Cases

G.R. No.
L-29059 December 15, 1987

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
CEBU PORTLAND CEMENT COMPANY and COURT OF TAX APPEALS, respondents.
By virtue of a decision of the Court of Tax Appeals rendered on June 21, 1961, as modified on
appeal by the Supreme Court on February 27, 1965, the Commissioner of Internal Revenue was
ordered to refund to the Cebu Portland Cement Company the amount of P 359,408.98, representing
overpayments of ad valorem taxes on cement produced and sold by it after October 1957. 1
On March 28, 1968, following denial of motions for reconsideration filed by both the petitioner and
the private respondent, the latter moved for a writ of execution to enforce the said judgment . 2
The motion was opposed by the petitioner on the ground that the private respondent had an
outstanding sales tax liability to which the judgment debt had already been credited. In fact, it was
stressed, there was still a balance owing on the sales taxes in the amount of P 4,789,279.85 plus
28% surcharge. 3
On April 22, 1968, the Court of Tax Appeals * granted the motion, holding that the alleged sales tax liability of the private
respondent was still being questioned and therefore could not be set-off against the refund.
In his petition to review the said resolution, the Commissioner of Internal Revenue claims that the
refund should be charged against the tax deficiency of the private respondent on the sales of cement
under Section 186 of the Tax Code. His position is that cement is a manufactured and not a mineral
product and therefore not exempt from sales taxes. He adds that enforcement of the said tax
deficiency was properly effected through his power of distraint of personal property under Sections
316 and 318 5 of the said Code and, moreover, the collection of any national internal revenue tax may not
be enjoined under Section 305, 6 subject only to the exception prescribed in Rep. Act No. 1125. 7 This is
not applicable to the instant case. The petitioner also denies that the sales tax assessments have already
prescribed because the prescriptive period should be counted from the filing of the sales tax returns,
which had not yet been done by the private respondent.
For its part, the private respondent disclaims liability for the sales taxes, on the ground that cement
is not a manufactured product but a mineral product. 8 As such, it was exempted from sales taxes
under Section 188 of the Tax Code after the effectivity of Rep. Act No. 1299 on June 16, 1955, in
accordance with Cebu Portland Cement Co. v. Collector of Internal Revenue, 9 decided in 1968. Here
Justice Eugenio Angeles declared that "before the effectivity of Rep. Act No. 1299, amending Section 246
of the National Internal Revenue Code, cement was taxable as a manufactured product under Section
186, in connection with Section 194(4) of the said Code," thereby implying that it was not considered a
manufactured product afterwards. Also, the alleged sales tax deficiency could not as yet be enforced
against it because the tax assessment was not yet final, the same being still under protest and still to be
definitely resolved on the merits. Besides, the assessment had already prescribed, not having been made
within the reglementary five-year period from the filing of the tax returns. 10
Our ruling is that the sales tax was properly imposed upon the private respondent for the reason that
cement has always been considered a manufactured product and not a mineral product. This matter
was extensively discussed and categorically resolved in Commissioner of Internal Revenue v.

Republic Cement Corporation, 11 decided on August 10, 1983, where Justice Efren L. Plana, after an exhaustive review of the
pertinent cases, declared for a unanimous Court:
From all the foregoing cases, it is clear that cement qua cement was never
considered as a mineral product within the meaning of Section 246 of the Tax Code,
notwithstanding that at least 80% of its components are minerals, for the simple
reason that cement is the product of a manufacturingprocess and is no longer the
mineral product contemplated in the Tax Code (i.e.; minerals subjected to simple
treatments) for the purpose of imposing the ad valorem tax.
What has apparently encouraged the herein respondents to maintain their present
posture is the case of Cebu Portland Cement Co. v. Collector of Internal Revenue, L20563, Oct. 29, 1968 (28 SCRA 789) penned by Justice Eugenio Angeles. For some
portions of that decision give the impression that Republic Act No. 1299, which
amended Section 246, reclassified cement as a mineral product that was not subject
to sales tax. ...
xxx xxx xxx
After a careful study of the foregoing, we conclude that reliance on the decision
penned by Justice Angeles is misplaced. The said decision is no authority for the
proposition that after the enactment of Republic Act No. 1299 in 1955 (defining
mineral product as things with at least 80% mineral content), cement became a
'mineral product," as distinguished from a "manufactured product," and therefore
ceased to be subject to sales tax. It was not necessary for the Court to so rule. It was
enough for the Court to say in effect that even assuming Republic Act No. 1299 had
reclassified cement was a mineral product, the reclassification could not be given
retrospective application (so as to justify the refund of sales taxes paid before
Republic Act 1299 was adopted) because laws operate prospectively only, unless the
legislative intent to the contrary is manifest, which was not so in the case of Republic
Act 1266. [The situation would have been different if the Court instead had ruled in
favor of refund, in which case it would have been absolutely necessary (1) to make
an unconditional ruling that Republic Act 1299 re-classified cement as a mineral
product (not subject to sales tax), and (2) to declare the law retroactive, as a basis
for granting refund of sales tax paid before Republic Act 1299.]
In any event, we overrule the CEPOC decision of October 29, 1968 (G.R. No. L20563) insofar as its pronouncements or any implication therefrom conflict with the
instant decision.
The above views were reiterated in the resolution
12 denying reconsideration of the said decision, thus:
The nature of cement as a "manufactured product" (rather than a "mineral product")

is well-settled. The issue has repeatedly presented itself as a threshold question for
determining the basis for computing the ad valorem mining tax to be paid by cement
Companies. No pronouncement was made in these cases that as a "manufactured

product" cement is subject to sales tax because this was not at issue.
The decision sought to be reconsidered here referred to the legislative history of
Republic Act No. 1299 which introduced a definition of the terms "mineral" and
"mineral products" in Sec. 246 of the Tax Code. Given the legislative intent, the
holding in the CEPOC case (G.R. No. L-20563) that cement was subject to sales tax
prior to the effectivity f Republic Act No. 1299 cannot be construed to mean that,
after the law took effect, cement ceased to be so subject to the tax. To erase any and
all misconceptions that may have been spawned by reliance on the case of Cebu
Portland Cement Co. v. Collector of Internal Revenue, L-20563, October 29, 1968
(28 SCRA 789) penned by Justice Eugenio Angeles, the Court has expressly
overruled it insofar as it may conflict with the decision of August 10, 1983, now
subject of these motions for reconsideration.
On the question of prescription, the private respondent claims that the five-year reglementary period
for the assessment of its tax liability started from the time it filed its gross sales returns on June 30,
1962. Hence, the assessment for sales taxes made on January 16, 1968 and March 4, 1968, were
already out of time. We disagree. This contention must fail for what CEPOC filed was not the sales
returns required in Section 183(n) but the ad valorem tax returns required under Section 245 of the
Tax Code. As Justice Irene R. Cortes emphasized in the aforestated resolution:
In order to avail itself of the benefits of the five-year prescription period under Section
331 of the Tax Code, the taxpayer should have filed the required return for the tax
involved, that is, a sales tax return. (Butuan Sawmill, Inc. v. CTA, et al., G.R. No. L21516, April 29, 1966, 16 SCRA 277). Thus CEPOC should have filed sales tax
returns of its gross sales for the subject periods. Both parties admit that returns were
made for the ad valorem mining tax. CEPOC argues that said returns contain the
information necessary for the assessment of the sales tax. The Commissioner does
not consider such returns as compliance with the requirement for the filing of tax
returns so as to start the running of the five-year prescriptive period.
We agree with the Commissioner. It has been held in Butuan Sawmill Inc. v. CTA,
supra, that the filing of an income tax return cannot be considered as substantial
compliance with the requirement of filing sales tax returns, in the same way that an
income tax return cannot be considered as a return for compensating tax for the
purpose of computing the period of prescription under Sec. 331. (Citing Bisaya Land
Transportation Co., Inc. v. Collector of Internal Revenue, G.R. Nos. L-12100 and L11812, May 29, 1959). There being no sales tax returns filed by CEPOC, the statute
of stations in Sec. 331 did not begin to run against the government. The assessment
made by the Commissioner in 1968 on CEPOC's cement sales during the period
from July 1, 1959 to December 31, 1960 is not barred by the five-year prescriptive
period. Absent a return or when the return is false or fraudulent, the applicable period
is ten (10) days from the discovery of the fraud, falsity or omission. The question in
this case is: When was CEPOC's omission to file tha return deemed discovered by
the government, so as to start the running of said period? 13
The argument that the assessment cannot as yet be enforced because it is still being contested
loses sight of the urgency of the need to collect taxes as "the lifeblood of the government." If the
payment of taxes could be postponed by simply questioning their validity, the machinery of the state
would grind to a halt and all government functions would be paralyzed. That is the reason why, save
for the exception already noted, the Tax Code provides:
Sec. 291. Injunction not available to restrain collection of tax. No court shall have
authority to grant an injunction to restrain the collection of any national internal
revenue tax, fee or charge imposed by this Code.
It goes without saying that this injunction is available not only when the assessment is already being
questioned in a court of justice but more so if, as in the instant case, the challenge to the
assessment is still-and only-on the administrative level. There is all the more reason to apply the rule
here because it appears that even after crediting of the refund against the tax deficiency, a balance
of more than P 4 million is still due from the private respondent.
To require the petitioner to actually refund to the private respondent the amount of the judgment
debt, which he will later have the right to distrain for payment of its sales tax liability is in our view an
Idle ritual. We hold that the respondent Court of Tax Appeals erred in ordering such a charade.
WHEREFORE, the petition is GRANTED. The resolution dated April 22, 1968, in CTA Case No. 786
is SET ASIDE, without any pronouncement as to costs.

vs.
SEKISUI JUSHI PHILIPPINES, INC., respondent.
Business enterprises registered with the Philippine Export Zone Authority (PEZA) may choose
between two fiscal incentive schemes: (1) to pay a five percent preferential tax rate on its gross
income and thus be exempt from all other taxes; or (b) to enjoy an income tax holiday, in which case
it is not exempt from applicable national revenue taxes including the value-added tax (VAT). The
present respondent, which availed itself of the second tax incentive scheme, has proven that all its
transactions were export sales. Hence, they should be VAT zero-rated.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, challenging the August 16,
2001 Decision2 of the Court of Appeals (CA) in CA-GR SP No. 64679. The assailed Decision upheld
the April 26, 2001 Decision3 of the Court of Tax Appeals (CTA) in CTA Case No. 5751. The CA
Decision disposed as follows:
"WHEREFORE, premises considered, the present petition for review is hereby DENIED DUE
COURSE and accordingly DISMISSED for lack of merit. The Decision dated April 26, 2001 of
the Court of Tax Appeals in CTA Case No. 5751 is hereby AFFIRMED and UPHELD." 4
On the other hand, the dispositive portion of the CTA Decision reads:
"WHEREFORE, the instant Petition for Review is PARTIALLY GRANTED. [Petitioner] is
hereby ordered to refund or to issue a Tax Credit Certificate in favor of the [Respondent] in
the amount of P4,377,102.26 representing excess input taxes paid for the period covering
January 1 to June 30, 1997."5
The Facts
The uncontested6 facts are narrated by the CA as follows:
"Respondent is a domestic corporation duly organized and existing under and by virtue of
the laws of the Philippines with principal office located at the Special Export Processing
Zone, Laguna Technopark, Bian, Laguna. It is principally engaged in the business of
manufacturing, importing, exporting, buying, selling, or otherwise dealing in, at wholesale
such goods as strapping bands and other packaging materials and goods of similar nature,
and any and all equipment, materials, supplies used or employed in or related to the
manufacture of such finished products.
"Having registered with the Bureau of Internal Revenue (BIR) as a value-added tax (VAT)
taxpayer, respondent filed its quarterly returns with the BIR, for the period January 1 to June
30, 1997, reflecting therein input taxes in the amount of P4,631,132.70 paid by it in
connection with its domestic purchase of capital goods and services. Said input taxes
remained unutilized since respondent has not engaged in any business activity or
transaction for which it may be liable for output tax and for which said input taxes may be
credited.
"On November 11, 1998, respondent filed with the One-Stop-Shop Inter-Agency Tax Credit
and Duty Drawback Center of the Department of Finance (CENTER-DOF) two (2) separate
applications for tax credit/refund of VAT input taxes paid for the period January 1 to March
31, 1997 and April 1 to June 30, 1997, respectively. There being no action on its application
for tax credit/refund under Section 112 (B) of the 1997 National Internal Revenue Code (Tax
Code), as amended, private respondent filed, within the two (2)-year prescriptive period
under Section 229 of said Code, a petition for review with the Court of Tax Appeals on March
26, 1999.
"Petitioner filed its Answer to the petition asseverating that: (1) said claim for tax credit/refund
is subject to administrative routinary investigation by the BIR; (2) respondent miserably failed
to show that the amount claimed as VAT input taxes were erroneously collected or that the
same were properly documented; (3) taxes due and collected are presumed to have been
made in accordance with law, hence, not refundable; (4) the burden of proof is on the
taxpayer to establish his right to a refund in an action for tax refund. Failure to discharge
such duty is fatal to his action; (5) respondent should show that it complied with the
provisions of Section 204 in relation to Section 229 of the 1997 Tax Code; and (6) claims for
refund are strictly construed against the taxpayer as it partakes of the nature of a tax
exemption. Hence, petitioner prayed for the denial of respondents petition." 7
Ruling of the Court of Tax Appeals

The CTA ruled that respondent was entitled to the refund. While the company was registered with
the PEZA as an ecozone and was, as such, exempt from income tax, it availed itself of the fiscal
incentive under Executive Order No. 226. It thereby subjected itself to other internal revenue taxes
like the VAT.8 The CTA then found that only input taxes amounting to P4,377,102.26 were duly
substantiated by invoices and Official Receipts,9 while those amounting to P254,313.43 had not
been sufficiently proven and were thus disallowed. 10
Ruling of the Court of Appeals
The Court of Appeals upheld the Decision of the CTA. According to the CA, respondent had
complied with the procedural and substantive requirements for a claim by 1) submitting receipts,
invoices, and supporting papers as evidence; 2) paying the subject input taxes on capital goods; 3)
not applying the input taxes against any output tax liability; and 4) filing the claim within the two-year
prescriptive period under Section 229 of the 1997 Tax Code. 11
Hence, this Petition.12
The Issue
Petitioner raises this sole issue for our consideration:
"Whether or not respondent is entitled to the refund or issuance of tax credit certificate in the
amount ofP4,377,102.26 as alleged unutilized input taxes paid on domestic purchase of
capital goods and services for the period covering January 1 to June 30, 1997." 13
The Courts Ruling
The Petition has no merit.
Sole Issue:
Entitlement to Refund
To support the issue raised, petitioner advances the following arguments:
"I. The Court of Appeals erred in not holding that respondent being registered with the
Philippine Economic Zone Authority (PEZA) as an [e]cozone [e]xport [e]nterprise, its
business is not subject to VAT pursuant to Section 24 of Republic Act No. 7916 in relation to
Section 103 (now Sec. 109) of the Tax Code, as amended by R.A. 7716.
"II. The Court of Appeals erred in not holding that since respondent is EXEMPT from ValueAdded Tax (VAT), the capital goods and services it purchased are considered not used in
VAT taxable business, hence, is not allowed any tax credit/refund on VAT input tax previously
paid on such capital goods pursuant to Section 4.106-1 of Revenue Regulations No. 7-95,
and of input taxes paid on services pursuant to Section 4.103-1 of the same regulations.
"III. The Court of Appeals erred in not holding that tax refunds being in the nature of tax
exemptions are construed strictissimi juris against claimants."14
These issues have previously been addressed by this Court in Commissioner of Internal Revenue v.
Toshiba Information Equipment (Phils.),15 Commissioner of Internal Revenue v. Cebu Toyo
Corporation,16 andCommissioner of Internal Revenue v. Seagate Technology (Philippines).17
An entity registered with the PEZA as an ecozone18 may be covered by the VAT system. Section 23
of Republic Act 7916, as amended, gives a PEZA-registered enterprise the option to choose
between two fiscal incentives: a) a five percent preferential tax rate on its gross income under the
said law; or b) an income tax holiday provided under Executive Order No. 226 or the Omnibus
Investment Code of 1987, as amended. If the entity avails itself of the five percent preferential tax
rate under the first scheme, it is exempt from all taxes, including the VAT;19 under the second, it is
exempt from income taxes for a number of years,20 but not from other national internal revenue taxes
like the VAT.21
The CA and CTA found that respondent had availed itself of the fiscal incentive of an income tax
holiday under Executive Order No. 226. This Court respects that factual finding. Absent a sufficient
showing of error, findings of the CTA as affirmed by the CA are deemed conclusive. 22 Moreover, a
perusal of the pleadings and supporting documents before us indicates that when it registered as a
VAT-entity -- a fact admitted by the parties -- respondent intended to avail itself of the income tax
holiday.23 Verily, being a question of fact, the type of fiscal incentive chosen cannot be a subject of
this Petition, which should raise only questions of law.
By availing itself of the income tax holiday, respondent became subject to the VAT. It correctly
registered as a VAT taxpayer, because its transactions were not VAT-exempt.
Notably, while an ecozone is geographically within the Philippines, it is deemed a separate customs
territory24 and is regarded in law as foreign soil.25 Sales by suppliers from outside the borders of the
ecozone to this separate customs territory are deemed as exports 26 and treated as export
sales.27 These sales are zero-rated or subject to a tax rate of zero percent. 28
Notwithstanding the fact that its purchases should have been zero-rated, respondent was able to
prove that it had paid input taxes in the amount of P4,377,102.26. The CTA found, and the CA
affirmed, that this amount was substantially supported by invoices and Official Receipts; 29 and
petitioner has not challenged the computation. Accordingly, this Court upholds the findings of the
CTA and the CA.
On the other hand, since 100 percent of the products of respondent are exported, 30 all its
transactions are deemed export sales and are thus VAT zero-rated. It has been shown that
respondent has no output tax with which it could offset its paid input tax. 31 Since the subject input tax
it paid for its domestic purchases of capital goods and services remained unutilized, it can claim a
refund for the input VAT previously charged by its suppliers. 32 The amount of P4,377,102.26 is
excess input taxes that justify a refund.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. No costs, as
petitioner is a government agency.
SO ORDERED.
G.R. No. 146984
July 28, 2006

vs.
MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM LIMITED OF THE MARDEN
GROUP (HK) and NATIONAL DEVELOPMENT COMPANY, respondents.
DECISION
TINGA, J.:
The issue in this present petition is whether the sale by the National Development Company (NDC)
of five (5) of its vessels to the private respondents is subject to value-added tax (VAT) under the
National Internal Revenue Code of 1986 (Tax Code) then prevailing at the time of the sale. The
Court of Tax Appeals (CTA) and the Court of Appeals commonly ruled that the sale is not subject to
VAT. We affirm, though on a more unequivocal rationale than that utilized by the rulings under
review. The fact that the sale was not in the course of the trade or business of NDC is sufficient in
itself to declare the sale as outside the coverage of VAT.
The facts are culled primarily from the ruling of the CTA.
Pursuant to a government program of privatization, NDC decided to sell to private enterprise all of its
shares in its wholly-owned subsidiary the National Marine Corporation (NMC). The NDC decided to
sell in one lot its NMC shares and five (5) of its ships, which are 3,700 DWT Tween-Decker,
"Kloeckner" type vessels.1 The vessels were constructed for the NDC between 1981 and 1984, then
initially leased to Luzon Stevedoring Company, also its wholly-owned subsidiary. Subsequently, the
vessels were transferred and leased, on a bareboat basis, to the NMC. 2
The NMC shares and the vessels were offered for public bidding. Among the stipulated terms and
conditions for the public auction was that the winning bidder was to pay "a value added tax of 10%
on the value of the vessels."3On 3 June 1988, private respondent Magsaysay Lines, Inc. (Magsaysay
Lines) offered to buy the shares and the vessels for P168,000,000.00. The bid was made by
Magsaysay Lines, purportedly for a new company still to be formed composed of itself, Baliwag
Navigation, Inc., and FIM Limited of the Marden Group based in Hongkong (collectively, private
respondents).4 The bid was approved by the Committee on Privatization, and a Notice of Award
dated 1 July 1988 was issued to Magsaysay Lines.
On 28 September 1988, the implementing Contract of Sale was executed between NDC, on one
hand, and Magsaysay Lines, Baliwag Navigation, and FIM Limited, on the other. Paragraph 11.02 of
the contract stipulated that "[v]alue-added tax, if any, shall be for the account of the
PURCHASER."5 Per arrangement, an irrevocable confirmed Letter of Credit previously filed as
bidders bond was accepted by NDC as security for the payment of VAT, if any. By this time, a formal
request for a ruling on whether or not the sale of the vessels was subject to VAT had already been
filed with the Bureau of Internal Revenue (BIR) by the law firm of Sycip Salazar Hernandez &
Gatmaitan, presumably in behalf of private respondents. Thus, the parties agreed that should no
favorable ruling be received from the BIR, NDC was authorized to draw on the Letter of Credit upon
written demand the amount needed for the payment of the VAT on the stipulated due date, 20
December 1988.6
In January of 1989, private respondents through counsel received VAT Ruling No. 568-88 dated 14
December 1988 from the BIR, holding that the sale of the vessels was subject to the 10% VAT. The
ruling cited the fact that NDC was a VAT-registered enterprise, and thus its "transactions incident to
its normal VAT registered activity of leasing out personal property including sale of its own assets
that are movable, tangible objects which are appropriable or transferable are subject to the 10%
[VAT]."7
Private respondents moved for the reconsideration of VAT Ruling No. 568-88, as well as VAT Ruling
No. 395-88 (dated 18 August 1988), which made a similar ruling on the sale of the same vessels in
response to an inquiry from the Chairman of the Senate Blue Ribbon Committee. Their motion was
denied when the BIR issued VAT Ruling Nos. 007-89 dated 24 February 1989, reiterating the earlier
VAT rulings. At this point, NDC drew on the Letter of Credit to pay for the VAT, and the amount
of P15,120,000.00 in taxes was paid on 16 March 1989.
On 10 April 1989, private respondents filed an Appeal and Petition for Refund with the CTA, followed
by a Supplemental Petition for Review on 14 July 1989. They prayed for the reversal of VAT Rulings
No. 395-88, 568-88 and 007-89, as well as the refund of the VAT payment made amounting
to P15,120,000.00.8 The Commissioner of Internal Revenue (CIR) opposed the petition, first arguing
that private respondents were not the real parties in interest as they were not the transferors or
sellers as contemplated in Sections 99 and 100 of the then Tax Code. The CIR also squarely
defended the VAT rulings holding the sale of the vessels liable for VAT, especially citing Section 3 of
Revenue Regulation No. 5-87 (R.R. No. 5-87), which provided that "[VAT] is imposed on any sale or
transactions deemed sale of taxable goods (including capital goods, irrespective of the date of
acquisition)." The CIR argued that the sale of the vessels were among those transactions "deemed
sale," as enumerated in Section 4 of R.R. No. 5-87. It seems that the CIR particularly emphasized
Section 4(E)(i) of the Regulation, which classified "change of ownership of business" as a
circumstance that gave rise to a transaction "deemed sale."
In a Decision dated 27 April 1992, the CTA rejected the CIRs arguments and granted the
petition.9 The CTA ruled that the sale of a vessel was an "isolated transaction," not done in the
ordinary course of NDCs business, and was thus not subject to VAT, which under Section 99 of the
Tax Code, was applied only to sales in the course of trade or business. The CTA further held that
the sale of the vessels could not be "deemed sale," and thus subject to VAT, as the transaction did
not fall under the enumeration of transactions deemed sale as listed either in Section 100(b) of the
Tax Code, or Section 4 of R.R. No. 5-87. Finally, the CTA ruled that any case of doubt should be
resolved in favor of private respondents since Section 99 of the Tax Code which implemented VAT is
not an exemption provision, but a classification provision which warranted the resolution of doubts in
favor of the taxpayer.
The CIR appealed the CTA Decision to the Court of Appeals,10 which on 11 March 1997, rendered a
Decision reversing the CTA.11 While the appellate court agreed that the sale was an isolated
transaction, not made in the course of NDCs regular trade or business, it nonetheless found that the
transaction fell within the classification of those "deemed sale" under R.R. No. 5-87, since the sale of
the vessels together with the NMC shares brought about a change of ownership in NMC. The Court
of Appeals also applied the principle governing tax exemptions that such should be strictly construed
against the taxpayer, and liberally in favor of the government. 12
However, the Court of Appeals reversed itself upon reconsidering the case, through a Resolution
dated 5 February 2001.13 This time, the appellate court ruled that the "change of ownership of
business" as contemplated in R.R. No. 5-87 must be a consequence of the "retirement from or
cessation of business" by the owner of the goods, as provided for in Section 100 of the Tax Code.
The Court of Appeals also agreed with the CTA that the classification of transactions "deemed sale"
was a classification statute, and not an exemption statute, thus warranting the resolution of any
doubt in favor of the taxpayer.14
To the mind of the Court, the arguments raised in the present petition have already been adequately
discussed and refuted in the rulings assailed before us. Evidently, the petition should be denied. Yet
the Court finds that Section 99 of the Tax Code is sufficient reason for upholding the refund of VAT
payments, and the subsequent disquisitions by the lower courts on the applicability of Section 100 of
the Tax Code and Section 4 of R.R. No. 5-87 are ultimately irrelevant.
A brief reiteration of the basic principles governing VAT is in order. VAT is ultimately a tax on
consumption, even though it is assessed on many levels of transactions on the basis of a fixed
percentage.15 It is the end user of consumer goods or services which ultimately shoulders the tax, as
the liability therefrom is passed on to the end users by the providers of these goods or
services16 who in turn may credit their own VAT liability (or input VAT) from the VAT payments they
receive from the final consumer (or output VAT).17 The final purchase by the end consumer
represents the final link in a production chain that itself involves several transactions and several
acts of consumption. The VAT system assures fiscal adequacy through the collection of taxes on
every level of consumption,18 yet assuages the manufacturers or providers of goods and services by
enabling them to pass on their respective VAT liabilities to the next link of the chain until finally the
end consumer shoulders the entire tax liability.
Yet VAT is not a singular-minded tax on every transactional level. Its assessment bears direct
relevance to the taxpayers role or link in the production chain. Hence, as affirmed by Section 99 of
the Tax Code and its subsequent incarnations,19 the tax is levied only on the sale, barter or exchange
of goods or services by persons who engage in such activities, in the course of trade or business.
These transactions outside the course of trade or business may invariably contribute to the
production chain, but they do so only as a matter of accident or incident. As the sales of goods or
services do not occur within the course of trade or business, the providers of such goods or services
would hardly, if at all, have the opportunity to appropriately credit any VAT liability as against their
own accumulated VAT collections since the accumulation of output VAT arises in the first place only
through the ordinary course of trade or business.
That the sale of the vessels was not in the ordinary course of trade or business of NDC was
appreciated by both the CTA and the Court of Appeals, the latter doing so even in its first decision
which it eventually reconsidered.20We cite with approval the CTAs explanation on this point:
In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955 (97
Phil. 992), the term "carrying on business" does not mean the performance of a single
disconnected act, but means conducting, prosecuting and continuing business by performing
progressively all the acts normally incident thereof; while "doing business" conveys the idea
of business being done, not from time to time, but all the time. [J. Aranas, UPDATED
NATIONAL INTERNAL REVENUE CODE (WITH ANNOTATIONS), p. 608-9 (1988)].
"Course of business" is what is usually done in the management of trade or business. [Idmi
v. Weeks & Russel, 99 So. 761, 764, 135 Miss. 65, cited in Words & Phrases, Vol. 10,
(1984)].
What is clear therefore, based on the aforecited jurisprudence, is that "course of business" or
"doing business" connotes regularity of activity. In the instant case, the sale was an isolated
transaction. The sale which was involuntary and made pursuant to the declared policy of
Government for privatization could no longer be repeated or carried on with regularity. It
should be emphasized that the normal VAT-registered activity of NDC is leasing personal
property.21
This finding is confirmed by the Revised Charter22 of the NDC which bears no indication that the
NDC was created for the primary purpose of selling real property.23
The conclusion that the sale was not in the course of trade or business, which the CIR does not
dispute before this Court,24 should have definitively settled the matter. Any sale, barter or exchange
of goods or services not in the course of trade or business is not subject to VAT.
Section 100 of the Tax Code, which is implemented by Section 4(E)(i) of R.R. No. 5-87 now relied
upon by the CIR, is captioned "Value-added tax on sale of goods," and it expressly states that
"[t]here shall be levied, assessed and collected on every sale, barter or exchange of goods, a value
added tax x x x." Section 100 should be read in light of Section 99, which lays down the general rule
on which persons are liable for VAT in the first place and on what transaction if at all. It may even be
noted that Section 99 is the very first provision in Title IV of the Tax Code, the Title that covers VAT in
the law. Before any portion of Section 100, or the rest of the law for that matter, may be applied in
order to subject a transaction to VAT, it must first be satisfied that the taxpayer and transaction
involved is liable for VAT in the first place under Section 99.
It would have been a different matter if Section 100 purported to define the phrase "in the course of
trade or business" as expressed in Section 99. If that were so, reference to Section 100 would have
been necessary as a means of ascertaining whether the sale of the vessels was "in the course of
trade or business," and thus subject to
VAT. But that is not the case. What Section 100 and Section 4(E)(i) of R.R. No. 5-87 elaborate on is
not the meaning of "in the course of trade or business," but instead the identification of the
transactions which may be deemed as sale. It would become necessary to ascertain whether under
those two provisions the transaction may be deemed a sale, only if it is settled that the transaction
occurred in the course of trade or business in the first place. If the transaction transpired outside the
course of trade or business, it would be irrelevant for the purpose of determining VAT liability
whether the transaction may be deemed sale, since it anyway is not subject to VAT.
Accordingly, the Court rules that given the undisputed finding that the transaction in question was not
made in the course of trade or business of the seller, NDC that is, the sale is not subject to VAT
pursuant to Section 99 of the Tax Code, no matter how the said sale may hew to those transactions
deemed sale as defined under Section 100.
In any event, even if Section 100 or Section 4 of R.R. No. 5-87 were to find application in this case,
the Court finds the discussions offered on this point by the CTA and the Court of Appeals (in its
subsequent Resolution) essentially correct. Section 4 (E)(i) of R.R. No. 5-87 does classify as among
the transactions deemed sale those involving "change of ownership of business." However, Section
4(E) of R.R. No. 5-87, reflecting Section 100 of the Tax Code, clarifies that such "change of
ownership" is only an attending circumstance to "retirement from or cessation of business[, ] with
respect to all goods on hand [as] of the date of such retirement or cessation." 25Indeed, Section 4(E)
of R.R. No. 5-87 expressly characterizes the "change of ownership of business" as only a
"circumstance" that attends those transactions "deemed sale," which are otherwise stated in the
same section.26
WHEREFORE, the petition is DENIED. No costs.
SO ORDERED.
vs.
COURT OF APPEALS and COMMONWEALTH MANAGEMENT AND SERVICES
CORPORATION, respondents.
PARDO, J.:
What is before the Court is a petition for review on certiorari of the decision of the Court of
Appeals,1 reversing that of the Court of Tax Appeals,2 which affirmed with modification the decision of
the Commissioner of Internal Revenue ruling that Commonwealth Management and Services
Corporation, is liable for value added tax for services to clients during taxable year 1988.
Commonwealth Management and Services Corporation (COMASERCO, for brevity), is a corporation
duly organized and existing under the laws of the Philippines. It is an affiliate of Philippine American
Life Insurance Co. (Philamlife), organized by the letter to perform collection, consultative and other
technical services, including functioning as an internal auditor, of Philamlife and its other affiliates.
1wphi1.nt
On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an assessment to private
respondent COMASERCO for deficiency value-added tax (VAT) amounting to P351,851.01, for
taxable year 1988, computed as follows:
Taxable sale/receipt
P1,679,155.00
============
10% tax due thereon
167,915.50
25% surcharge
41,978.88
20% interest per annum
125,936.63
Compromise penalty for late payment

TOTAL AMOUNT DUE AND COLLECTIBLE
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.
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.
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.
On June 22, 1995, the Court of Tax Appeals rendered decision in favor of the Commissioner of
Internal Revenue, the dispositive portion of which reads:
WHEREFORE, the decision of the Commissioner of Internal Revenue assessing petitioner
deficiency value-added tax for the taxable year 1988 is AFFIRMED with slight modifications.
Accordingly, petitioner is ordered to pay respondent Commissioner of Internal Revenue the
amount of P335,831.01 inclusive of the 25% surcharge and interest plus 20% interest from
January 24, 1992 until fully paid pursuant to Section 248 and 249 of the Tax Code.
The compromise penalty of P16,000.00 imposed by the respondent in her assessment letter
shall not be included in the payment as there was no compromise agreement entered into
between petitioner and respondent with respect to the value-added tax deficiency.5
On July 26, 1995, respondent filed with the Court of Appeals, a petition for review of the decision of
the Court of Appeals.
After due proceedings, on May 13, 1996, the Court of Appeals rendered decision reversing that of
the Court of Tax Appeals, the dispositive portion of which reads:
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 value-added tax (VAT) imposed in Sections 100 to
102 of this Code. 9
COMASERCO contends that the term "in the course of trade or business" requires that the
"business" is carried on with a view to profit or livelihood. It avers that the activities of the entity must
be profit-oriented. COMASERCO submits that it is not motivated by profit, as defined by its primary
purpose in the articles of incorporation, stating that it is operating "only on reimbursement-of-cost
basis, without any profit." Private respondent argues that profit motive is material in ascertaining who
to tax for purposes of determining liability for VAT.
We disagree.
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 non-stock, nonprofit, 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 profitoriented.
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
COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
SONY PHILIPPINES, INC., Respondent.
DECISION
MENDOZA, J.:
This petition for review on certiorari seeks to set aside the May 17, 2007 Decision and the July 5,
2007 Resolution of the Court of Tax Appeals En Banc1 (CTA-EB), in C.T.A. EB No. 90, affirming the
October 26, 2004 Decision of the CTA-First Division2 which, in turn, partially granted the petition for
review of respondent Sony Philippines, Inc.(Sony). The CTA-First Division decision cancelled the
deficiency assessment issued by petitioner Commissioner of Internal Revenue (CIR) against Sony
for Value Added Tax (VAT) but upheld the deficiency assessment for expanded withholding
tax (EWT) in the amount of P1,035,879.70 and the penalties for late remittance of internal revenue
taxes in the amount of P1,269, 593.90.3
THE FACTS:
On November 24, 1998, the CIR issued Letter of Authority No. 000019734 (LOA 19734) authorizing
certain revenue officers to examine Sonys books of accounts and other accounting records
regarding revenue taxes for"the period 1997 and unverified prior years." On December 6, 1999,
a preliminary assessment for 1997 deficiency taxes and penalties was issued by the CIR which Sony
protested. Thereafter, acting on the protest, the CIR issued final assessment notices, the formal
letter of demand and the details of discrepancies.4 Said details of the deficiency taxes and penalties
for late remittance of internal revenue taxes are as follows:
DEFICIENCY VALUE -ADDED TAX (VAT)
(Assessment No. ST-VAT-97-0124-2000)
Basic Tax Due
7,958,700.00
Add: Penalties
Interest up to 3-31-2000
P 3,157,314.41
Compromise
25,000.00
Deficiency VAT Due
3,182,314.41
P
11,141,014.41
1,416,976.90
DEFICIENCY EXPANDED WITHHOLDING TAX (EWT)

(Assessment No. ST-EWT-97-0125-2000)
Basic Tax Due
Add: Penalties
Compromise
550,485.82
25,000.00
Deficiency EWT Due
575,485.82
P
1,992,462.72
DEFICIENCY OF VAT ON ROYALTY PAYMENTS

(Assessment No. ST-LR1-97-0126-2000)
Basic Tax Due
Add: Penalties
Surcharge
359,177.80
87,580.34
Compromise
16,000.00
Penalties Due
462,758.14
P
LATE REMITTANCE OF FINAL WITHHOLDING TAX

Basic Tax Due
462,758.14
Add: Penalties
Surcharge
P 1,729,690.71
508,783.07
Compromise
50,000.00
Penalties Due
2,288,473.78
P
2,288,473.78
LATE REMITTANCE OF INCOME PAYMENTS

Basic Tax Due
Add: Penalties
25 % Surcharge
Compromise
8,865.34
58.29
2,000.00
10,923.60
Penalties Due
10,923.60
GRAND TOTAL
P 15,895,632.655
Sony sought re-evaluation of the aforementioned assessment by filing a protest on February 2,

2000. Sony submitted relevant documents in support of its protest on the 16th of that same month. 6
On October 24, 2000, within 30 days after the lapse of 180 days from submission of the said
supporting documents to the CIR, Sony filed a petition for review before the CTA. 7
After trial, the CTA-First Division disallowed the deficiency VAT assessment because the subsidized
advertising expense paid by Sony which was duly covered by a VAT invoice resulted in an input VAT
credit. As regards the EWT, the CTA-First Division maintained the deficiency EWT assessment on
Sonys motor vehicles and on professional fees paid to general professional partnerships. It also
assessed the amounts paid to sales agents as commissions with five percent (5%) EWT pursuant to
Section 1(g) of Revenue Regulations No. 6-85. The CTA-First Division, however, disallowed the
EWT assessment on rental expense since it found that the total rental deposit of P10,523,821.99
was incurred from January to March 1998 which was again beyond the coverage of LOA 19734.
Except for the compromise penalties, the CTA-First Division also upheld the penalties for the late
payment of VAT on royalties, for late remittance of final withholding tax on royalty as of December
1997 and for the late remittance of EWT by some of Sonys branches.8 In sum, the CTA-First
Division partly granted Sonys petition by cancelling the deficiency VAT assessment but upheld a
modified deficiency EWT assessment as well as the penalties. Thus, the dispositive portion reads:
WHEREFORE, the petition for review is hereby PARTIALLY GRANTED. Respondent is ORDERED
to CANCEL and WITHDRAW the deficiency assessment for value-added tax for 1997 for lack of
merit. However, the deficiency assessments for expanded withholding tax and penalties for late
remittance of internal revenue taxes are UPHELD.
Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency expanded withholding tax
in the amount of P1,035,879.70 and the following penalties for late remittance of internal revenue
taxes in the sum ofP1,269,593.90:
1. VAT on Royalty
P 429,242.07
2. Withholding Tax on Royalty
831,428.20
3. EWT of Petitioner's Branches
8,923.63
Total
P 1,269,593.90
Plus 20% delinquency interest from January 17, 2000 until fully paid pursuant to Section 249(C)(3)
of the 1997 Tax Code.
SO ORDERED.9
The CIR sought a reconsideration of the above decision and submitted the following grounds in
support thereof:
A. The Honorable Court committed reversible error in holding that petitioner is not liable for
the deficiency VAT in the amount of P11,141,014.41;
B. The Honorable court committed reversible error in holding that the commission expense in
the amount of P2,894,797.00 should be subjected to 5% withholding tax instead of the 10%
tax rate;
C. The Honorable Court committed a reversible error in holding that the withholding tax
assessment with respect to the 5% withholding tax on rental deposit in the amount
of P10,523,821.99 should be cancelled; and
D. The Honorable Court committed reversible error in holding that the remittance of final
withholding tax on royalties covering the period January to March 1998 was filed on time. 10
On April 28, 2005, the CTA-First Division denied the motion for reconsideration. Unfazed, the CIR
filed a petition for review with the CTA-EB raising identical issues:
1avvphi1
1. Whether or not respondent (Sony) is liable for the deficiency VAT in the amount of
P11,141,014.41;
2. Whether or not the commission expense in the amount of P2,894,797.00 should be
subjected to 10% withholding tax instead of the 5% tax rate;
3. Whether or not the withholding assessment with respect to the 5% withholding tax on
rental deposit in the amount of P10,523,821.99 is proper; and
4. Whether or not the remittance of final withholding tax on royalties covering the period
January to March 1998 was filed outside of time.11
Finding no cogent reason to reverse the decision of the CTA-First Division, the CTA-EB dismissed
CIRs petition on May 17, 2007. CIRs motion for reconsideration was denied by the CTA-EB on July
5, 2007.
The CIR is now before this Court via this petition for review relying on the very same grounds it
raised before the CTA-First Division and the CTA-EB. The said grounds are reproduced below:
GROUNDS FOR THE ALLOWANCE OF THE PETITION
I
THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS NOT LIABLE FOR DEFICIENCY
VAT IN THE AMOUNT OF PHP11,141,014.41.
II
AS TO RESPONDENTS DEFICIENCY EXPANDED WITHHOLDING TAX IN THE AMOUNT OF
PHP1,992,462.72:
A. THE CTA EN BANC ERRED IN RULING THAT THE COMMISSION EXPENSE
IN THE AMOUNT OF PHP2,894,797.00 SHOULD BE SUBJECTED TO A
WITHHOLDING TAX OF 5% INSTEAD OF THE 10% TAX RATE.
B. THE CTA EN BANC ERRED IN RULING THAT THE ASSESSMENT WITH
RESPECT TO THE 5% WITHHOLDING TAX ON RENTAL DEPOSIT IN THE
AMOUNT OF PHP10,523,821.99 IS NOT PROPER.
III
THE CTA EN BANC ERRED IN RULING THAT THE FINAL WITHHOLDING TAX ON ROYALTIES
COVERING THE PERIOD JANUARY TO MARCH 1998 WAS FILED ON TIME.12
Upon filing of Sonys comment, the Court ordered the CIR to file its reply thereto. The CIR
subsequently filed a manifestation informing the Court that it would no longer file a reply. Thus, on
December 3, 2008, the Court resolved to give due course to the petition and to decide the case on
the basis of the pleadings filed.13
The Court finds no merit in the petition.
The CIR insists that LOA 19734, although it states "the period 1997 and unverified prior years,"
should be understood to mean the fiscal year ending in March 31, 1998. 14 The Court cannot agree.
Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the authority given to the
appropriate revenue officer assigned to perform assessment functions. It empowers or enables said
revenue officer to examine the books of account and other accounting records of a taxpayer for the
purpose of collecting the correct amount of tax.15 The very provision of the Tax Code that the CIR
relies on is unequivocal with regard to its power to grant authority to examine and assess a taxpayer.
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements
for Tax Administration and Enforcement.
(A)Examination of Returns and Determination of tax Due. After a return has been filed as required
under the provisions of this Code, the Commissioner or his duly authorized representative may
authorize the examination of any taxpayer and the assessment of the correct amount of
tax: Provided, however, That failure to file a return shall not prevent the Commissioner
from authorizing the examination of any taxpayer. x x x [Emphases supplied]
Clearly, there must be a grant of authority before any revenue officer can conduct an examination or
assessment. Equally important is that the revenue officer so authorized must not go beyond the
authority given. In the absence of such an authority, the assessment or examination is a nullity.
As earlier stated, LOA 19734 covered "the period 1997 and unverified prior years." For said reason,
the CIR acting through its revenue officers went beyond the scope of their authority because the
deficiency VAT assessment they arrived at was based on records from January to March 1998 or
using the fiscal year which ended in March 31, 1998. As pointed out by the CTA-First Division in its
April 28, 2005 Resolution, the CIR knew which period should be covered by the investigation. Thus,
if CIR wanted or intended the investigation to include the year 1998, it should have done so by
including it in the LOA or issuing another LOA.
Upon review, the CTA-EB even added that the coverage of LOA 19734, particularly the phrase "and
unverified prior years," violated Section C of Revenue Memorandum Order No. 43-90 dated
September 20, 1990, the pertinent portion of which reads:
3. A Letter of Authority should cover a taxable period not exceeding one taxable year. The
practice of issuing L/As covering audit of "unverified prior years is hereby prohibited. If the audit of a
taxpayer shall include more than one taxable period, the other periods or years shall be specifically
indicated in the L/A.16 [Emphasis supplied]
On this point alone, the deficiency VAT assessment should have been disallowed. Be that as it may,
the CIRs argument, that Sonys advertising expense could not be considered as an input VAT credit
because the same was eventually reimbursed by Sony International Singapore (SIS), is also
erroneous.
The CIR contends that since Sonys advertising expense was reimbursed by SIS, the former never
incurred any advertising expense. As a result, Sony is not entitled to a tax credit. At most, the CIR
continues, the said advertising expense should be for the account of SIS, and not Sony.17
The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed by the CTAEB, Sonys deficiency VAT assessment stemmed from the CIRs disallowance of the input VAT
credits that should have been realized from the advertising expense of the latter.18 It is evident under
Section 11019 of the 1997 Tax Code that an advertising expense duly covered by a VAT invoice is a
legitimate business expense. This is confirmed by no less than CIRs own witness, Revenue Officer
Antonio Aluquin.20 There is also no denying that Sony incurred advertising expense. Aluquin testified
that advertising companies issued invoices in the name of Sony and the latter paid for the
same.21 Indubitably, Sony incurred and paid for advertising expense/ services. Where the money
came from is another matter all together but will definitely not change said fact.
The CIR further argues that Sony itself admitted that the reimbursement from SIS was income and,
thus, taxable. In support of this, the CIR cited a portion of Sonys protest filed before it:
The fact that due to adverse economic conditions, Sony-Singapore has granted to our client a
subsidy equivalent to the latters advertising expenses will not affect the validity of the input taxes
from such expenses. Thus, at the most, this is an additional income of our client subject to income
tax. We submit further that our client is not subject to VAT on the subsidy income as this was not
derived from the sale of goods or services.22
Insofar as the above-mentioned subsidy may be considered as income and, therefore, subject to
income tax, the Court agrees. However, the Court does not agree that the same subsidy should be
subject to the 10% VAT. To begin with, the said subsidy termed by the CIR as reimbursement was
not even exclusively earmarked for Sonys advertising expense for it was but an assistance or aid in
view of Sonys dire or adverse economic conditions, and was only "equivalent to the latters (Sonys)
advertising expenses."
Section 106 of the Tax Code explains when VAT may be imposed or exacted. Thus:
SEC. 106. Value-added Tax on Sale of Goods or Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or
exchange of goods or properties, value-added tax equivalent to ten percent (10%) of the gross
selling price or gross value in money of the goods or properties sold, bartered or exchanged, such
tax to be paid by the seller or transferor.
Thus, there must be a sale, barter or exchange of goods or properties before any VAT may be
levied. Certainly, there was no such sale, barter or exchange in the subsidy given by SIS to Sony. It
was but a dole out by SIS and not in payment for goods or properties sold, bartered or exchanged by
Sony.
In the case of CIR v. Court of Appeals (CA),23 the Court had the occasion to rule that services
rendered for a fee even on reimbursement-on-cost basis only and without realizing profit are also
subject to VAT. The case, however, is not applicable to the present case. In that case, COMASERCO
rendered service to its affiliates and, in turn, the affiliates paid the former reimbursement-on-cost
which means that it was paid the cost or expense that it incurred although without profit. This is not
true in the present case. Sony did not render any service to SIS at all. The services rendered by the
advertising companies, paid for by Sony using SIS dole-out, were for Sony and not SIS. SIS just
gave assistance to Sony in the amount equivalent to the latters advertising expense but never
received any goods, properties or service from Sony.
Regarding the deficiency EWT assessment, more particularly Sonys commission expense, the CIR
insists that said deficiency EWT assessment is subject to the ten percent (10%) rate instead of the
five percent (5%) citing Revenue Regulation No. 2-98 dated April 17, 1998. 24 The said revenue
regulation provides that the 10% rate is applied when the recipient of the commission income is a
natural person. According to the CIR, Sonys schedule of Selling, General and Administrative
expenses shows the commission expense as "commission/dealer salesman incentive," emphasizing
the word salesman.
On the other hand, the application of the five percent (5%) rate by the CTA-First Division is based on
Section 1(g) of Revenue Regulations No. 6-85 which provides:
(g) Amounts paid to certain Brokers and Agents. On gross payments to customs, insurance, real
estate and commercial brokers and agents of professional entertainers five per centum (5%). 25
In denying the very same argument of the CIR in its motion for reconsideration, the CTA-First
Division, held:
x x x, commission expense is indeed subject to 10% withholding tax but payments made to broker is
subject to 5% withholding tax pursuant to Section 1(g) of Revenue Regulations No. 6-85. While the
commission expense in the schedule of Selling, General and Administrative expenses submitted by
petitioner (SPI) to the BIR is captioned as "commission/dealer salesman incentive" the same does
not justify the automatic imposition of flat 10% rate. As itemized by petitioner, such expense is
composed of "Commission Expense" in the amount of P10,200.00 and Broker Dealer of
P2,894,797.00.26
The Court agrees with the CTA-EB when it affirmed the CTA-First Division decision. Indeed, the
applicable rule is Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94,
which was the applicable rule during the subject period of examination and assessment as specified
in the LOA. Revenue Regulations No. 2-98, cited by the CIR, was only adopted in April 1998 and,
therefore, cannot be applied in the present case. Besides, the withholding tax on brokers and agents
was only increased to 10% much later or by the end of July 2001 under Revenue Regulations No. 62001.27 Until then, the rate was only 5%.
The Court also affirms the findings of both the CTA-First Division and the CTA-EB on the deficiency
EWT assessment on the rental deposit. According to their findings, Sony incurred the subject rental
deposit in the amount of P10,523,821.99 only from January to March 1998. As stated earlier, in the
absence of the appropriate LOA specifying the coverage, the CIRs deficiency EWT assessment
from January to March 1998, is not valid and must be disallowed.
Finally, the Court now proceeds to the third ground relied upon by the CIR.
The CIR initially assessed Sony to be liable for penalties for belated remittance of its FWT on
royalties (i) as of December 1997; and (ii) for the period from January to March 1998. Again, the
Court agrees with the CTA-First Division when it upheld the CIR with respect to the royalties for
December 1997 but cancelled that from January to March 1998.
The CIR insists that under Section 328 of Revenue Regulations No. 5-82 and Sections 2.57.4 and
2.58(A)(2)(a)29of Revenue Regulations No. 2-98, Sony should also be made liable for the FWT on
royalties from January to March of 1998. At the same time, it downplays the relevance of the
Manufacturing License Agreement (MLA) between Sony and Sony-Japan, particularly in the
payment of royalties.
The above revenue regulations provide the manner of withholding remittance as well as the payment
of final tax on royalty. Based on the same, Sony is required to deduct and withhold final taxes on
royalty payments when the royalty is paid or is payable. After which, the corresponding return and
remittance must be made within 10 days after the end of each month. The question now is when
does the royalty become payable?
Under Article X(5) of the MLA between Sony and Sony-Japan, the following terms of royalty
payments were agreed upon:
(5)Within two (2) months following each semi-annual period ending June 30 and December 31, the
LICENSEE shall furnish to the LICENSOR a statement, certified by an officer of the LICENSEE,
showing quantities of the MODELS sold, leased or otherwise disposed of by the LICENSEE during
such respective semi-annual period and amount of royalty due pursuant this ARTICLE X therefore,
and the LICENSEE shall pay the royalty hereunder to the LICENSOR concurrently with the
furnishing of the above statement.30
Withal, Sony was to pay Sony-Japan royalty within two (2) months after every semi-annual period
which ends in June 30 and December 31. However, the CTA-First Division found that there was
accrual of royalty by the end of December 1997 as well as by the end of June 1998. Given this, the
FWTs should have been paid or remitted by Sony to the CIR on January 10, 1998 and July 10, 1998.
Thus, it was correct for the CTA-First Division and the CTA-EB in ruling that the FWT for the royalty
from January to March 1998 was seasonably filed. Although the royalty from January to March 1998
was well within the semi-annual period ending June 30, which meant that the royalty may be payable
until August 1998 pursuant to the MLA, the FWT for said royalty had to be paid on or before July 10,
1998 or 10 days from its accrual at the end of June 1998. Thus, when Sony remitted the same on
July 8, 1998, it was not yet late.
In view of the foregoing, the Court finds no reason to disturb the findings of the CTA-EB.
WHEREFORE, the petition is DENIED.
SO ORDERED.
JOSE CATRAL MENDOZA
Associate Justice
ATT E S TATI O N
I attest that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Courts Division.
ANTONIO T. CARPIO
Associate Justice
Chairperson, Second Division
C E R TI F I C ATI O N
Pursuant to Section 13, Article VIII of the Constitution and the Division Chairpersons Attestation, I
certify that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Courts Division.
RENATO C. CORONA
Chief Justice
G.R. No. 145559
July 14, 2006

vs.
BENGUET CORPORATION, respondent.
DECISION
In this petition for review under Rule 45 of the Rules of Court, petitioner Commissioner of Internal
Revenue seeks the reversal and setting aside of the following Resolutions of the Court of Appeals
(CA) in CA-G.R. SP No. 38413, to wit:
1. Resolution dated May 10, 20001 insofar as it ordered petitioner to issue a tax credit to
respondent Benguet Corporation in the amount of P49,749,223.31 representing input
VAT/tax attributable to its sales of gold to the Central Bank (now Bangko Sentral ng Pilipinas
or BSP) covering the period from January 1, 1988 to July 31, 1989; and
2. Resolution dated October 16, 20002 denying petitioner's motion for reconsideration.
The facts, as narrated by the CA in its basic Resolution of May 10, 2000, are:
[Respondent] is a domestic corporation engaged in mining business, specifically the
exploration, development and operation of mining properties for purposes of commercial
production and the marketing of mine products. It is a VAT-registered enterprise, with VAT
Registration No. 31-0-000027 issued on January 1, 1988. Sometime in January 1988,
[respondent] filed an application for zero-rating of its sales of mine products, which
application was duly approved by the [petitioner] Commissioner of Internal Revenue.
On August 28, 1988, then Deputy Commissioner of Internal Revenue Eufracio D. Santos
issued VAT Ruling No. 378-88 which declared that the sale of gold to the Central Bank is
considered an export sale and therefore subject to VAT at 0% rate. On December 14, 1988,
then Deputy Commissioner Santos also issued Revenue Memorandum Circular (RMC) No.
59-88, again declaring that the sale of gold by a VAT-registered taxpayer to the Central Bank
is subject to the zero-rate VAT. No less than five Rulings were subsequently issued by
[petitioner] from 1988 to 1990 reiterating and confirming its position that the sale of gold by a
VAT-registered taxpayer to the Central Bank is subject to the zero-rate VAT.
As a corollary, and in reliance, of the foregoing issuances, [respondent], during the six (6)
taxable quarters in question covering the period January 1, 1988 to July 31, 1989, sold gold
to the Central Bank and treated these sales as zero-rated that is, subject to the 0% VAT.
During the same period, [respondent] thus incurred input taxes attributable to said sales to
the Central Bank. Consequently, [respondent] filed with the Commissioner of Internal
Revenue applications for the issuance of Tax Credit Certificates for input VAT Credits
attributable to its export sales - that is, inclusive of direct export sales and sale of gold to the
Central Bank corresponding to the same taxable periods, to wit:
AMOUNT OF TAX
CREDIT APPLIED FOR
TAXABLE PERIOD
P34,449,817.71
01Jan88 to 30 Apr88
P30,382,666.86
01May88 to 31Jul88
P13,467,663.41 01
Nov88 to 31Jan89
P7,030,261.29 01
Feb89 to 30Apr89
P18,263,960.28
01May89 to 31Jul89
(CTA Decision dated March 23, 1995; Pages 83-86, rollo)

Meanwhile, on January 23, 1992, then Commissioner Jose U. Ong issued VAT Ruling No.
008-92 declaring and holding that the sales of gold to the Central Bank are considered
domestic sales subject to 10% VAT instead of 0% VAT as previously held in BIR Issuances
from 1998 to 1990. Subsequently, VAT Ruling No. 59-92, dated April 28, 1992, x x x were
issued by [petitioner] reiterating the treatment of sales of gold to the Central Bank as
domestic sales, and expressly countenancing the Retroactive application of VAT Ruling No.
008-92 to all such sales made starting January 1, 1988, ratiocinating, inter alia, that the
mining companies will not be unduly prejudiced by a retroactive application of VAT Ruling
008-92 because their claim for refund of input taxes are not lost because the same are
allowable on its output taxes on the sales of gold to Central Bank; on its output taxes on
other sales; and as deduction to income tax under Section 29 of the Tax Code.
On the basis of the aforequoted BIR Issuances, [petitioner] thus treated [respondent's] sales
of gold to the Central Bank as domestic sales subject to 10% VAT but allowed [respondent] a
total tax credit of onlyP81,991,810.91 which corresponded to VAT input taxes attributable to
its direct export sales (CTA Decision dated March 23, 1995; Page 87). Notwithstanding this
finding of the [petitioner], [respondent] was not refunded the said amounts of tax credit
claimed. Thus, to suspend the running of the two-year prescriptive period (Sec. 106, NIRC)
for claiming refunds or tax credits, [respondent] instituted x x x consolidated Petitions for
Review with the Court of Tax Appeals, praying for the issuance of "Tax Credit Certificates" for
the following input VAT credits attributable to export sales transacted during the taxable
quarters or periods in question, to wit:
CTA Case
Amount of Tax
Credit Applied for
Taxable Period
Number
4429
P64,832,374.67
01JAN 88 to 31JUL88
4495
P43,614,437.88
01AUG 88to 31JAN89
4575
P23,294,221.77
01FEB 89 to 31JUL89
P131,741,034.22 = TOTAL
Significantly, the total amount of P131,741,034.22, as hereinabove computed, corresponds

to the total input VAT credits attributable to export sales made by [respondent] during the
taxable periods set forth and therefore, represents a combination of input tax attributable to
both (1) direct export sales and (2) sales of gold to the Central Bank. (Words in brackets
added).3
In a decision dated March 23, 1995,4 the Court of Tax Appeals (CTA) dismissed respondent's
aforementioned consolidated Petitions for Review and denied the whole amount of its claim for tax
credit of P131,741,034.22. The tax court held that the alleged prejudice to respondent as a result of
the retroactive application of VAT Ruling No. 008-92 issued on January 23, 1992 to the latter's gold
sales to the Central Bank (CB) from January 1, 1988 to July 31, 1989 is merely speculative and not
actual and imminent so as to proscribe said Ruling's retroactivity. The CTA further held that
respondent would not be unduly prejudiced considering that VAT Ruling No. 59-92 which mandates
the retroactivity of VAT Ruling No. 008-92 likewise provides for alternative remedies for the recovery
of the input VAT.
Its motion for reconsideration having been denied by the tax court, respondent appealed to the CA
whereat its recourse was docketed as CA-G.R. SP No. 38413.
At first, the CA, in a decision dated May 30, 1996,5 affirmed in toto that of the tax court.
However, upon respondent's motion for reconsideration, the CA, in the herein assailed
basic Resolution dated May 10, 2000, reversed itself by setting aside its earlier decision of May 30,
1996 and ordering herein petitioner to issue in respondent's favor a tax credit in the amount
of P131,741,034.22, to wit:
IN THE LIGHT OF ALL THE FOREGOING, [respondent's] Motion for Reconsideration, x x x
as supplemented, is GRANTED. The Decision of this Court, dated May 30, 1996, affirming
the Decision of the Court of Tax Appeals x x x is SET ASIDE. The [petitioner Commissioner
of Internal Revenue] is hereby ordered to issue [respondent] a TAX CREDIT in the amount
of P131,741,034.22.
SO ORDERED.
In its reversal action, the CA ruled that the tax credit in the total amount of P131,741,034.22 consists
of (1)P81,991,810.91, representing input VAT credits attributable to direct export sales subject to 0%
VAT, and (2)P49,749,223.31, representing input VAT attributable to sales of gold to the CB which
were subject to 0% when said sales were made in 1988 and 1989. In effect, the CA rejected the
retroactive application of VAT Ruling No. 008-92 to the subject gold sales of respondent because of
the resulting prejudice to the latter despite the existence of alternative modes for the recovery of the
input VAT.
This time, it was petitioner who moved for a reconsideration but his motion was denied by the CA in
its subsequentResolution of October 16, 2000.
Hence, petitioner's present recourse assailing only that portion of the CA Resolution of May 10, 2000
allowing respondent the amount of P49,749,223.31 as tax credit corresponding to the input VAT
attributable to its sales of gold to the CB for the period January 1, 1988 to July 31, 1989. It is
petitioner's sole contention that the CA erred in rejecting the retroactive application of VAT Ruling No.
008-92, dated January 23, 1992, subjecting sales of gold to the CB to 10% VAT to respondent's
sales of gold during the period from January 1, 1988 to July 31, 1989. Petitioner posits that, contrary
to the ruling of the appellate court, the retroactive application of VAT Ruling No. 008-92 to
respondent would not prejudice the latter.
Initially, the Court, in its Resolution of January 24, 2001, 6 denied the Petition for lack of verification
and certification against forum shopping. However, upon petitioner's manifestation and motion for
reconsideration, the Court reinstated the Petition in its subsequent Resolution of March 5, 2001. 7
The petition must have to fall.
We start with the well-entrenched rule that rulings and circulars, rules and regulations, promulgated
by the Commissioner of Internal Revenue, would have no retroactive application if to so apply them
would be prejudicial to the taxpayers.8
And this is as it should be, for the Tax Code, specifically Section 246 thereof, is explicit that:
x x x Any revocation, modification, or reversal of any rules and regulations promulgated in
accordance with the preceding section or any of the rulings or circulars promulgated by the
Commissioner of Internal Revenue shall not be given retroactive application if the revocation,
modification, or reversal will be prejudicial to the taxpayers except in the following cases: a)
where the taxpayer deliberately misstates or omits material facts from his return or in any
document required of him by the Bureau of Internal Revenue; b) where the facts
subsequently gathered by the Bureau of Internal Revenue are materially different from the
facts on which the ruling is based; or c) where the taxpayer acted in bad faith.
There is no question, therefore, as to the prohibition against the retroactive application of the
revocation, modification or reversal, as the case maybe, of previously established Bureau on Internal
Revenue (BIR) Rulings when the taxpayer's interest would be prejudiced thereby. But even if
prejudicial to a taxpayer, retroactive application is still allowed where: (a) a taxpayer deliberately
misstates or omits material facts from his return or any document required by the BIR; (b) where
subsequent facts gathered by the BIR are materially different from which the ruling is based; and (c)
where the taxpayer acted in bad faith.
As admittedly, respondent's case does not fall under any of the above exceptions, what is crucial to
determine then is whether the retroactive application of VAT Ruling No. 008-92 would be prejudicial
to respondent Benguet Corporation.
The Court resolves the question in the affirmative.
Input VAT or input tax represents the actual payments, costs and expenses incurred by a VATregistered taxpayer in connection with his purchase of goods and services. Thus, "input tax" means
the value-added tax paid by a VAT-registered person/entity in the course of his/its trade or business
on the importation of goods or local purchases of goods or services from a VAT-registered person. 9
On the other hand, when that person or entity sells his/its products or services, the VAT-registered
taxpayer generally becomes liable for 10% of the selling price as output VAT or output tax. 10 Hence,
"output tax" is the value-added tax on the sale of taxable goods or services by any person registered
or required to register under Section 107 of the (old) Tax Code.11
The VAT system of taxation allows a VAT-registered taxpayer to recover its input VAT either by (1)
passing on the 10% output VAT on the gross selling price or gross receipts, as the case may be, to
its buyers, or (2) if the input tax is attributable to the purchase of capital goods or to zero-rated sales,
by filing a claim for a refund or tax credit with the BIR.12
Simply stated, a taxpayer subject to 10% output VAT on its sales of goods and services may recover
its input VAT costs by passing on said costs as output VAT to its buyers of goods and services but it
cannot claim the same as a refund or tax credit, while a taxpayer subject to 0% on its sales of goods
and services may only recover its input VAT costs by filing a refund or tax credit with the BIR.
Here, the claimed tax credit of input tax amounting to P49,749,223.31 represents the costs or
expenses incurred by respondent in connection with its gold production. Relying on BIR Rulings,
specifically VAT Ruling No. 378-88, dated August 28, 1988, and VAT Ruling No. 59-88, dated
December 14, 1988, both of which declared that sales of gold to the CB are considered export sales
subject to 0%, respondent sold gold to the CB from January 1, 1988 to July 31, 1989 without passing
on to the latter its input VAT costs, obviously intending to obtain a refund or credit thereof from the
BIR at the end of the taxable period. However, by the time respondent applied for refund/credit of its
input VAT costs, VAT Ruling No. 008-92 dated January 23, 1992, treating sales of gold to the CB as
domestic sales subject to 10% VAT, and VAT Ruling No. 059-92 dated April 28, 1992, retroactively
applying said VAT Ruling No. 008-92 to such sales made from January 1, 1988 onwards, were
issued. As a result, respondent's application for refund/credit was denied and, as likewise found by
the CA, it was even subsequently assessed deficiency output VAT on October 19, 1992 in the total
amounts of P252,283,241.95 for the year 1988, andP244,318,148.56 for the year 1989.13
Clearly, from the foregoing, the prejudice to respondent by the retroactive application of VAT Ruling
No. 008-92 to its sales of gold to the CB from January 1, 1988 to July 31, 1989 is patently evident.
Verily, by reason of the denial of its claim for refund/credit, respondent has been precluded from
recovering its input VAT costs attributable to its sales of gold to the CB during the period mentioned,
for the following reasons:
First, because respondent could not pass on to the CB the 10% output VAT which would be
retroactively imposed on said transactions, not having passed the same at the time the sales were
made on the assumption that said sales are subject to 0%, and, hence, maybe refunded or credited
later. And second, because respondent could not claim the input VAT costs as a refund/credit as it
has been prevented such option, the sales in question having been retroactively subjected to 10%
VAT, ergo limiting recovery of said costs to the application of the same against the output tax which
will result therefrom.
Indeed, respondent stands to suffer substantial economic prejudice by the retroactive application of
the VAT Ruling in question.
But petitioner maintains otherwise, arguing that respondent will not be unduly prejudiced since there
are still other available remedies for it to recover its input VAT costs. Said remedies, so petitioner
points out, are for respondent to either (1) use said input taxes in paying its output taxes in
connection with its other sales transactions which are subject to the 10% VAT or (2) if there are no
other sales transactions subject to 10% VAT, treat the input VAT as cost and deduct the same from
income for income tax purposes.
We are not persuaded.
The first remedy cannot be applied in this case. As correctly found by the CA, respondent has clearly
shown that it has no "other transactions" subject to 10% VAT, and petitioner has failed to prove the
existence of such "other transactions" against which to set off respondent's input VAT.14
Anent the second remedy, prejudice will still, indubitably, result because treating the input VAT as an
income tax deductible expense will yield only a partial and not full financial benefit of having the input
VAT refunded or used as a tax credit. We quote with approval the CA's observations in this respect,
thus:
x x x even assuming that input VAT is still available for deduction, [respondent] still suffers
prejudice. As a zero-rated taxpayer (pursuant to the 1988 to 1990 BIR issuances),
[respondent] could have claimed a cash refund or tax credit of the input VAT in the amount
of P49,749,223.31. If it had been allowed a cash refund or tax credit, it could have used the
full amount thereof to pay its other tax obligations (or, in the case of a cash refund, to fund its
operations). With VAT Ruling No. 059-92, [respondent] is precluded from claiming the cash
refund or tax credit and is limited to the so-called remedy of deducting the input VAT from
gross income. But a cash refund or tax credit is not the same as a tax deduction. A tax
deduction has less benefits than a tax credit. Consider the following differences;
2.42.1 A tax credit may be used to pay any national internal revenue tax liability. Section
104(b) of the Tax Code states;
"(b) Excess output or input tax. xxx Any input tax attributable to xxx zero-rated sales by a
VAT-registered person may at his option be refunded or credited against other internal
revenue taxes, subject to the provisions of Section 106."
On the other hand, a tax deduction may be used only against gross income for purposes of
income tax. A tax deduction is not allowed against other internal revenue taxes such as
excise taxes, documentary stamp taxes, and output VAT.
2.42.2 In terms of income tax, a tax deduction is only an expense item in computing income
tax liabilities (Sections 27 to 29, Tax Code) while a tax credit is a direct credit against final
income tax due (Section 106[b], Tax Code). This is illustrated in the example below:
Assume that in 1988, respondent had a gross income of P1,000,000,000 and deductible
expenses in general (such as salaries, utilities, transportation, fuel and costs of sale)
of P500,000,000. Assume also that [respondent] had input VAT of P131,741,034.22, the
amount being claimed in the instant case. [Respondent's] income tax liability, depending on
whether it utilized the input tax as tax credit or tax deduction, would be as follows:
a. Tax credit
Gross Income (Section 28, Tax Code)
P1,000,000,000.00
Deductions (Section 29, Tax Code)
( 500,000,000.00)
Taxable Income (Section 27, Tax Code)
P 500,000.000.00
Tax rate (Section 24[a], Tax Code)
x 35%
Tax Payable
P 175,000,000.00
Tax Credit
(131,741,034.22)
Tax due
P 43,258,965.78
b. Tax deduction
Gross income (Section 28, Tax Code)
P1,000,000,000.00
Deductions
General (Section 29, Tax Code)
P500,000,000.00
Input VAT (VAT Ruling No. 05992)
P131,741,034.22 P 631,741,034.22)
Taxable income (Section 27, Tax Code)
P 368,258,966.78
Tax rate (Section 24[a], Tax Code)
x 35%
Tax payable
P 128,890,638.02
Tax Credit
Tax due
______________
P 128,890,638.02
Thus, if the input VAT of P131,741,034.22 were to be credited against the income tax due,
the income tax payable is only P43,258,965.78. On the other hand, if the input VAT were to
be deducted from gross income before arriving at the net income, the income tax payable
is P128,890,638.02. This is almost three (3) times the income tax payable if the input VAT
were to be deducted from the income tax payable.
As can be seen from above, there is a substantial difference between a tax credit and a tax
deduction. A tax credit reduces tax liability while a tax deduction only reduces taxable income
(emphasis supplied).
A tax credit of input VAT fully utilizes the entire amount of P131,741,034.22, since tax liability
is reduced by the said amount. A tax deduction is not fully utilized because the savings is
only 35% or P46,109,361.98. In the above case, therefore, the use of input VAT as a tax
deduction results in a loss of 65% of the input VAT, or P85,631,672.24, which [respondent]
could have otherwise fully utilized as a tax credit.
xxx
xxx
xxx
x x x the deduction of an expense under Section 29 of the Tax Code is not tantamount to a
recovery of the expense. The deduction of a bad debt, for instance, does not result in the
recovery of the debt. On the other hand, a tax credit, because it can be fully utilized to
reduce tax liability, is as good as cash and is thus effectively a full recovery of the input VAT
cost.15 (Emphasis in the original; Words in brackets supplied).
We may add that the prejudice which befell respondent is all the more highlighted by the fact that it
has been issued assessments for deficiency output VAT on the basis of the same sales of gold to the
CB.
On a final note, the Court is fully cognizant of the well-entrenched principle that the Government is
not estopped from collecting taxes because of mistakes or errors on the part of its agents. 16 But, like
other principles of law, this also admits of exceptions in the interest of justice and fair play, as where
injustice will result to the taxpayer.17
As this Court has said in ABS-CBN Broadcasting Corporation v. Court of Tax Appeals and the
Commissioner of Internal Revenue:18
The insertion of Sec. 338-A [now Sec. 246] into the National Internal Revenue Code x x x is
indicative of legislative intention to support the principle of good faith. In fact, in the United
States x x x it has been held that the Commissioner or Collector is precluded from adopting a
position inconsistent with one previously taken where injustice would result therefrom, or
where there has been a misrepresentation to the taxpayer. [Word in brackets supplied].
Here, when respondent sold gold to the CB, it relied on the formal assurances of the BIR, i.e., VAT
Ruling No. 378-88 dated August 28, 1988 and VAT Ruling RMC No. 59-88 dated December 14,
1988, that such sales are zero-rated. To retroact a later ruling VAT Ruling No. 008-92 - revoking
the grant of zero-rating status to the sales of gold to the CB and applying a new and contrary
position that such sales are now subject to 10%, is clearly inconsistent with justice and the
elementary requirements of fair play.
Accordingly, we find that the CA did not commit a reversible error in holding that VAT Ruling No. 00892 cannot be retroactively applied to respondent's sales of gold to the CB during the period January
1, 1988 to July 31, 1989, hence, it is entitled to tax credit in the amount of P49,749,223.31
attributable to such sales.
IN VIEW WHEREOF, the instant petition is DENIED and the assailed CA Resolutions
are AFFIRMED.
No costs.
SO ORDERED.

vs.
SEAGATE TECHNOLOGY (PHILIPPINES), respondent.
DECISION
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;
2. [Petitioner] is sued in his official capacity, having been duly appointed and empowered to perform
the duties of his office, including, among others, the duty to act and approve claims for refund or tax
credit;
3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and has been issued
PEZA Certificate No. 97-044 pursuant to Presidential Decree No. 66, as amended, to engage in the
manufacture of recording components primarily used in computers for export. Such registration was
made on 6 June 1997;
4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT Registration
Certification No. 97-083-000600-V issued on 2 April 1997;
5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by [respondent];
6. An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with
supporting documents (inclusive of the P12,267,981.04 VAT input taxes subject of this Petition for
Review), was filed on 4 October 1999 with Revenue District Office No. 83, Talisay Cebu;
7. No final action has been received by [respondent] from [petitioner] on [respondents] claim for VAT
refund.
"The administrative claim for refund by the [respondent] on October 4, 1999 was not acted upon by
the [petitioner] prompting the [respondent] to elevate the case to [the CTA] on July 21, 2000 by way
of Petition for Review in order to toll the running of the two-year prescriptive period.
"For his part, [petitioner] x x x raised the following Special and Affirmative Defenses, to wit:
1. [Respondents] alleged claim for tax refund/credit is subject to administrative routinary
investigation/examination by [petitioners] Bureau;
2. Since taxes are presumed to have been collected in accordance with laws and regulations, the
[respondent] has the burden of proof that the taxes sought to be refunded were erroneously or
illegally collected x x x;
3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court ruled that:
"A claimant has the burden of proof to establish the factual basis of his or her claim for tax
credit/refund."
4. Claims for tax refund/tax credit are construed in strictissimi juris against the taxpayer. This is due
to the fact that claims for refund/credit [partake of] the nature of an exemption from tax. Thus, it is
incumbent upon the [respondent] to prove that it is indeed entitled to the refund/credit sought. Failure
on the part of the [respondent] to prove the same is fatal to its claim for tax credit. He who claims
exemption must be able to justify his claim by the clearest grant of organic or statutory law. An
exemption from the common burden cannot be permitted to exist upon vague implications;
5. Granting, without admitting, that [respondent] is a Philippine Economic Zone Authority (PEZA)
registered Ecozone Enterprise, then its business is not subject to VAT pursuant to Section 24 of
Republic Act No. ([RA]) 7916 in relation to Section 103 of the Tax Code, as amended. As
[respondents] business is not subject to VAT, the capital goods and services it alleged to have
purchased are considered not used in VAT taxable business. As such, [respondent] is not entitled to
refund of input taxes on such capital goods pursuant to Section 4.106.1 of Revenue Regulations No.
([RR])7-95, and of input taxes on services pursuant to Section 4.103 of said regulations.
6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229 of the 1997
Tax Code on filing of a written claim for refund within two (2) years from the date of payment of tax.
"On July 19, 2001, the Tax Court rendered a decision granting the claim for refund." 4
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 VATregistered 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.
Sole Issue:
Entitlement of a VAT-Registered PEZA Enterprise to a Refund of or Credit for Input VAT
No doubt, as a PEZA-registered enterprise within a special economic zone, 7 respondent is entitled to

the fiscal incentives and benefits8 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) 7227 11 and
7844.12
Preferential Tax Treatment Under Special Laws
If it avails itself of PD 66, notwithstanding the provisions of other laws to the contrary, respondent
shall not be subject to internal revenue laws and regulations for raw materials, supplies, articles,
equipment, machineries, spare parts and wares, except those prohibited by law, brought into the
zone to be stored, broken up, repacked, assembled, installed, sorted, cleaned, graded or otherwise
processed, manipulated, manufactured, mixed or used directly or indirectly in such activities. 13 Even
so, respondent would enjoy a net-operating loss carry over; accelerated depreciation; foreign
exchange and financial assistance; and exemption from export taxes, local taxes and licenses. 14
Comparatively, the same exemption from internal revenue laws and regulations applies if EO 226 15 is
chosen. Under this law, respondent shall further be entitled to an income tax holiday; additional
deduction for labor expense; simplification of customs procedure; unrestricted use of consigned
equipment; access to a bonded manufacturing warehouse system; privileges for foreign nationals
employed; tax credits on domestic capital equipment, as well as for taxes and duties on raw
materials; and exemption from contractors taxes, wharfage dues, taxes and duties on imported
capital equipment and spare parts, export taxes, duties, imposts and fees, 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 equipment18 -- is, ipso facto, also accorded to the zone19 under RA 7916.
Furthermore, the latter law -- notwithstanding other existing laws, rules and regulations to the
contrary -- extends20 to that zone the provision stating that no local or national taxes shall be
imposed therein.21 No exchange control policy shall be applied; and free markets for foreign
exchange, gold, securities and future shall be allowed and maintained. 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 locallyproduced materials used as inputs. Aside from the other incentives possibly already granted to it by
the Board of Investments, it also enjoys preferential credit facilities 25 and exemption from PD 1853.26
From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax treatment. 27 It
is not subject to internal revenue laws and regulations and is even entitled to tax credits. The VAT on
capital goods is an internal revenue tax from which petitioner as an entity is exempt. Although
the transactions involving such tax are not exempt, petitioner as a VAT-registered person, 28 however,
is entitled to their credits.
Nature of the VAT and the Tax Credit Method
Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent levied on
every importation of goods, whether or not in the course of trade or business, or imposed on each
sale, barter, exchange or lease of goods or properties or on each rendition of services in the course
of trade or business29 as they pass along the production and distribution chain, the tax being limited
only to the value added30 to such goods, properties or services by the seller, transferor or lessor.31 It
is an indirect tax that may be shifted or passed on to the buyer, transferee or lessee of the goods,
properties or services.32 As such, it should be understood not in the context of the person or entity
that is primarily, directly and legally liable for its payment, but in terms of its nature as a tax on
consumption.33 In either case, though, the same conclusion is arrived at.
The 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
If at the end of a taxable quarter the output taxes38 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 refunded 44 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 zerorated 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 a zero rate. 52 Again, as applied to
the tax base, such rate does not yield any tax chargeable against the purchaser. The seller who
charges zero output tax on such transactions can also claim a refund of or a tax credit certificate for
the VAT previously charged by suppliers.
Zero Rating and Exemption
In terms of the VAT computation, zero rating and exemption are the same, but the extent of relief that
results from either one of them is not.
Applying the destination principle53 to the exportation of goods, automatic zero rating54 is primarily
intended to be enjoyed by the seller who is directly and legally liable for the VAT, making such seller
internationally competitive by allowing the refund or credit of input taxes that are attributable to
export sales.55 Effective zero rating, on the contrary, is intended to benefit the purchaser who, not
being directly and legally liable for the payment of the VAT, will ultimately bear the burden of the tax
shifted by the suppliers.
In both instances of zero rating, there is total relief for the purchaser from the burden of the tax.56 But
in an exemption there is only partial relief,57 because the purchaser is not allowed any tax refund of
or credit for input taxes paid.58
Exempt Transaction >and Exempt Party

The object of exemption from the VAT may either be the transaction itself or any of the parties to the
transaction.59
An exempt transaction, on the one hand, involves goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the
tax status -- VAT-exempt or not -- of the party to the transaction.60 Indeed, such transaction is not
subject to the VAT, but the seller is not allowed any tax refund of or credit for any input taxes paid.
An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax
Code, a special law or an international agreement to which the Philippines is a signatory, and by
virtue of which its taxable transactions become exempt from the VAT.61 Such party is also not subject
to the VAT, but may be allowed a tax refund of or credit for input taxes paid, depending on its
registration as a VAT or non-VAT taxpayer.
As mentioned earlier, the VAT is a tax on consumption, the amount of which may be shifted or
passed on by the seller to the purchaser of the goods, properties or services. 62 While the liability is
imposed on one person, 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 VATexempt. These are subject to the VAT; respondent is required to register.
Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 10
percent,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 VATregistered 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 zone77within 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 area87 for manufacturing by registered export enterprises,88 of
which respondent is one. These rules also apply to all enterprises registered with the EPZA prior to
the effectivity of such rules.89
Fifth, export processing zone enterprises registered90 with the Board of Investments (BOI) under EO
226 patently enjoy exemption from national internal revenue taxes on imported capital equipment
reasonably needed and exclusively used for the manufacture of their products; 91 on required supplies
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 722796 are ipso facto accorded
to ecozones.97 In case of doubt, conflicts with respect to such tax exemption privilege shall be
resolved in favor of the ecozone.98
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 products100 -- 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 nonexemption of its transactions lead to the same result for the following considerations:
First, the contemporaneous construction of our tax laws by BIR authorities who are called upon to
execute or administer such laws109 will have to be 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 7916117 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 incentives120 to enhance the benefits that would
be derived from them121 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 zero-rated transaction does not
and cannot become exempt simply because an application therefor was not made or, if made, was
denied. To allow the additional requirement is to give unfettered discretion to those officials or agents
who, without fluid consideration, are bent on denying a valid application. Moreover, the State can
never be estopped by the omissions, mistakes or errors of its officials or agents. 144
Second, grantia argumenti that such an application is required by law, there is still the presumption
of regularity in the performance of official duty.145 Respondents registration carries with it the
presumption that, in the absence of contradictory evidence, an application for effective zero rating
was also filed and approval thereof given. Besides, it is also presumed that the law has been
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 226 152 -- starting January 1, 1996,
respondent would still have the same benefit under a general and express exemption contained in
both Article 77(1), Book VI of EO 226; and Section 12, paragraph 2 (c) of RA 7227, extended to the
ecozones by RA 7916.
There was a very clear intent on the part of our legislators, not only to exempt investors in ecozones
from national and local taxes, but also to grant them tax credits. This fact was revealed by the
sponsorship speeches in Congress during the second reading of House Bill No. 14295, which later
became RA 7916, as shown below:
"MR. RECTO. x x x Some of the incentives that this bill provides are exemption from national and
local taxes; x x x tax credit for locally-sourced inputs x x x."
xxxxxxxxx
"MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an environment
conducive for investors, the bill offers incentives such as the exemption from local and national
taxes, x x x tax credits for locally sourced inputs x x x."153
And third, no question as to either the filing of such claims within the prescriptive period or the
validity of the VAT returns has been raised. Even if such a question were raised, the tax exemption
under all the special laws cited above is broad enough to cover even the enforcement of internal
revenue laws, including prescription.154
Summary
To summarize, special laws expressly grant preferential tax treatment to business establishments
registered and operating within an ecozone, which by law is considered as a separate customs
territory. As such, respondent is exempt from all internal revenue taxes, including the VAT, and
regulations pertaining thereto. It has opted for the income tax holiday regime, instead of the 5
percent preferential tax regime. As a matter of law and procedure, its registration status entitling it to
such tax holiday can no longer be questioned. Its sales transactions intended for export may not be
exempt, but like its purchase transactions, they are zero-rated. No prior application for the effective
zero rating of its transactions is necessary. Being VAT-registered and having satisfactorily complied
with all the requisites for claiming a tax refund of or credit for the input VAT paid on capital goods
purchased, respondent is entitled to such VAT refund or credit.
WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No pronouncement as to
costs.
SO ORDERED.
.
CONTEX CORPORATION, petitioner,
vs.
HON. COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
For review is the Decision1 dated September 3, 2001, of the Court of Appeals, in CA-G.R. SP No.
62823, which reversed and set aside the decision2 dated October 13, 2000, of the Court of Tax
Appeals (CTA). The CTA had ordered the Commissioner of Internal Revenue (CIR) to refund the
sum of P683,061.90 to petitioner as erroneously paid input value-added tax (VAT) or in the
alternative, to issue a tax credit certificate for said amount. Petitioner also assails the appellate
courts Resolution,3 dated December 19, 2001, denying the motion for reconsideration.
Petitioner is a domestic corporation engaged in the business of manufacturing hospital textiles and
garments and other hospital supplies for export. Petitioners place of business is at the Subic Bay
Freeport Zone (SBFZ). It is duly registered with the Subic Bay Metropolitan Authority (SBMA) as a
Subic Bay Freeport Enterprise, pursuant to the provisions of Republic Act No. 7227. 4 As an SBMAregistered firm, petitioner is exempt from all local and national internal revenue taxes except for the
preferential tax provided for in Section 12 (c)5 of Rep. Act No. 7227. Petitioner also registered with
the Bureau of Internal Revenue (BIR) as a non-VAT taxpayer under Certificate of Registration RDO
Control No. 95-180-000133.
From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and materials
necessary in the conduct of its manufacturing business. The suppliers of these goods shifted unto
petitioner the 10% VAT on the purchased items, which led the petitioner to pay input taxes in the
amounts of P539,411.88 and P504,057.49 for 1997 and 1998, respectively.6
Acting on the belief that it was exempt from all national and local taxes, including VAT, pursuant to
Rep. Act No. 7227, petitioner filed two applications for tax refund or tax credit of the VAT it paid. Mr.
Edilberto Carlos, revenue district officer of BIR RDO No. 19, denied the first application letter, dated
December 29, 1998.
Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax refund/credit, this
time directly with Atty. Alberto Pagabao, the regional director of BIR Revenue Region No. 4. The
second letter sought a refund or issuance of a tax credit certificate in the amount of P1,108,307.72,
representing erroneously paid input VAT for the period January 1, 1997 to November 30, 1998.
When no response was forthcoming from the BIR Regional Director, petitioner then elevated the
matter to the Court of Tax Appeals, in a petition for review docketed as CTA Case No. 5895.
Petitioner stressed that Section 112(A)7 if read in relation to Section 106(A)(2)(a)8 of the National
Internal Revenue Code, as amended and Section 12(b)9 and (c) of Rep. Act No. 7227 would show
that it was not liable in any way for any value-added tax.
In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply the rule that claims
for refund are strictly construed against the taxpayer. Since petitioner failed to establish both its right
to a tax refund or tax credit and its compliance with the rules on tax refund as provided for in
Sections 20410 and 22911 of the Tax Code, its claim should be denied, according to the BIR.
On October 13, 2000, the CTA decided CTA Case No. 5895 as follows:
WHEREFORE, in view of the foregoing, the Petition for Review is hereby PARTIALLY
GRANTED. Respondent is hereby ORDERED to REFUND or in the alternative to ISSUE A
TAX CREDIT CERTIFICATE in favor of Petitioner the sum of P683,061.90, representing
erroneously paid input VAT.
SO ORDERED.12
In granting a partial refund, the CTA ruled that petitioner misread Sections 106(A)(2)(a) and 112(A) of
the Tax Code. The tax court stressed that these provisions apply only to those entities registered as
VAT taxpayers whose sales are zero-rated. Petitioner does not fall under this category, since it is a
non-VAT taxpayer as evidenced by the Certificate of Registration RDO Control No. 95-180-000133
issued by RDO Rosemarie Ragasa of BIR RDO No. 18 of the Subic Bay Freeport Zone and thus it is
exempt from VAT, pursuant to Rep. Act No. 7227, said the CTA.
Nonetheless, the CTA held that the petitioner is exempt from the imposition of input VAT on its
purchases of supplies and materials. It pointed out that under Section 12(c) of Rep. Act No. 7227
and the Implementing Rules and Regulations of the Bases Conversion and Development Act of
1992, all that petitioner is required to pay as a SBFZ-registered enterprise is a 5% preferential tax.
The CTA also disallowed all refunds of input VAT paid by the petitioner prior to June 29, 1997 for
being barred by the two-year prescriptive period under Section 229 of the Tax Code. The tax court
also limited the refund only to the input VAT paid by the petitioner on the supplies and materials
directly used by the petitioner in the manufacture of its goods. It struck down all claims for input VAT
paid on maintenance, office supplies, freight charges, and all materials and supplies shipped or
delivered to the petitioners Makati and Pasay City offices.
Respondent CIR then filed a petition, docketed as CA-G.R. SP No. 62823, for review of the CTA
decision by the Court of Appeals. Respondent maintained that the exemption of Contex Corp. under
Rep. Act No. 7227 was limited only to direct taxes and not to indirect taxes such as the input
component of the VAT. The Commissioner pointed out that from its very nature, the value-added tax
is a burden passed on by a VAT registered person to the end users; hence, the direct liability for the
tax lies with the suppliers and not Contex.
Finding merit in the CIRs arguments, the appellate court decided CA-G.R. SP No. 62823 in his
favor, thus:
WHEREFORE, premises considered, the appealed decision is hereby REVERSED AND
SET ASIDE. Contexs claim for refund of erroneously paid taxes is DENIED accordingly.
SO ORDERED.13
In reversing the CTA, the Court of Appeals held that the exemption from duties and taxes on the
importation of raw materials, capital, and equipment of SBFZ-registered enterprises under Rep. Act
No. 7227 and its implementing rules covers only "the VAT imposable under Section 107 of the [Tax
Code], which is a direct liability of the importer, and in no way includes the value-added tax of the
seller-exporter the burden of which was passed on to the importer as an additional costs of the
goods."14 This was because the exemption granted by Rep. Act No. 7227 relates to the act of
importation and Section 10715 of the Tax Code specifically imposes the VAT on importations. The
appellate court applied the principle that tax exemptions are strictly construed against the taxpayer.
The Court of Appeals pointed out that under the implementing rules of Rep. Act No. 7227, the
exemption of SBFZ-registered enterprises from internal revenue taxes is qualified as pertaining only
to those for which they may be directly liable. It then stated that apparently, the legislative intent
behind Rep. Act No. 7227 was to grant exemptions only to direct taxes, which SBFZ-registered
enterprise may be liable for and only in connection with their importation of raw materials, capital,
and equipment as well as the sale of their goods and services.
Petitioner timely moved for reconsideration of the Court of Appeals decision, but the motion was
denied.
Hence, the instant petition raising as issues for our resolution the following:
A. WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL AND NATIONAL INTERNAL
REVENUE TAXES PROVIDED IN REPUBLIC ACT NO. 7227 COVERS THE VALUE ADDED
TAX PAID BY PETITIONER, A SUBIC BAY FREEPORT ENTERPRISE ON ITS
PURCHASES OF SUPPLIES AND MATERIALS.
B. WHETHER OR NOT THE COURT OF TAX APPEALS CORRECTLY HELD THAT
PETITIONER IS ENTITLED TO A TAX CREDIT OR REFUND OF THE VAT PAID ON ITS
PURCHASES OF SUPPLIES AND RAW MATERIALS FOR THE YEARS 1997 AND 1998.16
Simply stated, we shall resolve now the issues concerning: (1) the correctness of the finding of the
Court of Appeals that the VAT exemption embodied in Rep. Act No. 7227 does not apply to petitioner
as a purchaser; and (2) the entitlement of the petitioner to a tax refund on its purchases of supplies
and raw materials for 1997 and 1998.
On the first issue, petitioner argues that the appellate courts restrictive interpretation of petitioners
VAT exemption as limited to those covered by Section 107 of the Tax Code is erroneous and devoid
of legal basis. It contends that the provisions of Rep. Act No. 7227 clearly and unambiguously
mandate that no local and national taxes shall be imposed upon SBFZ-registered firms and hence,
said law should govern the case. Petitioner calls our attention to regulations issued by both the
SBMA and BIR clearly and categorically providing that the tax exemption provided for by Rep. Act
No. 7227 includes exemption from the imposition of VAT on purchases of supplies and materials.
The respondent takes the diametrically opposite view that while Rep. Act No. 7227 does grant tax
exemptions, such grant is not all-encompassing but is limited only to those taxes for which a SBFZregistered business may be directly liable. Hence, SBFZ locators are not relieved from the indirect
taxes that may be shifted to them by a VAT-registered seller.
At this juncture, it must be stressed that the VAT is an indirect tax. As such, the amount of tax paid
on the goods, properties or services bought, transferred, or leased may be shifted or passed on by
the seller, transferor, or lessor to the buyer, transferee or lessee. 17 Unlike a direct tax, such as the
income tax, which primarily taxes an individuals ability to pay based on his income or net wealth, an
indirect tax, such as the VAT, is a tax on consumption of goods, services, or certain transactions
involving the same. The VAT, thus, forms a substantial portion of consumer expenditures.
Further, in indirect taxation, there is a need to distinguish between the liability for the tax and the
burden of the tax. As earlier pointed out, the amount of tax paid may be shifted or passed on by the
seller to the buyer. What is transferred in such instances is not the liability for the tax, but the tax
burden. In adding or including the VAT due to the selling price, the seller remains the person
primarily and legally liable for the payment of the tax. What is shifted only to the intermediate buyer
and ultimately to the final purchaser is the burden of the tax.18 Stated differently, a seller who is
directly and legally liable for payment of an indirect tax, such as the VAT on goods or services is not
necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser or
consumer of such goods or services who, although not directly and legally liable for the payment
thereof, ultimately bears the burden of the tax.19
Exemptions from VAT are granted by express provision of the Tax Code or special laws. Under VAT,
the transaction can have preferential treatment in the following ways:
(a) VAT Exemption. An exemption means that the sale of goods or properties and/or services
and the use or lease of properties is not subject to VAT (output tax) and the seller is not
allowed any tax credit on VAT (input tax) previously paid. 20 This is a case wherein the VAT is
removed at the exempt stage (i.e., at the point of the sale, barter or exchange of the goods
or properties).
The person making the exempt sale of goods, properties or services shall not bill any output
tax to his customers because the said transaction is not subject to VAT. On the other hand, a
VAT-registered purchaser of VAT-exempt goods/properties or services which are exempt
from VAT is not entitled to any input tax on such purchase despite the issuance of a VAT
invoice or receipt.21
(b) Zero-rated Sales. These are sales by VAT-registered persons which are subject to 0%
rate, meaning the tax burden is not passed on to the purchaser. A zero-rated sale by a VATregistered person, which is a taxable transaction for VAT purposes, shall not result in any
output tax. However, the input tax on his purchases of goods, properties or services related
to such zero-rated sale shall be available as tax credit or refund in accordance with these
regulations.22
Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm. In contrast,
exemption only removes the VAT at the exempt stage, and it will actually increase, rather than
reduce the total taxes paid by the exempt firms business or non-retail customers. It is for this reason
that a sharp distinction must be made between zero-rating and exemption in designating a valueadded tax.23
Apropos, the petitioners claim to VAT exemption in the instant case for its purchases of supplies and
raw materials is founded mainly on Section 12 (b) and (c) of Rep. Act No. 7227, which basically
exempts them from all national and local internal revenue taxes, including VAT and Section 4 (A)(a)
of BIR Revenue Regulations No. 1-95.24
On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is not controverted
by the respondent. In fact, petitioner is registered as a NON-VAT taxpayer per Certificate of
Registration25 issued by the BIR. As such, it is exempt from VAT on all its sales and importations of
goods and services.
Petitioners claim, however, for exemption from VAT for its purchases of supplies and raw materials
is incongruous with its claim that it is VAT-Exempt, for only VAT-Registered entities can claim Input
VAT Credit/Refund.
The point of contention here is whether or not the petitioner may claim a refund on the Input VAT
erroneously passed on to it by its suppliers.
While it is true that the petitioner should not have been liable for the VAT inadvertently passed on to
it by its supplier since such is a zero-rated sale on the part of the supplier, the petitioner is not the
proper party to claim such VAT refund.
Section 4.100-2 of BIRs Revenue Regulations 7-95, as amended, or the "Consolidated ValueAdded Tax Regulations" provide:
Sec. 4.100-2. Zero-rated Sales. A zero-rated sale by a VAT-registered person, which is a
taxable transaction for VAT purposes, shall not result in any output tax. However, the input
tax on his purchases of goods, properties or services related to such zero-rated sale shall be
available as tax credit or refund in accordance with these regulations.
The following sales by VAT-registered persons shall be subject to 0%:
(a) Export Sales
"Export Sales" shall mean
...
(5) Those considered export sales under Articles 23 and 77 of Executive Order No.
226, otherwise known as the Omnibus Investments Code of 1987, and other special
laws, e.g. Republic Act No. 7227, otherwise known as the Bases Conversion and
Development Act of 1992.
...
(c) Sales to persons or entities whose exemption under special laws, e.g. R.A. No. 7227 duly
registered and accredited enterprises with Subic Bay Metropolitan Authority (SBMA) and
Clark Development Authority (CDA), R. A. No. 7916, Philippine Economic Zone Authority
(PEZA), or international agreements, e.g. Asian Development Bank (ADB), International Rice
Research Institute (IRRI), etc. to which the Philippines is a signatory effectively subject such
sales to zero-rate."
Since the transaction is deemed a zero-rated sale, petitioners supplier may claim an Input VAT
credit with no corresponding Output VAT liability. Congruently, no Output VAT may be passed on to
the petitioner.
On the second issue, it may not be amiss to re-emphasize that the petitioner is registered as a NONVAT taxpayer and thus, is exempt from VAT. As an exempt VAT taxpayer, it is not allowed any tax
credit on VAT (input tax) previously paid. In fine, even if we are to assume that exemption from the
burden of VAT on petitioners purchases did exist, petitioner is still not entitled to any tax credit or
refund on the input tax previously paid as petitioner is an exempt VAT taxpayer.
Rather, it is the petitioners suppliers who are the proper parties to claim the tax credit and
accordingly refund the petitioner of the VAT erroneously passed on to the latter.
Accordingly, we find that the Court of Appeals did not commit any reversible error of law in holding
that petitioners VAT exemption under Rep. Act No. 7227 is limited to the VAT on which it is directly
liable as a seller and hence, it cannot claim any refund or exemption for any input VAT it paid, if any,
on its purchases of raw materials and supplies.
WHEREFORE, the petition is DENIED for lack of merit. The Decision dated September 3, 2001, of
the Court of Appeals in CA-G.R. SP No. 62823, as well as its Resolution of December 19, 2001 are
AFFIRMED. No pronouncement as to costs.
SO ORDERED.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. TOSHIBA

INFORMATION EQUIPMENT (PHILS.), INC.,respondent.
DECISION
In this Petition for Review under Rule 45 of the Rules of Court, petitioner Commissioner of
Internal Revenue (CIR) prays for the reversal of the decision of the Court of Appeals in CA-G.R.
SP No. 59106,[1] affirming the order of the Court of Tax Appeals (CTA) in CTA Case No. 5593,
[2]
which ordered said petitioner CIR to refund or, in the alternative, to issue a tax credit certificate
to respondent Toshiba Information Equipment (Phils.), Inc. (Toshiba), in the amount
of P16,188,045.44, representing unutilized input value-added tax (VAT) payments for the first
and second quarters of 1996.
There is hardly any dispute as to the facts giving rise to the present Petition.
Respondent Toshiba was organized and established as a domestic corporation, dulyregistered with the Securities and Exchange Commission on 07 July 1995, [3] with the primary
purpose of engaging in the business of manufacturing and exporting of electrical and
mechanical machinery, equipment, systems, accessories, parts, components, materials and
goods of all kinds, including, without limitation, to those relating to office automation and
information technology, and all types of computer hardware and software, such as HDD, CDROM and personal computer printed circuit boards.[4]
On 27 September 1995, respondent Toshiba also registered with the Philippine Economic
Zone Authority (PEZA) as an ECOZONE Export Enterprise, with principal office in Laguna
Technopark, Bian, Laguna.[5] Finally, on 29 December 1995, it registered with the Bureau of
Internal Revenue (BIR) as a VAT taxpayer and a withholding agent.[6]
Respondent Toshiba filed its VAT returns for the first and second quarters of taxable year
1996, reporting input VAT in the amount ofP13,118,542.00[7] and P5,128,761.94,[8] respectively,
or a total of P18,247,303.94. It alleged that the said input VAT was from its purchases of capital
goods and services which remained unutilized since it had not yet engaged in any business
activity or transaction for which it may be liable for any output VAT.[9] Consequently, on 27 March
1998, respondent Toshiba filed with the One-Stop Shop Inter-Agency Tax Credit and Duty
Drawback Center of the Department of Finance (DOF) applications for tax credit/refund of its
unutilized input VAT for 01 January to 31 March 1996 in the amount of P14,176,601.28,[10] and
for 01 April to 30 June 1996 in the amount of P5,161,820.79,[11] for a total of P19,338,422.07. To
toll the running of the two-year prescriptive period for judicially claiming a tax credit/refund,
respondent Toshiba, on 31 March 1998, filed with the CTA a Petition for Review. It would
subsequently file an Amended Petition for Review on 10 November 1998 so as to conform to
the evidence presented before the CTA during the hearings.
In his Answer to the Amended Petition for Review before the CTA, petitioner CIR raised
several Special and Affirmative Defenses, to wit
5. Assuming without admitting that petitioner filed a claim for refund/tax credit, the same is subject
to investigation by the Bureau of Internal Revenue.
6. Taxes are presumed to have been collected in accordance with law. Hence, petitioner must prove
that the taxes sought to be refunded were erroneously or illegally collected.
7. Petitioner must prove the allegations supporting its entitlement to a refund.
8. Petitioner must show that it has complied with the provisions of Sections 204(c) and 229 of the
1997 Tax Code on the filing of a written claim for refund within two (2) years from the date of
payment of the tax.
9. Claims for refund of taxes are construed strictly against claimants, the same being in the nature
of an exemption from taxation.[12]
After evaluating the evidence submitted by respondent Toshiba,[13] the CTA, in its Decision
dated 10 March 2000, ordered petitioner CIR to refund, or in the alternative, to issue a tax credit
certificate to respondent Toshiba in the amount of P16,188,045.44.[14]
In a Resolution, dated 24 May 2000, the CTA denied petitioner CIRs Motion for
Reconsideration for lack of merit.[15]
The Court of Appeals, in its Decision dated 27 September 2001, dismissed petitioner CIRs
Petition for Review and affirmed the CTA Decision dated 10 March 2000.
Comes now petitioner CIR before this Court assailing the above-mentioned Decision of the
Court of Appeals based on the following grounds
1. The Court of Appeals erred in holding that petitioners failure to raise in the Tax Court the
arguments relied upon by him in the petition, is fatal to his cause.
2. The Court of Appeals erred in not holding that respondent being registered with the Philippine
Economic Zone Authority (PEZA) as an Ecozone Export Enterprise, its business is not subject
to VAT pursuant to Section 24 of Republic Act No. 7916 in relation to Section 103 (now 109) of
the Tax Code.
3. The Court of Appeals erred in not holding that since respondents business is not subject to VAT,
the capital goods and services it purchased are considered not used in VAT taxable business,
and, therefore, it is not entitled to refund of input taxes on such capital goods pursuant to
Section 4.106-1 of Revenue Regulations No. 7-95 and of input taxes on services pursuant to
Section 4.103-1 of said Regulations.
4. The Court of Appeals erred in holding that respondent is entitled to a refund or tax credit of input
taxes it paid on zero-rated transactions.[16]
Ultimately, however, the issue still to be resolved herein shall be whether respondent
Toshiba is entitled to the tax credit/refund of its input VAT on its purchases of capital goods and
services, to which this Court answers in the affirmative.
I
An ECOZONE enterprise is a VAT-exempt entity. Sales of goods, properties, and services by persons from
the Customs Territory to ECOZONE enterprises shall be subject to VAT at zero percent (0%).
Respondent Toshiba bases its claim for tax credit/refund on Section 106(b) of the Tax Code
of 1977, as amended, which reads:
SEC. 106. Refunds or tax credits of creditable input tax.
(b) Capital goods. A VAT-registered person may apply for the issuance of a tax credit certificate or refund
of input taxes paid on capital goods imported or locally purchased, to the extent that such input taxes have
not been applied against output taxes. The application may be made only within two (2) years after the
close of the taxable quarter when the importation or purchase was made. [17]
Petitioner CIR, on the other hand, opposes such claim on account of Section 4.106-1(b) of
Revenue Regulations (RR) No. 7-95, otherwise known as the VAT Regulations, as amended,
which provides as follows
Sec. 4.106-1. Refunds or tax credits of input tax.
...
(b) Capital Goods. -- Only a VAT-registered person may apply for issuance of a tax credit certificate or
refund of input taxes paid on capital goods imported or locally purchased. The refund shall be allowed to
the extent that such input taxes have not been applied against output taxes. The application should be
made within two (2) years after the close of the taxable quarter when the importation or purchase was
made.
Refund of input taxes on capital goods shall be allowed only to the extent that such capital goods are used
in VAT taxable business. If it is also used in exempt operations, the input tax refundable shall only be the
ratable portion corresponding to the taxable operations.
Capital goods or properties refer to goods or properties with estimated useful life greater than one year
and which are treated as depreciable assets under Section 29(f), used directly or indirectly in the
production or sale of taxable goods or services. (Underscoring ours.)
Petitioner CIR argues that although respondent Toshiba may be a VAT-registered taxpayer,
it is not engaged in a VAT-taxable business. According to petitioner CIR, respondent Toshiba is
actually VAT-exempt, invoking the following provision of the Tax Code of 1977, as amended
SEC. 103. Exempt transactions. The following shall be exempt from value-added tax.
(q) Transactions which are exempt under special laws, except those granted under Presidential Decree No.
66, 529, 972, 1491, and 1590, and non-electric cooperatives under Republic Act No. 6938, or
international agreements to which the Philippines is a signatory.[18]
Since respondent Toshiba is a PEZA-registered enterprise, it is subject to the five percent
(5%) preferential tax rate imposed under Chapter III, Section 24 of Republic Act No. 7916,
otherwise known as The Special Economic Zone Act of 1995, as amended. According to the
said section, [e]xcept for real property taxes on land owned by developers, no taxes, local and
national, shall be imposed on business establishments operating within the ECOZONE. In lieu
thereof, five percent (5%) of the gross income earned by all business enterprises within the
ECOZONE shall be paid The five percent (5%) preferential tax rate imposed on the gross
income of a PEZA-registered enterprise shall be in lieu of all national taxes, including VAT. Thus,
petitioner CIR contends that respondent Toshiba is VAT-exempt by virtue of a special law, Rep.
Act No. 7916, as amended.
It would seem that petitioner CIR failed to differentiate between VAT-exempt transactions
from VAT-exempt entities. In the case ofCommissioner of Internal Revenue v. Seagate
Technology (Philippines),[19] this Court already made such distinction
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
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 VAT
Section 103(q) of the Tax Code of 1977, as amended, relied upon by petitioner CIR, relates
to VAT-exempt transactions. These are transactions exempted from VAT by special laws or
international agreements to which the Philippines is a signatory. Since such transactions are not
subject to VAT, the sellers cannot pass on any output VAT to the purchasers of goods,
properties, or services, and they may not claim tax credit/refund of the input VAT they had paid
thereon.
Section 103(q) of the Tax Code of 1977, as amended, cannot apply to transactions of
respondent Toshiba because although the said section recognizes that transactions covered by
special laws may be exempt from VAT, the very same section provides that those falling under
Presidential Decree No. 66 are not. Presidential Decree No. 66, creating the Export Processing
Zone Authority (EPZA), is the precursor of Rep. Act No. 7916, as amended, [20] under which the
EPZA evolved into the PEZA. Consequently, the exception of Presidential Decree No. 66 from
Section 103(q) of the Tax Code of 1977, as amended, extends likewise to Rep. Act No. 7916, as
amended.
This Court agrees, however, that PEZA-registered enterprises, which would necessarily be
located within ECOZONES, are VAT-exempt entities, not because of Section 24 of Rep. Act No.
7916, as amended, which imposes the five percent (5%) preferential tax rate on gross income of
PEZA-registered enterprises, in lieu of all taxes; but, rather, because of Section 8 of the same
statute which establishes the fiction that ECOZONES are foreign territory.
It is important to note herein that respondent Toshiba is located within an ECOZONE. An
ECOZONE or a Special Economic Zone has been described as
. . . [S]elected areas with highly developed or which have the potential to be developed into agroindustrial, industrial, tourist, recreational, commercial, banking, investment and financial centers whose
metes and bounds are fixed or delimited by Presidential Proclamations. An ECOZONE may contain any
or all of the following: industrial estates (IEs), export processing zones (EPZs), free trade zones and
tourist/recreational centers.[21]
The national territory of the Philippines outside of the proclaimed borders of the ECOZONE shall
be referred to as the Customs Territory.[22]
Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall manage and
operate the ECOZONES as a separate customs territory; [23] thus, creating the fiction that the
ECOZONE is a foreign territory.[24] As a result, sales made by a supplier in the Customs Territory
to a purchaser in the ECOZONE shall be treated as an exportation from the Customs Territory.
Conversely, sales made by a supplier from the ECOZONE to a purchaser in the Customs
Territory shall be considered as an importation into the Customs Territory.
Given the preceding discussion, what would be the VAT implication of sales made by a
supplier from the Customs Territory to an ECOZONE enterprise?
The Philippine VAT system adheres to the Cross Border Doctrine, according to which, 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. Hence, actual export of goods and services from the
Philippines to a foreign country must be free of VAT; while, those destined for use or
consumption within the Philippines shall be imposed with ten percent (10%) VAT.[25]
Applying said doctrine to the sale of goods, properties, and services to and from the
ECOZONES,[26] the BIR issued Revenue Memorandum Circular (RMC) No. 74-99, on 15
October 1999. Of particular interest to the present Petition is Section 3 thereof, which reads
SECTION 3. Tax Treatment Of Sales Made By a VAT Registered Supplier from The Customs
Territory, To a PEZA Registered Enterprise.
(1) If the Buyer is a PEZA registered enterprise which is subject to the 5% special tax regime, in lieu of
all taxes, except real property tax, pursuant to R.A. No. 7916, as amended:
(a) Sale of goods (i.e., merchandise). This shall be treated as indirect export hence, considered subject to
zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916, in relation
to ART. 77(2) of the Omnibus Investments Code.
(b) Sale of service. This shall be treated subject to zero percent (0%) VAT under the cross border
doctrine of the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998.
(2) If Buyer is a PEZA registered enterprise which is not embraced by the 5% special tax regime, hence,
subject to taxes under the NIRC, e.g., Service Establishments which are subject to taxes under the NIRC
rather than the 5% special tax regime:
(a) Sale of goods (i.e., merchandise). This shall be treated as indirect export hence, considered subject to
zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916 in relation
to ART. 77(2) of the Omnibus Investments Code.
(b) Sale of Service. This shall be treated subject to zero percent (0%) VAT under the cross border
doctrine of the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998.
(3) In the final analysis, any sale of goods, property or services made by a VAT registered supplier from
the Customs Territory to any registered enterprise operating in the ecozone, regardless of the class or type
of the latters PEZA registration, is actually qualified and thus legally entitled to the zero percent (0%)
VAT. Accordingly, all sales of goods or property to such enterprise made by a VAT registered supplier
from the Customs Territory shall be treated subject to 0% VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC,
in relation to ART. 77(2) of the Omnibus Investments Code, while all sales of services to the said
enterprises, made by VAT registered suppliers from the Customs Territory, shall be treated effectively
subject to the 0% VAT, pursuant to Section 108(B)(3), NIRC, in relation to the provisions of R.A. No.
7916 and the Cross Border Doctrine of the VAT system.
This Circular shall serve as a sufficient basis to entitle such supplier of goods, property or services to the
benefit of the zero percent (0%) VAT for sales made to the aforementioned ECOZONE enterprises and
shall serve as sufficient compliance to the requirement for prior approval of zero-rating imposed by
Revenue Regulations No. 7-95 effective as of the date of the issuance of this Circular.
Indubitably, no output VAT may be passed on to an ECOZONE enterprise since it is a VATexempt entity. The VAT treatment of sales to it, however, varies depending on whether the
supplier from the Customs Territory is VAT-registered or not.
Sales of goods, properties and services by a VAT-registered supplier from the Customs
Territory to an ECOZONE enterprise shall be treated as export sales. If such sales are made by
a VAT-registered supplier, they shall be subject to VAT at zero percent (0%). In zero-rated
transactions, the VAT-registered supplier shall not pass on any output VAT to the ECOZONE
enterprise, and at the same time, shall be entitled to claim tax credit/refund of its input VAT
attributable to such sales. Zero-rating of export sales primarily intends to benefit the exporter
(i.e., the supplier from the Customs Territory), who is directly and legally liable for the VAT,
making it internationally competitive by allowing it to credit/refund the input VAT attributable to its
export sales.
Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or unregistered supplier
would only be exempt from VAT and the supplier shall not be able to claim credit/refund of its
input VAT.
Even conceding, however, that respondent Toshiba, as a PEZA-registered enterprise, is a
VAT-exempt entity that could not have engaged in a VAT-taxable business, this Court still
believes, given the particular circumstances of the present case, that it is entitled to a
credit/refund of its input VAT.
II
Prior to RMC No. 74-99, however, PEZA-registered enterprises availing of the income tax holiday under
Executive Order No. 226, as amended, were deemed subject to VAT.
In his Petition, petitioner CIR opposed the grant of tax credit/refund to respondent Toshiba,
reasoning thus
In the first place, respondent could not have paid input taxes on its purchases of goods and services from
VAT-registered suppliers because such purchases being zero-rated, that is, no output tax was paid by the
suppliers, no input tax was shifted or passed on to respondent. The VAT 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
(Section 105, 1997 Tax Code).
Secondly, Section 4.100-2 of Revenue Regulations No. 7-95 provides:
SEC. 4.100-2. Zero-rated sales. A zero-rated sale by a VAT-registered person, which is a taxable
transaction for VAT purposes, shall not result in any output tax. However, the input tax on his purchases
of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in
accordance with these regulations.
From the foregoing, the VAT-registered person who can avail as tax credit or refund of the input tax on his
purchases of goods, services or properties is the seller whose sale is zero-rated. Applying the foregoing
provision to the case at bench, the VAT-registered supplier, whose sale of goods and services to
respondent is zero-rated, can avail as tax credit or refund the input taxes on its (supplier) own purchases
of goods and services related to its zero-rated sale of goods and services to respondent. On the other hand,
respondent, as the buyer in such zero-rated sale of goods and services, could not have paid input taxes for
which it can claim as tax credit or refund. [27]
Before anything else, this Court wishes to point out that petitioner CIR is working on the
erroneous premise that respondent Toshiba is claiming tax credit or refund of input VAT based
on Section 4.100-2,[28] in relation to Section 4.106-1(a),[29] of RR No. 7-95, as amended, which
allows the tax credit/refund of input VAT on zero-rated sales of goods, properties or services.
Instead, respondent Toshiba is basing its claim for tax credit or refund on Sec. 4.106-1(b) of the
same regulations, which allows a VAT-registered person to apply for tax credit/refund of the
input VAT on its capital goods. While in the former, the seller of the goods, properties or services
is the one entitled to the tax credit/refund; in the latter, it is the purchaser of the capital goods.
Nevertheless, regardless of his mistake as to the basis for respondent Toshibas application
for tax credit/refund, petitioner CIR validly raised the question of whether any output VAT was
actually passed on to respondent Toshiba which it could claim as input VAT subject to
credit/refund. If the VAT-registered supplier from the Customs Territory did not charge any output
VAT to respondent Toshiba believing that it is exempt from VAT or it is subject to zero-rated VAT,
then respondent Toshiba did not pay any input VAT on its purchase of capital goods and it could
not claim any tax credit/refund thereof.
The rule that any sale by a VAT-registered supplier from the Customs Territory to a PEZAregistered enterprise shall be considered an export sale and subject to zero percent (0%) VAT
was clearly established only on 15 October 1999, upon the issuance of RMC No. 74-99. Prior to
the said date, however, whether or not a PEZA-registered enterprise was VAT-exempt
depended on the type of fiscal incentives availed of by the said enterprise. This old rule on VATexemption or liability of PEZA-registered enterprises, followed by the BIR, also recognized and
affirmed by the CTA, the Court of Appeals, and even this Court, [30] cannot be lightly disregarded
considering the great number of PEZA-registered enterprises which did rely on it to determine
its tax liabilities, as well as, its privileges.
According to the old rule, Section 23 of Rep. Act No. 7916, as amended, gives the PEZAregistered enterprise the option to choose between two sets of fiscal incentives: (a) The five
percent (5%) preferential tax rate on its gross income under Rep. Act No. 7916, as amended;
and (b) the income tax holiday provided under Executive Order No. 226, otherwise known as
the Omnibus Investment Code of 1987, as amended.[31]
The five percent (5%) preferential tax rate on gross income under Rep. Act No. 7916, as
amended, is in lieu of all taxes. Except for real property taxes, no other national or local tax may
be imposed on a PEZA-registered enterprise availing of this particular fiscal incentive, not even
an indirect tax like VAT.
Alternatively, Book VI of Exec. Order No. 226, as amended, grants income tax holiday to
registered pioneer and non-pioneer enterprises for six-year and four-year periods, respectively.
[32]
Those availing of this incentive are exempt only from income tax, but shall be subject to all
other taxes, including the ten percent (10%) VAT.
This old rule clearly did not take into consideration the Cross Border Doctrine essential to
the VAT system or the fiction of the ECOZONE as a foreign territory. It relied totally on the
choice of fiscal incentives of the PEZA-registered enterprise. Again, for emphasis, the old VAT
rule for PEZA-registered enterprises was based on their choice of fiscal incentives: (1) If the
PEZA-registered enterprise chose the five percent (5%) preferential tax on its gross income, in
lieu of all taxes, as provided by Rep. Act No. 7916, as amended, then it would be VAT-exempt;
(2) If the PEZA-registered enterprise availed of the income tax holiday under Exec. Order No.
226, as amended, it shall be subject to VAT at ten percent (10%). Such distinction was
abolished by RMC No. 74-99, which categorically declared that all sales of goods, properties,
and services made by a VAT-registered supplier from the Customs Territory to an ECOZONE
enterprise shall be subject to VAT, at zero percent (0%) rate, regardless of the latters type or
class of PEZA registration; and, thus, affirming the nature of a PEZA-registered or an
ECOZONE enterprise as a VAT-exempt entity.
The sale of capital goods by suppliers from the Customs Territory to respondent Toshiba in
the present Petition took place during the first and second quarters of 1996, way before the
issuance of RMC No. 74-99, and when the old rule was accepted and implemented by no less
than the BIR itself. Since respondent Toshiba opted to avail itself of the income tax holiday
under Exec. Order No. 226, as amended, then it was deemed subject to the ten percent (10%)
VAT. It was very likely therefore that suppliers from the Customs Territory had passed on output
VAT to respondent Toshiba, and the latter, thus, incurred input VAT. It bears emphasis that the
CTA, with the help of SGV & Co., the independent accountant it commissioned to make a
report, already thoroughly reviewed the evidence submitted by respondent Toshiba consisting of
receipts, invoices, and vouchers, from its suppliers from the Customs Territory. Accordingly, this
Court gives due respect to and adopts herein the CTAs findings that the suppliers of capital
goods from the Customs Territory did pass on output VAT to respondent Toshiba and the
amount of input VAT which respondent Toshiba could claim as credit/refund.
Moreover, in another circular, Revenue Memorandum Circular (RMC) No. 42-2003, issued
on 15 July 2003, the BIR answered the following question
Q-5: Under Revenue Memorandum Circular (RMC) No. 74-99, purchases by PEZA-registered
firms automatically qualify as zero-rated without seeking prior approval from the BIR
effective October 1999.
1) Will the OSS-DOF Center still accept applications from PEZA-registered claimants
who were allegedly billed VAT by their suppliers before and during the effectivity of
the RMC by issuing VAT invoices/receipts?
A-5(1): If the PEZA-registered enterprise is paying the 5% preferential tax in lieu of all other taxes,
the said PEZA-registered taxpayer cannot claim TCC or refund for the VAT paid on
purchases. However, if the taxpayer is availing of the income tax holiday, it can claim
VAT credit provided:
a. The taxpayer-claimant is VAT-registered;
b. Purchases are evidenced by VAT invoices or receipts, whichever is applicable, with
shifted VAT to the purchaser prior to the implementation of RMC No. 74-99; and
c. The supplier issues a sworn statement under penalties of perjury that it shifted the VAT
and declared the sales to the PEZA-registered purchaser as taxable sales in its VAT
returns.
For invoices/receipts issued upon the effectivity of RMC No. 74-99, the claims for input
VAT by PEZA-registered companies, regardless of the type or class of PEZA registration,
should be denied.
Under RMC No. 42-2003, the DOF would still accept applications for tax credit/refund filed
by PEZA-registered enterprises, availing of the income tax holiday, for input VAT on their
purchases made prior to RMC No. 74-99. Acceptance of applications essentially implies
processing and possible approval thereof depending on whether the given conditions are met.
Respondent Toshibas claim for tax credit/refund arose from the very same circumstances
recognized by Q-5(1) and A-5(1) of RMC No. 42-2003. It therefore seems irrational and
unreasonable for petitioner CIR to oppose respondent Toshibas application for tax credit/refund
of its input VAT, when such claim had already been determined and approved by the CTA after
due hearing, and even affirmed by the Court of Appeals; while it could accept, process, and
even approve applications filed by other similarly-situated PEZA-registered enterprises at the
administrative level.
III
Findings of fact by the CTA are respected and adopted by this Court.
Finally, petitioner CIR, in a last desperate attempt to block respondent Toshibas claim for
tax credit/refund, challenges the allegation of said respondent that it availed of the income tax
holiday under Exec. Order No. 226, as amended, rather than the five percent (5%) preferential
tax rate under Rep. Act No. 7916, as amended. Undoubtedly, this is a factual matter that should
have been raised and threshed out in the lower courts. Giving it credence would belie petitioner
CIRs assertion that it is raising only issues of law in its Petition that may be resolved without
need for reception of additional evidences. Once more, this Court respects and adopts the
finding of the CTA, affirmed by the Court of Appeals, that respondent Toshiba had indeed
availed of the income tax holiday under Exec. Order No. 226, as amended.
WHEREFORE, based on the foregoing, this Court AFFIRMS the decision of the Court of
Appeals in CA-G.R. SP. No. 59106, and the order of the CTA in CTA Case No. 5593, ordering
said petitioner CIR to refund or, in the alternative, to issue a tax credit certificate to respondent
Toshiba, in the amount of P16,188,045.44, representing unutilized input VAT for the first and
second quarters of 1996.
SO ORDERED.
RENATO
V.
DIAZ
vs.
THE
SECRETARY
OF
REVENUE, Respondents.
and
FINANCE
AURORA
and
THE
MA.
F.
TIMBOL, Petitioners,
COMMISSIONER
DECISION
May toll fees collected by tollway operators be subjected to value- added tax?
The Facts and the Case
OF
INTERNAL
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 MacapagalArroyo 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 non-impairment clause cannot limit
the States sovereign taxing power which is generally read into contracts.
Finally, the government contends that the non-inclusion of VAT in the parametric formula for
computing toll rates cannot exempt tollway operators from VAT. In any event, it cannot be claimed
that the rights of tollway operators to a reasonable rate of return will be impaired by the VAT since
this is imposed on top of the toll rate. Further, the imposition of VAT on toll fees would have very
minimal effect on motorists using the tollways.
In their reply6 to the governments comment, petitioners point out that tollway operators cannot be
regarded as franchise grantees under the NIRC since they do not hold legislative franchises.
Further, the BIR intends to collect the VAT by rounding off the toll rate and putting any excess
collection in an escrow account. But this would be illegal since only the Congress can modify VAT
rates and authorize its disbursement. Finally, BIR Revenue Memorandum Circular 63-2010 (BIR
RMC 63-2010), which directs toll companies to record an accumulated input VAT of zero balance in
their books as of August 16, 2010, contravenes Section 111 of the NIRC which grants entities that
first become 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, quasijudicial, 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 low-income radio
and/or television broadcasting companies with gross annual incomes of less than P10 million and
gas and water utilities) that Section 11913 spares from the payment of VAT. The word "franchise"
broadly covers government grants of a special right to do an act or series of acts of public concern. 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) 25of 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 tax30 and simply becomes part of the cost that the buyer must pay in order to
purchase the good, property or service.
Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the tollway
operator. Under Section 105 of the Code, 31 VAT is imposed on any person who, in the course of
trade or business, sells or renders services for a fee. In other words, the seller of services, who in
this case is the tollway operator, is the person liable for VAT. The latter merely shifts the burden of
VAT to the tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were deemed as a
"users tax." VAT is assessed against the tollway operators gross receipts and not necessarily on the
toll fees. Although the tollway operator may shift the VAT burden to the tollway user, it will not make
the latter directly liable for the VAT. The shifted VAT burden simply becomes part of the toll fees that
one has to pay in order to use the tollways.32
Three. Petitioner Timbol has no personality to invoke the non-impairment of contract clause on
behalf of private investors in the tollway projects. She will neither be prejudiced by nor be affected by
the alleged diminution in return of investments that may result from the VAT imposition. She has no
interest at all in the profits to be earned under the TOAs. The interest in and right to recover
investments solely belongs to the private tollway investors.
Besides, her allegation that the private investors rate of recovery will be adversely affected by
imposing VAT on tollway operations is purely speculative. Equally presumptuous is her assertion that
a stipulation in the TOAs known as the Material Adverse Grantor Action will be activated if VAT is
thus imposed. The Court cannot rule on matters that are manifestly 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 VATinclusive 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.

vs.
SM PRIME HOLDINGS, INC. and FIRST ASIA REALTY DEVELOPMENT
CORPORATION, Respondents.
DECISION
DEL CASTILLO, J.:
When the intent of the law is not apparent as worded, or when the application of
the law would lead to absurdity or injustice, legislative history is all important. In
such cases, courts may take judicial notice of the origin and history of the
law,1 the deliberations during the enactment,2 as well as prior laws on the same
subject matter3 to ascertain the true intent or spirit of the law.
This Petition for Review on Certiorari under Rule 45 of the Rules of Court, in
relation to Republic Act (RA) No. 9282,4 seeks to set aside the April 30, 2008
Decision5 and the June 24, 2008 Resolution6 of the Court of Tax Appeals (CTA).
Factual Antecedents
Respondents SM Prime Holdings, Inc. (SM Prime) and First Asia Realty
Development Corporation (First Asia) are domestic corporations duly organized
and existing under the laws of the Republic of the Philippines. Both are engaged
in the business of operating cinema houses, among others.7
CTA Case No. 7079
On September 26, 2003, the Bureau of Internal Revenue (BIR) sent SM Prime a
Preliminary Assessment Notice (PAN) for value added tax (VAT) deficiency on
cinema ticket sales in the amount of P119,276,047.40 for taxable year 2000.8 In
response, SM Prime filed a letter-protest dated December 15, 2003.9
On December 12, 2003, the BIR sent SM Prime a Formal Letter of Demand for
the alleged VAT deficiency, which the latter protested in a letter dated January
14, 2004.10
On September 6, 2004, the BIR denied the protest filed by SM Prime and
ordered it to pay the VAT deficiency for taxable year 2000 in the amount
of P124,035,874.12.11
On October 15, 2004, SM Prime filed a Petition for Review before the CTA
docketed as CTA Case No. 7079.12
CTA Case No. 7085
On May 15, 2002, the BIR sent First Asia a PAN for VAT deficiency on
cinema ticket sales for taxable year 1999 in the total amount
of P35,823,680.93.13 First Asia protested the PAN in a letter dated July 9, 2002.14
Subsequently, the BIR issued a Formal Letter of Demand for the alleged VAT
deficiency which was protested by First Asia in a letter dated December 12,
2002.15
On September 6, 2004, the BIR rendered a Decision denying the protest and
ordering First Asia to pay the amount of P35,823,680.93 for VAT deficiency for
taxable year 1999.16
Accordingly, on October 20, 2004, First Asia filed a Petition for Review before the
CTA, docketed as CTA Case No. 7085.17
CTA Case No. 7111
On April 16, 2004, the BIR sent a PAN to First Asia for VAT deficiency on cinema
ticket sales for taxable year 2000 in the amount of P35,840,895.78. First Asia
protested the PAN through a letter dated April 22, 2004.18
Thereafter, the BIR issued a Formal Letter of Demand for alleged VAT
deficiency.19 First Asia protested the same in a letter dated July 9, 2004.20
On October 5, 2004, the BIR denied the protest and ordered First Asia to pay the
VAT deficiency in the amount ofP35,840,895.78 for taxable year 2000.21
This prompted First Asia to file a Petition for Review before the CTA on
December 16, 2004. The case was docketed as CTA Case No. 7111.22
CTA Case No. 7272
Re: Assessment Notice No. 008-02
A PAN for VAT deficiency on cinema ticket sales for the taxable year 2002 in the
total amount of P32,802,912.21 was issued against First Asia by the BIR. In
response, First Asia filed a protest-letter dated November 11, 2004. The BIR then
sent a Formal Letter of Demand, which was protested by First Asia on December
14, 2004.23
Re: Assessment Notice No. 003-03
A PAN for VAT deficiency on cinema ticket sales in the total amount
of P28,196,376.46 for the taxable year 2003 was issued by the BIR against First
Asia. In a letter dated September 23, 2004, First Asia protested the PAN. A
Formal Letter of Demand was thereafter issued by the BIR to First Asia, which
the latter protested through a letter dated November 11, 2004. 24
On May 11, 2005, the BIR rendered a Decision denying the protests. It ordered
First Asia to pay the amounts ofP33,610,202.91 and P28,590,826.50 for VAT
deficiency for taxable years 2002 and 2003, respectively.25
Thus, on June 22, 2005, First Asia filed a Petition for Review before the CTA,
docketed as CTA Case No. 7272.26
Consolidated Petitions
The Commissioner of Internal Revenue (CIR) filed his Answers to the Petitions
filed by SM Prime and First Asia.27
On July 1, 2005, SM Prime filed a Motion to Consolidate CTA Case Nos. 7085,
7111 and 7272 with CTA Case No. 7079 on the grounds that the issues raised
therein are identical and that SM Prime is a majority shareholder of First Asia.
The motion was granted.28
Upon submission of the parties respective memoranda, the consolidated cases
were submitted for decision on the sole issue of whether gross receipts derived
from admission tickets by cinema/theater operators or proprietors are subject to
VAT.29
Ruling of the CTA First Division
On September 22, 2006, the First Division of the CTA rendered a Decision
granting the Petition for Review. Resorting to the language used and the
legislative history of the law, it ruled that the activity of showing cinematographic
films is not a service covered by VAT under the National Internal Revenue Code
(NIRC) of 1997, as amended, but an activity subject to amusement tax under RA
7160, otherwise known as the Local Government Code (LGC) of 1991. Citing
House Joint Resolution No. 13, entitled "Joint Resolution Expressing the True
Intent of Congress with Respect to the Prevailing Tax Regime in the Theater and
Local Film Industry Consistent with the States Policy to Have a Viable,
Sustainable and Competitive Theater and Film Industry as One of its Partners in
National Development,"30 the CTA First Division held that the House of
Representatives resolved that there should only be one business tax applicable
to theaters and movie houses, which is the 30% amusement tax imposed by
cities and provinces under the LGC of 1991. Further, it held that consistent with
the States policy to have a viable, sustainable and competitive theater and film
industry, the national government should be precluded from imposing its own
business tax in addition to that already imposed and collected by local
government units. The CTA First Division likewise found that Revenue
Memorandum Circular (RMC) No. 28-2001, which imposes VAT on gross receipts
from admission to cinema houses, cannot be given force and effect because it
failed to comply with the procedural due process for tax issuances under RMC
No. 20-86.31 Thus, it disposed of the case as follows:
IN VIEW OF ALL THE FOREGOING, this Court hereby GRANTS the Petitions
for Review. Respondents Decisions denying petitioners protests against
deficiency value-added taxes are hereby REVERSED. Accordingly, Assessment
Notices Nos. VT-00-000098, VT-99-000057, VT-00-000122, 003-03 and 008-02
are ORDEREDcancelled and set aside.
SO ORDERED.32
Aggrieved, the CIR moved for reconsideration which was denied by the First
Division in its Resolution dated December 14, 2006.33
Ruling of the CTA En Banc
Thus, the CIR appealed to the CTA En Banc.34 The case was docketed as CTA
EB No. 244.35 The CTA En Banchowever denied36 the Petition for Review and
dismissed37 as well petitioners Motion for Reconsideration.
The CTA En Banc held that Section 108 of the NIRC actually sets forth an
exhaustive enumeration of what services are intended to be subject to VAT. And
since the showing or exhibition of motion pictures, films or movies by cinema
operators or proprietors is not among the enumerated activities contemplated in
the phrase "sale or exchange of services," then gross receipts derived by
cinema/ theater operators or proprietors from admission tickets in showing
motion pictures, film or movie are not subject to VAT. It reiterated that the
exhibition or showing of motion pictures, films, or movies is instead subject to
amusement tax under the LGC of 1991. As regards the validity of RMC No. 282001, the CTA En Banc agreed with its First Division that the same cannot be
given force and effect for failure to comply with RMC No. 20-86.
Issue
Hence, the present recourse, where petitioner alleges that the CTA En Banc
seriously erred:
(1) In not finding/holding that the gross receipts derived by operators/proprietors
of cinema houses from admission tickets [are] subject to the 10% VAT because:
(a) THE EXHIBITION OF MOVIES BY CINEMA

OPERATORS/PROPRIETORS TO THE PAYING PUBLIC IS A SALE
OF SERVICE;
(b) UNLESS EXEMPTED BY LAW, ALL SALES OF SERVICES ARE
EXPRESSLY SUBJECT TO VAT UNDER SECTION 108 OF THE
NIRC OF 1997;
(c) SECTION 108 OF THE NIRC OF 1997 IS A CLEAR PROVISION
OF LAW AND THE APPLICATION OF RULES OF STATUTORY
CONSTRUCTION AND EXTRINSIC AIDS IS UNWARRANTED;
(d) GRANTING WITHOUT CONCEDING THAT RULES OF
CONSTRUCTION ARE APPLICABLE HEREIN, STILL THE
HONORABLE COURT ERRONEOUSLY APPLIED THE SAME AND
PROMULGATED DANGEROUS PRECEDENTS;
(e) THERE IS NO VALID, EXISTING PROVISION OF LAW
EXEMPTING RESPONDENTS SERVICES FROM THE VAT
IMPOSED UNDER SECTION 108 OF THE NIRC OF 1997;
(f) QUESTIONS ON THE WISDOM OF THE LAW ARE NOT
PROPER ISSUES TO BE TRIED BY THE HONORABLE COURT;
and
(g) RESPONDENTS WERE TAXED BASED ON THE PROVISION
OF SECTION 108 OF THE NIRC.
(2) In ruling that the enumeration in Section 108 of the NIRC of 1997 is
exhaustive in coverage;
(3) In misconstruing the NIRC of 1997 to conclude that the showing of motion
pictures is merely subject to the amusement tax imposed by the Local
Government Code; and
(4) In invalidating Revenue Memorandum Circular (RMC) No. 28-2001.38
Simply put, the issue in this case is whether the gross receipts derived by
operators or proprietors of cinema/theater houses from admission tickets are
subject to VAT.
Petitioners Arguments
Petitioner argues that the enumeration of services subject to VAT in Section 108
of the NIRC is not exhaustive because it covers all sales of services unless
exempted by law. He claims that the CTA erred in applying the rules on statutory
construction and in using extrinsic aids in interpreting Section 108 because the
provision is clear and unambiguous. Thus, he maintains that the exhibition of
movies by cinema operators or proprietors to the paying public, being a sale of
service, is subject to VAT.
Respondents Arguments
Respondents, on the other hand, argue that a plain reading of Section 108 of the
NIRC of 1997 shows that the gross receipts of proprietors or operators of
cinemas/theaters derived from public admission are not among the services
subject to VAT. Respondents insist that gross receipts from cinema/theater
admission tickets were never intended to be subject to any tax imposed by the
national government. According to them, the absence of gross receipts from
cinema/theater admission tickets from the list of services which are subject to the
national amusement tax under Section 125 of the NIRC of 1997 reinforces this
legislative intent. Respondents also highlight the fact that RMC No. 28-2001 on
which the deficiency assessments were based is an unpublished administrative
ruling.
Our Ruling
The petition is bereft of merit.
The enumeration of services subject to VAT under Section 108 of the NIRC is not
exhaustive
Section 108 of the NIRC of the 1997 reads:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected, a
value-added tax equivalent to ten percent (10%) of gross receipts derived from
the sale or exchange of services, including the use or lease of properties.
The phrase "sale or exchange of services" means the performance of all kinds of
services in the Philippines for others for a fee, remuneration or consideration,
including those performed or rendered by construction and service contractors;
stock, real estate, commercial, customs and immigration brokers; lessors of
property, whether personal or real; warehousing services; lessors or distributors
of cinematographic films; persons engaged in milling, processing, manufacturing

or repacking goods for others; proprietors, operators or keepers of hotels, motels,
rest houses, pension houses, inns, resorts; proprietors or operators of
restaurants, refreshment parlors, cafes and other eating places, including clubs
and caterers; dealers in securities; lending investors; transportation contractors
on their transport of goods or cargoes, including persons who transport goods or
cargoes for hire and other domestic common carriers by land, air and water
relative to their transport of goods or cargoes; services of franchise grantees of
telephone and telegraph, radio and television broadcasting and all other
franchise grantees except those under Section 119 of this Code; services of
banks, non-bank financial intermediaries and finance companies; and non-life
insurance companies (except their crop insurances), including surety, fidelity,
indemnity and bonding companies; and similar services regardless of whether or
not the performance thereof calls for the exercise or use of the physical or mental
faculties. The phrase "sale or exchange of services" shall likewise include:
(1) The lease or the use of or the right or privilege to use any copyright, patent,
design or model, plan, secret formula or process, goodwill, trademark, trade
brand or other like property or right;
xxxx
(7) The lease of motion picture films, films, tapes and discs; and
(8) The lease or the use of or the right to use radio, television, satellite
transmission and cable television time.
x x x x (Emphasis supplied)
A cursory reading of the foregoing provision clearly shows that the enumeration
of the "sale or exchange of services" subject to VAT is not exhaustive. The words,
"including," "similar services," and "shall likewise include," indicate that the
enumeration is by way of example only.39
Among those included in the enumeration is the "lease of motion picture films,
films, tapes and discs." This, however, is not the same as the showing or
exhibition of motion pictures or films. As pointed out by the CTA En Banc:
"Exhibition" in Blacks Law Dictionary is defined as "To show or display. x x x To
produce anything in public so that it may be taken into possession" (6th ed., p.
573). While the word "lease" is defined as "a contract by which one owning such
property grants to another the right to possess, use and enjoy it on specified
period of time in exchange for periodic payment of a stipulated price, referred to

as rent (Blacks Law Dictionary, 6th ed., p. 889). x x x40
Since the activity of showing motion pictures, films or movies by cinema/ theater
operators or proprietors is not included in the enumeration, it is incumbent upon
the court to the determine whether such activity falls under the phrase "similar
services." The intent of the legislature must therefore be ascertained.
The legislature never intended operators
or proprietors of cinema/theater houses to be covered by VAT
Under the NIRC of 1939,41 the national government imposed amusement tax on
proprietors, lessees, or operators of theaters, cinematographs, concert halls,
circuses, boxing exhibitions, and other places of amusement, including cockpits,
race tracks, and cabaret.42 In the case of theaters or cinematographs, the taxes
were first deducted, withheld, and paid by the proprietors, lessees, or operators
of such theaters or cinematographs before the gross receipts were divided
between the proprietors, lessees, or operators of the theaters or cinematographs
and the distributors of the cinematographic films. Section 1143 of the Local Tax
Code,44 however, amended this provision by transferring the power to impose
amusement tax45 on admission from theaters, cinematographs, concert halls,
circuses and other places of amusements exclusively to the local government.
Thus, when the NIRC of 197746 was enacted, the national government imposed
amusement tax only on proprietors, lessees or operators of cabarets, day and
night clubs, Jai-Alai and race tracks.47
On January 1, 1988, the VAT Law48 was promulgated. It amended certain
provisions of the NIRC of 1977 by imposing a multi-stage VAT to replace the tax
on original and subsequent sales tax and percentage tax on certain services. It
imposed VAT on sales of services under Section 102 thereof, which provides:
SECTION 102. Value-added tax on sale of services. (a) Rate and base of tax.
There shall be levied, assessed and collected, a value-added tax equivalent to
10% percent of gross receipts derived by any person engaged in the sale of
services. The phrase "sale of services" means the performance of all kinds of
services for others for a fee, remuneration or consideration, including those
performed or rendered by construction and service contractors; stock, real
estate, commercial, customs and immigration brokers; lessors of personal
property; lessors or distributors of cinematographic films; persons engaged in
milling, processing, manufacturing or repacking goods for others; and similar
services regardless of whether or not the performance thereof calls for the
exercise or use of the physical or mental faculties: Provided That the following
services performed in the Philippines by VAT-registered persons shall be subject

to 0%:
(1) Processing manufacturing or repacking goods for other persons doing
business outside the Philippines which goods are subsequently exported, x
xx
xxxx
"Gross receipts" means the total amount of money or its equivalent
representing the contract price, compensation or service fee,
including the amount charged for materials supplied with the
services and deposits or advance payments actually or
constructively received during the taxable quarter for the service
performed or to be performed for another person, excluding valueadded tax.
(b) Determination of the tax. (1) Tax billed as a separate item in
the invoice. If the tax is billed as a separate item in the invoice,
the tax shall be based on the gross receipts, excluding the tax.
(2) Tax not billed separately or is billed erroneously in the invoice. If the
tax is not billed separately or is billed erroneously in the invoice, the tax
shall be determined by multiplying the gross receipts (including the amount
intended to cover the tax or the tax billed erroneously) by 1/11. (Emphasis
supplied)
Persons subject to amusement tax under the NIRC of 1977, as amended,
however, were exempted from the coverage of VAT.49
On February 19, 1988, then Commissioner Bienvenido A. Tan, Jr. issued RMC 888, which clarified that the power to impose amusement tax on gross receipts
derived from admission tickets was exclusive with the local government units and
that only the gross receipts of amusement places derived from sources other
than from admission tickets were subject to amusement tax under the NIRC of
1977, as amended. Pertinent portions of RMC 8-88 read:
Under the Local Tax Code (P.D. 231, as amended), the jurisdiction to levy
amusement tax on gross receipts arising from admission to places of amusement
has been transferred to the local governments to the exclusion of the national
government.
xxxx
Since the promulgation of the Local Tax Code which took effect on June 28, 1973
none of the amendatory laws which amended the National Internal Revenue
Code, including the value added tax law under Executive Order No. 273, has
amended the provisions of Section 11 of the Local Tax Code. Accordingly, the
sole jurisdiction for collection of amusement tax on admission receipts in places
of amusement rests exclusively on the local government, to the exclusion of the
national government. Since the Bureau of Internal Revenue is an agency of the
national government, then it follows that it has no legal mandate to levy
amusement tax on admission receipts in the said places of amusement.
Considering the foregoing legal background, the provisions under Section 123 of
the National Internal Revenue Code as renumbered by Executive Order No. 273
(Sec. 228, old NIRC) pertaining to amusement taxes on places of amusement
shall be implemented in accordance with BIR RULING, dated December 4, 1973
and BIR RULING NO. 231-86 dated November 5, 1986 to wit:
"x x x Accordingly, only the gross receipts of the amusement places derived
from sources other than from admission tickets shall be subject to x x x
amusement tax prescribed under Section 228 of the Tax Code, as
amended (now Section 123, NIRC, as amended by E.O. 273). The tax on gross
receipts derived from admission tickets shall be levied and collected by the
city government pursuant to Section 23 of Presidential Decree No. 231, as
amended x x x" or by the provincial government, pursuant to Section 11 of
P.D. 231, otherwise known as the Local Tax Code. (Emphasis supplied)
On October 10, 1991, the LGC of 1991 was passed into law. The local
government retained the power to impose amusement tax on proprietors,
lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia,
and other places of amusement at a rate of not more than thirty percent (30%) of
the gross receipts from admission fees under Section 140 thereof.50 In the case
of theaters or cinemas, the tax shall first be deducted and withheld by their
proprietors, lessees, or operators and paid to the local government before the
gross receipts are divided between said proprietors, lessees, or operators and
the distributors of the cinematographic films. However, the provision in the Local
Tax Code expressly excluding the national government from collecting tax from
the proprietors, lessees, or operators of theaters, cinematographs, concert halls,
circuses and other places of amusements was no longer included.
In 1994, RA 7716 restructured the VAT system by widening its tax base and
enhancing its administration. Three years later, RA 7716 was amended by RA
8241. Shortly thereafter, the NIRC of 199751 was signed into law. Several
amendments52 were made to expand the coverage of VAT. However, none pertain
to cinema/theater operators or proprietors. At present, only lessors or distributors
of cinematographic films are subject to VAT. While persons subject to amusement

tax53 under the NIRC of 1997 are exempt from the coverage of VAT.54
Based on the foregoing, the following facts can be established:
(1) Historically, the activity of showing motion pictures, films or movies by
cinema/theater operators or proprietors has always been considered as a
form of entertainment subject to amusement tax.
(2) Prior to the Local Tax Code, all forms of amusement tax were imposed
by the national government.
(3) When the Local Tax Code was enacted, amusement tax on admission
tickets from theaters, cinematographs, concert halls, circuses and other
places of amusements were transferred to the local government.
(4) Under the NIRC of 1977, the national government imposed amusement
tax only on proprietors, lessees or operators of cabarets, day and night
clubs, Jai-Alai and race tracks.
(5) The VAT law was enacted to replace the tax on original and subsequent
sales tax and percentage tax on certain services.
(6) When the VAT law was implemented, it exempted persons subject to
amusement tax under the NIRC from the coverage of VAT.
1auuphil
(7) When the Local Tax Code was repealed by the LGC of 1991, the local
government continued to impose amusement tax on admission tickets from
theaters, cinematographs, concert halls, circuses and other places of
amusements.
(8) Amendments to the VAT law have been consistent in exempting
persons subject to amusement tax under the NIRC from the coverage of
VAT.
(9) Only lessors or distributors of cinematographic films are included in the
coverage of VAT.
These reveal the legislative intent not to impose VAT on persons already covered
by the amusement tax. This holds true even in the case of cinema/theater
operators taxed under the LGC of 1991 precisely because the VAT law was
intended to replace the percentage tax on certain services. The mere fact that
they are taxed by the local government unit and not by the national government
is immaterial. The Local Tax Code, in transferring the power to tax gross receipts
derived by cinema/theater operators or proprietor from admission tickets to the

local government, did not intend to treat cinema/theater houses as a separate
class. No distinction must, therefore, be made between the places of amusement
taxed by the national government and those taxed by the local government.
To hold otherwise would impose an unreasonable burden on cinema/theater
houses operators or proprietors, who would be paying an additional 10%55 VAT
on top of the 30% amusement tax imposed by Section 140 of the LGC of 1991,
or a total of 40% tax. Such imposition would result in injustice, as persons taxed
under the NIRC of 1997 would be in a better position than those taxed under the
LGC of 1991. We need not belabor that a literal application of a law must be
rejected if it will operate unjustly or lead to absurd results.56 Thus, we are
convinced that the legislature never intended to include cinema/theater operators
or proprietors in the coverage of VAT.
On this point, it is apropos to quote the case of Roxas v. Court of Tax
Appeals,57 to wit:
The power of taxation is sometimes called also the power to destroy. Therefore, it
should be exercised with caution to minimize injury to the proprietary rights of a
taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector
kill the "hen that lays the golden egg." And, in order to maintain the general
public's trust and confidence in the Government this power must be used justly
and not treacherously.
The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the
imposition of VAT
Petitioner, in issuing the assessment notices for deficiency VAT against
respondents, ratiocinated that:
Basically, it was acknowledged that a cinema/theater operator was then subject
to amusement tax under Section 260 of Commonwealth Act No. 466, otherwise
known as the National Internal Revenue Code of 1939, computed on the amount
paid for admission. With the enactment of the Local Tax Code under Presidential
Decree (PD) No. 231, dated June 28, 1973, the power of imposing taxes on
gross receipts from admission of persons to cinema/theater and other places of
amusement had, thereafter, been transferred to the provincial government, to the
exclusion of the national or municipal government (Sections 11 & 13, Local Tax
Code). However, the said provision containing the exclusive power of the
provincial government to impose amusement tax, had also been repealed and/or
deleted by Republic Act (RA) No. 7160, otherwise known as the Local
Government Code of 1991, enacted into law on October 10, 1991. Accordingly,
the enactment of RA No. 7160, thus, eliminating the statutory prohibition on the
national government to impose business tax on gross receipts from admission of
persons to places of amusement, led the way to the valid imposition of the VAT
pursuant to Section 102 (now Section 108) of the old Tax Code, as amended by
the Expanded VAT Law (RA No. 7716) and which was implemented beginning
January 1, 1996.58 (Emphasis supplied)
We disagree.
The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the
imposition of VAT on the gross receipts of cinema/theater operators or proprietors
derived from admission tickets. The removal of the prohibition under the Local
Tax Code did not grant nor restore to the national government the power to
impose amusement tax on cinema/theater operators or proprietors. Neither did it
expand the coverage of VAT. Since the imposition of a tax is a burden on the
taxpayer, it cannot be presumed nor can it be extended by implication. A law will
not be construed as imposing a tax unless it does so clearly, expressly, and
unambiguously.59 As it is, the power to impose amusement tax on cinema/theater
operators or proprietors remains with the local government.
Revenue Memorandum Circular No. 28-2001 is invalid
Considering that there is no provision of law imposing VAT on the gross receipts
of cinema/theater operators or proprietors derived from admission tickets, RMC
No. 28-2001 which imposes VAT on the gross receipts from admission to cinema
houses must be struck down. We cannot overemphasize that RMCs must not
override, supplant, or modify the law, but must remain consistent and in harmony
with, the law they seek to apply and implement.60
In view of the foregoing, there is no need to discuss whether RMC No. 28-2001
complied with the procedural due process for tax issuances as prescribed under
RMC No. 20-86.
Rule on tax exemption does not apply
Moreover, contrary to the view of petitioner, respondents need not prove their
entitlement to an exemption from the coverage of VAT. The rule that tax
exemptions should be construed strictly against the taxpayer presupposes that
the taxpayer is clearly subject to the tax being levied against him.61 The reason is
obvious: it is both illogical and impractical to determine who are exempted
without first determining who are covered by the provision.62Thus, unless a
statute imposes a tax clearly, expressly and unambiguously, what applies is the
equally well-settled rule that the imposition of a tax cannot be presumed.63 In fact,
in case of doubt, tax laws must be construed strictly against the government and
in favor of the taxpayer.64
WHEREFORE, the Petition is hereby DENIED. The assailed April 30, 2008
Decision of the Court of Tax AppealsEn Banc holding that gross receipts derived
by respondents from admission tickets in showing motion pictures, films or
movies are not subject to value-added tax under Section 108 of the National
Internal Revenue Code of 1997, as amended, and its June 24, 2008 Resolution
denying the motion for reconsideration are AFFIRMED.
SO ORDERED.
AT T E S TAT I O N
I attest that the conclusions in the above Decision had been reached in
consultation before the case was assigned to the writer of the opinion of the
Courts Division.
ANTONIO T. CARPIO
Associate Justice
Chairperson, Second Division
C E R T I F I C AT I O N
Pursuant to Section 13, Article VIII of the Constitution, and the Division
Chairpersons attestation, it is hereby certified that the conclusions in the above
Decision had been reached in consultation before the case was assigned to the
writer of the opinion of the Courts Division.
REYNATO S. PUNO
Chief Justice
vs.
AMERICAN EXPRESS INTERNATIONAL, INC. (PHILIPPINE
BRANCH), Respondent.
DECISION
As a general rule, the value-added tax (VAT) system uses the destination
principle. However, our VAT law itself provides for a clear exception, under which
the supply of service shall be zero-rated when the following requirements are
met: (1) the service is performed in the Philippines; (2) the service falls under any
of the categories provided in Section 102(b) of the Tax Code; and (3) it is paid for
in acceptable foreign currency that is accounted for in accordance with the

regulations of the Bangko Sentral ng Pilipinas. Since respondents services meet
these requirements, they are zero-rated. Petitioners Revenue Regulations that
alter or revoke the above requirements are ultra vires and invalid.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing
the February 28, 2002 Decision2of the Court of Appeals (CA) in CA-GR SP No.
62727. The assailed Decision disposed as follows:
"WHEREFORE, premises considered, the petition is hereby DISMISSED for lack
of merit. The assailed decision of the Court of Tax Appeals (CTA)
is AFFIRMED in toto."3
The Facts
Quoting the CTA, the CA narrated the undisputed facts as follows:
"[Respondent] is a Philippine branch of American Express International, Inc., a
corporation duly organized and existing under and by virtue of the laws of the
State of Delaware, U.S.A., with office in the Philippines at the Ground Floor, ACE
Building, corner Rada and de la Rosa Streets, Legaspi Village, Makati City. It is a
servicing unit of American Express International, Inc. - Hongkong Branch (AmexHK) and is engaged primarily to facilitate the collections of Amex-HK receivables
from card members situated in the Philippines and payment to service
establishments in the Philippines.
"Amex Philippines registered itself with the Bureau of Internal Revenue (BIR),
Revenue District Office No. 47 (East Makati) as a value-added tax (VAT)
taxpayer effective March 1988 and was issued VAT Registration Certificate No.
088445 bearing VAT Registration No. 32A-3-004868. For the period January 1,
1997 to December 31, 1997, [respondent] filed with the BIR its quarterly VAT
returns as follows:
Exhibit Period Covered
Date Filed
1997 1st Qtr.
April 18, 1997
2nd Qtr.
July 21, 1997
3rd Qtr.
October 2, 1997
4th Qtr.
January 20, 1998
"On March 23, 1999, however, [respondent] amended the aforesaid returns and
declared the following:
Exh
199
7
Taxable
Sales
Output
VAT
Zero-rated
Sales
Domestic
Purchases
Input
VAT
I 1st
P17,513,801.1
P59,597.20 P5,959.72
P6,778,182.30 P677,818.23
qtr
1
J
2nd
qtr
67,517.20
6,751.72 17,937,361.51
9,333,242.90
933,324.29
K
3rd
qtr
51,936.60
5,193.66 19,627,245.36
8,438,357.00
843,835.70
L
4th
qtr
67,994.30
6,799.43 25,231,225.22 13,080,822.10 1,308,082.21
Tota P247,045.3 P24,704.5 P80,309,633.2 P37,630,604.3 P3,763,060.4

l
0
3
0
0
3
"On April 13, 1999, [respondent] filed with the BIR a letter-request for the refund
of its 1997 excess input taxes in the amount of P3,751,067.04, which amount
was arrived at after deducting from its total input VAT paid ofP3,763,060.43 its
applied output VAT liabilities only for the third and fourth quarters of 1997
amounting toP5,193.66 and P6,799.43, respectively. [Respondent] cites as basis
therefor, Section 110 (B) of the 1997 Tax Code, to state:
Section 110. Tax Credits. xxxxxxxxx
(B) Excess Output or Input Tax. - If at the end of any taxable quarter the output
tax exceeds the input tax, the excess shall be paid by the VAT-registered person.
If the input tax exceeds the output tax, the excess shall be carried over to the
succeeding quarter or quarters. Any input tax attributable to the purchase of
capital goods or to zero-rated sales by a VAT-registered person may at his option
be refunded or credited against other internal revenue taxes, subject to the
provisions of Section 112.
"There being no immediate action on the part of the [petitioner], [respondents]

petition was filed on April 15, 1999.
"In support of its Petition for Review, the following arguments were raised by
[respondent]:
A. Export sales by a VAT-registered person, the consideration for which is paid
for in acceptable foreign currency inwardly remitted to the Philippines and
accounted for in accordance with existing regulations of the Bangko Sentral ng
Pilipinas, are subject to [VAT] at zero percent (0%). According to [respondent],
being a VAT-registered entity, it is subject to the VAT imposed under Title IV of
the Tax Code, to wit:
Section 102.(sic) Value-added tax on sale of services.- (a) Rate and base of
tax. - There shall be levied, assessed and collected, a value-added tax
equivalent to 10% percent of gross receipts derived by any person engaged in
the sale of services. The phrase "sale of services" means the performance of all
kinds of services for others for a fee, remuneration or consideration, including
those performed or rendered by construction and service contractors: stock, real
estate, commercial, customs and immigration brokers; lessors of personal
property; lessors or distributors of cinematographic films; persons engaged in
milling, processing, manufacturing or repacking goods for others; and similar
services regardless of whether o[r] not the performance thereof calls for the
exercise or use of the physical or mental faculties: Provided That the following
services performed in the Philippines by VAT-registered persons shall be subject
to 0%:
(1) x x x
(2) Services other than those mentioned in the preceding subparagraph,
the consideration is paid for in acceptable foreign currency which is
remitted inwardly to the Philippines and accounted for in accordance with
the rules and regulations of the BSP. x x x.
In addition, [respondent] relied on VAT Ruling No. 080-89, dated April 3, 1989,
the pertinent portion of which reads as follows:
In Reply, please be informed that, as a VAT registered entity whose service is
paid for in acceptable foreign currency which is remitted inwardly to the
Philippines and accounted for in accordance with the rules and regulations of the
Central [B]ank of the Philippines, your service income is automatically zero rated
effective January 1, 1998. [Section 102(a)(2) of the Tax Code as amended].4 For
this, there is no need to file an application for zero-rate.
B. Input taxes on domestic purchases of taxable goods and services related to

zero-rated revenues are available as tax refund in accordance with Section 106
(now Section 112) of the [Tax Code] and Section 8(a) of [Revenue] Regulations
[(RR)] No. 5-87, to state:
Section 106. Refunds or tax credits of input tax. (A) Zero-rated or effectively Zero-rated Sales. - Any VAT-registered person,
except those covered by paragraph (a) above, whose sales are zero-rated or are
effectively zero-rated, may, within two (2) years after the close of the taxable
quarter when such sales were made, apply for the issuance of tax credit
certificate or refund of the input taxes due or attributable to such sales, to the
extent that such input tax has not been applied against output tax. x x x. [Section
106(a) of the Tax Code]5
Section 8. Zero-rating. - (a) In general. - A zero-rated sale is a taxable
transaction for value-added tax purposes. A sale by a VAT-registered person of
goods and/or services taxed at zero rate shall not result in any output tax. The
input tax on his purchases of goods or services related to such zero-rated sale
shall be available as tax credit or refundable in accordance with Section 16 of
these Regulations. x x x. [Section 8(a), [RR] 5-87].6
"[Petitioner], in his Answer filed on May 6, 1999, claimed by way of Special and
Affirmative Defenses that:
7. The claim for refund is subject to investigation by the Bureau of Internal
Revenue;
8. Taxes paid and collected are presumed to have been made in accordance with
laws and regulations, hence, not refundable. Claims for tax refund are construed
strictly against the claimant as they partake of the nature of tax exemption from
tax and it is incumbent upon the [respondent] to prove that it is entitled thereto
under the law and he who claims exemption must be able to justify his claim by
the clearest grant of organic or statu[t]e law. An exemption from the common
burden [cannot] be permitted to exist upon vague implications;
9. Moreover, [respondent] must prove that it has complied with the governing
rules with reference to tax recovery or refund, which are found in Sections 204(c)
and 229 of the Tax Code, as amended, which are quoted as follows:
Section 204. Authority of the Commissioner to Compromise, Abate and Refund
or Credit Taxes. - The Commissioner may - x x x.
(C) Credit or refund taxes erroneously or illegally received or penalties imposed

without authority, refund the value of internal revenue stamps when they are
returned in good condition by the purchaser, and, in his discretion, redeem or
change unused stamps that have been rendered unfit for use and refund their
value upon proof of destruction. No credit or refund of taxes or penalties shall be
allowed unless the taxpayer files in writing with the Commissioner a claim for
credit or refund within two (2) years after payment of the tax or penalty: Provided,
however, That a return filed with an overpayment shall be considered a written
claim for credit or refund.
Section 229. Recovery of tax erroneously or illegally collected.- No suit or
proceeding shall be maintained in any court for the recovery of any national
internal revenue tax hereafter alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have been collected without
authority, or of any sum alleged to have been excessively or in any manner
wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not
such tax, penalty or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be begun (sic) after the expiration
of two (2) years from the date of payment of the tax or penalty regardless of any
supervening cause that may arise after payment: Provided, however, That the
Commissioner may, even without written claim therefor, refund or credit any tax,
where on the face of the return upon which payment was made, such payment
appears clearly to have been erroneously paid.
"From the foregoing, the [CTA], through the Presiding Judge Ernesto D. Acosta
rendered a decision7 in favor of the herein respondent holding that its services
are subject to zero-rate pursuant to Section 108(b) of the Tax Reform Act of 1997
and Section 4.102-2 (b)(2) of Revenue Regulations 5-96, the decretal portion of
which reads as follows:
WHEREFORE, in view of all the foregoing, this Court finds the [petition]
meritorious and in accordance with law. Accordingly, [petitioner] is
hereby ORDERED to REFUND to [respondent] the amount of P3,352,406.59
representing the latters excess input VAT paid for the year 1997."8
In affirming the CTA, the CA held that respondents services fell under the first
type enumerated in Section 4.102-2(b)(2) of RR 7-95, as amended by RR 5-96.
More particularly, its "services were not of the same class or of the same nature
as project studies, information, or engineering and architectural designs" for non-
resident foreign clients; rather, they were "services other than the processing,
manufacturing or repacking of goods for persons doing business outside the
Philippines." The consideration in both types of service, however, was paid for in
acceptable foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas.
Furthermore, the CA reasoned that reliance on VAT Ruling No. 040-98 was
unwarranted. By requiring that respondents services be consumed abroad in
order to be zero-rated, petitioner went beyond the sphere of interpretation and
into that of legislation. Even granting that it is valid, the ruling cannot be given
retroactive effect, for it will be harsh and oppressive to respondent, which has
already relied upon VAT Ruling No. 080-89 for zero rating.
Hence, this Petition.9
The Issue
Petitioner raises this sole issue for our consideration:
"Whether or not the Court of Appeals committed reversible error in holding that
respondent is entitled to the refund of the amount of P3,352,406.59 allegedly
representing excess input VAT for the year 1997."10
The Courts Ruling
The Petition is unmeritorious.
Sole Issue:
Entitlement to Tax Refund
Section 102 of the Tax Code11 provides:
"Sec. 102. Value-added tax on sale of services and use or lease of properties. -(a) Rate and base of tax. -- There shall be levied, assessed and collected, a
value-added tax equivalent to ten percent (10%) of gross receipts derived from
the sale or exchange of services x x x.
"The phrase 'sale or exchange of services' means the performance of all kinds of
services in the Philippines for others for a fee, remuneration or consideration,
including those performed or rendered by x x x persons engaged in milling,
processing, manufacturing or repacking goods for others; x x x services of banks,
non-bank financial intermediaries and finance companies; x x x and similar
services regardless of whether or not the performance thereof calls for the
exercise or use of the physical or mental faculties. The phrase 'sale or exchange
of services' shall likewise include:
xxxxxxxxx
(3) The supply of x x x commercial knowledge or information;
(4) The supply of any assistance that is ancillary and subsidiary to and is
furnished as a means of enabling the application or enjoyment of x x x any such
knowledge or information as is mentioned in subparagraph (3);
xxxxxxxxx
(6) The supply of technical advice, assistance or services rendered in connection
with technical management or administration of any x x x commercial
undertaking, venture, project or scheme;
xxxxxxxxx
"The term 'gross receipts means the total amount of money or its equivalent
representing the contract price, compensation, service fee, rental or royalty,
including the amount charged for materials supplied with the services and
deposits and advanced payments actually or constructively received during the
taxable quarter for the services performed or to be performed for another person,
excluding value-added tax.
"(b) Transactions subject to zero percent (0%) rate. -- The following services
performed in the Philippines by VAT-registered persons shall be subject to zero
percent (0%) rate[:]
(1) Processing, manufacturing or repacking goods for other persons doing
business outside the Philippines which goods are subsequently exported, where
the services are paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP);
(2) Services other than those mentioned in the preceding subparagraph, the
consideration for which is paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the [BSP];"
xxxxxxxxx
Zero Rating of "Other" Services
The law is very clear. Under the last paragraph quoted above, services
performed by VAT-registered persons in the Philippines (other than the
processing, manufacturing or repacking of goods for persons doing business
outside the Philippines), when paid in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the BSP, are zero-rated.
Respondent is a VAT-registered person that facilitates the collection and payment
of receivables belonging to its non-resident foreign client, for which it gets paid in
acceptable foreign currency inwardly remitted and accounted for in conformity
with BSP rules and regulations. Certainly, the service it renders in the Philippines
is not in the same category as "processing, manufacturing or repacking of goods"
and should, therefore, be zero-rated. In reply to a query of respondent, the BIR
opined in VAT Ruling No. 080-89 that the income respondent earned from its
parent companys regional operating centers (ROCs) was automatically zerorated effective January 1, 1988.12
Service has been defined as "the art of doing something useful for a person or
company for a fee"13 or "useful labor or work rendered or to be rendered by one
person to another."14 For facilitating in the Philippines the collection and payment
of receivables belonging to its Hong Kong-based foreign client, and getting paid
for it in duly accounted acceptable foreign currency, respondent renders service
falling under the category of zero rating. Pursuant to the Tax Code, a VAT of zero
percent should, therefore, be levied upon the supply of that service.15
The Credit Card System and Its Components
For sure, the ancillary business of facilitating the said collection is different from
the main business of issuing credit cards.16 Under the credit card system, the
credit card company extends credit accommodations to its card holders for the
purchase of goods and services from its member establishments, to be
reimbursed by them later on upon proper billing. Given the complexities of
present-day business transactions, the components of this system can certainly
function as separate billable services.
Under RA 8484,17 the credit card that is issued by banks18 in general, or by nonbanks in particular, refers to "any card x x x or other credit device existing for the
purpose of obtaining x x x goods x x x or services x x x on credit;"19 and is being
used "usually on a revolving basis."20 This means that the consumer-credit
arrangement that exists between the issuer and the holder of the credit card
enables the latter to procure goods or services "on a continuing basis as long as
the outstanding balance does not exceed a specified limit."21 The card holder is,
therefore, given "the power to obtain present control of goods or service on a
promise to pay for them in the future."22
Business establishments may extend credit sales through the use of the credit
card facilities of a non-bank credit card company to avoid the risk of uncollectible
accounts from their customers. Under this system, the establishments do not
deposit in their bank accounts the credit card drafts23 that arise from the credit
sales. Instead, they merely record their receivables from the credit card company
and periodically send the drafts evidencing those receivables to the latter.
The credit card company, in turn, sends checks as payment to these business
establishments, but it does not redeem the drafts at full price. The agreement
between them usually provides for discounts to be taken by the company upon
its redemption of the drafts.24 At the end of each month, it then bills its credit card
holders for their respective drafts redeemed during the previous month. If the
holders fail to pay the amounts owed, the company sustains the loss.25
In the present case, respondents role in the consumer credit26 process described
above primarily consists of gathering the bills and credit card drafts of different
service establishments located in the Philippines and forwarding them to the
ROCs outside the country. Servicing the bill is not the same as billing. For the
former type of service alone, respondent already gets paid.
The parent company -- to which the ROCs and respondent belong -- takes
charge not only of redeeming the drafts from the ROCs and sending the checks
to the service establishments, but also of billing the credit card holders for their
respective drafts that it has redeemed. While it usually imposes finance
charges27 upon the holders, none may be exacted by respondent upon either the
ROCs or the card holders.
Branch and Home Office
By designation alone, respondent and the ROCs are operated as branches. This
means that each of them is a unit, "an offshoot, lateral extension, or
division"28 located at some distance from the home office29 of the parent
company; carrying separate inventories; incurring their own expenses; and
generating their respective incomes. Each may conduct sales operations in any
locality as an extension of the principal office.30
The extent of accounting activity at any of these branches depends upon
company policy,31 but the financial reports of the entire business enterprise -- the
credit card company to which they all belong -- must always show its financial
position, results of operation, and changes in its financial position as a single
unit.32 Reciprocal accounts are reconciled or eliminated, because they lose all
significance when the branches and home office are viewed as a single
entity.33 In like manner, intra-company profits or losses must be offset against

each other for accounting purposes.
Contrary to petitioners assertion,34 respondent can sell its services to another
branch of the same parent company.35 In fact, the business concept of a transfer
price allows goods and services to be sold between and among intra-company
units at cost or above cost.36 A branch may be operated as a revenue center, cost
center, profit center or investment center, depending upon the policies and
accounting system of its parent company.37Furthermore, the latter may choose
not to make any sale itself, but merely to function as a control center, where most
or all of its expenses are allocated to any of its branches.38
Gratia argumenti that the sending of drafts and bills by service establishments to
respondent is equivalent to the act of sending them directly to its parent company
abroad, and that the parent companys subsequent redemption of these drafts
and billings of credit card holders is also attributable to respondent, then with
greater reason should the service rendered by respondent be zero-rated under
our VAT system. The service partakes of the nature of export sales as applied to
goods,39 especially when rendered in the Philippines by a VAT-registered
person40 that gets paid in acceptable foreign currency accounted for in
accordance with BSP rules and regulations.
VAT Requirements for the Supply of Service
The VAT is a tax on consumption41 "expressed as a percentage of the value
added to goods or services"42purchased by the producer or taxpayer.43 As an
indirect tax44 on services,45 its main object is the transaction46itself or, more
concretely, the performance of all kinds of services47 conducted in the course of
trade or business in the Philippines.48 These services must be regularly
conducted in this country; undertaken in "pursuit of a commercial or an economic
activity;"49 for a valuable consideration; and not exempt under the Tax Code,
other special laws, or any international agreement.50
Without doubt, the transactions respondent entered into with its Hong Kongbased client meet all these requirements.
First, respondent regularly renders in the Philippines the service of
facilitating the collection and payment of receivables belonging to a foreign
company that is a clearly separate and distinct entity.
Second, such service is commercial in nature; carried on over a sustained
period of time; on a significant scale; with a reasonable degree of
frequency; and not at random, fortuitous or attenuated.
Third, for this service, respondent definitely receives consideration in

foreign currency that is accounted for in conformity with law.
Finally, respondent is not an entity exempt under any of our laws or
international agreements.
Services Subject to Zero VAT
As a general rule, the VAT system uses the destination principle as a basis for
the jurisdictional reach of the tax.51Goods and services are taxed only in the
country where they are consumed. Thus, exports are zero-rated, while imports
are taxed.
Confusion in zero rating arises because petitioner equates the performance of a
particular type of service with theconsumption of its output abroad. In the present
case, the facilitation of the collection of receivables is different from the utilization
or consumption of the outcome of such service. While the facilitation is done in
the Philippines, the consumption is not. Respondent renders assistance to its
foreign clients -- the ROCs outside the country -- by receiving the bills of service
establishments located here in the country and forwarding them to the ROCs
abroad. The consumption contemplated by law, contrary to petitioners
administrative interpretation,52 does not imply that the service be done abroad in
order to be zero-rated.
Consumption is "the use of a thing in a way that thereby exhausts it."53 Applied to
services, the term means the performance or "successful completion of a
contractual duty, usually resulting in the performers release from any past or
future liability x x x."54 The services rendered by respondent are performed or
successfully completed upon its sending to its foreign client the drafts and bills it
has gathered from service establishments here. Its services, having been
performed in the Philippines, are therefore also consumed in the Philippines.
Unlike goods, services cannot be physically used in or bound for a specific place
when their destination is determined. Instead, there can only be a "predetermined
end of a course"55 when determining the service "location or position x x x for
legal purposes."56 Respondents facilitation service has no physical existence, yet
takes place upon rendition, and therefore upon consumption, in the Philippines.
Under the destination principle, as petitioner asserts, such service is subject to
VAT at the rate of 10 percent.
Respondents Services Exempt from the Destination Principle
However, the law clearly provides for an exception to the destination principle;
that is, for a zero percent VAT rate for services that are performed in the
Philippines, "paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the [BSP]."57 Thus, for the supply of
service to be zero-rated as an exception, the law merely requires that first, the
service be performed in the Philippines; second, the service fall under any of the
categories in Section 102(b) of the Tax Code; and, third, it be paid in acceptable
foreign currency accounted for in accordance with BSP rules and regulations.
Indeed, these three requirements for exemption from the destination principle are
met by respondent. Its facilitation service is performed in the Philippines. It falls
under the second category found in Section 102(b) of the Tax Code, because it is
a service other than "processing, manufacturing or repacking of goods" as
mentioned in the provision. Undisputed is the fact that such service meets the
statutory condition that it be paid in acceptable foreign currency duly accounted
for in accordance with BSP rules. Thus, it should be zero-rated.
Performance of Service versus Product Arising from Performance
Again, contrary to petitioners stand, for the cost of respondents service to be
zero-rated, it need not be tacked in as part of the cost of goods exported.58 The
law neither imposes such requirement nor associates services with exported
goods. It simply states that the services performed by VAT-registered persons in
the Philippines -- services other than the processing, manufacturing or repacking
of goods for persons doing business outside this country -- if paid in acceptable
foreign currency and accounted for in accordance with the rules and regulations
of the BSP, are zero-rated. The service rendered by respondent is clearly
different from the product that arises from the rendition of such service. The
activity that creates the income must not be confused with the main business in
the course of which that income is realized.59
Tax Situs of a Zero-Rated Service
The law neither makes a qualification nor adds a condition in determining the tax
situs of a zero-rated service. Under this criterion, the place where the service is
rendered determines the jurisdiction60 to impose the VAT.61Performed in the
Philippines, such service is necessarily subject to its jurisdiction,62 for the State
necessarily has to have "a substantial connection"63 to it, in order to enforce a
zero rate.64 The place of payment is immaterial;65much less is the place where the
output of the service will be further or ultimately used.
Statutory Construction or Interpretation Unnecessary
As mentioned at the outset, Section 102(b)(2) of the Tax Code is very clear.
Therefore, no statutory construction or interpretation is needed. Neither can
conditions or limitations be introduced where none is provided for. Rewriting the
law is a forbidden ground that only Congress may tread upon.
The Court may not construe a statute that is free from doubt.66 "[W]here the law
speaks in clear and categorical language, there is no room for interpretation.
There is only room for application."67 The Court has no choice but to "see to it that
its mandate is obeyed."68
No Qualifications Under RR 5-87
In implementing the VAT provisions of the Tax Code, RR 5-87 provides for the
zero rating of services other than the processing, manufacturing or repacking of
goods -- in general and without qualifications -- when paid for by the person to
whom such services are rendered in acceptable foreign currency inwardly
remitted and duly accounted for in accordance with the BSP (then Central Bank)
regulations. Section 8 of RR 5-87 states:
"SECTION 8. Zero-rating. -- (a) In general. -- A zero-rated sale is a taxable
transaction for value-added tax purposes. A sale by a VAT-registered person of
goods and/or services taxed at zero rate shall not result in any output tax. The
input tax on his purchases of goods or services related to such zero-rated sale
shall be available as tax credit or refundable in accordance with Section 16 of
these Regulations.
xxxxxxxxx
" (c) Zero-rated sales of services. -- The following services rendered by VATregistered persons are zero-rated:
(1) Services in connection with the processing, manufacturing or repacking of
goods for persons doing business outside the Philippines, where such goods are
actually shipped out of the Philippines to said persons or their assignees and the
services are paid for in acceptable foreign currency inwardly remitted and duly
accounted for under the regulations of the Central Bank of the Philippines.
xxxxxxxxx
(3) Services performed in the Philippines other than those mentioned in
subparagraph (1) above which are paid for by the person or entity to whom the
service is rendered in acceptable foreign currency inwardly remitted and duly
accounted for in accordance with Central Bank regulations. Where the contract
involves payment in both foreign and local currency, only the service
corresponding to that paid in foreign currency shall enjoy zero-rating. The portion
paid for in local currency shall be subject to VAT at the rate of 10%."
RR 7-95 Broad Enough
RR 7-95, otherwise known as the "Consolidated VAT Regulations,"69 reiterates
the above-quoted provision and further presents as examples only the services
performed in the Philippines by VAT-registered hotels and other service
establishments. Again, the condition remains that these services must be paid in
acceptable foreign currency inwardly remitted and accounted for in accordance
with the rules and regulations of the BSP. The term "other service
establishments" is obviously broad enough to cover respondents facilitation
service. Section 4.102-2 of RR 7-95 provides thus:
"SECTION 4.102-2. Zero-Rating. -- (a) In general. -- A zero-rated sale by a VAT
registered person, which is a taxable transaction for VAT purposes, shall not
result in any output tax. However, the input tax on his purchases of goods,
properties or services related to such zero-rated sale shall be available as tax
credit or refund in accordance with these regulations.
"(b) Transaction subject to zero-rate. -- The following services performed in the
Philippines by VAT-registered persons shall be subject to 0%:
(1) Processing, manufacturing or repacking goods for other persons doing
business outside the Philippines which goods are subsequently exported,
where the services are paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP;
(2) Services other than those mentioned in the preceding subparagraph,
e.g. those rendered by hotels and other service establishments, the
consideration for which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP;"
xxxxxxxxx
Meaning of "as well as" in RR 5-96
Section 4.102-2(b)(2) of RR 7-95 was subsequently amended by RR 5-96 to read
as follows:
"Section 4.102-2(b)(2) -- Services other than processing, manufacturing or
repacking for other persons doing business outside the Philippines for goods
which are subsequently exported, as well as services by a resident to a nonresident foreign client such as project studies, information services, engineering
and architectural designs and other similar services, the consideration for which
is paid for in acceptable foreign currency and accounted for in accordance with
the rules and regulations of the BSP."
Aside from the already scopious coverage of services in Section 4.102-2(b)(2) of
RR 7-95, the amendment introduced by RR 5-96 further enumerates specific
services entitled to zero rating. Although superfluous, these sample services are
meant to be merely illustrative. In this provision, the use of the term "as well as"
is not restrictive. As a prepositional phrase with an adverbial relation to some
other word, it simply means "in addition to, besides, also or too."70
Neither the law nor any of the implementing revenue regulations aforequoted
categorically defines or limits the services that may be sold or exchanged for a
fee, remuneration or consideration. Rather, both merely enumerate the items of
service that fall under the term "sale or exchange of services."71
Ejusdem Generis
Inapplicable
The canon of statutory construction known as ejusdem generis or "of the same
kind or specie" does not apply to Section 4.102-2(b)(2) of RR 7-95 as amended
by RR 5-96.
First, although the regulatory provision contains an enumeration of
particular or specific words, followed by the general phrase "and other
similar services," such words do not constitute a readily discernible class
and are patently not of the same kind.72 Project studies involve investments
or marketing; information services focus on data technology; engineering
and architectural designs require creativity. Aside from calling for the
exercise or use of mental faculties or perhaps producing written technical
outputs, no common denominator to the exclusion of all others
characterizes these three services. Nothing sets them apart from other and
similar general services that may involve advertising, computers,
consultancy, health care, management, messengerial work -- to name only
a few.
Second, there is the regulatory intent to give the general phrase "and other
similar services" a broader meaning.73 Clearly, the preceding phrase "as
well as" is not meant to limit the effect of "and other similar services."
Third, and most important, the statutory provision upon which this
regulation is based is by itself not restrictive. The scope of the word
"services" in Section 102(b)(2) of the Tax Code is broad; it is not
susceptible of narrow interpretation.74
1avvphi1.zw+
VAT Ruling Nos. 040-98 and 080-89

VAT Ruling No. 040-98 relied upon by petitioner is a less general interpretation at
the administrative level,75rendered by the BIR commissioner upon request of a
taxpayer to clarify certain provisions of the VAT law. As correctly held by the CA,
when this ruling states that the service must be "destined for consumption
outside of the Philippines"76 in order to qualify for zero rating, it contravenes both
the law and the regulations issued pursuant to it.77 This portion of VAT Ruling No.
040-98 is clearly ultra vires and invalid.78
Although "[i]t is widely accepted that the interpretation placed upon a statute by
the executive officers, whose duty is to enforce it, is entitled to great respect by
the courts,"79 this interpretation is not conclusive and will have to be "ignored if
judicially found to be erroneous"80 and "clearly absurd x x x or improper."81 An
administrative issuance that overrides the law it merely seeks to interpret, instead
of remaining consistent and in harmony with it, will not be countenanced by this
Court.82
In the present case, respondent has relied upon VAT Ruling No. 080-89, which
clearly recognizes its zero rating. Changing this status will certainly deprive
respondent of a refund of the substantial amount of excess input taxes to which it
is entitled.
Again, assuming arguendo that VAT Ruling No. 040-98 revoked VAT Ruling No.
080-89, such revocation could not be given retroactive effect if the application of
the latter ruling would only be prejudicial to respondent.83 Section 246 of the Tax
Code categorically declares that "[a]ny revocation x x x of x x x any of the rulings
x x x promulgated by the Commissioner shall not be given retroactive application
if the revocation x x x will be prejudicial to the taxpayers."84
It is also basic in law that "no x x x rule x x x shall be given retrospective
effect85 unless explicitly stated."86 No indication of such retroactive application to
respondent does the Court find in VAT Ruling No. 040-98. Neither do the
exceptions enumerated in Section 24687 of the Tax Code apply.
Though vested with the power to interpret the provisions of the Tax Code88 and
not bound by predecessors acts or rulings, the BIR commissioner may render a
different construction to a statute89 only if the new interpretation is in congruence
with the law. Otherwise, no amount of interpretation can ever revoke, repeal or
modify what the law says.
"Consumed Abroad" Not Required by Legislature
Interpellations on the subject in the halls of the Senate also reveal a clear intent
on the part of the legislators not to impose the condition of being "consumed
abroad" in order for services performed in the Philippines by a VAT-registered
person to be zero-rated. We quote the relevant portions of the proceedings:
"Senator Maceda: Going back to Section 102 just for the moment. Will the
Gentleman kindly explain to me - I am referring to the lower part of the first
paragraph with the Provided. Section 102. Provided that the following services
performed in the Philippines by VAT registered persons shall be subject to zero
percent. There are three here. What is the difference between the three here
which is subject to zero percent and Section 103 which is exempt transactions, to
being with?
"Senator Herrera: Mr. President, in the case of processing and manufacturing or
repacking goods for persons doing business outside the Philippines which are
subsequently exported, and where the services are paid for in acceptable foreign
currencies inwardly remitted, this is considered as subject to 0%. But if these
conditions are not complied with, they are subject to the VAT.
"In the case of No. 2, again, as the Gentleman pointed out, these three are zerorated and the other one that he indicated are exempted from the very beginning.
These three enumerations under Section 102 are zero-rated provided that these
conditions indicated in these three paragraphs are also complied with. If they are
not complied with, then they are not entitled to the zero ratings. Just like in the
export of minerals, if these are not exported, then they cannot qualify under this
provision of zero rating.
"Senator Maceda: Mr. President, just one small item so we can leave this. Under
the proviso, it is required that the following services be performed in the
Philippines.
"Under No. 2, services other than those mentioned above includes, let us say,
manufacturing computers and computer chips or repacking goods for persons
doing business outside the Philippines. Meaning to say, we ship the goods to
them in Chicago or Washington and they send the payment inwardly to the
Philippines in foreign currency, and that is, of course, zero-rated.
lawphil.net
"Now, when we say services other than those mentioned in the preceding
subsection[,] may I have some examples of these?
"Senator Herrera: Which portion is the Gentleman referring to?
"Senator Maceda: I am referring to the second paragraph, in the same Section
102. The first paragraph is when one manufactures or packages something here
and he sends it abroad and they pay him, that is covered. That is clear to me.
The second paragraph says Services other than those mentioned in the
preceding subparagraph, the consideration of which is paid for in acceptable
foreign currency
"One example I could immediately think of -- I do not know why this comes to my
mind tonight -- is for tourism or escort services. For example, the services of the
tour operator or tour escort -- just a good name for all kinds of activities -- is
made here at the Midtown Ramada Hotel or at the Philippine Plaza, but the
payment is made from outside and remitted into the country.
"Senator Herrera: What is important here is that these services are paid in
acceptable foreign currency remitted inwardly to the Philippines.
"Senator Maceda: Yes, Mr. President. Like those Japanese tours which include
$50 for the services of a woman or a tourist guide, it is zero-rated when it is
remitted here.
"Senator Herrera: I guess it can be interpreted that way, although this tourist
guide should also be considered as among the professionals. If they earn more
than P200,000, they should be covered.
xxxxxxxxx
Senator Maceda: So, the services by Filipino citizens outside the Philippines are
subject to VAT, and I am talking of all services. Do big contractual engineers in
Saudi Arabia pay VAT?
"Senator Herrera: This provision applies to a VAT-registered person. When he
performs services in the Philippines, that is zero-rated.
"Senator Maceda: That is right."90
Legislative Approval By Reenactment
Finally, upon the enactment of RA 8424, which substantially carries over the
particular provisions on zero rating of services under Section 102(b) of the Tax
Code, the principle of legislative approval of administrative interpretation by

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

Associate Justice
CANCIO C. GARCIA
Associate Justice
AT T E S TAT I O N
I attest that the conclusions in the above Decision had been reached in
consultation before the case was assigned to the writer of the opinion of the
Courts Division.
ARTEMIO V. PANGANIBAN
Associate Justice
Chairman, Third Division
C E R T I F I C AT I O N
Pursuant to Section 13, Article VIII of the Constitution, and the Division
Chairmans Attestation, it is hereby certified that the conclusions in the above
Decision had been reached in consultation before the case was assigned to the
writer of the opinion of the Courts Division.
HILARIO G. DAVIDE, JR.
Chief Justice

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G.R. No.

L-29059 December 15, 1987

was extensively discussed and categorically resolved in Commissioner of Internal Revenue v.

12 denying reconsideration of the said decision, thus:

The nature of cement as a "manufactured product" (rather than a "mineral product")

Companies. No pronouncement was made in these cases that as a "manufactured

COMMISSIONER OF INTERNAL REVENUE, petitioner,

Ruling of the Court of Tax Appeals

July 28, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner,

10% tax due thereon

20% interest per annum

Compromise penalty for late payment

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

Deficiency VAT Due

DEFICIENCY EXPANDED WITHHOLDING TAX (EWT)

Deficiency EWT Due

DEFICIENCY OF VAT ON ROYALTY PAYMENTS

LATE REMITTANCE OF FINAL WITHHOLDING TAX

LATE REMITTANCE OF INCOME PAYMENTS

Sony sought re-evaluation of the aforementioned assessment by filing a protest on February 2,

2. Withholding Tax on Royalty

3. EWT of Petitioner's Branches

July 14, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner,

(CTA Decision dated March 23, 1995; Pages 83-86, rollo)

01AUG 88to 31JAN89

Significantly, the total amount of P131,741,034.22, as hereinabove computed, corresponds

Gross Income (Section 28, Tax Code)

Deductions (Section 29, Tax Code)

Taxable Income (Section 27, Tax Code)

Tax rate (Section 24[a], Tax Code)

Gross income (Section 28, Tax Code)

General (Section 29, Tax Code)

Input VAT (VAT Ruling No. 05992)

Taxable income (Section 27, Tax Code)

Tax rate (Section 24[a], Tax Code)

COMMISSIONER OF INTERNAL REVENUE, petitioner,

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

Exempt Transaction >and Exempt Party

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. TOSHIBA

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

(a) THE EXHIBITION OF MOVIES BY CINEMA

of cinematographic films; persons engaged in milling, processing, manufacturing

period of time in exchange for periodic payment of a stipulated price, referred to

services performed in the Philippines by VAT-registered persons shall be subject

of cinematographic films are subject to VAT. While persons subject to amusement

derived by cinema/theater operators or proprietor from admission tickets to the

in acceptable foreign currency that is accounted for in accordance with the

1997 1st Qtr.

April 18, 1997

July 21, 1997

January 20, 1998

6,799.43 25,231,225.22 13,080,822.10 1,308,082.21

Tota P247,045.3 P24,704.5 P80,309,633.2 P37,630,604.3 P3,763,060.4

"There being no immediate action on the part of the [petitioner], [respondents]

B. Input taxes on domestic purchases of taxable goods and services related to

(C) Credit or refund taxes erroneously or illegally received or penalties imposed

entity.33 In like manner, intra-company profits or losses must be offset against

Third, for this service, respondent definitely receives consideration in

VAT Ruling Nos. 040-98 and 080-89

Code, the principle of legislative approval of administrative interpretation by

CONCHITA CARPIO MORALES

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