Taxation II Cases

EN BANC G.R. No.
158885 October 2, 2009
FORT BONIFACIO DEVELOPMENT CORPORATION Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, REGIONAL DIRECTOR, REVENUE
REGION NO. 8, and CHIEF, ASSESSMENT DIVISION, REVENUE REGION NO. 8, BIR, Respondents.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 170680
FORT BONIFACIO DEVELOPMENT CORPORATION Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, REVENUE DISTRICT OFFICER, REVENUE
DISTRICT NO. 44, TAGUIG and PATEROS, BUREAU OF INTERNAL REVENUE. Respondents.
LEONARDO-DE CASTRO, J.:
Before us is respondents’ Motion for Reconsideration of our Decision dated April 2, 2009 which granted the consolidated petitions of petitioner
Fort Bonifacio Development Corporation, the dispositive portion of which reads:
WHEREFORE, the petitions are GRANTED. The assailed decisions of the Court of Tax Appeals and the Court of Appeals are REVERSED and SET ASIDE.
Respondents are hereby (1) restrained from collecting from petitioner the amount of ₱28,413,783.00 representing the transitional input tax credit
due it for the fourth quarter of 1996; and (2) directed to refund to petitioner the amount of ₱347,741,695.74 paid as output VAT for the third
quarter of 1997 in light of the persisting transitional input tax credit available to petitioner for the said quarter, or to issue a tax credit
corresponding to such amount. No pronouncement as to costs.
The Motion for Reconsideration raises the following arguments:
I. SECTION 100 OF THE OLD NATIONAL INTERNAL REVENUE CODE (OLD NIRC), AS AMENDED BY REPUBLIC ACT (R.A.) NO. 7716, COULD NOT HAVE
SUPPLIED THE DISTINCTION BETWEEN THE TREATMENT OF REAL PROPERTIES OR REAL ESTATE DEALERS ON THE ONE HAND, AND THE TREATMENT
OF TRANSACTIONS INVOLVING OTHER COMMERCIAL GOODS ON THE OTHER HAND, AS SAID DISTINCTION IS FOUND IN SECTION 105 AND,
SUBSEQUENTLY, REVENUE REGULATIONS NO. 7-95 WHICH DEFINES THE INPUT TAX CREDITABLE TO A REAL ESTATE DEALER WHO BECOMES
SUBJECT TO VAT FOR THE FIRST TIME.
II. SECTION 4.105.1 AND PARAGRAPH (A) (III) OF THE TRANSITORY PROVISIONS OF REVENUE REGULATIONS NO. 7-95 VALIDLY LIMIT THE 8%
TRANSITIONAL INPUT TAX TO THE IMPROVEMENTS ON REAL PROPERTIES.
III. REVENUE REGULATIONS NO. 6-97 DID NOT REPEAL REVENUE REGULATIONS NO. 7-95.
The instant motion for reconsideration lacks merit.
The first VAT law, found in Executive Order (EO) No. 273 [1987], took effect on January 1, 1988. It amended several provisions of the National
Internal Revenue Code of 1986 (Old NIRC). EO 273 likewise accommodated the potential burdens of the shift to the VAT system by allowing newly
VAT-registered persons to avail of a transitional input tax credit as provided for in Section 105 of the Old NIRC. Section 105 as amended by EO 273
reads:
Sec. 105. Transitional Input Tax Credits. — A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person
shall, subject to the filing of an inventory as prescribed by regulations, be allowed input tax on his beginning inventory of goods, materials and
supplies equivalent to 8% of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is
higher, which shall be creditable against the output tax.
RA 7716 took effect on January 1, 1996. It amended Section 100 of the Old NIRC by imposing for the first time value-added-tax on sale of real
properties. The amendment reads:
Sec. 100. 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, a value-added tax equivalent to 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.1avvph!1
(1) The term 'goods or properties' shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include:
(A) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business; xxx
The provisions of Section 105 of the NIRC, on the transitional input tax credit, remain intact despite the enactment of RA 7716. Section 105
however was amended with the passage of the new National Internal Revenue Code of 1997 (New NIRC), also officially known as Republic Act (RA)
8424. The provisions on the transitional input tax credit are now embodied in Section 111(A) of the New NIRC, which reads:
Section 111. Transitional/Presumptive Input Tax Credits. –
(A) Transitional Input Tax Credits. - A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall,
subject to the filing of an inventory according to rules and regulations prescribed by the Secretary of finance, upon recommendation of the
Commissioner, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent for 8% of the value of such
inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the
output tax. [Emphasis ours.]
The Commissioner of Internal Revenue (CIR) disallowed Fort Bonifacio Development Corporation’s (FBDC) presumptive input tax credit arising from
the land inventory on the basis of Revenue Regulation 7-95 (RR 7-95) and Revenue Memorandum Circular 3-96 (RMC 3-96). Specifically, Section
4.105-1 of RR 7-95 provides:
Sec. 4.105-1. Transitional input tax on beginning inventories. – Taxpayers who became VAT-registered persons upon effectivity of RA No. 7716 who
have exceeded the minimum turnover of ₱500,000.00 or who voluntarily register even if their turnover does not exceed ₱500,000.00 shall be
entitled to a presumptive input tax on the inventory on hand as of December 31, 1995 on the following: (a) goods purchased for resale in their
present condition; (b) materials purchased for further processing, but which have not yet undergone processing; (c) goods which have been
manufactured by the taxpayer; (d) goods in process and supplies, all of which are for sale or for use in the course of the taxpayer’s trade or
business as a VAT-registered person.
However, in the case of real estate dealers, the basis of the presumptive input tax shall be the improvements, such as buildings, roads, drainage
systems, and other similar structures, constructed on or after the effectivity of EO 273 (January 1, 1988).
The transitional input tax shall be 8% of the value of the inventory or actual VAT paid, whichever is higher, which amount may be allowed as tax
credit against the output tax of the VAT-registered person.
In the April 2, 2009 Decision sought to be reconsidered, the Court struck down Section 4.105-1 of RR 7-95 for being in conflict with the law. It held
that the CIR had no power to limit the meaning and coverage of the term "goods" in Section 105 of the Old NIRC sans statutory authority or basis
and justification to make such limitation. This it did when it restricted the application of Section 105 in the case of real estate dealers only to
improvements on the real property belonging to their beginning inventory.
A law must not be read in truncated parts; its provisions must be read in relation to the whole law. It is the cardinal rule in statutory construction
that a statute’s clauses and phrases must not be taken as detached and isolated expressions, but the whole and every part thereof must be
considered in fixing the meaning of any of its parts in order to produce a harmonious whole. Every part of the statute must be interpreted with
reference to the context, i.e., that every part of the statute must be considered together with other parts of the statute and kept subservient to the
general intent of the whole enactment.1
In construing a statute, courts have to take the thought conveyed by the statute as a whole; construe the constituent parts together; ascertain the
legislative intent from the whole act; consider each and every provision thereof in the light of the general purpose of the statute; and endeavor to
make every part effective, harmonious and sensible.2
The statutory definition of the term "goods or properties" leaves no room for doubt. It states:
Sec. 100. Value-added tax on sale of goods or properties. – (a) Rate and base of tax. – xxx.
(1) The term ‘goods or properties’ shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include:
(A) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business; xxx.
The amendatory provision of Section 105 of the NIRC, as introduced by RA 7716, states:
Sec. 105. Transitional Input tax Credits. – A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person
shall, subject to the filing of an inventory as prescribed by regulations, be allowed input tax on his beginning inventory of goods, materials and
supplies equivalent to 8% of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is
higher, which shall be creditable against the output tax.
The term "goods or properties" by the unambiguous terms of Section 100 includes "real properties held primarily for sale to costumers or held for
lease in the ordinary course of business." Having been defined in Section 100 of the NIRC, the term "goods" as used in Section 105 of the same
code could not have a different meaning. This has been explained in the Decision dated April 2, 2009, thus:
Under Section 105, the beginning inventory of "goods" forms part of the valuation of the transitional input tax credit. Goods, as commonly
understood in the business sense, refers to the product which the VAT-registered person offers for sale to the public. With respect to real estate
dealers, it is the real properties themselves which constitute their "goods." Such real properties are the operating assets of the real estate dealer.
Section 4.100-1 of RR No. 7-95 itself includes in its enumeration of "goods or properties" such "real properties held primarily for sale to customers
or held for lease in the ordinary course of trade or business." Said definition was taken from the very statutory language of Section 100 of the Old
NIRC. By limiting the definition of goods to "improvements" in Section 4.105-1, the BIR not only contravened the definition of "goods" as provided
in the Old NIRC, but also the definition which the same revenue regulation itself has provided.
Section 4.105-1 of RR 7-95 restricted the definition of "goods", viz:
systems, and other similar structures, constructed on or after the effectivity of EO 273 (January 1, 1988).
As mandated by Article 7 of the Civil Code,3 an administrative rule or regulation cannot contravene the law on which it is based. RR 7-95 is
inconsistent with Section 105 insofar as the definition of the term "goods" is concerned. This is a legislative act beyond the authority of the CIR and
the Secretary of Finance. The rules and regulations that administrative agencies promulgate, which are the product of a delegated legislative power
to create new and additional legal provisions that have the effect of law, should be within the scope of the statutory authority granted by the
legislature to the objects and purposes of the law, and should not be in contradiction to, but in conformity with, the standards prescribed by law.
To be valid, an administrative rule or regulation must conform, not contradict, the provisions of the enabling law. An implementing rule or
regulation cannot modify, expand, or subtract from the law it is intended to implement. Any rule that is not consistent with the statute itself is null
and void. 4
While administrative agencies, such as the Bureau of Internal Revenue, may issue regulations to implement statutes, they are without authority to
limit the scope of the statute to less than what it provides, or extend or expand the statute beyond its terms, or in any way modify explicit
provisions of the law. Indeed, a quasi-judicial body or an administrative agency for that matter cannot amend an act of Congress. Hence, in case of
a discrepancy between the basic law and an interpretative or administrative ruling, the basic law prevails.5
To recapitulate, RR 7-95, insofar as it restricts the definition of "goods" as basis of transitional input tax credit under Section 105 is a nullity.
On January 1, 1997, RR 6-97 was issued by the Commissioner of Internal Revenue. RR 6-97 was basically a reiteration of the same Section 4.105-1
of RR 7-95, except that the RR 6-97 deleted the following paragraph:
systems, and other similar structures, constructed on or after the effectivity of E.O. 273 (January 1, 1988).
It is clear, therefore, that under RR 6-97, the allowable transitional input tax credit is not limited to improvements on real properties. The particular
provision of RR 7-95 has effectively been repealed by RR 6-97 which is now in consonance with Section 100 of the NIRC, insofar as the definition of
real properties as goods is concerned. The failure to add a specific repealing clause would not necessarily indicate that there was no intent to
repeal RR 7-95. The fact that the aforequoted paragraph was deleted created an irreconcilable inconsistency and repugnancy between the
provisions of RR 6-97 and RR 7-95.
We now address the points raised in the dissenting opinion of the Honorable Justice Antonio T. Carpio.
At the outset, it must be stressed that FBDC sought the refund of the total amount of ₱347,741,695.74 which it had itself paid in cash to the BIR. It
is argued that the transitional input tax credit applies only when taxes were previously paid on the properties in the beginning inventory and that
there should be a law imposing the tax presumed to have been paid. The thesis is anchored on the argument that without any VAT or other input
business tax imposed by law on the real properties at the time of the sale, the 8% transitional input tax cannot be presumed to have been paid.
The language of Section 105 is explicit. It precludes reading into the law that the transitional input tax credit is limited to the amount of VAT
previously paid. When the aforesaid section speaks of "eight percent (8%) of the value of such inventory" followed by the clause "or the actual
value-added tax paid on such goods, materials and supplies," the implication is clear that under the first clause, "eight percent (8%) of the value of
such inventory," the law does not contemplate the payment of any prior tax on such inventory. This is distinguished from the second clause, "the
actual value-added tax paid on the goods, materials and supplies" where actual payment of VAT on the goods, materials and supplies is assumed.
Had the intention of the law been to limit the amount to the actual VAT paid, there would have been no need to explicitly allow a claim based on
8% of the value of such inventory.
The contention that the 8% transitional input tax credit in Section 105 presumes that a previous tax was paid, whether or not it was actually paid,
requires a transaction where a tax has been imposed by law, is utterly without basis in law. The rationale behind the provisions of Section 105 was
aptly elucidated in the Decision sought to be reconsidered, thus:
It is apparent that the transitional input tax credit operates to benefit newly VAT-registered persons, whether or not they previously paid taxes in
the acquisition of their beginning inventory of goods, materials and supplies. During that period of transition from non-VAT to VAT status, the
transitional input tax credit serves to alleviate the impact of the VAT on the taxpayer. At the very beginning, the VAT-registered taxpayer is obliged
to remit a significant portion of the income it derived from its sales as output VAT. The transitional input tax credit mitigates this initial diminution
of the taxpayer’s income by affording the opportunity to offset the losses incurred through the remittance of the output VAT at a stage when the
person is yet unable to credit input VAT payments.
As pointed out in Our Decision of April 2, 2009, to give Section 105 a restrictive construction that transitional input tax credit applies only when
taxes were previously paid on the properties in the beginning inventory and there is a law imposing the tax which is presumed to have been paid, is
to impose conditions or requisites to the application of the transitional tax input credit which are not found in the law. The courts must not read
into the law what is not there. To do so will violate the principle of separation of powers which prohibits this Court from engaging in judicial
legislation.6 WHEREFORE, premises considered, the Motion for Reconsideration is DENIED WITH FINALITY for lack of merit. SO ORDERED.
THIRD DIVISION | G.R. No. 180345 | November 25, 2009
SAN ROQUE POWER CORPORATION, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.
CHICO-NAZARIO, J.:
In this Petition for Review on Certiorari, under Rule 45 of the Revised Rules of Court, petitioner San Roque Power Corporation assails the
Decision1 of the Court of Tax Appeals (CTA) En Banc dated 20 September 2007 in CTA EB No. 248, affirming the Decision 2 dated 23 March 2006 of
the CTA Second Division in CTA Case No. 6916, which dismissed the claim of petitioner for the refund and/or issuance of a tax credit certificate in
the amount of Two Hundred Forty-Nine Million Three Hundred Ninety-Seven Thousand Six Hundred Twenty Pesos and 18/100 (₱249,397,620.18)
allegedly representing unutilized input Value Added Tax (VAT) for the period covering January to December 2002.
Respondent, as the Commissioner of the Bureau of Internal Revenue (BIR), is responsible for the assessment and collection of all national internal
revenue taxes, fees, and charges, including the Value Added Tax (VAT), imposed by Section 108 3 of the National Internal Revenue Code (NIRC) of
1997. Moreover, it is empowered to grant refunds or issue tax credit certificates in accordance with Section 112 of the NIRC of 1997 for unutilized
input VAT paid on zero-rated or effectively zero-rated sales and purchases of capital goods, to wit:
SEC. 112. Refunds or Tax Credits of Input Tax. -
(A) Zero-rated or Effectively Zero-rated Sales—Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2)
years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input
tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax:
Provided, however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable
foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale
of goods or properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the
transactions, it shall be allocated proportionately on the basis of the volume of sales.
(B) Capital Goods—A VAT-registered person may apply for the issuance of a tax credit certificate or refund of input taxes paid on capital goods
imported or locally purchased, to the extent the such input taxes have not been applied against output taxes. The application may be made only
within two (2) years after the close of the taxable quarter when the importation or purchase was made.
On the other hand, petitioner is a domestic corporation organized under the corporate laws of the Republic of the Philippines. On 14 October 1997,
it was incorporated for the sole purpose of building and operating the San Roque Multipurpose Project in San Manuel, Pangasinan, which is an
indivisible project consisting of the power station, the dam, spillway, and other related facilities. 4 It is registered with the Board of Investments
(BOI) on a preferred pioneer status to engage in the design, construction, erection, assembly, as well as own, commission, and operate electric
power-generating plants and related activities, for which it was issued the Certificate of Registration No. 97-356 dated 11 February 1998.5 As a
seller of services, petitioner is registered with the BIR as a VAT taxpayer under Certificate of Registration No. OCN-98-006-007394.6
On 11 October 1997, petitioner entered into a Power Purchase Agreement (PPA) with the National Power Corporation (NPC) to develop the hydro
potential of the Lower Agno River, and to be able to generate additional power and energy for the Luzon Power Grid, by developing and operating
the San Roque Multipurpose Project. The PPA provides that petitioner shall be responsible for the design, construction, installation, completion
and testing and commissioning of the Power Station and it shall operate and maintain the same, subject to the instructions of the NPC. During the
cooperation period of 25 years commencing from the completion date of the Power Station, the NPC shall purchase all the electricity generated by
the Power Plant.7
Because of the exclusive nature of the PPA between petitioner and the NPC, petitioner applied for and was granted five Certificates of Zero Rate by
the BIR, through the Chief Regulatory Operations Monitoring Division, now the Audit Information, Tax Exemption & Incentive Division. Based on
these certificates, the zero-rated status of petitioner commenced on 27 September 1998 and continued throughout the year 2002.8
For the period January to December 2002, petitioner filed with the respondent its Monthly VAT Declarations and Quarterly VAT Returns. Its
Quarterly VAT Returns showed excess input VAT payments on account of its importation and domestic purchases of goods and services, as
follows9 :
Period Covered Date Filed Particulars Amount
1st Quarter April 20, 2002 Tax Due for the Quarter (Box 13C) P 26,247.27
(January 1, 2002 to
March 31, 2002) Input Tax carried over from previous qtr (22B) 296,124,429.21
Input VAT on Domestic Purchases for the Qtr
(22D) 95,003,348.91
Input VAT on Importation of Goods for the Qtr
(22F) 20,758,668.00
Total Available Input tax (23) 411,886,446.12
VAT Refund/TCC Claimed (24A) 173,909,435.66
Net Creditable Input Tax (25) 237,977,010.46
VAT payable (Excess Input Tax) (26) (237,950,763.19)
Tax Payable (overpayment) (28) (237,950,763.19)
2nd Quarter July 24, 2002 Tax Due for the Quarter (Box 13C) P blank
(April 1, 2002 to
June 30, 2002) Input Tax carried over from previous qtr (22B) 237,950,763.19

(22D) 65,206,499.83
(22F) 18,485,758.00

3rd Quarter October 25, Tax Due for the Quarter (Box 13C) P blank
(July 1, 2002 to 2002 Input Tax carried over from previous qtr (22B) 199,428,027.47
September 30, 2002) Input VAT on Domestic Purchases for the Qtr
(22D) 28,924,020.79
(22F) 1,465,875.00
VAT Refund/TCC Claimed (24A) Blank
4th Quarter January 23, Tax Due for the Quarter (Box 13C) P 34,996.36
(October 1, 2002 to 2003 Input Tax carried over from previous qtr (22B) 114,082,153.62
December 31, 2002) Input VAT on Domestic Purchases for the Qtr
(22D) 18,166,330.54
(22F) 2,308,837.00
On 19 June 2002, 25 October 2002, 27 February 2003, and 29 May 2003, petitioner filed with the BIR four separate administrative claims for refund
of Unutilized Input VAT paid for the period January to March 2002, April to June 2002, July to September 2002, and October to December 2002,
respectively. In these letters addressed to the BIR, Carlos Echevarria (Echevarria), the Vice President and Director of Finance of petitioner,
explained that petitioner’s sale of power to NPC are subject to VAT at zero percent rate, in accordance with Section 108(B)(3) of the
NIRC.10Petitioner sought to recover the total amount of ₱250,258,094.25, representing its unutilized excess VAT on its importation of capital and
other taxable goods and services for the year 2002, broken down as follows11 :
Qtr Output Tax Input Tax

Involved
Domestic Purchases Importations Excess Input Tax
(A) (B) (C) (D) = (B) + (C) –(A)
1st P 26,247.27 P95,003,348.91 P20,758,668.00 P115,735,769.84
2nd - 65,206,499.83 18,485,758.00 83,692,257.83
3rd - 28,924,020.79 1,465,875.00 30,389,895.79
4th 34,996.36 18,166,330.54 2,308,837.00 20,440,171.18
P61,243.63 P207,300,200.07 P43,019,138.00 P250,258,094.44

Petitioner amended its Quarterly VAT Returns, particularly the items on (1) Input VAT on Domestic Purchases during the first quarter of 2002; (2)
Input VAT on Domestic Purchases for the fourth quarter of 2002; and (3) Input VAT on Importation of Goods for the fourth quarter of 2002. The
amendments read as follows12 :
Period Covered Date Filed Particulars Amount
1st Quarter April 24, 2003 Tax Due for the Quarter (Box 13C) P 26,247.27
(January 1, 2002 to
March 31, 2002) Input Tax carried over from previous qtr (22B) 297,719,296.25
(22D) 95,126,981.69
(22F) 20,758,668.00

2nd Quarter April 24, 2003 Tax Due for the Quarter (Box 13C) P blank
(April 1, 2002 to
June 30, 2002) Input Tax carried over from previous qtr (22B) 238,034,696.40
(22D) 65,206,499.83
(22F) 18,485,758.00
3rd Quarter October 25, 2002 Tax Due for the Quarter (Box 13C) P blank
(July 1, 2002 to
September 30, 2002) Input Tax carried over from previous qtr (22B) 83,692,257.83
(22D) 28,924,020.79
(22F) 1,465,875.00
VAT Refund/TCC Claimed (24A) Blank

4th Quarter January 23, 2003 Tax Due for the Quarter (Box 13C) P 34,996.36
(October 1, 2002 to Input Tax carried over from previous qtr (22B) 114,082,153.62
December 31, 2002) Input VAT on Domestic Purchases for the Qtr
(22D) 17,918,056.50
(22F) 1,573,004.00
On 30 May 2003 and 31 July 2003, petitioner filed two letters with the BIR to amend its claims for tax refund or credit for the first and fourth
quarter of 2002, respectively. Petitioner sought to recover a total amount of ₱249,397,620.18 representing its unutilized excess VAT on its
importation and domestic purchases of goods and services for the year 2002, broken down as follows13 :
Qtr Date Filed Output Tax Input Tax

Involved
Domestic Purchases Importations Excess Input Tax
(A) (B) (C) (D) = (B) + (C) –(A)
1st 30-May-03 P26,247.27 P95,126,981.69 P20,758,668.00 P115,859,402.42
2nd 25-Oct-02 - 65,206,499.83 18,185,758.00 83,692,257.83
3rd 27-Feb-03 - 28,924,920.79 1,465,875,00 30,389,895.79
4th 31-Jul-03 34,996.36 17,918,056.50 1,573,004.00 19,456,064.14
P61,243.63 P207,175,558.81 P42,283,305.00 P249,397,620.18

Respondent failed to act on the request for tax refund or credit of petitioner, which prompted the latter to file on 5 April 2004, with the CTA in
Division, a Petition for Review, docketed as CTA Case No. 6916 before it could be barred by the two-year prescriptive period within which to file its
claim. Petitioner sought the refund of the amount of ₱249,397,620.18 representing its unutilized excess VAT on its importation and local purchases
of various goods and services for the year 2002.14
During the proceedings before the CTA Second Division, petitioner presented the following documents, among other pieces of evidence: (1)
Petitioner’s Amended Quarterly VAT return for the 4th Quarter of 2002 marked as Exhibit "A," showing the amount of ₱42,500,000.00 paid by NTC
to petitioner for all the electricity produced during test runs; (2) the special audit report, prepared by the CPA firm of Punongbayan and Araullo
through a partner, Angel A. Aguilar (Aguilar), and the attached schedules, marked as Exhibits "J-2" to "J-21"; (3) Sales Invoices and Official Receipts
and related documents issued to petitioner for the year 2002, marked as Exhibits "J-4-A1" to "J-4-L265"; (4) Audited Financial Statements of
Petitioner for the year 2002, with comparative figures for 2001, marked as Exhibit "K"; and (5) the Affidavit of Echevarria dated 9 February 2005,
marked as Exhibit "L".15
During the hearings, the parties jointly stipulated on the issues involved:
1. Whether or not petitioner’s sales are subject to value-added taxes at effectively zero percent (0%) rate;
2. Whether or not petitioner incurred input taxes which are attributable to its effectively zero-rated transactions;
3. Whether or not petitioner’s importation and purchases of capital goods and related services are within the scope and meaning of "capital goods"
under Revenue Regulations No. 7-95;
4. Whether or not petitioner’s input taxes are sufficiently substantiated with VAT invoices or official receipts;
5. Whether or not the VAT input taxes being claimed for refund/tax credit by petitioner (had) been credited or utilized against any output taxes or
(had) been carried forward to the succeeding quarter or quarters; and
6. Whether or not petitioner is entitled to a refund of VAT input taxes it paid from January 1, 2002 to December 31, 2002 in the total amount of
Two Hundred Forty Nine Million Three Hundred Ninety Seven Thousand Six Hundred Twenty and 18/100 Pesos (₱249,397,620.18).
Simply put, the issue is: whether or not petitioner is entitled to refund or tax credit in the amount of ₱249,397,620.18 representing its unutilized
input VAT paid on importation and purchases of capital and other taxable goods and services from January 1 to December 31, 2002.
After a hearing on the merits, the CTA Second Division rendered a Decision16 dated 23 March 2006 denying petitioner’s claim for tax refund or
credit. The CTA noted that petitioner based its claim on creditable input VAT paid, which is attributable to (1) zero-rated or effectively zero-rated
sale, as provided under Section 112(A) of the NIRC, and (2) purchases of capital goods, in accordance with Section 112(B) of the NIRC. The court
ruled that in order for petitioner to be entitled to the refund or issuance of a tax credit certificate on the basis of Section 112(A) of the NIRC, it must
establish that it had incurred zero-rated sales or effectively zero-rated sales for the taxable year 2002. Since records show that petitioner did not
make any zero-rated or effectively-zero rated sales for the taxable year 2002, the CTA reasoned that petitioner’s claim must be denied.
Parenthetically, the court declared that the claim for tax refund or credit based on Section 112(B) of the NIRC requires petitioner to prove that it
paid input VAT on capital goods purchased, based on the definition of capital goods provided under Section 4.112-1(b) of Revenue Regulations No.
7-95—i.e., goods or properties which have an estimated useful life of greater than one year, are treated as depreciable assets under Section 34(F)
of the NIRC, and are used directly or indirectly in the production or sale of taxable goods and services. The CTA found that the evidence offered by
petitioner—the suppliers’ invoices and official receipts and Import Entries and Internal Revenue Declarations and the audit report of the Court-
commissioned Independent Certified Public Accountant (CPA) are insufficient to prove that the importations and domestic purchases were
classified as capital goods and properties entered as part of the "Property, Plant and Equipment" account of the petitioner. The dispositive part of
the said Decision reads:
WHEREFORE, the instant Petition for Review is DENIED for lack of merit.17
Not satisfied with the foregoing Decision dated 23 March 2006, petitioner filed a Motion for Reconsideration which was denied by the CTA Second
Division in a Resolution dated 4 January 2007.18
Petitioner filed an appeal with the CTA En Banc, docketed as CTA EB No. 248. The CTA En Banc promulgated its Decision 19 on 20 September 2007
denying petitioner’s appeal. The CTA En Banc reiterated the ruling of the Division that petitioner’s claim based on Section 112(A) of the NIRC should
be denied since it did not present any records of any zero-rated or effectively zero-rated transactions. It clarified that since petitioner failed to
prove that any sale of its electricity had transpired, petitioner may base its claim only on Section 112(B) of the NIRC, the provision governing the
purchase of capital goods. The court noted that the report of the Court-commissioned auditing firm, Punongbayan & Araullo, dealt specifically with
the unutilized input taxes paid or incurred by petitioner on its local and foreign purchases of goods and services attributable to its zero-rated sales,
and not to purchases of capital goods. It decided that petitioner failed to prove that the purchases evidenced by the invoices and receipts, which
petitioner presented, were classified as capital goods which formed part of its "Property, Plant and Equipment," especially since petitioner failed to
present its books of account. The dispositive part of the said Decision reads:
WHEREFORE, premises considered, the instant petition is hereby DISMISSED. Accordingly, the assailed Decision and Resolution are hereby
AFFIRMED.20
The CTA En Banc denied petitioner’s Motion for Reconsideration in a Resolution dated 22 October 2007. 21
Hence, the present Petition for Review where the petitioner raises the following errors allegedly committed by the CTA En banc:
I. THE COURT OF TAX APPEALS EN BANC COMMITTED SERIOUS ERROR AND ACTED WITH GRAVE ABUSE OF DISCRETION TANTAMOUNT TO LACK OR
EXCESS OF JURISDICTION IN FAILING OR REFUSING TO APPRECIATE THE OVERWHELMING AND UNCONTROVERTED EVIDENCE SUBMITTED BY THE
PETITIONER, THUS DEPRIVING PETITIONER OF ITS PROPERTY WITHOUT DUE PROCESS; AND
II. THE COURT OF TAX APPEALS COMMITTED SERIOUS ERROR AND ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS
OF JURISDICTION IN RULING THAT THE ABSENCE OF ZERO-RATED SALES BY PETITIONER DURING THE YEAR COVERED BY THE CLAIM FOR REFUND
DOES NOT ENTITLE PETITIONER TO A REFUND OF ITS EXCESS VAT INPUT TAXES ATTRIBUTABLE TO ZERO-RATED SALES, CONTRARY TO PROVISIONS
OF LAW.22
The present Petition is meritorious.

The main issue in this case is whether or not petitioner may claim a tax refund or credit in the amount of ₱249,397,620.18 for creditable input tax
attributable to zero-rated or effectively zero-rated sales pursuant to Section 112(A) of the NIRC or for input taxes paid on capital goods as provided
under Section 112(B) of the NIRC.
To resolve the issue, this Court must re-examine the facts and the evidence offered by the parties. It is an accepted doctrine that this Court is not a
trier of facts. It is not its function to review, examine and evaluate or weigh the probative value of the evidence presented. However, this rule does
not apply where the judgment is premised on a misapprehension of facts, or when the appellate court failed to notice certain relevant facts which
if considered would justify a different conclusion.23
After reviewing the records, this Court finds that petitioner’s claim for refund or credit is justified under Section 112(A) of the NIRC which states
that:
SEC. 112. Refunds or Tax Credits of Input Tax.—
(A) Zero-rated or Effectively Zero-rated Sales—Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2)
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
To claim refund or tax credit under Section 112(A), petitioner must comply with the following criteria: (1) the taxpayer is VAT registered; (2) the
taxpayer is engaged in zero-rated or effectively zero-rated sales; (3) the input taxes are due or paid; (4) the input taxes are not transitional input
taxes; (5) the input taxes have not been applied against output taxes during and in the succeeding quarters; (6) the input taxes claimed are
attributable to zero-rated or effectively zero-rated sales; (7) for zero-rated sales under Section 106(A)(2)(1) and (2); 106(B); and 108(B)(1) and (2),
the acceptable foreign currency exchange proceeds have been duly accounted for in accordance with BSP rules and regulations; (8) where there
are both zero-rated or effectively zero-rated sales and taxable or exempt sales, and the input taxes cannot be directly and entirely attributable to
any of these sales, the input taxes shall be proportionately allocated on the basis of sales volume; and (9) the claim is filed within two years after
the close of the taxable quarter when such sales were made.24
Based on the evidence presented, petitioner complied with the abovementioned requirements. Firstly, petitioner had adequately proved that it is a
VAT registered taxpayer when it presented Certificate of Registration No. OCN-98-006-007394, which it attached to its Petition for Review dated 29
March 2004 filed before the CTA in Division. Secondly, it is unquestioned that petitioner is engaged in providing electricity for NPC, an activity
which is subject to zero rate, under Section 108(B)(3) of the NIRC. Thirdly, petitioner offered as evidence suppliers’ VAT invoices or official receipts,
as well as Import Entries and Internal Revenue Declarations (Exhibits "J-4-A1" to "J-4-L265"), which were examined in the audit conducted by
Aguilar, the Court-commissioned Independent CPA. Significantly, Aguilar noted in his audit report (Exhibit "J-2") that of the ₱249,397,620.18
claimed by petitioner, he identified items with incomplete documentation and errors in computation with a total amount of ₱3,266,009.78. Based
on these findings, the remaining input VAT of ₱246,131,610.40 was properly documented and recorded in the books. The said report reads:
In performing the procedures referred under the Procedures Performed section of this report, no matters came to our attention that cause us to
believe that the amount of input VAT applied for as tax credit certificate/refund of P249,397,620.18 for the period January 1, 2002 to December 31,
2002 should be adjusted except for input VAT claimed with incomplete documentation, those with various and other exceptions on the supporting
documents and those with errors in computation totaling P3,266,009.78, as discussed in the Findings and Results of the Agreed-Upon Audit
Procedures Performed sections of this report. We have also ascertained that the input VAT claimed are properly recorded in the books and, except
as specifically identified in the Findings and Results of the Agreed-Upon Audit Procedures Performed sections of this report, are properly supported
by original and appropriate suppliers’ VAT invoices and/or official receipts. 25
Fourthly, the input taxes claimed, which consisted of local purchases and importations made in 2002, are not transitional input taxes, which Section
111 of the NIRC defines as input taxes allowed on the beginning inventory of goods, materials and supplies.26 Fifthly, the audit report of Aguilar
affirms that the input VAT being claimed for tax refund or credit is net of the input VAT that was already offset against output VAT amounting to
₱26,247.27 for the first quarter of 2002 and ₱34,996.36 for the fourth quarter of 2002,27 as reflected in the Quarterly VAT Returns.28
The main dispute in this case is whether or not petitioner’s claim complied with the sixth requirement—the existence of zero-rated or effectively
zero-rated sales, to which creditable input taxes may be attributed. The CTA in Division and en banc denied petitioner’s claim solely on this ground.
The tax courts based this conclusion on the audited report, marked as Exhibit "J-2," stating that petitioner made no sale of electricity to NPC in
2002.29 Moreover, the affidavit of Echevarria (Exhibit "L"), petitioner’s Vice President and Director for Finance, contained an admission that no
commercial sale of electricity had been made in favor of NPC in 2002 since the project was still under construction at that time.30
However, upon closer examination of the records, it appears that on 2002, petitioner carried out a "sale" of electricity to NPC. The fourth quarter
return for the year 2002, which petitioner filed, reported a zero-rated sale in the amount of ₱42,500,000.00.31 In the Affidavit of Echevarria dated 9
February 2005 (Exhibit "L"), which was uncontroverted by respondent, the affiant stated that although no commercial sale was made in 2002,
petitioner produced and transferred electricity to NPC during the testing period in exchange for the amount of ₱42,500,000.00, to wit:32
A: San Roque Power Corporation has had no sale yet during 2002. The ₱42,500,000.00 which was paid to us by Napocor was something similar to a
more cost recovery scheme. The pre-agreed amount would be about equal to our costs for producing the electricity during the testing period and
we just reflected this in our 4th quarter return as a zero-rated sale. x x x.
The Court is not unmindful of the fact that the transaction described hereinabove was not a commercial sale. In granting the tax benefit to VAT-
registered zero-rated or effectively zero-rated taxpayers, Section 112(A) of the NIRC does not limit the definition of "sale" to commercial
transactions in the normal course of business. Conspicuously, Section 106(B) of the NIRC, which deals with the imposition of the VAT, does not limit
the term "sale" to commercial sales, rather it extends the term to transactions that are "deemed" sale, which are thus enumerated:
SEC 106. Value-Added Tax on Sale of Goods or Properties.
xxxx
(B) Transactions Deemed Sale.—The following transactions shall be deemed sale:

(1) Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of
business;
(2) Distribution or transfer to:
(a) Shareholders or investors as share in the profits of the VAT-registered persons; or
(b) Creditors in payment of debt;
(3) Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned; and
(4) Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation. (Our
emphasis.)
After carefully examining this provision, this Court finds it an equitable construction of the law that when the term "sale" is made to include certain
transactions for the purpose of imposing a tax, these same transactions should be included in the term "sale" when considering the availability of
an exemption or tax benefit from the same revenue measures. It is undisputed that during the fourth quarter of 2002, petitioner transferred to
NPC all the electricity that was produced during the trial period. The fact that it was not transferred through a commercial sale or in the normal
course of business does not deflect from the fact that such transaction is deemed as a sale under the law.
The seventh requirement regarding foreign currency exchange proceeds is inapplicable where petitioner’s zero-rated sale of electricity to NPC did
not involve foreign exchange and consisted only of a single transaction wherein NPC paid petitioner ₱42,500,000.00 in exchange for the electricity
transferred to it by petitioner. Similarly, the eighth requirement is inapplicable to this case, where the only sale transaction consisted of an
effectively zero-rated sale and there are no exempt or taxable sales that transpired, which will require the proportionate allocation of the
creditable input tax paid.
The last requirement determines that the claim should be filed within two years after the close of the taxable quarter when such sales were made.
The sale of electricity to NPC was reported at the fourth quarter of 2002, which closed on 31 December 2002. Petitioner had until 30 December
2004 to file its claim for refund or credit. For the period January to March 2002, petitioner filed an amended request for refund or tax credit on 30
May 2003; for the period July 2002 to September 2002, on 27 February 2003; and for the period October 2002 to December 2002, on 31 July
2003.33 In these three quarters, petitioners seasonably filed its requests for refund and tax credit. However, for the period April 2002 to May 2002,
the claim was filed prematurely on 25 October 2002, before the last quarter had closed on 31 December 2002.34
Despite this lapse in procedure, this Court notes that petitioner was able to positively show that it was able to accumulate excess input taxes on
various importations and local purchases in the amount of ₱246,131,610.40, which were attributable to a transfer of electricity in favor of NPC. The
fact that it had filed its claim for refund or credit during the quarter when the transfer of electricity had taken place, instead of at the close of the
said quarter does not make petitioner any less entitled to its claim. Given the special circumstances of this case, wherein petitioner was
incorporated for the sole purpose of constructing or operating a power plant that will transfer all the electricity it generates to NPC, there is no
danger that petitioner would try to fraudulently claim input tax paid on purchases that will be attributed to sale transactions that are not zero-
rated. Substantial justice, equity and fair play are on the side of the petitioner. Technicalities and legalisms, however, exalted, should not be
misused by the government to keep money not belonging to it, thereby enriching itself at the expense of its law abiding citizens.
Substantial justice, equity and fair play are on the side of petitioner. Technicalities and legalisms, however exalted, should not be misused by the
government to keep money not belonging to it, thereby enriching itself at the expense of its law-abiding citizens. Under the principle of solutio
indebiti provided in Art. 2154, Civil Code, the BIR received something "when there [was] no right to demand it," and thus, it has the obligation to
return it. Heavily militating against respondent Commissioner is the ancient principle that no one, not even the State, shall enrich oneself at the
expense of another. Indeed, simple justice requires the speedy refund of the wrongly held taxes. 35
It bears emphasis that effective zero-rating is not intended as a benefit to the person legally liable to pay the tax, such as petitioner, but to relieve
certain exempt entities, such as the NPC, from the burden of indirect tax so as to encourage the development of particular industries. Before, as
well as after, the adoption of the VAT, certain special laws were enacted for the benefit of various entities and international agreements were
entered into by the Philippines with foreign governments and institutions exempting sale of goods or supply of services from indirect taxes at the
level of their suppliers. Effective zero-rating was intended to relieve the exempt entity from being burdened with the indirect tax which is or which
will be shifted to it had there been no exemption. In this case, petitioner is being exempted from paying VAT on its purchases to relieve NPC of the
burden of additional costs that petitioner may shift to NPC by adding to the cost of the electricity sold to the latter.36
Section 13 of Republic Act No. 6395, otherwise known as the NPC Charter, further clarifies that it is the lawmakers’ intention that NPC be made
completely exempt from all taxes, both direct and indirect:
Sec. 13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees, Imposts and Other Charges by Government and
Governmental Instrumentalities. - The corporation shall be non-profit and shall devote all its returns from its capital investment, as well as excess
revenues from its operation, for expansion. To enable the corporation to pay its indebtedness and obligations and in furtherance and effective
implementation of the policy enunciated in Section 1 of this Act, the corporation is hereby declared exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in any court or administrative proceedings in which it may
be a party, restrictions and duties to the Republic of the Philippines, its provinces, cities, municipalities, and other government agencies and
instrumentalities;
(b) From all income taxes, franchise taxes, and realty taxes to be paid to the National Government, its provinces, cities, municipalities and other
government agencies and instrumentalities;
(c) From all import duties, compensating taxes and advanced sales tax and wharfage fees on import of foreign goods, required for its operations
and projects; and
(d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of the Philippines, its provinces, cities, municipalities and
other government agencies and instrumentalities, on all petroleum products used by the corporation in the generation, transmission, utilization,
and sale of electric power.
To limit the exemption granted to the NPC to direct taxes, notwithstanding the general and broad language of the statute will be to thwart the
legislative intention in giving exemption from all forms of taxes and impositions, without distinguishing between those that are direct and those
that are not.37
Congress granted NPC a comprehensive tax exemption because of the significant public interest involved. This is enunciated in Section 1 of
Republic Act No. 6395:
Section 1. Declaration of Policy. Congress hereby declares that (1) the comprehensive development, utilization and conservation of Philippine
water resources for all beneficial uses, including power generation, and (2) the total electrification of the Philippines through the development of
power from all sources to meet the needs of industrial development and dispersal and the needs of rural electrification are primary objectives of
the nation which shall be pursued coordinately and supported by all instrumentalities and agencies of government, including its financial
institutions.
The ability of the NPC to provide sufficient and affordable electricity throughout the country greatly affects our industrial and rural development.
Erroneously and unjustly depriving industries that generate electrical power of tax benefits that the law clearly grants will have an immediate effect
on consumers of electricity and long term effects on our economy.
In the same breath, we cannot lose sight of the fact that it is the declared policy of the State, expressed in Section 2 of Republic Act No. 9136,
otherwise known as the EPIRA Law, "to ensure and accelerate the total electrification of the country;" "to enhance the inflow of private capital and
broaden the ownership base of the power generation, transmission and distribution sectors;" and "to promote the utilization of indigenous and
new and renewable energy resources in power generation in order to reduce dependence on imported energy." Further, Section 6 provides that
"pursuant to the objective of lowering electricity rates to end-users, sales of generated power by generation companies shall be value-added tax
zero-rated.
Section 75 of said law succinctly declares that "this Act shall, unless the context indicates otherwise, be construed in favor of the establishment,
promotion, preservation of competition and power empowerment so that the widest participation of the people, whether directly or indirectly is
ensured."
The objectives as set forth in the EPIRA Law can only be achieved if government were to allow petitioner and others similarly situated to obtain the
input tax credits available under the law. Denying petitioner such credits would go against the declared policies of the EPIRA Law.1 a vv p h i 1
The legislative grant of tax relief (whether in the EPIRA Law or the Tax Code) constitutes a sovereign commitment of Government to taxpayers that
the latter can avail themselves of certain tax reliefs and incentives in the course of their business activities here. Such a commitment is particularly
vital to foreign investors who have been enticed to invest heavily in our country’s infrastructure, and who have done so on the firm assurance that
certain tax reliefs and incentives can be availed of in order to enable them to achieve their projected returns on these very long-term and heavily
funded investments. While the government’s ability to keep its commitment is put in doubt, credit rating turns to worse; the costs of borrowing
becomes higher and the harder it will be to attract foreign investors. The country’s earnest efforts to move forward will all be put to naught.
Having decided that petitioner is entitled to claim refund or tax credit under Section 112(A) of the NIRC or on the basis of effectively zero-rated
sales in the amount of ₱246,131,610.40, there is no more need to establish its right to make the same claim under Section 112(B) of the NIRC or on
the basis of purchase of capital goods.
Finally, respondent contends that according to well-established doctrine, a tax refund, which is in the nature of a tax exemption, should be
construed strictissimi juris against the taxpayer.38 However, when the claim for refund has clear legal basis and is sufficiently supported by
evidence, as in the present case, then the Court shall not hesitate to grant the same.39
WHEREFORE, the instant Petition for Review is GRANTED. The Decision of the Court of Tax Appeals En Banc dated 20 September 2007 in CTA EB
Case No. 248, affirming the Decision dated 23 March 2006 of the CTA Second Division in CTA Case No. 6916, is REVERSED. Respondent
Commissioner of Internal Revenue is ordered to refund, or in the alternative, to issue a tax credit certificate to petitioner San Roque Power
Corporation in the amount of Two Hundred Forty-Six Million One Hundred Thirty-One Thousand Six Hundred Ten Pesos and 40/100
(₱246,131,610.40), representing unutilized input VAT for the period 1 January 2002 to 31 December 2002. No costs.
SO ORDERED.
FIRST DIVISION G.R. No. 179356 December 14, 2009
KEPCO PHILIPPINES CORPORATION, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.
CARPIO MORALES, J.:
Korea Electric Power Corporation (KEPCO) Philippines Corporation (petitioner) is an independent power producer engaged in selling electricity to
the National Power Corporation (NPC).
After its incorporation and registration with the Securities and Exchange Commission on June 15, 1995, petitioner forged a Rehabilitation
Operation Maintenance and Management Agreement with NPC for the rehabilitation and operation of Malaya Power Plant Complex in Pililia,
Rizal.1
On September 30, 1998, petitioner filed with the Commissioner of Internal Revenue (respondent) administrative claims for tax refund in the
amounts of ₱4,895,858.01 representing unutilized input Value Added Tax (VAT) payments on domestic purchases of goods and services for the 3rd
quarter of 1996 and ₱4,084,867.25 representing creditable VAT withheld from payments received from NPC for the months of April and June 1996.
Petitioner also filed a judicial claim before the Court of Tax Appeals (CTA), docketed as CTA Case No. 5765, also based on the above-stated
amounts.
Petitioner filed before respondent on December 28, 1998 still another claim for refund representing unutilized input VAT payments attributable to
its zero-rated sale transactions with NPC, including input VAT payments on domestic goods and services in the amount of ₱13,191,278.00 for the
4th quarter of 1996. Petitioner also filed the same claim before the CTA on December 29, 1998, docketed as CTA Case No. 5704.
The two petitions before the CTA for a refund in the total amount of ₱22,172,003.26 were consolidated.
In his report, the court-commissioned auditor, Ruben R. Rubio, concluded that the claimed amount of ₱20,550,953.93 was properly substantiated
for VAT purposes and subject of a valid refund.
By Decision of March 18, 2003, the CTA granted petitioner partial refund with respect to unutilized input VAT payment on domestic goods and
services qualifying as capital goods purchased for the 3rd and 4th quarters of 1996 in the amount of ₱8,325,350.35. All other claims were
disallowed.
Petitioner filed an urgent motion for reconsideration, claiming an additional amount of ₱5,012,875.67.
By Resolution of July 8, 2003,2 the CTA denied petitioner’s motion, it holding that part of the additional amount prayed for ─ ₱1,557,676.13 ─
involved purchases for the year 1997, and with respect to the remaining amount of ₱3,455,199.54, it was not recorded under depreciable asset
accounts, hence, it cannot be considered as capital goods.
Petitioner appealed under Rule 43 of the Rules of Court before the Court of Appeals,3 praying only for the refund of ₱3,455,199.54, claiming that
the purchases represented thereby were used in the rehabilitation of the Malaya Power Plant Complex which should be considered as capital
expense to fall within the purview of capital goods.
The appellate court, by Decision of December 11, 2006, affirmed that of the CTA. In arriving at its decision, the appellate court considered, among
other things, the account vouchers submitted by petitioner which listed the purchases under inventory accounts as follows:
1) Inventory supplies/materials
2) Inventory supplies/lubricants
3) Inventory supplies/spare parts
4) Inventory supplies/supplies
5) Cost/O&M Supplies
6) Cost/O&M Uniforms and Working Clothes
7) Cost/O&M/Supplies
8) Cost/O&M/Repairs and Maintenance
9) Office Supplies
10) Repair and Maintenance/Mechanics
11) Repair and Maintenance/Common/General
12) Repair and Maintenance/Chemicals
Reconsideration of the appellate court’s decision having been denied by Resolution of August 17, 2007, the present petition for review on certiorari
was filed.
In the main, petitioner faults the appellate court for not considering the purchases amounting to ₱3,455,199.54 as falling under the definition of
"capital goods."
The petition is bereft of merit.
Section 4.106-1 (b) of Revenue Regulations No. 7-95 defines capital goods and its scope in this wise:
xxxx
(b) Capital Goods. – Only a VAT-registered person may apply for issuance of a tax credit certificate or refund of input taxes paid on capital goods
imported or locally purchased. The refund shall be allowed to the extent that such input taxes have not been applied against output taxes. The
application should be made within two (2) years after the close of the taxable quarter when the importation or purchase was made.
Refund of input taxes on capital goods shall be allowed only to the extent that such capital goods are used in VAT taxable business. If it is also used
in exempt operations, the input tax refundable shall only be the ratable portion corresponding to taxable operations.
"Capital goods or properties" refer to goods or properties with estimated useful life greater that one year and which are treated as depreciable
assets under Section 29 (f) ,4 used directly or indirectly in the production or sale of taxable goods or services. (underscoring supplied)
For petitioner’s purchases of domestic goods and services to be considered as "capital goods or properties," three requisites must concur. First,
useful life of goods or properties must exceed one year; second, said goods or properties are treated as depreciable assets under Section 34 (f) and;
third, goods or properties must be used directly or indirectly in the production or sale of taxable goods and services.
From petitioner’s evidence, the account vouchers specifically indicate that the disallowed purchases were recorded under inventory accounts,
instead of depreciable accounts. That petitioner failed to indicate under its fixed assets or depreciable assets account, goods and services allegedly
purchased pursuant to the rehabilitation and maintenance of Malaya Power Plant Complex, militates against its claim for refund. As correctly found
by the CTA, the goods or properties must be recorded and treated as depreciable assets under Section 34 (F) of the NIRC.
Petitioner further contends that since the disallowed items are treated as capital goods in the general ledger and accounting records, as testified
on by its senior accountant, Karen Bulos, before the CTA, this should have been given more significance than the account vouchers which listed the
items under inventory accounts.
A general ledger is a record of a business entity’s accounts which make up its financial statements. Information contained in a general ledger is
gathered from source documents such as account vouchers, purchase orders and sales invoices. In case of variance between the source document
and the general ledger, the former is preferred.
The account vouchers presented by petitioner confirm that the purchases cannot qualify as capital goods for they are held as inventory items and
not charged to any depreciable asset account. Petitioner has proffered no explanation why the disallowed items were not listed under depreciable
asset accounts.1avvphi1
It is settled that tax refunds are in the nature of tax exemptions. Laws granting exemptions are construed strictissimi juris against the taxpayer and
liberally in favor of the taxing authority.5 Where the taxpayer claims a refund, the CTA as a court of record is required to conduct a formal trial (trial
de novo) to prove every minute aspect of the claim.6
By the very nature of its functions, the CTA is dedicated exclusively to the resolution of tax problems and has consequently developed an expertise
on the subject. Absent a showing of abuse or reckless exercise of authority,7the Court appreciates no ground to disturb the appellate court’s
Decision affirming that of the CTA.
IN FINE, petitioner having failed to establish that the disallowed items should be classified as capital goods, the assailed Decision of the Court of
Appeals must be upheld. WHEREFORE, the petition is DENIED. SO ORDERED.
SECOND DIVISION G.R. No. 193301 March 11, 2013
MINDANAO II GEOTHERMAL PARTNERSHIP, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.
x-----------------------x
G.R. No. 194637 | MINDANAO I GEOTHERMAL PARTNERSHIP, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.
CARPIO, J.:
G.R. No. 193301 is a petition for review1 assailing the Decision2 promulgated on 10 March 2010 as well as the Resolution3 promulgated on 28 July
2010 by the Court of Tax Appeals En Banc (CTA En Banc) in CTA EB No. 513. The CTA En Banc affirmed the 22 September 2008 Decision 4 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 Partnership’s (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 CIR’s petition for review in CTA Case No. 476. The CTA En Banc denied Mindanao I Geothermal Partnership’s (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 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 II’s 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 Division’s 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.
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 II’s
input tax credits remain unutilized.
Thus, on the belief that its sales qualify for VAT zero-rating, Mindanao II adopted the VAT zero-rating of the EPIRA in computing for its VAT payable
when it filed its Quarterly VAT Returns on the following dates:
CTA Case No. 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 BIR’s 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 II’s return as well as its administrative and
judicial claims, and concluded that Mindanao II’s administrative and judicial claims were timely filed in compliance with this Court’s 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 1 April 2004 13 April 2005 7 July 2005
7317 3rd Quarter 25 Oct. 2003 1 April 2004 13 April 2005 9 Sept. 2005
7317 4th Quarter 26 Jan. 2004 1 April 2004 13 April 2005 9 Sept. 200515
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 II’s 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 Division’s 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.
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 Division’s 22 September 2008 decision by citing this Court’s 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 II’s motion for partial reconsideration, found the CIR’s 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 II’s claims for refund for the first and second quarters of
2003 had already prescribed.
The CTA First Division found that the records of Mindanao II’s case are bereft of evidence that the sale of the Nissan Patrol is not incidental to
Mindanao II’s VAT zero-rated operations. Moreover, Mindanao II’s submitted documents failed to substantiate the requisites for the refund or
credit claims.
The CTA First Division modified its 22 September 2008 Decision to read as follows:
WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the CIR is hereby ORDERED to REFUND or to ISSUE A TAX CREDIT
CERTIFICATE to Mindanao II Geothermal Partnership in the modified amount of TWO MILLION NINE HUNDRED EIGHTY THOUSAND EIGHT
HUNDRED EIGHTY SEVEN AND 77/100 PESOS (₱2,980,887.77) representing its unutilized input VAT for the third and fourth quarters of the taxable
year 2003. SO ORDERED.21
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
On 10 March 2010, the CTA En Banc rendered its Decision23 in CTA EB No. 513 and denied Mindanao II’s 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 II’s 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 Banc’s 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 II’s 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 I’s
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 Division’s 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 I’s 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 Division’s further verification, and additional disallowances per the CTA Second Division’s further verification;
(3) Mindanao I’s 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 I’s 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 Division’s 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 I’s 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 I’s 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 I’s motion and maintained the proportionate allocation because there was a portion of
the gross receipts that was undeclared in Mindanao I’s 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 CIR’s motion, and cited Atlas 33 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 Division’s 10 March 2009 Resolution reads:
WHEREFORE, premises considered, the CIR’s Motion for Partial Reconsideration and Mindanao I’s 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 Banc’s 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 Banc’s 31 May 2010 Decision. In an Amended Decision promulgated
on 24 November 2010, the CTA En Banc agreed with the CIR’s claim that Section 229 of the NIRC of 1997 is inapplicable in light of this Court’s 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 I’s claim. The CTA En Banc reconsidered its 31 May 2010 Decision in light of this Court’s ruling in
Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. (Aichi).38
The pertinent portions of the CTA En Banc’s 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.
(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
(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 I’s 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 Revenue’s Motion for Reconsideration is hereby GRANTED; Mindanao I’s 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

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 II’s 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.
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 Court’s 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 II’s 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 I’s 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 II’s and Mindanao I’s 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
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper cases, the Commissioner shall grant a refund or issue the tax
credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in support of
the application filed in accordance with Subsections (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application
within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after
the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.
x x x x 43 (Underscoring supplied)
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 2005 2005
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 Roque’s 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
taxpayer’s petition. Philippine jurisprudence is replete with cases upholding and reiterating these doctrinal principles.
The charter of the CTA expressly provides that its jurisdiction is to review on appeal "decisions of the Commissioner of Internal Revenue in cases
involving x x x refunds of internal revenue taxes." When a taxpayer prematurely files a judicial claim for tax refund or credit with the CTA without
waiting for the decision of the Commissioner, there is no "decision" of the Commissioner to review and thus the CTA as a court of special
jurisdiction has no jurisdiction over the appeal. The charter of the CTA also expressly provides that if the Commissioner fails to decide within "a
specific period" required by law, such "inaction shall be deemed a denial" of the application for tax refund or credit. It is the Commissioner’s
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 Roque’s 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
Roque’s 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 petition’s 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
Roque’s 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 taxpayer’s 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 II’s 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 taxpayer’s 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 Commissioner’s 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 Roque’s 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 Commissioner’s decision, or if the Commissioner does not act on the taxpayer’s 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 Roque’s 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 II’s judicial claims for the second, third, and fourth quarters of 2003 as follows:
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 CIR’s 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 II’s judicial claim for the second quarter of 2003 was prematurely filed.
However, pursuant to San Roque’s recognition of the effect of BIR Ruling No. DA-489-03, we rule that Mindanao II’s 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 II’s 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 II’s 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 CIR’s 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 I’s judicial claim for the second quarter of 2003 was prematurely filed. However,
pursuant to San Roque’s recognition of the effect of BIR Ruling No. DA-489-03, we rule that Mindanao I’s 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 I’s 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 I’s judicial claim for the fourth
quarter of 2003 was thus filed after the prescriptive period, pursuant to Section 112(C) of the 1997 Tax Code.
San Roque: Recognition of BIR Ruling No. DA-489-03
In the consolidated cases of San Roque, the Court En Banc53 examined and ruled on the different claims for tax refund or credit of three different
companies. In San Roque, we reiterated that "following the verba legis doctrine, Section 112(C) must be applied exactly as worded since it is clear,
plain, and unequivocal. The taxpayer cannot simply file a petition with the CTA without waiting for the Commissioner’s 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.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its
issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6 October 2010, where this Court held that the 120+30 day periods are
mandatory and jurisdictional.
xxxx
Taganito, however, filed its judicial claim with the CTA on 14 February 2007, after the issuance of BIR Ruling No. DA-489-03 on 10 December 2003.
Truly, Taganito can claim that in filing its judicial claim prematurely without waiting for the 120-day period to expire, it was misled by BIR Ruling No.
DA-489-03. Thus, Taganito can claim the benefit of BIR Ruling No. DA-489-03, which shields the filing of its judicial claim from the vice of
prematurity. (Emphasis in the original)
Summary of Administrative and Judicial Claims
G.R. No. 193301

Mindanao II v. CIR
Administrative 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 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

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 Grant, pursuant to

1997 Tax Code
4th Quarter, 2003 Filed on time Filed late Grant, pursuant to

1997 Tax Code
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 CIR’s 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 II’s 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.
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 NDC’s trade or business as it was involuntary and made
pursuant to the Government’s policy for privatization. Magsaysay, in quoting from the CTA’s 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 II’s sale of the Nissan Patrol is said to be an isolated transaction.1âwphi1 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 II’s 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 II’s property, plant, and
equipment. Therefore, the sale of the Nissan Patrol is an incidental transaction made in the course of Mindanao II’s business which should be liable
for VAT.
Substantiation Requirements
Mindanao II claims that the CTA’s 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 II’s 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 Banc’s 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.
SECOND DIVISION G.R. No. 178697 November 17, 2010
COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. SONY PHILIPPINES, INC., Respondent.
MENDOZA, J.:
This petition for review on certiorari seeks to set aside the May 17, 2007 Decision and the July 5, 2007 Resolution of the Court of Tax Appeals – En
Banc1 (CTA-EB), in C.T.A. EB No. 90, affirming the October 26, 2004 Decision of the CTA-First Division2 which, in turn, partially granted the petition
for review of respondent Sony Philippines, Inc. (Sony). The CTA-First Division decision cancelled the deficiency assessment issued by petitioner
Commissioner of Internal Revenue (CIR) against Sony for Value Added Tax (VAT) but upheld the deficiency assessment for expanded withholding
tax (EWT) in the amount of ₱1,035,879.70 and the penalties for late remittance of internal revenue taxes in the amount of ₱1,269, 593.90.3
THE FACTS:
On November 24, 1998, the CIR issued Letter of Authority No. 000019734 (LOA 19734) authorizing certain revenue officers to examine Sony’s
books of accounts and other accounting records regarding revenue taxes for "the period 1997 and unverified prior years." On December 6, 1999, a
preliminary assessment for 1997 deficiency taxes and penalties was issued by the CIR which Sony protested. Thereafter, acting on the protest, the
CIR issued final assessment notices, the formal letter of demand and the details of discrepancies.4 Said details of the deficiency taxes and penalties
for late remittance of internal revenue taxes are as follows:
DEFICIENCY VALUE -ADDED TAX (VAT)
(Assessment No. ST-VAT-97-0124-2000)
Basic Tax Due P 7,958,700.00
Add: Penalties
Interest up to 3-31-2000 P 3,157,314.41
Compromise 25,000.00 3,182,314.41
Deficiency VAT Due P 11,141,014.41
DEFICIENCY EXPANDED WITHHOLDING TAX (EWT)
(Assessment No. ST-EWT-97-0125-2000)
Basic Tax Due P 1,416,976.90
Add: Penalties
Interest up to 3-31-2000 P 550,485.82
Compromise 25,000.00 575,485.82
Deficiency EWT Due P 1,992,462.72
DEFICIENCY OF VAT ON ROYALTY PAYMENTS
(Assessment No. ST-LR1-97-0126-2000)
Basic Tax Due P
Add: Penalties
Surcharge P 359,177.80
Interest up to 3-31-2000 87,580.34
Compromise 16,000.00 462,758.14
Penalties Due P 462,758.14
LATE REMITTANCE OF FINAL WITHHOLDING TAX
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

Basic Tax Due P
Add: Penalties
25 % Surcharge P 8,865.34
Interest up to 3-31-2000 58.29
Compromise 2,000.00 10,923.60
Penalties Due P 10,923.60
GRAND TOTAL P 15,895,632.655
Sony sought re-evaluation of the aforementioned assessment by filing a protest on February 2, 2000. Sony submitted relevant documents in
support of its protest on the 16th of that same month.6
On October 24, 2000, within 30 days after the lapse of 180 days from submission of the said supporting documents to the CIR, Sony filed a petition
for review before the CTA.7
After trial, the CTA-First Division disallowed the deficiency VAT assessment because the subsidized advertising expense paid by Sony which was
duly covered by a VAT invoice resulted in an input VAT credit. As regards the EWT, the CTA-First Division maintained the deficiency EWT
assessment on Sony’s motor vehicles and on professional fees paid to general professional partnerships. It also assessed the amounts paid to sales
agents as commissions with five percent (5%) EWT pursuant to Section 1(g) of Revenue Regulations No. 6-85. The CTA-First Division, however,
disallowed the EWT assessment on rental expense since it found that the total rental deposit of ₱10,523,821.99 was incurred from January to
March 1998 which was again beyond the coverage of LOA 19734. Except for the compromise penalties, the CTA-First Division also upheld the
penalties for the late payment of VAT on royalties, for late remittance of final withholding tax on royalty as of December 1997 and for the late
remittance of EWT by some of Sony’s branches.8 In sum, the CTA-First Division partly granted Sony’s petition by cancelling the deficiency VAT
assessment but upheld a modified deficiency EWT assessment as well as the penalties. Thus, the dispositive portion reads:
WHEREFORE, the petition for review is hereby PARTIALLY GRANTED. Respondent is ORDERED to CANCEL and WITHDRAW the deficiency
assessment for value-added tax for 1997 for lack of merit. However, the deficiency assessments for expanded withholding tax and penalties for late
remittance of internal revenue taxes are UPHELD.
Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency expanded withholding tax in the amount of ₱1,035,879.70 and the
following penalties for late remittance of internal revenue taxes in the sum of ₱1,269,593.90:
1. VAT on Royalty P 429,242.07
2. Withholding Tax on Royalty 831,428.20
3. EWT of Petitioner's Branches 8,923.63
Total P 1,269,593.90
Plus 20% delinquency interest from January 17, 2000 until fully paid pursuant to Section 249(C)(3) of the 1997 Tax Code. SO ORDERED.9
The CIR sought a reconsideration of the above decision and submitted the following grounds in support thereof:
A. The Honorable Court committed reversible error in holding that petitioner is not liable for the deficiency VAT in the amount of ₱11,141,014.41;
B. The Honorable court committed reversible error in holding that the commission expense in the amount of P2,894,797.00 should be subjected to
5% withholding tax instead of the 10% tax rate;
C. The Honorable Court committed a reversible error in holding that the withholding tax assessment with respect to the 5% withholding tax on
rental deposit in the amount of ₱10,523,821.99 should be cancelled; and
D. The Honorable Court committed reversible error in holding that the remittance of final withholding tax on royalties covering the period January
to March 1998 was filed on time.10
On April 28, 2005, the CTA-First Division denied the motion for reconsideration.1avvphi1 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 ₱2,894,797.00 should be subjected to 10% withholding tax instead of the 5% tax rate;
3. Whether or not the withholding assessment with respect to the 5% withholding tax on rental deposit in the amount of ₱10,523,821.99 is proper;
and
4. Whether or not the remittance of final withholding tax on royalties covering the period January to March 1998 was filed outside of time.11
Finding no cogent reason to reverse the decision of the CTA-First Division, the CTA-EB dismissed CIR’s petition on May 17, 2007. CIR’s motion for
reconsideration was denied by the CTA-EB on July 5, 2007.
The CIR is now before this Court via this petition for review relying on the very same grounds it raised before the CTA-First Division and the CTA-EB.
The said grounds are reproduced below:
GROUNDS FOR THE ALLOWANCE OF THE PETITION
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 RESPONDENT’S DEFICIENCY EXPANDED WITHHOLDING TAX IN THE AMOUNT OF PHP1,992,462.72:
A. THE CTA EN BANC ERRED IN RULING THAT THE COMMISSION EXPENSE IN THE AMOUNT OF PHP2,894,797.00 SHOULD BE SUBJECTED TO A
WITHHOLDING TAX OF 5% INSTEAD OF THE 10% TAX RATE.
B. THE CTA EN BANC ERRED IN RULING THAT THE ASSESSMENT WITH RESPECT TO THE 5% WITHHOLDING TAX ON RENTAL DEPOSIT IN THE
AMOUNT OF PHP10,523,821.99 IS NOT PROPER.
III. THE CTA EN BANC ERRED IN RULING THAT THE FINAL WITHHOLDING TAX ON ROYALTIES COVERING THE PERIOD JANUARY TO MARCH 1998
WAS FILED ON TIME.12
Upon filing of Sony’s comment, the Court ordered the CIR to file its reply thereto. The CIR subsequently filed a manifestation informing the Court
that it would no longer file a reply. Thus, on December 3, 2008, the Court resolved to give due course to the petition and to decide the case on the
basis of the pleadings filed.13
The Court finds no merit in the petition.
The CIR insists that LOA 19734, although it states "the period 1997 and unverified prior years," should be understood to mean the fiscal year ending
in March 31, 1998.14 The Court cannot agree.
Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the authority given to the appropriate revenue officer assigned to perform
assessment functions. It empowers or enables said revenue officer to examine the books of account and other accounting records of a taxpayer for
the purpose of collecting the correct amount of tax.15 The very provision of the Tax Code that the CIR relies on is unequivocal with regard to its
power to grant authority to examine and assess a taxpayer.
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and Enforcement. –
(A)Examination of Returns and Determination of tax Due. – After a return has been filed as required under the provisions of this Code, the
Commissioner or his duly authorized representative may authorize the examination of any taxpayer and the assessment of the correct amount of
tax: Provided, however, That failure to file a return shall not prevent the Commissioner from authorizing the examination of any taxpayer. x x x
[Emphases supplied]
Clearly, there must be a grant of authority before any revenue officer can conduct an examination or assessment. Equally important is that the
revenue officer so authorized must not go beyond the authority given. In the absence of such an authority, the assessment or examination is a
nullity.
As earlier stated, LOA 19734 covered "the period 1997 and unverified prior years." For said reason, the CIR acting through its revenue officers went
beyond the scope of their authority because the deficiency VAT assessment they arrived at was based on records from January to March 1998 or
using the fiscal year which ended in March 31, 1998. As pointed out by the CTA-First Division in its April 28, 2005 Resolution, the CIR knew which
period should be covered by the investigation. Thus, if CIR wanted or intended the investigation to include the year 1998, it should have done so by
including it in the LOA or issuing another LOA.
Upon review, the CTA-EB even added that the coverage of LOA 19734, particularly the phrase "and unverified prior years," violated Section C of
Revenue Memorandum Order No. 43-90 dated September 20, 1990, the pertinent portion of which reads:
3. A Letter of Authority should cover a taxable period not exceeding one taxable year. The practice of issuing L/As covering audit of "unverified
prior years is hereby prohibited. If the audit of a taxpayer shall include more than one taxable period, the other periods or years shall be specifically
indicated in the L/A.16 [Emphasis supplied]
On this point alone, the deficiency VAT assessment should have been disallowed. Be that as it may, the CIR’s argument, that Sony’s advertising
expense could not be considered as an input VAT credit because the same was eventually reimbursed by Sony International Singapore (SIS), is also
erroneous.
The CIR contends that since Sony’s advertising expense was reimbursed by SIS, the former never incurred any advertising expense. As a result, Sony
is not entitled to a tax credit. At most, the CIR continues, the said advertising expense should be for the account of SIS, and not Sony.17
The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed by the CTA-EB, Sony’s deficiency VAT assessment stemmed
from the CIR’s disallowance of the input VAT credits that should have been realized from the advertising expense of the latter.18 It is evident under
Section 11019 of the 1997 Tax Code that an advertising expense duly covered by a VAT invoice is a legitimate business expense. This is confirmed by
no less than CIR’s own witness, Revenue Officer Antonio Aluquin. 20 There is also no denying that Sony incurred advertising expense. Aluquin
testified that advertising companies issued invoices in the name of Sony and the latter paid for the same.21 Indubitably, Sony incurred and paid for
advertising expense/ services. Where the money came from is another matter all together but will definitely not change said fact.
The CIR further argues that Sony itself admitted that the reimbursement from SIS was income and, thus, taxable. In support of this, the CIR cited a
portion of Sony’s protest filed before it:
The fact that due to adverse economic conditions, Sony-Singapore has granted to our client a subsidy equivalent to the latter’s advertising
expenses will not affect the validity of the input taxes from such expenses. Thus, at the most, this is an additional income of our client subject to
income tax. We submit further that our client is not subject to VAT on the subsidy income as this was not derived from the sale of goods or
services.22
Insofar as the above-mentioned subsidy may be considered as income and, therefore, subject to income tax, the Court agrees. However, the Court
does not agree that the same subsidy should be subject to the 10% VAT. To begin with, the said subsidy termed by the CIR as reimbursement was
not even exclusively earmarked for Sony’s advertising expense for it was but an assistance or aid in view of Sony’s dire or adverse economic
conditions, and was only "equivalent to the latter’s (Sony’s) advertising expenses."
Section 106 of the Tax Code explains when VAT may be imposed or exacted. Thus:
SEC. 106. Value-added Tax on Sale of Goods or Properties. –
(A) Rate and Base of Tax. – There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, value-added tax
equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax
to be paid by the seller or transferor.
Thus, there must be a sale, barter or exchange of goods or properties before any VAT may be levied. Certainly, there was no such sale, barter or
exchange in the subsidy given by SIS to Sony. It was but a dole out by SIS and not in payment for goods or properties sold, bartered or exchanged
by Sony.
In the case of CIR v. Court of Appeals (CA),23 the Court had the occasion to rule that services rendered for a fee even on reimbursement-on-cost
basis only and without realizing profit are also subject to VAT. The case, however, is not applicable to the present case. In that case, COMASERCO
rendered service to its affiliates and, in turn, the affiliates paid the former reimbursement-on-cost which means that it was paid the cost or
expense that it incurred although without profit. This is not true in the present case. Sony did not render any service to SIS at all. The services
rendered by the advertising companies, paid for by Sony using SIS dole-out, were for Sony and not SIS. SIS just gave assistance to Sony in the
amount equivalent to the latter’s advertising expense but never received any goods, properties or service from Sony.
Regarding the deficiency EWT assessment, more particularly Sony’s commission expense, the CIR insists that said deficiency EWT assessment is
subject to the ten percent (10%) rate instead of the five percent (5%) citing Revenue Regulation No. 2-98 dated April 17, 1998.24 The said revenue
regulation provides that the 10% rate is applied when the recipient of the commission income is a natural person. According to the CIR, Sony’s
schedule of Selling, General and Administrative expenses shows the commission expense as "commission/dealer salesman incentive," emphasizing
the word salesman.
On the other hand, the application of the five percent (5%) rate by the CTA-First Division is based on Section 1(g) of Revenue Regulations No. 6-85
which provides:
(g) Amounts paid to certain Brokers and Agents. – On gross payments to customs, insurance, real estate and commercial brokers and agents of
professional entertainers – five per centum (5%).25
In denying the very same argument of the CIR in its motion for reconsideration, the CTA-First Division, held:
x x x, commission expense is indeed subject to 10% withholding tax but payments made to broker is subject to 5% withholding tax pursuant to
Section 1(g) of Revenue Regulations No. 6-85. While the commission expense in the schedule of Selling, General and Administrative expenses
submitted by petitioner (SPI) to the BIR is captioned as "commission/dealer salesman incentive" the same does not justify the automatic imposition
of flat 10% rate. As itemized by petitioner, such expense is composed of "Commission Expense" in the amount of P10,200.00 and ‘Broker Dealer’ of
P2,894,797.00.26
The Court agrees with the CTA-EB when it affirmed the CTA-First Division decision. Indeed, the applicable rule is Revenue Regulations No. 6-85, as
amended by Revenue Regulations No. 12-94, which was the applicable rule during the subject period of examination and assessment as specified in
the LOA. Revenue Regulations No. 2-98, cited by the CIR, was only adopted in April 1998 and, therefore, cannot be applied in the present case.
Besides, the withholding tax on brokers and agents was only increased to 10% much later or by the end of July 2001 under Revenue Regulations
No. 6-2001.27 Until then, the rate was only 5%.
The Court also affirms the findings of both the CTA-First Division and the CTA-EB on the deficiency EWT assessment on the rental deposit.
According to their findings, Sony incurred the subject rental deposit in the amount of ₱10,523,821.99 only from January to March 1998. As stated
earlier, in the absence of the appropriate LOA specifying the coverage, the CIR’s deficiency EWT assessment from January to March 1998, is not
valid and must be disallowed.
Finally, the Court now proceeds to the third ground relied upon by the CIR.
The CIR initially assessed Sony to be liable for penalties for belated remittance of its FWT on royalties (i) as of December 1997; and (ii) for the
period from January to March 1998. Again, the Court agrees with the CTA-First Division when it upheld the CIR with respect to the royalties for
December 1997 but cancelled that from January to March 1998.
The CIR insists that under Section 328 of Revenue Regulations No. 5-82 and Sections 2.57.4 and 2.58(A)(2)(a)29 of Revenue Regulations No. 2-98,
Sony should also be made liable for the FWT on royalties from January to March of 1998. At the same time, it downplays the relevance of the
Manufacturing License Agreement (MLA) between Sony and Sony-Japan, particularly in the payment of royalties.
The above revenue regulations provide the manner of withholding remittance as well as the payment of final tax on royalty. Based on the same,
Sony is required to deduct and withhold final taxes on royalty payments when the royalty is paid or is payable. After which, the corresponding
return and remittance must be made within 10 days after the end of each month. The question now is when does the royalty become payable?
Under Article X(5) of the MLA between Sony and Sony-Japan, the following terms of royalty payments were agreed upon:
(5)Within two (2) months following each semi-annual period ending June 30 and December 31, the LICENSEE shall furnish to the LICENSOR a
statement, certified by an officer of the LICENSEE, showing quantities of the MODELS sold, leased or otherwise disposed of by the LICENSEE during
such respective semi-annual period and amount of royalty due pursuant this ARTICLE X therefore, and the LICENSEE shall pay the royalty hereunder
to the LICENSOR concurrently with the furnishing of the above statement.30
Withal, Sony was to pay Sony-Japan royalty within two (2) months after every semi-annual period which ends in June 30 and December 31.
However, the CTA-First Division found that there was accrual of royalty by the end of December 1997 as well as by the end of June 1998. Given this,
the FWTs should have been paid or remitted by Sony to the CIR on January 10, 1998 and July 10, 1998. Thus, it was correct for the CTA-First
Division and the CTA-EB in ruling that the FWT for the royalty from January to March 1998 was seasonably filed. Although the royalty from January
to March 1998 was well within the semi-annual period ending June 30, which meant that the royalty may be payable until August 1998 pursuant to
the MLA, the FWT for said royalty had to be paid on or before July 10, 1998 or 10 days from its accrual at the end of June 1998. Thus, when Sony
remitted the same on July 8, 1998, it was not yet late.
In view of the foregoing, the Court finds no reason to disturb the findings of the CTA-EB.
WHEREFORE, the petition is DENIED. SO ORDERED.

THIRD DIVISION April 5, 2017 G.R. No. 222743
MEDICARD PHILIPPINES, INC., Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.
REYES,, J.:
This appeal by Petition for Review1 seeks to reverse and set aside the Decision2 dated September 2, 2015 and Resolution3 dated January 29, 2016
of the Court of Tax Appeals (CTA) en bane in CTA EB No. 1224, affirming with modification the Decision4 dated June 5, 2014 and the
Resolution5 dated September 15, 2014.in CTA Case No. 7948 of the CTA Third Division, ordering petitioner Medicard Philippines, Inc. (MEDICARD),
to pay respondent Commissioner of Internal Revenue (CIR) the deficiency Value-Added Tax. (VAT) assessment in the aggregate amount of
₱220,234,609.48, plus 20% interest per annum starting January 25, 2007, until fully paid, pursuant to Section 249(c)6 of the National Internal
Revenue Code (NIRC) of 1997.
The Facts
MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid health and medical insurance coverage to its clients. Individuals
enrolled in its health care programs pay an annual membership fee and are entitled to various preventive, diagnostic and curative medical services
provided by duly licensed physicians, specialists and other professional technical staff participating in the group practice health delivery system at a
hospital or clinic owned, operated or accredited by it.7
MEDICARD filed its First, Second, and Third Quarterly VAT Returns through Electronic Filing and Payment System (EFPS) on April 20, 2006, July 25,
2006 and October 20, 2006, respectively, and its Fourth Quarterly VAT Return on January 25, 2007.8
Upon finding some discrepancies between MEDICARD's Income Tax Returns (ITR) and VAT Returns, the CIR informed MEDICARD and issued a Letter
Notice (LN) No. 122-VT-06-00-00020 dated September 20, 2007. Subsequently, the CIR also issued a Preliminary Assessment Notice (PAN) against
MEDICARD for deficiency VAT. A Memorandum dated December 10, 2007 was likewise issued recommending the issuance of a Formal Assessment
Notice (FAN) against MEDICARD.9 On. January 4, 2008, MEDICARD received CIR's FAN dated December' 10, 2007 for alleged deficiency VAT for
taxable year 2006 in the total amount of Pl 96,614,476.69,10 inclusive of penalties. 11
According to the CIR, the taxable base of HMOs for VAT purposes is its gross receipts without any deduction under Section 4.108.3(k) of Revenue
Regulation (RR) No. 16-2005. Citing Commissioner of Internal Revenue v. Philippine Health Care Providers, Inc., 12 the CIR argued that since
MEDICARD. does not actually provide medical and/or hospital services, but merely arranges for the same, its services are not VAT exempt.13
MEDICARD argued that: (1) the services it render is not limited merely to arranging for the provision of medical and/or hospital services by
hospitals and/or clinics but include actual and direct rendition of medical and laboratory services; in fact, its 2006 audited balance sheet shows that
it owns x-ray and laboratory facilities which it used in providing medical and laboratory services to its members; (2) out of the ₱l .9 Billion
membership fees, ₱319 Million was received from clients that are registered with the Philippine Export Zone Authority (PEZA) and/or Bureau of
Investments; (3) the processing fees amounting to ₱l 1.5 Million should be excluded from gross receipts because P5.6 Million of which represent
advances for professional fees due from clients which were paid by MEDICARD while the remainder was already previously subjected to VAT; (4)
the professional fees in the amount of Pl 1 Million should also be excluded because it represents the amount of medical services actually and
directly rendered by MEDICARD and/or its subsidiary company; and (5) even assuming that it is liable to pay for the VAT, the 12% VAT rate should
not be applied on the entire amount but only for the period when the 12% VAT rate was already in effect, i.e., on February 1, 2006. It should not
also be held liable for surcharge and deficiency interest because it did not pass on the VAT to its members. 14
On February 14, 2008, the CIR issued a Tax Verification Notice authorizing Revenue Officer Romualdo Plocios to verify the supporting documents of
MEDICARD's Protest. MEDICARD also submitted additional supporting documentary evidence in aid of its Protest thru a letter dated March 18,
2008.15
On June 19, 2009, MEDICARD received CIR's Final Decision on Disputed Assessment dated May 15, 2009, denying MEDICARD's protest, to wit:
IN VIEW HEREOF, we deny your letter protest and hereby reiterate in toto assessment of deficiency [VAT] in total sum of ₱196,614,476.99. It is
requested that you pay said deficiency taxes immediately. Should payment be made later, adjustment has to be made to impose interest until date
of payment. This is olir final decision. If you disagree, you may take an appeal to the [CTA] within the period provided by law, otherwise, said
assessment shall become final, executory and demandable. 16
On July 20, 2009, MEDICARD proceeded to file a petition for review before the CT A, reiterating its position before the tax authorities. 17
On June 5, 2014, the CTA Division rendered a Decision18 affirming with modifications the CIR's deficiency VAT assessment covering taxable year
2006, viz.:
WHEREFORE, premises considered, the deficiency VAT assessment issued by [CIR] against [MEDICARD] covering taxable year 2006 ·is
hereby AFFIRMED WITH MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR] the amount of P223,l 73,208.35, inclusive of the
twenty-five percent (25%) surcharge imposed under -Section 248(A)(3) of the NIRC of 1997, as amended, computed as follows:
Basic Deficiency VAT ₱l78,538,566.68
Add: 25% Surcharge 44,634,641.67
Total ₱223.173.208.35
In addition, [MEDICARD] is ordered to pay:
a. Deficiency interest at the rate of twenty percent (20%) per annum on the basis deficiency VAT of Pl 78,538,566.68 computed from January 25,
2007 until full payment thereof pursuant to Section 249(B) of the NIRC of 1997, as amended; and
b. Delinquency interest at the rate of twenty percent (20%) per annum on the total amount of ₱223,173,208.35 representing basic deficiency VAT
of ₱l78,538,566.68 and· 25% surcharge of ₱44,634,64 l .67 and on the 20% deficiency interest which have accrued as afore-stated in (a), computed
from June 19, 2009 until full payment thereof pursuant to Section 249(C) of the NIRC of 1997. SO ORDERED.19
The CTA Division held that: (1) the determination of deficiency VAT is not limited to the issuance of Letter of Authority (LOA) alone as the CIR is
granted vast powers to perform examination and assessment functions; (2) in lieu of an LOA, an LN was issued to MEDICARD informing it· of the
discrepancies between its ITRs and VAT Returns and this procedure is authorized under Revenue Memorandum Order (RMO) No. 30-2003 and 42-
2003; (3) MEDICARD is estopped from questioning the validity of the assessment on the ground of lack of LOA since the assessment issued against
MEDICARD contained the requisite legal and factual bases that put MEDICARD on notice of the deficiencies and it in fact availed of the remedies
provided by law without questioning the nullity of the assessment; (4) the amounts that MEDICARD earmarked , and eventually paid to doctors,
hospitals and clinics cannot be excluded from · the computation of its gross receipts under the provisions of RR No. 4-2007 because the act of
earmarking or allocation is by itself an act of ownership and management over the funds by MEDICARD which is beyond the contemplation of RR
No. 4-2007; (5) MEDICARD's earnings from its clinics and laboratory facilities cannot be excluded from its gross receipts because the operation of
these clinics and laboratory is merely an incident to MEDICARD's main line of business as HMO and there is no evidence that MEDICARD segregated
the amounts pertaining to this at the time it received the premium from its members; and (6) MEDICARD was not able to substantiate the amount
pertaining to its January 2006 income and therefore has no basis to impose a 10% VAT rate.20
Undaunted, MEDICARD filed a Motion for Reconsideration but it was denied. Hence, MEDICARD elevated the matter to the CTA en banc.
In a Decision21 dated September 2, 2015, the CTA en banc partially granted the petition only insofar as the 10% VAT rate for January 2006 is
concerned but sustained the findings of the CTA Division in all other matters, thus:
WHEREFORE, in view thereof, the instant Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the Decision date June 5, 2014 is
hereby MODIFIED, as follows:
"WHEREFORE, premises considered, the deficiency VAT assessment issued by [CIR] against
[MEDICARD] covering taxable year 2006 is hereby AFFIRMED WITH MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR] the amount
of ₱220,234,609.48, inclusive of the 25% surcharge imposed under Section 248(A)(3) of the NIRC of 1997, as amended, computed as follows:
Basic Deficiency VAT ₱76,187,687.58
Add: 25% Surcharge 44,046,921.90
Total ₱220,234.609.48
In addition, [MEDICARD] is ordered to pay:
(a) Deficiency interest at the rate of 20% per annum on the basic deficiency VAT of ₱l 76,187,687.58 computed from January 25, 2007 until full
payment thereof pursuant to Section 249(B) of the NIRC of 1997, as amended; and
(b) Delinquency interest at the rate of 20% per annum on the total amount of ₱220,234,609.48 (representing basic deficiency VAT of
₱l76,187,687.58 and 25% surcharge of ₱44,046,921.90) and on the deficiency interest which have accrued as afore-stated in (a), computed from
June 19, 2009 until full payment thereof pursuant to Section 249(C) of the NIRC of 1997, as amended." SO ORDERED.22
Disagreeing with the CTA en bane's decision, MEDICARD filed a motion for reconsideration but it was denied. 23Hence, MEDICARD now seeks
recourse to this Court via a petition for review on certiorari.
The Issues
l. WHETHER THE ABSENCE OF THE LOA IS FATAL; and
2. WHETHER THE AMOUNTS THAT MEDICARD EARMARKED AND EVENTUALLY PAID TO THE MEDICAL SERVICE PROVIDERS SHOULD STILL FORM
PART OF ITS GROSS RECEIPTS FOR VAT PURPOSES.24
Ruling of the Court
The petition is meritorious.
The absence of an LOA violated MEDICARD's right to due process
An 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. 25 An
LOA is premised on the fact that the examination of a taxpayer who has already filed his tax returns is a power that statutorily belongs only to the
CIR himself or his duly authorized representatives. Section 6 of the NIRC clearly provides as follows:
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and Enforcement. –
(A) Examination of Return 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 examinationof 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 x (Emphasis and underlining ours)
Based on the afore-quoted provision, it is clear that unless authorized by the CIR himself or by his duly authorized representative, through an LOA,
an examination of the taxpayer cannot ordinarily be undertaken. The circumstances contemplated under Section 6 where the taxpayer may be
assessed through best-evidence obtainable, inventory-taking, or surveillance among others has nothing to do with the LOA. These are simply
methods of examining the taxpayer in order to arrive at .the correct amount of taxes. Hence, unless undertaken by the CIR himself or his duly
authorized representatives, other tax agents may not validly conduct any of these kinds of examinations without prior authority.
With the advances in information and communication technology, the Bureau of Internal Revenue (BIR) promulgated RMO No. 30-2003 to lay
down the policies and guidelines once its then incipient centralized Data Warehouse (DW) becomes fully operational in conjunction with its
Reconciliation of Listing for Enforcement System (RELIEF System).26 This system can detect tax leaks by matching the data available under the BIR's
Integrated Tax System (ITS) with data gathered from third-party sources. Through the consolidation and cross-referencing of third-party
information, discrepancy reports on sales and purchases can be generated to uncover under declared income and over claimed purchases of Goods
and services.
Under this RMO, several offices of the BIR are tasked with specific functions relative to the RELIEF System, particularly with regard to LNs. Thus, the
Systems Operations Division (SOD) under the Information Systems Group (ISG) is responsible for: (1) coming up with the List of Taxpayers with
discrepancies within the threshold amount set by management for the issuance of LN and for the system-generated LNs; and (2) sending the same
to the taxpayer and to the Audit Information, Tax Exemption and Incentives Division (AITEID). After receiving the LNs, the AITEID under the
Assessment
Service (AS), in coordination with the concerned offices under the ISG, shall be responsible for transmitting the LNs to the investigating offices
[Revenue District Office (RDO)/Large Taxpayers District Office (LTDO)/Large Taxpayers Audit and Investigation Division (LTAID)]. At the level of
these investigating offices, the appropriate action on the LN s issued to taxpayers with RELIEF data discrepancy would be determined.
RMO No. 30-2003 was supplemented by RMO No. 42-2003, which laid down the "no-contact-audit approach" in the CIR's exercise of its ·power to
authorize any examination of taxpayer arid the assessment of the correct amount of tax. The no-contact-audit approach includes the process of
computerized matching of sales and purchases data contained in the Schedules of Sales and Domestic Purchases and Schedule of Importation
submitted by VAT taxpayers under the RELIEF System pursuant to RR No. 7-95, as amended by RR Nos. 13-97, 7-99 and 8-2002. This may also
include the matching of data from other information or returns filed by the taxpayers with the BIR such as Alphalist of Payees subject to Final or
Creditable Withholding Taxes.
Under this policy, even without conducting a detailed examination of taxpayer's books and records, if the computerized/manual matching of sales
and purchases/expenses appears to reveal discrepancies, the same shall be communicated to the concerned taxpayer through the issuance of LN.
The LN shall serve as a discrepancy notice to taxpayer similar to a Notice for Informal Conference to the concerned taxpayer. Thus, under the
RELIEF System, a revenue officer may begin an examination of the taxpayer even prior to the issuance of an LN or even in the absence of an LOA
with the aid of a computerized/manual matching of taxpayers': documents/records. Accordingly, under the RELIEF System, the presumption that
the tax returns are in accordance with law and are presumed correct since these are filed under the penalty of perjury27 are easily rebutted and the
taxpayer becomes instantly burdened to explain a purported discrepancy.
Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are silent on the statutory requirement of an LOA before any investigation or
examination of the taxpayer may be conducted. As provided in the RMO No. 42-2003, the LN is merely similar to a Notice for Informal Conference.
However, for a Notice of Informal Conference, which generally precedes the issuance of an assessment notice to be valid, the same presupposes
that the revenue officer who issued the same is properly authorized in the first place.
With this apparent lacuna in the RMOs, in November 2005, RMO No. 30-2003, as supplemented by RMO No. 42-2003, was amended by RMO No.
32-2005 to fine tune existing procedures in handing assessments against taxpayers'· issued LNs by reconciling various revenue issuances which
conflict with the NIRC. Among the objectives in the issuance of RMO No. 32-2005 is to prescribe procedure in the resolution of LN discrepancies,
conversion of LNs to LOAs and assessment and collection of deficiency taxes.
IV. POLICIES AND GUIDELINES
xxxx
8. In the event a taxpayer who has been issued an LN refutes the discrepancy shown in the LN, the concerned taxpayer will be given an
opportunity to reconcile its records with those of the BIR within
One Hundred and Twenty (120) days from the date of the issuance of the LN. However, the subject taxpayer shall no longer be entitled to the
abatement of interest and penalties after the lapse of the sixty (60)-day period from the LN issuance.
9. In case the above discrepancies remained unresolved at the end of the One Hundred and Twenty (120)-day period, the revenue officer (RO)
assigned to handle the LN shall recommend the issuance of [LOA) to replace the LN. The head of the concerned investigating office shall submit a
summary list of LNs for conversion to LAs (using the herein prescribed format in Annex "E" hereof) to the OACIR-LTS I ORD for the preparation of
the corresponding LAs with the notation "This LA cancels LN_________ No. "
xxxx
V. PROCEDURES
xxxx
B. At the Regional Office/Large Taxpayers Service
xxxx
7. Evaluate the Summary List of LNs for Conversion to LAs submitted by the RDO x x x prior to approval.
8. Upon approval of the above list, prepare/accomplish and sign the corresponding LAs.
xxxx
Decision 11 G.R. No. 222743
xxxx
10. Transmit the approved/signed LAs, together with the duly accomplished/approved Summary List of LNs for conversion to LAs, to the concerned
investigating offices for the encoding of the required information x x x and for service to the concerned taxpayers.
xxxx
C. At the RDO x x x
xxxx
11. If the LN discrepancies remained unresolved within One Hundred and Twenty (120) days from issuance thereof, prepare a summary list of said
LN s for conversion to LAs x x x.
xxxx
16. Effect the service of the above LAs to the concerned taxpayers.28
In this case, there is no dispute that no LOA was issued prior to the issuance of a PAN and FAN against MED ICARD. Therefore no LOA was also
served on MEDICARD. The LN that was issued earlier was also not converted into an LOA contrary to the above quoted provision. Surprisingly, the
CIR did not even dispute the applicability of the above provision of RMO 32-2005 in the present case which is clear and unequivocal on the
necessity of an LOA for the· assessment proceeding to be valid. Hence, the CTA's disregard of MEDICARD's right to due process warrant the reversal
of the assailed decision and resolution.
In the case of Commissioner of Internal Revenue v. Sony Philippines, Inc. ,29 the Court said that:
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.30 (Emphasis and underlining ours)
The Court cannot convert the LN into the LOA required under the law even if the same was issued by the CIR himself. Under RR No. 12-2002, LN is
issued to a person found to have underreported sales/receipts per data generated under the RELIEF system. Upon receipt of the LN, a taxpayer
may avail of the BIR's Voluntary Assessment and Abatement Program. If a taxpayer fails or refuses to avail of the said program, the BIR may avail of
administrative and criminal .remedies, particularly closure, criminal action, or audit and investigation. Since the law specifically requires an LOA and
RMO No. 32-2005 requires the conversion of the previously issued LN to an LOA, the absence thereof cannot be simply swept under the rug, as the
CIR would have it. In fact Revenue Memorandum Circular No. 40-2003 considers an LN as a notice of audit or investigation only for the purpose of
disqualifying the taxpayer from amending his returns.
The following differences between an LOA and LN are crucial. First, an LOA addressed to a revenue officer is specifically required under the NIRC
before an examination of a taxpayer may be had while an LN is not found in the NIRC and is only for the purpose of notifying the taxpayer that a
discrepancy is found based on the BIR's RELIEF System. Second, an LOA is valid only for 30 days from date of issue while an LN has no such
limitation. Third, an LOA gives the revenue officer only a period of 10days from receipt of LOA to conduct his examination of the taxpayer whereas
an LN does not contain such a limitation.31 Simply put, LN is entirely different and serves a different purpose than an LOA. Due process demands, as
recognized under RMO No. 32-2005, that after an LN has serve its purpose, the revenue officer should have properly secured an LOA before
proceeding with the further examination and assessment of the petitioner. Unfortunarely, this was not done in this case.
Contrary to the ruling of the CTA en banc, an LOA cannot be dispensed with just because none of the financial books or records being physically
kept by MEDICARD was examined. To begin with, Section 6 of the NIRC requires an authority from the CIR or from his duly authorized
representatives before an examination "of a taxpayer" may be made. The requirement of authorization is therefore not dependent on whether the
taxpayer may be required to physically open his books and financial records but only on whether a taxpayer is being subject to examination.
The BIR's RELIEF System has admittedly made the BIR's assessment and collection efforts much easier and faster. The ease by which the BIR's
revenue generating objectives is achieved is no excuse however for its non-compliance with the statutory requirement under Section 6 and with its
own administrative issuance. In fact, apart from being a statutory requirement, an LOA is equally needed even under the BIR's RELIEF System
because the rationale of requirement is the same whether or not the CIR conducts a physical examination of the taxpayer's records: to prevent
undue harassment of a taxpayer and level the playing field between the government' s vast resources for tax assessment, collection and
enforcement, on one hand, and the solitary taxpayer's dual need to prosecute its business while at the same time responding to the BIR exercise of
its statutory powers. The balance between these is achieved by ensuring that any examination of the taxpayer by the BIR' s revenue officers is
properly authorized in the first place by those to whom the discretion to exercise the power of examination is given by the statute.
That the BIR officials herein were not shown to have acted unreasonably is beside the point because the issue of their lack of authority was only
brought up during the trial of the case. What is crucial is whether the proceedings that led to the issuance of VAT deficiency assessment against
MEDICARD had the prior approval and authorization from the CIR or her duly authorized representatives. Not having authority to examine
MEDICARD in the first place, the assessment issued by the CIR is inescapably void.
At any rate, even if it is assumed that the absence of an LOA is not fatal, the Court still partially finds merit in MEDICARD's substantive arguments.
The amounts earmarked and eventually paid by MEDICARD to the medical service providers do not form part of gross receipts for VAT purposes
MEDICARD argues that the CTA en banc seriously erred in affirming the ruling of the CTA Division that the gross receipts of an HMO for VAT
purposes shall be the total amount of money or its equivalent actually received from members undiminished by any amount paid or payable to the
owners/operators of hospitals, clinics and medical and dental practitioners. MEDICARD explains that its business as an HMO involves two different
although interrelated contracts. One is between a corporate client and MEDICARD, with the corporate client's employees being considered as
MEDICARD members; and the other is between the health care institutions/healthcare professionals and MED ICARD.
Under the first, MEDICARD undertakes to make arrangements with healthcare institutions/healthcare professionals for the coverage of MEDICARD
members under specific health related services for a specified period of time in exchange for payment of a more or less fixed membership fee.
Under its contract with its corporate clients, MEDICARD expressly provides that 20% of the membership fees per individual, regardless of the
amount involved, already includes the VAT of 10%/20% excluding the remaining 80o/o because MED ICARD would earmark this latter portion for
medical utilization of its members. Lastly, MEDICARD also assails CIR's inclusion in its gross receipts of its earnings from medical services which it
actually and directly rendered to its members.
Since an HMO like MEDICARD is primarily engaged m arranging for coverage or designated managed care services that are needed by plan
holders/members for fixed prepaid membership fees and for a specified period of time, then MEDICARD is principally engaged in the sale of
services. Its VAT base and corresponding liability is, thus, determined under Section 108(A) 32 of the Tax Code, as amended by Republic Act No.
9337.
Prior to RR No. 16-2005, an HMO, like a pre-need company, is treated for VAT purposes as a dealer in securities whose gross receipts is the amount
actually received as contract price without allowing any deduction from the gross receipts. 33 This restrictive tenor changed under RR No. 16-2005.
Under this RR, an HMO's gross receipts and gross receipts in general were defined, thus:
Section 4.108-3. xxx
xxxx
HMO's gross receipts shall be the total amount of money or its equivalent representing the service fee actually or constructively received during
the taxable period for the services performed or to be performed for another person, excluding the value-added tax. The compensation for their
services representing their service fee, is presumed to be the total amount received as enrollment fee from their members plus other charges
received.
Section 4.108-4. x x x. "Gross receipts" refers to the total amount of money or its equivalent representing the contract price, compensation, service
fee, rental or royalty, including the amount charged for materials supplied with the services and deposits applied as payments for services
rendered, and advance payments actually or constructively received during the taxable period for the services performed or to be performed for
another person, excluding the VAT. 34
In 2007, the BIR issued RR No. 4-2007 amending portions of RR No. 16-2005, including the definition of gross receipts in general.35
According to the CTA en banc, the entire amount of membership fees should form part of MEDICARD's gross receipts because the exclusions to the
gross receipts under RR No. 4-2007 does not apply to MEDICARD. What applies to MEDICARD is the definition of gross receipts of an HMO under RR
No. 16-2005 and not the modified definition of gross receipts in general under the RR No. 4-2007.
The CTA en banc overlooked that the definition of gross receipts under. RR No. 16-2005 merely presumed that the amount received by an HMO as
membership fee is the HMO's compensation for their services. As a mere presumption, an HMO is, thus, allowed to establish that a portion of the
amount it received as membership fee does NOT actually compensate it but some other person, which in this case are the medical service
providers themselves. It is a well-settled principle of legal hermeneutics that words of a statute will be interpreted in their natural, plain and
ordinary acceptation and signification, unless it is evident that the legislature intended a technical or special legal meaning to those words. The
Court cannot read the word "presumed" in any other way.
It is notable in this regard that the term gross receipts as elsewhere mentioned as the tax base under the NIRC does not contain any specific
definition.36 Therefore, absent a statutory definition, this Court has construed the term gross receipts in its plain and ordinary meaning, that is,
gross receipts is understood as comprising the entire receipts without any deduction. 37 Congress, under Section 108, could have simply left the
term gross receipts similarly undefined and its interpretation subjected to ordinary acceptation,. Instead of doing so, Congress limited the scope of
the term gross receipts for VAT purposes only to the amount that the taxpayer received for the services it performed or to the amount it received
as advance payment for the services it will render in the future for another person.
In the proceedings ·below, the nature of MEDICARD's business and the extent of the services it rendered are not seriously disputed. As an HMO,
MEDICARD primarily acts as an intermediary between the purchaser of healthcare services (its members) and the healthcare providers (the
doctors, hospitals and clinics) for a fee. By enrolling membership with MED ICARD, its members will be able to avail of the pre-arranged medical
services from its accredited healthcare providers without the necessary protocol of posting cash bonds or deposits prior to being attended to or
admitted to hospitals or clinics, especially during emergencies, at any given time. Apart from this, MEDICARD may also directly provide medical,
hospital and laboratory services, which depends upon its member's choice.
Thus, in the course of its business as such, MED ICARD members can either avail of medical services from MEDICARD's accredited healthcare
providers or directly from MEDICARD. In the former, MEDICARD members obviously knew that beyond the agreement to pre-arrange the
healthcare needs of its ·members, MEDICARD would not actually be providing the actual healthcare service. Thus, based on industry practice,
MEDICARD informs its would-be member beforehand that 80% of the amount would be earmarked for medical utilization and only the remaining
20% comprises its service fee. In the latter case, MEDICARD's sale of its services is exempt from VAT under Section 109(G).
The CTA's ruling and CIR's Comment have not pointed to any portion of Section 108 of the NIRC that would extend the definition of gross receipts
even to amounts that do not only pertain to the services to be performed: by another person, other than the taxpayer, but even to amounts that
were indisputably utilized not by MED ICARD itself but by the medical service providers.
It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a statute shall be considered surplusage or
superfluous, meaningless, void and insignificant. To this end, a construction which renders every word operative is preferred over that which
makes some words idle and nugatory. This principle is expressed in the maxim Ut magisvaleat quam pereat, that is, we choose the interpretation
which gives effect to the whole of the statute – it’s every word.
In Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue,38the Court adopted the principal object and purpose object in
determining whether the MEDICARD therein is engaged in the business of insurance and therefore liable for documentary stamp tax. The Court
held therein that an HMO engaged in preventive, diagnostic and curative medical services is not engaged in the business of an insurance, thus:
To summarize, the distinctive features of the cooperative are the rendering of service, its extension, the bringing of physician and patient
together, the preventive features, the regularization of service as well as payment, the substantial reduction in cost by quantity purchasing in
short, getting the medical job done and paid for; not, except incidentally to these features, the indemnification for cost after .the services is
rendered. Except the last, these are not distinctive or generally characteristic of the insurance arrangement. There is, therefore, a substantial
difference between contracting in this way for the rendering of service, even on the contingency that it be needed, and contracting merely to stand
its cost when or after it is rendered.39 (Emphasis ours)
In sum, the Court said that the main difference between an HMO arid an insurance company is that HMOs undertake to provide or arrange for the
provision of medical services through participating physicians while insurance companies simply undertake to indemnify the insured for medical
expenses incurred up to a pre-agreed limit. In the present case, the VAT is a tax on the value added by the performance of the service by the
taxpayer. It is, thus, this service and the value charged thereof by the taxpayer that is taxable under the NIRC.
To be sure, there are pros and cons in subjecting the entire amount of membership fees to VAT. 40 But the Court's task however is not to weigh
these policy considerations but to determine if these considerations in favor of taxation can even be implied from the statute where the CIR
purports to derive her authority. This Court rules that they cannot because the language of the NIRC is pretty straightforward and clear. As this
Court previously ruled:
What is controlling in this case is the well-settled doctrine of strict interpretation in the imposition of taxes, not the similar doctrine as applied to
tax exemptions. The rule in the interpretation of tax laws is that a statute will not be construed as imposing a tax unless it does so clearly,
expressly, and unambiguously. A tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of
requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to
be extended by implication. In answering the question of who is subject to tax statutes, it is basic that in case of doubt, such statutes are to be
construed most strongly against the government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to
be imposed beyond what statutes expressly and clearly import. As burdens, taxes should not be unduly exacted nor assumed beyond the plain
meaning of the tax laws. 41 (Citation omitted and emphasis and underlining ours)
For this Court to subject the entire amount of MEDICARD's gross receipts without exclusion, the authority should have been reasonably founded
from the language of the statute. That language is wanting in this case. In the scheme of judicial tax administration, the need for certainty and
predictability in the implementation of tax laws is crucial. Our tax authorities fill in the details that Congress may not have the opportunity or
competence to provide. The regulations these authorities issue are relied upon by taxpayers, who are certain that these will be followed by the
courts. Courts, however, will not uphold these authorities' interpretations when dearly absurd, erroneous or improper. 42 The CIR's interpretation of
gross receipts in the present case is patently erroneous for lack of both textual and non-textual support.
As to the CIR's argument that the act of earmarking or allocation is by itself an act of ownership and management over the funds, the Court does
not agree.1âwphi1 On the contrary, it is MEDICARD's act of earmarking or allocating 80% of the amount it received as membership fee at the time
of payment that weakens the ownership imputed to it. By earmarking or allocating 80% of the amount, MEDICARD unequivocally recognizes that
its possession of the funds is not in the concept of owner but as a mere administrator of the same. For this reason, at most, MEDICARD's right in
relation to these amounts is a mere inchoate owner which would ripen into actual ownership if, and only if, there is underutilization of the
membership fees at the end of the fiscal year. Prior to that, MEDI CARD is bound to pay from the amounts it had allocated as an administrator once
its members avail of the medical services of MEDICARD's healthcare providers.
Before the Court, the parties were one in submitting the legal issue of whether the amounts MEDICARD earmarked, corresponding to 80% of its
enrollment fees, and paid to the medical service providers should form part of its gross receipt for VAT purposes, after having paid the VAT on the
amount comprising the 20%. It is significant to note in this regard that MEDICARD established that upon receipt of payment of membership fee it
actually issued two official receipts, one pertaining to the VAT able portion, representing compensation for its services, and the other represents
the non-vatable portion pertaining to the amount earmarked for medical utilization.: Therefore, the absence of an actual and physical segregation
of the amounts pertaining to two different kinds · of fees cannot arbitrarily disqualify MEDICARD from rebutting the presumption under the law
and from proving that indeed services were rendered by its healthcare providers for which it paid the amount it sought to be excluded from its
gross receipts.
With the foregoing discussions on the nullity of the assessment on due process grounds and violation of the NIRC, on one hand, and the utter lack
of legal basis of the CIR's position on the computation of MEDICARD's gross receipts, the Court finds it unnecessary, nay useless, to discuss the rest
of the parties' arguments and counter-arguments.
In fine, the foregoing discussion suffices for the reversal of the assailed decision and resolution of the CTA en banc grounded as it is on due process
violation. The Court likewise rules that for purposes of determining the VAT liability of an HMO, the amounts earmarked and actually spent for
medical utilization of its members should not be included in the computation of its gross receipts.
WHEREFORE, in consideration of the foregoing disquisitions, the petition is hereby GRANTED. The Decision dated September 2, 2015 and
Resolution dated January 29, 2016 issued by the Court of Tax Appeals en bane in CTA EB No. 1224 are REVERSED and SET ASIDE. The definition of
gross receipts under Revenue Regulations Nos. 16-2005 and 4-2007, in relation to Section 108(A) of the National Internal Revenue Code, as
amended by Republic Act No. 9337, for purposes of determining its Value-Added Tax liability, is hereby declared to EXCLUDE the eighty percent
(80%) of the amount of the contract price earmarked as fiduciary funds for the medical utilization of its members. Further, the Value-Added Tax
deficiency assessment issued against Medicard Philippines, Inc. is hereby declared unauthorized for having been issued without a Letter of
Authority by the Commissioner of Internal Revenue or his duly authorized representatives. SO ORDERED.
SECOND DIVISION G.R. No. 181961 December 5, 2011
LVM CONSTRUCTION CORPORATION, represented by its Managing Director, ANDRES CHUA LAO,Petitioner, vs. F.T. SANCHEZ/SOCOR/KIMWA
(JOINT VENTURE), F.T. SANCHEZ CONSTRUCTION CORPORATION, SOCOR CONSTRUCTION CORPORATION AND KIMWA CONSTRUCTION AND
DEVELOPMENT CORPORATION all represented by FORTUNATO O. SANCHEZ, JR., Respondents.
PEREZ, J.:
Filed pursuant to Rule 45 of the 1997 Rules of Civil Procedure, the petition for review on certiorari at bench seeks the reversal of the 28 September
2007 Decision1 rendered by the then Thirteenth Division of the Court of Appeals (CA) in CA-G.R. SP No. 94849,2 the decretal portion of which states:
WHEREFORE, premises considered, the assailed Decision dated April 26, 2006 of the Construction Industry Arbitration Commission in CIAC Case No.
25-2005 is hereby AFFIRMED. SO ORDERED.3
The Facts
Petitioner LVM Construction Corporation (LVM) is a duly licensed construction firm primarily engaged in the construction of roads and bridges for
the Department of Public Works and Highways (DPWH). Awarded the construction of the Arterial Road Link Development Project in Southern Leyte
(the Project), LVM sub-contracted approximately 30% of the contract amount with the Joint Venture composed of respondents F.T. Sanchez
Corporation (FTSC), Socor Construction Corporation (SCC) and Kimwa Construction Development Corporation (KCDC). For the contract price of
₱90,061,917.25 which was later on reduced to ₱86,318,478.38,4 the Joint Venture agreed to undertake construction of the portion of the Project
starting from Sta. 154 + 210.20 to Sta. 160 + 480.00. With LVM as the Contractor and the Joint Venture as Sub-Contractor, the 27 November 1996
Sub-Contract Agreement5 executed by the parties pertinently provided as follows:
3) That payment to the SUB-CONTRACTOR shall be on item of work accomplished in the sub-contracted portion of the project at awarded unit cost
of the project less NINE PERCENT (9%). The SUB-CONTRACTOR shall issue a BIR registered receipt to the CONTRACTOR.
4) Ten percent (10%) retention to be deducted for every billing of sub-contractor as prescribed under the Tender Documents.
xxxx
13) The payment to the SUB-CONTRACTOR shall be made within seven (7) days after the check issued by DPWH to CONTRACTOR has already been
made good.6
For work rendered in the premises, there is no dispute regarding the fact that the Joint Venture sent LVM a total of 27 Billings. For Billing Nos. 1 to
26, LVM paid the Joint Venture the total sum of ₱80,414,697.12 and retained the sum of ₱8,041,469.79 by way of the 10% retention stipulated in
the Sub-Contract Agreement.7 For Billing No. 27 in the sum of ₱5,903,780.96, on the other hand, LVM paid the Joint Venture the partial sum of
₱2,544,934.99 on 31 May 2001,8 claiming that it had not yet been fully paid by the DPWH.9 Having completed the sub-contracted works, the Joint
Venture subsequently demanded from LVM the settlement of its unpaid claims as well as the release of money retained by the latter in accordance
with the Sub-Contract Agreement. In a letter dated 16 May 2001, however, LVM apprised the Joint Venture of the fact that its auditors have
belatedly discovered that no deductions for E-VAT had been made from its payments on Billing Nos. 1 to 26 and that it was, as a consequence,
going to deduct the 8.5% payments for said tax from the amount still due in the premises.10 In its 14 June 2001 Reply, the Joint Venture claimed
that, having issued Official Receipts for every payment it received, it was liable to pay 10% VAT thereon and that LVM can, in turn, claim therefrom
an equivalent input tax of 10%.11
With its claims still unpaid despite the lapse of more than four (4) years from the completion of the sub-contracted works, the Joint Venture, thru
its Managing Director, Fortunato O. Sanchez, Jr., filed against LVM the 30 June 2005 complaint for sum of money and damages which was docketed
before the Construction Industry Arbitration Commission (CIAC) as CIAC Case No. 25-2005.12 Having submitted a Bill of Particulars in response to
LVM’s motion therefor,13 the Joint Venture went on to file an Amended Complaint dated 23 December 2005 specifying its claims as follows: (a)
₱8,041,469.73 as retention monies for Billing Nos. 1 to 26; (b) ₱3,358,845.97 as unpaid balance on Billing No. 27; (c) ₱6,186,570.71 as interest on
unpaid retention money computed at 12% per annum reckoned from 6 August 1999 up to 1 January 2006; and (d) ₱5,365,677.70 as interest at 12%
per annum on delayed payment of monies collected from DPWH on Billing Nos. 1 to 26. In addition, the Joint Venture sought indemnity for
attorney’s fees equivalent to 10% of the amount collected and/or in a sum not less than ₱1,000,000.00.14
In its 21 October 2005 Answer with Compulsory Counterclaim, LVM maintained that it did not release the 10% retention for Billing Nos. 1 to 26 on
the ground that it had yet to make the corresponding 8.5% deductions for E-VAT which the Joint Venture should have paid to the Bureau of
Internal Revenue (BIR) and that there is, as a consequence, a need to offset the sums corresponding thereto from the retention money still in its
possession. Moreover, LVM alleged that the Joint Venture’s claims failed to take into consideration its own outstanding obligation in the total
amount of ₱21,737,094.05, representing the liquidated damages it incurred as a consequence of its delays in the completion of the project. In
addition to said liquidated damages, LVM prayed for the grant of its counterclaims for exemplary damages and attorney’s fees. 15 In its 2 January
2006 supplemental answer, LVM likewise argued that the Joint Venture’s prayer for imposition of 12% interest on the retention money and the
balance of Billing No. 27 is bereft of factual and legal bases since no interest was stipulated in the parties’ agreement and it was justified in refusing
the release of said sums claimed.16
With the parties’ assent to the 19 December 2005 Terms of Reference which identified, among other matters, the issues to be resolved in the
case,17 the CIAC proceeded to receive the parties’ evidence in support of their respective causes. On 26 April 2006, the CIAC rendered its decision
granting the Joint Venture’s claims for the payment of the retention money for Billing Nos. 1 to 26 as well as the interest thereon and the unpaid
balance billing from 6 August 1999 to 1 January 2006 in the aggregate sum of ₱11,307,646.68. Discounting the contractual and legal bases for
LVM’s claim that it had the right to offset its E-VAT payments from the retention money still in its possession, the CIAC ruled that the VAT
deductions the DPWH made from its payments to LVM were for the whole project and already included all its supplies and subcontractors. Instead
of withholding said retention money, LVM was determined to have – to its credit and for its use – the input VAT corresponding to the 10%
equivalent VAT paid by the Joint Venture based on the BIR-registered official receipts it issued. Finding that the delays incurred by the Joint Venture
were justified, the CIAC likewise denied LVM’s counterclaim for liquidated damages for lack of contractual basis.18
Elevated by LVM to the CA through a petition for review filed pursuant to Rule 43 of the 1997 Rules of Civil Procedure, 19 the CIAC’s decision was
affirmed in toto in the herein assailed Decision dated 28 September 2007 rendered by said court’s Thirteenth Division in CA-G.R. SP No. 94849.20 In
upholding the CIAC’s rejection of LVM’s insistence on the offsetting of E-VAT payments from the retention money, the CA ruled as follows:
Clearly, there was no provision in the Sub-Contract Agreement that would hold Sanchez liable for EVAT on the amounts paid to it by LVM. As
pointed out by the CIAC in its Award, ‘the contract documents provide only for the payment of the awarded cost of the project less 9%. Any other
deduction must be clearly stated in the provisions of the contract or upon agreement of the parties. xxx The tribunal finds no provision that EVAT
will be deducted from the sub-contractor. xxx If [the Joint Venture] should pay or share in the payment of the EVAT, it must be clearly defined in
the sub-contract agreement.’
Elucidating further, CIAC pointed out that Sanchez, under the contract was required to issue official receipts registered with the BIR for every
payment LVM makes for the progress billings, which it did. For these official receipts issued by Sanchez to LVM, Sanchez already paid 10% VAT to
the BIR, thus: ‘The VAT Law is very clear. Everyone must pay 10% VAT based on their issued official receipts. These receipts must be official receipts
and registered with the BIR. Respondent (LVM) must pay its output Vat based on its receipts. Complainant (Sanchez) must also pay output VAT
based on its receipts. The law however allow each entity to deduct the input VAT based on the official receipts issued to it. Clearly, therefore,
respondent [LVM], has to its credit the 10% output VAT paid by claimant [Joint Venture] based on the official receipts issued to it. Respondent
[LVM] can use this input VAT to offset any output VAT respondent [LVM] must pay for any of its other projects."21
LVM’s motion for reconsideration of the foregoing decision was denied for lack of merit in the CA’s 26 February 2008 Resolution,22 hence, this Rule
45 petition for review on certiorari.
The Issues
LVM urges the grant of its petition for review upon the following errors imputed against the CA, to wit:
I. CONTRARY TO THE FINDING OF THE COURT OF APPEALS, RESPONDENTS’ LIABILITY TO PAY VALUE ADDED TAX NEED NOT BE STATED IN THE SUB-
CONTRACT AGREEMENT DATED 27 NOVEMBER 1996 AS THE PROVISIONS OF REPUBLIC ACT 8424, OTHERWISE KNOWN AS THE NATIONAL
INTERNAL REVENUE CODE OF THE PHILIPPINES, FORM PART OF, AND ARE DEEMED INCORPORATED AND READ INTO SAID AGREEMENT.
II. THE COURT OF APPEALS ERRED WHEN IT RULED THAT RESPONDENTS ARE DEEMED TO HAVE ALREADY PAID VALUE ADDED TAX MERELY
BECAUSE RESPONDENTS HAD ALLEGEDLY ISSUED RECEIPTS FOR SERVICES RENDERED. 23
The Court’s Ruling
The petition is bereft of merit.
For lack of any stipulation regarding the same in the parties’ Sub-Contract Agreement, we find that the CA correctly brushed aside LVM’s insistence
on deducting its supposed E-VAT payments from the retention money demanded by the Joint Venture. Indeed, a contract constitutes the law
between the parties who are, therefore, bound by its stipulations24 which, when couched in clear and plain language, should be applied according
to their literal tenor.25That there was no agreement regarding the offsetting urged by LVM may likewise be readily gleaned from the parties’
contemporaneous and subsequent acts which are given primordial consideration in determining their intention. 26 The record shows that, except
for deducting sums corresponding to the 10% retention agreed upon, 9% as contingency on sub-contract, 1% withholding tax and such other
itemized miscellaneous expenses, LVM settled the Joint Venture’s Billing Nos. 1 to 26 without any mention of deductions for the E-VAT payments it
claims to have advanced.27 It was, in fact, only on 16 May 2001 that LVM’s Managing Director, Andres C. Lao, apprised the Joint Venture in writing
of its intention to deduct said payments,28 to wit:
If you would recall, during our last meeting with Deputy Project Manager of the DPWH-PJHL, Eng. Jimmy T. Chan, last March 2001 at the PJHL
Office in Palo, Leyte, our company made a commitment to pay up to 99% accomplishment and release the retention money up to the 23rd partial
billing after receipt by our company of the 27th partial billing from JBIC and GOP relative to the above mentioned project.
Much as our company wants to comply with said commitment, our auditors recently discovered that all payments made by us to your Joint
Venture, relative to the above mentioned project were made without the corresponding deduction of the E-VAT of 8.50% x 10/11, which your Joint
Venture should have paid to the BIR. Records would show that from billing number 1 up to 26, no deductions for E-VAT were made. As a matter of
fact, our company was the one who shouldered all payments due for the E-VAT which should have been deducted from the payments made by us
to your Joint Venture. Copy of the payments made by our company to the BIR relative to the E-VAT is hereto attached as Annex "1" for your perusal
and ready reference.1avvphi1
This being the case and to offset the advances made by our company, we would like to inform you that our company would deduct the payments
made for E-VAT to the amount due to your Joint Venture. Only by doing so, would our advances be settled and liquidated. We hope that our
auditor and your auditor can discuss this matter to avoid any possible conflict regarding this matter.
From the foregoing letter, it is evident that LVM unilaterally broached its intention of deducting the subject E-VAT payments only on 15 May 2001
or long after the project’s completion on 9 July 1999.29 In the absence of any stipulation thereon, however, the CA correctly disallowed the
offsetting of said sums from the retention money undoubtedly due the Joint Venture. Courts are obliged to give effect to the parties’ agreement
and enforce the contract to the letter.30 The rule is settled that they have no authority to alter a contract by construction or to make a new contract
for the parties; their duty is confined to the interpretation of the one which the parties have made for themselves, without regard to its wisdom or
folly. Courts cannot supply material stipulations, read into the contract words it does not contain31 or, for that matter, read into it any other
intention that would contradict its plain import.32This is particularly true in this case where, in addition to the dearth of a meeting of minds
between the parties, their contemporaneous and subsequent acts fail to yield any intention to offset the said E-VAT payments from the retention
money still in LVM’s possession.lawphi1
In taking exception to the CA’s affirmance of the CIAC’s rejection of its position for lack of contractual basis, LVM argues that the Joint Venture’s
liability for E-VAT as an entity that renders services in the course of trade or business need not be stated in the Sub-Contract Agreement
considering that it is an obligation imposed by law which forms part of, and is read into, every contract.33 As correctly argued by the Joint Venture,
however, there are two (2) contracts under the factual milieu of the case: the main contract DPWH entered into with LVM for the construction of
the Arterial Road Link Development Project in Southern Leyte and the Sub-Contract Agreement the latter in turn concluded with the Joint Venture
over 30% of said project’s contract amount. As the entity which directly dealt with the government insofar as the main contract was concerned,
LVM was itself required by law to pay the 8.5% VAT which was withheld by the DPWH in accordance with Republic Act No. 8424 34 or the Tax
Reform Act of 1997 as well as the National Internal Revenue Code of 1997 (NIRC). Section 114 (C) of said law provides as follows:
"Section 114. Return and Payment of Value-Added Tax. –
xxxx
(C) Withholding of Creditable Value-added Tax. - The Government or any of its political subdivisions, instrumentalities or agencies, including
government-owned or -controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods from sellers and
services rendered by contractors which are subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold the
value-added tax due at the rate of three percent (3%) of the gross payment for the purchase of goods and six percent (6%) on gross receipts for
services rendered by contractors on every sale or installment payment which shall be creditable against the value-added tax liability of the seller or
contractor: Provided, however, That in the case of government public works contractors, the withholding rate shall be eight and one-half percent
(8.5%): Provided, further, That the payment for lease or use of properties or property rights to nonresident owners shall be subject to ten percent
(10%) withholding tax at the time of payment. For this purpose, the payor or person in control of the payment shall be considered as the
withholding agent."
For the Sub-Contract Agreement, on the other hand, respondent F. Sanchez Construction, acting on behalf of the Joint Venture, issued BIR-
registered receipts for the sums paid by LVM for Billing Nos. 1 to 26, indicating the total amount paid by the latter, the retention fee deducted
therefrom and the tax due thereon.35 These were in consonance with paragraph 3 of the Sub-Contract Agreement which, after stating that LVM’s
payment shall "be on item of work accomplished in the sub-contracted portion of the project awarded unit cost of the project less NINE PERCENT
(9%)," simply provided, that "(t)he SUB-CONTRACTOR shall issue a BIR registered receipt to the CONTRACTOR."36 As the VAT-registered person, on
the other hand, Fortunato T. Sanchez, Sr.37 also filed the corresponding Monthly VAT Declarations38 with the BIR which, by themselves, are
evidence of the Joint Venture’s VAT liability for LVM’s payments on its billings. In fixing the base of the tax, the first paragraph A Section 108 of the
NIRC provides that "(t)here shall be levied assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from
the sale or exchange of services, including the use or lease of properties."
In the absence of any stipulation regarding the Joint Venture’s sharing in the VAT deducted and withheld by the DPWH from its payment on the
main contract, the CIAC and the CA correctly ruled that LVM has no basis in offsetting the amounts of said tax from the retention still in its
possession. VAT is a uniform tax levied on every importation of goods, whether or not in the course of trade or business, or imposed on each sale,
barter, exchange or lease of goods or properties or on each rendition of services in the course of trade or business. 39 It is a tax on transactions,
imposed at every stage of the distribution process on the sale, barter, exchange of goods or property, and on the performance of services, even in
the absence of profit attributable thereto.40 As an indirect tax that may be shifted or passed on to the buyer, transferee or lessee of the goods,
properties or services, VAT should be understood not in the context of the person or entity that is primarily, directly and legally liable for its
payment, but in terms of its nature as a tax on consumption.41
Neither do we find merit in LVM’s harping over the lack of showing in the record that the Joint Venture has actually paid its liability for VAT. For this
purpose, LVM insists that the Official Receipts for its payments on the Joint Venture’s billing were issued by respondent F. Sanchez Construction
and that the Monthly VAT Declarations were, in fact, filed by Fortunato Sanchez, Sr. However, the evidence on record is to the effect that, failing to
register with the Securities and Exchange Commission (SEC) and to obtain a Mayor’s Permit and authorization from the BIR to print its official
receipts, the Joint Venture apprised LVM of its intention to use respondent F. Sanchez Construction’s BIR-registered receipts.42 Aside from being
indicative of its knowledge of the foregoing circumstances, LVM’s previous unqualified acceptance of said official receipts should, clearly, bar the
belated exceptions it now takes with respect thereto. A party, having performed affirmative acts upon which another person based his subsequent
actions, cannot thereafter refute his acts or renege on the effects of the same, to the prejudice of the latter.43
To recapitulate, LVM, as Contractor for the Project, was liable for the 8.5% VAT which was withheld by the DPWH from its payments, pursuant to
Section 114 (C) of the NIRC. Absent any agreement to that effect, LVM cannot deduct the amounts thus withheld from the sums it still owed the
Joint Venture which, as Sub-Contractor of 30% of the Project, had its own liability for 10% VAT insofar as the sums paid for the sub-contracted
works were concerned. Although the burden to pay an indirect tax like VAT can, admittedly, be passed on to the purchaser of the goods or services,
it bears emphasizing that the liability to pay the same remains with the manufacturer or seller like LVM and the Joint Venture. In the same manner
that LVM is liable for the VAT due on the payments made by the DPWH pursuant to the contract on the Project, the Joint Venture is, consequently,
liable for the VAT due on the payments made by LVM pursuant to the parties’ Sub-Contract.
WHEREFORE, premises considered, the petition is DENIED for lack of merit and the CA’s 28 September 2007 Decision is, accordingly, AFFIRMED in
toto. SO ORDERED.
SECOND DIVISION | G.R. No. 190102 | July 11, 2012
ACCENTURE, INC., Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.
SERENO, J.:
This is a Petition filed under Rule 45 of the 1997 Rules of Civil Procedure, praying for the reversal of the Decision of the Court of Tax Appeals En
Banc (CTA En Banc ) dated 22 September 2009 and its subsequent Resolution dated 23 October 2009. 1
Accenture, Inc. (Accenture) is a corporation engaged in the business of providing management consulting, business strategies development, and
selling and/or licensing of software.2 It is duly registered with the Bureau of Internal Revenue (BIR) as a Value Added Tax (VAT) taxpayer or
enterprise in accordance with Section 236 of the National Internal Revenue Code (Tax Code). 3
On 9 August 2002, Accenture filed its Monthly VAT Return for the period 1 July 2002 to 31 August 2002 (1st period). Its Quarterly VAT Return for
the fourth quarter of 2002, which covers the 1st period, was filed on 17 September 2002; and an Amended Quarterly VAT Return, on 21 June
2004.4 The following are reflected in Accenture’s VAT Return for the fourth quarter of 2002:5
1âwphi1
Purchases Amount Input VAT
Domestic Purchases- Capital Goods ₱12,312,722.00 ₱1,231,272.20
Domestic Purchases- Goods other than capital Goods ₱64,789,507.90 ₱6,478,950.79
Domestic Purchases- Services ₱16,455,868.10 ₱1,645,586.81
Total Input Tax ₱9,355,809.80
Zero-rated Sales ₱316,113,513.34
Total Sales ₱335,640,544.74

Accenture filed its Monthly VAT Return for the month of September 2002 on 24 October 2002; and that for October 2002, on 12 November 2002.
These returns were amended on 9 January 2003. Accenture’s Quarterly VAT Return for the first quarter of 2003, which included the period 1
September 2002 to 30 November 2002 (2nd period), was filed on 17 December 2002; and the Amended Quarterly VAT Return, on 18 June 2004.
The latter contains the following information:6
Purchases Amount Input VAT
Domestic Purchases- Capital Goods ₱80,765,294.10 ₱8,076,529.41
Domestic Purchases- Goods other than capital Goods ₱132,820,541.70 ₱13,282,054.17
Domestic Purchases-Services ₱63,238,758.00 ₱6,323,875.80
Total Input Tax ₱27,682,459.38
Zero-rated Sales ₱545,686,639.18
Total Sales ₱ ₱572,880,982.68

The monthly and quarterly VAT returns of Accenture show that, notwithstanding its application of the input VAT credits earned from its zero-rated
transactions against its output VAT liabilities, it still had excess or unutilized input VAT credits. These VAT credits are in the amounts of
P9,355,809.80 for the 1st period and P27,682,459.38 for the 2nd period, or a total of P37,038,269.18.7
Out of the P37,038,269.18, only P35,178,844.21 pertained to the allocated input VAT on Accenture’s "domestic purchases of taxable goods which
cannot be directly attributed to its zero-rated sale of services."8 This allocated input VAT was broken down to P8,811,301.66 for the 1st period and
P26,367,542.55 for the 2nd period.9
The excess input VAT was not applied to any output VAT that Accenture was liable for in the same quarter when the amount was earned—or to
any of the succeeding quarters. Instead, it was carried forward to petitioner’s 2nd Quarterly VAT Return for 2003. 10
Thus, on 1 July 2004, Accenture filed with the Department of Finance (DoF) an administrative claim for the refund or the issuance of a Tax Credit
Certificate (TCC). The DoF did not act on the claim of Accenture. Hence, on 31 August 2004, the latter filed a Petition for Review with the First
Division of the Court of Tax Appeals (Division), praying for the issuance of a TCC in its favor in the amount of P35,178,844.21.
The Commissioner of Internal Revenue (CIR), in its Answer,11 argued thus:
1. The sale by Accenture of goods and services to its clients are not zero-rated transactions.
2. Claims for refund are construed strictly against the claimant, and Accenture has failed to prove that it is entitled to a refund, because its claim
has not been fully substantiated or documented.
In a 13 November 2008 Decision,12 the Division denied the Petition of Accenture for failing to prove that the latter’s sale of services to the alleged
foreign clients qualified for zero percent VAT.13
In resolving the sole issue of whether or not Accenture was entitled to a refund or an issuance of a TCC in the amount of P35,178,844.21,14 the
Division ruled that Accenture had failed to present evidence to prove that the foreign clients to which the former rendered services did business
outside the Philippines.15 Ruling that Accenture’s services would qualify for zero-rating under the 1997 National Internal Revenue Code of the
Philippines (Tax Code) only if the recipient of the services was doing business outside of the Philippines,16 the Division cited Commissioner of
Internal Revenue v. Burmeister and Wain Scandinavian Contractor Mindanao, Inc. (Burmeister)17 as basis.
Accenture appealed the Division’s Decision through a Motion for Reconsideration (MR).18 In its MR, it argued that the reliance of the Division on
Burmeister was misplaced19 for the following reasons:
1. The issue involved in Burmeister was the entitlement of the applicant to a refund, given that the recipient of its service was doing business in the
Philippines; it was not an issue of failure of the applicant to present evidence to prove the fact that the recipient of its services was a foreign
corporation doing business outside the Philippines.20
2. Burmeister emphasized that, to qualify for zero-rating, the recipient of the services should be doing business outside the Philippines, and
Accenture had successfully established that.21
3. Having been promulgated on 22 January 2007 or after Accenture filed its Petition with the Division, Burmeister cannot be made to apply to this
case.22
Accenture also cited Commissioner of Internal Revenue v. American Express (Amex) 23 in support of its position. The MR was denied by the Division
in its 12 March 2009 Resolution.24
Accenture appealed to the CTA En Banc. There it argued that prior to the amendment introduced by Republic Act No. (R.A.) 9337, 25 there was no
requirement that the services must be rendered to a person engaged in business conducted outside the Philippines to qualify for zero-rating. The
CTA En Banc agreed that because the case pertained to the third and the fourth quarters of taxable year 2002, the applicable law was the 1997 Tax
Code, and not R.A. 9337.26 Still, it ruled that even though the provision used in Burmeister was Section 102(b)(2) of the earlier 1977 Tax Code, the
pronouncement therein requiring recipients of services to be engaged in business outside the Philippines to qualify for zero-rating was applicable
to the case at bar, because Section 108(B)(2) of the 1997 Tax Code was a mere reenactment of Section 102(b)(2) of the 1977 Tax Code.
The CTA En Banc concluded that Accenture failed to discharge the burden of proving the latter’s allegation that its clients were foreign-based.27
Resolute, Accenture filed a Petition for Review with the CTA En Banc, but the latter affirmed the Division’s Decision and Resolution.28 A subsequent
MR was also denied in a Resolution dated 23 October 2009.
Hence, the present Petition for Review29 under Rule 45.
In a Joint Stipulation of Facts and Issues, the parties and the Division have agreed to submit the following issues for resolution:
1. Whether or not Petitioner’s sales of goods and services are zero-rated for VAT purposes under Section 108(B)(2)(3) of the 1997 Tax Code.
2. Whether or not petitioner’s claim for refund/tax credit in the amount of P35,178,884.21 represents unutilized input VAT paid on its domestic
purchases of goods and services for the period commencing from 1 July 2002 until 30 November 2002.
3. Whether or not Petitioner has carried over to the succeeding taxable quarter(s) or year(s) the alleged unutilized input VAT paid on its domestic
purchases of goods and services for the period commencing from 1 July 2002 until 30 November 2002, and applied the same fully to its output VAT
liability for the said period.
4. Whether or not Petitioner is entitled to the refund of the amount of P35,178,884.21, representing the unutilized input VAT on domestic
purchases of goods and services for the period commencing from 1 July 2002 until 30 November 2002, from its sales of services to various foreign
clients.
5. Whether or not Petitioner’s claim for refund/tax credit in the amount of P35,178,884.21, as alleged unutilized input VAT on domestic purchases
of goods and services for the period covering 1 July 2002 until 30 November 2002 are duly substantiated by proper documents.30
For consideration in the present Petition are the following issues:
1. Should the recipient of the services be "doing business outside the Philippines" for the transaction to be zero-rated under Section 108(B)(2) of
the 1997 Tax Code?
2. Has Accenture successfully proven that its clients are entities doing business outside the Philippines?
Recipient of services must be doing business outside the Philippines for the transactions to qualify as zero-rated.
Accenture anchors its refund claim on Section 112(A) of the 1997 Tax Code, which allows the refund of unutilized input VAT earned from zero-rated
or effectively zero-rated sales. The provision reads:
SEC. 112. Refunds or Tax Credits of Input Tax. -
(A) Zero-Rated or Effectively Zero-Rated Sales. - Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2)
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
of goods of properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the
transactions, it shall be allocated proportionately on the basis of the volume of sales. Section 108(B) referred to in the foregoing provision was first
seen when Presidential Decree No. (P.D.) 199431 amended Title IV of P.D. 1158,32 which is also known as the National Internal Revenue Code of
1977. Several Decisions have referred to this as the 1986 Tax Code, even though it merely amended Title IV of the 1977 Tax Code.
Two years thereafter, or on 1 January 1988, Executive Order No. (E.O.) 27333 further amended provisions of Title IV. E.O. 273 by transferring the old
Title IV provisions to Title VI and filling in the former title with new provisions that imposed a VAT.
The VAT system introduced in E.O. 273 was restructured through Republic Act No. (R.A.) 7716. 34 This law, which was approved on 5 May 1994,
widened the tax base. Section 3 thereof reads:
SECTION 3. Section 102 of the National Internal Revenue Code, as amended, is hereby further amended to read as follows:
"SEC. 102. Value-added tax on sale of services and use or lease of properties. x x x
xxx xxx xxx
"(b) Transactions subject to zero-rate. — The following services performed in the Philippines by VAT-registered persons shall be subject to 0%:
"(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently
exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP).
"(2) Services other than those mentioned in the preceding sub-paragraph, the consideration for which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP)."
Essentially, Section 102(b) of the 1977 Tax Code—as amended by P.D. 1994, E.O. 273, and R.A. 7716—provides that if the consideration for the
services provided by a VAT-registered person is in a foreign currency, then this transaction shall be subjected to zero percent rate.
The 1997 Tax Code reproduced Section 102(b) of the 1977 Tax Code in its Section 108(B), to wit:
(B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the Philippines by VAT- registered persons shall be subject
to zero percent (0%) rate.
(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported,
where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP);
(2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); x x x.
On 1 November 2005, Section 6 of R.A. 9337, which amended the foregoing provision, became effective. It reads:
SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows:
"SEC. 108. Value-added Tax on Sale of Services and Use or Lease of
Properties. -
(B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the Philippines by VAT-registered persons shall be subject
to zero percent (0%) rate:
(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported,
where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP);
"(2) Services other than those mentioned in the preceding paragraph rendered to a person engaged in business conducted outside the Philippines
or to a nonresident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is
paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); x x
x." (Emphasis supplied)
The meat of Accenture’s argument is that nowhere does Section 108(B) of the 1997 Tax Code state that services, to be zero-rated, should be
rendered to clients doing business outside the Philippines, the requirement introduced by R.A. 9337. 35 Required by Section 108(B), prior to the
amendment, is that the consideration for the services rendered be in foreign currency and in accordance with the rules of the Bangko Sentral ng
Pilipinas (BSP). Since Accenture has complied with all the conditions imposed in Section 108(B), it is entitled to the refund prayed for.
In support of its claim, Accenture cites Amex, in which this Court supposedly ruled that Section 108(B) reveals a clear intent on the part of the
legislators not to impose the condition of being "consumed abroad" in order for the services performed in the Philippines to be zero-rated.36
The Division ruled that this Court, in Amex and Burmeister, did not declare that the requirement—that the client must be doing business outside
the Philippines—can be disregarded, because this requirement is expressly provided in Article 108(2) of the Tax Code. 37
Accenture questions the Division’s application to this case of the pronouncements made in Burmeister. According to petitioner, the provision
applied to the present case was Section 102(b) of the 1977 Tax Code, and not Section 108(B) of the 1997 Tax Code, which was the law effective
when the subject transactions were entered into and a refund was applied for.
In refuting Accenture’s theory, the CTA En Banc ruled that since Section 108(B) of the 1997 Tax Code was a mere reproduction of Section 102(b) of
the 1977 Tax Code, this Court’s interpretation of the latter may be used in interpreting the former, viz:
In the Burmeister case, the Supreme Court harmonized both Sections 102(b)(1) and 102(b)(2) of the 1977 Tax Code, as amended, pertaining to
zero-rated transactions. A parallel approach should be accorded to the renumbered provisions of Sections 108(B)(2) and 108(B)(1) of the 1997
NIRC. This means that Section 108(B)(2) must be read in conjunction with Section 108(B)(1). Section 108(B)(2) requires as follows: a) services other
than processing, manufacturing or repacking rendered by VAT registered persons in the Philippines; and b) the transaction paid for in acceptable
foreign currency duly accounted for in accordance with BSP rules and regulations. The same provision made reference to Section 108(B)(1) further
imposing the requisite c) that the recipient of services must be performing business outside of Philippines. Otherwise, if both the provider and
recipient of service are doing business in the Philippines, the sale transaction is subject to regular VAT as explained in the Burmeister case x x x.
xxx xxx xxx

Clearly, the Supreme Court’s pronouncements in the Burmeister case requiring that the recipient of the services must be doing business outside
the Philippines as mandated by law govern the instant case.38
Assuming that the foregoing is true, Accenture still argues that the tax appeals courts cannot be allowed to apply to Burmeister this Court’s
interpretation of Section 102(b) of the 1977 Tax Code, because the Petition of Accenture had already been filed before the case was even
promulgated on 22 January 2007,39 to wit:
x x x. While the Burmeister case forms part of the legal system and assumes the same authority as the statute itself, however, the same cannot be
applied retroactively against the Petitioner because to do so will be prejudicial to the latter. 40
The CTA en banc is of the opinion that Accenture cannot invoke the non-retroactivity of the rulings of the Supreme Court, whose interpretation of
the law is part of that law as of the date of its enactment.41
We rule that the recipient of the service must be doing business outside the Philippines for the transaction to qualify for zero-rating under Section
108(B) of the Tax Code.
This Court upholds the position of the CTA en banc that, because Section 108(B) of the 1997 Tax Code is a verbatim copy of Section 102(b) of the
1977 Tax Code, any interpretation of the latter holds true for the former.
Moreover, even though Accenture’s Petition was filed before Burmeister was promulgated, the pronouncements made in that case may be applied
to the present one without violating the rule against retroactive application. When this Court decides a case, it does not pass a new law, but merely
interprets a preexisting one.42 When this Court interpreted Section 102(b) of the 1977 Tax Code in Burmeister, this interpretation became part of
the law from the moment it became effective. It is elementary that the interpretation of a law by this Court constitutes part of that law from the
date it was originally passed, since this Court's construction merely establishes the contemporaneous legislative intent that the interpreted law
carried into effect.43
Accenture questions the CTA’s application of Burmeister, because the provision interpreted therein was Section 102(b) of the 1977 Tax Code. In
support of its position that Section 108 of the 1997 Tax Code does not require that the services be rendered to an entity doing business outside the
Philippines, Accenture invokes this Court’s pronouncements in Amex. However, a reading of that case will readily reveal that the provision applied
was Section 102(b) of the 1977 Tax Code, and not Section 108 of the 1997 Tax Code. As previously mentioned, an interpretation of Section 102(b)
of the 1977 Tax Code is an interpretation of Section 108 of the 1997 Tax Code, the latter being a mere reproduction of the former.
This Court further finds that Accenture’s reliance on Amex is misplaced.
We ruled in Amex that Section 102 of the 1977 Tax Code does not require that the services be consumed abroad to be zero-rated. However,
nowhere in that case did this Court discuss the necessary qualification of the recipient of the service, as this matter was never put in question. In
fact, the recipient of the service in Amex is a nonresident foreign client.
The aforementioned case explains how the credit card system works. The issuance of a credit card allows the holder thereof to obtain, on credit,
goods and services from certain establishments. As proof that this credit is extended by the establishment, a credit card draft is issued. Thereafter,
the company issuing the credit card will pay for the purchases of the credit card holders by redeeming the drafts. The obligation to collect from the
card holders and to bear the loss—in case they do not pay—rests on the issuer of the credit card.
The service provided by respondent in Amex consisted of gathering the bills and credit card drafts from establishments located in the Philippines
and forwarding them to its parent company's regional operating centers outside the country. It facilitated in the Philippines the collection and
payment of receivables belonging to its Hong Kong-based foreign client.
The Court explained how the services rendered in Amex were considered to have been performed and consumed in the Philippines, to wit:
Consumption is "the use of a thing in a way that thereby exhausts it." Applied to services, the term means the performance or "successful
completion of a contractual duty, usually resulting in the performer’s release from any past or future liability x x x." The services rendered by
respondent are performed or successfully completed upon its sending to its foreign client the drafts and bills it has gathered from service
establishments here. Its services, having been performed in the Philippines, are therefore also consumed in the Philippines. 44
The effect of the place of consumption on the zero-rating of the transaction was not the issue in Burmeister.1âwphi1Instead, this Court addressed
the squarely raised issue of whether the recipient of services should be doing business outside the Philippines for the transaction to qualify for
zero-rating. We ruled that it should. Thus, another essential condition for qualification for zero-rating under Section 102(b)(2) of the 1977 Tax Code
is that the recipient of the business be doing that business outside the Philippines. In clarifying that there is no conflict between this
pronouncement and that laid down in Amex, we ruled thus:
x x x. As the Court held in Commissioner of Internal Revenue v. American Express International, Inc. (Philippine Branch), the place of payment is
immaterial, much less is the place where the output of the service is ultimately used. An essential condition for entitlement to 0% VAT under
Section 102 (b) (1) and (2) is that the recipient of the services is a person doing business outside the Philippines. In this case, the recipient of the
services is the Consortium, which is doing business not outside, but within the Philippines because it has a 15-year contract to operate and
maintain NAPOCOR’s two 100-megawatt power barges in Mindanao. (Emphasis in the original)45
In Amex we ruled that the place of performance and/or consumption of the service is immaterial. In Burmeister, the Court found that, although the
place of the consumption of the service does not affect the entitlement of a transaction to zero-rating, the place where the recipient conducts its
business does.
Amex does not conflict with Burmeister. In fact, to fully understand how Section 102(b)(2) of the 1977 Tax Code—and consequently Section
108(B)(2) of the 1997 Tax Code—was intended to operate, the two aforementioned cases should be taken together. The zero-rating of the services
performed by respondent in Amex was affirmed by the Court, because although the services rendered were both performed and consumed in the
Philippines, the recipient of the service was still an entity doing business outside the Philippines as required in Burmeister.
That the recipient of the service should be doing business outside the Philippines to qualify for zero-rating is the only logical interpretation of
Section 102(b)(2) of the 1977 Tax Code, as we explained in Burmeister:
This can only be the logical interpretation of Section 102 (b) (2). If the provider and recipient of the "other services" are both doing business in the
Philippines, the payment of foreign currency is irrelevant. Otherwise, those subject to the regular VAT under Section 102 (a) can avoid paying the
VAT by simply stipulating payment in foreign currency inwardly remitted by the recipient of services. To interpret Section 102 (b) (2) to apply to a
payer-recipient of services doing business in the Philippines is to make the payment of the regular VAT under Section 102 (a) dependent on the
generosity of the taxpayer. The provider of services can choose to pay the regular VAT or avoid it by stipulating payment in foreign currency
inwardly remitted by the payer-recipient. Such interpretation removes Section 102 (a) as a tax measure in the Tax Code, an interpretation this
Court cannot sanction. A tax is a mandatory exaction, not a voluntary contribution.
xxx xxx xxx
Further, when the provider and recipient of services are both doing business in the Philippines, their transaction falls squarely under Section 102 (a)
governing domestic sale or exchange of services. Indeed, this is a purely local sale or exchange of services subject to the regular VAT, unless of
course the transaction falls under the other provisions of Section 102 (b).
Thus, when Section 102 (b) (2) speaks of "services other than those mentioned in the preceding subparagraph," the legislative intent is that only
the services are different between subparagraphs 1 and 2. The requirements for zero-rating, including the essential condition that the recipient of
services is doing business outside the Philippines, remain the same under both subparagraphs. (Emphasis in the original) 46
Lastly, it is worth mentioning that prior to the promulgation of Burmeister, Congress had already clarified the intent behind Sections 102(b)(2) of
the 1977 Tax Code and 108(B)(2) of the 1997 Tax Code amending the earlier provision. R.A. 9337 added the following phrase: "rendered to a
person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines
when the services are performed."
Accenture has failed to establish that the recipients of its services do business outside the Philippines.
Accenture argues that based on the documentary evidence it presented,47 it was able to establish the following circumstances:
1. The records of the Securities and Exchange Commission (SEC) show that Accenture’s clients have not established any branch office in which to do
business in the Philippines.
2. For these services, Accenture bills another corporation, Accenture Participations B.V. (APB), which is likewise a foreign corporation with no
"presence in the Philippines."
3. Only those not doing business in the Philippines can be required under BSP rules to pay in acceptable currency for their purchase of goods and
services from the Philippines. Thus, in a domestic transaction, where the provider and recipient of services are both doing business in the
Philippines, the BSP cannot require any party to make payment in foreign currency.48
Accenture claims that these documentary pieces of evidence are supported by the Report of Emmanuel Mendoza, the Court-commissioned
Independent Certified Public Accountant. He ascertained that Accenture’s gross billings pertaining to zero-rated sales were all supported by zero-
rated Official Receipts and Billing Statements. These documents show that these zero-rated sales were paid in foreign exchange currency and duly
accounted for in the rules and regulations of the BSP.49
In the CTA’s opinion, however, the documents presented by Accenture merely substantiate the existence of the sales, receipt of foreign currency
payments, and inward remittance of the proceeds of these sales duly accounted for in accordance with BSP rules. Petitioner presented no evidence
whatsoever that these clients were doing business outside the Philippines. 50
Accenture insists, however, that it was able to establish that it had rendered services to foreign corporations doing business outside the
Philippines, unlike in Burmeister, which allegedly involved a foreign corporation doing business in the Philippines.51
We deny Accenture’s Petition for a tax refund.
The evidence presented by Accenture may have established that its clients are foreign.1âwphi1 This fact does not automatically mean, however,
that these clients were doing business outside the Philippines. After all, the Tax Code itself has provisions for a foreign corporation engaged in
business within the Philippines and vice versa, to wit:
SEC. 22. Definitions - When used in this Title:
xxx xxx xxx
(H) The term "resident foreign corporation" applies to a foreign corporation engaged in trade or business within the Philippines.
(I) The term ‘nonresident foreign corporation’ applies to a foreign corporation not engaged in trade or business within the Philippines. (Emphasis in
the original)
Consequently, to come within the purview of Section 108(B)(2), it is not enough that the recipient of the service be proven to be a foreign
corporation; rather, it must be specifically proven to be a nonresident foreign corporation.
There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. We ruled thus in Commissioner of Internal
Revenue v. British Overseas Airways Corporation:52
x x x. There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in the light of
its peculiar environmental circumstances. The term implies a continuity of commercial dealings and arrangements, and contemplates, to that
extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of
commercial gain or for the purpose and object of the business organization. "In order that a foreign corporation may be regarded as doing business
within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and
not one of a temporary character."53
A taxpayer claiming a tax credit or refund has the burden of proof to establish the factual basis of that claim.1âwphi1 Tax refunds, like tax
exemptions, are construed strictly against the taxpayer.54
Accenture failed to discharge this burden. It alleged and presented evidence to prove only that its clients were foreign entities. However, as found
by both the CTA Division and the CTA En Banc, no evidence was presented by Accenture to prove the fact that the foreign clients to whom
petitioner rendered its services were clients doing business outside the Philippines.
As ruled by the CTA En Banc, the Official Receipts, Intercompany Payment Requests, Billing Statements, Memo Invoices-Receivable, Memo
Invoices-Payable, and Bank Statements presented by Accenture merely substantiated the existence of sales, receipt of foreign currency payments,
and inward remittance of the proceeds of such sales duly accounted for in accordance with BSP rules, all of these were devoid of any evidence that
the clients were doing business outside of the Philippines.55
WHEREFORE, the instant Petition is DENIED. The 22 September 2009 Decision and the 23 October 2009 Resolution of the Court of Tax Appeals En
Banc in C.T.A. EB No. 477, dismissing the Petition for the refund of the excess or unutilized input VAT credits of Accenture, Inc., are AFFIRMED.
SO ORDERED.
FIRST DIVISION G.R. No. 188260 November 13, 2013
LUZON HYDRO CORPORATION, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.
BERSAMIN, J.:
This case involves a claim for refund or tax credit to cover petitioner Luzon Hydro Corporation's unutilized Input Value-Added Tax (VAT) worth 1
2,920,665 .16 corresponding to the four quarters of taxable year 2001.
The Case
The petitioner brought this action in the Court of Tax Appeals (CTA) after the Commissioner of Internal Revenue (respondent) did not act on the
claim (CTA Case No. 6669). The CTA 2nd Division denied the claim on May 2, 2008 on the ground that the petitioner did not prove that it had zero-
rated sales for the four quarters of 2001.1 The CT A En Banc denied the petitioner's motion for reconsideration, and affirmed the decision of the
CTA 2nd Division through its decision dated May 5, 2009.2 Hence, the petitioner appeals the decision of the CTA En Banc.
Antecedents
The petitioner, a corporation duly organized under the laws of the Philippines, has been registered with the Bureau of Internal Revenue (BIR) as a
VAT taxpayer under Taxpayer Identification No. 004-266-526. It was formed as a consortium of several corporations, namely: Northern Mini Hydro
Corporation, Aboitiz Equity Ventures, Inc., Ever Electrical Manufacturing, Inc. and Pacific Hydro Limited.
Pursuant to the Power Purchase Agreement entered into with the National Power Corporation (NPC), the electricity produced by the petitioner
from its operation of the Bakun Hydroelectric Power Plant was to be sold exclusively to NPC.3 Relative to its sale to NPC, the petitioner was granted
by the BIR a certificate for Zero Rate for VAT purposes in the periods from January 1, 2000 to December 31, 2000; February 1, 2000 to December
31, 2000 (Certificate No. Z-162-2000); and from January 2, 2001 to December 31, 2001 (Certificate No. 2001-269).4
The petitioner alleged herein that it had incurred input VAT in the amount of ₱9,795,427.89 on its domestic purchases of goods and services used
in its generation and sales of electricity to NPC in the four quarters of 2001;5and that it had declared the input VAT of ₱9,795,427.89 in its amended
VAT returns for the four quarters on 2001, as follows:6
Exhibit Date Filed Period Covered Input VAT (P)
F May 25, 2001 1st quarter – 2001 1,903,443.96
I July 23, 2001 2nd quarter – 2001 2,166,051.96
L July 23, 2002 3rd quarter –2001 1,598,482.39
O July 24, 2002 4th quarter – 2001 4,127,449.58
Total 9,795,427.89
On November 26, 2001, the petitioner filed a written claim for refund or tax credit relative to its unutilized input VAT for the period from October
1999 to October 2001 aggregating ₱14,557,004.38.7 Subsequently, on July 24, 2002, it amended the claim for refund or tax credit to cover the
period from October 1999 to May 2002 for ₱20,609,047.56.8
The BIR, through Revenue Examiner Felicidad Mangabat of Revenue District Office No. 2 in Vigan City, concluded an investigation, and made a
recommendation in its report dated August 19, 2002 favorable to the petitioner’s claim for the period from January 1, 2001 to December 31, 2001.9
Respondent Commissioner of Internal Revenue (Commissioner) did not ultimately act on the petitioner’s claim despite the favorable
recommendation. Hence, on April 14, 2003, the petitioner filed its petition for review in the CTA, praying for the refund or tax credit certificate
(TCC) corresponding to the unutilized input VAT paid for the four quarters of 2001 totalling ₱9,795,427.88. 10
Answering on May 29, 2003,11 the Commissioner denied the claim, and raised the following special and affirmative defenses, to wit:
xxxx
7. The petitioner has failed to demonstrate that the taxes sought to be refunded were erroneously or illegally collected;
8. In an action for tax refund, the burden is upon the taxpayer to prove that he is entitled thereto, and failure to sustain the same is fatal to the
action for tax refund;
9. It is incumbent upon petitioner to show compliance with the provisions of Section 112 and Section 229, both of the National Internal Revenue
Code, as amended;
10. Claims for refund are construed strictly against the claimant for the same partakes the nature of exemption from taxation (Commissioner of
Internal Revenue vs. Ledesma, G.R. No. L-13509, January 30, 1970, 31 SCRA 95) and as such they are looked upon [with] disfavor (Western Minolco
Corp. vs. Commissioner of Internal Revenue, 124 SCRA 121);
11. Taxes paid and collected are presumed to have been made in accordance with the law and regulations, hence, not refundable. 12
xxxx
On October 30, 2003, the parties submitted a Joint Stipulation of Facts and Issues,13 which the CTA in Division approved on November 10, 2003.
The issues to be resolved were consequently the following:
1. Whether or not the input value added tax being claimed by petitioner is supported by sufficient documentary evidence;
2. Whether petitioner has excess and unutilized input VAT from its purchases of domestic goods and services, including capital goods in the amount
of ₱9,795,427.88;
3. Whether or not the input VAT being claimed by petitioner is attributable to its zero-rated sale of electricity to the NPC;
4.Whether or not the operation of the Bakun Hydroelectric Power Plant is directly connected and attributable to the generation and sale of
electricity to NPC, the sole business of petitioner; and 5. Whether or not the claim filed by the petitioner was filed within the reglementary period
provided by law.14
While the case was pending hearing, the Commissioner, through the Assistant Commissioner for Assessment Services, informed the petitioner by
the letter dated March 3, 2005 that its claim had been granted in the amount of ₱6,874,762.72, net of disallowances of ₱2,920,665.16.
Accompanying the letter was the TCC for ₱6,874,762.72 (TCC No. 00002618).15
On May 3, 2005, the petitioner filed a Motion for Leave of Court to Amend Petition for Review in consideration of the partial grant of the claim
through TCC No. 00002618. The CTA in Division granted the motion on May 11, 2005, and admitted the Amended Petition for Review, whereby the
petitioner sought the refund or tax credit in the reduced amount of ₱2,920,665.16. The CTA in Division also directed the respondent to file a
supplemental answer within ten days from notice.16
When no supplemental answer was filed within the period thus allowed, the CTA in Division treated the answer filed on May 16, 2003 as the
Commissioner’s answer to the Amended Petition for Review.17
Thereafter, the petitioner presented testimonial and documentary evidence to support its claim. On the other hand, the Commissioner submitted
the case for decision based on the pleadings.18 On May 2, 2007, the case was submitted for decision without the memorandum of the
Commissioner.19
Ruling of the CTA in Division
The CTA in Division promulgated its decision in favor of the respondent denying the petition for review, viz:
In petitioner’s VAT returns for the four quarters of 2001, no amount of zero-rated sales was declared. Likewise, petitioner did not submit any VAT
official receipt of payments for services rendered to NPC. The only proof submitted by petitioner is a letter from Regional Director Rene Q. Aguas,
Revenue Region No. 1, stating that the financial statements and annual income tax return constitute sufficient secondary proof of effectively zero-
rated and that based on their examination and evaluation of the financial statements and annual income tax return of petitioner for taxable year
2000, it had annual gross receipts of Ph₱187,992,524.00. This Court cannot give credence to the said letter as it refers to taxable year 2000, while
the instant case refers to taxable year 2001.
Without zero-rated sales for the four quarters of 2001, the input VAT payments of Ph₱9,795,427.88 (including the present claim of
Ph₱2,920,665.16) allegedly attributable thereto cannot be refunded. It is clear under Section 112 (A) of the NIRC of 1997 that the refund/tax credit
of unutilized input VAT is premised on the existence of zero-rated or effectively zero-rated sales.
xxxx
For petitioner’s non-compliance with the first requisite of proving that it had effectively zero-rated sales for the four quarters of 2001, the claimed
unutilized input VAT payments of Ph₱2,920,665.16 cannot be granted.
WHEREFORE, the instant Petition for Review is hereby DENIED for lack of merit. SO ORDERED.20
On May 21, 2008, the petitioner moved to reconsider the decision of the CTA in Division.21 However, the CTA in Division denied the petitioner’s
motion for reconsideration on September 5, 2008.22
Decision of the CTA En Banc
On October 17, 2008, the petitioner filed a petition for review in the CTA En Banc (CTA E.B No. 420), posing the main issue whether or not the CTA
in Division erred in denying its claim for refund or tax credit upon a finding that it had not established its having effectively zero-rated sales for the
four quarters of 2001.
On May 5, 2009, the CTA En Banc promulgated the assailed decision affirming the Division, and denying the claim for refund or tax credit, stating:
The other argument of petitioner that even if the tax credit certificate will not be used as evidence, it was able to prove that it has zero-rated sale
as shown in its financial statements and income tax returns quoting the letter opinion of Regional Director Rene Q. Aguas that the statements and
the return are considered sufficient to establish that it generated zero-rated sale of electricity is bereft of merit. As found by the Court a quo, the
letter opinion refers to taxable year 2000, while the instant case covers taxable year 2001; hence, cannot be given credence. Even assuming for the
sake of argument that the financial statements, the return and the letter opinion relates to 2001, the same could not be taken plainly as it is
because there is still a need to produce the supporting documents proving the existence of such zero-rated sales, which is wanting in this case.
Considering that there are no zero-rated sales to speak of for taxable year 2001, petitioner is, therefore, not entitled to a refund of
Ph₱2,920,665.16 input tax allegedly attributable thereto since it is basic requirement under Section 112 (A) of the NIRC that there should exists a
zero-rated sales in order to be entitled to a refund of unutilized input tax.
It is settled that tax refunds, like tax exemptions, are construed strictly against the taxpayer and that the claimant has the burden of proof to
establish the factual basis of its claim for tax credit or refund. Failure in this regard, petitioner’s claim must therefore, fail.
WHEREFORE, the instant Petition for Review is hereby DENIED for lack of merit. SO ORDERED.23
On June 10, 2009, the CTA En Banc also denied the petitioner’s motion for reconsideration. 24
Issue
Aggrieved, the petitioner has appealed, urging as the lone issue: –
WHETHER THE CTA EN BANC COMMITTED A REVERSIBLE ERROR IN AFFIRMING THE DECISION OF THE CTA.
In its August 3, 2009 petition for review,25 the petitioner has argued as follows:
(1) Its sale of electricity to NPC was automatically zero-rated pursuant to Republic Act No. 9136 (EPIRA Law); hence, it need not prove that it had
zero-rated sales in the period from January 1, 2001 to December 31, 2001 by the presentation of VAT official receipts that would contain all the
necessary information required under Section 113 of the National Internal Revenue Code of 1997, as implemented by Section 4.108-1 of Revenue
Regulations No. 7-95. Evidence of sale of electricity to NPC other than official receipts could prove zero-rated sales.
(2) The TCC, once issued, constituted an administrative opinion that deserved consideration and respect by the CTA En Banc.
(3) The CTA En Banc was devoid of any authority to determine the existence of the petitioner’s zero-rated sales, inasmuch as that would constitute
an encroachment on the powers granted to an administrative agency having expertise on the matter.
(4) The CTA En Banc manifestly overlooked evidence not disputed by the parties and which, if properly considered, would justify a different
conclusion.26
The petitioner has prayed for the reversal of the decision of the CTA En Banc, and for the remand of the case to the CTA for the reception of its VAT
official receipts as newly discovered evidence. It has supported the latter relief prayed for by representing that the VAT official receipts had been
misplaced by Edwin Tapay, its former Finance and Accounting Manager, but had been found only after the CTA En Banc has already affirmed the
decision of the CTA in Division. In the alternative, it has asked that the Commissioner allow the claim for refund or tax credit of ₱2,920,665.16.
In the comment submitted on December 3, 2009,27 the Commissioner has insisted that the petitioner’s claim cannot be granted because it did not
incur any zero-rated sale; that its failure to comply with the invoicing requirements on the documents supporting the sale of services to NPC
resulted in the disallowance of its claim for the input tax; and the claim should also be denied for not being substantiated by appropriate and
sufficient evidence.
In its reply filed on February 4, 2010,28 the petitioner reiterated its contention that it had established its claim for refund or tax credit; and that it
should be allowed to present the official receipts in a new trial.
Ruling of the Court
The petition is without merit.
Section 112 of the National Internal Revenue Code 1997 provides:
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)
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
xxxx
A claim for refund or tax credit for unutilized input VAT may be allowed only if the following requisites concur, namely: (a) the taxpayer is VAT-
registered; (b) the taxpayer is engaged in zero-rated or effectively zero-rated sales; (c) the input taxes are due or paid; (d) the input taxes are not
transitional input taxes; (e) the input taxes have not been applied against output taxes during and in the succeeding quarters; (f) the input taxes
claimed are attributable to zero-rated or effectively zero-rated sales; (g) for zero-rated sales under Section 106(A)(2)(1) and (2); 106(B); and
108(B)(1) and (2), the acceptable foreign currency exchange proceeds have been duly accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas; (h) where there are both zero-rated or effectively zero-rated sales and taxable or exempt sales, and the input taxes
cannot be directly and entirely attributable to any of these sales, the input taxes shall be proportionately allocated on the basis of sales volume;
and (i) the claim is filed within two years after the close of the taxable quarter when such sales were made. 29
The petitioner did not competently establish its claim for refund or tax credit.1avvphi1 We agree with the CTA En Banc that the petitioner did not
produce evidence showing that it had zero-rated sales for the four quarters of taxable year 2001. As the CTA En Banc precisely found, the petitioner
did not reflect any zero-rated sales from its power generation in its four quarterly VAT returns, which indicated that it had not made any sale of
electricity. Had there been zero-rated sales, it would have reported them in the returns. Indeed, it carried the burden not only that it was entitled
under the substantive law to the allowance of its claim for refund or tax credit but also that it met all the requirements for evidentiary
substantiation of its claim before the administrative official concerned, or in the de novo litigation before the CTA in Division.30
Although the petitioner has correctly contended here that the sale of electricity by a power generation company like it should be subject to zero-
rated VAT under Republic Act No. 9136,31 its assertion that it need not prove its having actually made zero-rated sales of electricity by presenting
the VAT official receipts and VAT returns cannot be upheld. It ought to be reminded that it could not be permitted to substitute such vital and
material documents with secondary evidence like financial statements.
We further find to be lacking in substance and bereft of merit the petitioner’s insistence that the CTA En Banc should not have disregarded the
letter opinion by BIR Regional Director Rene Q. Aguas to the effect that its financial statements and its return were sufficient to establish that it had
generated zero-rated sale of electricity. To recall, the CTA En Banc rejected the insistence because, firstly, the letter opinion referred to taxable
year 2000 but this case related to taxable year 2001, and, secondly, even assuming for the sake of argument that the financial statements, the
return and the letter opinion had related to taxable year 2001, they still could not be taken at face value for the purpose of approving the claim for
refund or tax credit due to the need to produce the supporting documents proving the existence of the zero-rated sales, which did not happen
here. In that respect, the CTA En Banc properly disregarded the letter opinion as irrelevant to the present claim of the petitioner.
We further see no reason to grant the prayer of the petitioner for the remand of this case to enable it to present before the CTA newly discovered
evidence consisting in VAT official receipts.
Ordinarily, the concept of newly discovered evidence is applicable to litigations in which a litigant seeks a new trial or the re-opening of the case in
the trial court. Seldom is the concept appropriate when the litigation is already on appeal, particularly in this Court. The absence of a specific rule
on newly discovered evidence at this late stage of the proceedings is not without reason. The propriety of remanding the case for the purpose of
enabling the CTA to receive newly discovered evidence would undo the decision already on appeal and require the examination of the pieces of
newly discovered evidence, an act that the Court could not do by virtue of its not being a trier of facts. Verily, the Court has emphasized in Atlas
Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue32 that a judicial claim for tax refund or tax credit brought
to the CTA is by no means an original action but an appeal by way of a petition for review of the taxpayer’s unsuccessful administrative claim;
hence, the taxpayer has to convince the CTA that the quasi-judicial agency a quo should not have denied the claim, and to do so the taxpayer
should prove every minute aspect of its case by presenting, formally offering and submitting its evidence to the CTA, including whatever was
required for the successful prosecution of the administrative claim as the means of demonstrating to the CTA that its administrative claim should
have been granted in the first place.
Nonetheless, on the proposition that we may relax the stringent rules of procedure for the sake of rendering justice, we still hold that the concept
of newly discovered evidence may not apply herein. In order that newly discovered evidence may be a ground for allowing a new trial, it must be
fairly shown that: (a) the evidence is discovered after the trial; (b) such evidence could not have been discovered and produced at the trial even
with the exercise of reasonable diligence; (c) such evidence is material, not merely cumulative, corroborative, or impeaching; and (d) such evidence
is of such weight that it would probably change the judgment if admitted.33
The first two requisites are not attendant. To start with, the proposed evidence was plainly not newly discovered considering the petitioner s
admission that its former Finance and Accounting Manager had misplaced the VAT official receipts. If that was true, the misplaced receipts were
forgotten evidence. And, secondly, the receipts, had they truly existed, could have been sooner discovered and easily produced at the trial with the
exercise of reasonable diligence. But the petitioner made no convincing demonstration that it had exercised reasonable diligence. The Court cannot
accept its tender of such receipts and return now, for, indeed, the non-production of documents as vital and material as such receipts and return
were to the success of its claim for refund or tax credit was improbable, as it goes against the sound business practice of safekeeping relevant
documents precisely to ensure their future use to support an eventual substantial claim for refund or tax credit.
WHEREFORE, the Court DENIES the petition for review on certiorari for its lack of merit; AFFIRMS the decision dated May 5, 2009 of the Court of
Tax Appeals En Bane; and ORDERS the petitioner to pay the costs of suit. SO ORDERED.

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EN BANC G.R. No.

158885 October 2, 2009

G.R. No. 170680

LEONARDO-DE CASTRO, J.:

The Motion for Reconsideration raises the following arguments:

The instant motion for reconsideration lacks merit.

Section 111. Transitional/Presumptive Input Tax Credits. –

Section 4.105-1 of RR 7-95 restricted the definition of "goods", viz:

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

Period Covered Date Filed Particulars Amount

Input VAT on Domestic Purchases for the Qtr

Input VAT on Importation of Goods for the Qtr

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

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

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

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

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

Input VAT on Domestic Purchases for the Qtr

Input VAT on Importation of Goods for the Qtr

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

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

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

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

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

Qtr Output Tax Input Tax

Domestic Purchases Importations Excess Input Tax

(A) (B) (C) (D) = (B) + (C) –(A)

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

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

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

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

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

Period Covered Date Filed Particulars Amount

Input VAT on Domestic Purchases for the Qtr

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

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

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

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

Input VAT on Domestic Purchases for the Qtr

Input VAT on Importation of Goods for the Qtr

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

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

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

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

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

Input VAT on Domestic Purchases for the Qtr

Input VAT on Importation of Goods for the Qtr

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

VAT Refund/TCC Claimed (24A) Blank

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

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

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

Qtr Date Filed Output Tax Input Tax

Domestic Purchases Importations Excess Input Tax

(A) (B) (C) (D) = (B) + (C) –(A)

1st 30-May-03 P26,247.27 P95,126,981.69 P20,758,668.00 P115,859,402.42

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

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

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

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

The present Petition is meritorious.

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

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

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