#1706ENBANC

FORTBONIFACIODEVELOPMENTG.R.Number158885

CORPORATION,

Petitioner,Present:

PUNO,C.J.,

QUISUMBING,

YNARESSANTIAGO,

CARPIO,

AUSTRIAMARTINEZ,

CORONA,

versusCARPIOMORALES,

TINGA,

CHICONAZARIO,

VELASCO,JR.,

NACHURA,

LEONARDODECASTRO,

BRION,and

COMMISSIONEROFINTERNALPERALTA,JJ.

REVENUE,REGIONALDIRECTOR,

REVENUEREGIONNO.8,and

CHIEF,ASSESSMENTDIVISION,Promulgated:

REVENUEREGIONNO.8,BIR,

Respondents.April2,2009

FORTBONIFACIODEVELOPMENTG.R.Number170680
CORPORATION,

Petitioner,

versus

COMMISSIONEROFINTERNALREVENUE

andREVENUEDISTRICTOFFICER,

REVENUEDISTRICTNO.44,TAGUIG

andPATEROS,BUREAUOFINTERNAL

REVENUE,

Respondents.

Decision

Tinga,J.:

ThevalueaddedtaxsystemwasfirstintroducedinthePhilippineson1January1988,withthetax
imposableonanypersonwho,inthecourseoftradeorbusiness,sells,bartersorexchangesgoods,
rendersservices,orengagesinsimilartransactionsandanypersonwhoimportsgoods.Thefirst
VATlawisfoundinExecutiveOrderNumber273,whichamendedseveralprovisionsofthethen
NationalInternalRevenueCodeof1986.E.O.Number273likewiseaccommodatedthepotential
burdensoftheshifttotheVATsystembyallowingnewlyliableVATregisteredpersonstoavailof
atransitionalinputtaxcredit,asprovidedforinSection105oftheoldNIRC,asamendedbyE.O.
Number273.SaidSection105isquoted,thus:

SEC.105.Transitionalinputtaxcredits.Apersonwhobecomesliabletovalueaddedtaxorany
personwhoelectstobeaVATregisteredpersonshall,subjecttothefilingofaninventoryas
prescribedbyregulations,beallowedinputtaxonhisbeginninginventoryofgoods,materialsand
suppliesequivalentto8%ofthevalueofsuchinventoryortheactualvalueaddedtaxpaidonsuch
goods,materialsandsupplies,whicheverishigher,whichshallbecreditableagainsttheoutputtax.

ThereareothermeasurescontainedinE.O.Number273whichweresimilarlyintendedtoeasethe
shifttotheVATsystem.Thesemeasuresalsotooktheformoftransitionalinputtaxeswhichcanbe
creditedagainstoutputtax,andarefoundinSection25ofE.O.Number273,thesectionentitled
TransitoryProvisions.Saidtransitoryprovisions,whichwereneverincorporatedintheOldNIRC,
read:

Secretary25.Transitoryprovisions.AllVATregisteredpersonsshallbeallowedtransitionalinput
taxeswhichcanbecreditedagainstoutputtaxinthesamemannerasprovidedinSections104of
theNationalInternalRevenueCodeasfollows:
1)ThebalanceofthedeferredsalestaxcreditaccountasofDecember31,1987whichareaccounted
forinaccordancewithregulationsprescribedtherefor

2)Apresumptiveinputtaxequivalentto8%ofthevalueoftheinventoryasofDecember31,1987
ofmaterialsandsupplieswhicharenotforsale,thetaxonwhichwasnottakenuporclaimedas
deferredsalestaxcreditand

3)Apresumptiveinputtaxequivalentto8%ofthevalueoftheinventoryasofDecember31,1987
asgoodsforsale,thetaxonwhichwasnottakenuporclaimedasdeferredsalestaxcredit.

TaxcreditprescribedinparagraphsandaboveshallbeallowedonlytoaVATregisteredpersonwho
filesaninventoryofthegoodsreferredtoinsaidparagraphsasprovidedinregulations.

AnyunusedtaxcreditcertificateissuedpriortoJanuary1,1988forexcesstaxcreditswhichare
applicableagainstadvancesalestaxshallbesurrenderedto,andreplacedbytheCommissioner
withnewtaxcreditcertificateswhichcanbeusedinpaymentforvalueaddedtaxliabilities.

Anypersonalreadyengagedinbusinesswhosegrosssalesorreceiptsfora12monthperiodfrom
September1,1986toAugust1,1987,exceedtheamountof200,000,Pesosoranypersonwhohas
beeninbusinessforlessthan12monthsasofAugust1,1987butexpectshisgrosssalesorreceipts
toexceed200,000PesosonorbeforeDecember31,1987,shallapplyforregistrationonorbefore
October29,1987.

On1January1996,RepublicActNumber7716tookeffect.ItamendedprovisionsoftheOldNIRC
principallybyrestructuringtheVATsystem.ItwasunderRep.ActNumber7716thatVATwas
imposedforthefirsttimeonthesaleofrealproperties.Thiswasaccomplishedbyamending
Section100oftheNIRCtoincluderealpropertiesamongthegoodsorproperties,thesale,barteror
exchangeofwhichismadesubjecttoVAT.TherelevantportionsofSection100,asamendedby
Rep.ActNumber7716,thusread:

Secretary100.Valueaddedtaxonsaleofgoodsorproperties.

Rateandbaseoftax.Thereshallbelevied,assessedandcollectedoneverysale,barterorexchange
ofgoodsorproperties,avalueaddedtaxequivalentto10%ofthegrosssellingpriceorgrossvalue
inmoneyofthegoods,orpropertiessold,barteredorexchanged,suchtaxtobepaidbytheselleror
transferor.

Theterm'goodsorproperties'shallmeanalltangibleandintangibleobjectswhicharecapableof
pecuniaryestimationandshallinclude:

Realpropertiesheldprimarilyforsaletocustomersorheldforleaseintheordinarycourseoftrade
orbusiness

TheprovisionsofSection105oftheNIRC,onthetransitionalinputtaxcredit,hadremainedintact
despitetheenactmentofRep.ActNumber7716.Saidprovisionswouldhoweverbeamended
followingthepassageofthenewNationalInternalRevenueCodeof1997,alsoofficiallyknownas
RepActNumber8424.Thesectiononthetransitionalinputtaxcreditwasrenumberedfrom
Section105oftheOldNIRCtoSection111oftheNewNIRC.Thenewamendmentsonthe
transitionalinputtaxcreditarerelativelyminor,hardlymaterialtothecaseatbar.Theyare
highlightedbelowforeasyreference:

Section111.Transitional/PresumptiveInputTaxCredits.

TransitionalInputTaxCredits.Apersonwhobecomesliabletovalueaddedtaxoranypersonwho
electstobeaVATregisteredpersonshall,subjecttothefilingofaninventoryaccordingtorules
andregulationsprescribedbytheSecretaryoffinance,uponrecommendationoftheCommissioner,
beallowedinputtaxonhisbeginninginventoryofgoods,materialsandsuppliesequivalentfor
eightpercentofthevalueofsuchinventoryortheactualvalueaddedtaxpaidonsuchgoods,
materialsandsupplies,whicheverishigher,whichshallbecreditableagainsttheoutputtax..

Rep.ActNumber8424alsomadepartoftheNIRC,forthefirsttime,theconceptofpresumptive
inputtaxcredits,withSection111oftheNewNIRCprovidingasfollows:

PresumptiveInputTaxCredits.

Personsorfirmsengagedintheprocessingofsardines,mackerelandmilk,andinmanufacturing
refinedsugarandcookingoil,shallbeallowedapresumptiveinputtax,creditableagainstthe
outputtax,equivalenttooneandonehalfpercentofthegrossvalueinmoneyoftheirpurchasesof
primaryagriculturalproductswhichareusedasinputstotheirproduction.

AsusedinthisSubsection,theterm'processing'shallmeanpasteurization,canningandactivities
whichthroughphysicalorchemicalprocessaltertheexteriortextureorformorinnersubstanceofa
productinsuchmannerastoprepareitforspecialusetowhichitcouldnothavebeenputinits
originalformorcondition.

Publicworkscontractorsshallbeallowedapresumptiveinputtaxequivalenttooneandonehalf
percentofthecontractpricewithrespecttogovernmentcontractsonlyinlieuofactualinputtaxes
therefrom.

Whatwehaveexplainedabovearethestatutoryantecedentsthatunderliethepresentpetitionsfor
review.Wenowturntothefactualantecedents.

I.

PetitionerFortBonifacioDevelopmentCorporationisengagedinthedevelopmentandsaleofreal
property.On8February1995,FBDCacquiredbywayofsalefromthenationalgovernment,avast
tractoflandthatformerlyformedpartoftheFortBonifaciomilitaryreservation,locatedinwhatis
nowtheFortBonifacioGlobalCityinTaguigCity.Sincethesalewasconsummatedpriortothe
enactmentofRep.ActNumber7716,noVATwaspaidthereon.FBDCthenproceededtodevelop
thetractofland,andfromOctober,1966onwardsithasbeensellinglotslocatedintheGlobalCity
tointerestedbuyers.
FollowingtheeffectivityofRep.ActNumber7716,realestatetransactionssuchasthoseregularly
engagedinbyFBDChavesincebeenmadesubjecttoVAT.Asthevendor,FBDCfromthereonhas
becomeobligedtoremittotheBureauofInternalRevenueoutputVATpaymentsitreceivedfrom
thesaleofitspropertiestotheBureauofInternalRevenue.FBDClikewiseinvokeditsrightto
availofthetransitionalinputtaxcreditandaccordinglysubmittedaninventorylistofreal
propertiesitowned,withatotalbookvalueof71,227,503,200.Pesos

On14October1996,FBDCexecutedinfavorofMetroPacificCorporationtwocontractstosell,
separatelyconveyingtwoparcelsoflandwithintheGlobalCityinconsiderationofthepurchase
pricesat1,526,298,949Pesosand785,009,018,Pesosbothpayableininstallments.Forthefourth
quarterof1996,FBDCearnedatotalof3,498,888,713.60Pesosfromthesaleofitslots,onwhich
theoutputVATpayabletotheBIRwas318,080,792.14.PesosInthecontextofremittingitsoutput
VATpaymentstotheBIR,FBDCpaidatotalof269,340,469.45Pesosandutilized28,413,783
Pesosrepresentingaportionofitsthentotaltransitional/presumptiveinputtaxcreditof
5,698,200,256,PesoswhichpetitionerallocatedforthetwolotssoldtoMetroPacificandits
regularinputtaxcreditof20,326,539.69Pesosonthepurchaseofgoodsandservices.

BetweenJulyandOctober1997,FBDCsenttwoletterstotheBIRrequestingappropriateactionon
whetheritsuseofitspresumptiveinputVATonitslandinventory,totheextentof28,413,783
PesosinpartialpaymentofitsoutputVATforthefourthquarterof1996,wasinorder.After
investigatingthematter,theBIRrecommendedthattheclaimedpresumptiveinputtaxcreditbe
disallowed.Consequently,theBIRissuedtoFBDCaPreAssessmentNoticedated23December
1997fordeficiencyVATforthe4thquarterof1996.Thiswasfollowedbyaletterofrespondent
CommissionerofInternalRevenue,addressedtoandreceivedbyFBDCon5March1998,
disallowingthepresumptiveinputtaxcreditarisingfromthelandinventoryonthebasisof
RevenueRegulation795andRevenueMemorandumCircular396.Section4.1051ofRR795
providedthebasisinmainfortheCIRsopinion,thesectionreading,thus:

Secretary4.1051.Transitionalinputtaxonbeginninginventories.TaxpayerswhobecameVAT
registeredpersonsuponeffectivityofRANumber7716whohaveexceededtheminimumturnover
of500,000Pesosorwhovoluntarilyregistereveniftheirturnoverdoesnotexceed500,000Pesos
shallbeentitledtoapresumptiveinputtaxontheinventoryonhandasofDecember31,1995on
thefollowing:goodspurchasedforresaleintheirpresentconditionmaterialspurchasedforfurther
processing,butwhichhavenotyetundergoneprocessinggoodswhichhavebeenmanufacturedby
thetaxpayergoodsinprocessandsupplies,allofwhichareforsaleorforuseinthecourseofthe
taxpayerstradeorbusinessasaVATregisteredperson.

However,inthecaseofrealestatedealers,thebasisofthepresumptiveinputtaxshallbethe
improvements,suchasbuildings,roads,drainagesystems,andothersimilarstructures,constructed
onoraftertheeffectivityofEO273.

Thetransitionalinputtaxshallbe8%ofthevalueoftheinventoryoractualVATpaid,whicheveris
higher,whichamountmaybeallowedastaxcreditagainsttheoutputtaxoftheVATregistered
person.

TheCIRlikewisecitedfromtheTransitoryProvisionsofRR795,particularlythefollowing:
PresumptiveInputTaxCredits

Forrealestatedealers,thepresumptiveinputtaxof8%ofthebookvalueofimprovementsonor
afterJanuary1,1988shallbeallowed.

Forpurposesofsubparagraphs,andabove,aninventoryasofDecember31,1995ofsuchgoodsor
propertiesandimprovementsshowingthequantity,descriptionandamountfiledwiththeRDOnot
laterthanJanaury31,1996.

Consequently,FBDCreceivedanAssessmentNoticeintheamountof45,188,708.08,Pesos
representingdeficiencyVATforthe4thquarterof1996,includingsurcharge,interestandpenalty.
AfterrespondentRegionalDirectordeniedFBDCsmotionforreconsideration/protest,FBDCfileda
petitionforreviewwiththeCourtofTaxAppeals,docketedasC.T.A.CaseNumber5665.On11
August2000,theCTArenderedadecisionaffirmingtheassessmentmadebytherespondents.
FBDCassailedtheCTAdecisionthroughapetitionforreviewfiledwiththeCourtofAppeals,
docketedasCAG.R.SPNumber60477.On15November2002,theCOURTOFAPPEALS
renderedadecisionaffirmingtheCTAdecision,butremovingthesurcharge,interestsand
penalties,thusreducingtheamountdueto28,413,783.PesosFromsaiddecision,FBDCfileda
petitionforreviewwiththisCourt,thefirstofthetwopetitionsnowbeforeus,seekingthereversal
oftheCTAdecisiondated11August2000andapronouncementthatFBDCisentitledtothe
transitional/presumptiveinputtaxcreditof28,413,783.PesosThispetitionhasbeendocketedas
G.R.Number158885.

Thesecondpetition,whichisdocketedasG.R.Number170680,involvesthesamepartiesand
legalissues,butconcernstheclaimofFBDCthatitisentitledtoclaimasimilar
transitional/presumptiveinputtaxcredit,thistimeforthethirdquarterof1997.Abriefrecitalof
theantecedingfactsunderlyingthissecondclaimisinorder.

Forthethirdquarterof1997,FBDCderivedthetotalamountof3,591,726,328.11Pesosfromits
salesandleaseoflots,onwhichtheoutputVATpayabletotheBIRwas359,172,632.81.Pesos
Accordingly,FBDCmadecashpaymentstotaling347,741,695.74Pesosandutilizeditsregular
inputtaxcreditof19,743,565.73Pesosonpurchasesofgoodsandservices.On11May1999,
FBDCfiledwiththeBIRaclaimforrefundoftheamountof347,741,695.74Pesoswhichithad
paidasVATforthethirdquarterof1997.Noactionwastakenontherefundclaim,leadingFBDC
tofileapetitionforreviewwiththeCTA,docketedasCTACaseNumber5926.Utilizingthesame
valuationof8%ofthetotalbookvalueofitsbeginninginventoryofrealpropertiesFBDCargued
thatitsinputtaxcreditwasmorethanenoughtooffsettheVATpaidbyitforthethirdquarterof
1997.

On17October2000,theCTApromulgateditsdecisioninCTACaseNumber5926,denyingthe
claimforrefund.FBDCthenfiledapetitionforreviewwiththeCourtofAppeals,docketedasCA
G.R.SPNumber61517.On3October2003,theCOURTOFAPPEALSrenderedadecision
affirmingthejudgmentoftheCTA.Asaresult,FBDCfileditssecondpetition,docketedasG.R.
Number170680.
II.

Thetwopetitionsweredulyconsolidatedandcalledfororalargumenton18April2006.Duringthe
oralarguments,thepartiesweredirectedtodiscussthefollowingissues:

1.Indeterminingthe10%valueaddedtaxinSection100oftheonthesaleofrealpropertiesby
realestatedealers,isthe8%transitionalinputtaxcreditinSection105appliedonlytothe
improvementsontherealpropertyorisitappliedonthevalueoftheentirerealproperty?

2.AreSection4.105.1andparagraphoftheTransitoryProvisionsofRevenueRegulations
Number795validinlimitingthe8%transitionalinputtaxtotheimprovementsonthereal
property?

Whilethetwoissuesarelinked,themainissueisevidentlywhetherSection105oftheOldNIRC
maybeinterpretedinsuchawayastorestrictitsapplicationinthecaseofrealestatedealersonly
totheimprovementsontherealpropertybelongingtotheirbeginninginventory,andnottheentire
realpropertyitself.TherewouldbenocontroversybeforeusiftheOldNIRChaditselfsupplied
thatlimitation,yetthelawistellinglysilentinthatregard.RR795,whichimposessuch
restrictionsonrealestatedealers,isdiscordantwiththeOldNIRC,soitisalleged.

III.

Onitsface,thereisnothinginSection105oftheOldNIRCthatprohibitstheinclusionofreal
properties,togetherwiththeimprovementsthereon,inthebeginninginventoryofgoods,materials
andsupplies,basedonwhichinventorythetransitionalinputtaxcreditiscomputed.Itcanbe
concededthatwhenitwasdraftedSection105couldnothavepossiblycontemplatedconcerns
specifictorealproperties,asrealestatetransactionswerenotoriginallysubjecttoVAT.Atthe
sametime,whentransactionsonrealpropertieswerefinallymadesubjecttoVATbeginningwith
Rep.ActNumber7716,nocorrespondingamendmentwasadoptedasregardsSection105to
provideforadifferentiatedtreatmentintheapplicationofthetransitionalinputtaxcreditwith
respecttorealpropertiesorrealestatedealers.

ItwasSection100oftheOldNIRC,asamendedbyRep.ActNumber7716,whichmaderealestate
transactionssubjecttoVATforthefirsttime.Priortotheamendment,Section100hadimposedthe
VAToneverysale,barterorexchangeofgoods,withouthoweverspecifyingthekindofproperties
thatfallwithinorunderthegenericclassgoodssubjecttothetax.

Rep.ActNumber7716,whichsignificantlyisalsoknownastheExpandedValueAddedTaxlaw,
expandedthecoverageoftheVATbyamendingSection100oftheOldNIRCinseveralrespects,
someofwhichwewillenumerate.First,itmadeeverysale,barterorexchangeofgoodsor
propertiessubjecttoVAT.Second,itgenerallydefinedgoodsorpropertiesasalltangibleand
intangibleobjectswhicharecapableofpecuniaryestimation.Third,itincludedanonexclusive
enumerationofvariousobjectsthatfallundertheclassgoodsorpropertiessubjecttoVAT,
includingealpropertiesheldprimarilyforsaletocustomersorheldforleaseintheordinarycourse
oftradeorbusiness.
FromtheseamendmentstoSection100,isthereanydifferentiatedVATtreatmentonrealproperties
orrealestatedealersthatwouldjustifythesuggestedlimitationsontheapplicationofthe
transitionalinputtaxonthem?Weseenone.

Rep.ActNumber7716clarifiesthatitistherealpropertiesheldprimarilyforsaletocustomersor
heldforleaseintheordinarycourseoftradeorbusinessthataresubjecttotheVAT,andnotwhen
therealestatetransactionsareengagedinbypersonswhodonotsellorleasepropertiesinthe
ordinarycourseoftradeorbusiness.Itisclearthatthoseregularlyengagedintherealestate
businessareaccordedthesametreatmentasthemerchantsofothergoodsorpropertiesavailablein
themarket.Inthesamewaythatamillinerconsidershatsashisgoodsandarancherconsiders
cattleashisgoods,arealestatedealerholdsrealproperty,whetherornotitcontainsimprovements,
ashisgoods.

HadSection100itselfsuppliedanydifferentiationbetweenthetreatmentofrealpropertiesorreal
estatedealersandthetreatmentofthetransactionsinvolvingothercommercialgoods,thensuch
differingtreatmentwouldhaveconstitutedthestatutorybasisfortheCIRtoengageinsuch
differentiationwhichsaidrespondentdidseektoaccomplishinthiscasethroughSection4.1051
ofRR795.YettheamendmentsintroducedbyRep.ActNumber7716toSection100,coupled
withthefactthatthesaidlawleftSection105intact,revealthelackofanylegislativeintentionto
makepersonsorentitiesintherealestatebusinesssubjecttoaVATtreatmentdifferentfromthose
engagedinthesaleofothergoodsorpropertiesorinanyothercommercialtradeorbusiness.

IftheplaintextofRep.ActNumber7716failstosupplyanyapparentjustificationforlimitingthe
beginninginventoryofrealestatedealersonlytotheimprovementsontheirproperties,howthen
weretheCIRandthecourtsaquoabletojustifysuchaview?

Iversus

ThefactalonethatthedenialofFBDCsclaimsisinaccordwithSection4.1051ofRR795does
not,ofcourse,putthisinquirytorest.IfSection4.1051isitselfincongruenttoRep.ActNumber
7716,theincongruencecannotbyitselfjustifythedenialoftheclaiMissWeneedtoinquireintothe
rationalebehindSection4.1051,aswellasthequestionwhethertheinterpretationofthelaw
embodiedthereinisvalidatedbythelawitself.

TheCTA,initsrulings,proceededfromathesiswhichisnotreadilyapparentfromthetextsofthe
lawswehavecited.Thetransitionalinputtaxcreditisconditionedonthepriorpaymentofsales
taxesortheVAT,sotheCTAobserved.TheintroductionoftheVATthroughE.O.Number273and
itssubsequentexpansionthroughRep.ActNumber7716subjectedvariouspersonstothetaxfor
theveryfirsttime,leavingthemunabletoclaimtheinputtaxcreditbasedontheirpurchasesbefore
theybecamesubjecttotheVAT.Hence,thetransitionalinputtaxcreditwasdesignedtoalleviate
thatrelativelyiniquitousloss.Giventhatrationale,accordingtotheCTA,itwouldbeimproperto
allowFBDC,whichhadacquireditspropertiesthroughataxfreepurchase,toclaimthetransitional
inputtaxcredit.TheCTAaddedthatSection105.4.1ofRR795isconsonantwithitsperceived
rationalebehindthetransitionalinputtaxcreditsincethematerialsusedfortheconstructionof
improvementswouldhavemostlikelyinvolvedthepaymentofVATontheirpurchase.
Concededly,thistheoryoftheCTAhassomesense,extravagantlyextrapolatedasitisthoughfrom
theseemingsilenceonthepartoftheprovisionsofthelaw.Yetultimately,thetheoryiswoefully
limitedinperspective.

Itiscorrect,aspointedoutbytheCTA,thatupontheshiftfromsalestaxestoVATin1987newly
VATregisteredpeoplewouldhavebeenprejudicedbytheinabilitytocreditagainsttheoutputVAT
theirpaymentsbywayofsalestaxontheirexistingstocksintrade.Yetthatinequitywasprecisely
addressedbyatransitoryprovisioninE.O.Number273foundinSection25thereof.The
provisionauthorizedVATregisteredpersonstoinvokeapresumptiveinputtaxequivalentto8%of
thevalueoftheinventoryasofDecember31,1987ofmaterialsandsupplieswhicharenotforsale,
thetaxonwhichwasnottakenuporclaimedasdeferredsalestaxcredit,andasimilar
presumptiveinputtaxequivalentto8%ofthevalueoftheinventoryasofDecember31,1987of
goodsforsale,thetaxonwhichwasnottakenuporclaimedasdeferredsalestaxcredit.

Section25ofE.O.Number273perfectlyremediestheproblemassumedbytheCTAasthebasis
fortheintroductionoftransitionalinputtaxcreditin1987.Ifthecorepurposeofthetaxcreditis
only,ashintedbytheCTA,toallowforsomemodeofaccreditationofpreviouslypaidsalestaxes,
thenSection25alonewouldhavesufficed.YetE.O.Number273amendedtheOldNIRCitselfby
providingforthetransitionalinputtaxcreditunderSection105,therebyassuringthatthetaxcredit
wouldendurelongafterthelastgoodsmadesubjecttosalestaxhavebeenconsumed.

Ifindeedthetransitionalinputtaxcreditisintegrallyrelatedtopreviouslypaidsalestaxes,the
purportedcausallinkbetweenthosetwowouldhavebeennonethelessextinguishedlongago.Yet
Congresshasreenactedthetransitionalinputtaxcreditseveraltimesthatfactsimplybeliesthe
absenceofanyrelationshipbetweensuchtaxcreditandthelongabolishedsalestaxes.Obviously
then,thepurposebehindthetransitionalinputtaxcreditisnotconfinedtothetransitionfromsales
taxtoVAT.

Thereishardlyanyconstricteddefinitionof"transitional"thatwilllimititspossiblemeaningtothe
shiftfromthesalestaxregimetotheVATregime.Indeed,itcouldalsoalludetothetransitionone
undergoesfromnotbeingaVATregisteredpersontobecomingaVATregisteredperson.Such
transitiondoesnottakeplacemerelybyoperationoflaw,E.O.Number273orRep.ActNumber
7716inparticular.Itcouldalsooccurwhenonedecidestostartabusiness.Section105statesthat
thetransitionalinputtaxcreditsbecomeavailableeithertoapersonwhobecomesliabletoVATor
anypersonwhoelectstobeVATregistered.Theclearlanguageofthelawentitlesnewtradesor
businessestoavailofthetaxcreditoncetheybecomeVATregistered.Thetransitionalinputtax
credit,whetherundertheOldNIRCortheNewNIRC,maybeclaimedbyanewlyVATregistered
personsuchaswhenabusinessasitcommencesoperations.Ifweviewthematterfromthe
perspectiveofastartingentrepreneur,greaterclarityemergesonthecontinuedutilityofthe
transitionalinputtaxcredit.

FollowingthetheoryoftheCTA,thenewenterpriseshouldbeabletoclaimthetransitionalinput
taxcreditbecauseithaspresumablypaidtaxes,VATinparticular,inthepurchaseofthegoods,
materialsandsuppliesinitsbeginninginventory.Consequently,astheCTAheldbelow,ifthenew
enterprisehasnotpaidVATinitspurchasesofsuchgoods,materialsandsupplies,thenitshould
notbeabletoclaimthetaxcredit.However,itisnotalwaystruethattheacquisitionofsuchgoods,
materialsandsuppliesentailthepaymentoftaxesonthepartofthenewbusiness.Infact,thiscould
occurasamatterofcoursebyvirtueoftheoperationofvariousprovisionsoftheNIRC,andnot
onlyonaccountofaspeciallylegislatedexemption.

LetusciteafewexamplesdrawnfromtheNewNIRC.Ifthegoodsorpropertiesarenotacquired
fromapersoninthecourseoftradeorbusiness,thetransactionwouldnotbesubjecttoVATunder
Section105.ThesalewouldbesubjecttocapitalgainstaxesunderSection24,butsincecapital
gainsisataxonpassiveincomeitistheseller,notthebuyer,whogenerallywouldshoulderthetax.

Ifthegoodsorpropertiesareacquiredthroughdonation,theacquisitionwouldnotbesubjectto
VATbuttodonorstaxunderSection98instead.Itisthedonorwhowouldbeliabletopaythe
donorstax,andthedonationwouldbeexemptifthedonorstotalnetgiftsduringthecalendaryear
doesnotexceed100,000.Pesos

Ifthegoodsorpropertiesareacquiredthroughtestateorintestatesuccession,thetransferwouldnot
besubjecttoVATbutliableinsteadforestatetaxunderTitleIIIoftheNewNIRC.Ifthenetestate
doesnotexceed200,000,Pesosnoestatetaxwouldbeassessed.

TheinterpretationprofferedbytheCTAwouldexcludegoodsandpropertieswhichareacquired
throughsalenotintheordinarycourseoftradeorbusiness,donationorthroughsuccession,from
thebeginninginventoryonwhichthetransitionalinputtaxcreditisbased.Thisprospectallbut
highlightstheultimateabsurdityoftherespondents'position.Again,nothingintheOldNIRC
speaksofsuchapossibilityorqualifiesthepreviouspaymentofVAToranyothertaxesonthe
goods,materialsandsuppliesasaprerequisiteforinclusioninthebeginninginventory.

ItisapparentthatthetransitionalinputtaxcreditoperatestobenefitnewlyVATregisteredpersons,
whetherornottheypreviouslypaidtaxesintheacquisitionoftheirbeginninginventoryofgoods,
materialsandsupplies.DuringthatperiodoftransitionfromnonVATtoVATstatus,the
transitionalinputtaxcreditservestoalleviatetheimpactoftheVATonthetaxpayer.Atthevery
beginning,theVATregisteredtaxpayerisobligedtoremitasignificantportionoftheincomeit
derivedfromitssalesasoutputVAT.Thetransitionalinputtaxcreditmitigatesthisinitial
diminutionofthetaxpayersincomebyaffordingtheopportunitytooffsetthelossesincurred
throughtheremittanceoftheoutputVATatastagewhenthepersonisyetunabletocreditinput
VATpayments.

ThereisanotherpointthatweighsagainsttheCTAsinterpretation.UnderSection105oftheOld
NIRC,therateofthetransitionalinputtaxcreditis8%ofthevalueofsuchinventoryortheactual
valueaddedtaxpaidonsuchgoods,materialsandsupplies,whicheverishigher.Ifindeedthe
transitionalinputtaxcreditispremisedonthepreviouspaymentofVAT,thenitdoesnotmake
sensetoaffordthetaxpayerthebenefitofsuchcreditbasedon8%ofthevalueofsuchinventory
shouldthesameprovehigherthantheactualVATpaid.ThisintentthattheCTAalludedtocould
havebeenimplementedwitheasehadthelegislaturesharedsuchintentbyprovidingtheactualVAT
paidasthesolebasisfortherateofthetransitionalinputtaxcredit.

TheCTAharpedonthecircumstancethatFBDCwasexcusedfrompayinganytaxonthepurchase
ofitspropertiesfromthenationalgovernment,evenclaimingthattoallowthetransitionalinputtax
creditis"tantamounttogivinganundeservedbonustorealestatedealerssimilarlysituatedas
whichtheGovernmentcannotaffordtoprovide."Yetthetaxlawsinquestion,andalltaxlawsin
general,aredesignedtoenforceuniformtaxtreatmenttopersonsorclassesofpersonswhoshare
minimumlegislatedstandards.Thecommonstandardfortheapplicationofthetransitionalinput
taxcredit,asenactedbyE.O.Number273andallsubsequenttaxlawswhichreinforcedor
reintegratedthetaxcredit,issimplythatthetaxpayerinquestionhasbecomeliabletoVATorhas
electedtobeaVATregisteredperson.E.O.Number273andthesubsequenttaxlawsareall
decidedlyneutralandaccommodatinginascertainingwhoshouldbeentitledtothetaxcredit,andit
behoovestheCIRandtheCTAtoadoptasimilarlyjudiciousperspective.

Iversus

GiventhefatalflawsinthetheoryofferedbytheCTAassupposedlyunderlyingthetransitional
inputtaxcredit,isthereanyotherbasistojustifythelimitationsimposedbytheCIRthroughRR7
95?Wediscernnothingmore.Asseeninourdiscussion,thereisnologicthatcohereswitheitherE.
O.Number273orRep.ActNumber7716whichsupportstherestrictionimposedonrealestate
brokersandtheirabilitytoclaimthetransitionalinputtaxcreditbasedonthevalueoftheirreal
properties.Inaddition,theveryideaofexcludingtherealpropertiesitselffromthebeginning
inventorysimplyrunscountertowhatthetransitionalinputtaxcreditseekstoaccomplishfor
personsengagedinthesaleofgoods,whetherornotsuchgoodstaketheformofrealpropertiesor
moremundanecommodities.

UnderSection105,thebeginninginventoryofgoodsformspartofthevaluationofthetransitional
inputtaxcredit.Goods,ascommonlyunderstoodinthebusinesssense,referstotheproductwhich
theVATregisteredpersonoffersforsaletothepublic.Withrespecttorealestatedealers,itisthe
realpropertiesthemselveswhichconstitutetheirgoods.Suchrealpropertiesaretheoperatingassets
oftherealestatedealer.

Section4.1001ofRRNumber795itselfincludesinitsenumerationofgoodsorpropertiessuch
realpropertiesheldprimarilyforsaletocustomersorheldforleaseintheordinarycourseoftrade
orbusiness.SaiddefinitionwastakenfromtheverystatutorylanguageofSection100oftheOld
NIRC.BylimitingthedefinitionofgoodstoimprovementsinSection4.1051,theBIRnotonly
contravenedthedefinitionofgoodsasprovidedintheOldNIRC,butalsothedefinitionwhichthe
samerevenueregulationitselfhasprovided.

TheCourtofTaxAppealsclaimedthatunderSection105oftheOldNIRCthebasisforthe
inventoryofgoods,materialsandsuppliesuponwhichthetransitionalinputVATwouldbebased
shallbelefttoregulationbytheappropriateadministrativeauthority.Thisisbasedonthephrase
filingofaninventoryasprescribedbyregulationsfoundinSection105.Nonetheless,Section105
doesincludetheparticularpropertiestobeincludedintheinventory,namelygoods,materialsand
supplies.ItisquestionablewhethertheCIRhasthepowertoactuallyredefinetheconceptofgoods,
asshedidwhensheexcludedrealpropertiesfromtheclassofgoodswhichrealestatecompaniesin
thebusinessofsellingrealpropertiesmayincludeintheirinventory.Theauthoritytoprescribe
regulationscanpertaintomoretechnicalmatters,suchashowtoappraisethevalueoftheinventory
orwhatpapersneedtobefiledtoproperlyitemizethecontentsofsuchinventory.Butsuch
authoritycannotgoasfarastoamendSection105itself,whichtheCommissionerhad
unfortunatelyaccomplishedinthiscase.
Itisofcourseaxiomaticthataruleorregulationmustbearupon,andbeconsistentwith,the
provisionsoftheenablingstatuteifsuchruleorregulationistobevalid.Incaseofconflict
betweenastatuteandanadministrativeorder,theformermustprevail.Indeed,theCIRhasno
powertolimitthemeaningandcoverageofthetermgoodsinSection105oftheOldNIRCabsent
statutoryauthorityorbasistomakeandjustifysuchlimitation.Acontraryconclusionwouldmean
theCIRcouldverywellmootthelaworarrogatelegislativeauthorityuntohimselfbyretaining
solediscretiontoprovidethedefinitionandscopeofthetermgoods.

versus

Atthisjuncture,weturntosomeofthepointsraisedinthedissentoftheesteemedJusticeAntonio
T.Carpio.

ThedissentadoptstheCTAsthesisthatthetransitionalinputtaxcreditappliesonlywhentaxes
werepreviouslypaidonthepropertiesinthebeginninginventory.Hadthedissentingviewwon,it
wouldhaveintroducedanewrequisitetotheapplicationofthetransitionalinputtaxcreditand
requiredthetaxpayertosupplyproofthatithadpreviouslypaidtaxesontheacquisitionofgoods,
materialsandsuppliescomprisingitsbeginninginventory.Wehavesufficientlyrebuttedthisthesis,
butthedissentaddsatwisttotheargumentbyusingthetermpresumptiveinputtaxcredittoimply
thatthetransitionalinputtaxcreditinvolvesapresumptionthattherewasapreviouspaymentof
taxes.

Letusclarifythedistinctionbetweenthepresumptiveinputtaxcreditandthetransitionalinputtax
credit.Aswiththetransitionalinputtaxcredit,thepresumptiveinputtaxcreditiscreditable
againsttheoutputVAT.Itnecessarilyhascomeintoexistenceinourtaxstructureonlyafterthe
introductionoftheVAT.Asquotedearlier,E.O.Number273providedforapresumptiveinputtax
creditasoneofthetransitorymeasuresintheshiftfromsalestaxestoVAT,butsuchpresumptive
inputtaxcreditwasneverintegratedintheNIRCitself.Itwasonlyin1997,orelevenyearsafter
theVATwasfirstintroduced,thatthepresumptiveinputtaxcreditwasfirstincorporatedinthe
NIRC,moreparticularlyinSection111oftheNewNIRC.Asborneoutbythetextoftheprovision,
itisplainthatthepresumptiveinputtaxcreditishighlylimitedinapplicationasitmaybeclaimed
onlybypersonsorfirmsengagedintheprocessingofsardines,mackerelandmilk,andin
manufacturingrefinedsugarandcookingoilandpublicworkscontractors.

Clearly,formorethanadecadenow,thetermpresumptiveinputtaxcredithascontemplateda
particularlyidiosyncratictaxcreditfardivorcedfromitsoriginalusageinthetransitoryprovisions
ofE.O.Number273.Thereisutterlynosensetheninlatchingontothetermashavingany
significantmeaningforthepurposeofthecasesatbar.

Thedissent,inarguingfortheeffectivityofSection4.1051ofRR795,ratiocinatesinthis
manner:Section4.1051findsbasisinSection105oftheOldNIRC,whichprovidesthattheinput
taxisallowedonthebeginninginventoryofgoods,materialsandsuppliesinputtaxesmusthave
beenpaidonsuchgoods,materialsandsuppliesunlikerealpropertyitself,theimprovements
thereonwerealreadysubjecttoVATevenpriortothepassageofRep.ActNumber7716sinceno
VATwaspaidontherealpropertypriortothepassageofRep.ActNumber7716,itcouldnotform
partofthebeginninginventoryofgoods,materialsandsupplies.
Thischainofpremiseshavealreadybeendebunked.Itisapparentthatthedissentbelievesthatonly
thosegoods,materialsandsuppliesonwhichinputVATwaspaidcouldformthebasisofvaluation
oftheinputtaxcredit.Thus,iftheVATregisteredpersonacquiredallthegoods,materialsand
suppliesofthebeginninginventorythroughasalenotintheordinarycourseoftradeorbusiness,or
throughsuccessionordonation,saidpersonwouldbeunabletoreceiveatransitionalinputtax
credit.YetevenRR795,whichimposestherestrictiononlyonrealestatedealerspermitssuch
otherpersonswhoobtainedtheirbeginninginventorythroughtaxfreemeanstoclaimthe
transitionalinputtaxcredit.Thedissentthusbetraysaviewthatisevenmoreradicalandmore
misalignedwiththelanguageofthelawthanthatexpressedbytheCIR.

VI.

Afinalobservation.Section4.105.1ofRRNumber795,insofarasitdisallowsrealestatedealers
fromincludingthevalueoftheirrealpropertiesinthebeginninginventoryofgoods,materialsand
supplies,hasinfactalreadybeenrepealed.Theoffendingprovisionsweredeletedwiththe
enactmentofRevenueRegulationNumber697dated2January1997,whichamendedRR795.
TherepealofthebasisforthepresentassessmentsbyRR697onlyhighlightsthecontinuing
absurdityofthepositionoftheBIRtowardsFBDC.

FBDCpointsoutthatwhilethetransactionsinvolvedinG.R.Number158885tookplaceduring
theeffectivityofRR795,thetransactionsinvolvedinG.R.Number170680infacttookplace
afterRRNumber697hadtakeneffect.Indeed,theassessmentssubjectofG.R.Number170680
wereforthethirdquarterof1997,orseveralmonthsaftertheeffectivityofRR697.Thatfact
providesadditionalreasontosustainFBDCsclaimforrefundofits1997ThirdQuarterVAT
payments.Nevertheless,sincetheassailedrestrictionsimplementedbyRR795werenot
sanctionedbylawinthefirstplacethereisnolongerneedtodwellonsuchfact.

Wherefore,thepetitionsareGRANTED.TheassaileddecisionsoftheCourtofTaxAppealsand
theCOURTOFAPPEALSareREVERSEDandSETASIDE.Respondentsareherebyrestrained
fromcollectingfrompetitionertheamountof28,413,783Pesosrepresentingthetransitionalinput
taxcreditdueitforthefourthquarterof1996anddirectedtorefundtopetitionertheamountof
347,741,695.74PesospaidasoutputVATforthethirdquarterof1997inlightofthepersisting
transitionalinputtaxcreditavailabletopetitionerforthesaidquarter,ortoissueataxcredit
correspondingtosuchamount.Nopronouncementastocosts.

SOORDERED.

DANTEO.TINGA

AssociateJustice

WECONCUR:

REYNATOS.PUNO

ChiefJustice

LEONARDOA.QUISUMBING
AssociateJustice

CONSUELOYNARESSANTIAGO

AssociateJustice

ANTONIOT.CARPIO

AssociateJustice

MA.ALICIAAUSTRIAMARTINEZ

AssociateJustice

RENATOC.CORONA

AssociateJustice

CONCHITACARPIOMORALES

AssociateJustice

MINITAversusCHICONAZARIO

AssociateJustice

PRESBITEROJ.VELASCO,JR.

AssociateJustice

ANTONIOEDUARDOB.NACHURA

AssociateJustice

TERESITAJ.LEONARDODECASTO

AssociateJustice

ARTUROD.BRION

AssociateJustice

DIOSDADOM.PERALTA

AssociateJustice

CERTIFICATION

PursuanttoArticleVIII,Section13oftheConstitution,itisherebycertifiedthattheconclusionsin
theaboveDecisionwerereachedinconsultationbeforethecasewasassignedtothewriterofthe
opinionoftheCourt.

REYNATOS.PUNO

ChiefJustice

SeeSecretary1,E.O.Number273.

Secretary105,NationalInternalRevenueCodeof1986,asamendedbyE.O.Number273.

SeeSecretary25,E.O.Number273.

Secretary25,E.O.Number273.

SeeG.R.Number158885rollo,p.215.Thelawitselfwasapprovedon5May1994,butits
implementationwasdelayedfollowingthelegalchallengestoitsconstitutionality,whichwere
finallyresolvedinTolentinoversusSecretaryofFinance,G.R.115455,30October1995.

Secretary100,NationalInternalRevenueCodeof1986,asamendedbyRep.ActNumber7716.

Secretary111,NationalInternalRevenueCodeof1997sinceamendedbyRep.ActNumber9337.

Secretary111,NationalInternalRevenueCodeof1997.SinceamendedbyRep.ActNumber9337.

Rollo,p.215.

Id.at216.

Id.at216.

Id.

Id.at216.

Id.at217.

Rollo,p.187,theletterbeingsignedbythenCommissionerofInternalRevenue.

TheRegionalDirectorhaddeniedthemotionforreconsideration/protestonthegroundthatFBDC
wasbarredbythestatuteoflimitationsfromraisingthesame.Theissueofwhendidthestatuteof
limitationsbegintorunagainstFBDCwasamongtheissuesraisedbeforetheCourtofTax
Appeals,whichresolvedthesameinfavorofFBDC.SuchissueisnotbeforethisCourt.

DecisionpennedbyPresidingJudgeErnestoD.Acosta,andconcurredinbyAssociateJudge
RamonO.DeVeyra.AssociateJudgeAmancioQ.SagafiledaDissentingOpinion.
Rollo,pp.402411.DecisionpennedbyAssociateJusticeRodrigoCosico,concurredinby
AssociateJusticesRebeccadeGuiaSalvadorandRegaladoMaambong.TheCOURTOF
APPEALShoweverremovedfrompetitionersliability,theassessmentofsurcharge,interestsand
penaltybytheBIR.Seeid.at411.

Rollo,p.130.

Id.

Id.

Seenote11.

Rollo,p.131.

DecisionpennedbyAssociateJudgeRamonO.DeVeyra,andconcurredinbyPresidingJudge
ErnestoD.Acosta.AssociateJudgeAmancioQ.SagafiledaDissentingOpinion.

PennedbyAssociateJusticeNoelTijam,andconcurredinbyAssociateJusticesRubenT.Reyes
andEdgardoP.Cruz.

ThroughaResolutiondated4April2006.

SeeSecretary100,NationalInternalRevenueCodeof1986,asamendedbyRep.ActNumber
7716.

SeeSecretary100,NationalInternalRevenueCodeof1986,asamendedbyRep.ActNumber
7716.

SeeSecretary100,NationalInternalRevenueCodeof1986,asamendedbyRep.ActNumber
7716,supraat45.

SeeSecretary25,E.O.Number273.

SeeSecretary105,NewNIRC,asamended.

SeeSecretary24,NewNIRC,asamended.

SeeSecretary98,NewNIRC,asamended.

SeeSecretary99,NewNIRC,asamended.

Id.

SeeSections8497,NewNIRC,asamended.

SeeSecretary84,NewNIRC,asamended.

Seenote2.
Lina,JuniorversusCarino,G.R.Number100127,23April1993,,531UnitedBFHomeowners
AssociationversusHomeInsuranceandGuarantyCorp.,G.R.Number124783,14July1999,,316.

KilusangMayoUnoLaborCenterversusGarcia,Junior,G.R.Number115381,,411,23December
1994ConteversusCommissiononAudit,G.R.Number116422,4November1996,,50.

Seenote30.

Seenote8.

Id.

Id.

SuchfactwascommonlyagreedtobythepartiesintheirjointstipulationoffactsinCTACase
Number5665.SeeRollo,p.119.