G.R. No.
146984 July 28, 2006 with the Bureau of Internal Revenue (BIR) by the law firm of Sycip Salazar
COMMISSIONER OF INTERNAL REVENUE v.
MAGSAYSAY LINES, INC.
The issue in this present petition is whether the sale by the National Development
Company (NDC) of five (5) of its vessels to the private respondents is subject to
value-added tax (VAT) under the National Internal Revenue Code of 1986 (Tax
Code) then prevailing at the time of the sale. The Court of Tax Appeals (CTA) and
the Court of Appeals commonly ruled that the sale is not subject to VAT. We affirm,
though on a more unequivocal rationale than that utilized by the rulings under
review. The fact that the sale was not in the course of the trade or business of NDC
is sufficient in itself to declare the sale as outside the coverage of VAT.
The facts are culled primarily from the ruling of the CTA.
Pursuant to a government program of privatization, NDC decided to sell to private
enterprise all of its shares in its wholly-owned subsidiary the National Marine
Corporation (NMC). The NDC decided to sell in one lot its NMC shares and five (5)
of its ships, which are 3,700 DWT Tween-Decker, Kloeckner type vessels.[1] The
vessels were constructed for the NDC between 1981 and 1984, then initially leased
to Luzon Stevedoring Company, also its wholly-owned subsidiary. Subsequently,
the vessels were transferred and leased, on a bareboat basis, to the NMC.[2]
The NMC shares and the vessels were offered for public bidding. Among the
stipulated terms and conditions for the public auction was that the winning bidder
was to pay a value added tax of 10% on the value of the vessels.[3] On 3 June 1988,
private respondent Magsaysay Lines, Inc. (Magsaysay Lines) offered to buy the
shares and the vessels for P168,000,000.00. The bid was made by Magsaysay Lines,
purportedly for a new company still to be formed composed of itself, Baliwag
Navigation, Inc., and FIM Limited of the Marden Group based in Hongkong
(collectively, private respondents).[4] The bid was approved by the Committee on
Privatization, and a Notice of Award dated 1 July 1988 was issued to Magsaysay
Lines.
On 28 September 1988, the implementing Contract of Sale was executed between
NDC, on one hand, and Magsaysay Lines, Baliwag Navigation, and FIM Limited, on
the other. Paragraph 11.02 of the contract stipulated that [v]alue-added tax, if any,
shall be for the account of the PURCHASER.[5] Per arrangement, an irrevocable
confirmed Letter of Credit previously filed as bidders bond was accepted by NDC as
security for the payment of VAT, if any. By this time, a formal request for a ruling
on whether or not the sale of the vessels was subject to VAT had already been filed
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. The Court of Appeals also
agreed with the CTA that the classification of transactions deemed sale was a
classification statute, and not an exemption statute, thus warranting the resolution
of any doubt in favor of the taxpayer.[14]
To the mind of the Court, the arguments raised in the present petition have already
been adequately discussed and refuted in the rulings assailed before us. Evidently,
the petition should be denied. Yet the Court finds that Section 99 of the Tax Code is
sufficient reason for upholding the refund of VAT payments, and the subsequent
disquisitions by the lower courts on the applicability of Section 100 of the Tax Code
and Section 4 of R.R. No. 5-87 are ultimately irrelevant.
A brief reiteration of the basic principles governing VAT is in order. VAT is
ultimately a tax on consumption, even though it is assessed on many levels of
transactions on the basis of a fixed percentage. [15] It is the end user of consumer
goods or services which ultimately shoulders the tax, as the liability therefrom is
passed on to the end users by the providers of these goods or services[16] who in
turn may credit their own VAT liability (or input VAT) from the VAT payments they
receive from the final consumer (or output VAT).[17] The final purchase by the end
consumer represents the final link in a production chain that itself involves several
transactions and several acts of consumption. The VAT system assures fiscal
adequacy through the collection of taxes on every level of consumption,[18] yet
assuages the manufacturers or providers of goods and services by enabling them to
pass on their respective VAT liabilities to the next link of the chain until finally the
end consumer shoulders the entire tax liability.
Yet VAT is not a singular-minded tax on every transactional level. Its assessment
bears direct relevance to the 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 Charter[22] of the NDC which bears no
indication that the NDC was created for the primary purpose of selling real
property.[23]
The conclusion that the sale was not in the course of trade or business, which the
CIR does not dispute before this Court,[24] should have definitively settled the
matter. Any sale, barter or exchange of goods or services not in the course of trade
or business is not subject to VAT.
Section 100 of the Tax Code, which is implemented by Section 4(E)(i) of R.R. No. 5-
87 now relied upon by the CIR, is captioned Value-added tax on sale of goods, and
it expressly states that [t]here shall be levied, assessed and collected on every sale,
barter or exchange of goods, a value added tax x x x. Section 100 should be read in
light of Section 99, which lays down the general rule on which persons are liable for
VAT in the first place and on what transaction if at all. It may even be noted that
Section 99 is the very first provision in Title IV of the Tax Code, the Title that covers
VAT in the law. Before any portion of Section 100, or the rest of the law for that
matter, may be applied in order to subject a transaction to VAT, it must first be
satisfied that the taxpayer and transaction involved is liable for VAT in the first
place under Section 99.
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]

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
G.R. No. 153866. February 11, 2005
COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES)
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 Review[1] under Rule 45 of the Rules of Court,
seeking to set aside the May 27, 2002 Decision[2] of the Court of Appeals (CA) in CA-
GR SP No. 66093. The decretal portion of the Decision reads as follows:
WHEREFORE, foregoing premises considered, the petition for review is DENIED for
lack of merit.[3]
The Facts
The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as
follows:
As jointly stipulated by the parties, the pertinent facts x x x involved in this case are
as follows:
1. [Respondent] is a resident foreign corporation duly registered with
the Securities and Exchange Commission to do business in the
Philippines, with principal office address at the new Cebu Township
One, Special Economic Zone, Barangay Cantao-an, Naga, Cebu;
2. [Petitioner] is sued in his official capacity, having been duly
appointed and empowered to perform the duties of his office,
including, among others, the duty to act and approve claims for
refund or tax credit;
3. [Respondent] is registered with the Philippine Export Zone Authority
(PEZA) and has been issued PEZA Certificate No. 97-044 pursuant to
Presidential Decree No. 66, as amended, to engage in the
manufacture of recording components primarily used in computers
for export. Such registration was made on 6 June 1997;
4. [Respondent] is VAT [(Value Added Tax)]-registered entity as
evidenced by VAT Registration Certification No. 97-083-000600-V
issued on 2 April 1997;
5. VAT returns for the period 1 April 1998 to 30 June 1999 have been
filed by [respondent];
6. An administrative claim for refund of VAT input taxes in the amount
of P28,369,226.38 with supporting documents (inclusive of
the P12,267,981.04 VAT input taxes subject of this Petition for
Review), was filed on 4 October 1999 with Revenue District Office
No. 83, Talisay Cebu;
7. No final action has been received by [respondent] from [petitioner]
on [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;
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. [4]
Ruling of the Court of Appeals
The CA affirmed the Decision of the CTA granting the claim for refund or
issuance of a tax credit certificate (TCC) in favor of respondent in the reduced
amount of P12,122,922.66. This sum represented the unutilized but substantiated
input VAT paid on capital goods purchased for the period covering April 1, 1998 to
June 30, 1999.
The appellate court reasoned that respondent had availed itself only of the
fiscal incentives under Executive Order No. (EO) 226 (otherwise known as the
Omnibus Investment Code of 1987), not of those under both Presidential Decree
No. (PD) 66, as amended, and Section 24 of RA 7916. Respondent was, therefore,
considered exempt only from the payment of income tax when it opted for the
income tax holiday in lieu of the 5 percent preferential tax on gross income earned.
As a VAT-registered entity, though, it was still subject to the payment of other
national internal revenue taxes, like the VAT.
Moreover, the CA held that neither Section 109 of the Tax Code nor Sections
4.106-1 and 4.103-1 of RR 7-95 were applicable. Having paid the input VAT on the
capital goods it purchased, respondent correctly filed the administrative and
judicial claims for its refund within the two-year prescriptive period. Such
payments were -- to the extent of the refundable value -- duly supported by VAT
invoices or official receipts, and were not yet offset against any output VAT liability.
Hence this Petition.[5]
Sole Issue
Petitioner submits this sole issue for our consideration:
Whether or not respondent is entitled to the refund or issuance of Tax Credit
Certificate in the amount of P12,122,922.66 representing alleged unutilized input
VAT paid on capital goods purchased for the period April 1, 1998 to June 30,
1999.[6]
The 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,[7] respondent is entitled to the fiscal incentives and benefits [8] provided for in
either PD 66[9] or EO 226.[10]It shall, moreover, enjoy all privileges, benefits,
advantages or exemptions under both Republic Act Nos. (RA) 7227 [11] and 7844.[12]
Preferential Tax Treatment
Under Special Laws
If it avails itself of PD 66, notwithstanding the provisions of other laws to the
contrary, respondent shall not be subject to internal revenue laws and regulations
for raw materials, supplies, articles, equipment, machineries, spare parts and
wares, except those prohibited by law, brought into the zone to be stored, broken
up, repacked, assembled, installed, sorted, cleaned, graded or otherwise
processed, manipulated, manufactured, mixed or used directly or indirectly in such
activities.[13] Even so, respondent would enjoy a net-operating loss carry over;
accelerated depreciation; foreign exchange and financial assistance; and exemption
from export taxes, local taxes and licenses.[14]
Comparatively, the same exemption from internal revenue laws and
regulations applies if EO 226[15] is chosen. Under this law, respondent shall further
be entitled to an income tax holiday; additional deduction for labor expense;
simplification of customs procedure; unrestricted use of consigned equipment;
access to a bonded manufacturing warehouse system; privileges for foreign
nationals employed; tax credits on domestic capital equipment, as well as for taxes
and duties on raw materials; and exemption from contractors taxes, wharfage
dues, taxes and duties on imported capital equipment and spare parts, export
taxes, duties, imposts and fees,[16] local taxes and licenses, and real property
taxes.[17]
A privilege available to respondent under the provision in RA 7227 on tax and
duty-free importation of raw materials, capital and equipment[18] -- is, ipso facto,
also accorded to the zone[19] under RA 7916. Furthermore, the latter law --
notwithstanding other existing laws, rules and regulations to the contrary --
extends[20] 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
credits[24] 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 facilities[25] and exemption from PD 1853.[26]
From the above-cited laws, it is immediately clear that petitioner enjoys
preferential tax treatment.[27] It is not subject to internal revenue laws and
regulations and is even entitled to tax credits. The VAT on capital goods is an
internal revenue tax from which petitioner as an entity is exempt. Although
the transactions involving such tax are not exempt, petitioner as a VAT-registered
person,[28] however, is entitled to their credits.
Nature of the VAT and
the Tax Credit Method
Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent
to 10 percent levied on every importation of goods, whether or not in the course of
trade or business, or imposed on each sale, barter, exchange or lease of goods or
properties or on each rendition of services in the course of trade or business[29] as
they pass along the production and distribution chain, the tax being limited only to
the value added[30] to such goods, properties or services by the seller, transferor or
lessor.[31] It is an indirect tax that may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services.[32] As such, it should be
understood not in the context of the person or entity that is primarily, directly and
legally liable for its payment, but in terms of its nature as a tax on
consumption.[33] In either case, though, the same conclusion is arrived at.
The law[34] that originally imposed the VAT in the country, as well as the
subsequent amendments of that law, has been drawn from the tax credit
method.[35] Such method adopted the mechanics and self-enforcement features of
the VAT as first implemented and practiced in Europe and subsequently adopted in
New Zealand and Canada.[36] Under the present method that relies on invoices, an
entity can credit against or subtract from the VAT charged on its sales or outputs
the VAT paid on its purchases, inputs and imports.[37]
If at the end of a taxable quarter the output taxes[38] charged by a
seller[39]
are equal to the input taxes[40] passed on by the suppliers, no payment is
required. It is when the output taxes exceed the input taxes that the excess has to
be paid.[41] If, however, the input taxes exceed the output taxes, the excess shall be
carried over to the succeeding quarter or quarters.[42] Should the input taxes result
from zero-rated or effectively zero-rated transactions or from the acquisition of
capital goods,[43] any excess over the output taxes shall instead be refunded[44] to
the taxpayer or credited[45] against other internal revenue taxes.[46]
Zero-Rated and Effectively
Zero-Rated Transactions
Although both are taxable and similar in effect, zero-rated transactions differ
from effectively zero-rated transactions as to their source.
 Zero-rated transactions generally refer to the export sale of goods and supply
of services.[47] The tax rate is set at zero.[48] When applied to the tax base, such rate
obviously results in no tax chargeable against the purchaser. The seller of such
transactions charges no output tax,[49] but can claim a refund of or a tax credit
certificate for the VAT previously charged by suppliers.
Effectively zero-rated transactions, however, refer to the sale of goods[50] or
supply of services[51] to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects
such transactions to a zero rate.[52] Again, as applied to the tax base, such rate does
not yield any tax chargeable against the purchaser. The seller who charges zero
output tax on such transactions can also claim a refund of or a tax credit certificate
for the VAT previously charged by suppliers.
Zero Rating and
Exemption
In terms of the VAT computation, zero rating and exemption are the same,
but the extent of relief that results from either one of them is not.
Applying the destination principle[53]
to the exportation of goods, automatic
zero rating[54] is primarily intended to be enjoyed by the seller who is directly and
legally liable for the VAT, making such seller internationally competitive by allowing
the refund or credit of input taxes that are attributable to export sales.[55] Effective
zero rating, on the contrary, is intended to benefit the purchaser who, not being
directly and legally liable for the payment of the VAT, will ultimately bear the
burden of the tax shifted by the suppliers.
In both instances of zero rating, there is total relief for the purchaser from
the burden of the tax.[56] But in an exemption there is only partial relief,[57] because
the purchaser is not allowed any tax refund of or credit for input taxes paid.[58]
Exempt Transaction
and Exempt Party
The object of exemption from the VAT may either be the transaction itself or
any of the parties to the transaction.[59]
An exempt transaction, on the one hand, involves goods or services which, by
their nature, are specifically listed in and expressly exempted from the VAT under
the Tax Code, without regard to the tax status -- VAT-exempt or not -- of the party
to the transaction.[60] Indeed, such transaction is not subject to the VAT, but the
seller is not allowed any tax refund of or credit for any input taxes paid.
An exempt party, on the other hand, is a person or entity granted VAT
exemption under the Tax Code, a special law or an international agreement to
which the Philippines is a signatory, and by virtue of which its taxable transactions
become exempt from the VAT.[61] Such party is also not subject to the VAT, but may
be allowed a tax refund of or credit for input taxes paid, depending on its
registration as a VAT or non-VAT taxpayer.
As mentioned earlier, the VAT is a tax on consumption, the amount of which
may be shifted or passed on by the seller to the purchaser of the goods, properties
or services.[62] While the liability is imposed on one person, the burden may be
passed on to another. Therefore, if a special law merely exempts a party as a seller
from its direct liability for payment of the VAT, but does not relieve the same party
as a purchaser from its indirect burden of the VAT shifted to it by its VAT-registered
suppliers, the purchase transaction is not exempt. Applying this principle to the
case at bar, the purchase transactions entered into by respondent are not VAT-
exempt.
Special laws may certainly exempt transactions from the VAT.[63] However,
the Tax Code provides that those falling under PD 66 are not. PD 66 is the precursor
of RA 7916 -- the special law under which respondent was registered. The
purchase transactions it entered into are, therefore, not VAT-exempt. These are
subject to the VAT; respondent is required to register.
Its sales transactions, however, will either be zero-rated or taxed at the
standard rate of 10 percent,[64] depending again on the application of
the destination principle.[65]
If respondent enters into such sales transactions with a purchaser -- usually in
a foreign country -- for use or consumption outside the Philippines, these shall be
subject to 0 percent.[66] If entered into with a purchaser for use or consumption in
the Philippines, then these shall be subject to 10 percent,[67] unless the purchaser is
exempt from the indirect burden of the VAT, in which case it shall also be zero-
rated.
Since the purchases of respondent are not exempt from the VAT, the rate to
be applied is zero. Its exemption under both PD 66 and RA 7916 effectively subjects
such transactions to a zero rate,[68] because the ecozone within which it is
registered is managed and operated by the PEZA as a separate customs
territory.[69] This means that in such zone is created the legal fiction of foreign
territory.[70] Under the cross-border principle[71] of the VAT system being enforced
by the Bureau of Internal Revenue (BIR),[72] no VAT shall be imposed to form part of
the cost of goods destined for consumption outside of the territorial border of the
taxing authority. If exports of goods and services from the Philippines to a foreign
country are free of the VAT,[73] then the same rule holds for such exports from the
national territory -- except specifically declared areas -- to an ecozone.
Sales made by a VAT-registered person in the customs territory to a PEZA-
registered entity are considered exports to a foreign country; conversely, sales by a
PEZA-registered entity to a VAT-registered person in the customs territory are
deemed imports from a foreign country.[74] An ecozone -- indubitably a
geographical territory of the Philippines -- is, however, regarded in law as foreign
soil.[75] This legal fiction is necessary to give meaningful effect to the policies of the
special law creating the zone.[76] If respondent is located in an export processing
zone[77] within that ecozone, sales to the export processing zone, even without
being actually exported, shall in fact be viewed as constructively exported under EO
226.[78] Considered as export sales,[79] such purchase transactions by respondent
would indeed be subject to a zero rate.[80]
Tax Exemptions
Broad and Express
Applying the special laws we have earlier discussed, respondent as an entity
is exempt from internal revenue laws and regulations.
This exemption covers both direct and indirect taxes, stemming from the very
nature of the VAT as a tax on consumption, for which the direct liability is imposed
on one person but the indirect burden is passed on to another. Respondent, as an
exempt entity, can neither be directly charged for the VAT on its sales nor indirectly
made to bear, as added cost to such sales, the equivalent VAT on its purchases. Ubi
lex non distinguit, nec nos distinguere debemus. Where the law does not
distinguish, we ought not to distinguish.
Moreover, the exemption is both express and pervasive for the following
reasons:
First, RA 7916 states that no taxes, local and national, shall be imposed on
business establishments operating within the ecozone.[81] Since this law does not
exclude the VAT from the prohibition, it is deemed included. Exceptio firmat
regulam in casibus non exceptis. An exception confirms the rule in cases not
excepted; that is, a thing not being excepted must be regarded as coming within
the purview of the general rule.
Moreover, even though the VAT is not imposed on the entity but on the
transaction, it may still be passed on and, therefore, indirectly imposed on the
same entity -- a patent circumvention of the law. That no VAT shall be imposed
directly upon business establishments operating within the ecozone under RA 7916
also means that no VAT may be passed on and imposed indirectly. Quando aliquid
prohibetur ex directo prohibetur et per obliquum. When anything is prohibited
directly, it is also prohibited indirectly.
Second, when RA 8748 was enacted to amend RA 7916, the same prohibition
applied, except for real property taxes that presently are imposed on land owned
by developers.[82] This similar and repeated prohibition is an unambiguous
ratification of the 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
66[83] -- 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
area[87] 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 registered[90] with the Board of
Investments (BOI) under EO 226 patently enjoy exemption from national internal
revenue taxes on imported capital equipment reasonably needed and exclusively
used for the manufacture of their products;[91] on required supplies and spare part
for consigned equipment;[92] and on foreign and domestic merchandise, raw
materials, equipment and the like -- except those prohibited by law -- brought into
the zone for manufacturing.[93] In addition, they are given credits for the value of
the national internal revenue taxes imposed on domestic capital equipment also
reasonably needed and exclusively used for the manufacture of their
products,[94] as well as for the value of such taxes imposed on domestic raw
materials and supplies that are used in the manufacture of their export products
and that form part thereof.[95]
 Sixth, the exemption from local and national taxes granted under RA
7227[96] 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]
And seventh, the tax credits under RA 7844 -- given for imported raw
materials primarily used in the production of export goods, [99] and for locally
produced raw materials, capital equipment and spare parts used by exporters of
non-traditional products[100] -- 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[102] against the taxpayer[103] and liberally in favor of the taxing authority.[104]
Tax refunds are in the nature of such exemptions. [105] Accordingly, the
claimants of those refunds bear the burden of proving the factual basis of their
claims;[106] and of showing, by words too plain to be mistaken, that the legislature
intended to exempt them.[107] In the present case, all the cited legal provisions are
teeming with life with respect to the grant of tax exemptions too vivid to pass
unnoticed. In addition, respondent easily meets the challenge.
Respondent, which as an entity is exempt, is different from its transactions
which are not exempt. The end result, however, is that it is not subject to the VAT.
The non-taxability of transactions that are otherwise taxable is merely a necessary
incident to the tax exemption conferred by law upon it as an entity, not upon the
transactions themselves.[108] Nonetheless, its exemption as an entity and the non-
exemption of its transactions lead to the same result for the following
considerations:
First, the contemporaneous construction of our tax laws by BIR authorities
who are called upon to execute or administer such laws[109] will have to be
adopted. Their prior tax issuances have held inconsistent positions brought about
by their probable failure to comprehend and fully appreciate the nature of the VAT
as a tax on consumption and the application of the destination
principle.[110] Revenue Memorandum Circular No. (RMC) 74-99, however, now
clearly and correctly provides that any VAT-registered 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]
Second, the policies of the law should prevail. Ratio legis est anima. The
reason for the law is its very soul.
In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as
the establishment of export processing zones, seeks to encourage and promote
foreign commerce as a means of x x x strengthening our export trade and foreign
exchange position, of hastening industrialization, of reducing domestic
unemployment, and of accelerating the development of the country.[112]
RA 7916, as amended by RA 8748, declared that by creating the PEZA and
integrating the special economic zones, the government shall actively encourage,
promote, induce and accelerate a sound and balanced industrial, economic and
social development of the country x x x through the establishment, among others,
of special economic zones x x x that shall effectively attract legitimate and
productive foreign investments.[113]
Under EO 226, the State shall encourage x x x foreign investments in industry
x x x which shall x x x meet the tests of international competitiveness[,] accelerate
development of less developed regions of the country[,] and result in increased
volume and value of exports for the economy.[114] Fiscal incentives that are cost-
efficient and simple to administer shall be devised and extended to significant
projects to compensate for market imperfections, to reward performance
contributing to economic development,[115] and to stimulate the establishment and
assist initial operations of the enterprise.[116]
Wisely accorded to ecozones created under RA 7916[117] was the
governments policy -- spelled out earlier in RA 7227 -- of converting into alternative
productive uses[118] the former military reservations and their extensions,[119] as
well as of providing them incentives[120] to enhance the benefits that would be
derived from them[121] in promoting economic and social development.[122]
Finally, under RA 7844, the State declares the need to evolve export
development into a national effort[123] in order to win international markets. By
providing many export and tax incentives,[124] the State is able to drive home the
point that exporting is indeed the key to national survival and the means through
which the economic goals of increased employment and enhanced incomes can
most expeditiously be achieved.[125]
The Tax Code itself seeks to promote sustainable economic growth x x x; x x x
increase economic activity; and x x x create a robust environment for business to
enable firms to compete better in the regional as well as the global
market.[126] After all, international competitiveness requires economic and tax
incentives to lower the cost of goods produced for export. State actions that affect
global competition need to be specific and selective in the pricing of particular
goods or services.[127]
All these statutory policies are congruent to the constitutional mandates of
providing incentives to needed investments, [128] as well as of promoting the
preferential use of domestic materials and locally produced goods and adopting
measures to help make these competitive.[129] Tax credits for domestic inputs
strengthen backward linkages. Rightly so, the rule of law and the existence of
credible and efficient public institutions are essential prerequisites for sustainable
economic development.[130]
VAT Registration, Not Application
for Effective Zero Rating,
Indispensable to VAT Refund
Registration is an indispensable requirement under our VAT
law.[131] Petitioner alleges that respondent did register for VAT purposes with the
appropriate Revenue District Office. However, it is now too late in the day for
petitioner to challenge the VAT-registered status of respondent, given the 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.[132] EO 226 even reiterates this privilege among the incentives it
gives to such enterprises.[133] 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.[134] 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,[135] petitioner is deemed to have conceded. It is a
cardinal rule that issues and arguments not adequately and seriously brought
below cannot be raised for the first time on appeal.[136] This is a matter of
procedure[137] and a question of fairness.[138] Failure to assert within a reasonable
time warrants a presumption that the party entitled to assert it either has
abandoned or declined to assert it.[139]
The BIR regulations additionally requiring an approved prior application for
effective zero rating[140] 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.[141]
First, a mere administrative issuance, like a BIR regulation, cannot amend the
law; the former cannot purport to do any more than interpret the latter.[142] The
courts will not countenance one that overrides the statute it seeks to apply and
implement.[143]
Other than the general registration of a taxpayer the VAT status of which is
aptly determined, no provision under our VAT law requires an additional
application to be made for such 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.[144]
Second, grantia argumenti that such an application is required by law, there
is still the presumption of regularity in the performance of official
duty.[145] 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
obeyed[146] by both the administrative officials and the applicant.
Third, even though such an application was not made, all the special laws we
have tackled exempt respondent not only from internal revenue laws but also from
the regulations issued pursuant thereto. Leniency in the implementation of the VAT
in ecozones is an imperative, precisely to spur economic growth in the country and
attain global competitiveness as envisioned in those laws.
A VAT-registered status, as well as compliance with the invoicing
requirements,[147] is sufficient for the effective zero rating of the transactions of a
taxpayer. The nature of its business and transactions can easily be perused from, as
already clearly indicated in, its VAT registration papers and photocopied
documents attached thereto. Hence, its transactions cannot be exempted by its
mere failure to apply for their effective zero rating. Otherwise, their VAT
exemption would be determined, not by their nature, but by the taxpayers
negligence -- a result not at all contemplated. Administrative convenience cannot
thwart legislative mandate.
Tax Refund or
Credit in Order
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,[148] for EO 226[149] also has provisions to contend with. These
two regimes are in fact incompatible and cannot be availed of simultaneously by
the same entity. While EO 226 merely exempts it from income taxes, the PEZA law
exempts it from all taxes.
Therefore, respondent can be considered exempt, not from the VAT, but only
from the payment of income tax for a certain number of years, depending on its
registration as a pioneer or a non-pioneer enterprise. Besides, the remittance of
the aforesaid 5 percent of gross income earned in lieu of local and national taxes
imposable upon business establishments within the ecozone cannot outrightly
determine a VAT exemption. Being subject to VAT, payments erroneously collected
thereon may then be refunded or credited.
Even if it is argued that respondent is subject to the 5 percent preferential tax
regime in RA 7916, Section 24 thereof does not preclude the VAT. One can,
therefore, counterargue that such provision merely exempts respondent from
taxes imposed on business. To repeat, the VAT is a tax imposed on consumption,
not on business. Although respondent as an entity is exempt, the transactions it
enters into are not necessarily so. The VAT payments made in excess of the zero
rate that is imposable may certainly be refunded or credited.
Compliance with All Requisites
for VAT Refund or Credit
As further enunciated by the Tax Court, respondent complied with all the
requisites for claiming a VAT refund or credit.[150]
First, respondent is a VAT-registered entity. This fact alone distinguishes the
present case from Contex, in which this Court held that the petitioner therein was
registered as a non-VAT taxpayer.[151] Hence, for being merely VAT-exempt, the
petitioner in that case cannot claim any VAT refund or credit.
Second, the input taxes paid on the capital goods of respondent are duly
supported by VAT invoices and have not been offset against any output taxes.
Although enterprises registered with the BOI after December 31, 1994 would no
longer enjoy the tax credit incentives on domestic capital equipment -- as provided
for under Article 39(d), Title III, Book I of EO 226[152] -- starting January 1, 1996,
respondent would still have the same benefit under a general and express
exemption contained in both Article 77(1), Book VI of EO 226; and Section 12,
paragraph 2 (c) of RA 7227, extended to the ecozones by RA 7916.
There was a very clear intent on the part of our legislators, not only to
exempt investors in ecozones from national and local taxes, but also to grant them
tax credits. This fact was revealed by the sponsorship speeches in Congress during
the second reading of House Bill No. 14295, which later became RA 7916, as shown
below:
MR. RECTO. x x x Some of the incentives that this bill provides are exemption from
national and local taxes; x x x tax credit for locally-sourced inputs x x x.
xxxxxxxxx
MR. DEL MAR. x x x To advance its cause in encouraging investments and creating
an environment conducive for investors, the bill offers incentives such as the
exemption from local and national taxes, x x x tax credits for locally sourced inputs
x x x.[153]
And third, no question as to either the filing of such claims within the
prescriptive period or the validity of the VAT returns has been raised. Even if such a
question were raised, the tax exemption under all the special laws cited above is
broad enough to cover even the enforcement of internal revenue laws, including
prescription.[154]
Summary
To summarize, special laws expressly grant preferential tax treatment to
business establishments registered and operating within an ecozone, which by law
is considered as a separate customs territory. As such, respondent is exempt from
all internal revenue taxes, including the VAT, and regulations pertaining thereto. It
has opted for the income tax holiday regime, instead of the 5 percent preferential
tax regime. As a matter of law and procedure, its registration status entitling it to
such tax holiday can no longer be questioned. Its sales transactions intended for
export may not be exempt, but like its purchase transactions, they are zero-rated.
No prior application for the effective zero rating of its transactions is necessary.
Being VAT-registered and having satisfactorily complied with all the requisites for
claiming a tax refund of or credit for the input VAT paid on capital goods
purchased, respondent is entitled to such VAT refund or credit.
G.R. No. 151135. July 2, 2004
CONTEX CORPORATION vs. HON. COMMISSIONER OF INTERNAL REVENUE
For review is the Decision[1] dated September 3, 2001, of the Court of Appeals, in
CA-G.R. SP No. 62823, which reversed and set aside the decision[2] 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 district officer of
BIR RDO No. 19, denied the first application letter, dated December 29, 1998.
Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax
refund/credit, this time directly with Atty. Alberto Pagabao, the regional director of
BIR Revenue Region No. 4. The second letter sought a refund or issuance of a tax
credit certificate in the amount of P1,108,307.72, representing erroneously paid
input VAT for the period January 1, 1997 to November 30, 1998.
When no response was forthcoming from the BIR Regional Director, petitioner then
elevated the matter to the Court of Tax Appeals, in a petition for review docketed
as CTA Case No. 5895. Petitioner stressed that Section 112(A)[7] if read in relation to
Section 106(A)(2)(a)[8] of the National Internal Revenue Code, as amended and
Section 12(b)[9] and (c) of Rep. Act No. 7227 would show that it was not liable in
any way for any value-added tax.
In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply
the rule that claims for refund are strictly construed against the taxpayer. Since
petitioner failed to establish both its right to a tax refund or tax credit and its
compliance with the rules on tax refund as provided for in Sections 204[10] and
229[11] of the Tax Code, its claim should be denied, according to the BIR.
On October 13, 2000, the CTA decided CTA Case No. 5895 as follows:
WHEREFORE, in view of the foregoing, the Petition for Review is hereby PARTIALLY
GRANTED. Respondent is hereby ORDERED to REFUND or in the alternative to
ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner the sum of P683,061.90,
representing erroneously paid input VAT.
SO ORDERED.[12]
In granting a partial refund, the CTA ruled that petitioner misread Sections
106(A)(2)(a) and 112(A) of the Tax Code. The tax court stressed that these
provisions apply only to those entities registered as VAT taxpayers whose sales are
zero-rated. Petitioner does not fall under this category, since it is a non-VAT
taxpayer as evidenced by the Certificate of Registration RDO Control No. 95-180-
000133 issued by RDO Rosemarie Ragasa of BIR RDO No. 18 of the Subic Bay
Freeport Zone and thus it is exempt from VAT, pursuant to Rep. Act No. 7227, said
the CTA.
Nonetheless, the CTA held that the petitioner is exempt from the imposition of
input VAT on its purchases of supplies and materials. It pointed out that under
Section 12(c) of Rep. Act No. 7227 and the Implementing Rules and Regulations of
the Bases Conversion and Development Act of 1992, all that petitioner is required
to pay as a SBFZ-registered enterprise is a 5% preferential tax.
The CTA also disallowed all refunds of input VAT paid by the petitioner prior to June
29, 1997 for being barred by the two-year prescriptive period under Section 229 of
the Tax Code.The tax court also limited the refund only to the input VAT paid by
the petitioner on the supplies and materials directly used by the petitioner in the
manufacture of its goods. It struck down all claims for input VAT paid on
maintenance, office supplies, freight charges, and all materials and supplies
shipped or delivered to the 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 ContexCorp. 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 SBFZ-
registered enterprises under Rep. Act No. 7227 and its implementing rules covers
only the VAT imposable under Section 107 of the [Tax Code], which is a direct
liability of the importer, and in no way includes the value-added tax of the seller-
exporter the burden of which was passed on to the importer as an additional costs
of the goods.[14] This was because the exemption granted by Rep. Act No. 7227
relates to the act of importation and Section 107[15] of the Tax Code specifically
imposes the VAT on importations. The appellate court applied the principle that tax
exemptions are strictly construed against the taxpayer. The Court of Appeals
pointed out that under the implementing rules of Rep. Act No. 7227, the
exemption of SBFZ-registered enterprises from internal revenue taxes is qualified
as pertaining only to those for which they may be directly liable. It then stated that
apparently, the legislative intent behind Rep. Act No. 7227 was to grant
exemptions only to direct taxes, which SBFZ-registered enterprise may be liable for
and only in connection with their importation of raw materials, capital, and
equipment as well as the sale of their goods and services.
Petitioner timely moved for reconsideration of the Court of Appeals decision, but
the motion was denied.
Hence, the instant petition raising as issues for our resolution the following:
A. WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL AND
NATIONAL INTERNAL REVENUE TAXES PROVIDED IN REPUBLIC
ACT NO. 7227 COVERS THE VALUE ADDED TAX PAID BY
PETITIONER, A SUBIC BAY FREEPORT ENTERPRISE ON ITS
PURCHASES OF SUPPLIES AND MATERIALS.
B. WHETHER OR NOT THE COURT OF TAX APPEALS CORRECTLY
HELD THAT PETITIONER IS ENTITLED TO A TAX CREDIT OR
REFUND OF THE VAT PAID ON ITS PURCHASES OF SUPPLIES
AND RAW MATERIALS FOR THE YEARS 1997 AND 1998.[16]
C. 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.
D. 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.
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 Registration[25] 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.
Section 4.100-2 of BIRs Revenue Regulations 7-95, as amended, or the Consolidated
Value-Added Tax Regulations provide:
Sec. 4.100-2. Zero-rated Sales. A zero-rated sale by a VAT-registered person, which
is a taxable transaction for VAT purposes, shall not result in any output
tax. However, the input tax on his purchases of goods, properties or services
related to such zero-rated sale shall be available as tax credit or refund in
accordance with these regulations.
The following sales by VAT-registered persons shall be subject to 0%:
(a) Export Sales
Export Sales shall mean
...
(5) Those considered export sales under Articles 23 and 77 of Executive Order No.
226, otherwise known as the Omnibus Investments Code of 1987, and other special
laws, e.g. Republic Act No. 7227, otherwise known as the Bases Conversion and
Development Act of 1992.
...
(c) Sales to persons or entities whose exemption under special laws, e.g. R.A. No.
7227 duly registered and accredited enterprises with Subic Bay Metropolitan
Authority (SBMA) and Clark Development Authority (CDA), R. A. No. 7916,
Philippine Economic Zone Authority (PEZA), or international agreements, e.g. Asian
Development Bank (ADB), International Rice Research Institute (IRRI), etc. to which
the Philippines is a signatory effectively subject such sales to zero-rate.
Since the transaction is deemed a zero-rated sale, 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 to any tax credit or refund on the
input tax previously paid as petitioner is an exempt VAT taxpayer.

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.
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.

G.R. No. 125355 March 30, 2000
COMMISSIONER OF INTERNAL REVENUE vs. COURT OF APPEALS and
COMMONWEALTH MANAGEMENT AND SERVICES CORPORATION
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.
On September 29,1992, COMASERCO filed with the Court of Tax Appeals[4] 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 id 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%
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
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 P1,679,155.00
10% tax due thereon 167,915.50
25% surcharge 41,978.88
20% interest per annum 125,936.63
Compromise penalty for late payment 16,000.00
TOTAL AMOUNT DUE AND COLLECTIBLE P 351,831.01"[3]
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. J lexj
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.
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."[5]
On July 26, 1995, respondent filed with the Court of Appeals, 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: Lexj uris
"WHEREFORE, in view of the foregoing, judgment is hereby rendered REVERSING
and SETTING ASIDE the questioned Decision promulgated on 22 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]
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. Juri smis
We agree with the Commissioner.
Section 99 of the National Internal Revenue Code of 1986, as amended by
Executive Order (E.O.) No. 273 in 1988, provides that:
"Section 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 value-added
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.
The definition of the term "in the course of trade or business" incorporated in the
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.
On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling No.
010-98[12] emphasizing that a domestic corporation that provided technical,
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 value-added 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. Jjj uris
"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 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.
Section 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]
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 of realizing profit, any income or
profit generated by the entity in the conduct of its activities was subject to income
tax.lex
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.
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 quasi-judicial 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. Jksm
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.
G.R. No. 193301 March 11, 2013
MINDANAO II GEOTHERMAL PARTNERSHIP
vs.
COMMISSIONER OF INTERNAL REVENUE
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
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
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.
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 3,160,984.69 for the first quarter of 2003. In CTA Case No.
7287, Mindanao II claims a tax refund or credit of 1,562,085.33 for the second
quarter of 2003. In CTA Case No. 7317, Mindanao II claims a tax refund or credit of
3,521,129.50 for the third and fourth quarters of 2003.
The CTA First Divisions narration of the pertinent facts is as follows:
xxxx
On March 11, 1997, [Mindanao II] allegedly entered into a Built (sic)-Operate-
Transfer (BOT) contract with the Philippine National Oil Corporation Energy
Development Company (PNOC-EDC) for finance, engineering, supply, installation,
testing, commissioning, operation, and maintenance of a 48.25 megawatt
geothermal power plant, provided that PNOC-EDC shall supply and deliver steam to
Mindanao II at no cost. In turn, Mindanao II shall convert the steam into electric
capacity and energy for PNOC-EDC and shall deliver the same to the National
Power Corporation (NPC) for and in behalf of PNOC-EDC. Mindanao II alleges that
its sale of generated power and delivery of electric capacity and energy of
Mindanao II to NPC for and in behalf of PNOC-EDC is its only revenue-generating
activity which is in the ambit of VAT zero-rated sales under the EPIRA Law, x x x.
xxxx
Hence, the amendment of the NIRC of 1997 modified the VAT rate applicable to
sales of generated power by generation companies from ten (10%) percent to zero
(0%) percent.
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. Period Covered Date of Filing
(2003)
Original Return Amended Return

7227 1st Quarter April 23, 2003 July 3, 2002 (sic),

April 1, 2004 &
October 22, 2004

7287 2nd Quarter July 22, 2003 April 1, 2004

7317 3rd Quarter Oct. 27, 2003 April 1, 2004

7317 4th Quarter 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: (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:
1. There must be zero-rated or effectively zero-rated sales;
2. That input taxes were incurred or paid;
3. That such input VAT payments are directly attributable to zero-rated sales or
effectively zero-rated sales;
4. That the input VAT payments were not applied against any output VAT liability;
and
5. That the claim for refund was filed within the two-year prescriptive period.13
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 Period Date Filing

Case No. Covered
(2003) Original Amended Administrative Judicial Claim
Return Return Return

7227 1st Quarter 23 April 2003 1 April 2004 13 April 2005 22 April 2005
 7287 2nd Quarter 22 July 2003
7317 3rd Quarter 25 Oct. 2003
7317 4th Quarter 26 Jan. 2004
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 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.
The CTA First Division found that Mindanao II is entitled to a refund in the modified
amount of 7,703,957.79, after disallowing 522,059.91 from input VAT16 and
deducting 18,181.82 from Mindanao IIs sale of a fully depreciated 200,000.00
Nissan Patrol. The input taxes amounting to 522,059.91 were disallowed for
failure to meet invoicing requirements, while the input VAT on the sale of the
Nissan Patrol was reduced by 18,181.82 because the output VAT for the sale was
not included in the VAT declarations.
The dispositive portion of the CTA First Divisions 22 September 2008 Decision
reads:
WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly,
the CIR is hereby ORDERED to REFUND or to ISSUE A TAX CREDIT CERTIFICATE in
the modified amount of SEVEN MILLION SEVEN HUNDRED THREE THOUSAND NINE
HUNDRED FIFTY SEVEN AND 79/100 PESOS (7,703,957.79) representing its
unutilized input VAT for the four (4) quarters of the taxable year 2003.
SO ORDERED.17
Mindanao II filed a motion for partial reconsideration. 18 It stated that the sale of
the fully depreciated Nissan Patrol is a one-time transaction and is not incidental to
its VAT zero-rated operations. Moreover, the disallowed input taxes substantially
complied with the requirements for refund or tax credit.
WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly,
the CIR is hereby ORDERED to REFUND or to ISSUE A TAX CREDIT CERTIFICATE to
Mindanao II Geothermal Partnership in the modified amount of TWO MILLION
NINE HUNDRED EIGHTY THOUSAND EIGHT HUNDRED EIGHTY SEVEN AND 77/100
PESOS (2,980,887.77) representing its unutilized input VAT for the third and
fourth quarters of the taxable year 2003.
SO ORDERED
Mindanao II filed a Petition for Review,22 docketed as CTA EB No. 513, before the
CTA En Banc.
The Court of Tax Appeals Ruling: En Banc
1 April 2004 13 April 2005 7 July 2005
1 April 2004 13 April 2005 9 Sept. 2005
1 April 2004 13 April 2005 9 Sept. 200515
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 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:
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 zero-rated sales or
effectively zero-rated sales shall be counted from the close of the taxable quarter
when the sales were made; (2) the Atlas and Mirant cases applied different tax
codes: Atlas applied the 1977 Tax Code while Mirant applied the 1997 Tax Code; (3)
the sale of the fully-depreciated Nissan Patrol is incidental to Mindanao 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 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.24
The CTA En Banc issued a Resolution25 on 28 July 2010 denying for lack of merit
Mindanao IIs Motion for Reconsideration.26 The CTA En Banc highlighted the
following bases of their previous ruling:
1. The Supreme Court has long decided that the claim for refund of unutilized input
VAT must be filed within two (2) years after the close of the taxable quarter when
such sales were made.
2. The Supreme Court is the ultimate arbiter whose decisions all other courts
should take bearings.
3. The words of the law are clear, plain, and free from ambiguity; hence, it must be
given its literal meaning and applied without any interpretation.27
G.R. No. 194637
Mindanao I v. CIR
The Facts
G.R. No. 194637 covers two cases consolidated by the CTA EB: CTA EB Case Nos.
476 and 483. Both CTA EB cases consolidate three cases from the CTA Second
Division: CTA Case Nos. 7228, 7286, and 7318. CTA Case Nos. 7228, 7286, and 7318
claim a tax refund or credit of Mindanao 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 3,893,566.14 for the first quarter of 2003. In CTA Case No.
7286, Mindanao I claims a tax refund or credit of 2,351,000.83 for the second
quarter of 2003. In CTA Case No. 7318, Mindanao I claims a tax refund or credit of
7,940,727.83 for the third and fourth quarters of 2003.
Mindanao I is similarly situated as Mindanao II. The CTA Second Divisions narration
of the pertinent facts is as follows:
xxxx
In December 1994, Mindanao I entered into a contract of Build-Operate-Transfer
(BOT) with the Philippine National Oil Corporation Energy Development
Corporation (PNOC-EDC) for the finance, design, construction, testing,
commissioning, operation, maintenance and repair of a 47-megawatt geothermal
power plant. Under the said BOT contract, PNOC-EDC shall supply and deliver
steam to Mindanao I at no cost. In turn, Mindanao I will convert the steam into
electric capacity and energy for PNOC-EDC and shall subsequently supply and
deliver the same to the National Power Corporation (NPC), for and in behalf of
PNOC-EDC.
Mindanao 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 14,185, 294.80.
Alleging inaction on the part of CIR, Mindanao I elevated its claims before this
Court on April 22, 2005, July 7, 2005, and September 9, 2005 docketed as CTA Case
Nos. 7228, 7286, and 7318, respectively. However, on October 10, 2005, Mindanao
I received a copy of the letter dated September 30, 2003 (sic) of the BIR denying its
application for tax credit/refund.28
The Court of Tax Appeals Ruling: Division
On 24 October 2008, the CTA Second Division rendered its Decision29 in CTA Case
Nos. 7228, 7286, and 7318. The CTA Second Division found that (1) pursuant to
Section 112(A), Mindanao I can only claim 90.27% of the amount of substantiated
excess input VAT because a portion was not reported in its quarterly VAT returns;
(2) out of the 14,185,294.80 excess input VAT applied for refund, only
11,657,447.14 can be considered substantiated excess input VAT due to
disallowances by the Independent Certified Public Accountant, adjustment on the
disallowances per the CTA Second 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 (10,523,177.53) representing Mindanao Is unutilized
input VAT for the four quarters of the taxable year 2003.
SO ORDERED.30
Mindanao I filed a motion for partial reconsideration with motion for
Clarification31 on 11 November 2008. It claimed that the CTA Second Division
should not have allocated proportionately Mindanao 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 reconsideration32 on 11 November 2008. It
claimed that Mindanao I failed to exhaust administrative remedies before it filed its
petition for review. The CTA Second Division denied the CIRs motion, and cited
Atlas33 as the basis for ruling that it is more practical and reasonable to count the
two-year prescriptive period for filing a claim for refund or credit of input VAT on
zero-rated sales from the date of filing of the return and payment of the tax due.
The dispositive portion of the CTA Second 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.34
The Ruling of the Court of Tax Appeals: En Banc
On 31 May 2010, the CTA En Banc rendered its Decision35 in CTA EB Case Nos. 476
and 483 and denied the petitions filed by the CIR and Mindanao I. The CTA En Banc
found no new matters which have not yet been considered and passed upon by the
CTA Second Division in its assailed decision and resolution.
The dispositive portion of the CTA En 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 Nos. 7228, 7286, and
7318, entitled "Mindanao I Geothermal Partnership vs. Commissioner of Internal
Revenue" are hereby AFFIRMED in toto.
SO ORDERED.36
Both the CIR and Mindanao I filed Motions for Reconsideration of the CTA En
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)37 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).38
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:
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns
for the second quarter of 2003. Pursuant to
Section 112(A) of the NIRC of 1997, as amended, Mindanao I has two years from
June 30, 2003, within which to file its administrative claim for refund for the second
quarter of 2003, or until June 30, 2005;
(2) On April 4, 2005, Mindanao I applied an administrative claim for refund of
unutilized input VAT for the second quarter of taxable year 2003 with the BIR,
which is within the two-year prescriptive period, provided under Section 112 (A) of
the NIRC of 1997, as amended;
(3) The CIR has 120 days from April 4, 2005 (presumably the date Mindanao I
submitted the supporting documents together with the application for refund) or
until August 2, 2005, to decide the administrative claim for refund;
(4) Within 30 days from the lapse of the 120-day period or from August 3, 2005 to
September 1, 2005, Mindanao I should have elevated its claim for refund to the
CTA in Division;
(5) However, on July 7, 2005, Mindanao I filed its Petition for Review with this
Court, docketed as CTA Case No. 7286, even before the 120-day period for the CIR
to decide the claim for refund had lapsed on August 2, 2005. The Petition for
Review was, therefore, prematurely filed and there was failure to exhaust
administrative remedies;
xxxx
C.T.A. Case No. 7318:
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns
for the third and fourth quarters of 2003. Pursuant to Section 112(A) of the NIRC of
1997, as amended, Mindanao I therefore, has two years from September 30, 2003
and December 31, 2003, or until September 30, 2005 and December 31, 2005,
respectively, within which to file its administrative claim for the third and fourth
quarters of 2003;
(2) On April 4, 2005, Mindanao I applied an administrative claim for refund of
unutilized input VAT for the third and fourth quarters of taxable year 2003 with the
BIR, which is well within the two-year prescriptive period, provided under Section
112(A) of the NIRC of 1997, as amended;
(3) From April 4, 2005, which is also presumably the date Mindanao I submitted
supporting documents, together with the aforesaid application for refund, the CIR
has 120 days or until August 2, 2005, to decide the claim;
(4) Within thirty (30) days from the lapse of the 120-day period or from August 3,
2005 until September 1, 2005 Mindanao I should have elevated its claim for refund
to the CTA;
(5) However, Mindanao I filed its Petition for Review with the CTA in Division only
on September 9, 2005, which is 8 days beyond the 30-day period to appeal to the
CTA.
Evidently, the Petition for Review was filed way beyond the 30-day prescribed
period. Thus, the Petition for Review should have been dismissed for being filed
late.
In recapitulation:
(1) C.T.A. Case No. 7228
Claim for the first quarter of 2003 had already prescribed for having been filed
beyond the two-year prescriptive period;
(2) C.T.A. Case No. 7286
Claim for the second quarter of 2003 should be dismissed for Mindanao 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;
(3) C.T.A. Case No. 7318
Petition for Review was filed beyond the 30-day prescribed period to appeal to the
CTA.
xxxx
IN VIEW OF THE FOREGOING, the Commissioner of Internal Revenues Motion for
Reconsideration is hereby GRANTED; Mindanao Is Motion for Partial
Reconsideration is hereby DENIED for lack of merit.
The May 31, 2010 Decision of this Court En Banc is hereby REVERSED.
Accordingly, the Petition for Review of the Commissioner of Internal Revenue in
CTA EB No. 476 is hereby GRANTED and the entire claim of Mindanao I Geothermal
Partnership for the first, second, third and fourth quarters of 2003 is hereby
DENIED.
SO ORDERED.39
The Issues
G.R. No. 193301
Mindanao II v. CIR
Mindanao II raised the following grounds in its Petition for Review:
I. The Honorable Court of Tax Appeals erred in holding that the claim of Mindanao
II for the 1st and 2nd quarters of year 2003 has already prescribed pursuant to the
Mirant case.
A. The Atlas case and Mirant case have conflicting interpretations of the law as to
the reckoning date of the two year prescriptive period for filing claims for VAT
refund.
B. The Atlas case was not and cannot be superseded by the Mirant case in light of
Section 4(3), Article VIII of the 1987 Constitution.
C. The ruling of the Mirant case, which uses the close of the taxable quarter when
the sales were made as the reckoning date in counting the two-year prescriptive
period cannot be applied retroactively in the case of Mindanao II.
II. The Honorable Court of Tax Appeals erred in interpreting Section 105 of the
1997 Tax Code, as amended in that the sale of the fully depreciated Nissan Patrol is
a one-time transaction and is not incidental to the VAT zero-rated operation of
Mindanao II.
III. The Honorable Court of Tax Appeals erred in denying the amount disallowed by
the Independent Certified Public Accountant as Mindanao II substantially complied
with the requisites of the 1997 Tax Code, as amended, for refund/tax credit.
A. The amount of 2,090.16 was brought about by the timing difference in the
recording of the foreign currency deposit transaction.
B. The amount of 2,752.00 arose from the out-of-pocket expenses reimbursed to
SGV & Company which is substantially suppoerted [sic] by an official receipt.
C. The amount of 487,355.93 was unapplied and/or was not included in Mindanao
IIs claim for refund or tax credit for the year 2004 subject matter of CTA Case No.
7507.
IV. The doctrine of strictissimi juris on tax exemptions should be relaxed in the
present case.40
G.R. No. 194637
Mindanao I v. CIR
Mindanao I raised the following grounds in its Petition for Review:
I. The administrative claim and judicial claim in CTA Case No. 7228 were timely filed
pursuant to the case of Atlas Consolidated Mining and Development Corporation
vs. Commissioner of Internal Revenue, which was then the controlling ruling at the
time of filing.
A. The recent ruling in the Commissioner of Internal Revenue vs. Mirant Pagbilao
Corporation, which uses the end of the taxable quarter when the sales were made
as the reckoning date in counting the two-year prescriptive period, cannot be
applied retroactively in the case of Mindanao I.
B. The Atlas case promulgated by the Third Division of this Honorable Court on June
8, 2007 was not and cannot be superseded by the Mirant Pagbilao case
promulgated by the Second Division of this Honorable Court on September 12,
2008 in light of the explicit provision of Section 4(3), Article VIII of the 1987
Constitution.
(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
II. Likewise, the recent ruling of this Honorable Court in Commissioner of Internal
Revenue vs. Aichi Forging Company of Asia, Inc., cannot be applied retroactively to
Mindanao I in the present case.41
In a Resolution dated 14 December 2011,42 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 3,160,984.69 and 1,562,085.33, respectively, 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
3,893,566.14, 2,351,000.83, and 7,940,727.83, respectively, are covered by
G.R. No. 194637.
Section 112 of the 1997 Tax Code
The pertinent sections of the 1997 Tax Code, the law applicable at the time of
Mindanao 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 zero-rated sales under Section
106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign
currency exchange proceeds thereof had been duly accounted for in accordance
with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided,
further, That where the taxpayer is engaged in zero-rated or effectively zero-rated
sale and also in taxable or exempt sale of goods or properties or services, and the
amount of creditable input tax due or paid cannot be directly and entirely
attributed to any one of the transactions, it shall be allocated proportionately on
the basis of the volume of sales.
xxxx
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 twenty day-period, appeal the decision or the unacted claim with the Court of Tax
on the part of the Commissioner to act on the application within the period Appeals.
prescribed above, the taxpayer affected may, within thirty (30) days from the x x x x 43 (Underscoring supplied)
receipt of the decision denying the claim or after the expiration of the one hundred

The relevant dates for G.R. No. 193301 (Mindanao II) are:
CTA Period Close of Last day Actual date of Last day for Actual Date
Case No. covered by quarter for filing filing filing case of filing case
VAT Sales in when sales application application for with CTA45 with CTA
2003 and were of tax tax refund/ (judicial
amount made refund/tax credit with the claim)
credit CIR
certificate (administrative
with the claim)44
CIR

7227 1st Quarter, 31 March 31 March 13 April 2005 12 September 22 April 2005
3,160,984.69 2003 2005 2005

7287 2nd Quarter, 30 June 30 June 13 April 2005 12 September 7 July 2005
1,562,085.33 2003 2005 2005

7317 3rd and 4th 30 30 13 April 2005 12 September 9 September

Quarters, September September 2005 2005
3,521,129.50 2003 2005

31 2 January
December 2006
2003 (31
December
2005 being
a Saturday)
The relevant dates for G.R. No. 194637 (Minadanao I) are:
CTA Period Close of Last day Actual date of Last day for Actual Date
Case covered by quarter for filing filing filing case of filing case
No. VAT Sales in when sales application application for with CTA47 with CTA
2003 and were of tax tax refund/ (judicial
amount made refund/tax credit with the claim)
credit CIR
certificate (administrative
with the claim)46
CIR
 7227 1st Quarter, 31 March 31 March 4 April 2005 1 September 22 April 2005
3,893,566.14 2003 2005 2005

7287 2nd Quarter, 30 June 30 June 4 April 2005 1 September 7 July 2005
2,351,000.83 2003 2005 2005

7317 3rd 30 30 4 April 2005 1 September 9 September

and 4th September September
Quarters, 2003 2005
7,940,727.83
31 2 January
December 2006
2003 (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):48
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
2005 2005
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.
This Court cannot disregard mandatory and jurisdictional conditions mandated by
law simply because the Commissioner chose not to contest the numerical
correctness of the claim for tax refund or credit of the taxpayer. Non-compliance
with mandatory periods, non-observance of prescriptive periods, and non-
adherence to exhaustion of administrative remedies bar a 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
In determining whether the administrative claims of Mindanao I and Mindanao II
for 2003 have prescribed, we see no need to rely on either Atlas or Mirant. Section
112(A) of the 1997 Tax Code is clear: "Any VAT-registered person, whose sales are
zero-rated or effectively zero-rated may, within two (2) years after the close of the
taxable quarter when the sales were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable to such sales x
x x."
We rule on Mindanao I and IIs administrative claims for the first, second, third, and
fourth quarters of 2003 as follows:
(1) The last day for filing an application for tax refund or credit with the CIR for the
first quarter of 2003 was on 31 March 2005. Mindanao II filed its administrative
claim before the CIR on 13 April 2005, while Mindanao I filed its administrative
claim before the CIR on 4 April 2005. Both claims have prescribed, pursuant to
Section 112(A) of the 1997 Tax Code.
(2) The last day for filing an application for tax refund or credit with the CIR for the
second quarter of 2003 was on 30 June 2005. Mindanao II filed its administrative
claim before the CIR on 13 April 2005, while Mindanao I filed its administrative
claim before the CIR on 4 April 2005. Both claims were filed on time, pursuant to
Section 112(A) of the 1997 Tax Code.
(3) The last day for filing an application for tax refund or credit with the CIR for the
third quarter of 2003 was on 30 September 2005. Mindanao II filed its
administrative claim before the CIR on 13 April 2005, while Mindanao I filed its
administrative claim before the CIR on 4 April 2005. Both claims were filed on time,
pursuant to Section 112(A) of the 1997 Tax Code.
(4) The last day for filing an application for tax refund or credit with the CIR for the
fourth quarter of 2003 was on 2 January 2006. Mindanao II filed its administrative
claim before the CIR on 13 April 2005, while Mindanao I filed its administrative
claim before the CIR on 4 April 2005. Both claims were filed on time, pursuant to
Section 112(A) of the 1997 Tax Code.
Prescriptive Period for
the Filing of Judicial Claims
In determining whether the claims for the second, third and fourth quarters of
2003 have been properly appealed, we still see no need to refer to either Atlas or
Mirant, or even to Section 229 of the 1997 Tax Code. The second paragraph of
Section 112(C) of the 1997 Tax Code is clear: "In case of full or partial denial of the
claim for tax refund or tax credit, or the failure on the part of the Commissioner to
act on the application within the period prescribed above, the taxpayer affected
may, within thirty (30) days from the receipt of the decision denying the claim or
after the expiration of the one hundred twenty day-period, appeal the decision or
the unacted claim with the Court of Tax Appeals."
The mandatory and jurisdictional nature of the 120+30 day periods was explained
in San Roque:
At the time San Roque filed its petition for review with the CTA, the 120+30 day
mandatory periods were already in the law. Section 112(C) expressly grants the
Commissioner 120 days within which to decide the 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 two-year
prescriptive period (equivalent to 730 days), then the taxpayer must file his
administrative claim for refund or credit within the first 610 days of the two-year
prescriptive period. Otherwise, the filing of the administrative claim beyond the
first 610 days will result in the appeal to the CTA being filed beyond the two-year
prescriptive period. Thus, if the taxpayer files his administrative claim on the 611th
day, the Commissioner, with his 120-day period, will have until the 731st day to
decide the claim. If the Commissioner decides only on the 731st day, or does not
decide at all, the taxpayer can no longer file his judicial claim with the CTA because
the two-year prescriptive period (equivalent to 730 days) has lapsed. The 30-day
period granted by law to the taxpayer to file an appeal before the CTA becomes
utterly useless, even if the taxpayer complied with the law by filing his
administrative claim within the two-year prescriptive period.
The theory that the 30-day period must fall within the two-year prescriptive period
adds a condition that is not found in the law. It results in truncating 120 days from
the 730 days that the law grants the taxpayer for filing his administrative claim with
the Commissioner. This Court cannot interpret a law to defeat, wholly or even
partly, a remedy that the law expressly grants in clear, plain, and unequivocal
language.
Section 112(A) and (C) must be interpreted according to its clear, plain, and
unequivocal language. The taxpayer can file his administrative claim for refund or
credit at anytime within the two-year prescriptive period. If he files his claim on the
last day of the two-year prescriptive
period, his claim is still filed on time. The Commissioner will have 120 days from
such filing to decide the claim. If the Commissioner decides the claim on the 120th
day, or does not decide it on that day, the taxpayer still has 30 days to file his
judicial claim with the CTA. This is not only the plain meaning but also the only
logical interpretation of Section 112(A) and (C).50 (Emphases in the original;
citations omitted)
In San Roque, this Court ruled that "all taxpayers can rely on BIR Ruling No. DA-489-
03 from the time of its issuance on 10 December 2003 up to its reversal in Aichi on
6 October 2010, where this Court held that the 120+30 day periods are mandatory
and jurisdictional."51 We shall discuss later the effect of San 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.
(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 Banc 53 examined and ruled on
the different claims for tax refund or credit of three different companies. In San
Roque, we reiterated that "following the verba legis doctrine, Section 112(C) must
be applied exactly as worded since it is clear, plain, and unequivocal. The taxpayer
cannot simply file a petition with the CTA without waiting for the 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
120-day period.
Administrative Judicial Claim
Claim
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
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

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
G.R. No. 194637
Mindanao I v. CIR
Administrative Judicial Claim Action on Claim
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
 3rd Quarter, 2003 Filed on time Filed late
4th Quarter, 2003 Filed on time Filed late
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.
(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.
"Incidental" Transaction
Mindanao II asserts that the sale of a fully depreciated Nissan Patrol is not an
incidental transaction in the course of its business; hence, it is an isolated
transaction that should not have been subject to 10% VAT.
Section 105 of the 1997 Tax Code does not support Mindanao IIs position:
SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells
barters, exchanges, leases goods or properties, renders services, and any person
who imports goods shall be subject to the value-added tax (VAT) imposed in
Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted or
passed on to the buyer, transferee or lessee of the goods, properties or services.
This rule shall likewise apply to existing contracts of sale or lease of goods,
properties or services at the time of the effectivity of Republic Act No. 7716.
Grant, pursuant to
Section 112(C) of the
1997 Tax Code
Grant, pursuant to
Section 112(C) of the
1997 Tax Code
The phrase "in the course of trade or business" means the regular conduct or
pursuit of a commercial or an economic activity, including transactions incidental
thereto, by any person regardless of whether or not the person engaged therein is
a nonstock, nonprofit private organization (irrespective of the disposition of its net
income and whether or not it sells exclusively to members or their guests), or
government entity.
The rule of regularity, to the contrary notwithstanding, services as defined in this
Code rendered in the Philippines by nonresident foreign persons shall be
considered as being rendered in the course of trade or business. (Emphasis
supplied)
Mindanao II relies on Commissioner of Internal Revenue v. Magsaysay Lines, Inc.
(Magsaysay)55 and Imperial v. Collector of Internal Revenue (Imperial)56 to justify its
position. Magsaysay, decided under the NIRC of 1986, involved the sale of vessels
of the National Development Company (NDC) to Magsaysay Lines, Inc. We ruled
that the sale of vessels was not in the course of 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
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."
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 492,198.09 is
improper as it has substantially complied with the substantiation requirements of
Section 113(A)58 in relation to Section 23759 of the 1997 Tax Code, as implemented
by Section 4.104-1, 4.104-5 and 4.108-1 of Revenue Regulation No. 7-95.60
We are constrained to state that Mindanao 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 on 31 May 2010, as well
as the Amended Decision promulgated on 24 November 2010, are AFFIRMED with
MODIFICATION.
For G.R. No. 193301, the claim of Mindanao II Geothermal Partnership for the first
quarter of 2003 is DENIED while its claims for the second, third, and fourth quarters
of 2003 are GRANTED. For G.R. No. 19463 7, the claims of Mindanao I Geothermal
Partnership for the first, third, and fourth quarters of 2003 are DENIED while its
claim for the second quarter of 2003 is GRANTED.
SO ORDERED.
COMMISSIONER OF INTERNAL REVENUE, G.R. No. 178697 This petition for review on certiorari seeks to set aside the May 17, 2007 Decision
Petitioner, and the July 5, 2007 Resolution of the Court of Tax Appeals En Banc [1] (CTA-EB), in
Present: C.T.A. EB No. 90, affirming the October 26, 2004 Decision of the CTA-First
Division[2] which, in turn, partially granted the petition for review of respondent
CARPIO, J., Chairperson, Sony Philippines, Inc. (Sony). The CTA-First Division decision cancelled the
LEONARDO-DE CASTRO,* deficiency assessment issued by petitioner Commissioner of Internal
- versus - PERALTA, Revenue (CIR) against Sony for Value Added Tax (VAT) but upheld the deficiency
ABAD, and assessment for expanded withholding tax (EWT) in the amount of P1,035,879.70
MENDOZA, JJ. and the penalties for late remittance of internal revenue taxes in the amount
of P1,269, 593.90.[3]

THE FACTS:
SONY PHILIPPINES, INC.,
Respondent. Promulgated: On November 24, 1998, the CIR issued Letter of Authority No. 000019734 (LOA
November 17, 2010 19734) authorizing certain revenue officers to examine Sonys books of accounts
and other accounting records regarding revenue taxes for the period 1997 and
X ---------------------------------------------------------------------------------------X unverified prior years. On December 6, 1999, a preliminary assessment for 1997
deficiency taxes and penalties was issued by the CIR which Sony
DECISION protested. Thereafter, acting on the protest, the CIR issued final assessment
notices, the formal letter of demand and the details of discrepancies. [4] Said details
MENDOZA, J.: of the deficiency taxes and penalties for late remittance of internal revenue taxes
are as follows:

DEFICIENCY VALUE -ADDED TAX (VAT)

(Assessment No. ST-VAT-97-0124-2000)

Basic Tax Due P 7,958,700.00

Add: Penalties

Interest up to 3-31-2000 P 3,157,314.41

Compromise 25,000.00 3,182,314.41

Deficiency VAT Due P 11,141,014.41

DEFICIENCY EXPANDED WITHHOLDING TAX (EWT)

(Assessment No. ST-EWT-97-0125-2000)

Basic Tax Due P 1,416,976.90

Add: Penalties

Interest up to 3-31-2000 P 550,485.82

Compromise 25,000.00 575,485.82

Deficiency EWT Due P 1,992,462.72

DEFICIENCY OF VAT ON ROYALTY PAYMENTS

(Assessment No. ST-LR1-97-0126-2000)

Basic Tax Due P

Add: Penalties

Surcharge P 359,177.80

Interest up to 3-31-2000 87,580.34

Compromise 16,000.00 462,758.14

Penalties Due P 462,758.14

LATE REMITTANCE OF FINAL WITHHOLDING TAX

(Assessment No. ST-LR2-97-0127-2000)

Basic Tax Due P

Add: Penalties

Surcharge P 1,729,690.71

Interest up to 3-31-2000 508,783.07

 Compromise 50,000.00 2,288,473.78

Penalties Due P 2,288,473.78

LATE REMITTANCE OF INCOME PAYMENTS

(Assessment No. ST-LR3-97-0128-2000)

Basic Tax Due P

Add: Penalties

25 % Surcharge P 8,865.34

Interest up to 3-31-2000 58.29

Compromise 2,000.00 10,923.60

Penalties Due P 10,923.60

GRAND TOTAL P 15,895,632.65[5]

Sony sought re-evaluation of the aforementioned assessment by filing a protest on
February 2, 2000. Sony submitted relevant documents in support of its protest on
the 16th of that same month.[6]
On October 24, 2000, within 30 days after the lapse of 180 days from submission of
the said supporting documents to the CIR, Sony filed a petition for review before
the CTA.[7]
After trial, the CTA-First Division disallowed the deficiency VAT assessment because
the subsidized advertising expense paid by Sony which was duly covered by a VAT
invoice resulted in an input VAT credit. As regards the EWT, the CTA-First Division
maintained the deficiency EWT assessment on Sonys motor vehicles and on
professional fees paid to general professional partnerships. It also assessed the
amounts paid to sales agents as commissions with five percent (5%) EWT pursuant
to Section 1(g) of Revenue Regulations No. 6-85. The CTA-First Division, however,
disallowed the EWT assessment on rental expense since it found that the total
rental deposit of P10,523,821.99 was incurred from January to March 1998 which
was again beyond the coverage of LOA 19734. Except for the compromise
penalties, the CTA-First Division also upheld the penalties for the late payment of
VAT on royalties, for late remittance of final withholding tax on royalty as of
December 1997 and for the late remittance of EWT by some of Sonys
branches.[8] In sum, the CTA-First Division partly granted Sonys petition by
cancelling the deficiency VAT assessment but upheld a modified deficiency EWT
assessment as well as the penalties. Thus, the dispositive portion reads:
WHEREFORE, the petition for review is hereby PARTIALLY GRANTED. Respondent is
ORDERED to CANCEL and WITHDRAW the deficiency assessment for value-added
tax for 1997 for lack of merit. However, the deficiency assessments for expanded
withholding tax and penalties for late remittance of internal revenue taxes are
UPHELD.
Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency expanded
withholding tax in the amount of P1,035,879.70 and the following penalties for late
remittance of internal revenue taxes in the sum of P1,269,593.90:
1. VAT on Royalty P 429,242.07
2. Withholding Tax on Royalty 831,428.20
3. EWT of Petitioners Branches 8,923.63
Total P 1,269,593.90
Plus 20% delinquency interest from January 17, 2000 until fully paid pursuant to
Section 249(C)(3) of the 1997 Tax Code.
SO ORDERED.[9]
The CIR sought a reconsideration of the above decision and submitted the
following grounds in support thereof:
A. The Honorable Court committed reversible error in holding that petitioner is
not liable for the deficiency VAT in the amount of P11,141,014.41;
B. The Honorable court committed reversible error in holding that the
commission expense in the amount of P2,894,797.00 should be subjected to 5%
withholding tax instead of the 10% tax rate;
C. The Honorable Court committed a reversible error in holding that the
withholding tax assessment with respect to the 5% withholding tax on rental
deposit in the amount of P10,523,821.99 should be cancelled; and
D. The Honorable Court committed reversible error in holding that the remittance
of final withholding tax on royalties covering the period January to March 1998 was
filed on time.[10]
On April 28, 2005, the CTA-First Division denied the motion for reconsideration.
Unfazed, the CIR filed a petition for review with the CTA-EB raising identical issues:
1. Whether or not respondent (Sony) is liable for the deficiency VAT in
the amount of P11,141,014.41;
2. Whether or not the commission expense in the amount of P2,894,797.00
should be subjected to 10% withholding tax instead of the 5% tax rate;
3. Whether or not the withholding assessment with respect to the 5%
withholding tax on rental deposit in the amount of P10,523,821.99 is proper; and
4. Whether or not the remittance of final withholding tax on royalties covering
the period January to March 1998 was filed outside of time.[11]
Finding no cogent reason to reverse the decision of the CTA-First Division, the CTA-
EB dismissed CIRs petition on May 17, 2007. CIRs motion for reconsideration was
denied by the CTA-EB on July 5, 2007.
The CIR is now before this Court via this petition for review relying on the very
same grounds it raised before the CTA-First Division and the CTA-EB. The said
grounds are reproduced below:
GROUNDS FOR THE ALLOWANCE OF THE PETITION
I
THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS NOT LIABLE FOR
DEFICIENCY VAT IN THE AMOUNT OF PHP11,141,014.41.
II
AS TO RESPONDENTS DEFICIENCY EXPANDED WITHHOLDING TAX IN THE AMOUNT
OF PHP1,992,462.72:
A. THE CTA EN BANC ERRED IN RULING THAT THE COMMISSION EXPENSE IN THE
AMOUNT OF PHP2,894,797.00 SHOULD BE SUBJECTED TO A WITHHOLDING TAX OF
5% INSTEAD OF THE 10% TAX RATE.
B. THE CTA EN BANC ERRED IN RULING THAT THE ASSESSMENT WITH RESPECT
TO THE 5% WITHHOLDING TAX ON RENTAL DEPOSIT IN THE AMOUNT OF
PHP10,523,821.99 IS NOT PROPER.
III
THE CTA EN BANC ERRED IN RULING THAT THE FINAL WITHHOLDING TAX ON
ROYALTIES COVERING THE PERIOD JANUARY TO MARCH 1998 WAS FILED ON
TIME.[12]
Upon filing of Sonys comment, the Court ordered the CIR to file its reply thereto.
The CIR subsequently filed a manifestation informing the Court that it would no
longer file a reply. Thus, on December 3, 2008, the Court resolved to give due
course to the petition and to decide the case on the basis of the pleadings filed.[13]
The Court finds no merit in the petition.
The CIR insists that LOA 19734, although it states the period 1997 and unverified
prior years, should be understood to mean the fiscal year ending in March 31,
1998.[14]The Court cannot agree.
Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the authority
given to the appropriate revenue officer assigned to perform assessment functions.
It empowers or enables said revenue officer to examine the books of account and
other accounting records of a taxpayer for the purpose of collecting the correct
amount of tax.[15]The very provision of the Tax Code that the CIR relies on is
unequivocal with regard to its power to grant authority to examine and assess a
taxpayer.
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional
Requirements for Tax Administration and Enforcement.
(A)Examination of Returns and Determination of tax Due. After a return has been
filed as required under the provisions of this Code, the Commissioner or his duly
authorized representative may authorize the examination of any taxpayer and the
assessment of the correct amount of tax: Provided, however, That failure to file a
return shall not prevent the Commissioner from authorizing the examination of any
taxpayer. x x x [Emphases supplied]
Clearly, there must be a grant of authority before any revenue officer can conduct
an examination or assessment. Equally important is that the revenue officer so
authorized must not go beyond the authority given. In the absence of such an
authority, the assessment or examination is a nullity.
As earlier stated, LOA 19734 covered the period 1997 and unverified prior years.
For said reason, the CIR acting through its revenue officers went beyond the scope
of their authority because the deficiency VAT assessment they arrived at was based
on records from January to March 1998 or using the fiscal year which ended in
March 31, 1998. As pointed out by the CTA-First Division in its April 28, 2005
Resolution, the CIR knew which period should be covered by the investigation.
Thus, if CIR wanted or intended the investigation to include the year 1998, it should
have done so by including it in the LOA or issuing another LOA.
Upon review, the CTA-EB even added that the coverage of LOA 19734, particularly
the phrase and unverified prior years, violated Section C of Revenue Memorandum
Order No. 43-90 dated September 20, 1990, the pertinent portion of which reads:
3. A Letter of Authority should cover a taxable period not exceeding one taxable
year. The practice of issuing L/As covering audit of unverified prior years is hereby
prohibited. If the audit of a taxpayer shall include more than one taxable period,
the other periods or years shall be specifically indicated in the L/A. [16] [Emphasis
supplied]
On this point alone, the deficiency VAT assessment should have been disallowed.
Be that as it may, the CIRs argument, that Sonys advertising expense could not be
considered as an input VAT credit because the same was eventually reimbursed by
Sony International Singapore (SIS), is also erroneous.
The CIR contends that since Sonys advertising expense was reimbursed by SIS, the
former never incurred any advertising expense. As a result, Sony is not entitled to a
tax credit. At most, the CIR continues, the said advertising expense should be for
the account of SIS, and not Sony.[17]
The Court is not persuaded. As aptly found by the CTA-First Division and later
affirmed by the CTA-EB, Sonys deficiency VAT assessment stemmed from the CIRs
disallowance of the input VAT credits that should have been realized from the
advertising expense of the latter.[18] It is evident under Section 110[19] of the 1997
Tax Code that an advertising expense duly covered by a VAT invoice is a legitimate
business expense. This is confirmed by no less than CIRs own witness, Revenue
Officer Antonio Aluquin.[20] There is also no denying that Sony incurred advertising
expense. Aluquin testified that advertising companies issued invoices in the name
of Sony and the latter paid for the same.[21] Indubitably, Sony incurred and paid for
advertising expense/ services. Where the money came from is another matter all
together but will definitely not change said fact.
The CIR further argues that Sony itself admitted that the reimbursement from SIS
was income and, thus, taxable. In support of this, the CIR cited a portion of Sonys
protest filed before it:
The fact that due to adverse economic conditions, Sony-Singapore has granted to
our client a subsidy equivalent to the latters advertising expenses will not affect the
validity of the input taxes from such expenses. Thus, at the most, this is an
additional income of our client subject to income tax. We submit further that our
client is not subject to VAT on the subsidy income as this was not derived from the
sale of goods or services.[22]
Insofar as the above-mentioned subsidy may be considered as income and,
therefore, subject to income tax, the Court agrees. However, the Court does not
agree that the same subsidy should be subject to the 10% VAT. To begin with, the
said subsidy termed by the CIR as reimbursement was not even exclusively
earmarked for Sonys advertising expense for it was but an assistance or aid in view
of Sonys dire or adverse economic conditions, and was only equivalent to the
latters (Sonys) advertising expenses.
Section 106 of the Tax Code explains when VAT may be imposed or exacted. Thus:
SEC. 106. Value-added Tax on Sale of Goods or Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected on every
sale, barter or exchange of goods or properties, value-added tax equivalent to ten
percent (10%) of the gross selling price or gross value in money of the goods or
properties sold, bartered or exchanged, such tax to be paid by the seller or
transferor.
Thus, there must be a sale, barter or exchange of goods or properties before any
VAT may be levied. Certainly, there was no such sale, barter or exchange in the
subsidy given by SIS to Sony. It was but a dole out by SIS and not in payment for
goods or properties sold, bartered or exchanged by Sony.
In the case of CIR v. Court of Appeals (CA),[23] the Court had the occasion to rule
that services rendered for a fee even on reimbursement-on-cost basis only and
without realizing profit are also subject to VAT. The case, however, is not applicable
to the present case. In that case, COMASERCO rendered service to its affiliates and,
in turn, the affiliates paid the former reimbursement-on-cost which means that it
was paid the cost or expense that it incurred although without profit. This is not
true in the present case. Sony did not render any service to SIS at all. The services
rendered by the advertising companies, paid for by Sony using SIS dole-out, were
for Sony and not SIS. SIS just gave assistance to Sony in the amount equivalent to
the latters advertising expense but never received any goods, properties or service
from Sony.
Regarding the deficiency EWT assessment, more particularly Sonys commission
expense, the CIR insists that said deficiency EWT assessment is subject to the ten
percent (10%) rate instead of the five percent (5%) citing Revenue Regulation No.
2-98 dated April 17, 1998.[24] The said revenue regulation provides that the 10%
rate is applied when the recipient of the commission income is a natural person.
According to the CIR, Sonys schedule of Selling, General and Administrative
expenses shows the commission expense as commission/dealer salesman
incentive, emphasizing the word salesman.
On the other hand, the application of the five percent (5%) rate by the CTA-First
Division is based on Section 1(g) of Revenue Regulations No. 6-85 which provides:
(g) Amounts paid to certain Brokers and Agents. On gross payments to customs,
insurance, real estate and commercial brokers and agents of professional
entertainers five per centum (5%).[25]
In denying the very same argument of the CIR in its motion for reconsideration, the
CTA-First Division, held:
x x x, commission expense is indeed subject to 10% withholding tax but payments
made to broker is subject to 5% withholding tax pursuant to Section 1(g) of
Revenue Regulations No. 6-85. While the commission expense in the schedule of
Selling, General and Administrative expenses submitted by petitioner (SPI) to the
BIR is captioned as commission/dealer salesman incentive the same does not
justify the automatic imposition of flat 10% rate. As itemized by petitioner, such
expense is composed of Commission Expense in the amount of P10,200.00 and
Broker Dealer of P2,894,797.00.[26]
The Court agrees with the CTA-EB when it affirmed the CTA-First Division
decision. Indeed, the applicable rule is Revenue Regulations No. 6-85, as amended
by Revenue Regulations No. 12-94, which was the applicable rule during the
subject period of examination and assessment as specified in the LOA. Revenue
Regulations No. 2-98, cited by the CIR, was only adopted in April 1998 and,
therefore, cannot be applied in the present case. Besides, the withholding tax on
brokers and agents was only increased to 10% much later or by the end of July
2001 under Revenue Regulations No. 6-2001.[27] Until then, the rate was only 5%.
The Court also affirms the findings of both the CTA-First Division and the CTA-EB on
the deficiency EWT assessment on the rental deposit. According to their findings,
Sony incurred the subject rental deposit in the amount of P10,523,821.99 only
from January to March 1998. As stated earlier, in the absence of the appropriate
LOA specifying the coverage, the CIRs deficiency EWT assessment from January to 30, which meant that the royalty may be payable until August 1998 pursuant to the
March 1998, is not valid and must be disallowed. MLA, the FWT for said royalty had to be paid on or before July 10, 1998 or 10 days
Finally, the Court now proceeds to the third ground relied upon by the CIR. from its accrual at the end of June 1998. Thus, when Sony remitted the same on
July 8, 1998, it was not yet late.
The CIR initially assessed Sony to be liable for penalties for belated remittance of its
FWT on royalties (i) as of December 1997; and (ii) for the period from January to
March 1998. Again, the Court agrees with the CTA-First Division when it upheld the
CIR with respect to the royalties for December 1997 but cancelled that from
January to March 1998.

The CIR insists that under Section 3[28] of Revenue Regulations No. 5-82 and
Sections 2.57.4 and 2.58(A)(2)(a)[29] of Revenue Regulations No. 2-98, Sony should
also be made liable for the FWT on royalties from January to March of 1998. At the
same time, it downplays the relevance of the Manufacturing License Agreement
(MLA) between Sony and Sony-Japan, particularly in the payment of royalties.

The above revenue regulations provide the manner of withholding remittance as

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

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

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

Withal, Sony was to pay Sony-Japan royalty within two (2) months after every semi-
annual period which ends in June 30 and December 31. However, the CTA-First
Division found that there was accrual of royalty by the end of December 1997 as
well as by the end of June 1998. Given this, the FWTs should have been paid or
remitted by Sony to the CIR on January 10, 1998 and July 10, 1998. Thus, it was
correct for the CTA-First Division and the CTA-EB in ruling that the FWT for the
royalty from January to March 1998 was seasonably filed. Although the royalty
from January to March 1998 was well within the semi-annual period ending June