G.R. No.

153866

February 11, 2005

COMMISSIONER OF INTERNAL REVENUE, petitioner,

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

4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT

Registration Certification No. 97-083-000600-V issued on 2 April 1997;
5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by [respondent];
6. An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38
with supporting documents (inclusive of the P12,267,981.04 VAT input taxes subject of this
Petition for Review), was filed on 4 October 1999 with Revenue District Office No. 83,
Talisay Cebu;
7. No final action has been received by [respondent] from [petitioner] on [respondents]
claim for VAT refund.
"The administrative claim for refund by the [respondent] on October 4, 1999 was not acted
upon by the [petitioner] prompting the [respondent] to elevate the case to [the CTA] on July
21, 2000 by way of Petition for Review in order to toll the running of the two-year
prescriptive period.
"For his part, [petitioner] x x x raised the following Special and Affirmative Defenses, to wit:
1. [Respondents] alleged claim for tax refund/credit is subject to administrative routinary
investigation/examination by [petitioners] Bureau;
2. Since taxes are presumed to have been collected in accordance with laws and
regulations, the [respondent] has the burden of proof that the taxes sought to be refunded
were erroneously or illegally collected x x x;
3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court ruled
that:
"A claimant has the burden of proof to establish the factual basis of his or her claim for tax
credit/refund."

2. [Petitioner] is sued in his official capacity, having been duly appointed and empowered to
perform the duties of his office, including, among others, the duty to act and approve claims
for refund or tax credit;

4. Claims for tax refund/tax credit are construed in strictissimi juris against the taxpayer.
This is due to the fact that claims for refund/credit [partake of] the nature of an exemption
from tax. Thus, it is incumbent upon the [respondent] to prove that it is indeed entitled to the
refund/credit sought. Failure on the part of the [respondent] to prove the same is fatal to its
claim for tax credit. He who claims exemption must be able to justify his claim by the
clearest grant of organic or statutory law. An exemption from the common burden cannot be
permitted to exist upon vague implications;

3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and has
been issued PEZA Certificate No. 97-044 pursuant to Presidential Decree No. 66, as
amended, to engage in the manufacture of recording components primarily used in
computers for export. Such registration was made on 6 June 1997;

5. Granting, without admitting, that [respondent] is a Philippine Economic Zone Authority

(PEZA) registered Ecozone Enterprise, then its business is not subject to VAT pursuant to
Section 24 of Republic Act No. ([RA]) 7916 in relation to Section 103 of the Tax Code, as
amended. As [respondents] business is not subject to VAT, the capital goods and services it

alleged to have purchased are considered not used in VAT taxable business. As such,
[respondent] is not entitled to refund of input taxes on such capital goods pursuant to
Section 4.106.1 of Revenue Regulations No. ([RR])7-95, and of input taxes on services
pursuant to Section 4.103 of said regulations.

Sole Issue:

6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229 of
the 1997 Tax Code on filing of a written claim for refund within two (2) years from the date of
payment of tax.

No doubt, as a PEZA-registered enterprise within a special economic zone, 7 respondent is

entitled to the fiscal incentives and benefits 8 provided for in either PD 669 or EO 226.10 It
shall, moreover, enjoy all privileges, benefits, advantages or exemptions under both
Republic Act Nos. (RA) 722711 and 7844.12

"On July 19, 2001, the Tax Court rendered a decision granting the claim for refund." 4
Ruling of the Court of Appeals
The CA affirmed the Decision of the CTA granting the claim for refund or issuance of a tax
credit certificate (TCC) in favor of respondent in the reduced amount of P12,122,922.66.
This sum represented the unutilized but substantiated input VAT paid on capital goods
purchased for the period covering April 1, 1998 to June 30, 1999.
The appellate court reasoned that respondent had availed itself only of the fiscal incentives
under Executive Order No. (EO) 226 (otherwise known as the Omnibus Investment Code of
1987), not of those under both Presidential Decree No. (PD) 66, as amended, and Section
24 of RA 7916. Respondent was, therefore, considered exempt only from the payment of
income tax when it opted for the income tax holiday in lieu of the 5 percent preferential tax
on gross income earned. As a VAT-registered entity, though, it was still subject to the
payment of other national internal revenue taxes, like the VAT.
Moreover, the CA held that neither Section 109 of the Tax Code nor Sections 4.106-1 and
4.103-1 of RR 7-95 were applicable. Having paid the input VAT on the capital goods it
purchased, respondent correctly filed the administrative and judicial claims for its refund
within the two-year prescriptive period. Such payments were -- to the extent of the
refundable value -- duly supported by VAT invoices or official receipts, and were not yet
offset against any output VAT liability.
Hence this Petition.5
Sole Issue
Petitioner submits this sole issue for our consideration:
"Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate in
the amount ofP12,122,922.66 representing alleged unutilized input VAT paid on capital
goods purchased for the period April 1, 1998 to June 30, 1999." 6
The Courts Ruling
The Petition is unmeritorious.

Entitlement of a VAT-Registered PEZA Enterprise to a Refund of or Credit for Input VAT

Preferential Tax Treatment Under Special Laws

If it avails itself of PD 66, notwithstanding the provisions of other laws to the contrary,
respondent shall not be subject to internal revenue laws and regulations for raw materials,
supplies, articles, equipment, machineries, spare parts and wares, except those prohibited
by law, brought into the zone to be stored, broken up, repacked, assembled, installed,
sorted, cleaned, graded or otherwise processed, manipulated, manufactured, mixed or used
directly or indirectly in such activities.13 Even so, respondent would enjoy a net-operating
loss carry over; accelerated depreciation; foreign exchange and financial assistance; and
exemption from export taxes, local taxes and licenses. 14
Comparatively, the same exemption from internal revenue laws and regulations applies if
EO 22615 is chosen. Under this law, respondent shall further be entitled to an income tax
holiday; additional deduction for labor expense; simplification of customs procedure;
unrestricted use of consigned equipment; access to a bonded manufacturing warehouse
system; privileges for foreign nationals employed; tax credits on domestic capital
equipment, as well as for taxes and duties on raw materials; and exemption from
contractors taxes, wharfage dues, taxes and duties on imported capital equipment and
spare parts, export taxes, duties, imposts and fees, 16local taxes and licenses, and real
property taxes.17
A privilege available to respondent under the provision in RA 7227 on tax and duty-free
importation of raw materials, capital and equipment 18 -- is, ipso facto, also accorded to the
zone19 under RA 7916. Furthermore, the latter law -- notwithstanding other existing laws,
rules and regulations to the contrary -- extends 20 to that zone the provision stating that no
local or national taxes shall be imposed therein. 21 No exchange control policy shall be
applied; and free markets for foreign exchange, gold, securities and future shall be allowed
and maintained.22Banking and finance shall also be liberalized under minimum Bangko
Sentral regulation with the establishment of foreign currency depository units of local
commercial banks and offshore banking units of foreign banks. 23
In the same vein, respondent benefits under RA 7844 from negotiable tax credits 24 for
locally-produced materials used as inputs. Aside from the other incentives possibly already
granted to it by the Board of Investments, it also enjoys preferential credit facilities 25 and
exemption from PD 1853.26

From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax
treatment.27 It is not subject to internal revenue laws and regulations and is even entitled to
tax credits. The VAT on capital goods is an internal revenue tax from which petitioner as an
entity is exempt. Although the transactions involving such tax are not exempt, petitioner as a
VAT-registered person,28 however, is entitled to their credits.
Nature of the VAT and the Tax Credit Method

a zero rate.52 Again, as applied to the tax base, such rate does not yield any tax chargeable
against the purchaser. The seller who charges zero output tax on such transactions can
also claim a refund of or a tax credit certificate for the VAT previously charged by suppliers.
Zero Rating and Exemption
In terms of the VAT computation, zero rating and exemption are the same, but the extent of
relief that results from either one of them is not.

Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent
levied on every importation of goods, whether or not in the course of trade or business, or
imposed on each sale, barter, exchange or lease of goods or properties or on each rendition
of services in the course of trade or business 29 as they pass along the production and
distribution chain, the tax being limited only to the value added 30 to such goods, properties
or services by the seller, transferor or lessor.31 It is an indirect tax that may be shifted or
passed on to the buyer, transferee or lessee of the goods, properties or services. 32 As such,
it should be understood not in the context of the person or entity that is primarily, directly
and legally liable for its payment, but in terms of its nature as a tax on consumption. 33 In
either case, though, the same conclusion is arrived at.

Applying the destination principle53 to the exportation of goods, automatic zero rating 54 is
primarily intended to be enjoyed by the seller who is directly and legally liable for the VAT,
making such seller internationally competitive by allowing the refund or credit of input taxes
that are attributable to export sales.55 Effective zero rating, on the contrary, is intended to
benefit the purchaser who, not being directly and legally liable for the payment of the VAT,
will ultimately bear the burden of the tax shifted by the suppliers.

The law34 that originally imposed the VAT in the country, as well as the subsequent
amendments of that law, has been drawn from the tax credit method.35 Such method
adopted the mechanics and self-enforcement features of the VAT as first implemented and
practiced in Europe and subsequently adopted in New Zealand and Canada. 36Under the
present method that relies on invoices, an entity can credit against or subtract from the VAT
charged on its sales or outputs the VAT paid on its purchases, inputs and imports. 37

Exempt Transaction >and Exempt Party

If at the end of a taxable quarter the output taxes 38 charged by a seller39 are equal to the
input taxes40 passed on by the suppliers, no payment is required. It is when the output taxes
exceed the input taxes that the excess has to be paid. 41 If, however, the input taxes exceed
the output taxes, the excess shall be carried over to the succeeding quarter or
quarters.42 Should the input taxes result from zero-rated or effectively zero-rated
transactions or from the acquisition of capital goods, 43 any excess over the output taxes
shall instead be refunded44 to the taxpayer or credited45 against other internal revenue
taxes.46
Zero-Rated and Effectively Zero-Rated Transactions
Although both are taxable and similar in effect, zero-rated transactions differ from effectively
zero-rated transactions as to their source.
Zero-rated transactions generally refer to the export sale of goods and supply of
services.47 The tax rate is set at zero.48 When applied to the tax base, such rate obviously
results in no tax chargeable against the purchaser. The seller of such transactions charges
no output tax,49 but can claim a refund of or a tax credit certificate for the VAT previously
charged by suppliers.
Effectively zero-rated transactions, however, refer to the sale of goods 50 or supply of
services51 to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects such transactions to

In both instances of zero rating, there is total relief for the purchaser from the burden of the
tax.56 But in an exemption there is only partial relief,57 because the purchaser is not allowed
any tax refund of or credit for input taxes paid. 58

The object of exemption from the VAT may either be the transaction itself or any of the
parties to the transaction.59
An exempt transaction, on the one hand, involves goods or services which, by their nature,
are specifically listed in and expressly exempted from the VAT under the Tax Code, without
regard to the tax status -- VAT-exempt or not -- of the party to the transaction.60 Indeed, such
transaction is not subject to the VAT, but the seller is not allowed any tax refund of or credit
for any input taxes paid.
An exempt party, on the other hand, is a person or entity granted VAT exemption under the
Tax Code, a special law or an international agreement to which the Philippines is a
signatory, and by virtue of which its taxable transactions become exempt from the
VAT.61 Such party is also not subject to the VAT, but may be allowed a tax refund of or credit
for input taxes paid, depending on its registration as a VAT or non-VAT taxpayer.
As mentioned earlier, the VAT is a tax on consumption, the amount of which may be shifted
or passed on by the seller to the purchaser of the goods, properties or services. 62 While
the liability is imposed on one person, theburden may be passed on to another. Therefore, if
a special law merely exempts a party as a seller from its direct liability for payment of the
VAT, but does not relieve the same party as a purchaser from its indirect burden of the VAT
shifted to it by its VAT-registered suppliers, the purchase transaction is not exempt. Applying
this principle to the case at bar, the purchase transactions entered into by respondent are
not VAT-exempt.

Special laws may certainly exempt transactions from the VAT.63 However, the Tax Code
provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 -- the
special law under which respondent was registered. The purchase transactions it entered
into are, therefore, not VAT-exempt. These are subject to the VAT; respondent is required to
register.
Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 10
percent,64 depending again on the application of the destination principle.65
If respondent enters into such sales transactions with a purchaser -- usually in a foreign
country -- for use or consumption outside the Philippines, these shall be subject to 0
percent.66 If entered into with a purchaser for use or consumption in the Philippines, then
these shall be subject to 10 percent,67 unless the purchaser is exempt from the indirect
burden of the VAT, in which case it shall also be zero-rated.
Since the purchases of respondent are not exempt from the VAT, the rate to be applied is
zero. Its exemption under both PD 66 and RA 7916 effectively subjects such transactions to
a zero rate,68 because the ecozone within which it is registered is managed and operated by
the PEZA as a separate customs territory.69 This means that in such zone is created the
legal fiction of foreign territory.70 Under the cross-border principle71 of the VAT system being
enforced by the Bureau of Internal Revenue (BIR), 72 no VAT shall be imposed to form part of
the cost of goods destined for consumption outside of the territorial border of the taxing
authority. If exports of goods and services from the Philippines to a foreign country are free
of the VAT,73 then the same rule holds for such exports from the national territory -- except
specifically declared areas -- to an ecozone.
Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity
are considered exports to a foreign country; conversely, sales by a PEZA-registered entity to
a VAT-registered person in the customs territory are deemed imports from a foreign
country.74 An ecozone -- indubitably a geographical territory of the Philippines -- is, however,
regarded in law as foreign soil.75 This legal fiction is necessary to give meaningful effect to
the policies of the special law creating the zone. 76 If respondent is located in an export
processing zone77 within that ecozone, sales to the export processing zone, even without
being actually exported, shall in fact be viewed as constructively exported under EO
226.78 Considered as export sales,79 such purchase transactions by respondent would
indeed be subject to a zero rate.80
Tax Exemptions Broad and Express
Applying the special laws we have earlier discussed, respondent as an entity is exempt from
internal revenue laws and regulations.
This exemption covers both direct and indirect taxes, stemming from the very nature of the
VAT as a tax on consumption, for which the direct liability is imposed on one person but the
indirect burden is passed on to another. Respondent, as an exempt entity, can neither be
directly charged for the VAT on its sales nor indirectly made to bear, as added cost to such
sales, the equivalent VAT on its purchases. Ubi lex non distinguit, nec nos distinguere
debemus. Where the law does not distinguish, we ought not to distinguish.

Moreover, the exemption is both express and pervasive for the following reasons:
First, RA 7916 states that "no taxes, local and national, shall be imposed on business
establishments operating within the ecozone." 81 Since this law does not exclude the VAT
from the prohibition, it is deemed included.Exceptio firmat regulam in casibus non exceptis.
An exception confirms the rule in cases not excepted; that is, a thing not being excepted
must be regarded as coming within the purview of the general rule.
Moreover, even though the VAT is not imposed on the entity but on the transaction, it may
still be passed on and, therefore, indirectly imposed on the same entity -- a patent
circumvention of the law. That no VAT shall be imposed directly upon business
establishments operating within the ecozone under RA 7916 also means that no VAT may
be passed on and imposed indirectly. Quando aliquid prohibetur ex directo prohibetur et per
obliquum. When anything is prohibited directly, it is also prohibited indirectly.
Second, when RA 8748 was enacted to amend RA 7916, the same prohibition applied,
except for real property taxes that presently are imposed on land owned by
developers.82 This similar and repeated prohibition is an unambiguous ratification of the
laws intent in not imposing local or national taxes on business enterprises within the
ecozone.
Third, foreign and domestic merchandise, raw materials, equipment and the like "shall not
be subject to x x x internal revenue laws and regulations" under PD 66 83 -- the original
charter of PEZA (then EPZA) that was later amended by RA 7916. 84 No provisions in the
latter law modify such exemption.
Although this exemption puts the government at an initial disadvantage, the reduced tax
collection ultimately redounds to the benefit of the national economy by enticing more
business investments and creating more employment opportunities. 85
Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise -except those prohibited by law -- "shall not be subject to x x x internal revenue laws and
regulations x x x"86 if brought to the ecozones restricted area 87 for manufacturing by
registered export enterprises,88 of which respondent is one. These rules also apply to all
enterprises registered with the EPZA prior to the effectivity of such rules. 89
Fifth, export processing zone enterprises registered 90 with the Board of Investments (BOI)
under EO 226 patently enjoy exemption from national internal revenue taxes on imported
capital equipment reasonably needed and exclusively used for the manufacture of their
products;91 on required supplies and spare part for consigned equipment; 92 and on foreign
and domestic merchandise, raw materials, equipment and the like -- except those prohibited
by law -- brought into the zone for manufacturing. 93 In addition, they are given credits for the
value of the national internal revenue taxes imposed on domestic capital equipment also
reasonably needed and exclusively used for the manufacture of their products, 94 as well as
for the value of such taxes imposed on domestic raw materials and supplies that are used in
the manufacture of their export products and that form part thereof. 95

Sixth, the exemption from local and national taxes granted under RA 7227 96 are ipso facto
accorded to ecozones.97 In case of doubt, conflicts with respect to such tax exemption
privilege shall be resolved in favor of the ecozone. 98
And seventh, the tax credits under RA 7844 -- given for imported raw materials primarily
used in the production of export goods,99 and for locally produced raw materials, capital
equipment and spare parts used by exporters of non-traditional products 100 -- shall also be
continuously enjoyed by similar exporters within the ecozone. 101Indeed, the latter exporters
are likewise entitled to such tax exemptions and credits.
Tax Refund as Tax Exemption
To be sure, statutes that grant tax exemptions are construed strictissimi juris102 against the
taxpayer103 and liberally in favor of the taxing authority.104
Tax refunds are in the nature of such exemptions. 105 Accordingly, the claimants of those
refunds bear the burden of proving the factual basis of their claims; 106 and of showing, by
words too plain to be mistaken, that the legislature intended to exempt them. 107 In the
present case, all the cited legal provisions are teeming with life with respect to the grant of
tax exemptions too vivid to pass unnoticed. In addition, respondent easily meets the
challenge.
Respondent, which as an entity is exempt, is different from its transactions which are not
exempt. The end result, however, is that it is not subject to the VAT. The non-taxability of
transactions that are otherwise taxable is merely a necessary incident to the tax exemption
conferred by law upon it as an entity, not upon the transactions themselves. 108 Nonetheless,
its exemption as an entity and the non-exemption of its transactions lead to the same result
for the following considerations:
First, the contemporaneous construction of our tax laws by BIR authorities who are called
upon to execute or administer such laws 109 will have to be adopted. Their prior tax issuances
have held inconsistent positions brought about by their probable failure to comprehend and
fully appreciate the nature of the VAT as a tax on consumption and the application of
the destination principle.110 Revenue Memorandum Circular No. (RMC) 74-99, however, now
clearly and correctly provides that any VAT-registered suppliers sale of goods, property or
services from the customs territory to any registered enterprise operating in the ecozone -regardless of the class or type of the latters PEZA registration -- is legally entitled to a zero
rate.111
Second, the policies of the law should prevail. Ratio legis est anima. The reason for the law
is its very soul.
In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as the
establishment of export processing zones, seeks "to encourage and promote foreign
commerce as a means of x x x strengthening our export trade and foreign exchange
position, of hastening industrialization, of reducing domestic unemployment, and of
accelerating the development of the country." 112

RA 7916, as amended by RA 8748, declared that by creating the PEZA and integrating the
special economic zones, "the government shall actively encourage, promote, induce and
accelerate a sound and balanced industrial, economic and social development of the
country x x x through the establishment, among others, of special economic zones x x x that
shall effectively attract legitimate and productive foreign investments." 113
Under EO 226, the "State shall encourage x x x foreign investments in industry x x x which
shall x x x meet the tests of international competitiveness[,] accelerate development of less
developed regions of the country[,] and result in increased volume and value of exports for
the economy."114 Fiscal incentives that are cost-efficient and simple to administer shall be
devised and extended to significant projects "to compensate for market imperfections, to
reward performance contributing to economic development," 115 and "to stimulate the
establishment and assist initial operations of the enterprise." 116
Wisely accorded to ecozones created under RA 7916 117 was the governments policy -spelled out earlier in RA 7227 -- of converting into alternative productive uses 118 the former
military reservations and their extensions,119as well as of providing them incentives 120 to
enhance the benefits that would be derived from them 121 in promoting economic and social
development.122
Finally, under RA 7844, the State declares the need "to evolve export development into a
national effort"123 in order to win international markets. By providing many export and tax
incentives,124 the State is able to drive home the point that exporting is indeed "the key to
national survival and the means through which the economic goals of increased
employment and enhanced incomes can most expeditiously be achieved." 125
The Tax Code itself seeks to "promote sustainable economic growth x x x; x x x increase
economic activity; and x x x create a robust environment for business to enable firms to
compete better in the regional as well as the global market." 126 After all, international
competitiveness requires economic and tax incentives to lower the cost of goods produced
for export. State actions that affect global competition need to be specific and selective in
the pricing of particular goods or services.127
All these statutory policies are congruent to the constitutional mandates of providing
incentives to needed investments,128 as well as of promoting the preferential use of domestic
materials and locally produced goods and adopting measures to help make these
competitive.129 Tax credits for domestic inputs strengthen backward linkages. Rightly so,
"the rule of law and the existence of credible and efficient public institutions are essential
prerequisites for sustainable economic development." 130
VAT Registration, Not Application for Effective Zero Rating, Indispensable to VAT Refund
Registration is an indispensable requirement under our VAT law.131 Petitioner alleges that
respondent did register for VAT purposes with the appropriate Revenue District Office.
However, it is now too late in the day for petitioner to challenge the VAT-registered status of
respondent, given the latters prior representation before the lower courts and the mode of
appeal taken by petitioner before this Court.

The PEZA law, which carried over the provisions of the EPZA law, is clear in exempting from
internal revenue laws and regulations the equipment -- including capital goods -- that
registered enterprises will use, directly or indirectly, in manufacturing. 132 EO 226 even
reiterates this privilege among the incentives it gives to such enterprises. 133 Petitioner
merely asserts that by virtue of the PEZA registration alone of respondent, the latter is not
subject to the VAT. Consequently, the capital goods and services respondent has purchased
are not considered used in the VAT business, and no VAT refund or credit is due. 134 This is a
non sequitur. By the VATs very nature as a tax on consumption, the capital goods and
services respondent has purchased are subject to the VAT, although at zero rate.
Registration does not determine taxability under the VAT law.
Moreover, the facts have already been determined by the lower courts. Having failed to
present evidence to support its contentions against the income tax holiday privilege of
respondent,135 petitioner is deemed to have conceded. It is a cardinal rule that "issues and
arguments not adequately and seriously brought below cannot be raised for the first time on
appeal."136 This is a "matter of procedure"137 and a "question of fairness."138 Failure to assert
"within a reasonable time warrants a presumption that the party entitled to assert it either
has abandoned or declined to assert it." 139
The BIR regulations additionally requiring an approved prior application for effective zero
rating140 cannot prevail over the clear VAT nature of respondents transactions. The scope of
such regulations is not "within the statutory authority x x x granted by the legislature. 141
First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the
former cannot purport to do any more than interpret the latter.142 The courts will not
countenance one that overrides the statute it seeks to apply and implement. 143
Other than the general registration of a taxpayer the VAT status of which is aptly
determined, no provision under our VAT law requires an additional application to be made
for such taxpayers transactions to be considered effectively zero-rated. An effectively zerorated transaction does not and cannot become exempt simply because an application
therefor was not made or, if made, was denied. To allow the additional requirement is to give
unfettered discretion to those officials or agents who, without fluid consideration, are bent on
denying a valid application. Moreover, the State can never be estopped by the omissions,
mistakes or errors of its officials or agents.144
Second, grantia argumenti that such an application is required by law, there is still the
presumption of regularity in the performance of official duty.145 Respondents registration
carries with it the presumption that, in the absence of contradictory evidence, an application
for effective zero rating was also filed and approval thereof given. Besides, it is also
presumed that the law has been obeyed146 by both the administrative officials and the
applicant.
Third, even though such an application was not made, all the special laws we have tackled
exempt respondent not only from internal revenue laws but also from the regulations issued
pursuant thereto. Leniency in the implementation of the VAT in ecozones is an imperative,
precisely to spur economic growth in the country and attain global competitiveness as
envisioned in those laws.

A VAT-registered status, as well as compliance with the invoicing requirements, 147 is

sufficient for the effective zero rating of the transactions of a taxpayer. The nature of its
business and transactions can easily be perused from, as already clearly indicated in, its
VAT registration papers and photocopied documents attached thereto. Hence, its
transactions cannot be exempted by its mere failure to apply for their effective zero rating.
Otherwise, their VAT exemption would be determined, not by their nature, but by the
taxpayers negligence -- a result not at all contemplated. Administrative convenience cannot
thwart legislative mandate.
Tax Refund or Credit in Order
Having determined that respondents purchase transactions are subject to a zero VAT rate,
the tax refund or credit is in order.
As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal
incentives in EO 226 over those in RA 7916 and PD 66. It opted for the income tax holiday
regime instead of the 5 percent preferential tax regime.
The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA
law,148 for EO 226149also has provisions to contend with. These two regimes are in fact
incompatible and cannot be availed of simultaneously by the same entity. While EO 226
merely exempts it from income taxes, the PEZA law exempts it from all taxes.
Therefore, respondent can be considered exempt, not from the VAT, but only from the
payment of income tax for a certain number of years, depending on its registration as a
pioneer or a non-pioneer enterprise. Besides, the remittance of the aforesaid 5 percent of
gross income earned in lieu of local and national taxes imposable upon business
establishments within the ecozone cannot outrightly determine a VAT exemption. Being
subject to VAT, payments erroneously collected thereon may then be refunded or credited.
Even if it is argued that respondent is subject to the 5 percent preferential tax regime in RA
7916, Section 24 thereof does not preclude the VAT. One can, therefore, counterargue that
such provision merely exempts respondent from taxes imposed on business. To repeat, the
VAT is a tax imposed on consumption, not on business. Although respondent as an entity is
exempt, the transactions it enters into are not necessarily so. The VAT payments made in
excess of the zero rate that is imposable may certainly be refunded or credited.
Compliance with All Requisites for VAT Refund or Credit
As further enunciated by the Tax Court, respondent complied with all the requisites for
claiming a VAT refund or credit.150
First, respondent is a VAT-registered entity. This fact alone distinguishes the present case
from Contex, in which this Court held that the petitioner therein was registered as a non-VAT
taxpayer.151 Hence, for being merely VAT-exempt, the petitioner in that case cannot claim
any VAT refund or credit.

Second, the input taxes paid on the capital goods of respondent are duly supported by VAT
invoices and have not been offset against any output taxes. Although enterprises registered
with the BOI after December 31, 1994 would no longer enjoy the tax credit incentives on
domestic capital equipment -- as provided for under Article 39(d), Title III, Book I of EO
226152 -- starting January 1, 1996, respondent would still have the same benefit under a
general and express exemption contained in both Article 77(1), Book VI of EO 226; and
Section 12, paragraph 2 (c) of RA 7227, extended to the ecozones by RA 7916.
There was a very clear intent on the part of our legislators, not only to exempt investors in
ecozones from national and local taxes, but also to grant them tax credits. This fact was
revealed by the sponsorship speeches in Congress during the second reading of House Bill
No. 14295, which later became RA 7916, as shown below:
"MR. RECTO. x x x Some of the incentives that this bill provides are exemption from
national and local taxes; x x x tax credit for locally-sourced inputs x x x."
xxxxxxxxx
"MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an
environment conducive for investors, the bill offers incentives such as the exemption from
local and national taxes, x x x tax credits for locally sourced inputs x x x." 153
And third, no question as to either the filing of such claims within the prescriptive period or
the validity of the VAT returns has been raised. Even if such a question were raised, the tax
exemption under all the special laws cited above is broad enough to cover even the
enforcement of internal revenue laws, including prescription. 154
Summary
To summarize, special laws expressly grant preferential tax treatment to business
establishments registered and operating within an ecozone, which by law is considered as
a separate customs territory. As such, respondent is exempt from all internal revenue taxes,
including the VAT, and regulations pertaining thereto. It has opted for the income tax holiday
regime, instead of the 5 percent preferential tax regime. As a matter of law and procedure,
its registration status entitling it to such tax holiday can no longer be questioned. Its sales
transactions intended for export may not be exempt, but like its purchase transactions, they
are zero-rated. No prior application for the effective zero rating of its transactions is
necessary. Being VAT-registered and having satisfactorily complied with all the requisites for
claiming a tax refund of or credit for the input VAT paid on capital goods purchased,
respondent is entitled to such VAT refund or credit.
WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No pronouncement as
to costs.
SO ORDERED.

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.
G.R. No. 193301 is a petition for review1 assailing the Decision2 promulgated on 10 March
2010 as well as the Resolution3 promulgated on 28 July 2010 by the Court of Tax Appeals
En Banc (CTA En Banc) in CTA EB No. 513. The CTA En Banc affirmed the 22 September
2008 Decision4 as well as the 26 June 2009 Amended Decision5 of the First Division of the
Court of Tax Appeals (CTA First Division) in CTA Case Nos. 7227, 7287, and 7317. The CTA
First Division denied Mindanao II Geothermal Partnerships (Mindanao II) claims for refund
or tax credit for the first and second quarters of taxable year 2003 for being filed out of time
(CTA Case Nos. 7227 and 7287). The CTA First Division, however, ordered the
Commissioner of Internal Revenue (CIR) to refund or credit to Mindanao II unutilized input
value-added tax (VAT) for the third and fourth quarters of taxable year 2003 (CTA Case No.
7317).
G.R. No. 194637 is a petition for review6 assailing the Decision7 promulgated on 31 May
2010 as well as the Amended Decision8 promulgated on 24 November 2010 by the CTA En
Banc in CTA EB Nos. 476 and 483. In its Amended Decision, the CTA En Banc reversed its
31 May 2010 Decision and granted the CIRs petition for review in CTA Case No. 476. The

CTA En Banc denied Mindanao I Geothermal Partnerships (Mindanao I) claims for refund or
tax credit for the first (CTA Case No. 7228), second (CTA Case No. 7286), third, and fourth
quarters (CTA Case No. 7318) of 2003.
Both Mindanao I and II are partnerships registered with the Securities and Exchange
Commission, value added taxpayers registered with the Bureau of Internal Revenue (BIR),
and Block Power Production Facilities accredited by the Department of Energy. Republic Act
No. 9136, or the Electric Power Industry Reform Act of 2000 (EPIRA), effectively amended
Republic Act No. 8424, or the Tax Reform Act of 1997 (1997 Tax Code), 9 when it decreed
that sales of power by 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

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 revenuegenerating activity is VAT zero-rated under RA No. 9136, Mindanao IIs input tax credits
remain unutilized.
Thus, on the belief that its sales qualify for VAT zero-rating, Mindanao II adopted the VAT
zero-rating of the EPIRA in computing for its VAT payable when it filed its Quarterly VAT
Returns on the following dates:
CTA Case No.

Period Covered
(2003)

Date of Filing
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

The Facts
G.R. No. 193301 covers three CTA First Division cases, CTA Case Nos. 7227, 7287, and
7317, which were consolidated as CTA EB No. 513. CTA Case Nos. 7227, 7287, and 7317
claim a tax refund or credit of Mindanao IIs alleged excess or unutilized input taxes due to
VAT zero-rated sales. In CTA Case No. 7227, Mindanao II claims a tax refund or credit
of P3,160,984.69 for the first quarter of 2003. In CTA Case No. 7287, Mindanao II claims a
tax refund or credit of P1,562,085.33 for the second quarter of 2003. In CTA Case No. 7317,
Mindanao II claims a tax refund or credit of P3,521,129.50 for the third and fourth quarters
of 2003.

Considering that it has accumulated unutilized creditable input taxes from its only incomegenerating activity, Mindanao II filed an application for refund and/or issuance of tax credit
certificate with the BIRs Revenue District Office at Kidapawan City on April 13, 2005 for the
four quarters of 2003.

The CTA First Divisions narration of the pertinent facts is as follows:

xxxx
On March 11, 1997, [Mindanao II] allegedly entered into a Built (sic)-Operate-Transfer
(BOT) contract with the Philippine National Oil Corporation Energy Development
Company (PNOC-EDC) for finance, engineering, supply, installation, testing,
commissioning, operation, and maintenance of a 48.25 megawatt geothermal power plant,
provided that PNOC-EDC shall supply and deliver steam to Mindanao II at no cost. In turn,
Mindanao II shall convert the steam into electric capacity and energy for PNOC-EDC and
shall deliver the same to the National Power Corporation (NPC) for and in behalf of PNOCEDC. 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 revenuegenerating 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.

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;

HUNDRED FIFTY SEVEN AND 79/100 PESOS (P7,703,957.79) representing its unutilized
input VAT for the four (4) quarters of the taxable year 2003.

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

SO ORDERED.17

5. That the claim for refund was filed within the two-year prescriptive period. 13
With respect to the fifth requirement, the CTA First Division tabulated the dates of filing of
Mindanao IIs return as well as its administrative and judicial claims, and concluded that
Mindanao IIs administrative and judicial claims were timely filed in compliance with this
Courts ruling in Atlas Consolidated Mining and Development Corporation v. Commissioner
of Internal Revenue (Atlas).14 The CTA First Division declared that the two-year prescriptive
period for filing a VAT refund claim should not be counted from the close of the quarter but
from the date of the filing of the VAT return. As ruled in Atlas, VAT liability or entitlement to a
refund can only be determined upon the filing of the quarterly VAT return.
CTA
Case No.

Period
Covered
(2003)

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 zerorated operations. Moreover, the disallowed input taxes substantially complied with the
requirements for refund or tax credit.
The CIR also filed a motion for partial reconsideration. It argued that the judicial claims for
the first and second quarters of 2003 were filed beyond the period allowed by law, as stated
in Section 112(A) of the 1997 Tax Code. The CIR further stated that Section 229 is a general
provision, and governs cases not covered by Section 112(A). The CIR countered the CTA
First Divisions 22 September 2008 decision by citing this Courts ruling in Commisioner of
Internal Revenue v. Mirant Pagbilao Corporation (Mirant), 19 which stated that unutilized input
VAT payments must be claimed within two years reckoned from the close of the taxable
quarter when the relevant sales were made regardless of whether said tax was paid.

Date Filing
Original
Return

Amended
Return

Administrative
Return

Judicial Claim

7227

1st Quarter

23 April 2003

1 April 2004

13 April 2005

22 April 2005

7287

2nd Quarter

22 July 2003

1 April 2004

13 April 2005

7 July 2005

7317

3rd Quarter

25 Oct. 2003

1 April 2004

13 April 2005

9 Sept. 2005

7317

4th Quarter

26 Jan. 2004

1 April 2004

13 April 2005

9 Sept. 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 P7,703,957.79, after disallowing P522,059.91 from input VAT16 and deducting P18,181.82
from Mindanao IIs sale of a fully depreciated P200,000.00 Nissan Patrol. The input taxes
amounting to P522,059.91 were disallowed for failure to meet invoicing requirements, while
the input VAT on the sale of the Nissan Patrol was reduced by P18,181.82 because the
output VAT for the sale was not included in the VAT declarations.
The dispositive portion of the CTA First Divisions 22 September 2008 Decision reads:
WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the
CIR is hereby ORDERED to REFUND or to ISSUE A TAX CREDIT CERTIFICATE in the
modified amount of SEVEN MILLION SEVEN HUNDRED THREE THOUSAND NINE

The CTA First Division denied Mindanao IIs motion for partial reconsideration, found the
CIRs motion for partial reconsideration partly meritorious, and rendered an Amended
Decision20 on 26 June 2009. The CTA First Division stated that the claim for refund or credit
with the BIR and the subsequent appeal to the CTA must be filed within the two-year period
prescribed under Section 229. The two-year prescriptive period in Section 229 was
denominated as a mandatory statute of limitations. Therefore, Mindanao IIs claims for
refund for the first and second quarters of 2003 had already prescribed.
The CTA First Division found that the records of Mindanao IIs case are bereft of evidence
that the sale of the Nissan Patrol is not incidental to Mindanao IIs VAT zero-rated
operations. Moreover, Mindanao IIs submitted documents failed to substantiate the
requisites for the refund or credit claims.
The CTA First Division modified its 22 September 2008 Decision to read as follows:
WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the
CIR is hereby ORDERED to REFUND or to ISSUE A TAX CREDIT CERTIFICATE to
Mindanao II Geothermal Partnership in the modified amount of TWO MILLION NINE
HUNDRED EIGHTY THOUSAND EIGHT HUNDRED EIGHTY SEVEN AND 77/100 PESOS
(P2,980,887.77) representing its unutilized input VAT for the third and fourth quarters of the
taxable year 2003.
SO ORDERED.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 Decision 23 in CTA EB No. 513 and denied
Mindanao IIs petition. The CTA En Banc ruled that (1) Section 112(A) clearly provides that
the reckoning of the two-year prescriptive period for filing the application for refund or credit
of input VAT attributable to zero-rated sales or effectively zero-rated sales shall be counted
from the close of the taxable quarter when the sales were made; (2) the Atlas and Mirant
cases applied different tax codes: Atlas applied the 1977 Tax Code while Mirant applied the
1997 Tax Code; (3) the sale of the fully-depreciated Nissan Patrol is incidental to Mindanao
IIs VAT zero-rated transactions pursuant to Section 105; (4) Mindanao II failed to comply
with the substantiation requirements provided under Section 113(A) in relation to Section
237 of the 1997 Tax Code as implemented by Section 4.104-1, 4.104-5, and 4.108-1 of
Revenue Regulation No. 7-95; and (5) the doctrine of strictissimi juris on tax exemptions
cannot be relaxed in the present case.
The dispositive portion of the CTA En Bancs 10 March 2010 Decision reads:
WHEREFORE, on the basis of the foregoing considerations, the Petition for Review en
banc is DISMISSED for lack of merit. Accordingly, the Decision dated September 22, 2008
and the Amended Decision dated June 26, 2009 issued by the First Division are
AFFIRMED.
SO ORDERED.24
The CTA En Banc issued a Resolution25 on 28 July 2010 denying for lack of merit Mindanao
IIs Motion for Reconsideration.26 The CTA En Banc highlighted the following bases of their
previous ruling:
1. The Supreme Court has long decided that the claim for refund of unutilized
input VAT must be filed within two (2) years after the close of the taxable quarter
when such sales were made.
2. The Supreme Court is the ultimate arbiter whose decisions all other courts
should take bearings.
3. The words of the law are clear, plain, and free from ambiguity; hence, it must
be given its literal meaning and applied without any interpretation. 27
G.R. No. 194637
Mindanao I v. CIR
The Facts
G.R. No. 194637 covers two cases consolidated by the CTA EB: CTA EB Case Nos. 476
and 483. Both CTA EB cases consolidate three cases from the CTA Second Division: CTA
Case Nos. 7228, 7286, and 7318. CTA Case Nos. 7228, 7286, and 7318 claim a tax refund
or credit of Mindanao Is accumulated unutilized and/or excess input taxes due to VAT zerorated sales. In CTA Case No. 7228, Mindanao I claims a tax refund or credit
ofP3,893,566.14 for the first quarter of 2003. In CTA Case No. 7286, Mindanao I claims a

tax refund or credit ofP2,351,000.83 for the second quarter of 2003. In CTA Case No. 7318,
Mindanao I claims a tax refund or credit ofP7,940,727.83 for the third and fourth quarters of
2003.
Mindanao I is similarly situated as Mindanao II. The CTA Second Divisions narration of the
pertinent facts is as follows:
xxxx
In December 1994, Mindanao I entered into a contract of Build-Operate-Transfer (BOT) with
the Philippine National Oil Corporation Energy Development Corporation (PNOC-EDC) for
the finance, design, construction, testing, commissioning, operation, maintenance and
repair of a 47-megawatt geothermal power plant. Under the said BOT contract, PNOC-EDC
shall supply and deliver steam to Mindanao I at no cost. In turn, Mindanao I will convert the
steam into electric capacity and energy for PNOC-EDC and shall subsequently supply and
deliver the same to the National Power Corporation (NPC), for and in behalf of PNOC-EDC.
Mindanao Is 47-megawatt geothermal power plant project has been accredited by the
Department of Energy (DOE) as a Private Sector Generation Facility, pursuant to the
provision of Executive Order No. 215, wherein Certificate of Accreditation No. 95-037 was
issued.
On June 26, 2001, Republic Act (R.A.) No. 9136 took effect, and the relevant provisions of
the National Internal Revenue Code (NIRC) of 1997 were deemed modified. R.A. No. 9136,
also known as the "Electric Power Industry Reform Act of 2001 (EPIRA), was enacted by
Congress to ordain reforms in the electric power industry, highlighting, among others, the
importance of ensuring the reliability, security and affordability of the supply of electric power
to end users. Under the provisions of this Republic Act and its implementing rules and
regulations, the delivery and supply of electric energy by generation companies became
VAT zero-rated, which previously were subject to ten percent (10%) VAT.
xxxx
The amendment of the NIRC of 1997 modified the VAT rate applicable to sales of generated
power by generation companies from ten (10%) percent to zero percent (0%). Thus,
Mindanao I adopted the VAT zero-rating of the EPIRA in computing for its VAT payable
when it filed its VAT Returns, on the belief that its sales qualify for VAT zero-rating.
Mindanao I reported its unutilized or excess creditable input taxes in its Quarterly VAT
Returns for the first, second, third, and fourth quarters of taxable year 2003, which were
subsequently amended and filed with the BIR.
On April 4, 2005, Mindanao I filed with the BIR separate administrative claims for the
issuance of tax credit certificate on its alleged unutilized or excess input taxes for taxable
year 2003, in the accumulated amount ofP14,185, 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

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 Court of Tax Appeals Ruling: Division

WHEREFORE, premises considered, the CIRs Motion for Partial Reconsideration and
Mindanao Is Motion for Partial Reconsideration with Motion for Clarification are hereby
DENIED for lack of merit.

On 24 October 2008, the CTA Second Division rendered its Decision 29 in CTA Case Nos.
7228, 7286, and 7318. The CTA Second Division found that (1) pursuant to Section 112(A),
Mindanao I can only claim 90.27% of the amount of substantiated excess input VAT
because a portion was not reported in its quarterly VAT returns; (2) out of
the P14,185,294.80 excess input VAT applied for refund, only P11,657,447.14 can be
considered substantiated excess input VAT due to disallowances by the Independent
Certified Public Accountant, adjustment on the disallowances per the CTA Second Divisions
further verification, and additional disallowances per the CTA Second Divisions further
verification;
(3) Mindanao Is accumulated excess input VAT for the second quarter of 2003 that was
carried over to the third quarter of 2003 is net of the claimed input VAT for the first quarter of
2003, and the same procedure was done for the second, third, and fourth quarters of 2003;
and (4) Mindanao Is administrative claims were filed within the two-year prescriptive period
reckoned from the respective dates of filing of the quarterly VAT returns.
The dispositive portion of the CTA Second Divisions 24 October 2008 Decision reads:
WHEREFORE, premises considered, the consolidated Petitions for Review are hereby
PARTIALLY GRANTED. Accordingly, the CIR is hereby ORDERED TO ISSUE A TAX
CREDIT CERTIFICATE in favor of Mindanao I in the reduced amount of TEN MILLION FIVE
HUNDRED TWENTY THREE THOUSAND ONE HUNDRED SEVENTY SEVEN PESOS
AND 53/100 (P10,523,177.53) representing Mindanao Is unutilized input VAT for the four
quarters of the taxable year 2003.
SO ORDERED.30
Mindanao I filed a motion for partial reconsideration with motion for Clarification 31 on 11
November 2008. It claimed that the CTA Second Division should not have allocated
proportionately Mindanao Is unutilized creditable input taxes for the taxable year 2003,
because the proportionate allocation of the amount of creditable taxes in Section 112(A)
applies only when the creditable input taxes due cannot be directly and entirely attributed to
any of the zero-rated or effectively zero-rated sales. Mindanao I claims that its unreported
collection is directly attributable to its VAT zero-rated sales. The CTA Second Division
denied Mindanao Is motion and maintained the proportionate allocation because there was
a portion of the gross receipts that was undeclared in Mindanao Is gross receipts.
The CIR also filed a motion for partial reconsideration 32 on 11 November 2008. It claimed
that Mindanao I failed to exhaust administrative remedies before it filed its petition for
review. The CTA Second Division denied the CIRs motion, and cited Atlas 33 as the basis for
ruling that it is more practical and reasonable to count the two-year prescriptive period for

The dispositive portion of the CTA Second Divisions 10 March 2009 Resolution reads:

SO ORDERED.34
The Ruling of the Court of Tax Appeals: En Banc
On 31 May 2010, the CTA En Banc rendered its Decision 35 in CTA EB Case Nos. 476 and
483 and denied the petitions filed by the CIR and Mindanao I. The CTA En Banc found no
new matters which have not yet been considered and passed upon by the CTA Second
Division in its assailed decision and resolution.
The dispositive portion of the CTA En Bancs 31 May 2010 Decision reads:
WHEREFORE, premises considered, the Petitions for Review are hereby DISMISSED for
lack of merit. Accordingly, the October 24, 2008 Decision and March 10, 2009 Resolution of
the CTA Former Second Division in CTA Case Nos. 7228, 7286, and 7318, entitled
"Mindanao I Geothermal Partnership vs. Commissioner of Internal Revenue" are hereby
AFFIRMED in toto.
SO ORDERED.36
Both the CIR and Mindanao I filed Motions for Reconsideration of the CTA En Bancs 31
May 2010 Decision. In an Amended Decision promulgated on 24 November 2010, the CTA
En Banc agreed with the CIRs claim that Section 229 of the NIRC of 1997 is inapplicable in
light of this Courts ruling in Mirant. The CTA En Banc also ruled that the procedure
prescribed under Section 112(D) now 112(C)37 of the 1997 Tax Code should be followed first
before the CTA En Banc can act on Mindanao Is claim. The CTA En Banc reconsidered its
31 May 2010 Decision in light of this Courts ruling in Commissioner of Internal Revenue v.
Aichi Forging Company of Asia, Inc. (Aichi). 38
The pertinent portions of the CTA En Bancs 24 November 2010 Amended Decision read:
C.T.A. Case No. 7228:
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT
Returns for the First Quarter of 2003. Pursuant to Section 112(A) of the NIRC of
1997, as amended, Mindanao I has two years from March 31, 2003 or until
March 31, 2005 within which to file its administrative claim for refund;

(2) On April 4, 2005, Mindanao I applied for an administrative claim for refund of
unutilized input VAT for the first quarter of taxable year 2003 with the BIR, which
is beyond the two-year prescriptive period mentioned above.
C.T.A. Case No. 7286:
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT
Returns for the second quarter of 2003. Pursuant to
Section 112(A) of the NIRC of 1997, as amended, Mindanao I has two years from
June 30, 2003, within which to file its administrative claim for refund for the
second quarter of 2003, or until June 30, 2005;
(2) On April 4, 2005, Mindanao I applied an administrative claim for refund of
unutilized input VAT for the second quarter of taxable year 2003 with the BIR,
which is within the two-year prescriptive period, provided under Section 112 (A)
of the NIRC of 1997, as amended;

(3) 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

(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

Claim for the first quarter of 2003 had already prescribed for having been filed
beyond the two-year prescriptive period;
(2) C.T.A. Case No. 7286
Claim for the second quarter of 2003 should be dismissed for Mindanao Is failure
to comply with a condition precedent when it failed to exhaust administrative
remedies by filing its Petition for Review even before the lapse of the 120-day
period for the CIR to decide the administrative claim;
(3) C.T.A. Case No. 7318
Petition for Review was filed beyond the 30-day prescribed period to appeal to
the CTA.

C.T.A. Case No. 7318:

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;

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

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

(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;

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.

The May 31, 2010 Decision of this Court En Banc is hereby REVERSED.

SO ORDERED.39

IV. The doctrine of strictissimi juris on tax exemptions should be relaxed in the
present case.40
The Issues

G.R. No. 193301

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

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 Courts Ruling
Determination of Prescriptive Period
G.R. Nos. 193301 and 194637 both raise the question of the determination of the
prescriptive period, or the interpretation of Section 112 of the 1997 Tax Code, in light of our
rulings in Atlas and Mirant.
Mindanao IIs unutilized input VAT tax credit for the first and second quarters of 2003, in the
amounts ofP3,160,984.69 and P1,562,085.33, respectively, are covered by G.R. No.
193301, while Mindanao Is unutilized input VAT tax credit for the first, second, third, and
fourth quarters of 2003, in the amounts of P3,893,566.14,P2,351,000.83,
and P7,940,727.83, respectively, are covered by G.R. No. 194637.

Section 112 of the 1997 Tax Code

P3,160,984.69

2003

2005

The pertinent sections of the 1997 Tax Code, the law applicable at the time of Mindanao IIs
and Mindanao Is administrative and judicial claims, provide:

2nd Quarter,
P1,562,085.33

30 June
2003

30 June
2005

13 April 2005

12 September
2005

7 July 2005

3rd and 4th

Quarters,
P3,521,129.50

30
September
2003

30
September
2005

13 April 2005

12 September
2005

9 September
2005

31
December
2003

2 January
2006
(31
December
2005 being
a Saturday)

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.

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

Period
covered by
VAT Sales in
2003 and
(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 amount
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.

Close of
quarter
when sales
were
made

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

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

Last day for

filing case
with CTA47

Actual Date
of filing case
with CTA
(judicial
claim)

1st Quarter,
3,893,566.14

31 March
2003

31 March
2005

4 April 2005

1 September
2005

22 April 2005

2nd Quarter,
2,351,000.83

30 June
2003

30 June
2005

4 April 2005

1 September
2005

7 July 2005

30
September
2003

30
September
2005

4 April 2005

1 September
2005

9 September
2005

31
December
2003

2 January
2006
(31
December
2005 being
a Saturday)

xxxx

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)

and 4th
Quarters,
7,940,727.83

The relevant dates for G.R. No. 193301 (Mindanao II) are:
CTA
Case No.

7227

Period
covered by
VAT Sales in
2003 and
amount

1st Quarter,

Close of
quarter
when sales
were
made

31 March

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

Actual date of
filing
application for
tax refund/
credit with the
CIR
(administrative
claim)44
13 April 2005

Last day for

filing case
with CTA45

12 September

2005

of filing case

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
22 April claims
2005 in issue. As this Court explained in the recent consolidated cases of Commissioner of

Internal Revenue v. San Roque Power Corporation, Taganito Mining Corporation v.

Commissioner of Internal Revenue, and Philex Mining Corporation v. Commissioner of
Internal Revenue (San Roque):48
Clearly, San Roque failed to comply with the 120-day waiting period, the time expressly
given by law to the Commissioner to decide whether to grant or deny San Roques
application for tax refund or credit. It is indisputable that compliance with the 120-day
waiting period is mandatory and jurisdictional. The waiting period, originally fixed at 60 days
only, was part of the provisions of the first VAT law, Executive Order No. 273, which took
effect on 1 January 1988. The waiting period was extended to 120 days effective 1 January
1998 under RA 8424 or the Tax Reform Act of 1997. Thus, the waiting period has been in
our statute books for more than fifteen (15) years before San Roque filed its judicial claim.
Failure to comply with the 120-day waiting period violates a mandatory provision of law. It
violates the doctrine of exhaustion of administrative remedies and renders the petition
premature and thus without a cause of action, with the effect that the CTA does not acquire
jurisdiction over the taxpayers petition. Philippine jurisprudence is replete with cases
upholding and reiterating these doctrinal principles.
The charter of the CTA expressly provides that its jurisdiction is to review on appeal
"decisions of the Commissioner of Internal Revenue in cases involving x x x refunds of
internal revenue taxes." When a taxpayer prematurely files a judicial claim for tax refund or
credit with the CTA without waiting for the decision of the Commissioner, there is no
"decision" of the Commissioner to review and thus the CTA as a court of special jurisdiction
has no jurisdiction over the appeal. The charter of the CTA also expressly provides that if
the Commissioner fails to decide within "a specific period" required by law, such "inaction
shall be deemed a denial" of the application for tax refund or credit. It is the Commissioners
decision, or inaction "deemed a denial," that the taxpayer can take to the CTA for review.
Without a decision or an "inaction x x x deemed a denial" of the Commissioner, the CTA has
no jurisdiction over a petition for review.
San Roques failure to comply with the 120-day mandatory period renders its petition for
review with the CTA void. Article 5 of the Civil Code provides, "Acts executed against
provisions of mandatory or prohibitory laws shall be void, except when the law itself
authorizes their validity." San Roques void petition for review cannot be legitimized by the
CTA or this Court because Article 5 of the Civil Code states that such void petition cannot be
legitimized "except when the law itself authorizes its validity." There is no law authorizing the
petitions validity.
It is hornbook doctrine that a person committing a void act contrary to a mandatory provision
of law cannot claim or acquire any right from his void act. A right cannot spring in favor of a
person from his own void or illegal act. This doctrine is repeated in Article 2254 of the Civil
Code, which states, "No vested or acquired right can arise from acts or omissions which are
against the law or which infringe upon the rights of others." For violating a mandatory
provision of law in filing its petition with the CTA, San Roque cannot claim any right arising
from such void petition. Thus, San Roques petition with the CTA is a mere scrap of paper.
This Court cannot brush aside the grave issue of the mandatory and jurisdictional nature of
the 120-day period just because the Commissioner merely asserts that the case was
prematurely filed with the CTA and does not question the entitlement of San Roque to the

refund. The mere fact that a taxpayer has undisputed excess input VAT, or that the tax was
admittedly illegally, erroneously or excessively collected from him, does not entitle him as a
matter of right to a tax refund or credit. Strict compliance with the mandatory and
jurisdictional conditions prescribed by law to claim such tax refund or credit is essential and
necessary for such claim to prosper. Well-settled is the rule that tax refunds or credits, just
like tax exemptions, are strictly construed against the taxpayer.
The burden is on the taxpayer to show that he has strictly complied with the conditions for
the grant of the tax refund or credit.
This Court cannot disregard mandatory and jurisdictional conditions mandated by law
simply because the Commissioner chose not to contest the numerical correctness of the
claim for tax refund or credit of the taxpayer. Non-compliance with mandatory periods, nonobservance of prescriptive periods, and non-adherence to exhaustion of administrative
remedies bar a taxpayers claim for tax refund or credit, whether or not the Commissioner
questions the numerical correctness of the claim of the taxpayer. This Court should not
establish the precedent that non-compliance with mandatory and jurisdictional conditions
can be excused if the claim is otherwise meritorious, particularly in claims for tax refunds or
credit. Such precedent will render meaningless compliance with mandatory and
jurisdictional requirements, for then every tax refund case will have to be decided on the
numerical correctness of the amounts claimed, regardless of non-compliance with
mandatory and jurisdictional conditions.
San Roque cannot also claim being misled, misguided or confused by the Atlas doctrine
because San Roque filed its petition for review with the CTA more than four years before
Atlas was promulgated. The Atlas doctrine did not exist at the time San Roque failed to
comply with the 120-day period. Thus, San Roque cannot invoke the Atlas doctrine as an
excuse for its failure to wait for the 120-day period to lapse. In any event, the Atlas doctrine
merely stated that the two-year prescriptive period should be counted from the date of
payment of the output VAT, not from the close of the taxable quarter when the sales
involving the input VAT were made. The Atlas doctrine does not interpret, expressly or
impliedly, the 120+30 day periods.49 (Emphases in the original; citations omitted)
Prescriptive Period for
the Filing of Administrative Claims
In determining whether the administrative claims of Mindanao I and Mindanao II for 2003
have prescribed, we see no need to rely on either Atlas or Mirant. Section 112(A) of the
1997 Tax Code is clear: "Any VAT-registered person, whose sales are zero-rated or
effectively zero-rated may, within two (2) years after the close of the taxable quarter when
the sales were made, apply for the issuance of a tax credit certificate or refund of creditable
input tax due or paid attributable to such sales x x x."
We rule on Mindanao I and IIs administrative claims for the first, second, third, and fourth
quarters of 2003 as follows:
(1) The last day for filing an application for tax refund or credit with the CIR for
the first quarter of 2003 was on 31 March 2005. Mindanao II filed its
administrative claim before the CIR on 13 April 2005, while Mindanao I filed its

administrative claim before the CIR on 4 April 2005. Both claims have prescribed,
pursuant to Section 112(A) of the 1997 Tax Code.

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:

(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.

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)

(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.

This law is clear, plain, and unequivocal. Following the well-settled verba legis doctrine, this
law should be applied exactly as worded since it is clear, plain, and unequivocal. As this law
states, the taxpayer may, if he wishes, appeal the decision of the Commissioner to the CTA
within 30 days from receipt of the Commissioners decision, or if the Commissioner does not
act on the taxpayers claim within the 120-day period, the taxpayer may appeal to the CTA
within 30 days from the expiration of the 120-day period.
xxxx

(4) The last day for filing an application for tax refund or credit with the CIR for
the fourth quarter of 2003 was on 2 January 2006. Mindanao II filed its
administrative claim before the CIR on 13 April 2005, while Mindanao I filed its
administrative claim before the CIR on 4 April 2005. Both claims were filed on
time, pursuant to Section 112(A) of the 1997 Tax Code.
Prescriptive Period for
the Filing of Judicial Claims
In determining whether the claims for the second, third and fourth quarters of 2003 have
been properly appealed, we still see no need to refer to either Atlas or Mirant, or even to
Section 229 of the 1997 Tax Code. The second paragraph of Section 112(C) of the 1997 Tax
Code is clear: "In case of full or partial denial of the claim for tax refund or tax credit, or the
failure on the part of the Commissioner to act on the application within the period prescribed
above, the taxpayer affected may, within thirty (30) days from the receipt of the decision
denying the claim or after the expiration of the one hundred twenty day-period, appeal the
decision or the unacted claim with the Court of Tax Appeals."
The mandatory and jurisdictional nature of the 120+30 day periods was explained in San
Roque:
At the time San Roque filed its petition for review with the CTA, the 120+30 day mandatory
periods were already in the law. Section 112(C) expressly grants the Commissioner 120
days within which to decide the taxpayers claim. The law is clear, plain, and unequivocal: "x
x x the Commissioner shall grant a refund or issue the tax credit certificate for creditable
input taxes within one hundred twenty (120) days from the date of submission of complete
documents." Following the verba legis doctrine, this law must be applied exactly as worded
since it is clear, plain, and unequivocal. The taxpayer cannot simply file a petition with the
CTA without waiting for the Commissioners decision within the 120-day mandatory and
jurisdictional period. The CTA will have no jurisdiction because there will be no "decision" or
"deemed a denial" decision of the Commissioner for the CTA to review. In San Roques
case, it filed its petition with the CTA a mere 13 days after it filed its administrative claim with
the Commissioner. Indisputably, San Roque knowingly violated the mandatory 120-day
period, and it cannot blame anyone but itself.

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 twoyear prescriptive period.
First, Section 112(A) clearly, plainly, and unequivocally provides that the taxpayer "may,
within two (2) years after the close of the taxable quarter when the sales were made, apply
for the issuance of a tax credit certificate or refund of the creditable input tax due or paid to
such sales." In short, the law states that the taxpayer may apply with the Commissioner for
a refund or credit "within two (2) years," which means at anytime within two years. Thus, the
application for refund or credit may be filed by the taxpayer with the Commissioner on the
last day of the two-year prescriptive period and it will still strictly comply with the law. The
two-year prescriptive period is a grace period in favor of the taxpayer and he can avail of the
full period before his right to apply for a tax refund or credit is barred by prescription.
Second, Section 112(C) provides that the Commissioner shall decide the application for
refund or credit "within one hundred twenty (120) days from the date of submission of
complete documents in support of the application filed in accordance with Subsection (A)."
The reference in Section 112(C) of the submission of documents "in support of the
application filed in accordance with Subsection A" means that the application in Section
112(A) is the administrative claim that the Commissioner must decide within the 120-day
period. In short, the two-year prescriptive period in Section 112(A) refers to the period within
which the taxpayer can file an administrative claim for tax refund or credit. Stated otherwise,
the two-year prescriptive period does not refer to the filing of the judicial claim with the CTA
but to the filing of the administrative claim with the Commissioner. As held in Aichi, the
"phrase within two years x x x apply for the issuance of a tax credit or refund refers to
applications for refund/credit with the CIR and not to appeals made to the CTA."
Third, if the 30-day period, or any part of it, is required to fall within the two-year prescriptive
period (equivalent to 730 days), then the taxpayer must file his administrative claim for
refund or credit within the first 610 days of the two-year prescriptive period. Otherwise, the
filing of the administrative claim beyond the first 610 days will result in the appeal to the CTA
being filed beyond the two-year prescriptive period. Thus, if the taxpayer files his
administrative claim on the 611th day, the Commissioner, with his 120-day period, will have

until the 731st day to decide the claim. If the Commissioner decides only on the 731st day,
or does not decide at all, the taxpayer can no longer file his judicial claim with the CTA
because the two-year prescriptive period (equivalent to 730 days) has lapsed. The 30-day
period granted by law to the taxpayer to file an appeal before the CTA becomes utterly
useless, even if the taxpayer complied with the law by filing his administrative claim within
the two-year prescriptive period.
The theory that the 30-day period must fall within the two-year prescriptive period adds a
condition that is not found in the law. It results in truncating 120 days from the 730 days that
the law grants the taxpayer for filing his administrative claim with the Commissioner. This
Court cannot interpret a law to defeat, wholly or even partly, a remedy that the law expressly
grants in clear, plain, and unequivocal language.
Section 112(A) and (C) must be interpreted according to its clear, plain, and unequivocal
language. The taxpayer can file his administrative claim for refund or credit at anytime within
the two-year prescriptive period. If he files his claim on the last day of the two-year
prescriptive
period, his claim is still filed on time. The Commissioner will have 120 days from such filing
to decide the claim. If the Commissioner decides the claim on the 120th day, or does not
decide it on that day, the taxpayer still has 30 days to file his judicial claim with the CTA.
This is not only the plain meaning but also the only logical interpretation of Section 112(A)
and (C).50 (Emphases in the original; citations omitted)
In San Roque, this Court ruled that "all taxpayers can rely on BIR Ruling No. DA-489-03
from the time of its issuance on 10 December 2003 up to its reversal in Aichi on 6 October
2010, where this Court held that the 120+30 day periods are mandatory and
jurisdictional."51 We shall discuss later the effect of San Roques recognition of BIR Ruling
No. DA-489-03 on claims filed between 10 December 2003 and 6 October 2010. Mindanao I
and II filed their claims within this period.
We rule on Mindanao I and IIs judicial claims for the second, third, and fourth quarters of
2003 as follows:
G.R. No. 193301
Mindanao II v. CIR
Mindanao II filed its administrative claims for the second, third, and fourth quarters of 2003
on 13 April 2005. Counting 120 days after filing of the administrative claim with the CIR (11
August 2005) and 30 days after the CIRs denial by inaction, the last day for filing a judicial
claim with the CTA for the second, third, and fourth quarters of 2003 was on 12 September
2005. However, the judicial claim cannot be filed earlier than 11 August 2005, which is the
expiration of the 120-day period for the Commissioner to act on the claim.
(1) Mindanao II filed its judicial claim for the second quarter of 2003 before the
CTA on 7 July 2005, before the expiration of the 120-day period. Pursuant to
Section 112(C) of the 1997 Tax Code, Mindanao IIs judicial claim for the second
quarter of 2003 was prematurely filed.

However, pursuant to San Roques recognition of the effect of BIR Ruling No.
DA-489-03, we rule that Mindanao IIs judicial claim for the second quarter of
2003 qualifies under the exception to the strict application of the 120+30 day
periods.
(2) Mindanao II filed its judicial claim for the third quarter of 2003 before the CTA
on 9 September 2005. Mindanao IIs judicial claim for the third quarter of 2003
was thus filed on time, pursuant to Section 112(C) of the 1997 Tax Code.
(3) Mindanao II filed its judicial claim for the fourth quarter of 2003 before the
CTA on 9 September 2005. Mindanao IIs judicial claim for the fourth quarter of
2003 was thus filed on time, pursuant to Section 112(C) of the 1997 Tax Code.
G.R. No. 194637
Mindanao I v. CIR
Mindanao I filed its administrative claims for the second, third, and fourth quarters of 2003
on 4 April 2005. Counting 120 days after filing of the administrative claim with the CIR (2
August 2005) and 30 days after the CIRs denial by inaction, 52 the last day for filing a judicial
claim with the CTA for the second, third, and fourth quarters of 2003 was on 1 September
2005. However, the judicial claim cannot be filed earlier than 2 August 2005, which is the
expiration of the 120-day period for the Commissioner to act on the claim.
(1) Mindanao I filed its judicial claim for the second quarter of 2003 before the
CTA on 7 July 2005, before the expiration of the 120-day period. Pursuant to
Section 112(C) of the 1997 Tax Code, Mindanao Is judicial claim for the second
quarter of 2003 was prematurely filed. However, pursuant to San Roques
recognition of the effect of BIR Ruling No. DA-489-03, we rule that Mindanao Is
judicial claim for the second quarter of 2003 qualifies under the exception to the
strict application of the 120+30 day periods.
(2) Mindanao I filed its judicial claim for the third quarter of 2003 before the CTA
on 9 September 2005. Mindanao Is judicial claim for the third quarter of 2003
was thus filed after the prescriptive period, pursuant to Section 112(C) of the
1997 Tax Code.
(3) Mindanao I filed its judicial claim for the fourth quarter of 2003 before the CTA
on 9 September 2005. Mindanao Is judicial claim for the fourth quarter of 2003
was thus filed after the prescriptive period, pursuant to Section 112(C) of the
1997 Tax Code.
San Roque: Recognition of BIR Ruling No. DA-489-03
In the consolidated cases of San Roque, the Court En Banc 53 examined and ruled on the
different claims for tax refund or credit of three different companies. In San Roque, we
reiterated that "following the verba legis doctrine, Section 112(C) must be applied exactly as
worded since it is clear, plain, and unequivocal. The taxpayer cannot simply file a petition
with the CTA without waiting for the Commissioners decision within the 120-day mandatory

and jurisdictional period. The CTA will have no jurisdiction because there will be no
decision or deemed a denial decision of the Commissioner for the CTA to review."
Notwithstanding a strict construction of any claim for tax exemption or refund, the Court in
San Roque recognized that BIR Ruling No. DA-489-03 constitutes equitable estoppel 54 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:
1st Quarter, 2003
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
2nd Quarter,
2003
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 is3rd
applying
Quarter, 2003
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.
4th Quarter, 2003

Summary of Administrative and Judicial Claims

G.R. No. 193301
Mindanao II v. CIR
Administrative
Claim

Judicial Claim

Action on Claim

Filed late

--

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

Filed on time

Prematurely filed

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

Filed on time

Filed on time

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

Filed on time

Filed on time

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

Administrative
Claim

Judicial Claim

Action on Claim

Filed late

--

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

Filed on time

Prematurely filed

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

Filed on time

Filed late

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

Filed on time

Filed late

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

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
1st Quarter, 2003
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
2nd Quarter, 2003
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
3rdcan
Quarter, 2003
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.
4th Quarter, 2003

G.R. No. 194637

Mindanao I v. CIR

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 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.

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)

(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.

Mindanao II relies on Commissioner of Internal Revenue v. Magsaysay Lines, Inc.

(Magsaysay)55 and Imperial v. Collector of Internal Revenue (Imperial) 56 to justify its position.
Magsaysay, decided under the NIRC of 1986, involved the sale of vessels of the National
Development Company (NDC) to Magsaysay Lines, Inc. We ruled that the sale of vessels
was not in the course of NDCs trade or business as it was involuntary and made pursuant
to the Governments policy for privatization. Magsaysay, in quoting from the CTAs decision,
imputed upon Imperial the definition of "carrying on business." Imperial, however, is an
unreported case that merely stated that "to engage is to embark in a business or to employ
oneself therein."57

(3) A judicial claim must be filed with the CTA within 30 days from the receipt of
the CIRs decision denying the administrative claim or from the expiration of the
120-day period without any action from the CIR.
(4) All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from the time
of its issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6
October 2010, as an exception to the mandatory and jurisdictional 120+30 day
periods.
"Incidental" Transaction
Mindanao II asserts that the sale of a fully depreciated Nissan Patrol is not an incidental
transaction in the course of its business; hence, it is an isolated transaction that should not
have been subject to 10% VAT.
Section 105 of the 1997 Tax Code does not support Mindanao IIs position:
SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells
barters, exchanges, leases goods or properties, renders services, and any person who
imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108
of this Code.

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

transaction.1wphi1 However, it does not follow that an isolated transaction cannot be an
incidental transaction for purposes of VAT liability. Indeed, a reading of Section 105 of the
1997 Tax Code would show that a transaction "in the course of trade or business" includes
"transactions incidental thereto."
Mindanao IIs business is to convert the steam supplied to it by PNOC-EDC into electricity
and to deliver the electricity to NPC. In the course of its business, Mindanao II bought and
eventually sold a Nissan Patrol. Prior to the sale, the Nissan Patrol was part of Mindanao
IIs property, plant, and equipment. Therefore, the sale of the Nissan Patrol is an incidental
transaction made in the course of Mindanao IIs business which should be liable for VAT.
Substantiation Requirements
Mindanao II claims that the CTAs disallowance of a total amount of P492,198.09 is
improper as it has substantially complied with the substantiation requirements of Section
113(A)58 in relation to Section 23759 of the 1997 Tax Code, as implemented by Section
4.104-1, 4.104-5 and 4.108-1 of Revenue Regulation No. 7-95. 60

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.

We are constrained to state that Mindanao IIs compliance with the substantiation
requirements is a finding of fact. The CTA En Banc evaluated the records of the case and
found that the transactions in question are purchases for services and that Mindanao II
failed to comply with the substantiation requirements. We affirm the CTA En Bancs finding
of fact, which in turn affirmed the finding of the CTA First Division. We see no reason to
overturn their findings.

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.

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.

On February 10, 1992, COMASERCO filed with the BIR, a letter-protest objecting to the
latter's finding of deficiency VAT. On August 20, 1992, the Commissioner of Internal
Revenue sent a collection letter to COMASERCO demanding payment of the deficiency
VAT.

SO ORDERED.
G.R. No. 125355

On September 29, 1992, COMASERCO filed with the Court of Tax Appeals 4 a petition for
review contesting the Commissioner's assessment. COMASERCO asserted that the
services it rendered to Philamlife and its affiliates, relating to collections, consultative and
other technical assistance, including functioning as an internal auditor, were on a "no-profit,
reimbursement-of-cost-only" basis. It averred that it was not engaged in the business of
providing services to Philamlife and its affiliates. COMASERCO was established to ensure
operational orderliness and administrative efficiency of Philamlife and its affiliates, and not in
the sale of services. COMASERCO stressed that it was not profit-motivated, thus not
engaged in business. In fact, it did not generate profit but suffered a net loss in taxable year
1988. COMASERCO averred that since it was not engaged in business, it was not liable to
pay VAT.

March 30, 2000

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
COURT OF APPEALS and COMMONWEALTH MANAGEMENT AND SERVICES
CORPORATION, respondents.
What is before the Court is a petition for review on certiorari of the decision of the Court of
Appeals,1 reversing that of the Court of Tax Appeals,2 which affirmed with modification the
decision of the Commissioner of Internal Revenue ruling that Commonwealth Management
and Services Corporation, is liable for value added tax for services to clients during taxable
year 1988.

On June 22, 1995, the Court of Tax Appeals rendered decision in favor of the Commissioner
of Internal Revenue, the dispositive portion of which reads:

Commonwealth Management and Services Corporation (COMASERCO, for brevity), is a

corporation duly organized and existing under the laws of the Philippines. It is an affiliate of
Philippine American Life Insurance Co. (Philamlife), organized by the letter to perform
collection, consultative and other technical services, including functioning as an internal
auditor, of Philamlife and its other affiliates.1wphi1.nt

WHEREFORE, the decision of the Commissioner of Internal Revenue assessing

petitioner deficiency value-added tax for the taxable year 1988 is AFFIRMED with
slight modifications. Accordingly, petitioner is ordered to pay respondent
Commissioner of Internal Revenue the amount of P335,831.01 inclusive of the
25% surcharge and interest plus 20% interest from January 24, 1992 until fully
paid pursuant to Section 248 and 249 of the Tax Code.

On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an assessment to
private respondent COMASERCO for deficiency value-added tax (VAT) amounting to
P351,851.01, for taxable year 1988, computed as follows:

Taxable sale/receipt
10% tax due thereon
25% surcharge
20% interest per annum
Compromise penalty for late payment
TOTAL AMOUNT DUE AND COLLECTIBLE

P1,679,155.00
============
167,915.50

The compromise penalty of P16,000.00 imposed by the respondent in her

assessment letter shall not be included in the payment as there was no
compromise agreement entered into between petitioner and respondent with
respect to the value-added tax deficiency.5
On July 26, 1995, respondent filed with the Court of Appeals, a petition for review of the
decision of the Court of Appeals.

41,978.88
After due proceedings, on May 13, 1996, the Court of Appeals rendered decision reversing
125,936.63 that of the Court of Tax Appeals, the dispositive portion of which reads:
16,000.00

P351,831.01
============

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

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

REVERSING and SETTING ASIDE the questioned Decision promulgated on 22
June 1995. The assessment for deficiency value-added tax for the taxable year
1988 inclusive of surcharge, interest and penalty charges are ordered
CANCELLED for lack of legal and factual basis. 6
The Court of Appeals anchored its decision on the ratiocination in another tax case involving
the same parties,7where it was held that COMASERCO was not liable to pay fixed and
contractor's tax for services rendered to Philamlife and its affiliates. The Court of Appeals, in
that case, reasoned that COMASERCO was not engaged in business of providing services
to Philamlife and its affiliates. In the same manner, the Court of Appeals held that

COMASERCO was not liable to pay VAT for it was not engaged in the business of selling
services.
On July 16, 1996, the Commissioner of Internal Revenue filed with this Court a petition for
review on certiorariassailing the decision of the Court of Appeals.
On August 7, 1996, we required respondent COMASERCO to file comment on the petition,
and on September 26, 1996, COMASERCO complied with the resolution. 8
We give due course to the petition.
At issue in this case is whether COMASERCO was engaged in the sale of services, and
thus liable to pay VAT thereon.
Petitioner avers that to "engage in business" and to "engage in the sale of services" are two
different things. Petitioner maintains that the services rendered by COMASERCO to
Philamlife and its affiliates, for a fee or consideration, are subject to VAT. VAT is a tax on the
value added by the performance of the service. It is immaterial whether profit is derived from
rendering the service.
We agree with the Commissioner.
Sec. 99 of the National Internal Revenue Code of 1986, as amended by Executive Order (E.
O.) No. 273 in 1988, provides that:
Sec. 99. Persons liable. Any person who, in the course of trade or business,
sells, barters or exchanges goods, renders services, or engages in similar
transactions and any person who, imports goods shall be subject to the valueadded tax (VAT) imposed in Sections 100 to 102 of this Code. 9
COMASERCO contends that the term "in the course of trade or business" requires that the
"business" is carried on with a view to profit or livelihood. It avers that the activities of the
entity must be profit-oriented. COMASERCO submits that it is not motivated by profit, as
defined by its primary purpose in the articles of incorporation, stating that it is operating
"only on reimbursement-of-cost basis, without any profit." Private respondent argues that
profit motive is material in ascertaining who to tax for purposes of determining liability for
VAT.
We disagree.
On May 28, 1994, Congress enacted Republic Act No. 7716, the Expanded VAT Law
(EVAT), amending among other sections, Section 99 of the Tax Code. On January 1, 1998,
Republic Act 8424, the National Internal Revenue Code of 1997, took effect. The amended
law provides that:

Sec. 105. Persons Liable. Any person who, in the course of trade or business,
sells, barters, exchanges, leases goods or properties, renders services, and any
person who imports goods shall be subject to the value-added tax (VAT) imposed
in Sections 106 and 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted or
passed on to the buyer, transferee or lessee of the goods, properties or services.
This rule shall likewise apply to existing sale or lease of goods, properties or
services at the time of the effectivity of Republic Act No. 7716.
The phrase "in the course of trade or business" means the regular conduct or
pursuit of a commercial or an economic activity, including transactions incidental
thereto, by any person regardless of whether or not the person engaged therein
is a nonstock, nonprofit organization (irrespective of the disposition of its net
income and whether or not it sells exclusively to members of their guests), or
government entity.
The rule of regularity, to the contrary notwithstanding, services as defined in this
Code rendered in the Philippines by nonresident foreign persons shall be
considered as being rendered in the course of trade or business.
Contrary to COMASERCO's contention the above provision clarifies that even a nonstock, non-profit, organization or government entity, is liable to pay VAT on the sale of goods
or services. VAT is a tax on transactions, imposed at every stage of the distribution process
on the sale, barter, exchange of goods or property, and on the performance of services,
even in the absence of profit attributable thereto. The term "in the course of trade or
business" requires the regular conduct or pursuit of a commercial or an economic activity
regardless of whether or not the entity is profit-oriented.
The definition of the term "in the course of trade or business" present law applies to all
transactions even to those made prior to its enactment. Executive Order No. 273 stated that
any person who, in the course of trade or business, sells, barters or exchanges goods and
services, was already liable to pay VAT. The present law merely stresses that even a
nonstock, nonprofit organization or government entity is liable to pay VAT for the sale of
goods and services.
Sec. 108 of the National Internal Revenue Code of 1997 10 defines the phrase "sale of
services" as the "performance of all kinds of services for others for a fee, remuneration or
consideration." It includes "the supply of technical advice, assistance or services rendered
in connection with technical management or administration of any scientific, industrial or
commercial undertaking or project." 11
On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling No. 01098 12 emphasizing that a domestic corporation that provided technical, research,
management and technical assistance to its affiliated companies and received payments on
a reimbursement-of-cost basis, without any intention of realizing profit, was subject to VAT
on services rendered. In fact, even if such corporation was organized without any intention
realizing profit, any income or profit generated by the entity in the conduct of its activities
was subject to income tax.

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

receives payments for services rendered to its affiliates on a reimbursement-on-cost basis
only, without realizing profit, for purposes of determining liability for VAT on services
rendered. As long as the entity provides service for a fee, remuneration or consideration,
then the service rendered is subject to VAT.1awp++i1
At any rate, it is a rule that because taxes are the lifeblood of the nation, statutes that allow
exemptions are construed strictly against the grantee and liberally in favor of the
government. Otherwise stated, any exemption from the payment of a tax must be clearly
stated in the language of the law; it cannot be merely implied therefrom. 13 In the case of
VAT, Section 109, Republic Act 8424 clearly enumerates the transactions exempted from
VAT. The services rendered by COMASERCO do not fall within the exemptions.
Both the Commissioner of Internal Revenue and the Court of Tax Appeals correctly ruled
that the services rendered by COMASERCO to Philamlife and its affiliates are subject to
VAT. As pointed out by the Commissioner, the performance of all kinds of services for others
for a fee, remuneration or consideration is considered as sale of services subject to VAT. As
the government agency charged with the enforcement of the law, the opinion of the
Commissioner of Internal Revenue, in the absence of any showing that it is plainly wrong, is
entitled to great weight. 14 Also, it has been the long standing policy and practice of this
Court to respect the conclusions of quasi-judicial agencies, such as the Court of Tax
Appeals which, by the nature of its functions, is dedicated exclusively to the study and
consideration of tax cases and has necessarily developed an expertise on the subject,
unless there has been an abuse or improvident exercise of its authority. 15
There is no merit to respondent's contention that the Court of Appeals' decision in CA-G.R.
No. 34042, declaring the COMASERCO as not engaged in business and not liable for the
payment of fixed and percentage taxes, binds petitioner. The issue in CA-G.R. No. 34042 is
different from the present case, which involves COMASERCO's liability for VAT. As
heretofore stated, every person who sells, barters, or exchanges goods and services, in the
course of trade or business, as defined by law, is subject to VAT.
WHEREFORE, the Court GRANTS the petition and REVERSES the decision of the Court of
Appeals in CA-G.R. SP No. 37930. The Court hereby REINSTATES the decision of the
Court of Tax Appeals in C. T. A. Case No. 4853.
No costs.
SO ORDERED.1wphi1.nt
G.R. No. 193007

July 19, 2011

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

vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, Respondents.

May toll fees collected by tollway operators be subjected to value- added tax?
The Facts and the Case
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for
declaratory relief1 assailing the validity of the impending imposition of value-added tax (VAT)
by the Bureau of Internal Revenue (BIR) on the collections of tollway operators.
Petitioners claim that, since the VAT would result in increased toll fees, they have an interest
as regular users of tollways in stopping the BIR action. Additionally, Diaz claims that he
sponsored the approval of Republic Act 7716 (the 1994 Expanded VAT Law or EVAT Law)
and Republic Act 8424 (the 1997 National Internal Revenue Code or the NIRC) at the
House of Representatives. Timbol, on the other hand, claims that she served as Assistant
Secretary of the Department of Trade and Industry and consultant of the Toll Regulatory
Board (TRB) in the past administration.
Petitioners allege that the BIR attempted during the administration of President Gloria
Macapagal-Arroyo to impose VAT on toll fees. The imposition was deferred, however, in
view of the consistent opposition of Diaz and other sectors to such move. But, upon
President Benigno C. Aquino IIIs assumption of office in 2010, the BIR revived the idea and
would impose the challenged tax on toll fees beginning August 16, 2010 unless judicially
enjoined.
Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include
toll fees within the meaning of "sale of services" that are subject to VAT; that a toll fee is a
"users tax," not a sale of services; that to impose VAT on toll fees would amount to a tax on
public service; and that, since VAT was never factored into the formula for computing toll
fees, its imposition would violate the non-impairment clause of the constitution.
On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining the
implementation of the VAT. The Court required the government, represented by respondents
Cesar V. Purisima, Secretary of the Department of Finance, and Kim S. Jacinto-Henares,
Commissioner of Internal Revenue, to comment on the petition within 10 days from
notice.2 Later, the Court issued another resolution treating the petition as one for
prohibition.3
On August 23, 2010 the Office of the Solicitor General filed the governments
comment.4 The government avers that the NIRC imposes VAT on all kinds of services of
franchise grantees, including tollway operations, except where the law provides otherwise;
that the Court should seek the meaning and intent of the law from the words used in the
statute; and that the imposition of VAT on tollway operations has been the subject as early
as 2003 of several BIR rulings and circulars.5

The government also argues that petitioners have no right to invoke the non-impairment of
contracts clause since they clearly have no personal interest in existing toll operating
agreements (TOAs) between the government and tollway operators. At any rate, the nonimpairment clause cannot limit the States sovereign taxing power which is generally read
into contracts.
Finally, the government contends that the non-inclusion of VAT in the parametric formula for
computing toll rates cannot exempt tollway operators from VAT. In any event, it cannot be
claimed that the rights of tollway operators to a reasonable rate of return will be impaired by
the VAT since this is imposed on top of the toll rate. Further, the imposition of VAT on toll
fees would have very minimal effect on motorists using the tollways.
In their reply6 to the governments comment, petitioners point out that tollway operators
cannot be regarded as franchise grantees under the NIRC since they do not hold legislative
franchises. Further, the BIR intends to collect the VAT by rounding off the toll rate and
putting any excess collection in an escrow account. But this would be illegal since only the
Congress can modify VAT rates and authorize its disbursement. Finally, BIR Revenue
Memorandum Circular 63-2010 (BIR RMC 63-2010), which directs toll companies to record
an accumulated input VAT of zero balance in their books as of August 16, 2010,
contravenes Section 111 of the NIRC which grants entities that first become liable to VAT a
transitional input tax credit of 2% on beginning inventory. For this reason, the VAT on toll
fees cannot be implemented.
The Issues Presented
The case presents two procedural issues:
1. Whether or not the Court may treat the petition for declaratory relief as one for
prohibition; and
2. Whether or not petitioners Diaz and Timbol have legal standing to file the
action.
The case also presents two substantive issues:
1. Whether or not the government is unlawfully expanding VAT coverage by
including tollway operators and tollway operations in the terms "franchise
grantees" and "sale of services" under Section 108 of the Code; and
2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax
on tax and not a tax on services; b) will impair the tollway operators right to a
reasonable return of investment under their TOAs; and c) is not administratively
feasible and cannot be implemented.

The Courts Rulings

A. On the Procedural Issues:
On August 24, 2010 the Court issued a resolution, treating the petition as one for prohibition
rather than one for declaratory relief, the characterization that petitioners Diaz and Timbol
gave their action. The government has sought reconsideration of the Courts
resolution,7 however, arguing that petitioners allegations clearly made out a case for
declaratory relief, an action over which the Court has no original jurisdiction. The
government adds, moreover, that the petition does not meet the requirements of Rule 65 for
actions for prohibition since the BIR did not exercise judicial, quasi-judicial, or ministerial
functions when it sought to impose VAT on toll fees. Besides, petitioners Diaz and Timbol
has a plain, speedy, and adequate remedy in the ordinary course of law against the BIR
action in the form of an appeal to the Secretary of Finance.
But there are precedents for treating a petition for declaratory relief as one for prohibition if
the case has far-reaching implications and raises questions that need to be resolved for the
public good.8 The Court has also held that a petition for prohibition is a proper remedy to
prohibit or nullify acts of executive officials that amount to usurpation of legislative authority. 9
Here, the imposition of VAT on toll fees has far-reaching implications. Its imposition would
impact, not only on the more than half a million motorists who use the tollways everyday, but
more so on the governments effort to raise revenue for funding various projects and for
reducing budgetary deficits.
To dismiss the petition and resolve the issues later, after the challenged VAT has been
imposed, could cause more mischief both to the tax-paying public and the government. A
belated declaration of nullity of the BIR action would make any attempt to refund to the
motorists what they paid an administrative nightmare with no solution. Consequently, it is
not only the right, but the duty of the Court to take cognizance of and resolve the issues that
the petition raises.
Although the petition does not strictly comply with the requirements of Rule 65, the Court
has ample power to waive such technical requirements when the legal questions to be
resolved are of great importance to the public. The same may be said of the requirement of
locus standi which is a mere procedural requisite. 10
B. On the Substantive Issues:
One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT is levied,
assessed, and collected, according to Section 108, on the gross receipts derived from the
sale or exchange of services as well as from the use or lease of properties. The third
paragraph of Section 108 defines "sale or exchange of services" as follows:

The phrase sale or exchange of services means the performance of all kinds of services in
the Philippines for others for a fee, remuneration or consideration, including those
performed or rendered by construction and service contractors; stock, real estate,
commercial, customs and immigration brokers; lessors of property, whether personal or real;
warehousing services; lessors or distributors of cinematographic films; persons engaged in
milling, processing, manufacturing or repacking goods for others; proprietors, operators or
keepers of hotels, motels, resthouses, pension houses, inns, resorts; proprietors or
operators of restaurants, refreshment parlors, cafes and other eating places, including clubs
and caterers; dealers in securities; lending investors; transportation contractors on their
transport of goods or cargoes, including persons who transport goods or cargoes for hire
and other domestic common carriers by land relative to their transport of goods or cargoes;
common carriers by air and sea relative to their transport of passengers, goods or cargoes
from one place in the Philippines to another place in the Philippines; sales of electricity by
generation companies, transmission, and distribution companies; services of franchise
grantees of electric utilities, telephone and telegraph, radio and television broadcasting and
all other franchise grantees except those under Section 119 of this Code and non-life
insurance companies (except their crop insurances), including surety, fidelity, indemnity and
bonding companies; and similar services regardless of whether or not the performance
thereof calls for the exercise or use of the physical or mental faculties. (Underscoring
supplied)
It is plain from the above that the law imposes VAT on "all kinds of services" rendered in the
Philippines for a fee, including those specified in the list. The enumeration of affected
services is not exclusive.11 By qualifying "services" with the words "all kinds," Congress has
given the term "services" an all-encompassing meaning. The listing of specific services are
intended to illustrate how pervasive and broad is the VATs reach rather than establish
concrete limits to its application. Thus, every activity that can be imagined as a form of
"service" rendered for a fee should be deemed included unless some provision of law
especially excludes it.
Now, do tollway operators render services for a fee? Presidential Decree (P.D.) 1112 or the
Toll Operation Decree establishes the legal basis for the services that tollway operators
render. Essentially, tollway operators construct, maintain, and operate expressways, also
called tollways, at the operators expense. Tollways serve as alternatives to regular public
highways that meander through populated areas and branch out to local roads. Traffic in the
regular public highways is for this reason slow-moving. In consideration for constructing
tollways at their expense, the operators are allowed to collect government-approved fees
from motorists using the tollways until such operators could fully recover their expenses and
earn reasonable returns from their investments.
When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latters
use of the tollway facilities over which the operator enjoys private proprietary rights 12 that its
contract and the law recognize. In this sense, the tollway operator is no different from the
following service providers under Section 108 who allow others to use their properties or
facilities for a fee:

1. Lessors of property, whether personal or real;

2. Warehousing service operators;
3. Lessors or distributors of cinematographic films;
4. Proprietors, operators or keepers of hotels, motels, resthouses, pension
houses, inns, resorts;
5. Lending investors (for use of money);
6. Transportation contractors on their transport of goods or cargoes, including
persons who transport goods or cargoes for hire and other domestic common
carriers by land relative to their transport of goods or cargoes; and
7. Common carriers by air and sea relative to their transport of passengers,
goods or cargoes from one place in the Philippines to another place in the
Philippines.
It does not help petitioners cause that Section 108 subjects to VAT "all kinds of services"
rendered for a fee "regardless of whether or not the performance thereof calls for the
exercise or use of the physical or mental faculties." This means that "services" to be subject
to VAT need not fall under the traditional concept of services, the personal or professional
kinds that require the use of human knowledge and skills.
And not only do tollway operators come under the broad term "all kinds of services," they
also come under the specific class described in Section 108 as "all other franchise
grantees" who are subject to VAT, "except those under Section 119 of this Code."
Tollway operators are franchise grantees and they do not belong to exceptions (the lowincome radio and/or television broadcasting companies with gross annual incomes of less
than P10 million and gas and water utilities) that Section 119 13 spares from the payment of
VAT. The word "franchise" broadly covers government grants of a special right to do an act
or series of acts of public concern.14
Petitioners of course contend that tollway operators cannot be considered "franchise
grantees" under Section 108 since they do not hold legislative franchises. But nothing in
Section 108 indicates that the "franchise grantees" it speaks of are those who hold
legislative franchises. Petitioners give no reason, and the Court cannot surmise any, for
making a distinction between franchises granted by Congress and franchises granted by
some other government agency. The latter, properly constituted, may grant franchises.
Indeed, franchises conferred or granted by local authorities, as agents of the state,
constitute as much a legislative franchise as though the grant had been made by Congress

itself.15 The term "franchise" has been broadly construed as referring, not only to
authorizations that Congress directly issues in the form of a special law, but also to those
granted by administrative agencies to which the power to grant franchises has been
delegated by Congress.16
Tollway operators are, owing to the nature and object of their business, "franchise
grantees." The construction, operation, and maintenance of toll facilities on public
improvements are activities of public consequence that necessarily require a special grant
of authority from the state. Indeed, Congress granted special franchise for the operation of
tollways to the Philippine National Construction Company, the former tollway concessionaire
for the North and South Luzon Expressways. Apart from Congress, tollway franchises may
also be granted by the TRB, pursuant to the exercise of its delegated powers under P.D.
1112.17 The franchise in this case is evidenced by a "Toll Operation Certificate." 18
Petitioners contend that the public nature of the services rendered by tollway operators
excludes such services from the term "sale of services" under Section 108 of the Code. But,
again, nothing in Section 108 supports this contention. The reverse is true. In specifically
including by way of example electric utilities, telephone, telegraph, and broadcasting
companies in its list of VAT-covered businesses, Section 108 opens other companies
rendering public service for a fee to the imposition of VAT. Businesses of a public nature
such as public utilities and the collection of tolls or charges for its use or service is a
franchise.19
Nor can petitioners cite as binding on the Court statements made by certain lawmakers in
the course of congressional deliberations of the would-be law. As the Court said in South
African Airways v. Commissioner of Internal Revenue, 20 "statements made by individual
members of Congress in the consideration of a bill do not necessarily reflect the sense of
that body and are, consequently, not controlling in the interpretation of law." The
congressional will is ultimately determined by the language of the law that the lawmakers
voted on. Consequently, the meaning and intention of the law must first be sought "in the
words of the statute itself, read and considered in their natural, ordinary, commonly
accepted and most obvious significations, according to good and approved usage and
without resorting to forced or subtle construction."
Two. Petitioners argue that a toll fee is a "users tax" and to impose VAT on toll fees is
tantamount to taxing a tax.21 Actually, petitioners base this argument on the following
discussion in Manila International Airport Authority (MIAA) v. Court of Appeals: 22
No one can dispute that properties of public dominion mentioned in Article 420 of the Civil
Code, like "roads, canals, rivers, torrents, ports and bridges constructed by the State," are
owned by the State. The term "ports" includes seaports and airports. The MIAA Airport
Lands and Buildings constitute a "port" constructed by the State. Under Article 420 of the
Civil Code, the MIAA Airport Lands and Buildings are properties of public dominion and thus
owned by the State or the Republic of the Philippines.

x x x The operation by the government of a tollway does not change the character of the
road as one for public use. Someone must pay for the maintenance of the road, either the
public indirectly through the taxes they pay the government, or only those among the public
who actually use the road through the toll fees they pay upon using the road. The tollway
system is even a more efficient and equitable manner of taxing the public for the
maintenance of public roads.
The charging of fees to the public does not determine the character of the property whether
it is for public dominion or not. Article 420 of the Civil Code defines property of public
dominion as "one intended for public use."Even if the government collects toll fees, the road
is still "intended for public use" if anyone can use the road under the same terms and
conditions as the rest of the public. The charging of fees, the limitation on the kind of
vehicles that can use the road, the speed restrictions and other conditions for the use of the
road do not affect the public character of the road.
The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to
airlines, constitute the bulk of the income that maintains the operations of MIAA. The
collection of such fees does not change the character of MIAA as an airport for public use.
Such fees are often termed users tax. This means taxing those among the public who
actually use a public facility instead of taxing all the public including those who never use
the particular public facility. A users tax is more equitable a principle of taxation mandated
in the 1987 Constitution."23 (Underscoring supplied)
Petitioners assume that what the Court said above, equating terminal fees to a "users tax"
must also pertain to tollway fees. But the main issue in the MIAA case was whether or not
Paraaque City could sell airport lands and buildings under MIAA administration at public
auction to satisfy unpaid real estate taxes. Since local governments have no power to tax
the national government, the Court held that the City could not proceed with the auction
sale. MIAA forms part of the national government although not integrated in the department
framework."24 Thus, its airport lands and buildings are properties of public dominion beyond
the commerce of man under Article 420(1)25 of the Civil Code and could not be sold at public
auction.
As can be seen, the discussion in the MIAA case on toll roads and toll fees was made, not
to establish a rule that tollway fees are users tax, but to make the point that airport lands
and buildings are properties of public dominion and that the collection of terminal fees for
their use does not make them private properties. Tollway fees are not taxes. Indeed, they
are not assessed and collected by the BIR and do not go to the general coffers of the
government.
It would of course be another matter if Congress enacts a law imposing a users tax,
collectible from motorists, for the construction and maintenance of certain roadways. The
tax in such a case goes directly to the government for the replenishment of resources it
spends for the roadways. This is not the case here. What the government seeks to tax here
are fees collected from tollways that are constructed, maintained, and operated by private

tollway operators at their own expense under the build, operate, and transfer scheme that
the government has adopted for expressways.26 Except for a fraction given to the
government, the toll fees essentially end up as earnings of the tollway operators.
In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes in
any sense. A tax is imposed under the taxing power of the government principally for the
purpose of raising revenues to fund public expenditures. 27 Toll fees, on the other hand, are
collected by private tollway operators as reimbursement for the costs and expenses
incurred in the construction, maintenance and operation of the tollways, as well as to assure
them a reasonable margin of income. Although toll fees are charged for the use of public
facilities, therefore, they are not government exactions that can be properly treated as a tax.
Taxes may be imposed only by the government under its sovereign authority, toll fees may
be demanded by either the government or private individuals or entities, as an attribute of
ownership.28
Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the nature
of VAT as an indirect tax. In indirect taxation, a distinction is made between the liability for
the tax and burden of the tax. The seller who is liable for the VAT may shift or pass on the
amount of VAT it paid on goods, properties or services to the buyer. In such a case, what is
transferred is not the sellers liability but merely the burden of the VAT.29
Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer
bears its burden since the amount of VAT paid by the former is added to the selling price.
Once shifted, the VAT ceases to be a tax30and simply becomes part of the cost that the
buyer must pay in order to purchase the good, property or service.
Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the
tollway operator. Under Section 105 of the Code, 31 VAT is imposed on any person who, in
the course of trade or business, sells or renders services for a fee. In other words, the seller
of services, who in this case is the tollway operator, is the person liable for VAT. The latter
merely shifts the burden of VAT to the tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were
deemed as a "users tax." VAT is assessed against the tollway operators gross receipts and
not necessarily on the toll fees. Although the tollway operator may shift the VAT burden to
the tollway user, it will not make the latter directly liable for the VAT. The shifted VAT burden
simply becomes part of the toll fees that one has to pay in order to use the tollways. 32
Three. Petitioner Timbol has no personality to invoke the non-impairment of contract clause
on behalf of private investors in the tollway projects. She will neither be prejudiced by nor be
affected by the alleged diminution in return of investments that may result from the VAT
imposition. She has no interest at all in the profits to be earned under the TOAs. The
interest in and right to recover investments solely belongs to the private tollway investors.

Besides, her allegation that the private investors rate of recovery will be adversely affected
by imposing VAT on tollway operations is purely speculative. Equally presumptuous is her
assertion that a stipulation in the TOAs known as the Material Adverse Grantor Action will be
activated if VAT is thus imposed. The Court cannot rule on matters that are manifestly
conjectural. Neither can it prohibit the State from exercising its sovereign taxing power
based on uncertain, prophetic grounds.
Four. Finally, petitioners assert that the substantiation requirements for claiming input VAT
make the VAT on tollway operations impractical and incapable of implementation. They cite
the fact that, in order to claim input VAT, the name, address and tax identification number of
the tollway user must be indicated in the VAT receipt or invoice. The manner by which the
BIR intends to implement the VAT by rounding off the toll rate and putting any excess
collection in an escrow account is also illegal, while the alternative of giving "change" to
thousands of motorists in order to meet the exact toll rate would be a logistical nightmare.
Thus, according to them, the VAT on tollway operations is not administratively feasible. 33
Administrative feasibility is one of the canons of a sound tax system. It simply means that
the tax system should be capable of being effectively administered and enforced with the
least inconvenience to the taxpayer. Non-observance of the canon, however, will not render
a tax imposition invalid "except to the extent that specific constitutional or statutory
limitations are impaired."34 Thus, even if the imposition of VAT on tollway operations may
seem burdensome to implement, it is not necessarily invalid unless some aspect of it is
shown to violate any law or the Constitution.
Here, it remains to be seen how the taxing authority will actually implement the VAT on
tollway operations. Any declaration by the Court that the manner of its implementation is
illegal or unconstitutional would be premature. Although the transcript of the August 12,
2010 Senate hearing provides some clue as to how the BIR intends to go about it, 35 the
facts pertaining to the matter are not sufficiently established for the Court to pass judgment
on. Besides, any concern about how the VAT on tollway operations will be enforced must
first be addressed to the BIR on whom the task of implementing tax laws primarily and
exclusively rests. The Court cannot preempt the BIRs discretion on the matter, absent any
clear violation of law or the Constitution.
For the same reason, the Court cannot prematurely declare as illegal, BIR RMC 63-2010
which directs toll companies to record an accumulated input VAT of zero balance in their
books as of August 16, 2010, the date when the VAT imposition was supposed to take
effect. The issuance allegedly violates Section 111(A) 36 of the Code which grants first time
VAT payers a transitional input VAT of 2% on beginning inventory.
In this connection, the BIR explained that BIR RMC 63-2010 is actually the product of
negotiations with tollway operators who have been assessed VAT as early as 2005, but
failed to charge VAT-inclusive toll fees which by now can no longer be collected. The tollway
operators agreed to waive the 2% transitional input VAT, in exchange for cancellation of their
past due VAT liabilities. Notably, the right to claim the 2% transitional input VAT belongs to

the tollway operators who have not questioned the circulars validity. They are thus the ones
who have a right to challenge the circular in a direct and proper action brought for the
purpose.
Conclusion
In fine, the Commissioner of Internal Revenue did not usurp legislative prerogative or
expand the VAT laws coverage when she sought to impose VAT on tollway operations.
Section 108(A) of the Code clearly states that services of all other franchise grantees are
subject to VAT, except as may be provided under Section 119 of the Code. Tollway
operators are not among the franchise grantees subject to franchise tax under the latter
provision. Neither are their services among the VAT-exempt transactions under Section 109
of the Code.
If the legislative intent was to exempt tollway operations from VAT, as petitioners so strongly
allege, then it would have been well for the law to clearly say so. Tax exemptions must be
justified by clear statutory grant and based on language in the law too plain to be
mistaken.37 But as the law is written, no such exemption obtains for tollway operators. The
Court is thus duty-bound to simply apply the law as it is found.1avvphi1

Lastly, the grant of tax exemption is a matter of legislative policy that is within the exclusive
prerogative of Congress. The Courts role is to merely uphold this legislative policy, as
reflected first and foremost in the language of the tax statute. Thus, any unwarranted
burden that may be perceived to result from enforcing such policy must be properly referred
to Congress. The Court has no discretion on the matter but simply applies the law.
The VAT on franchise grantees has been in the statute books since 1994 when R.A. 7716 or
the Expanded Value-Added Tax law was passed. It is only now, however, that the executive
has earnestly pursued the VAT imposition against tollway operators. The executive
exercises exclusive discretion in matters pertaining to the implementation and execution of
tax laws. Consequently, the executive is more properly suited to deal with the immediate
and practical consequences of the VAT imposition.
WHEREFORE, the Court DENIES respondents Secretary of Finance and Commissioner of
Internal Revenues motion for reconsideration of its August 24, 2010 resolution, DISMISSES
the petitioners Renato V. Diaz and Aurora Ma. F. Timbols petition for lack of merit, and
SETS ASIDE the Courts temporary restraining order dated August 13, 2010.
SO ORDERED.