEZA
law exempts it from all taxes.
Therefore, respondent can be considered exempt, not from the VAT, but only
from the payment of income tax for a certain number of years, depending on
its registration as a pioneer or a non-pioneer enterprise. Besides, the
remittance of the aforesaid 5 percent of gross income earned in lieu of local
and national taxes imposable upon business establishments within the
ecozone cannot outrightly determine a VAT exemption. Being subject to VAT,
payments erroneously collected thereon may then be refunded or credited.
Even if it is argued that respondent is subject to the 5 percent preferential tax
regime in RA 7916, Section 24 thereof does not preclude the VAT. One can,
therefore, counterargue that such provision merely exempts respondent from

As further enunciated by the Tax Court, respondent complied with all the
requisites for claiming a VAT refund or credit.
First, respondent is a VAT-registered entity. This fact alone distinguishes the
present case from Contex, in which this Court held that the petitioner therein
was registered as a non-VAT taxpayer. Hence, for being merely VAT-exempt,
the petitioner in that case cannot claim any VAT refund or credit.

There was a very clear intent on the part of our legislators, not only to exempt
investors in ecozones from national and local taxes, but also to grant them tax
credits. This fact was revealed by the sponsorship speeches in Congress during
the second reading of House Bill No. 14295, which later became RA 7916, as
shown below:
"MR. RECTO. x x x Some of the incentives that this bill provides are exemption
from national and local taxes; x x x tax credit for locally-sourced inputs x x x."
xxxxxxxxx
"MR. DEL MAR. x x x To advance its cause in encouraging investments and
creating an environment conducive for investors, the bill offers incentives such
as the exemption from local and national taxes, x x x tax credits for locally
sourced inputs x x x."153

Page 48 of 98

And third, no question as to either the filing of such claims within the
prescriptive period or the validity of the VAT returns has been raised. Even if
such a question were raised, the tax exemption under all the special laws cited
above is broad enough to cover even the enforcement of internal revenue
laws, including prescription.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

Summary

G.R. No. 166408

October 6, 2008

To summarize, special laws expressly grant preferential tax treatment to

business establishments registered and operating within an ecozone, which by
law is considered as a separate customs territory. As such, respondent is
exempt from all internal revenue taxes, including the VAT, and regulations
pertaining thereto. It has opted for the income tax holiday regime, instead of
the 5 percent preferential tax regime. As a matter of law and procedure, its
registration status entitling it to such tax holiday can no longer be questioned.
Its sales transactions intended for export may not be exempt, but like its
purchase transactions, they are zero-rated. No prior application for the
effective zero rating of its transactions is necessary. Being VAT-registered and
having satisfactorily complied with all the requisites for claiming a tax refund
of or credit for the input VAT paid on capital goods purchased, respondent is
entitled to such VAT refund or credit.

QUEZON CITY and THE CITY TREASURER OF QUEZON CITY, petitioners, vs.
ABS-CBN BROADCASTING CORPORATION, respondent.

WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No

pronouncement as to costs.

The Facts

REYES, R.T., J.:

CLAIMS for tax exemption must be based on language in law too plain to be
mistaken. It cannot be made out of inference or implication.
The principle is relevant in this petition for review on certiorari of the Decision1
of the Court of Appeals (CA) and that2 of the Regional Trial Court (RTC)
ordering the refund and declaring invalid the imposition and collection of local
franchise tax by the City Treasurer of Quezon City on ABS-CBN Broadcasting
Corporation (ABS-CBN).

Petitioner City Government of Quezon City is a local government unit duly

organized and existing by virtue of Republic Act (R.A.) No. 537, otherwise
known as the Revised Charter of Quezon City. Petitioner City Treasurer of
Quezon City is primarily responsible for the imposition and collection of taxes
within the territorial jurisdiction of Quezon City.
Under Section 31, Article 13 of the Quezon City Revenue Code of 1993,3 a
franchise tax was imposed on businesses operating within its jurisdiction. The
provision states:
Section 31. Imposition of Tax. - Any provision of special laws or grant of tax
exemption to the contrary notwithstanding, any person, corporation,
partnership or association enjoying a franchise whether issued by the national
government or local government and, doing business in Quezon City, shall pay
a franchise tax at the rate of ten percent (10%) of one percent (1%) for 19931994, twenty percent (20%) of one percent (1%) for 1995, and thirty percent
(30%) of one percent (1%) for 1996 and the succeeding years thereafter, of

Page 49 of 98

gross receipts and sales derived from the operation of the business in Quezon
City during the preceding calendar year.

Hundred Eighty-Two and 29/100 centavos (P14,233,582.29) broken down as

follows:

On May 3, 1995, ABS-CBN was granted the franchise to install and operate
radio and television broadcasting stations in the Philippines under R.A. No.
7966.4 Section 8 of R.A. No. 7966 provides the tax liabilities of ABS-CBN which
reads:

O.R. No.

Date

2536134

1-22-96

8354906

1-23-97

8,621,470.83

0048756

1-23-97

2,731,135.81

Section 8. Tax Provisions. - The grantee, its successors or assigns, shall be

liable to pay the same taxes on their real estate, buildings and personal
property, exclusive of this franchise, as other persons or corporations are now
hereafter may be required by law to pay. In addition thereto, the grantee, its
successors or assigns, shall pay a franchise tax equivalent to three percent
(3%) of all gross receipts of the radio/television business transacted under this
franchise by the grantee, its successors or assigns, and the said percentage
tax shall be in lieu of all taxes on this franchise or earnings thereof; Provided
that the grantee, its successors or assigns shall continue to be liable for income
taxes under Title II of the National Internal Revenue Code pursuant to Section
2 of Executive No. 72 unless the latter enactment is amended or repealed, in
which case the amendment or repeal shall be applicable thereto. (Emphasis
added)
ABS-CBN had been paying local franchise tax imposed by Quezon City.
However, in view of the above provision in R.A. No. 9766 that it "shall pay a
franchise tax x x x in lieu of all taxes," the corporation developed the opinion
that it is not liable to pay the local franchise tax imposed by Quezon City.
Consequently, ABS-CBN paid under protest the local franchise tax imposed by
Quezon City on the dates, in the amounts and under the official receipts as
follows:
O.R. No.

Date

Amount Paid

2464274

7/18/1995

P 1,489,977.28

2484651

10/20/1995

1,489,977.28

2536134

1/22/1996

2,880,975.65

8354906

1/23/1997

8,621,470.83

48756

1/23/1997

2,731,135.81

67352

4/3/1997

2,731,135.81

Total

P19,944,672.66

On January 29, 1997, ABS-CBN filed a written claim for refund for local
franchise tax paid to Quezon City for 1996 and for the first quarter of 1997 in
the total amount of Fourteen Million Two Hundred Thirty-Three Thousand Five

Total

Amount Paid
P 2,880,975.65

P14,233,582.29

In a letter dated March 3, 1997 to the Quezon City Treasurer, ABS-CBN

reiterated its claim for refund of local franchise taxes paid.
On June 25, 1997, for failure to obtain any response from the Quezon City
Treasurer, ABS-CBN filed a complaint before the RTC in Quezon City seeking
the declaration of nullity of the imposition of local franchise tax by the City
Government of Quezon City for being unconstitutional. It likewise prayed for
the refund of local franchise tax in the amount of Nineteen Million Nine
Hundred Forty-Four Thousand Six Hundred Seventy-Two and 66/100 centavos
(P19,944,672.66) broken down as follows:
O.R. No.

Date

2464274

7-18-95

P 1,489,977.28

2484651

10-20-95

1,489,977.28

2536134

1-22-96

2,880,975.65

8354906

1-23-97

8,621,470.83

0048756

1-23-97

2,731,135.81

0067352

4-03-97

2,731,135.81

Total

Amount Paid

P19,944,672.66

Quezon City argued that the "in lieu of all taxes" provision in R.A. No. 9766
could not have been intended to prevail over a constitutional mandate which
ensures the viability and self-sufficiency of local government units. Further,
that taxes collectible by and payable to the local government were distinct
from taxes collectible by and payable to the national government, considering
that the Constitution specifically declared that the taxes imposed by local
government units "shall accrue exclusively to the local governments." Lastly,
the City contended that the exemption claimed by ABS-CBN under R.A. No.
7966 was withdrawn by Congress when the Local Government Code (LGC)
was passed.8 Section 193 of the LGC provides:
Section 193. Withdrawal of Tax Exemption Privileges. - Unless otherwise
provided in this Code, tax exemptions or incentives granted to, or presently

Page 50 of 98

enjoyed by all persons, whether natural or juridical, including governmentowned or -controlled corporations, except local water districts, cooperatives
duly registered under R.A. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this
Code. (Emphasis added)
On August 13, 1997, ABS-CBN filed a supplemental complaint adding to its
claim for refund the local franchise tax paid for the third quarter of 1997 in
the amount of Two Million Seven Hundred Thirty-One Thousand One Hundred
Thirty-Five and 81/100 centavos (P2,731,135.81) and of other amounts of
local franchise tax as may have been and will be paid by ABS-CBN until the
resolution of the case.
Quezon City insisted that the claim for refund must fail because of the absence
of a prior written claim for it.
RTC and CA Dispositions
On January 20, 1999, the RTC rendered judgment declaring as invalid the
imposition on and collection from ABS-CBN of local franchise tax paid pursuant
to Quezon City Ordinance No. SP-91, S-93, after the enactment of R.A. No.
7966, and ordered the refund of all payments made. The dispositive portion
of the RTC decision reads:
WHEREFORE, judgment is hereby rendered declaring the imposition on and
collection from plaintiff ABS-CBN BROADCASTING CORPORATION of local
franchise taxes pursuant to Quezon City Ordinance No. SP-91, S-93 after the
enactment of Republic Act No. 7966 to be invalid, and, accordingly, the Court
hereby orders the defendants to refund all its payments made after the
effectivity of its legislative franchise on May 3, 1995.
SO ORDERED.
In its decision, the RTC ruled that the "in lieu of all taxes" provision contained
in Section 8 of R.A. No. 7966 absolutely excused ABS-CBN from the payment
of local franchise tax imposed under Quezon City Ordinance No. SP-91, S-93.
The intent of the legislature to excuse ABS-CBN from payment of local
franchise tax could be discerned from the usage of the "in lieu of all taxes"
provision and from the absence of any qualification except income taxes. Had
Congress intended to exclude taxes imposed from the exemption, it would
have expressly mentioned so in a fashion similar to the proviso on income
taxes.

The RTC also based its ruling on the 1990 case of Province of Misamis Oriental
v. Cagayan Electric Power and Light Company, Inc. (CEPALCO).10 In said case,
the exemption of respondent electric company CEPALCO from payment of
provincial franchise tax was upheld on the ground that the franchise of
CEPALCO was a special law, while the Local Tax Code, on which the provincial
ordinance imposing the local franchise tax was based, was a general law.
Further, it was held that whenever there is a conflict between two laws, one
special and particular and the other general, the special law must be taken as
intended to constitute an exception to the general act.
The RTC noted that the legislative franchise of ABS-CBN was granted years
after the effectivity of the LGC. Thus, it was unavoidable to conclude that
Section 8 of R.A. No. 7966 was an exception since the legislature ought to be
presumed to have enacted it with the knowledge and awareness of the
existence and prior enactment of Section 13711 of the LGC.
In addition, the RTC, again citing the case of Province of Misamis Oriental v.
Cagayan Electric Power and Light Company, Inc. (CEPALCO),12 ruled that the
imposition of the local franchise tax was an impairment of ABS-CBN's contract
with the government. The imposition of another franchise on the corporation
by the local authority would constitute an impairment of the former's charter,
which is in the nature of a private contract between it and the government.
As to the amounts to be refunded, the RTC rejected Quezon City's position
that a written claim for refund pursuant to Section 196 of the LGC was a
condition sine qua non before filing the case in court. The RTC ruled that
although Fourteen Million Two Hundred Thirty-Three Thousand Five Hundred
Eighty-Two and 29/100 centavos (P14,233,582.29) was the only amount
stated in the letter to the Quezon City Treasurer claiming refund, ABS-CBN
should nonetheless be also refunded of all payments made after the effectivity
of R.A. No. 7966. The inaction of the City Treasurer on the claim for refund of
ABS-CBN legally rendered any further claims for refund on the part of plaintiff
absurd and futile in relation to the succeeding payments.
The City of Quezon and its Treasurer filed a motion for reconsideration which
was subsequently denied by the RTC. Thus, appeal was made to the CA. On
September 1, 2004, the CA dismissed the petition of Quezon City and its
Treasurer. According to the appellate court, the issues raised were purely legal
questions cognizable only by the Supreme Court. The CA ratiocinated:

Page 51 of 98

For another, the issues which appellants submit for this Court's consideration
are more of legal query necessitating a legal opinion rather than a call for
adjudication on the matter in dispute.

The second issue, being procedural in nature, shall be dealt with immediately.
But there are other resultant issues linked to the first.

xxxx

I. The dismissal by the CA of petitioners' appeal is in order because it raised

purely legal issues, namely:

The first issue has earlier been categorized in Province of Misamis Oriental v.
Cagayan Electric and Power Co., Inc. to be a legal one. There is no more
argument to this.

1) Whether appellee, whose franchise expressly provides that its payment of

franchise tax shall be in lieu of all taxes in this franchise or earnings thereof,
is absolutely excused from paying the franchise tax imposed by appellants;

The next issue although it may need the reexamination of the pertinent
provisions of the local franchise and the legislative franchise given to appellee,
also needs no evaluation of facts. It suffices that there may be a conflict which
may need to be reconciled, without regard to the factual backdrop of the case.

2) Whether appellants' imposition of local franchise tax is a violation of

appellee's legislative franchise; and

The last issue deals with a legal question, because whether or not there is a
prior written claim for refund is no longer in dispute. Rather, the question
revolves on whether the said requirement may be dispensed with, which
obviously is not a factual issue.13
On September 23, 2004, petitioner moved for reconsideration. The motion
was, however, denied by the CA in its Resolution dated December 16, 2004.
Hence, the present recourse.
Issues

Obviously, these are purely legal questions, cognizable by this Court, to the
exclusion of all other courts. There is a question of law when the doubt or
difference arises as to what the law is pertaining to a certain state of facts.16
Section 2, Rule 50 of the Rules of Court provides that an appeal taken to the
CA under Rule 41 raising only questions of law is erroneous and shall be
dismissed, issues of pure law not being within its jurisdiction.17 Consequently,
the dismissal by the CA of petitioners' appeal was in order.
In the recent case of Sevilleno v. Carilo,18 this Court ruled that the dismissal
of the appeal of petitioner was valid, considering the issues raised there were
pure questions of law, viz.:

Petitioner submits the following issues for resolution:

I.
Whether or not the phrase "in lieu of all taxes" indicated in the franchise of
the respondent appellee (Section 8 of RA 7966) serves to exempt it from the
payment of the local franchise tax imposed by the petitioners-appellants.
II.
Whether or not the petitioners-appellants raised factual and legal issues before
the Honorable Court of Appeals.14
Our Ruling

3) Whether one can do away with the requirement on prior written claim for
refund.15

Petitioners interposed an appeal to the Court of Appeals but it was dismissed

for being the wrong mode of appeal. The appellate court held that since the
issue being raised is whether the RTC has jurisdiction over the subject matter
of the case, which is a question of law, the appeal should have been elevated
to the Supreme Court under Rule 45 of the 1997 Rules of Civil Procedure, as
amended. Section 2, Rule 41 of the same Rules which governs appeals from
judgments and final orders of the RTC to the Court of Appeals, provides:
SEC. 2. Modes of appeal. (a) Ordinary appeal. - The appeal to the Court of Appeals in cases decided by
the Regional Trial Court in the exercise of its original jurisdiction shall be taken
by filing a notice of appeal with the court which rendered the judgment or final

Page 52 of 98

order appealed from and serving a copy thereof upon the adverse party. No
record on appeal shall be required except in special proceedings and other
cases of multiple or separate appeals where the law or these Rules so require.
In such cases, the record on appeal shall be filed and served in like manner.
(b) Petition for review. - The appeal to the Court of Appeals in cases decided
by the Regional Trial Court in the exercise of its appellate jurisdiction shall be
by petition for review in accordance with Rule 42.
(c) Appeal by certiorari. - In all cases where only questions of law are raised
or involved, the appeal shall be to the Supreme Court by petition for review
on certiorari in accordance with Rule 45.
In Macawili Gold Mining and Development Co., Inc. v. Court of Appeals, we
summarized the rule on appeals as follows:
(1) In all cases decided by the RTC in the exercise of its original jurisdiction,
appeal may be made to the Court of Appeals by mere notice of appeal where
the appellant raises questions of fact or mixed questions of fact and law;
(2) In all cases decided by the RTC in the exercise of its original jurisdiction
where the appellant raises only questions of law, the appeal must be taken to
the Supreme Court on a petition for review on certiorari under Rule 45;
(3) All appeals from judgments rendered by the RTC in the exercise of its
appellate jurisdiction, regardless of whether the appellant raises questions of
fact, questions of law, or mixed questions of fact and law, shall be brought to
the Court of Appeals by filing a petition for review under Rule 42.
It is not disputed that the issue brought by petitioners to the Court of Appeals
involves the jurisdiction of the RTC over the subject matter of the case. We
have a long standing rule that a court's jurisdiction over the subject matter of
an action is conferred only by the Constitution or by statute. Otherwise put,
jurisdiction of a court over the subject matter of the action is a matter of law.
Consequently, issues which deal with the jurisdiction of a court over the
subject matter of a case are pure questions of law. As petitioners' appeal solely
involves a question of law, they should have directly taken their appeal to this
Court by filing a petition for review on certiorari under Rule 45, not an ordinary
appeal with the Court of Appeals under Rule 41. Clearly, the appellate court
did not err in holding that petitioners pursued the wrong mode of appeal.

Indeed, the Court of Appeals did not err in dismissing petitioners' appeal.
Section 2, Rule 50 of the same Rules provides that an appeal from the RTC to
the Court of Appeals raising only questions of law shall be dismissed; and that
an appeal erroneously taken to the Court of Appeals shall be dismissed
outright, x x x. (Emphasis added)
However, to serve the demands of substantial justice and equity, the Court
opts to relax procedural rules and rule upon on the merits of the case. In Ong
Lim Sing Jr. v. FEB Leasing and Finance Corporation, this Court stated:
Courts have the prerogative to relax procedural rules of even the most
mandatory character, mindful of the duty to reconcile both the need to
speedily put an end to litigation and the parties' right to due process. In
numerous cases, this Court has allowed liberal construction of the rules when
to do so would serve the demands of substantial justice and equity. In Aguam
v. Court of Appeals, the Court explained:
"The court has the discretion to dismiss or not to dismiss an appellant's appeal.
It is a power conferred on the court, not a duty. The "discretion must be a
sound one, to be exercised in accordance with the tenets of justice and fair
play, having in mind the circumstances obtaining in each case." Technicalities,
however, must be avoided. The law abhors technicalities that impede the
cause of justice. The court's primary duty is to render or dispense justice. "A
litigation is not a game of technicalities." "Lawsuits unlike duels are not to be
won by a rapier's thrust. Technicality, when it deserts its proper office as an
aid to justice and becomes its great hindrance and chief enemy, deserves scant
consideration from courts." Litigations must be decided on their merits and not
on technicality. Every party litigant must be afforded the amplest opportunity
for the proper and just determination of his cause, free from the unacceptable
plea of technicalities. Thus, dismissal of appeals purely on technical grounds
is frowned upon where the policy of the court is to encourage hearings of
appeals on their merits and the rules of procedure ought not to be applied in
a very rigid, technical sense; rules of procedure are used only to help secure,
not override substantial justice. It is a far better and more prudent course of
action for the court to excuse a technical lapse and afford the parties a review
of the case on appeal to attain the ends of justice rather than dispose of the
case on technicality and cause a grave injustice to the parties, giving a false
impression of speedy disposal of cases while actually resulting in more delay,
if not a miscarriage of justice.
II. The "in lieu of all taxes" provision in its franchise does not exempt ABSCBN from payment of local franchise tax.

Page 53 of 98

A. The present controversy essentially boils down to a dispute between the

inherent taxing power of Congress and the delegated authority to tax of local
governments under the 1987 Constitution and effected under the LGC of 1991.
The power of the local government of Quezon City to impose franchise tax is
based on Section 151 in relation to Section 137 of the LGC, to wit:
Section 137. Franchise Tax. - Notwithstanding any exemption granted by any
law or other special law, the province may impose a tax on businesses enjoying
a franchise, at the rate not exceeding fifty percent (50%) of one percent (1%)
of the gross annual receipts for the preceding calendar year based on the
incoming receipt, or realized within its territorial jurisdiction. x x x
xxxx
Section 151. Scope of Taxing Powers. - Except as otherwise provided in this
Code, the city may levy the taxes, fees and charges which the province or
municipality may impose: Provided, however, That the taxes, fees and charges
levied and collected by highly urbanized and component cities shall accrue to
them and distributed in accordance with the provisions of this Code.
The rates of taxes that the city may levy may exceed the maximum rates
allowed for the province or municipality by not more than fifty percent (50%)
except the rates of professional and amusement taxes. (Emphasis supplied)
Such taxing power by the local government, however, is limited in the sense
that Congress can enact legislation granting exemptions. This principle was
upheld in City Government of Quezon City, et al. v. Bayan
Telecommunications, Inc.22 Said this Court:
This thus raises the question of whether or not the City's Revenue Code
pursuant to which the city treasurer of Quezon City levied real property taxes
against Bayantel's real properties located within the City effectively withdrew
the tax exemption enjoyed by Bayantel under its franchise, as amended.
Bayantel answers the poser in the negative arguing that once again it is only
"liable to pay the same taxes, as any other persons or corporations on all its
real or personal properties, exclusive of its franchise."
Bayantel's posture is well-taken. While the system of local government
taxation has changed with the onset of the 1987 Constitution, the power of

local government units to tax is still limited. As we explained in Mactan Cebu

International Airport Authority:
"The power to tax is primarily vested in the Congress; however, in our
jurisdiction, it may be exercised by local legislative bodies, no longer merely
be virtue of a valid delegation as before, but pursuant to direct authority
conferred by Section 5, Article X of the Constitution. Under the latter, the
exercise of the power may be subject to such guidelines and limitations as the
Congress may provide which, however, must be consistent with the basic
policy of local autonomy. x x x"
Clearly then, while a new slant on the subject of local taxation now prevails in
the sense that the former doctrine of local government units' delegated power
to tax had been effectively modified with Article X, Section 5 of the 1987
Constitution now in place, the basic doctrine on local taxation remains
essentially the same. For as the Court stressed in Mactan, "the power to tax is
[still] primarily vested in the Congress."
This new perspective is best articulated by Fr. Joaquin G. Bernas, S.J., himself
a Commissioner of the 1986 Constitutional Commission which crafted the 1987
Constitution, thus:
"What is the effect of Section 5 on the fiscal position of municipal corporations?
Section 5 does not change the doctrine that municipal corporations do not
possess inherent powers of taxation. What it does is to confer municipal
corporations a general power to levy taxes and otherwise create sources of
revenue. They no longer have to wait for a statutory grant of these powers.
The power of the legislative authority relative to the fiscal powers of local
governments has been reduced to the authority to impose limitations on
municipal powers. Moreover, these limitations must be "consistent with the
basic policy of local autonomy." The important legal effect of Section 5 is thus
to reverse the principle that doubts are resolved against municipal
corporations. Henceforth, in interpreting statutory provisions on municipal
fiscal powers, doubts will be resolved in favor of municipal corporations. It is
understood, however, that taxes imposed by local government must be for a
public purpose, uniform within a locality, must not be confiscatory, and must
be within the jurisdiction of the local unit to pass."
In net effect, the controversy presently before the Court involves, at bottom,
a clash between the inherent taxing power of the legislature, which necessarily
includes the power to exempt, and the local government's delegated power to
tax under the aegis of the 1987 Constitution.

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Now to go back to the Quezon City Revenue Code which imposed real estate
taxes on all real properties within the city's territory and removed exemptions
theretofore "previously granted to, or presently enjoyed by all persons,
whether natural or juridical [x x x]" there can really be no dispute that the
power of the Quezon City Government to tax is limited by Section 232 of the
LGC which expressly provides that "a province or city or municipality within
the Metropolitan Manila Area may levy an annual ad valorem tax on real
property such as land, building, machinery, and other improvement not
hereinafter specifically exempted." Under this law, the Legislature highlighted
its power to thereafter exempt certain realties from the taxing power of local
government units. An interpretation denying Congress such power to exempt
would reduce the phrase "not hereinafter specifically exempted" as a pure
jargon, without meaning whatsoever. Needless to state, such absurd situation
is unacceptable.
For sure, in Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City
of Davao, this Court has upheld the power of Congress to grant exemptions
over the power of local government units to impose taxes. There, the Court
wrote:
"Indeed, the grant of taxing powers to local government units under the
Constitution and the LGC does not affect the power of Congress to grant
exemptions to certain persons, pursuant to a declared national policy. The
legal effect of the constitutional grant to local governments simply means that
in interpreting statutory provisions on municipal taxing powers, doubts must
be resolved in favor of municipal corporations."23 (Emphasis supplied)
In the case under review, the Philippine Congress enacted R.A. No. 7966 on
March 30, 1995, subsequent to the effectivity of the LGC on January 1, 1992.
Under it, ABS-CBN was granted the franchise to install and operate radio and
television broadcasting stations in the Philippines. Likewise, Section 8 imposed
on ABS-CBN the duty of paying 3% franchise tax. It bears stressing, however,
that payment of the percentage franchise tax shall be "in lieu of all taxes" on
the said franchise.24
Congress has the inherent power to tax, which includes the power to grant tax
exemptions. On the other hand, the power of Quezon City to tax is prescribed
by Section 151 in relation to Section 137 of the LGC which expressly provides
that notwithstanding any exemption granted by any law or other special law,
the City may impose a franchise tax. It must be noted that Section 137 of the
LGC does not prohibit grant of future exemptions. As earlier discussed, this
Court in City Government of Quezon City v. Bayan Telecommunications, Inc.25

sustained the power of Congress to grant tax exemptions over and above the
power of the local government's delegated power to tax.
B. The more pertinent issue now to consider is whether or not by passing R.A.
No. 7966, which contains the "in lieu of all taxes" provision, Congress intended
to exempt ABS-CBN from local franchise tax.
Petitioners argue that the "in lieu of all taxes" provision in ABS-CBN's franchise
does not expressly exempt it from payment of local franchise tax. They
contend that a tax exemption cannot be created by mere implication and that
one who claims tax exemptions must be able to justify his claim by clearest
grant of organic law or statute.
Taxes are what civilized people pay for civilized society. They are the lifeblood
of the nation. Thus, statutes granting tax exemptions are construed stricissimi
juris against the taxpayer and liberally in favor of the taxing authority. A claim
of tax exemption must be clearly shown and based on language in law too
plain to be mistaken. Otherwise stated, taxation is the rule, exemption is the
exception.26 The burden of proof rests upon the party claiming the exemption
to prove that it is in fact covered by the exemption so claimed.27
The basis for the rule on strict construction to statutory provisions granting
tax exemptions or deductions is to minimize differential treatment and foster
impartiality, fairness and equality of treatment among taxpayers.28 He who
claims an exemption from his share of common burden must justify his claim
that the legislature intended to exempt him by unmistakable terms. For
exemptions from taxation are not favored in law, nor are they presumed. They
must be expressed in the clearest and most unambiguous language and not
left to mere implications. It has been held that "exemptions are never
presumed, the burden is on the claimant to establish clearly his right to
exemption and cannot be made out of inference or implications but must be
laid beyond reasonable doubt. In other words, since taxation is the rule and
exemption the exception, the intention to make an exemption ought to be
expressed in clear and unambiguous terms.29
Section 8 of R.A. No. 7966 imposes on ABS-CBN a franchise tax equivalent to
three (3) percent of all gross receipts of the radio/television business
transacted under the franchise and the franchise tax shall be "in lieu of all
taxes" on the franchise or earnings thereof.
The "in lieu of all taxes" provision in the franchise of ABS-CBN does not
expressly provide what kind of taxes ABS-CBN is exempted from. It is not clear

Page 55 of 98

whether the exemption would include both local, whether municipal, city or
provincial, and national tax. What is clear is that ABS-CBN shall be liable to
pay three (3) percent franchise tax and income taxes under Title II of the
NIRC. But whether the "in lieu of all taxes provision" would include exemption
from local tax is not unequivocal.
As adverted to earlier, the right to exemption from local franchise tax must be
clearly established and cannot be made out of inference or implications but
must be laid beyond reasonable doubt. Verily, the uncertainty in the "in lieu
of all taxes" provision should be construed against ABS-CBN. ABS-CBN has the
burden to prove that it is in fact covered by the exemption so claimed. ABSCBN miserably failed in this regard.

In the case under review, ABS-CBN's franchise did not embody an exemption
similar to those in Carcar, Manila Railroad, Philippine Railway, and Visayan
Electric. Too, the franchise failed to specify the taxing authority from whose
jurisdiction the taxing power is withheld, whether municipal, provincial, or
national. In fine, since ABS-CBN failed to justify its claim for exemption from
local franchise tax, by a grant expressed in terms "too plain to be mistaken"
its claim for exemption for local franchise tax must fail.
C. The "in lieu of all taxes" clause in the franchise of ABS-CBN has become
functus officio with the abolition of the franchise tax on broadcasting
companies with yearly gross receipts exceeding Ten Million Pesos.

ABS-CBN cites the cases Carcar Electric & Ice Plant v. Collector of Internal
Revenue, Manila Railroad v. Rafferty, Philippine Railway Co. v. Collector of
Internal Revenue, and Visayan Electric Co. v. David33 to support its claim that
that the "in lieu of all taxes" clause includes exemption from all taxes.

In its decision dated January 20, 1999, the RTC held that pursuant to the "in
lieu of all taxes" provision contained in Section 8 of R.A. No. 7966, ABS-CBN
is exempt from the payment of the local franchise tax. The RTC further
pronounced that ABS-CBN shall instead be liable to pay a franchise tax of 3%
of all gross receipts in lieu of all other taxes.

However, a review of the foregoing case law reveals that the grantees'
respective franchises expressly exempt them from municipal and provincial
taxes. Said the Court in Manila Railroad v. Rafferty:

On this score, the RTC ruling is flawed. In keeping with the laws that have
been passed since the grant of ABS-CBN's franchise, the corporation should
now be subject to VAT, instead of the 3% franchise tax.

On the 7th day of July 1906, by an Act of the Philippine Legislature, a special
charter was granted to the Manila Railroad Company. Subsection 12 of Section
1 of said Act (No. 1510) provides that:

At the time of the enactment of its franchise on May 3, 1995, ABS-CBN was
subject to 3% franchise tax under Section 117(b) of the 1977 National Internal
Revenue Code (NIRC), as amended, viz.:

"In consideration of the premises and of the granting of this concession or

franchise, there shall be paid by the grantee to the Philippine Government,
annually, for the period of thirty (30) years from the date hereof, an amount
equal to one-half (1/2) of one per cent of the gross earnings of the grantee in
respect of the lines covered hereby for the preceding year; after said period
of thirty (30) years, and for the fifty (50) years thereafter, the amount so to
be paid annually shall be an amount equal to one and one-half (1 1/2) per
cent of such gross earnings for the preceding year; and after such period of
eighty (80) years, the percentage and amount so to be paid annually by the
grantee shall be fixed by the Philippine Government.

SECTION 117. Tax on franchises. - Any provision of general or special laws to

the contrary notwithstanding, there shall be levied, assessed and collected in
respect to all franchise, upon the gross receipts from the business covered by
the law granting the franchise, a tax in accordance with the schedule
prescribed hereunder:

Such annual payments, when promptly and fully made by the grantee, shall
be in lieu of all taxes of every name and nature - municipal, provincial or
central - upon its capital stock, franchises, right of way, earnings, and all other
property owned or operated by the grantee under this concession or
franchise." (Underscoring supplied)

(c) On other franchises Five (5%) percent. (Emphasis supplied)

(a) On electric utilities, city gas, and water supplies Two (2%) percent
(b) On telephone and/or telegraph systems, radio and/or broadcasting stations
Three (3%) percent

On January 1, 1996, R.A. No. 7716, otherwise known as the Expanded Value
Added Tax Law,36 took effect and subjected to VAT those services rendered
by radio and/or broadcasting stations. Section 3 of R.A. No. 7716 provides:

Page 56 of 98

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.
- (a) Rate and base of tax. - There shall be levied, assessed and collected, as
value-added tax equivalent to 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; x x x services of franchise grantees of telephone and
telegraph, radio and television broadcasting and all other franchise grantees
except those under Section 117 of this Code; x x x (Emphasis supplied)
Notably, under the same law, "telephone and/or telegraph systems,
broadcasting stations and other franchise grantees" were omitted from the list
of entities subject to franchise tax. The impression was that these entities were
subject to 10% VAT but not to franchise tax. Only the franchise tax on
"electric, gas and water utilities" remained. Section 12 of R.A. No. 7716
provides:
Section 12. Section 117 of the National Internal Revenue Code, as amended,
is hereby further amended to read as follows:
SEC. 117. Tax on Franchises. - Any provision of general or special law to the
contrary notwithstanding there shall be levied, assessed and collected in
respect to all franchises on electric, gas and water utilities a tax of two percent
(2%) on the gross receipts derived from the business covered by the law
granting the franchise. (Emphasis added)
Subsequently, R.A. No. 824137 took effect on January 1, 199738 containing
more amendments to the NIRC. Radio and/or television companies whose
annual gross receipts do not exceed P10,000,000.00 were granted the option
to choose between paying 3% national franchise tax or 10% VAT. Section 9
of R.A. No. 8241 provides:
SECTION 9. Section 12 of Republic Act No. 7716 is hereby amended to read
as follows:

"Sec. 12. Section 117 of the National Internal Revenue Code, as amended, is
hereby further amended to read as follows:
"Sec. 117. Tax on franchise. - Any provision of general or special law to the
contrary, notwithstanding, there shall be levied, assessed and collected in
respect to all franchises on radio and/or television broadcasting companies
whose annual gross receipts of the preceding year does not exceed Ten million
pesos (P10,000,000.00), subject to Section 107(d) of this Code, a tax of three
percent (3%) and on electric, gas and water utilities, a tax of two percent
(2%) on the gross receipts derived from the business covered by the law
granting the franchise: Provided, however, That radio and television
broadcasting companies referred to in this section, shall have an option to be
registered as a value-added tax payer and pay the tax due thereon: Provided,
further, That once the option is exercised, it shall not be revoked. (Emphasis
supplied)
On the other hand, radio and/or television companies with yearly gross
receipts exceeding P10,000,000.00 were subject to 10% VAT, pursuant to
Section 102 of the NIRC.
On January 1, 1998, R.A. No. 842439 was passed confirming the 10% VAT
liability of radio and/or television companies with yearly gross receipts
exceeding P10,000,000.00.
R.A. No. 9337 was subsequently enacted and became effective on July 1,
2005. The said law further amended the NIRC by increasing the rate of VAT
to 12%. The effectivity of the imposition of the 12% VAT was later moved
from January 1, 2006 to February 1, 2006.
In consonance with the above survey of pertinent laws on the matter, ABSCBN is subject to the payment of VAT. It does not have the option to choose
between the payment of franchise tax or VAT since it is a broadcasting
company with yearly gross receipts exceeding Ten Million Pesos
(P10,000,000.00).
VAT is a percentage tax imposed on any person whether or not a franchise
grantee, who in the course of trade or business, sells, barters, exchanges,
leases, goods or properties, renders services. It is also levied on every
importation of goods whether or not in the course of trade or business. The
tax base of the VAT is limited only to the value added to such goods,
properties, or services by the seller, transferor or lessor. Further, the VAT is
an indirect tax and can be passed on to the buyer.

Page 57 of 98

Republic of the Philippines

SUPREME COURT
Manila

The franchise tax, on the other hand, is a percentage tax imposed only on
franchise holders. It is imposed under Section 119 of the Tax Code and is a
direct liability of the franchise grantee.
The clause "in lieu of all taxes" does not pertain to VAT or any other tax. It
cannot apply when what is paid is a tax other than a franchise tax. Since the
franchise tax on the broadcasting companies with yearly gross receipts
exceeding ten million pesos has been abolished, the "in lieu of all taxes" clause
has now become functus officio, rendered inoperative.
In sum, ABS-CBN's claims for exemption must fail on twin grounds. First, the
"in lieu of all taxes" clause in its franchise failed to specify the taxes the
company is sought to be exempted from. Neither did it particularize the
jurisdiction from which the taxing power is withheld. Second, the clause has
become functus officio because as the law now stands, ABS-CBN is no longer
subject to a franchise tax. It is now liable for VAT.
WHEREFORE, the petition is GRANTED and the appealed Decision REVERSED
AND SET ASIDE. The petition in the trial court for refund of local franchise tax
is DISMISSED.

THIRD DIVISION
G.R. Nos. 141104 & 148763

June 8, 2007

ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION,

petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.
CHICO-NAZARIO, J.:
Before this Court are the consolidated cases involving the unsuccessful claims
of herein petitioner Atlas Consolidated Mining and Development Corporation
(petitioner corporation) for the refund/credit of the input Value Added Tax
(VAT) on its purchases of capital goods and on its zero-rated sales in the
taxable quarters of the years 1990 and 1992, the denial of which by the Court
of Tax Appeals (CTA), was affirmed by the Court of Appeals.
Petitioner corporation is engaged in the business of mining, production, and
sale of various mineral products, such as gold, pyrite, and copper
concentrates. It is a VAT-registered taxpayer. It was initially issued VAT
Registration No. 32-A-6-002224, dated 1 January 1988, but it had to register
anew with the appropriate revenue district office (RDO) of the Bureau of
Internal Revenue (BIR) when it moved its principal place of business, and it
was re-issued VAT Registration No. 32-0-004622, dated 15 August 1990.1
G.R. No. 141104
Petitioner corporation filed with the BIR its VAT Return for the first quarter of
1992.2 It alleged that it likewise filed with the BIR the corresponding
application for the refund/credit of its input VAT on its purchases of capital
goods and on its zero-rated sales in the amount of P26,030,460.00.3 When its
application for refund/credit remained unresolved by the BIR, petitioner
corporation filed on 20 April 1994 its Petition for Review with the CTA,
docketed as CTA Case No. 5102. Asserting that it was a "zero-rated VAT
person," it prayed that the CTA order herein respondent Commissioner of
Internal Revenue (respondent Commissioner) to refund/credit petitioner
corporation with the amount of P26,030,460.00, representing the input VAT it
had paid for the first quarter of 1992. The respondent Commissioner opposed
and sought the dismissal of the petition for review of petitioner corporation for

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failure to state a cause of action. After due trial, the CTA promulgated its
Decision4 on 24 November 1997 with the following disposition
WHEREFORE, in view of the foregoing, the instant claim for refund is hereby
DENIED on the ground of prescription, insufficiency of evidence and failure to
comply with Section 230 of the Tax Code, as amended. Accordingly, the
petition at bar is hereby DISMISSED for lack of merit.
The CTA denied the motion for reconsideration of petitioner corporation in a
Resolution5 dated 15 April 1998.
When the case was elevated to the Court of Appeals as CA-G.R. SP No. 47607,
the appellate court, in its Decision, dated 6 July 1999, dismissed the appeal of
petitioner corporation, finding no reversible error in the CTA Decision, dated
24 November 1997. The subsequent motion for reconsideration of petitioner
corporation was also denied by the Court of Appeals in its Resolution, dated
14 December 1999.
Thus, petitioner corporation comes before this Court, via a Petition for Review
on Certiorari under Rule 45 of the Revised Rules of Court, assigning the
following errors committed by the Court of Appeals

IV
THE COURT OF APPEALS ERRED IN NOT ORDERING CTA TO ALLOW THE REOPENING OF THE CASE FOR PETITIONER TO PRESENT ADDITIONAL
EVIDENCE.
G.R. No. 148763
G.R. No. 148763 involves almost the same set of facts as in G.R. No. 141104
presented above, except that it relates to the claims of petitioner corporation
for refund/credit of input VAT on its purchases of capital goods and on its zerorated sales made in the last three taxable quarters of 1990.
Petitioner corporation filed with the BIR its VAT Returns for the second, third,
and fourth quarters of 1990, on 20 July 1990, 18 October 1990, and 20
January 1991, respectively. It submitted separate applications to the BIR for
the refund/credit of the input VAT paid on its purchases of capital goods and
on its zero-rated sales, the details of which are presented as follows

I
THE COURT OF APPEALS ERRED IN AFFIRMING THE REQUIREMENT OF
REVENUE REGULATIONS NO. 2-88 THAT AT LEAST 70% OF THE SALES OF
THE [BOARD OF INVESTMENTS (BOI)]-REGISTERED FIRM MUST CONSIST OF
EXPORTS FOR ZERO-RATING TO APPLY.
II

Period Covered

Amount Applied For

21 August 1990

2nd Quarter, 1990

P 54,014,722.04

21 November 1990

3rd Quarter, 1990

75,304,774.77

19 February 1991

4th Quarter, 1990

43,829,766.10

When the BIR failed to act on its applications for refund/credit, petitioner
corporation filed with the CTA the following petitions for review

THE COURT OF APPEALS ERRED IN AFFIRMING THAT PETITIONER FAILED

TO SUBMIT SUFFICIENT EVIDENCE SINCE FAILURE TO SUBMIT
PHOTOCOPIES OF VAT INVOICES AND RECEIPTS IS NOT A FATAL DEFECT.
III
THE COURT OF APPEALS ERRED IN RULING THAT THE JUDICIAL CLAIM WAS
FILED BEYOND THE PRESCRIPTIVE PERIOD SINCE THE JUDICIAL CLAIM WAS
FILED WITHIN TWO (2) YEARS FROM THE FILING OF THE VAT RETURN.

Date of Application

Date Filed

Period Covered

CTA Case No.

20 July 1992

2nd Quarter, 1990

4831

9 October 1992

3rd Quarter, 1990

4859

14 January 1993

4th Quarter, 1990

4944

which were eventually consolidated. The respondent Commissioner contested

the foregoing Petitions and prayed for the dismissal thereof. The CTA ruled in

Page 59 of 98

favor of respondent Commissioner and in its Decision, dated 30 October 1997,

dismissed the Petitions mainly on the ground that the prescriptive periods for
filing the same had expired. In a Resolution, dated 15 January 1998, the CTA
denied the motion for reconsideration of petitioner corporation since the latter
presented no new matter not already discussed in the court's prior Decision.
In the same Resolution, the CTA also denied the alternative prayer of
petitioner corporation for a new trial since it did not fall under any of the
grounds cited under Section 1, Rule 37 of the Revised Rules of Court, and it
was not supported by affidavits of merits required by Section 2 of the same
Rule.

of Revenue Regulations No. 2-88 imposing upon petitioner corporation, as a

requirement for the VAT zero-rating of its sales, the burden of proving that
the buyer companies were not just BOI-registered but also exporting 70% of
their total annual production; (3) sufficiency of evidence presented by
petitioner corporation to establish that it is indeed entitled to input VAT
refund/credit; and (4) legal ground for granting the motion of petitioner
corporation for re-opening of its cases or holding of new trial before the CTA
so it could be given the opportunity to present the required evidence.

Petitioner corporation appealed its case to the Court of Appeals, where it was
docketed as CA-G.R. SP No. 46718. On 15 September 2000, the Court of
Appeals rendered its Decision,11 finding that although petitioner corporation
timely filed its Petitions for Review with the CTA, it still failed to substantiate
its claims for the refund/credit of its input VAT for the last three quarters of
1990. In its Resolution,12 dated 27 June 2001, the appellate court denied the
motion for reconsideration of petitioner corporation, finding no cogent reason
to reverse its previous Decision.

The prescriptive period for filing an application for tax refund/credit of input
VAT on zero-rated sales made in 1990 and 1992 was governed by Section
106(b) and (c) of the Tax Code of 1977, as amended, which provided that

Aggrieved, petitioner corporation filed with this Court another Petition for
Review on Certiorari under Rule 45 of the Revised Rules of Court, docketed as
G.R. No. 148763, raising the following issues
A.

Prescription

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

(b) Zero-rated or effectively zero-rated sales. Any person, except those
covered by paragraph (a) above, whose sales are zero-rated may, within two
years after the close of the quarter when such sales were made, apply for the
issuance of a tax credit certificate or refund of the input taxes attributable to
such sales to the extent that such input tax has not been applied against
output tax.
xxxx

WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING THAT

PETITIONER'S CLAIM IS BARRED UNDER REVENUE REGULATIONS NOS. 2-88
AND 3-88 I.E., FOR FAILURE TO PTOVE [sic] THE 70% THRESHOLD FOR
ZERO-RATING TO APPLY AND FOR FAILURE TO ESTABLISH THE FACTUAL
BASIS FOR THE INSTANT CLAIM.
B.

(e) Period within which refund of input taxes may be made by the
Commissioner. The Commissioner shall refund input taxes within 60 days
from the date the application for refund was filed with him or his duly
authorized representative. No refund of input taxes shall be allowed unless the
VAT-registered person files an application for refund within the period
prescribed in paragraphs (a), (b) and (c) as the case may be.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN FINDING THAT THERE

IS NO BASIS TO GRANT PETITIONER'S MOTION FOR NEW TRIAL.

By a plain reading of the foregoing provision, the two-year prescriptive period

for filing the application for refund/credit of input VAT on zero-rated sales shall
be determined from the close of the quarter when such sales were made.

There being similarity of parties, subject matter, and issues, G.R. Nos. 141104
and 148763 were consolidated pursuant to a Resolution, dated 4 September
2006, issued by this Court. The ruling of this Court in these cases hinges on
how it will resolve the following key issues: (1) prescription of the claims of
petitioner corporation for input VAT refund/credit; (2) validity and applicability

Petitioner contends, however, that the said two-year prescriptive period should
be counted, not from the close of the quarter when the zero-rated sales were
made, but from the date of filing of the quarterly VAT return and payment of
the tax due 20 days thereafter, in accordance with Section 110(b) of the Tax
Code of 1977, as amended, quoted as follows

Page 60 of 98

SEC. 110. Return and payment of value-added tax. x x x.

(b) Time for filing of return and payment of tax. The return shall be filed and
the tax paid within 20 days following the end of each quarter specifically
prescribed for a VAT-registered person under regulations to be promulgated
by the Secretary of Finance: Provided, however, That any person whose
registration is cancelled in accordance with paragraph (e) of Section 107 shall
file a return within 20 days from the cancellation of such registration.
It is already well-settled that the two-year prescriptive period for instituting a
suit or proceeding for recovery of corporate income tax erroneously or illegally
paid under Section 23013 of the Tax Code of 1977, as amended, was to be
counted from the filing of the final adjustment return. This Court already set
out in ACCRA Investments Corporation v. Court of Appeals,14 the rationale for
such a rule, thus
Clearly, there is the need to file a return first before a claim for refund can
prosper inasmuch as the respondent Commissioner by his own rules and
regulations mandates that the corporate taxpayer opting to ask for a refund
must show in its final adjustment return the income it received from all sources
and the amount of withholding taxes remitted by its withholding agents to the
Bureau of Internal Revenue. The petitioner corporation filed its final
adjustment return for its 1981 taxable year on April 15, 1982. In our Resolution
dated April 10, 1989 in the case of Commissioner of Internal Revenue v. Asia
Australia Express, Ltd. (G.R. No. 85956), we ruled that the two-year
prescriptive period within which to claim a refund commences to run, at the
earliest, on the date of the filing of the adjusted final tax return. Hence, the
petitioner corporation had until April 15, 1984 within which to file its claim for
refund.
Considering that ACCRAIN filed its claim for refund as early as December 29,
1983 with the respondent Commissioner who failed to take any action thereon
and considering further that the non-resolution of its claim for refund with the
said Commissioner prompted ACCRAIN to reiterate its claim before the Court
of Tax Appeals through a petition for review on April 13, 1984, the respondent
appellate court manifestly committed a reversible error in affirming the holding
of the tax court that ACCRAIN's claim for refund was barred by prescription.
It bears emphasis at this point that the rationale in computing the two-year
prescriptive period with respect to the petitioner corporation's claim for refund
from the time it filed its final adjustment return is the fact that it was only then
that ACCRAIN could ascertain whether it made profits or incurred losses in its

business operations. The "date of payment", therefore, in ACCRAIN's case was

when its tax liability, if any, fell due upon its filing of its final adjustment return
on April 15, 1982.
In another case, Commissioner of Internal Revenue v. TMX Sales, Inc.,15 this
Court further expounded on the same matter
A re-examination of the aforesaid minute resolution of the Court in the Pacific
Procon case is warranted under the circumstances to lay down a categorical
pronouncement on the question as to when the two-year prescriptive period
in cases of quarterly corporate income tax commences to run. A full-blown
decision in this regard is rendered more imperative in the light of the reversal
by the Court of Tax Appeals in the instant case of its previous ruling in the
Pacific Procon case.
Section 292 (now Section 230) of the National Internal Revenue Code should
be interpreted in relation to the other provisions of the Tax Code in order to
give effect the legislative intent and to avoid an application of the law which
may lead to inconvenience and absurdity. In the case of People vs. Rivera (59
Phil. 236 [1933]), this Court stated that statutes should receive a sensible
construction, such as will give effect to the legislative intention and so as to
avoid an unjust or an absurd conclusion. INTERPRETATIO TALIS IN AMBIGUIS
SEMPER FRIENDA EST, UT EVITATUR INCONVENIENS ET ABSURDUM. Where
there is ambiguity, such interpretation as will avoid inconvenience and
absurdity is to be adopted. Furthermore, courts must give effect to the general
legislative intent that can be discovered from or is unraveled by the four
corners of the statute, and in order to discover said intent, the whole statute,
and not only a particular provision thereof, should be considered. (Manila
Lodge No. 761, et al. vs. Court of Appeals, et al. 73 SCRA 162 [1976) Every
section, provision or clause of the statute must be expounded by reference to
each other in order to arrive at the effect contemplated by the legislature. The
intention of the legislator must be ascertained from the whole text of the law
and every part of the act is to be taken into view. (Chartered Bank vs. Imperial,
48 Phil. 931 [1921]; Lopez vs. El Hoger Filipino, 47 Phil. 249, cited in Aboitiz
Shipping Corporation vs. City of Cebu, 13 SCRA 449 [1965]).
Thus, in resolving the instant case, it is necessary that we consider not only
Section 292 (now Section 230) of the National Internal Revenue Code but also
the other provisions of the Tax Code, particularly Sections 84, 85 (now both
incorporated as Section 68), Section 86 (now Section 70) and Section 87 (now
Section 69) on Quarterly Corporate Income Tax Payment and Section 321

Page 61 of 98

(now Section 232) on keeping of books of accounts. All these provisions of the
Tax Code should be harmonized with each other.
xxxx
Therefore, the filing of a quarterly income tax returns required in Section 85
(now Section 68) and implemented per BIR Form 1702-Q and payment of
quarterly income tax should only be considered mere installments of the
annual tax due. These quarterly tax payments which are computed based on
the cumulative figures of gross receipts and deductions in order to arrive at a
net taxable income, should be treated as advances or portions of the annual
income tax due, to be adjusted at the end of the calendar or fiscal year. This
is reinforced by Section 87 (now Section 69) which provides for the filing of
adjustment returns and final payment of income tax. Consequently, the twoyear prescriptive period provided in Section 292 (now Section 230) of the Tax
Code should be computed from the time of filing the Adjustment Return or
Annual Income Tax Return and final payment of income tax.
In the case of Collector of Internal Revenue vs. Antonio Prieto (2 SCRA 1007
[1961]), this Court held that when a tax is paid in installments, the prescriptive
period of two years provided in Section 306 (Section 292) of the National
Internal Revenue Code should be counted from the date of the final payment.
This ruling is reiterated in Commissioner of Internal Revenue vs. Carlos
Palanca (18 SCRA 496 [1966]), wherein this Court stated that where the tax
account was paid on installment, the computation of the two-year prescriptive
period under Section 306 (Section 292) of the Tax Code, should be from the
date of the last installment.
In the instant case, TMX Sales, Inc. filed a suit for a refund on March 14, 1984.
Since the two-year prescriptive period should be counted from the filing of the
Adjustment Return on April 15,1982, TMX Sales, Inc. is not yet barred by
prescription.
The very same reasons set forth in the afore-cited cases concerning the twoyear prescriptive period for claims for refund of illegally or erroneously
collected income tax may also apply to the Petitions at bar involving the same
prescriptive period for claims for refund/credit of input VAT on zero-rated
sales.
It is true that unlike corporate income tax, which is reported and paid on
installment every quarter, but is eventually subjected to a final adjustment at
the end of the taxable year, VAT is computed and paid on a purely quarterly

basis without need for a final adjustment at the end of the taxable year.
However, it is also equally true that until and unless the VAT-registered
taxpayer prepares and submits to the BIR its quarterly VAT return, there is no
way of knowing with certainty just how much input VAT16 the taxpayer may
apply against its output VAT;17 how much output VAT it is due to pay for the
quarter or how much excess input VAT it may carry-over to the following
quarter; or how much of its input VAT it may claim as refund/credit. It should
be recalled that not only may a VAT-registered taxpayer directly apply against
his output VAT due the input VAT it had paid on its importation or local
purchases of goods and services during the quarter; the taxpayer is also given
the option to either (1) carry over any excess input VAT to the succeeding
quarters for application against its future output VAT liabilities, or (2) file an
application for refund or issuance of a tax credit certificate covering the
amount of such input VAT.18 Hence, even in the absence of a final adjustment
return, the determination of any output VAT payable necessarily requires that
the VAT-registered taxpayer make adjustments in its VAT return every quarter,
taking into consideration the input VAT which are creditable for the present
quarter or had been carried over from the previous quarters.
Moreover, when claiming refund/credit, the VAT-registered taxpayer must be
able to establish that it does have refundable or creditable input VAT, and the
same has not been applied against its output VAT liabilities information which
are supposed to be reflected in the taxpayer's VAT returns. Thus, an
application for refund/credit must be accompanied by copies of the taxpayer's
VAT return/s for the taxable quarter/s concerned.
Lastly, although the taxpayer's refundable or creditable input VAT may not be
considered as illegally or erroneously collected, its refund/credit is a privilege
extended to qualified and registered taxpayers by the very VAT system
adopted by the Legislature. Such input VAT, the same as any illegally or
erroneously collected national internal revenue tax, consists of monetary
amounts which are currently in the hands of the government but must
rightfully be returned to the taxpayer. Therefore, whether claiming
refund/credit of illegally or erroneously collected national internal revenue tax,
or input VAT, the taxpayer must be given equal opportunity for filing and
pursuing its claim.
For the foregoing reasons, it is more practical and reasonable to count the
two-year prescriptive period for filing a claim for refund/credit of input VAT on
zero-rated sales from the date of filing of the return and payment of the tax
due which, according to the law then existing, should be made within 20 days

Page 62 of 98

from the end of each quarter. Having established thus, the relevant dates in
the instant cases are summarized and reproduced below
Period Covered

Date of
Filing(Return w/
BIR)

Date of
Filing(Application w/
BIR)

Date of Filing(Case w/
CTA)

2nd Quarter, 1990

20 July 1990

21 August 1990

20 July 1992

3rd Quarter, 1990

18 October 1990

21 November 1990

9 October 1992

4th Quarter, 1990

20 January 1991

19 February 1991

14 January 1993

1st Quarter, 1992

20 April 1992

--

20 April 1994

The above table readily shows that the administrative and judicial claims of
petitioner corporation for refund of its input VAT on its zero-rated sales for the
last three quarters of 1990 were all filed within the prescriptive period.
However, the same cannot be said for the claim of petitioner corporation for
refund of its input VAT on its zero-rated sales for the first quarter of 1992.
Even though it may seem that petitioner corporation filed in time its judicial
claim with the CTA, there is no showing that it had previously filed an
administrative claim with the BIR. Section 106(e) of the Tax Code of 1977, as
amended, explicitly provided that no refund of input VAT shall be allowed
unless the VAT-registered taxpayer filed an application for refund with
respondent Commissioner within the two-year prescriptive period. The
application of petitioner corporation for refund/credit of its input VAT for the
first quarter of 1992 was not only unsigned by its supposed authorized
representative, Ma. Paz R. Semilla, Manager-Finance and Treasury, but it was
not dated, stamped, and initialed by the BIR official who purportedly received
the same. The CTA, in its Decision,19 dated 24 November 1997, in CTA Case
No. 5102, made the following observations
This Court, likewise, rejects any probative value of the Application for Tax
Credit/Refund of VAT Paid (BIR Form No. 2552) [Exhibit "B'] formally offered
in evidence by the petitioner on account of the fact that it does not bear the
BIR stamp showing the date when such application was filed together with the
signature or initial of the receiving officer of respondent's Bureau. Worse still,
it does not show the date of application and the signature of a certain Ma. Paz
R. Semilla indicated in the form who appears to be petitioner's authorized filer.

A review of the records reveal that the original of the aforecited application
was lost during the time petitioner transferred its office (TSN, p. 6, Hearing of
December 9, 1994). Attempt was made to prove that petitioner exerted efforts
to recover the original copy, but to no avail. Despite this, however, We observe
that petitioner completely failed to establish the missing dates and signatures
abovementioned. On this score, said application has no probative value in
demonstrating the fact of its filing within two years after the [filing of the VAT
return for the quarter] when petitioner's sales of goods were made as
prescribed under Section 106(b) of the Tax Code. We believe thus that
petitioner failed to file an application for refund in due form and within the
legal period set by law at the administrative level. Hence, the case at bar has
failed to satisfy the requirement on the prior filing of an application for refund
with the respondent before the commencement of a judicial claim for refund,
as prescribed under Section 230 of the Tax Code. This fact constitutes another
one of the many reasons for not granting petitioner's judicial claim.
As pointed out by the CTA, in serious doubt is not only the fact of whether
petitioner corporation timely filed its administrative claim for refund of its input
VAT for the first quarter of 1992, but also whether petitioner corporation
actually filed such administrative claim in the first place. For failing to prove
that it had earlier filed with the BIR an application for refund/credit of its input
VAT for the first quarter of 1992, within the period prescribed by law, then the
case instituted by petitioner corporation with the CTA for the refund/credit of
the very same tax cannot prosper.
Revenue Regulations No. 2-88 and the 70% export requirement
Under Section 100(a) of the Tax Code of 1977, as amended, a 10% VAT was
imposed on the gross selling price or gross value in money of goods sold,
bartered or exchanged. Yet, the same provision subjected the following sales
made by VAT-registered persons to 0% VAT
(1) Export sales; and
(2) Sales to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively
subjects such sales to zero-rate.
"Export Sales" means the sale and shipment or exportation of goods from the
Philippines to a foreign country, irrespective of any shipping arrangement that
may be agreed upon which may influence or determine the transfer of
ownership of the goods so exported, or foreign currency denominated sales.

Page 63 of 98

"Foreign currency denominated sales", means sales to nonresidents of goods

assembled or manufactured in the Philippines, for delivery to residents in the
Philippines and paid for in convertible foreign currency remitted through the
banking system in the Philippines.

registered enterprise to be used in manufacturing, processing or repacking of

the said buyer's goods and paid for in foreign currency, inwardly remitted in
accordance with Central Bank rules and regulations shall be subject to zerorate.

These are termed zero-rated sales. A zero-rated sale is still considered a

taxable transaction for VAT purposes, although the VAT rate applied is 0%. A
sale by a VAT-registered taxpayer of goods and/or services taxed at 0% shall
not result in any output VAT, while the input VAT on its purchases of goods or
services related to such zero-rated sale shall be available as tax credit or
refund.20

It is the position of the respondent Commissioner, affirmed by the CTA and

the Court of Appeals, that Section 2 of Revenue Regulations No. 2-88 should
be applied in the cases at bar; and to be entitled to the zero-rating of its sales
to PASAR and PHILPHOS, petitioner corporation, as a VAT-registered seller,
must be able to prove not only that PASAR and PHILPHOS are BOI-registered
corporations, but also that more than 70% of the total annual production of
these corporations are actually exported. Revenue Regulations No. 2-88
merely echoed the requirement imposed by the BOI on export-oriented
corporations registered with it.

Petitioner corporation questions the validity of Revenue Regulations No. 2-88

averring that the said regulations imposed additional requirements, not found
in the law itself, for the zero-rating of its sales to Philippine Smelting and
Refining Corporation (PASAR) and Philippine Phosphate, Inc. (PHILPHOS),
both of which are registered not only with the BOI, but also with the then
Export Processing Zone Authority (EPZA).21
The contentious provisions of Revenue Regulations No. 2-88 read
SEC. 2. Zero-rating. (a) Sales of raw materials to BOI-registered exporters.
Sales of raw materials to export-oriented BOI-registered enterprises whose
export sales, under rules and regulations of the Board of Investments, exceed
seventy percent (70%) of total annual production, shall be subject to zerorate under the following conditions:
"(1) The seller shall file an application with the BIR, ATTN.: Division, applying
for zero-rating for each and every separate buyer, in accordance with Section
8(d) of Revenue Regulations No. 5-87. The application should be accompanied
with a favorable recommendation from the Board of Investments."
"(2) The raw materials sold are to be used exclusively by the buyer in the
manufacture, processing or repacking of his own registered export product;
"(3) The words "Zero-Rated Sales" shall be prominently indicated in the sales
invoice. The exporter (buyer) can no longer claim from the Bureau of Internal
Revenue or any other government office tax credits on their zero-rated
purchases;
(b) Sales of raw materials to foreign buyer. Sales of raw materials to a
nonresident foreign buyer for delivery to a resident local export-oriented BOI-

While this Court is not prepared to strike down the validity of Revenue
Regulations No. 2-88, it finds that its application must be limited and placed
in the proper context. Note that Section 2 of Revenue Regulations No. 2-88
referred only to the zero-rated sales of raw materials to export-oriented BOIregistered enterprises whose export sales, under BOI rules and regulations,
should exceed seventy percent (70%) of their total annual production.
Section 2 of Revenue Regulations No. 2-88, should not have been applied to
the zero-rating of the sales made by petitioner corporation to PASAR and
PHILPHOS. At the onset, it must be emphasized that PASAR and PHILPHOS,
in addition to being registered with the BOI, were also registered with the
EPZA and located within an export-processing zone. Petitioner corporation
does not claim that its sales to PASAR and PHILPHOS are zero-rated on the
basis that said sales were made to export-oriented BOI-registered
corporations, but rather, on the basis that the sales were made to EPZAregistered enterprises operating within export processing zones. Although
sales to export-oriented BOI-registered enterprises and sales to EPZAregistered enterprises located within export processing zones were both
deemed export sales, which, under Section 100(a) of the Tax Code of 1977,
as amended, shall be subject to 0% VAT distinction must be made between
these two types of sales because each may have different substantiation
requirements.
The Tax Code of 1977, as amended, gave a limited definition of export sales,
to wit: "The sale and shipment or exportation of goods from the Philippines to
a foreign country, irrespective of any shipping arrangement that may be
agreed upon which may influence or determine the transfer of ownership of

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the goods so exported, or foreign currency denominated sales." Executive

Order No. 226, otherwise known as the Omnibus Investments Code of 1987 which, in the years concerned (i.e., 1990 and 1992), governed enterprises
registered with both the BOI and EPZA, provided a more comprehensive
definition of export sales, as quoted below:
"ART. 23. "Export sales" shall mean the Philippine port F.O.B. value,
determined from invoices, bills of lading, inward letters of credit, landing
certificates, and other commercial documents, of export products exported
directly by a registered export producer or the net selling price of export
product sold by a registered export producer or to an export trader that
subsequently exports the same: Provided, That sales of export products to
another producer or to an export trader shall only be deemed export sales
when actually exported by the latter, as evidenced by landing certificates of
similar commercial documents: Provided, further, That without actual
exportation the following shall be considered constructively exported for
purposes of this provision: (1) sales to bonded manufacturing warehouses of
export-oriented manufacturers; (2) sales to export processing zones; (3) sales
to registered export traders operating bonded trading warehouses supplying
raw materials used in the manufacture of export products under guidelines to
be set by the Board in consultation with the Bureau of Internal Revenue and
the Bureau of Customs; (4) sales to foreign military bases, diplomatic missions
and other agencies and/or instrumentalities granted tax immunities, of locally
manufactured, assembled or repacked products whether paid for in foreign
currency or not: Provided, further, That export sales of registered export
trader may include commission income; and Provided, finally, That exportation
of goods on consignment shall not be deemed export sales until the export
products consigned are in fact sold by the consignee.
Sales of locally manufactured or assembled goods for household and personal
use to Filipinos abroad and other non-residents of the Philippines as well as
returning Overseas Filipinos under the Internal Export Program of the
government and paid for in convertible foreign currency inwardly remitted
through the Philippine banking systems shall also be considered export sales.
(Underscoring ours.)
The afore-cited provision of the Omnibus Investments Code of 1987
recognizes as export sales the sales of export products to another producer or
to an export trader, provided that the export products are actually exported.
For purposes of VAT zero-rating, such producer or export trader must be
registered with the BOI and is required to actually export more than 70% of
its annual production.

Without actual exportation, Article 23 of the Omnibus Investments Code of

1987 also considers constructive exportation as export sales. Among other
types of constructive exportation specifically identified by the said provision
are sales to export processing zones. Sales to export processing zones are
subjected to special tax treatment. Article 77 of the same Code establishes the
tax treatment of goods or merchandise brought into the export processing
zones. Of particular relevance herein is paragraph 2, which provides that
"Merchandise purchased by a registered zone enterprise from the customs
territory and subsequently brought into the zone, shall be considered as export
sales and the exporter thereof shall be entitled to the benefits allowed by law
for such transaction."
Such tax treatment of goods brought into the export processing zones are only
consistent with the Destination Principle and Cross Border Doctrine to which
the Philippine VAT system adheres. According to the Destination Principle,22
goods and services are taxed only in the country where these are consumed.
In connection with the said principle, the Cross Border Doctrine23 mandates
that no VAT shall be imposed to form part of the cost of the goods destined
for consumption outside 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 10% VAT.24 Export processing zones25 are
to be managed as a separate customs territory from the rest of the Philippines
and, thus, for tax purposes, are effectively considered as foreign territory. For
this reason, sales by persons from the Philippine customs territory to those
inside the export processing zones are already taxed as exports.
Plainly, sales to enterprises operating within the export processing zones are
export sales, which, under the Tax Code of 1977, as amended, were subject
to 0% VAT. It is on this ground that petitioner corporation is claiming
refund/credit of the input VAT on its zero-rated sales to PASAR and PHILPHOS.
The distinction made by this Court in the preceding paragraphs between the
zero-rated sales to export-oriented BOI-registered enterprises and zero-rated
sales to EPZA-registered enterprises operating within export processing zones
is actually supported by subsequent development in tax laws and regulations.
In Revenue Regulations No. 7-95, the Consolidated VAT Regulations, as
amended,26 the BIR defined with more precision what are zero-rated export
sales
(1) The sale and actual shipment of goods from the Philippines to a foreign
country, irrespective of any shipping arrangement that may be agreed upon

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which may influence or determine the transfer of ownership of the goods so

exported paid for in acceptable foreign currency or its equivalent in goods or
services, and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP);
(2) The sale of raw materials or packaging materials to a non-resident buyer
for delivery to a resident local export-oriented enterprise to be used in
manufacturing, processing, packing or repacking in the Philippines of the said
buyer's goods and paid for in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP);
(3) The sale of raw materials or packaging materials to an export-oriented
enterprise whose export sales exceed seventy percent (70%) of total annual
production;
Any enterprise whose export sales exceed 70% of the total annual production
of the preceding taxable year shall be considered an export-oriented enterprise
upon accreditation as such under the provisions of the Export Development
Act (R.A. 7844) and its implementing rules and regulations;
(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and
(5) Those considered export sales under Articles 23 and 77 of Executive Order
No. 226, otherwise known as the Omnibus Investments Code of 1987, and
other special laws, e.g. Republic Act No. 7227, otherwise known as the Bases
Conversion and Development Act of 1992.
The Tax Code of 1997, as amended,27 later adopted the foregoing definition
of export sales, which are subject to 0% VAT.
This Court then reiterates its conclusion that Section 2 of Revenue Regulations
No. 2-88, which applied to zero-rated export sales to export-oriented BOIregistered enterprises, should not be applied to the applications for
refund/credit of input VAT filed by petitioner corporation since it based its
applications on the zero-rating of export sales to enterprises registered with
the EPZA and located within export processing zones.
Sufficiency of evidence
There can be no dispute that the taxpayer-claimant has the burden of proving
the legal and factual bases of its claim for tax credit or refund, but once it has

submitted all the required documents, it is the function of the BIR to assess
these documents with purposeful dispatch.28 It therefore falls upon herein
petitioner corporation to first establish that its sales qualify for VAT zero-rating
under the existing laws (legal basis), and then to present sufficient evidence
that said sales were actually made and resulted in refundable or creditable
input VAT in the amount being claimed (factual basis).
It would initially appear that the applications for refund/credit filed by
petitioner corporation cover only input VAT on its purportedly zero-rated sales
to PASAR and PHILPHOS; however, a more thorough perusal of its
applications, VAT returns, pleadings, and other records of these cases would
reveal that it is also claiming refund/credit of its input VAT on purchases of
capital goods and sales of gold to the Central Bank of the Philippines (CBP).
This Court finds that the claims for refund/credit of input VAT of petitioner
corporation have sufficient legal bases.
As has been extensively discussed herein, Section 106(b)(2), in relation to
Section 100(a)(2) of the Tax Code of 1977, as amended, allowed the
refund/credit of input VAT on export sales to enterprises operating within
export processing zones and registered with the EPZA, since such export sales
were deemed to be effectively zero-rated sales.29 The fact that PASAR and
PHILPHOS, to whom petitioner corporation sold its products, were operating
inside an export processing zone and duly registered with EPZA, was never
raised as an issue herein. Moreover, the same fact was already judicially
recognized in the case Atlas Consolidated Mining & Development Corporation
v. Commissioner of Internal Revenue.30 Section 106(c) of the same Code
likewise permitted a VAT-registered taxpayer to apply for refund/credit of the
input VAT paid on capital goods imported or locally purchased to the extent
that such input VAT has not been applied against its output VAT. Meanwhile,
the effective zero-rating of sales of gold to the CBP from 1989 to 199131 was
already affirmed by this Court in Commissioner of Internal Revenue v. Benguet
Corporation,32 wherein it ruled that
At the time when the subject transactions were consummated, the prevailing
BIR regulations relied upon by respondent ordained that gold sales to the
Central Bank were zero-rated. The BIR interpreted Sec. 100 of the NIRC in
relation to Sec. 2 of E.O. No. 581 s. 1980 which prescribed that gold sold to
the Central Bank shall be considered export and therefore shall be subject to
the export and premium duties. In coming out with this interpretation, the BIR
also considered Sec. 169 of Central Bank Circular No. 960 which states that all
sales of gold to the Central Bank are considered constructive exports. x x x.

Page 66 of 98

This Court now comes to the question of whether petitioner corporation has
sufficiently established the factual bases for its applications for refund/credit
of input VAT. It is in this regard that petitioner corporation has failed, both in
the administrative and judicial level.
Applications for refund/credit of input VAT with the BIR must comply with the
appropriate revenue regulations. As this Court has already ruled, Revenue
Regulations No. 2-88 is not relevant to the applications for refund/credit of
input VAT filed by petitioner corporation; nonetheless, the said applications
must have been in accordance with Revenue Regulations No. 3-88, amending
Section 16 of Revenue Regulations No. 5-87, which provided as follows
SECTION 16. Refunds or tax credits of input tax.
xxxx
(c) Claims for tax credits/refunds. Application for Tax Credit/Refund of ValueAdded 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. In addition, the following
documents shall be attached whenever applicable:
xxxx
"3. Effectively zero-rated sale of goods and services.
"i) photo copy of approved application for zero-rate if filing for the first time.
"ii) sales invoice or receipt showing name of the person or entity to whom the
sale of goods or services were delivered, date of delivery, amount of
consideration, and description of goods or services delivered.
"iii) evidence of actual receipt of goods or services.
"4. Purchase of capital goods.

"i) original copy of invoice or receipt showing the date of purchase, purchase
price, amount of value-added tax paid and description of the capital equipment
locally purchased.
"ii) with respect to capital equipment imported, the photo copy of import entry
document for internal revenue tax purposes and the confirmation receipt
issued by the Bureau of Customs for the payment of the value-added tax.
"5. In applicable cases,
where the applicant's zero-rated transactions are regulated by certain
government agencies, a statement therefrom showing the amount and
description of sale of goods and services, name of persons or entities (except
in case of exports) to whom the goods or services were sold, and date of
transaction shall also be submitted.
In all cases, the amount of refund or tax credit that may be granted shall be
limited to the amount of the value-added tax (VAT) paid directly and entirely
attributable to the zero-rated transaction during the period covered by the
application for credit or refund.
Where the applicant is engaged in zero-rated and other taxable and exempt
sales of goods and services, and the VAT paid (inputs) on purchases of goods
and services cannot be directly attributed to any of the aforementioned
transactions, the following formula shall be used to determine the creditable
or refundable input tax for zero-rated sale:
Amount of Zero-rated Sale
Total Sales
X
Total Amount of Input Taxes
=
Amount Creditable/Refundable
In case the application for refund/credit of input VAT was denied or remained
unacted upon by the BIR, and before the lapse of the two-year prescriptive
period, the taxpayer-applicant may already file a Petition for Review before
the CTA. If the taxpayer's claim is supported by voluminous documents, such
as receipts, invoices, vouchers or long accounts, their presentation before the
CTA shall be governed by CTA Circular No. 1-95, as amended, reproduced in
full below

Page 67 of 98

In the interest of speedy administration of justice, the Court hereby

promulgates the following rules governing the presentation of voluminous
documents and/or long accounts, such as receipts, invoices and vouchers, as
evidence to establish certain facts pursuant to Section 3(c), Rule 130 of the
Rules of Court and the doctrine enunciated in Compania Maritima vs. Allied
Free Workers Union (77 SCRA 24), as well as Section 8 of Republic Act No.
1125:

emphasized the importance of complying with the substantiation requirements

for claiming refund/credit of input VAT on zero-rated sales, to wit

1. The party who desires to introduce as evidence such voluminous documents

must, after motion and approval by the Court, present:

This respondent failed to do.

(a) a Summary containing, among others, a chronological listing of the

numbers, dates and amounts covered by the invoices or receipts and the
amount/s of tax paid; and (b) a Certification of an independent Certified Public
Accountant attesting to the correctness of the contents of the summary after
making an examination, evaluation and audit of the voluminous receipts and
invoices. The name of the accountant or partner of the firm in charge must be
stated in the motion so that he/she can be commissioned by the Court to
conduct the audit and, thereafter, testify in Court relative to such summary
and certification pursuant to Rule 32 of the Rules of Court.

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.

Revenue Regulations No. 3-88 amending Revenue Regulations No. 5-87

provides the requirements in claiming tax credits/refunds.
xxxx
Under Section 8 of RA1125, 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.

2. The method of individual presentation of each and every receipt, invoice or

account for marking, identification and comparison with the originals thereof
need not be done before the Court or Clerk of Court anymore after the
introduction of the summary and CPA certification. It is enough that the
receipts, invoices, vouchers or other documents covering the said accounts or
payments to be introduced in evidence must be pre-marked by the party
concerned and submitted to the Court in order to be made accessible to the
adverse party who desires to check and verify the correctness of the summary
and CPA certification. Likewise, the originals of the voluminous receipts,
invoices or accounts must be ready for verification and comparison in case
doubt on the authenticity thereof is raised during the hearing or resolution of
the formal offer of evidence.

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

Since CTA Cases No. 4831, 4859, 4944,33 and 5102,34 were still pending
before the CTA when the said Circular was issued, then petitioner corporation
must have complied therewith during the course of the trial of the said cases.

xxx

In Commissioner of Internal Revenue v. Manila Mining Corporation,35 this

Court denied the claim of therein respondent, Manila Mining Corporation, for
refund of the input VAT on its supposed zero-rated sales of gold to the CBP
because it was unable to substantiate its claim. In the same case, this Court

x x x [S]ale of gold to the Central Bank should not be subject to the 10% VAToutput tax but this does not ipso fact 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 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.

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. (Emphasis and italics supplied)

Page 68 of 98

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.
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.
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,
and taken collectively are the best means to prove the input VAT payments.36
Although the foregoing decision focused only on the proof required for the
applicant for refund/credit to establish the input VAT payments it had made
on its purchases from suppliers, Revenue Regulations No. 3-88 also required
it to present evidence proving actual zero-rated VAT sales to qualified buyers,
such as (1) photocopy of the approved application for zero-rate if filing for the
first time; (2) sales invoice or receipt showing the name of the person or entity
to whom the goods or services were delivered, date of delivery, amount of
consideration, and description of goods or services delivered; and (3) the
evidence of actual receipt of goods or services.
Also worth noting in the same decision is the weight given by this Court to the
certification by the independent certified public accountant (CPA), thus
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. 1097 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.
xxxx
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.
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, all purchases covered by invoices other
than a VAT invoice shall not be entitled to a refund of input VAT.
xxxx
While the CTA is not governed strictly by technical rules of evidence, 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 the respondent's claims.
The records further show that respondent miserably failed to substantiate its
claims 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. x x x
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

Page 69 of 98

to the Central Bank, this Court cannot rely thereon and regard it as sufficient
proof of the respondent's input VAT payments for the second semester.37
As for the Petition in G.R. No. 141104, involving the input VAT of petitioner
corporation on its zero-rated sales in the first quarter of 1992, this Court
already found that the petitioner corporation failed to comply with Section
106(b) of the Tax Code of 1977, as amended, imposing the two-year
prescriptive period for the filing of the application for refund/credit thereof.
This bars the grant of the application for refund/credit, whether
administratively or judicially, by express mandate of Section 106(e) of the
same Code.

"c) evidence of actual receipt of goods;

"d) BOI statement showing the amount and description of sale of goods, etc.
"e) original or attested copies of invoice or receipt on capital equipment locally
purchased; and
"f) photocopy of import entry document and confirmation receipt on imported
capital equipment.

Granting arguendo that the application of petitioner corporation for the

refund/credit of the input VAT on its zero-rated sales in the first quarter of
1992 was actually and timely filed, petitioner corporation still failed to present
together with its application the required supporting documents, whether
before the BIR or the CTA. As the Court of Appeals ruled

"There is the need to examine the sales invoices or receipts in order to

ascertain the actual amount or quantity of goods sold and their selling price.
Without them, this Court cannot verify the correctness of petitioner's claim
inasmuch as the regulations require that the input taxes being sought for
refund should be limited to the portion that is directly and entirely attributable
to the particular zero-rated transaction. In this instance, the best evidence of
such transaction are the said sales invoices or receipts.

In actions involving claims for refund of taxes assessed and collected, the
burden of proof rests on the taxpayer. As clearly discussed in the CTA's
decision, petitioner failed to substantiate its claim for tax refunds. Thus:

"Also, even if sales invoices are produced, there is the further need to submit
evidence that such goods were actually received by the buyer, in this case, by
CBP, Philp[h]os and PASAR.

"We note, however, that in the cases at bar, petitioner has relied totally on
Revenue Regulations No. 2-88 in determining compliance with the
documentary requirements for a successful refund or issuance of tax credit.
Unmentioned is the applicable and specific amendment later introduced by
Revenue Regulations No. 3-88 dated April 7, 1988 (issued barely after two
months from the promulgation of Revenue Regulations No. 2-88 on February
15, 1988), which amended Section 16 of Revenue Regulations No. 5-87 on
refunds or tax credits of input tax. x x x.

xxxx

xxxx
"A thorough examination of the evidence submitted by the petitioner before
this court reveals outright the failure to satisfy documentary requirements laid
down under the above-cited regulations. Specifically, petitioner was not able
to present the following documents, to wit:
"a) sales invoices or receipts;
"b) purchase invoices or receipts;

"Lastly, this Court cannot determine whether there were actual local and
imported purchase of capital goods as well as domestic purchase of non-capital
goods without the required purchase invoice or receipt, as the case may be,
and confirmation receipts.
"There is, thus, the imperative need to submit before this Court the original or
attested photocopies of petitioner's invoices or receipts, confirmation receipts
and import entry documents in order that a full ascertainment of the claimed
amount may be achieved.
"Petitioner should have taken the foresight to introduce in evidence all of the
missing documents abovementioned. Cases filed before this Court are litigated
de novo. This means that party litigants should endeavor to prove at the first
instance every minute aspect of their cases strictly in accordance with the
Rules of Court, most especially on documentary evidence." (pp. 37-42, Rollo)
Tax refunds are in the nature of tax exemptions. It is regarded as in derogation
of the sovereign authority, and should be construed in strictissimi juris against

Page 70 of 98

the person or entity claiming the exemption. The taxpayer who claims for
exemption must justify his claim by the clearest grant of organic or statute law
and should not be permitted to stand on vague implications (Asiatic Petroleum
Co. v. Llanes, 49 Phil. 466; Northern Phil. Tobacco Corp. v. Mun. of Agoo, La
Union, 31 SCRA 304; Reagan v. Commissioner, 30 SCRA 968; Asturias Sugar
Central, Inc. v. Commissioner of Customs, 29 SCRA 617; Davao Light and
Power Co., Inc. v. Commissioner of Customs, 44 SCRA 122).
There is no cogent reason to fault the CTA's conclusion that the SGV's
certificate is "self-destructive", as it finds comfort in the very SGV's stand, as
follows:
"It is our understanding that the above procedure are sufficient for the purpose
of the Company. We make no presentation regarding the sufficiency of these
procedures for such purpose. We did not compare the total of the input tax
claimed each quarter against the pertinent VAT returns and books of accounts.
The above procedures do not constitute an audit made in accordance with
generally accepted auditing standards. Accordingly, we do not express an
opinion on the company's claim for input VAT refund or credit. Had we
performed additional procedures, or had we made an audit in accordance with
generally accepted auditing standards, other matters might have come to our
attention that we would have accordingly reported on."
The SGV's "disclaimer of opinion" carries much weight as it is petitioner's
independent auditor. Indeed, SGV expressed that it "did not compare the total
of the input tax claimed each quarter against the VAT returns and books of
accounts."38
Moving on to the Petition in G.R. No. 148763, concerning the input VAT of
petitioner corporation on its zero-rated sales in the second, third, and fourth
quarters of 1990, the appellate court likewise found that petitioner corporation
failed to sufficiently establish its claims. Already disregarding the declarations
made by the Court of Appeals on its erroneous application of Revenue
Regulations No. 2-88, quoted hereunder is the rest of the findings of the
appellate court after evaluating the evidence submitted in accordance with the
requirements under Revenue Regulations No. 3-88
The Secretary of Finance validly adopted Revenue Regulations [No.] x x x 398 pursuant to Sec. 245 of the National Internal Revenue Code, which
recognized his power to "promulgate all needful rules and regulations for the
effective enforcement of the provisions of this Code." Thus, it is incumbent
upon a taxpayer intending to file a claim for refund of input VATs or the

issuance of a tax credit certificate with the BIR x x x to prove sales to such
buyers as required by Revenue Regulations No. 3-98. Logically, the same
evidence should be presented in support of an action to recover taxes which
have been paid.
x x x Neither has [herein petitioner corporation] presented sales invoices or
receipts showing sales of gold, copper concentrates, and pyrite to the CBP,
[PASAR], and [PHILPHOS], respectively, and the dates and amounts of the
same, nor any evidence of actual receipt by the said buyers of the mineral
products. It merely presented receipts of purchases from suppliers on which
input VATs were allegedly paid. Thus, the Court of Tax Appeals correctly
denied the claims for refund of input VATs or the issuance of tax credit
certificates of petitioner [corporation]. Significantly, in the resolution, dated 7
June 2000, this Court directed the parties to file memoranda discussing,
among others, the submission of proof for "its [petitioner's] sales of gold,
copper concentrates, and pyrite to buyers." Nevertheless, the parties,
including the petitioner, failed to address this issue, thereby necessitating the
affirmance of the ruling of the Court of Tax Appeals on this point.39
This Court is, therefore, bound by the foregoing facts, as found by the
appellate court, for well-settled is the general rule that the jurisdiction of this
Court in cases brought before it from the Court of Appeals, by way of a Petition
for Review on Certiorari under Rule 45 of the Revised Rules of Court, is limited
to reviewing or revising errors of law; findings of fact of the latter are
conclusive.40 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.41
The distinction between a question of law and a question of fact is clear-cut.
It has been held that "[t]here is a question of law in a given case when the
doubt or difference arises as to what the law is on a certain state of facts;
there is a question of fact when the doubt or difference arises as to the truth
or falsehood of alleged facts."42
Whether petitioner corporation actually made zero-rated sales; whether it paid
input VAT on these sales in the amount it had declared in its returns; whether
all the input VAT subject of its applications for refund/credit can be attributed
to its zero-rated sales; and whether it had not previously applied the input VAT
against its output VAT liabilities, are all questions of fact which could only be
answered after reviewing, examining, evaluating, or weighing the probative
value of the evidence it presented, and which this Court does not have the

Page 71 of 98

jurisdiction to do in the present Petitions for Review on Certiorari under Rule

45 of the revised Rules of Court.
Granting that there are exceptions to the general rule, when this Court looked
into questions of fact under particular circumstances,43 none of these exist in
the instant cases. The Court of Appeals, in both cases, found a dearth of
evidence to support the claims for refund/credit of the input VAT of petitioner
corporation, and the records bear out this finding. Petitioner corporation itself
cannot dispute its non-compliance with the requirements set forth in Revenue
Regulations No. 3-88 and CTA Circular No. 1-95, as amended. It concentrated
its arguments on its assertion that the substantiation requirements under
Revenue Regulations No. 2-88 should not have applied to it, while being
conspicuously silent on the evidentiary requirements mandated by other
relevant regulations.
Re-opening of cases/holding of new trial before the CTA
This Court now faces the final issue of whether the prayer of petitioner
corporation for the re-opening of its cases or holding of new trial before the
CTA for the reception of additional evidence, may be granted. Petitioner
corporation prays that the Court exercise its discretion on the matter in its
favor, consistent with the policy that rules of procedure be liberally construed
in pursuance of substantive justice.
This Court, however, cannot grant the prayer of petitioner corporation.
An aggrieved party may file a motion for new trial or reconsideration of a
judgment already rendered in accordance with Section 1, Rule 37 of the
revised Rules of Court, which provides
SECTION 1. Grounds of and period for filing motion for new trial or
reconsideration. Within the period for taking an appeal, the aggrieved party
may move the trial court to set aside the judgment or final order and grant a
new trial for one or more of the following causes materially affecting the
substantial rights of said party:
(a) Fraud, accident, mistake or excusable negligence which ordinary prudence
could not have guarded against and by reason of which such aggrieved party
has probably been impaired in his rights; or

(b) Newly discovered evidence, which he could not, with reasonable diligence,
have discovered and produced at the trial, and which if presented would
probably alter the result.
Within the same period, the aggrieved party may also move fore
reconsideration upon the grounds that the damages awarded are excessive,
that the evidence is insufficient to justify the decision or final order, or that
the decision or final order is contrary to law.
In G.R. No. 148763, petitioner corporation attempts to justify its motion for
the re-opening of its cases and/or holding of new trial before the CTA by
contending that the "[f]ailure of its counsel to adduce the necessary evidence
should be construed as excusable negligence or mistake which should
constitute basis for such re-opening of trial as for a new trial, as counsel was
of the belief that such evidence was rendered unnecessary by the presentation
of unrebutted evidence indicating that respondent [Commissioner] has
acknowledged the sale of [sic] PASAR and [PHILPHOS] to be zero-rated." 44
The CTA denied such motion on the ground that it was not accompanied by
an affidavit of merit as required by Section 2, Rule 37 of the revised Rules of
Court. The Court of Appeals affirmed the denial of the motion, but apart from
this technical defect, it also found that there was no justification to grant the
same.
On the matter of the denial of the motion of the petitioner corporation for the
re-opening of its cases and/or holding of new trial based on the technicality
that said motion was unaccompanied by an affidavit of merit, this Court rules
in favor of the petitioner corporation. The facts which should otherwise be set
forth in a separate affidavit of merit may, with equal effect, be alleged and
incorporated in the motion itself; and this will be deemed a substantial
compliance with the formal requirements of the law, provided, of course, that
the movant, or other individual with personal knowledge of the facts, take oath
as to the truth thereof, in effect converting the entire motion for new trial into
an affidavit.45 The motion of petitioner corporation was prepared and verified
by its counsel, and since the ground for the motion was premised on said
counsel's excusable negligence or mistake, then the obvious conclusion is that
he had personal knowledge of the facts relating to such negligence or mistake.
Hence, it can be said that the motion of petitioner corporation for the reopening of its cases and/or holding of new trial was in substantial compliance
with the formal requirements of the revised Rules of Court.

Page 72 of 98

Even so, this Court finds no sufficient ground for granting the motion of
petitioner corporation for the re-opening of its cases and/or holding of new
trial.
In G.R. No. 141104, petitioner corporation invokes the Resolution,46 dated 20
July 1998, by the CTA in another case, CTA Case No. 5296, involving the claim
of petitioner corporation for refund/credit of input VAT for the third quarter of
1993. The said Resolution allowed the re-opening of CTA Case No. 5296,
earlier dismissed by the CTA, to give the petitioner corporation the opportunity
to present the missing export documents.
The rule that the grant or denial of motions for new trial rests on the discretion
of the trial court,47 may likewise be extended to the CTA. When the denial of
the motion rests upon the discretion of a lower court, this Court will not
interfere with its exercise, unless there is proof of grave abuse thereof.48
That the CTA granted the motion for re-opening of one case for the
presentation of additional evidence and, yet, deny a similar motion in another
case filed by the same party, does not necessarily demonstrate grave abuse
of discretion or arbitrariness on the part of the CTA. Although the cases involve
identical parties, the causes of action and the evidence to support the same
can very well be different. As can be gleaned from the Resolution, dated 20
July 1998, in CTA Case No. 5296, petitioner corporation was claiming
refund/credit of the input VAT on its zero-rated sales, consisting of actual
export sales, to Mitsubishi Metal Corporation in Tokyo, Japan. The CTA took
into account the presentation by petitioner corporation of inward remittances
of its export sales for the quarter involved, its Supply Contract with Mitsubishi
Metal Corporation, its 1993 Annual Report showing its sales to the said foreign
corporation, and its application for refund. In contrast, the present Petitions
involve the claims of petitioner corporation for refund/credit of the input VAT
on its purchases of capital goods and on its effectively zero-rated sales to CBP
and EPZA-registered enterprises PASAR and PHILPHOS for the second, third,
and fourth quarters of 1990 and first quarter of 1992. There being a difference
as to the bases of the claims of petitioner corporation for refund/credit of input
VAT in CTA Case No. 5926 and in the Petitions at bar, then, there are resulting
variances as to the evidence required to support them.
Moreover, the very same Resolution, dated 20 July 1998, in CTA Case No.
5296, invoked by petitioner corporation, emphasizes that the decision of the
CTA to allow petitioner corporation to present evidence "is applicable pro hac
vice or in this occasion only as it is the finding of [the CTA] that petitioner
[corporation] has established a few of the aforementioned material points

regarding the possible existence of the export documents together with the
prior and succeeding returns for the quarters involved, x x x" [Emphasis
supplied.] Therefore, the CTA, in the present cases, cannot be bound by its
ruling in CTA Case No. 5296, when these cases do not involve the exact same
circumstances that compelled it to grant the motion of petitioner corporation
for re-opening of CTA Case No. 5296.
Finally, assuming for the sake of argument that the non-presentation of the
required documents was due to the fault of the counsel of petitioner
corporation, this Court finds that it does not constitute excusable negligence
or mistake which would warrant the re-opening of the cases and/or holding of
new trial.
Under Section 1, Rule 37 of the Revised Rules of Court, the "negligence" must
be excusable and generally imputable to the party because if it is imputable to
the counsel, it is binding on the client. To follow a contrary rule and allow a
party to disown his counsel's conduct would render proceedings indefinite,
tentative, and subject to re-opening by the mere subterfuge of replacing the
counsel. What the aggrieved litigant should do is seek administrative sanctions
against the erring counsel and not ask for the reversal of the court's ruling.49
As elucidated by this Court in another case,50 the general rule is that the client
is bound by the action of his counsel in the conduct of his case and he cannot
therefore complain that the result of the litigation might have been otherwise
had his counsel proceeded differently. It has been held time and again that
blunders and mistakes made in the conduct of the proceedings in the trial
court as a result of the ignorance, inexperience or incompetence of counsel do
not qualify as a ground for new trial. If such were to be admitted as valid
reasons for re-opening cases, there would never be an end to litigation so long
as a new counsel could be employed to allege and show that the prior counsel
had not been sufficiently diligent, experienced or learned.
Moreover, negligence, to be "excusable," must be one which ordinary diligence
and prudence could not have guarded against.51 Revenue Regulations No. 388, which was issued on 15 February 1988, had been in effect more than two
years prior to the filing by petitioner corporation of its earliest application for
refund/credit of input VAT involved herein on 21 August 1990. CTA Circular
No. 1-95 was issued only on 25 January 1995, after petitioner corporation had
filed its Petitions before the CTA, but still during the pendency of the cases of
petitioner corporation before the tax court. The counsel of petitioner
corporation does not allege ignorance of the foregoing administrative
regulation and tax court circular, only that he no longer deemed it necessary

Page 73 of 98

to present the documents required therein because of the presentation of

alleged unrebutted evidence of the zero-rated sales of petitioner corporation.
It was a judgment call made by the counsel as to which evidence to present
in support of his client's cause, later proved to be unwise, but not necessarily
negligent.
Neither is there any merit in the contention of petitioner corporation that the
non-presentation of the required documentary evidence was due to the
excusable mistake of its counsel, a ground under Section 1, Rule 37 of the
revised Rules of Court for the grant of a new trial. "Mistake," as it is referred
to in the said rule, must be a mistake of fact, not of law, which relates to the
case.52 In the present case, the supposed mistake made by the counsel of
petitioner corporation is one of law, for it was grounded on his interpretation
and evaluation that Revenue Regulations No. 3-88 and CTA Circular No. 1-95,
as amended, did not apply to his client's cases and that there was no need to
comply with the documentary requirements set forth therein. And although
the counsel of petitioner corporation advocated an erroneous legal position,
the effects thereof, which did not amount to a deprivation of his client's right
to be heard, must bind petitioner corporation. The question is not whether
petitioner corporation succeeded in establishing its interests, but whether it
had the opportunity to present its side.53
Besides, litigation is a not a "trial and error" proceeding. A party who moves
for a new trial on the ground of mistake must show that ordinary prudence
could not have guarded against it. A new trial is not a refuge for the
obstinate.54 Ordinary prudence in these cases would have dictated the
presentation of all available evidence that would have supported the claims
for refund/credit of input VAT of petitioner corporation. Without sound legal
basis, counsel for petitioner corporation concluded that Revenue Regulations
No. 3-88, and later on, CTA Circular No. 1-95, as amended, did not apply to
its client's claims. The obstinacy of petitioner corporation and its counsel is
demonstrated in their failure, nay, refusal, to comply with the appropriate
administrative regulations and tax court circular in pursuing the claims for
refund/credit, now subject of G.R. Nos. 141104 and 148763, even though
these were separately instituted in a span of more than two years. It is also
evident in the failure of petitioner corporation to address the issue and to
present additional evidence despite being given the opportunity to do so by
the Court of Appeals. As pointed out by the appellate court, in its Decision,
dated 15 September 2000, in CA-G.R. SP No. 46718

for "its [petitioner's] sales of gold, copper concentrates, and pyrite to buyers."
Nevertheless, the parties, including the petitioner, failed to address this issue,
thereby necessitating the affirmance of the ruling of the Court of Tax Appeals
on this point.
Summary
Hence, although this Court agreed with the petitioner corporation that the twoyear prescriptive period for the filing of claims for refund/credit of input VAT
must be counted from the date of filing of the quarterly VAT return, and that
sales to EPZA-registered enterprises operating within economic processing
zones were effectively zero-rated and were not covered by Revenue
Regulations No. 2-88, it still denies the claims of petitioner corporation for
refund of its input VAT on its purchases of capital goods and effectively zerorated sales during the second, third, and fourth quarters of 1990 and the first
quarter of 1992, for not being established and substantiated by appropriate
and sufficient evidence. Petitioner corporation is also not entitled to the reopening of its cases and/or holding of new trial since the non-presentation of
the required documentary evidence before the BIR and the CTA by its counsel
does not constitute excusable negligence or mistake as contemplated in
Section 1, Rule 37 of the revised Rules of Court.
WHEREFORE, premises considered, the instant Petitions for Review are hereby
DENIED, and the Decisions, dated 6 July 1999 and 15 September 2000, of the
Court of Appeals in CA-G.R. SP Nos. 47607 and 46718, respectively, are hereby
AFFIRMED. Costs against petitioner.

x x x Significantly, in the resolution, dated 7 June 2000, this Court directed the
parties to file memoranda discussing, among others, the submission of proof
Page 74 of 98

d. Zero-rated sales of Goods

i. Export Sales
3. Sale of raw and packaging materials whose export sales
exceed 70% of the annual production
Republic of the Philippines
SUPREME COURT
Manila

On 11 September 1998, the CTA rendered a decision, the dispositive portion

of which reads:
IN THE LIGHT OF ALL THE FOREGOING, petitioners claim for refund or
issuance of a tax credit certificate is hereby GRANTED, but only up to the
amount of P13,451,536.15, because this was clearly admitted by the
respondent in her Answer in CTA Case No. 4416 and therefore need not be
proven. However, the rest of the claims of petitioner as adverted to is DENIED
due to insufficiency of evidence.

SECOND DIVISION
G.R. No. 146221

quarter of 1988; (2) P54,633,476.07 for the second quarter of 1988; (3)
P30,190,111.06 for the third quarter of 1988; and (4) P49,048,911.76 for the
fourth quarter of 1988. The four cases were later consolidated.

September 25, 2007

ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION,

Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.

SO ORDERED.

The Case

Petitioner and the Commissioner of Internal Revenue (respondent) separately

filed their motions for reconsideration. In a Resolution dated 3 December
1998, the CTA modified its Decision, thus:

This is a petition for review1 of the Decision2 dated 19 June 2000 and the
Resolution dated 24 November 2000 of the Court of Appeals in CA-G.R. SP No.
50068.

WHEREFORE, in view of the foregoing, Respondents motion to modify a

portion of Our Decision, dated September 11, 1998, is GRANTED. Accordingly,
the decretal portion of said Decision is modified as follows:

The Facts

"IN THE LIGHT OF ALL THE FOREGOING, petitioners claim for refund or
issuance of a tax credit certificate is hereby DENIED, considering that the tax
credit previously granted by this Court in the amount of P13,451,536.15 has
already been given by respondent and the rest of the claim was denied due to
insufficiency of evidence. No pronouncement as to costs.

CARPIO, J.:

Petitioner Atlas Consolidated Mining and Development Corporation (petitioner)

is a domestic corporation engaged in the business of mining, production, and
sale of various mineral products consisting principally of copper concentrates
and gold. Petitioner is registered with the Bureau of Internal Revenue (BIR)
as a Value Added Tax (VAT) entity with Registration No. 32-A-6-002224.
In 1988, petitioner filed VAT returns for the four quarters of 1988. Petitioner
submitted corresponding applications for excess input VAT refunds resulting
from the claimed zero-VAT nature of its sales of gold to the Bangko Sentral ng
Pilipinas (BSP), copper concentrates to the Philippine Smelting and Refining
Corporation (PASAR), and pyrite to the Philippine Phosphate, Inc. (Philphos).
When BIR failed to act on its request, petitioner filed with the Court of Tax
Appeals (CTA) four separate petitions corresponding to the four quarters in
1988, reiterating its claims for refund. Petitioner claimed the following
amounts representing its excess input VAT: (1) P33,489,768 for the first

SO ORDERED."
With respect to Petitioners Motion for Reconsideration/New Trial, We hereby
DENY the same for lack of merit.
SO ORDERED.
Petitioner appealed to the Court of Appeals. On 19 June 2000, the Court of
Appeals dismissed the petition and affirmed the CTA Resolution dated 3
December 1998. Petitioner filed a motion for reconsideration, which the Court
of Appeals denied in its Resolution dated 24 November 2000.

Page 75 of 98

Hence, this petition for review.

The Issues

The Ruling of the Court of Tax Appeals

Petitioner raises the following issues:

The CTA held that the sale of gold, copper concentrates, and pyrite to BSP,
PASAR, and Philphos, respectively, is exempt from the 10% VAT output tax.
However, the exemption does not automatically entitle petitioner to the
amount of refund sought because petitioner is required by law to present
evidence showing payment of the input taxes during the period for which
petitioner is claiming refund. The CTA found that petitioner failed to show
proof that it had paid input taxes in 1988. Section 2(c)(1) of Revenue
Regulations No. 3-88 requires that a photocopy of the purchase invoice or
receipt evidencing the VAT paid should be submitted with the application for
tax credit or refund. Petitioner failed to submit such evidence which prevented
the CTA from confirming the veracity of the amount claimed by petitioner as
excess input VAT payments.

1. WHETHER THE COURT A QUO ERRED IN RULING THAT CTA CIRCULAR 195 REQUIRES THE SUBMISSION OF PHOTOCOPIES OF INVOICES AND
RECEIPTS IN SUPPORT OF A JUDICIAL CLAIM FOR EXCESS INPUT VAT
REFUND.

However, since respondent already admitted in his Answer that petitioner is

entitled to VAT credit for the first quarter of 1988 in the amount of
P13,451,536.15, the CTA granted petitioners claim for refund for this amount.
Upon motion for reconsideration, the CTA modified its decision to reflect
respondents payment to petitioner on 28 March 1990 of the amount of
P13,451,536.15 through Tax Credit Certificate No. SN-000026.
The Ruling of the Court of Appeals

2. WHETHER ZERO-RATED SALES OF GOODS TO BOI- AND EPZAREGISTERED ENTERPRISES ARE LIMITED TO THE PROPORTION WHICH
SUCH ZERO-RATED SALES HAVE TO THE ACTUAL EXPORTATION OF BOIAND EPZA-REGISTERED ENTERPRISES.
3. WHETHER THE REQUIREMENT OF REVENUE REGULATION NO. 2-88 THAT
BOI- AND EPZA-REGISTERED ENTERPRISES MUST HAVE AT LEAST 70%
EXPORT SALES IN ORDER FOR THE SALES TO SAID ENTERPRISES BE
CONSIDERED ZERO-RATED IS VALID.
4. WHETHER THE COURT A QUO ERRED IN NOT REMANDING THE CASE TO
THE COURT OF TAX APPEALS FOR PETITIONER TO PRESENT ADDITIONAL
EVIDENCE.5
The Ruling of the Court
The petition is without merit.

The Court of Appeals agreed with the CTA that petitioner failed to substantiate
its claim of overpayment to the BIR of input VAT for zero-rated transactions.
The Court of Appeals found that the lists of alleged VAT documents and the
report of petitioners independent auditor were made without the examination
of the actual invoices and receipts which would support petitioners claims.
The Court of Appeals quoted the letter of the accounting firm which petitioner
hired for independent audit in which it admitted that it did not compare the
total of the input tax claimed for the quarter against the pertinent VAT returns
and books of accounts. The Court of Appeals concluded that the listing and
the report made by petitioners independent auditor are unreliable proofs of
petitioners claims. Likewise, the Summary Amount of VAT Listings submitted
by petitioner cannot be relied upon in the absence of the actual receipts and
invoices which petitioner never offered as evidence.

Submission of Purchase Invoices or Receipts

Petitioner asserts that it has adduced sufficient evidence to support its claim
for input VAT refund. Petitioner claims that CTA Circular No. 1-95 requires only
the submission of a summary listing of the invoices and receipts and a
certification of an independent certified public accountant (CPA) attesting to
the correctness of the summary listing in lieu of the presentation of voluminous
documentary evidence.
We disagree with petitioners contention. CTA Circular No. 1-95 clearly requires
that photocopies of the receipts or invoices must be pre-marked and submitted
to the CTA to verify the correctness of the summary listing and the CPA
certification. CTA Circular No. 1-95, issued on 25 January 1995, reads:

Page 76 of 98

CIRCULAR NO. 1-95

SUBJECT: CTA Rules governing the presentation of voluminous documents as
evidence such as receipts, invoices and vouchers
In accordance with the announced policy of the court and in the interest of
speedy administration of justice, the Court hereby promulgates the following
rules governing the presentation of voluminous documents and/or long
accounts, such as receipts, invoices and vouchers, as evidence to establish
certain facts, pursuant to Section 3(c), Rule 130 of the Rules of Court and the
doctrine enunciated in Compania Maritima vs. Allied Free Workers Union (77
SCRA 24), as well as Section 8 of Republic Act No. 1125.
1. The party who desires to introduce as evidence such voluminous documents
must present: (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 doubt on
the authenticity of the particular documents presented is raised during the
hearing of the case. (Emphasis supplied)
Thus, in Commissioner of Internal Revenue v. Manila Mining Corporation,6 the
Court held:
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.
xxxx
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 auditors conclusions.
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, all purchases covered by invoices other
than a VAT invoice shall not be entitled to a refund of input VAT.7
The submission of photocopies of purchase invoices and receipts is
indispensable when applying for tax credit or refund. In fact, the original copy
of the invoices or receipts must be presented for cancellation prior to the
issuance of a tax credit certificate or refund. The requisites for claiming refunds
or tax credits for input tax are set forth in Section 2 of Revenue Regulations
No. 3-88:8
SECTION 2. Section 16 of Revenue Regulations 5-87 is hereby amended to
read as follows:
Section 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 zero-rated sales of goods or 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 within two years after the close
of the quarter when the transaction took place.
xxxx

Page 77 of 98

(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 said
invoice-receipt, however, shall be presented for cancellation prior to the
issuance of the Tax Credit certificate or refund. x x x (Emphasis supplied)

Under Section 2 of Revenue Regulations No. 2-88,10 zero-rated sales also

apply to sales of raw materials to BOI-registered exporters, whose export sales
exceed 70% of its total annual production. Revenue Regulations No. 7-95,11
promulgated to implement the VAT provisions of the National Internal Revenue
Code, amended previous revenue regulations by providing that the sale of raw
materials or packaging materials by VAT-registered persons to an exportoriented enterprise whose export sales exceed seventy percent (70%) of total
annual production shall be subject to zero percent (0%) rate. This provision is
now incorporated in Section 106(A)(2)(a)(3) of the National Internal Revenue
Code of 1997.12

Petitioners failure to adduce evidence to support its claims for refund cannot
be countenanced. We find no plausible reason to remand the case to the CTA
for presentation of additional evidence. The invoices and receipts do not
constitute newly discovered evidence which would warrant a new trial.

Petitioner submits that the zero-rating of sales to export-oriented entities

applies in its entirety and should not be limited merely to the proportion of the
sales to the actual exports of the export-oriented entities. Petitioner alleges
that the Court of Appeals failed to rule on this issue.

Sales to Export-Oriented Enterprises

The Court of Appeals may have deemed this issue superfluous considering
petitioners failure to offer as evidence the purchase invoices or receipts to
substantiate its claim for refund.

Section 100(a) of the National Internal Revenue Code of 1986, as amended

by Executive Order No. 273,9 provides:
SEC. 100. Value-added tax on sale of goods. (a) Rate and base of tax.
There shall be levied, assessed and collected on every sale, barter or exchange
of goods, a value-added tax equivalent to 10% of the gross selling price or
gross value in money of the goods sold, bartered or exchanged, such tax to
be paid by the seller or transferor: Provided, That the following sales by VATregistered persons shall be subject to 0%:
(1) export sales; and
(2) sales to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively
subjects such sales to zero rate.
"Export sales" means the sale and shipment or exportation of goods from the
Philippines to a foreign country, irrespective of any shipping arrangement that
may be agreed upon which may influence or determine the transfer of
ownership of the goods so exported, or foreign currency denominated sales.
"Foreign currency denominated sales" means sales to non-residents of goods
assembled or manufactured in the Philippines, for delivery to residents in the
Philippines and paid for in convertible foreign currency remitted through the
banking system in the Philippines.

Nevertheless, the Court has already resolved this issue in Atlas Consolidated
Mining & Devt Corp. v. CIR,13 which incidentally involves the same parties as
in this case.1wphi1 The Court held:
[A]n examination of Section 4.100.2 of Revenue Regulation 7-95 in relation to
Section 102(b) of the Tax Code shows that sales to an export-oriented
enterprise whose export sales exceed 70 percent of its annual production are
to be zero-rated, provided the seller complies with other requirements, like
registration with the BOI and the EPZA. The said regulation does not even
hint, much less expressly mention, that only a percentage of the sales would
be zero-rated. The Internal Revenue Commissioner cannot, by administrative
fiat, amend the law by making compliance therewith more burdensome.14
Thus, the 0% rate applies to the total sale of raw materials or packaging
materials to an export-oriented enterprise and not just the percentage of the
sale in proportion to the actual exports of the enterprise.
Petitioner further questions the validity of the requirement under Revenue
Regulations No. 2-88 that BOI- and EPZA-registered enterprises must have at
least 70% export sales for the sales to be qualified for zero-rating. Petitioner
asserts that such requirement constitutes an amendment to the Omnibus
Investment Code and the NIRC of 1986, as amended. This argument is

Page 78 of 98

rendered moot by the enactment of Republic Act No. 8424 or the NIRC of 1997
which incorporated the provision that the sale of raw materials or packaging
materials by VAT-registered persons to an export-oriented enterprise whose
export sales exceed 70% of total annual production shall be subject to 0%
rate.

f. Sale of Services and Use or Lease of Property

ii. Meaning of Sale or exchange of Services
Republic of the Philippines
SUPREME COURT
Manila

WHEREFORE, we DENY the petition. We AFFIRM the Decision dated 19 June

2000 and the Resolution dated 24 November 2000 of the Court of Appeals in
CA-G.R. SP No. 50068.

SECOND DIVISION
G.R. No. 183505

February 26, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. SM PRIME

HOLDINGS, INC. and FIRST ASIA REALTY DEVELOPMENT CORPORATION,
Respondents.
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 P119,276,047.40 for taxable year
2000.8 In response, SM Prime filed a letter-protest dated December 15, 2003.9
Page 79 of 98

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.
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
P124,035,874.12.
On October 15, 2004, SM Prime filed a Petition for Review before the CTA
docketed as CTA Case No. 7079.
CTA Case No. 7085

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.
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 P32,802,912.21 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.
Re: Assessment Notice No. 003-03

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
P35,823,680.93.13 First Asia protested the PAN in a letter dated July 9, 2002.
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.
On September 6, 2004, the BIR rendered a Decision denying the protest and
ordering First Asia to pay the amount of P35,823,680.93 for VAT deficiency for
taxable year 1999.
Accordingly, on October 20, 2004, First Asia filed a Petition for Review before
the CTA, docketed as CTA Case No. 7085.
CTA Case No. 7111

A PAN for VAT deficiency on cinema ticket sales in the total amount of
P28,196,376.46 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.
On May 11, 2005, the BIR rendered a Decision denying the protests. It ordered
First Asia to pay the amounts of P33,610,202.91 and P28,590,826.50 for VAT
deficiency for taxable years 2002 and 2003, respectively.
Thus, on June 22, 2005, First Asia filed a Petition for Review before the CTA,
docketed as CTA Case No. 7272.
Consolidated Petitions
The Commissioner of Internal Revenue (CIR) filed his Answers to the Petitions
filed by SM Prime and First Asia.

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 P35,840,895.78.
First Asia protested the PAN through a letter dated April 22, 2004.
Thereafter, the BIR issued a Formal Letter of Demand for alleged VAT
deficiency. First Asia protested the same in a letter dated July 9, 2004.
On October 5, 2004, the BIR denied the protest and ordered First Asia to pay
the VAT deficiency in the amount of P35,840,895.78 for taxable year 2000.

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.
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.

Page 80 of 98

Ruling of the CTA En Banc

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 States Policy to Have a Viable, Sustainable and Competitive Theater and
Film Industry as One of its Partners in National Development," 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 States 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. Thus, it
disposed of the case as follows:

Thus, the CIR appealed to the CTA En Banc. The case was docketed as CTA
EB No. 244. The CTA En Banc however denied the Petition for Review and
dismissed as well petitioners 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:

IN VIEW OF ALL THE FOREGOING, this Court hereby GRANTS the Petitions for
Review. Respondents 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 00802 are ORDERED cancelled and set aside.

(a) THE EXHIBITION OF MOVIES BY CINEMA OPERATORS/PROPRIETORS TO

THE PAYING PUBLIC IS A SALE OF SERVICE;

SO ORDERED.

(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;

Aggrieved, the CIR moved for reconsideration which was denied by the First
Division in its Resolution dated December 14, 2006.

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

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

(d) GRANTING WITHOUT CONCEDING THAT RULES OF CONSTRUCTION ARE

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

Page 81 of 98

(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.
Petitioners 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:

Page 82 of 98

(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 Blacks 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 (Blacks 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.

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 VATregistered persons shall be subject to 0%:

The legislature never intended operators

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

business outside the Philippines which goods are subsequently exported, x x
x

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

xxxx

Under the NIRC of 1939,41 the national government imposed amusement tax
on proprietors, lessees, or operators of theaters, cinematographs, concert

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

representing the contract price, compensation or service fee, including the

Page 83 of 98

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:

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)

xxxx

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.

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

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
amendments 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 tax under the NIRC of 1997 are exempt from the coverage of
VAT.

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.

Page 84 of 98

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

Page 85 of 98

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.(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. As it is, the power to impose
amusement tax on cinema/theater operators or proprietors remains with the
local government.

without first determining who are covered by the provision. 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.
In fact, in case of doubt, tax laws must be construed strictly against the
government and in favor of the taxpayer.
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.

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. 282001 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. The reason
is obvious: it is both illogical and impractical to determine who are exempted
Page 86 of 98

G.R. No. 193007

Republic of the Philippines

SUPREME COURT
Manila

impose VAT on toll fees would amount to a tax on public service; and that,
since VAT was never factored into the formula for computing toll fees, its
imposition would violate the non-impairment clause of the constitution.

EN BANC

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

July 19, 2011

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

SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE,
Respondents.
ABAD, J.:
May toll fees collected by tollway operators be subjected to value- added tax?
The Facts and the Case
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this
petition for declaratory relief1 assailing the validity of the impending imposition
of value-added tax (VAT) by the Bureau of Internal Revenue (BIR) on the
collections of tollway operators.
Petitioners claim that, since the VAT would result in increased toll fees, they
have an interest as regular users of tollways in stopping the BIR action.
Additionally, Diaz claims that he sponsored the approval of Republic Act 7716
(the 1994 Expanded VAT Law or EVAT Law) and Republic Act 8424 (the 1997
National Internal Revenue Code or the NIRC) at the House of Representatives.
Timbol, on the other hand, claims that she served as Assistant Secretary of
the Department of Trade and Industry and consultant of the Toll Regulatory
Board (TRB) in the past administration.
Petitioners allege that the BIR attempted during the administration of
President Gloria Macapagal-Arroyo to impose VAT on toll fees. The imposition
was deferred, however, in view of the consistent opposition of Diaz and other
sectors to such move. But, upon President Benigno C. Aquino IIIs assumption
of office in 2010, the BIR revived the idea and would impose the challenged
tax on toll fees beginning August 16, 2010 unless judicially enjoined.
Petitioners hold the view that Congress did not, when it enacted the NIRC,
intend to include toll fees within the meaning of "sale of services" that are
subject to VAT; that a toll fee is a "users tax," not a sale of services; that to

On August 23, 2010 the Office of the Solicitor General filed the governments
comment.4 The government avers that the NIRC imposes VAT on all kinds of
services of franchise grantees, including tollway operations, except where the
law provides otherwise; that the Court should seek the meaning and intent of
the law from the words used in the statute; and that the imposition of VAT on
tollway operations has been the subject as early as 2003 of several BIR rulings
and circulars.5
The government also argues that petitioners have no right to invoke the nonimpairment of contracts clause since they clearly have no personal interest in
existing toll operating agreements (TOAs) between the government and
tollway operators. At any rate, the non-impairment clause cannot limit the
States sovereign taxing power which is generally read into contracts.
Finally, the government contends that the non-inclusion of VAT in the
parametric formula for computing toll rates cannot exempt tollway operators
from VAT. In any event, it cannot be claimed that the rights of tollway
operators to a reasonable rate of return will be impaired by the VAT since this
is imposed on top of the toll rate. Further, the imposition of VAT on toll fees
would have very minimal effect on motorists using the tollways.
In their reply6 to the governments comment, petitioners point out that tollway
operators cannot be regarded as franchise grantees under the NIRC since they
do not hold legislative franchises. Further, the BIR intends to collect the VAT
by rounding off the toll rate and putting any excess collection in an escrow
account. But this would be illegal since only the Congress can modify VAT rates
and authorize its disbursement. Finally, BIR Revenue Memorandum Circular
63-2010 (BIR RMC 63-2010), which directs toll companies to record an
accumulated input VAT of zero balance in their books as of August 16, 2010,
contravenes Section 111 of the NIRC which grants entities that first become

Page 87 of 98

liable to VAT a transitional input tax credit of 2% on beginning inventory. For

this reason, the VAT on toll fees cannot be implemented.
The Issues Presented
The case presents two procedural issues:
1. Whether or not the Court may treat the petition for declaratory relief as one
for prohibition; and
2. Whether or not petitioners Diaz and Timbol have legal standing to file the
action.
The case also presents two substantive issues:
1. Whether or not the government is unlawfully expanding VAT coverage by
including tollway operators and tollway operations in the terms "franchise
grantees" and "sale of services" under Section 108 of the Code; and
2. Whether or not the imposition of VAT on tollway operators a) amounts to a
tax on tax and not a tax on services; b) will impair the tollway operators right
to a reasonable return of investment under their TOAs; and c) is not
administratively feasible and cannot be implemented.
The Courts Rulings

But there are precedents for treating a petition for declaratory relief as one for
prohibition if the case has far-reaching implications and raises questions that
need to be resolved for the public good.8 The Court has also held that a
petition for prohibition is a proper remedy to prohibit or nullify acts of executive
officials that amount to usurpation of legislative authority.9
Here, the imposition of VAT on toll fees has far-reaching implications. Its
imposition would impact, not only on the more than half a million motorists
who use the tollways everyday, but more so on the governments effort to
raise revenue for funding various projects and for reducing budgetary deficits.
To dismiss the petition and resolve the issues later, after the challenged VAT
has been imposed, could cause more mischief both to the tax-paying public
and the government. A belated declaration of nullity of the BIR action would
make any attempt to refund to the motorists what they paid an administrative
nightmare with no solution. Consequently, it is not only the right, but the duty
of the Court to take cognizance of and resolve the issues that the petition
raises.
Although the petition does not strictly comply with the requirements of Rule
65, the Court has ample power to waive such technical requirements when the
legal questions to be resolved are of great importance to the public. The same
may be said of the requirement of locus standi which is a mere procedural
requisite.10
B. On the Substantive Issues:

A. On the Procedural Issues:

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

One. The relevant law in this case is Section 108 of the NIRC, as amended.
VAT is levied, assessed, and collected, according to Section 108, on the gross
receipts derived from the sale or exchange of services as well as from the use
or lease of properties. The third paragraph of Section 108 defines "sale or
exchange of services" as follows:
The phrase sale or exchange of services means the performance of all kinds
of services in the Philippines for others for a fee, remuneration or
consideration, including those performed or rendered by construction and
service contractors; stock, real estate, commercial, customs and immigration
brokers; lessors of property, whether personal or real; warehousing services;
lessors or distributors of cinematographic films; persons engaged in milling,
processing, manufacturing or repacking goods for others; proprietors,
operators or keepers of hotels, motels, resthouses, pension houses, inns,
resorts; proprietors or operators of restaurants, refreshment parlors, cafes and

Page 88 of 98

other eating places, including clubs and caterers; dealers in securities; lending
investors; transportation contractors on their transport of goods or cargoes,
including persons who transport goods or cargoes for hire and other domestic
common carriers by land relative to their transport of goods or cargoes;
common carriers by air and sea relative to their transport of passengers, goods
or cargoes from one place in the Philippines to another place in the Philippines;
sales of electricity by generation companies, transmission, and distribution
companies; services of franchise grantees of electric utilities, telephone and
telegraph, radio and television broadcasting and all other franchise grantees
except those under Section 119 of this Code and non-life insurance companies
(except their crop insurances), including surety, fidelity, indemnity and
bonding companies; and similar services regardless of whether or not the
performance thereof calls for the exercise or use of the physical or mental
faculties. (Underscoring supplied)
It is plain from the above that the law imposes VAT on "all kinds of services"
rendered in the Philippines for a fee, including those specified in the list. The
enumeration of affected services is not exclusive.11 By qualifying "services"
with the words "all kinds," Congress has given the term "services" an allencompassing meaning. The listing of specific services are intended to
illustrate how pervasive and broad is the VATs reach rather than establish
concrete limits to its application. Thus, every activity that can be imagined as
a form of "service" rendered for a fee should be deemed included unless some
provision of law especially excludes it.
Now, do tollway operators render services for a fee? Presidential Decree (P.D.)
1112 or the Toll Operation Decree establishes the legal basis for the services
that tollway operators render. Essentially, tollway operators construct,
maintain, and operate expressways, also called tollways, at the operators
expense. Tollways serve as alternatives to regular public highways that
meander through populated areas and branch out to local roads. Traffic in the
regular public highways is for this reason slow-moving. In consideration for
constructing tollways at their expense, the operators are allowed to collect
government-approved fees from motorists using the tollways until such
operators could fully recover their expenses and earn reasonable returns from
their investments.
When a tollway operator takes a toll fee from a motorist, the fee is in effect
for the latters use of the tollway facilities over which the operator enjoys
private proprietary rights12 that its contract and the law recognize. In this
sense, the tollway operator is no different from the following service providers

under Section 108 who allow others to use their properties or facilities for a
fee:
1. Lessors of property, whether personal or real;
2. Warehousing service operators;
3. Lessors or distributors of cinematographic films;
4. Proprietors, operators or keepers of hotels, motels, resthouses, pension
houses, inns, resorts;
5. Lending investors (for use of money);
6. Transportation contractors on their transport of goods or cargoes, including
persons who transport goods or cargoes for hire and other domestic common
carriers by land relative to their transport of goods or cargoes; and
7. Common carriers by air and sea relative to their transport of passengers,
goods or cargoes from one place in the Philippines to another place in the
Philippines.
It does not help petitioners cause that Section 108 subjects to VAT "all kinds
of services" rendered for a fee "regardless of whether or not the performance
thereof calls for the exercise or use of the physical or mental faculties." This
means that "services" to be subject to VAT need not fall under the traditional
concept of services, the personal or professional kinds that require the use of
human knowledge and skills.
And not only do tollway operators come under the broad term "all kinds of
services," they also come under the specific class described in Section 108 as
"all other franchise grantees" who are subject to VAT, "except those under
Section 119 of this Code."
Tollway operators are franchise grantees and they do not belong to exceptions
(the low-income radio and/or television broadcasting companies with gross
annual incomes of less than P10 million and gas and water utilities) that
Section 11913 spares from the payment of VAT. The word "franchise" broadly
covers government grants of a special right to do an act or series of acts of
public concern.

Page 89 of 98

Petitioners of course contend that tollway operators cannot be considered

"franchise grantees" under Section 108 since they do not hold legislative
franchises. But nothing in Section 108 indicates that the "franchise grantees"
it speaks of are those who hold legislative franchises. Petitioners give no
reason, and the Court cannot surmise any, for making a distinction between
franchises granted by Congress and franchises granted by some other
government agency. The latter, properly constituted, may grant franchises.
Indeed, franchises conferred or granted by local authorities, as agents of the
state, constitute as much a legislative franchise as though the grant had been
made by Congress itself.15 The term "franchise" has been broadly construed
as referring, not only to authorizations that Congress directly issues in the form
of a special law, but also to those granted by administrative agencies to which
the power to grant franchises has been delegated by Congress.16
Tollway operators are, owing to the nature and object of their business,
"franchise grantees." The construction, operation, and maintenance of toll
facilities on public improvements are activities of public consequence that
necessarily require a special grant of authority from the state. Indeed,
Congress granted special franchise for the operation of tollways to the
Philippine National Construction Company, the former tollway concessionaire
for the North and South Luzon Expressways. Apart from Congress, tollway
franchises may also be granted by the TRB, pursuant to the exercise of its
delegated powers under P.D. 1112.17 The franchise in this case is evidenced
by a "Toll Operation Certificate."
Petitioners contend that the public nature of the services rendered by tollway
operators excludes such services from the term "sale of services" under
Section 108 of the Code. But, again, nothing in Section 108 supports this
contention. The reverse is true. In specifically including by way of example
electric utilities, telephone, telegraph, and broadcasting companies in its list
of VAT-covered businesses, Section 108 opens other companies rendering
public service for a fee to the imposition of VAT. Businesses of a public nature
such as public utilities and the collection of tolls or charges for its use or service
is a franchise.
Nor can petitioners cite as binding on the Court statements made by certain
lawmakers in the course of congressional deliberations of the would-be law.
As the Court said in South African Airways v. Commissioner of Internal
Revenue, "statements made by individual members of Congress in the
consideration of a bill do not necessarily reflect the sense of that body and
are, consequently, not controlling in the interpretation of law." The
congressional will is ultimately determined by the language of the law that the

lawmakers voted on. Consequently, the meaning and intention of the law must
first be sought "in the words of the statute itself, read and considered in their
natural, ordinary, commonly accepted and most obvious significations,
according to good and approved usage and without resorting to forced or
subtle construction."
Two. Petitioners argue that a toll fee is a "users tax" and to impose VAT on
toll fees is tantamount to taxing a tax.21 Actually, petitioners base this
argument on the following discussion in Manila International Airport Authority
(MIAA) v. Court of Appeals:
No one can dispute that properties of public dominion mentioned in Article 420
of the Civil Code, like "roads, canals, rivers, torrents, ports and bridges
constructed by the State," are owned by the State. The term "ports" includes
seaports and airports. The MIAA Airport Lands and Buildings constitute a "port"
constructed by the State. Under Article 420 of the Civil Code, the MIAA Airport
Lands and Buildings are properties of public dominion and thus owned by the
State or the Republic of the Philippines.
x x x The operation by the government of a tollway does not change the
character of the road as one for public use. Someone must pay for the
maintenance of the road, either the public indirectly through the taxes they
pay the government, or only those among the public who actually use the road
through the toll fees they pay upon using the road. The tollway system is even
a more efficient and equitable manner of taxing the public for the maintenance
of public roads.
The charging of fees to the public does not determine the character of the
property whether it is for public dominion or not. Article 420 of the Civil Code
defines property of public dominion as "one intended for public use." Even if
the government collects toll fees, the road is still "intended for public use" if
anyone can use the road under the same terms and conditions as the rest of
the public. The charging of fees, the limitation on the kind of vehicles that can
use the road, the speed restrictions and other conditions for the use of the
road do not affect the public character of the road.
The terminal fees MIAA charges to passengers, as well as the landing fees
MIAA charges to airlines, constitute the bulk of the income that maintains the
operations of MIAA. The collection of such fees does not change the character
of MIAA as an airport for public use. Such fees are often termed users tax.
This means taxing those among the public who actually use a public facility
instead of taxing all the public including those who never use the particular

Page 90 of 98

public facility. A users tax is more equitable a principle of taxation mandated

in the 1987 Constitution." (Underscoring supplied)

under its sovereign authority, toll fees may be demanded by either the
government or private individuals or entities, as an attribute of ownership.28

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

Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due

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

As can be seen, the discussion in the MIAA case on toll roads and toll fees was
made, not to establish a rule that tollway fees are users tax, but to make the
point that airport lands and buildings are properties of public dominion and
that the collection of terminal fees for their use does not make them private
properties. Tollway fees are not taxes. Indeed, they are not assessed and
collected by the BIR and do not go to the general coffers of the government.
It would of course be another matter if Congress enacts a law imposing a
users tax, collectible from motorists, for the construction and maintenance of
certain roadways. The tax in such a case goes directly to the government for
the replenishment of resources it spends for the roadways. This is not the case
here. What the government seeks to tax here are fees collected from tollways
that are constructed, maintained, and operated by private tollway operators
at their own expense under the build, operate, and transfer scheme that the
government has adopted for expressways.26 Except for a fraction given to the
government, the toll fees essentially end up as earnings of the tollway
operators.
In sum, fees paid by the public to tollway operators for use of the tollways,
are not taxes in any sense. A tax is imposed under the taxing power of the
government principally for the purpose of raising revenues to fund public
expenditures.27 Toll fees, on the other hand, are collected by private tollway
operators as reimbursement for the costs and expenses incurred in the
construction, maintenance and operation of the tollways, as well as to assure
them a reasonable margin of income. Although toll fees are charged for the
use of public facilities, therefore, they are not government exactions that can
be properly treated as a tax. Taxes may be imposed only by the government

Thus, the seller remains directly and legally liable for payment of the VAT, but
the buyer bears its burden since the amount of VAT paid by the former is
added to the selling price. Once shifted, the VAT ceases to be a tax30 and
simply becomes part of the cost that the buyer must pay in order to purchase
the good, property or service.
Consequently, VAT on tollway operations is not really a tax on the tollway user,
but on the tollway operator. Under Section 105 of the Code, 31 VAT is imposed
on any person who, in the course of trade or business, sells or renders services
for a fee. In other words, the seller of services, who in this case is the tollway
operator, is the person liable for VAT. The latter merely shifts the burden of
VAT to the tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even if toll
fees were deemed as a "users tax." VAT is assessed against the tollway
operators gross receipts and not necessarily on the toll fees. Although the
tollway operator may shift the VAT burden to the tollway user, it will not make
the latter directly liable for the VAT. The shifted VAT burden simply becomes
part of the toll fees that one has to pay in order to use the tollways.32
Three. Petitioner Timbol has no personality to invoke the non-impairment of
contract clause on behalf of private investors in the tollway projects. She will
neither be prejudiced by nor be affected by the alleged diminution in return of
investments that may result from the VAT imposition. She has no interest at
all in the profits to be earned under the TOAs. The interest in and right to
recover investments solely belongs to the private tollway investors.
Besides, her allegation that the private investors rate of recovery will be
adversely affected by imposing VAT on tollway operations is purely
speculative. Equally presumptuous is her assertion that a stipulation in the
TOAs known as the Material Adverse Grantor Action will be activated if VAT is
thus imposed. The Court cannot rule on matters that are manifestly

Page 91 of 98

conjectural. Neither can it prohibit the State from exercising its sovereign
taxing power based on uncertain, prophetic grounds.
Four. Finally, petitioners assert that the substantiation requirements for
claiming input VAT make the VAT on tollway operations impractical and
incapable of implementation. They cite the fact that, in order to claim input
VAT, the name, address and tax identification number of the tollway user must
be indicated in the VAT receipt or invoice. The manner by which the BIR
intends to implement the VAT by rounding off the toll rate and putting any
excess collection in an escrow account is also illegal, while the alternative of
giving "change" to thousands of motorists in order to meet the exact toll rate
would be a logistical nightmare. Thus, according to them, the VAT on tollway
operations is not administratively feasible.
Administrative feasibility is one of the canons of a sound tax system. It simply
means that the tax system should be capable of being effectively administered
and enforced with the least inconvenience to the taxpayer. Non-observance of
the canon, however, will not render a tax imposition invalid "except to the
extent that specific constitutional or statutory limitations are impaired."34
Thus, even if the imposition of VAT on tollway operations may seem
burdensome to implement, it is not necessarily invalid unless some aspect of
it is shown to violate any law or the Constitution.
Here, it remains to be seen how the taxing authority will actually implement
the VAT on tollway operations. Any declaration by the Court that the manner
of its implementation is illegal or unconstitutional would be premature.
Although the transcript of the August 12, 2010 Senate hearing provides some
clue as to how the BIR intends to go about it,35 the facts pertaining to the
matter are not sufficiently established for the Court to pass judgment on.
Besides, any concern about how the VAT on tollway operations will be
enforced must first be addressed to the BIR on whom the task of implementing
tax laws primarily and exclusively rests. The Court cannot preempt the BIRs
discretion on the matter, absent any clear violation of law or the Constitution.
For the same reason, the Court cannot prematurely declare as illegal, BIR RMC
63-2010 which directs toll companies to record an accumulated input VAT of
zero balance in their books as of August 16, 2010, the date when the VAT
imposition was supposed to take effect. The issuance allegedly violates Section
111(A)36 of the Code which grants first time VAT payers a transitional input
VAT of 2% on beginning inventory.

In this connection, the BIR explained that BIR RMC 63-2010 is actually the
product of negotiations with tollway operators who have been assessed VAT
as early as 2005, but failed to charge VAT-inclusive toll fees which by now can
no longer be collected. The tollway operators agreed to waive the 2%
transitional input VAT, in exchange for cancellation of their past due VAT
liabilities. Notably, the right to claim the 2% transitional input VAT belongs to
the tollway operators who have not questioned the circulars validity. They are
thus the ones who have a right to challenge the circular in a direct and proper
action brought for the purpose.
Conclusion
In fine, the Commissioner of Internal Revenue did not usurp legislative
prerogative or expand the VAT laws coverage when she sought to impose VAT
on tollway operations. Section 108(A) of the Code clearly states that services
of all other franchise grantees are subject to VAT, except as may be provided
under Section 119 of the Code. Tollway operators are not among the franchise
grantees subject to franchise tax under the latter provision. Neither are their
services among the VAT-exempt transactions under Section 109 of the Code.
If the legislative intent was to exempt tollway operations from VAT, as
petitioners so strongly allege, then it would have been well for the law to
clearly say so. Tax exemptions must be justified by clear statutory grant and
based on language in the law too plain to be mistaken. But as the law is
written, no such exemption obtains for tollway operators. The Court is thus
duty-bound to simply apply the law as it is found.
Lastly, the grant of tax exemption is a matter of legislative policy that is within
the exclusive prerogative of Congress. The Courts role is to merely uphold this
legislative policy, as reflected first and foremost in the language of the tax
statute. Thus, any unwarranted burden that may be perceived to result from
enforcing such policy must be properly referred to Congress. The Court has
no discretion on the matter but simply applies the law.
The VAT on franchise grantees has been in the statute books since 1994 when
R.A. 7716 or the Expanded Value-Added Tax law was passed. It is only now,
however, that the executive has earnestly pursued the VAT imposition against
tollway operators. The executive exercises exclusive discretion in matters
pertaining to the implementation and execution of tax laws. Consequently, the
executive is more properly suited to deal with the immediate and practical
consequences of the VAT imposition.

Page 92 of 98

WHEREFORE, the Court DENIES respondents Secretary of Finance and

Commissioner of Internal Revenues motion for reconsideration of its August
24, 2010 resolution, DISMISSES the petitioners Renato V. Diaz and Aurora Ma.
F. Timbols petition for lack of merit, and SETS ASIDE the Courts temporary
restraining order dated August 13, 2010.

g. Zero-Rated Sale of Services

ii. Other Services for non-residents paid for in acceptable
foreign currency
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 153205

January 22, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. BURMEISTER AND

WAIN SCANDINAVIAN CONTRACTOR MINDANAO, INC., Respondent.
CARPIO, J.:
The Case
This petition for review1 seeks to set aside the 16 April 2002 Decision2 of the
Court of Appeals in CA-G.R. SP No. 66341 affirming the 8 August 2001
Decision3 of the Court of Tax Appeals (CTA). The CTA ordered the
Commissioner of Internal Revenue (petitioner) to issue a tax credit certificate
for P6,994,659.67 in favor of Burmeister and Wain Scandinavian Contractor
Mindanao, Inc. (respondent).
The Antecedents
The CTA summarized the facts, which the Court of Appeals adopted, as
follows:
[Respondent] is a domestic corporation duly organized and existing under and
by virtue of the laws of the Philippines with principal address located at
Daruma Building, Jose P. Laurel Avenue, Lanang, Davao City.
It is represented that a foreign consortium composed of Burmeister and Wain
Scandinavian Contractor A/S (BWSC-Denmark), Mitsui Engineering and
Shipbuilding, Ltd., and Mitsui and Co., Ltd. entered into a contract with the
National Power Corporation (NAPOCOR) for the operation and maintenance of
[NAPOCORs] two power barges. The Consortium appointed BWSC-Denmark
as its coordination manager.
Page 93 of 98

BWSC-Denmark established [respondent] which subcontracted the actual

operation and maintenance of NAPOCORs two power barges as well as the
performance of other duties and acts which necessarily have to be done in the
Philippines.

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:

NAPOCOR paid capacity and energy fees to the Consortium in a mixture of

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

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:

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

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 nonresident foreign client such as project studies, information services,
engineering and architectural designs and other similar services, the
consideration for which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP."
x x x x x x x x x x.
In [conformity] with the aforecited Revenue Regulations, [respondent]
subjected its sale of services to the Consortium to the 10% VAT in the total
amount of P103,558,338.11 representing April to December 1996 sales since
said Revenue Regulations No. 5-96 became effective only on April 1996. The
sum of P43,893,951.07, representing January to March 1996 sales was
subjected to zero rate. Consequently, [respondent] filed its 1996 amended
VAT return consolidating therein the VAT output and input taxes for the four
calendar quarters of 1996. It paid the amount of P6,994,659.67 through BIRs
collecting agent, PCIBank, as its output tax liability for the year 1996,
computed as follows:
Amount subject to 10% VAT P103,558,338.11
Multiply by 10%

1st

04-18-96

P 33,019,651.07

P608,953.48

2nd

07-16-96

37,108,863.33

756,802.66

3rd

10-14-96

34,196,372.35

930,279.14

4th

01-20-97

42,992,302.87

1,065,138.86

P147,317,189.62

P3,361,174.14

Totals

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
Page 94 of 98

"insofar as it held that the services being rendered by BWSCMI is subject to

VAT at zero percent (0%)."
On the strength of the aforementioned rulings, [respondent] on April 22,1999,
filed a claim for the issuance of a tax credit certificate with Revenue District
No. 113 of the BIR. [Respondent] believed that it erroneously paid the output
VAT for 1996 due to its availment of the Voluntary Assessment Program (VAP)
of the BIR.4
On 27 December 1999, respondent filed a petition for review with the CTA in
order to toll the running of the two-year prescriptive period under the Tax
Code.
The Ruling of the Court of Tax Appeals
In its 8 August 2001 Decision, the CTA ordered petitioner to issue a tax credit
certificate for P6,994,659.67 in favor of respondent. The CTAs ruling stated:
[Respondents] sale of services to the Consortium [was] paid for in acceptable
foreign currency inwardly remitted to the Philippines and accounted for in
accordance with the rules and regulations of Bangko Sentral ng Pilipinas.
These were established by various BPI Credit Memos showing remittances in
Danish Kroner (DKK) and US dollars (US$) as payments for the specific
invoices billed by [respondent] to the consortium. These remittances were
further certified by the Branch Manager x x x of BPI-Davao Lanang Branch to
represent payments for sub-contract fees that came from Den Danske
Aktieselskab Bank-Denmark for the account of [respondent]. Clearly,
[respondents] sale of services to the Consortium is subject to VAT at 0%
pursuant to Section 108(B)(2) of the Tax Code.
xxxx
The zero-rating of [respondents] sale of services to the Consortium was even
confirmed by the [petitioner] in BIR Ruling No. 023-95 dated February 15,
1995, and later by VAT Ruling No. 003-99 dated January 7,1999, x x x.
Since it is apparent that the payments for the services rendered by
[respondent] were indeed subject to VAT at zero percent, it follows that it
mistakenly availed of the Voluntary Assessment Program by paying output tax
for its sale of services. x x x

x x x Considering the principle of solutio indebiti which requires the return of

what has been delivered by mistake, the [petitioner] is obligated to issue the
tax credit certificate prayed for by [respondent]. x x x5
Petitioner filed a petition for review with the Court of Appeals, which dismissed
the petition for lack of merit and affirmed the CTA decision.6
Hence, this petition.
The Court of Appeals Ruling
In affirming the CTA, the Court of Appeals rejected petitioners view that since
respondents services are not destined for consumption abroad, they are not
of the same nature as project studies, information services, engineering and
architectural designs, and other similar services mentioned in Section 4.1022(b)(2) of Revenue Regulations No. 5-967 as subject to 0% VAT. Thus,
according to petitioner, respondents services cannot legally qualify for 0%
VAT but are subject to the regular 10% VAT.8
The Court of Appeals found untenable petitioners contention that under VAT
Ruling No. 040-98, respondents services should be destined for consumption
abroad to enjoy zero-rating. Contrary to petitioners interpretation, there are
two kinds of transactions or services subject to zero percent VAT under VAT
Ruling No. 040-98. These are (a) services other than repacking goods for other
persons doing business outside the Philippines which goods are subsequently
exported; and (b) services by a resident to a non-resident foreign client, such
as project studies, information services, engineering and architectural designs
and other similar services, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP).9
The Court of Appeals stated that "only the first classification is required by the
provision to be consumed abroad in order to be taxed at zero rate. In x x x
the absence of such express or implied stipulation in the statute, the second
classification need not be consumed abroad."10
The Court of Appeals further held that assuming petitioners interpretation of
Section 4.102-2(b)(2) of Revenue Regulations No. 5-96 is correct, such
administrative provision is void being an amendment to the Tax Code.
Petitioner went beyond merely providing the implementing details by adding
another requirement to zero-rating. "This is indicated by the additional phrase
as well as services by a resident to a non-resident foreign client, such as

Page 95 of 98

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 zerorating, these must comply only with two requisites, to wit: (1) payment in
acceptable foreign currency and (2) accounted for in accordance with the rules
of the BSP. Section 108(b)(2) of the Tax Code does not provide that services
must be "destined for consumption abroad" in order to be VAT zero-rated.13
The Court of Appeals disagreed with petitioners argument that our VAT law
generally follows the destination principle (i.e., exports exempt, imports
taxable).14 The Court of Appeals stated that "if indeed the destination
principle underlies and is the basis of the VAT laws, then petitioners proper
remedy would be to recommend an amendment of Section 108(b)(2) to
Congress. Without such amendment, however, petitioner should apply the
terms of the basic law. Petitioner could not resort to administrative legislation,
as what [he] had done in this case."15
The Issue
The lone issue for resolution is whether respondent is entitled to the refund of
P6,994,659.67 as erroneously paid output VAT for the year 1996.16
The Ruling of the Court
We deny the petition.
At the outset, the Court declares that the denial of the instant petition is not
on the ground that respondents services are subject to 0% VAT. Rather, it is
based on the non-retroactivity of the prejudicial revocation of BIR Ruling No.
023-9517 and VAT Ruling No. 003-99,18 which held that respondents services
are subject to 0% VAT and which respondent invoked in applying for refund
of the output VAT.
Section 102(b) of the Tax Code,19 the applicable provision in 1996 when
respondent rendered the services and paid the VAT in question, enumerates
which services are zero-rated, thus:

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

the Philippines by VAT-registered persons shall be subject to 0%:
(1) Processing, manufacturing or repacking goods for other persons doing
business outside the Philippines which goods are subsequently exported,
where the services are paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP);
(2) Services other than those mentioned in the preceding sub-paragraph, the
consideration for which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
(3) Services rendered to persons or entities whose exemption under special
laws or international agreements to which the Philippines is a signatory
effectively subjects the supply of such services to zero rate;
(4) Services rendered to vessels engaged exclusively in international shipping;
and
(5) Services performed by subcontractors and/or contractors in processing,
converting, or manufacturing goods for an enterprise whose export sales
exceed seventy percent (70%) of total annual production. (Emphasis supplied)
In insisting that its services should be zero-rated, respondent claims that it
complied with the requirements of the Tax Code for zero rating under the
second paragraph of Section 102(b). Respondent asserts that (1) the payment
of its service fees was in acceptable foreign currency, (2) there was inward
remittance of the foreign currency into the Philippines, and (3) accounting of
such remittance was in accordance with BSP rules. Moreover, respondent
contends that its services which "constitute the actual operation and
management of two (2) power barges in Mindanao" are not "even remotely
similar to project studies, information services and engineering and
architectural designs under Section 4.102-2(b)(2) of Revenue Regulations No.
5-96." As such, respondents services need not be "destined to be consumed
abroad in order to be VAT zero-rated."
Respondent is mistaken.
The Tax Code not only requires that the services be other than "processing,
manufacturing or repacking of goods" and that payment for such services be

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in acceptable foreign currency accounted for in accordance with BSP rules.

Another essential condition for qualification to zero-rating under Section
102(b)(2) is that the recipient of such services is doing business outside the
Philippines. While this requirement is not expressly stated in the second
paragraph of Section 102(b), this is clearly provided in the first paragraph of
Section 102(b) where the listed services must be "for other persons doing
business outside the Philippines." The phrase "for other persons doing
business outside the Philippines" not only refers to the services enumerated in
the first paragraph of Section 102(b), but also pertains to the general term
"services" appearing in the second paragraph of Section 102(b). In short,
services other than processing, manufacturing, or repacking of goods must
likewise be performed for persons doing business outside the Philippines.
This can only be the logical interpretation of Section 102(b)(2). If the provider
and recipient of the "other services" are both doing business in the Philippines,
the payment of foreign currency is irrelevant. Otherwise, those subject to the
regular VAT under Section 102(a) can avoid paying the VAT by simply
stipulating payment in foreign currency inwardly remitted by the recipient of
services. To interpret Section 102(b)(2) to apply to a payer-recipient of
services doing business in the Philippines is to make the payment of the regular
VAT under Section 102(a) dependent on the generosity of the taxpayer. The
provider of services can choose to pay the regular VAT or avoid it by stipulating
payment in foreign currency inwardly remitted by the payer-recipient. Such
interpretation removes Section 102(a) as a tax measure in the Tax Code, an
interpretation this Court cannot sanction. A tax is a mandatory exaction, not a
voluntary contribution.
When Section 102(b)(2) stipulates payment in "acceptable foreign currency"
under BSP rules, the law clearly envisions the payer-recipient of services to be
doing business outside the Philippines. Only those not doing business in the
Philippines can be required under BSP rules20 to pay in acceptable foreign
currency for their purchase of goods or services from the Philippines. In a
domestic transaction, where the provider and recipient of services are both
doing business in the Philippines, the BSP cannot require any party to make
payment in foreign currency.
Services covered by Section 102(b) (1) and (2) are in the nature of export
sales since the payer-recipient of services is doing business outside the
Philippines. Under BSP rules,21 the proceeds of export sales must be reported
to the Bangko Sentral ng Pilipinas. Thus, there is reason to require the provider
of services under Section 102(b) (1) and (2) to account for the foreign
currency proceeds to the BSP. The same rationale does not apply if the

provider and recipient of the services are both doing business in the Philippines
since their transaction is not in the nature of an export sale even if payment
is denominated in foreign currency.
Further, when the provider and recipient of services are both doing business
in the Philippines, their transaction falls squarely under Section 102(a)
governing domestic sale or exchange of services. Indeed, this is a purely local
sale or exchange of services subject to the regular VAT, unless of course the
transaction falls under the other provisions of Section 102(b).
Thus, when Section 102(b)(2) speaks of "[s]ervices other than those
mentioned in the preceding subparagraph," the legislative intent is that only
the services are different between subparagraphs 1 and 2. The requirements
for zero-rating, including the essential condition that the recipient of services
is doing business outside the Philippines, remain the same under both
subparagraphs.
Significantly, the amended Section 108(b)22 [previously Section 102(b)] of the
present Tax Code clarifies this legislative intent. Expressly included among the
transactions subject to 0% VAT are "[s]ervices other than those mentioned in
the [first] paragraph [of Section 108(b)] rendered to a person engaged in
business conducted outside the Philippines or to a nonresident person not
engaged in business who is outside the Philippines when the services are
performed, the consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of
the BSP."
In this case, the payer-recipient of respondents services is the Consortium
which is a joint-venture doing business in the Philippines. While the
Consortiums principal members are non-resident foreign corporations, the
Consortium itself is doing business in the Philippines. This is shown clearly in
BIR Ruling No. 023-95 which states that the contract between the Consortium
and NAPOCOR is for a 15-year term, thus:
This refers to your letter dated January 14, 1994 requesting for a clarification
of the tax implications of a contract between a consortium composed of
Burmeister & Wain Scandinavian Contractor A/S ("BWSC"), Mitsui Engineering
& Shipbuilding, Ltd. (MES), and Mitsui & Co., Ltd. ("MITSUI"), all referred to
hereinafter as the "Consortium", and the National Power Corporation
("NAPOCOR") for the operation and maintenance of two 100-Megawatt power
barges ("Power Barges") acquired by NAPOCOR for a 15-year term.

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Considering this length of time, the Consortiums operation and maintenance

of NAPOCORs power barges cannot be classified as a single or isolated
transaction. The Consortium does not fall under Section 102(b)(2) which
requires that the recipient of the services must be a person doing business
outside the Philippines. Therefore, respondents services to the Consortium,
not being supplied to a person doing business outside the Philippines, cannot
legally qualify for 0% VAT.
Respondent, as subcontractor of the Consortium, operates and maintains
NAPOCORs power barges in the Philippines. NAPOCOR pays the Consortium,
through its non-resident partners, partly in foreign currency outwardly
remitted. In turn, the Consortium pays respondent also in foreign currency
inwardly remitted and accounted for in accordance with BSP rules. This
payment scheme does not entitle respondent to 0% VAT. As the Court held in
Commissioner of Internal Revenue v. American Express International, Inc.
(Philippine Branch),24 the place of payment is immaterial, much less is the
place where the output of the service is ultimately used. An essential condition
for entitlement to 0% VAT under Section 102(b)(1) and (2) is that the recipient
of the services is a person doing business outside the Philippines. In this case,
the recipient of the services is the Consortium, which is doing business not
outside, but within the Philippines because it has a 15-year contract to operate
and maintain NAPOCORs two 100-megawatt power barges in Mindanao.
The Court recognizes the rule that the VAT system generally follows the
"destination principle" (exports are zero-rated whereas imports are taxed).
However, as the Court stated in American Express, there is an exception to
this rule.25 This exception refers to the 0% VAT on services enumerated in
Section 102 and performed in the Philippines. For services covered by Section
102(b)(1) and (2), the recipient of the services must be a person doing
business outside the Philippines. Thus, to be exempt from the destination
principle under Section 102(b)(1) and (2), the services must be (a) performed
in the Philippines; (b) for a person doing business outside the Philippines; and
(c) paid in acceptable foreign currency accounted for in accordance with BSP
rules.

receivables belonging to its non-resident foreign client [American Express

International, Inc. (Hongkong Branch)], for which it gets paid in acceptable
foreign currency inwardly remitted and accounted for in accordance with BSP
rules and regulations. x x x x27 (Emphasis supplied)
In contrast, this case involves a recipient of services the Consortium which
is doing business in the Philippines. Hence, American Express services were
subject to 0% VAT, while respondents services should be subject to 10% VAT.
Nevertheless, in seeking a refund of its excess output tax, respondent relied
on VAT Ruling No. 003-99,28 which reconfirmed BIR Ruling No. 023-9529
"insofar as it held that the services being rendered by BWSCMI is subject to
VAT at zero percent (0%)." Respondents reliance on these BIR rulings binds
petitioner.
Petitioners filing of his Answer before the CTA challenging respondents claim
for refund effectively serves as a revocation of VAT Ruling No. 003-99 and BIR
Ruling No. 023-95. However, such revocation cannot be given retroactive
effect since it will prejudice respondent. Changing respondents status will
deprive respondent of a refund of a substantial amount representing excess
output tax.30 Section 246 of the Tax Code provides that any revocation of a
ruling by the Commissioner of Internal Revenue shall not be given retroactive
application if the revocation will prejudice the taxpayer. Further, there is no
showing of the existence of any of the exceptions enumerated in Section 246
of the Tax Code for the retroactive application of such revocation.
However, upon the filing of petitioners Answer dated 2 March 2000 before the
CTA contesting respondents claim for refund, respondents services shall be
subject to the regular 10% VAT.31 Such filing is deemed a revocation of VAT
Ruling No. 003-99 and BIR Ruling No. 023-95.
WHEREFORE, the Court DENIES the petition.

Respondents reliance on the ruling in American Express26 is misplaced. That

case involved a recipient of services, specifically American Express
International, Inc. (Hongkong Branch), doing business outside the Philippines.
There, the Court stated:
Respondent [American Express International, Inc. (Philippine Branch)] is a
VAT-registered person that facilitates the collection and payment of
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