THIRD DIVISION

COMMISSIONER OF INTERNAL G.R. No. 178490

REVENUE,
Present:
Petitioner,
YNARES-SANTIAGO, J.,
Chairperson,
CHICO-NAZARIO,

VELASCO, JR.,

NACHURA, and
- versus - PERALTA, JJ.

Promulgated:

BANK OF THE PHILIPPINEISLANDS, July 7, 2009

Respondent.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CHICO-NAZARIO, J.:
 This is a Petition for Review assailing the Decision[1] dated 29 April 2005 and
the Resolution dated 20 April 2007 of the Court of Appeals in CA-G.R. SP No.
77655, which annulled and set aside the Decision dated 12 March 2003 of the
Court of Tax Appeals (CTA) in CTA Case No. 6276, wherein the CTA held that
respondent Bank of the Philippine Islands (BPI) already exercised the irrevocable
option to carry over its excess tax credits for the year 1998 to the succeeding
years 1999 and 2000 and was, therefore, no longer entitled to claim the refund or
issuance of a tax credit certificate for the amount thereof.

On 15 April 1999, BPI filed with the Bureau of Internal Revenue (BIR) its
final adjusted Corporate Annual Income Tax Return (ITR) for the taxable year
ending on 31 December 1998, showing a taxable income ofP1,773,236,745.00
and a total tax due of P602,900,493.00.

For the same taxable year 1998, BPI already made income tax payments for
the first three quarters, which amounted to P563,547,470.46.[2] The bank also
received income in 1998 from various third persons, which, were already
subjected to expanded withholding taxes amounting to P7,685,887.90. BPI
additionally acquired foreign tax credit when it paid the United
States government taxes in the amount of $151,467.00, or the equivalent
ofP6,190,014.46, on the operations of formers New York Branch. Finally,
respondent BPI had carried over excess tax credit from the prior year, 1997,
amounting to P59,424,222.00.

Crediting the aforementioned amounts against the total tax due from it at
the end of 1998, BPI computed an overpayment to the BIR of income taxes in the
amount of P33,947,101.00. The computation of BPI is reproduced below:

Total Income Taxes Due P602,900,493.00

 Less: Tax Credits:

Prior years tax credits P59,424,222.00

Quarterly payments 563,547,470.46

Creditable taxes withheld 7,685,887.90

Foreign tax credit 6,190,014.00 636,847,594.00

------------------- -------------------

Net Tax Payable/(Refundable) P(33,947,101.00)

BPI opted to carry over its 1998 excess tax credit, in the amount
of P33,947,101.00, to the succeeding taxable year ending 31 December
1999.[3] For 1999, however, respondent BPI ended up with (1) a net loss in the
amount of P615,742,102.00; (2) its still unapplied excess tax credit carried over
from 1998, in the amount of P33,947,101.00; and (3) more excess tax credit,
acquired in 1999, in the sum of P12,975,750.00. So in 1999, the total excess tax
credits of BPI increased to P46,922,851.00, which it once more opted to carry
over to the following taxable year.

For the taxable year ending 31 December 2000, respondent BPI declared in
its Corporate Annual ITR: (1) zero taxable income; (2) excess tax credit carried
over from 1998 and 1999, amounting to P46,922,851.00; and (3) even more
excess tax credit, gained in 2000, in the amount of P25,207,939.00. This time, BPI
failed to indicate in its ITR its choice of whether to carry over its excess tax credits
or to claim the refund of or issuance of a tax credit certificate for the amounts
thereof.

On 3 April 2001, BPI filed with petitioner Commissioner of Internal Revenue

(CIR) an administrative claim for refund in the amount of P33,947,101.00,
representing its excess creditable income tax for 1998.
 The CIR failed to act on the claim for tax refund of BPI. Hence, BPI filed a
Petition for Review before the CTA, docketed as CTA Case No. 6276.

The CTA promulgated its Decision in CTA Case No. 6276 on 12 March 2003,
ruling therein that since BPI had opted to carry over its 1998 excess tax credit to
1999 and 2000, it was barred from filing a claim for the refund of the same.

The CTA relied on the irrevocability rule laid down in Section 76 of the
National Internal Revenue Code (NIRC) of 1997, which states that once the
taxpayer opts to carry over and apply its excess income tax to succeeding taxable
years, its option shall be irrevocable for that taxable period and no application for
tax refund or issuance of a tax credit shall be allowed for the same.

The CTA Decision adjudged:

A close scrutiny of the 1998 income tax return of [BPI] reveals that it opted to
carry over its excess tax credits, the amount subject of this claim, to the succeeding
taxable year by placing an x mark on the corresponding box of said return (Exhibits A-
2 & 3-a). For the year 1999, [BPI] again manifested its intention to carry over to the
succeeding taxable period the subject claim together with the current excess tax credits
(Exhibit J). Still unable to apply its prior years excess credits in 1999 as it ended up in a
net loss position, petitioner again carried over the said excess credits in the year 2000
(Exhibit K).

The court already categorically ruled in a number of cases that once the option
to carry-over and apply the excess quarterly income tax against the income tax due for
the taxable quarters of the succeeding taxable years has been made, such option shall
be considered irrevocable and no application for cash refund or issuance of a tax credit
certificate shall be allowed therefore (Pilipinas Transport Industries vs. Commissioner of
Internal Revenue, CTA Case No. 6073, dated March 1, 2002; Pilipinas Hino, Inc. vs.
Commissioner of Internal Revenue, CTA Case No. 6074, dated April 19, 2002; Philam
Asset Management, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 6210,
dated May 2, 2002; The Philippine Banking Corporation (now known as Global Business
Bank, Inc.) vs. Commissioner of Internal Revenue, CTA Resolution, CTA Case No. 6280,
 August 16, 2001. Since [BPI] already exercised the irrevocable option to carry over its
excess tax credits for the year 1998 to the succeeding years 1999 and 2000, it is,
therefore, no longer entitled to claim for a refund or issuance of a tax credit
certificate.[4]

In the end, the CTA decreed:

IN VIEW OF ALL THE FOREGOING, the instant petition for review is hereby
DENIED for lack of merit.[5]

BPI filed a Motion for Reconsideration of the foregoing Decision, but the
CTA denied the same in a Resolution dated 3 June 2003.

BPI filed an appeal with the Court of Appeals, docketed as CA-G.R. SP No.
77655. On 29 April 2005, the Court of Appeals rendered its Decision, reversing
that of the CTA and holding that BPI was entitled to a refund of the excess income
tax it paid for 1998.

The Court of Appeals conceded that BPI indeed opted to carry over its
excess tax credit in 1998 to 1999 by placing an x mark on the corresponding box
of its 1998 ITR. Nonetheless, there was no actual carrying over of the excess tax
credit, given that BPI suffered a net loss in 1999, and was not liable for any
income tax for said taxable period, against which the 1998 excess tax credit could
have been applied.

The Court of Appeals added that even if Section 76 was to be construed

strictly and literally, the irrevocability rule would still not bar BPI from seeking a
tax refund of its 1998 excess tax credit despite previously opting to carry over the
same. The phrase for that taxable period qualified the irrevocability of the
option of BIR to carry over its 1998 excess tax credit to only the 1999 taxable
period; such that, when the 1999 taxable period expired, the irrevocability of the
option of BPI to carry over its excess tax credit from 1998 also expired.

The Court of Appeals further reasoned that the government would be

unjustly enriched should the appellate court hold that the irrevocability
rule barred the claim for refund of a taxpayer, who previously opted to carry-over
its excess tax credit, but was not able to use the same because it suffered a net
loss in the succeeding year.

Finally, the appellate court cited BPI-Family Savings Bank, Inc. v. Court of
Appeals[6] wherein this Court held that if a taxpayer suffered a net loss in a year,
thus, incurring no tax liability to which the tax credit from the previous year could
be applied, there was no reason for the BIR to withhold the tax refund which
rightfully belonged to the taxpayer.[7]

In a Resolution dated 20 April 2007, the Court of Appeals denied the

Motion for Reconsideration of the CIR.[8]

Hence, the CIR filed the instant Petition for Review, alleging that:

THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN HOLDING THAT THE

IRREVOCABILITY RULE UNDER SECTION 76 OF THE TAX CODE DOES NOT OPERATE TO
BAR PETITIONER FROM ASKING FOR A TAX REFUND.

II
 THE COURT OF APPEALS COMMITTED GRAVE ERROR WHEN IT REVERSED AND SET ASIDE
THE DECISION OF THE COURT OF TAX APPEALS AND HELD THAT RESPONDENT IS
ENTITLED TO THE CLAIMED TAX REFUND.

The Court finds merit in the instant Petition.

The Court of Appeals erred in relying on BPI-Family, missing significant

details that rendered said case inapplicable to the one at bar.

In BPI-Family, therein petitioner BPI-Family declared in its Corporate

Annual ITR for 1989 excess tax credits of P185,001.00 from 1988 and P112,491.00
from 1989, totaling P297,492.00. BPI-Family clearly indicated in the same ITR that
it was carrying over said excess tax credits to the following year. But on 11
October 1990, BPI-Family filed a claim for refund of its P112,491.00 tax credit
from 1989. When no action from the BIR was forthcoming, BPI-Family filed its
claim with the CTA. The CTA denied the claim for refund of BPI-Family on the
ground that, since the bank declared in its 1989 ITR that it would carry over its tax
credits to the following year, it should be presumed to have done so. In its
Motion for Reconsideration filed with the CTA, BPI-Family submitted its final
adjusted ITR for 1989 showing that it incurred P52,480,173.00 net loss in
1990. Still, the CTA denied the Motion for Reconsideration of BPI-Family. The
Court of Appeals likewise denied the appeal of BPI-Family and merely affirmed
the judgment of the CTA. The Court, however, reversed the CTA and the Court of
Appeals.

This Court decided to grant the claim for refund of BPI-Family after finding
that the bank had presented sufficient evidence to prove that it incurred a net
loss in 1990 and, thus, had no tax liability to which its tax credit from 1989 could
be applied. The Court stressed in BPI Family that the undisputed fact is that
[BPI-Family] suffered a net loss in 1990; accordingly, it incurred no tax liability to
which the tax credit could be applied. Consequently, there is no reason for the
BIR and this Court to withhold the tax refund which rightfully belongs to the [BPI-
Family]. It was on the basis of this fact that the Court granted the appeal of BPI-
Family, brushing aside all procedural and technical objections to the same
through the following pronouncements:

Finally, respondents argue that tax refunds are in the nature of tax exemptions
and are to be construed strictissimi juris against the claimant. Under the facts of this
case, we hold that [BPI-Family] has established its claim. [BPI-Family] may have failed to
strictly comply with the rules of procedure; it may have even been negligent. These
circumstances, however, should not compel the Court to disregard this cold, undisputed
fact: that petitioner suffered a net loss in 1990, and that it could not have applied the
amount claimed as tax credits.

Substantial justice, equity and fair play are on the side of [BPI-
Family]. Technicalities and legalisms, however exalted, should not be misused by the
government to keep money not belonging to it and thereby enrich itself at the expense
of its law-abiding citizens. If the State expects its taxpayers to observe fairness and
honesty in paying their taxes, so must it apply the same standard against itself in
refunding excess payments of such taxes. Indeed, the State must lead by its own
example of honor, dignity and uprightness.[9]

It is necessary for this Court, however, to emphasize that BPI-

Family involved tax credit acquired by the bank in 1989, which it initially opted to
carry over to 1990. The prevailing tax law then was the NIRC of 1985, Section
79[10] of which provided:

Sec. 79. Final Adjustment Return. - Every corporation liable to tax under Section
24 shall file a final adjustment return covering the total net income for the preceding
calendar or fiscal year. If the sum of the quarterly tax payments made during the said
taxable year is not equal to the total tax due on the entire taxable net income of that
year the corporation shall either:

(a) Pay the excess tax still due; or

 (b) Be refunded the excess amount paid, as the case may be.

In case the corporation is entitled to a refund of the excess estimated quarterly

income taxes-paid, the refundable amount shown on its final adjustment return may
be credited against the estimated quarterly income tax liabilities for the taxable quarters
of the succeeding taxable year. (Emphases ours.)

By virtue of the afore-quoted provision, the taxpayer with excess income

tax was given the option to either (1) refund the amount; or (2) credit the same to
its tax liability for succeeding taxable periods.

Section 79 of the NIRC of 1985 was reproduced as Section 76 of the NIRC of

1997, with the addition of one important sentence, which laid down
[11]

the irrevocability rule:

Section 76. Final Adjustment Return. - Every corporation liable to tax under
Section 24 shall file a final adjustment return covering the total net income for the
preceding calendar or fiscal year. If the sum of the quarterly tax payments made during
the said taxable year is not equal to the total tax due on the entire taxable net income
of that year the corporation shall either:

(a) Pay the excess tax still due; or

(b) Be refunded the excess amount paid, as the case may be.

In case the corporation is entitled to a refund of the excess estimated quarterly

income taxes paid, the refundable amount shown on its final adjustment return may
be credited against the estimated quarterly income tax liabilities for the taxable
quarters of the succeeding taxable years. Once the option to carry-over and apply the
excess quarterly income tax against income tax due for the taxable quarters of the
 succeeding taxable years has been made, such option shall be considered irrevocable
for that taxable period and no application for tax refund or issuance of a tax credit
certificate shall be allowed therefor. (Emphases ours.)

When BPI-Family was decided by this Court, it did not yet have
the irrevocability rule to consider. Hence, BPI-Family cannot be cited as a
precedent for this case.

The factual background of Philam Asset Management, Inc. v. Commissioner

of Internal Revenue,[12] cited by the CIR, is closer to the instant Petition. Both
involve tax credits acquired and claims for refund filed more than a decade after
those in BPI-Family, to which Section 76 of the NIRC of 1997 already apply.

The Court, in Philam, recognized the two options offered by Section 76 of

the NIRC of 1997 to a taxable corporation whose total quarterly income tax
payments in a given taxable year exceeds its total income tax due. These options
are: (1) filing for a tax refund or (2) availing of a tax credit. The Court further
explained:

The first option is relatively simple. Any tax on income that is paid in excess of
the amount due the government may be refunded, provided that a taxpayer properly
applies for the refund.

The second option works by applying the refundable amount, as shown on the
[Final Adjustment Return (FAR)] of a given taxable year, against the estimated quarterly
income tax liabilities of the succeeding taxable year.

These two options under Section 76 are alternative in nature. The choice of
one precludes the other. Indeed, in Philippine Bank of Communications v. Commissioner
of Internal Revenue, the Court ruled that a corporation must signify its intention --
 whether to request a tax refund or claim a tax credit -- by marking the corresponding
option box provided in the FAR. While a taxpayer is required to mark its choice in the
form provided by the BIR, this requirement is only for the purpose of facilitating tax
collection.

One cannot get a tax refund and a tax credit at the same time for the same
excess income taxes paid.[13] x x x

The Court categorically declared in Philam that: Section 76 remains clear

and unequivocal. Once the carry-over option is taken, actually or constructively,
it becomes irrevocable. It mentioned no exception or qualification to
the irrevocability rule.

Hence, the controlling factor for the operation of the irrevocability rule is
that the taxpayer chose an option; and once it had already done so, it could no
longer make another one. Consequently, after the taxpayer opts to carry-over its
excess tax credit to the following taxable period, the question of whether or not it
actually gets to apply said tax credit is irrelevant. Section 76 of the NIRC of 1997
is explicit in stating that once the option to carry over has been made, no
application for tax refund or issuance of a tax credit certificate shall be allowed
therefor.

The last sentence of Section 76 of the NIRC of 1997 reads: Once the option
to carry-over and apply the excess quarterly income tax against income tax due
for the taxable quarters of the succeeding taxable years has been made, such
option shall be considered irrevocable for that taxable period and no application
for tax refund or issuance of a tax credit certificate shall be allowed
therefor. The phrase for that taxable period merely identifies the excess
income tax, subject of the option, by referring to the taxable period when it was
acquired by the taxpayer. In the present case, the excess income tax credit, which
BPI opted to carry over, was acquired by the said bank during the taxable year
1998. The option of BPI to carry over its 1998 excess income tax credit is
irrevocable; it cannot later on opt to apply for a refund of the very same 1998
excess income tax credit.

The Court of Appeals mistakenly understood the phrase for that taxable
period as a prescriptive period for the irrevocability rule. This would mean that
since the tax credit in this case was acquired in 1998, and BPI opted to carry it
over to 1999, then the irrevocability of the option to carry over expired by the
end of 1999, leaving BPI free to again take another option as regards its 1998
excess income tax credit. This construal effectively renders nugatory
the irrevocability rule. The evident intent of the legislature, in adding the last
sentence to Section 76 of the NIRC of 1997, is to keep the taxpayer from flip-
flopping on its options, and avoid confusion and complication as regards said
taxpayers excess tax credit. The interpretation of the Court of Appeals only
delays the flip-flopping to the end of each succeeding taxable period.

The Court similarly disagrees in the declaration of the Court of Appeals that
to deny the claim for refund of BPI, because of the irrevocability rule, would be
tantamount to unjust enrichment on the part of the government. The Court
addressed the very same argument in Philam, where it elucidated that there
would be no unjust enrichment in the event of denial of the claim for refund
under such circumstances, because there would be no forfeiture of any amount in
favor of the government. The amount being claimed as a refund would remain in
the account of the taxpayer until utilized in succeeding taxable years,[14] as
provided in Section 76 of the NIRC of 1997. It is worthy to note that unlike the
option for refund of excess income tax, which prescribes after two years from the
filing of the FAR, there is no prescriptive period for the carrying over of the
same. Therefore, the excess income tax credit of BPI, which it acquired in 1998
and opted to carry over, may be repeatedly carried over to succeeding taxable
years, i.e., to 1999, 2000, 2001, and so on and so forth, until actually applied or
credited to a tax liability of BPI.

Finally, while the Court, in Philam, was firm in its position that the choice
of option as regards the excess income tax shall be irrevocable, it was less rigid in
the determination of which option the taxpayer actually chose. It did not limit
itself to the indication by the taxpayer of its option in the ITR.

Thus, failure of the taxpayer to make an appropriate marking of its option

in the ITR does not automatically mean that the taxpayer has opted for a tax
credit. The Court ratiocinated in G.R. No. 156637[15] of Philam:

One cannot get a tax refund and a tax credit at the same time for the same
excess income taxes paid. Failure to signify ones intention in the FAR does not mean
outright barring of a valid request for a refund, should one still choose this option
later on. A tax credit should be construed merely as an alternative remedy to a tax
refund under Section 76, subject to prior verification and approval by respondent.

The reason for requiring that a choice be made in the FAR upon its filing is to
ease tax administration, particularly the self-assessment and collection aspects. A
taxpayer that makes a choice expresses certainty or preference and thus demonstrates
clear diligence. Conversely, a taxpayer that makes no choice expresses uncertainty or
lack of preference and hence shows simple negligence or plain oversight.

xxxx

x x x Despite the failure of [Philam] to make the appropriate marking in the BIR
form, the filing of its written claim effectively serves as an expression of its choice to
request a tax refund, instead of a tax credit. To assert that any future claim for a tax
refund will be instantly hindered by a failure to signify ones intention in the FAR is to
render nugatory the clear provision that allows for a two-year prescriptive
[16]
period. (Emphases ours.)

Philam reveals a meticulous consideration by the Court of the evidence

submitted by the parties and the circumstances surrounding the taxpayers
option to carry over or claim for refund. When circumstances show that a choice
has been made by the taxpayer to carry over the excess income tax as credit, it
should be respected; but when indubitable circumstances clearly show that
another choice a tax refund is in order, it should be granted. Technicalities
and legalisms, however exalted, should not be misused by the government to
keep money not belonging to it and thereby enrich itself at the expense of its law-
abiding citizens.

Therefore, as to which option the taxpayer chose is generally a matter of

evidence. It is axiomatic that a claimant has the burden of proof to establish the
factual basis of his or her claim for tax credit or refund. Tax refunds, like tax
exemptions, are construed strictly against the taxpayer.[17]

In the Petition at bar, BPI was unable to discharge the burden of proof
necessary for the grant of a refund. BPI expressly indicated in its ITR for 1998 that
it was carrying over, instead of refunding, the excess income tax it paid during the
said taxable year. BPI consistently reported the said amount in its ITRs for 1999
and 2000 as credit to be applied to any tax liability the bank may incur; only, no
such opportunity arose because it suffered a net loss in 1999 and incurred zero
tax liability in 2000. In G.R. No. 162004 of Philam, the Court found:

First, the fact that it filled out the portion Prior Years Excess Credits in its
1999 FAR means that it categorically availed itself of the carry-over option. In fact, the
line that precedes that phrase in the BIR form clearly states Less: Tax
Credits/Payments. The contention that it merely filled out that portion because it was
a requirement and that to have done otherwise would have been tantamount to
falsifying the FAR is a long shot.

The FAR is the most reliable firsthand evidence of corporate acts pertaining to
income taxes. In it are found the itemization and summary of additions to and
deductions from income taxes due. These entries are not without rhyme or
reason. They are required, because they facilitate the tax administration process.[18]
 BPI itself never denied that its original intention was to carry over the
excess income tax credit it acquired in 1998, and only chose to refund the said
amount when it was unable to apply the same to any tax liability in the
succeeding taxable years. There can be no doubt that BPI opted to carry over its
excess income tax credit from 1998; it only subsequently changed its mind
which it was barred from doing by the irrevocability rule.

The choice by BPI of the option to carry over its 1998 excess income tax
credit to succeeding taxable years, which it explicitly indicated in its 1998 ITR, is
irrevocable, regardless of whether it was able to actually apply the said amount to
a tax liability. The reiteration by BPI of the carry over option in its ITR for 1999
was already a superfluity, as far as its 1998 excess income tax credit was
concerned, given the irrevocability of the initial choice made by the bank to carry
over the said amount. For the same reason, the failure of BPI to indicate any
option in its ITR for 2000 was already immaterial to its 1998 excess income tax
credit.

WHEREFORE, the instant Petition for Review of the Commissioner for

Internal Revenue is GRANTED. The Decision dated 29 April 2005 and the
Resolution dated 20 April 2007 of the Court of Appeals in CA-G.R. SP No. 77655
are REVERSED and SET ASIDE. The Decision dated 12 March 2003 of the Court of
Tax Appeals in CTA Case No. 6276, denying the claim of respondent Bank of the
Philippine Islands for the refund of its 1998 excess income tax credits,
is REINSTATED. No costs.

SO ORDERED.
 FIRST DIVISION

COMMISSIONER OF G.R. No. 149671

INTERNAL REVENUE,
Petitioner, Present:

Panganiban, CJ,
Chairman,
- versus - Ynares-Santiago,
Austria-Martinez,
Callejo, Sr., and
Chico-Nazario, JJ

SEKISUI JUSHI Promulgated:

PHILIPPINES, INC.,
Respondent. July 21, 2006
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISION
PANGANIBAN, CJ:

B
usiness 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 Review[1] under Rule 45 of the Rules of

Court, challenging the August 16, 2001 Decision[2] of the Court of Appeals
(CA) in CA-GR SP No. 64679. The assailed Decision upheld the April 26,
2001 Decision[3] 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 uncontested[6] 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 of P4,377,102.26 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 Value-Added 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 ecozone[18] 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 territory[24] 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.
SECOND DIVISION

COMMISSIONER OF G.R. No. 178697

INTERNAL REVENUE,
Petitioner, Present:

CARPIO, J., Chairperson,

LEONARDO-DE CASTRO,
PERALTA,
- versus - ABAD, and
MENDOZA, JJ.

SONY PHILIPPINES, INC., Promulgated:

Respondent. November 17, 2010

X ---------------------------------------------------------------------------------------X

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
Banc[1] (CTA-EB), in C.T.A. EB No. 90, affirming the October 26, 2004 Decision
of the CTA-First Division[2] which, in turn, partially granted the petition for review
of respondent 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 P 7,958,700.00
Add: Penalties
Interest up to 3-31-2000 P 3,157,314.41
Compromise 25,000.00 3,182,314.41
Deficiency VAT Due P 11,141,014.41

DEFICIENCY EXPANDED WITHHOLDING TAX (EWT)

(Assessment No. ST-EWT-97-0125-2000)
Basic Tax Due P 1,416,976.90
Add: Penalties
Interest up to 3-31-2000 P 550,485.82
Compromise 25,000.00 575,485.82
Deficiency EWT Due P 1,992,462.72

DEFICIENCY OF VAT ON ROYALTY PAYMENTS

(Assessment No. ST-LR1-97-0126-2000)
Basic Tax Due P
Add: Penalties
Surcharge P 359,177.80
Interest up to 3-31-2000 87,580.34
Compromise 16,000.00 462,758.14
Penalties Due P 462,758.14

LATE REMITTANCE OF FINAL WITHHOLDING TAX

(Assessment No. ST-LR2-97-0127-2000)
Basic Tax Due P
Add: Penalties
Surcharge P 1,729,690.71
Interest up to 3-31-2000 508,783.07
Compromise 50,000.00 2,288,473.78
Penalties Due P 2,288,473.78

LATE REMITTANCE OF INCOME PAYMENTS

(Assessment No. ST-LR3-97-0128-2000)
Basic Tax Due P
Add: Penalties
25 % Surcharge P 8,865.34
Interest up to 3-31-2000 58.29
Compromise 2,000.00 10,923.60
Penalties Due P 10,923.60

GRAND TOTAL P 15,895,632.65[5]

Sony sought re-evaluation of the aforementioned assessment by filing a

protest on February 2, 2000. Sony submitted relevant documents in support of its
protest on the 16th of that same month.[6]
 On October 24, 2000, within 30 days after the lapse of 180 days from
submission of the said supporting documents to the CIR, Sony filed a petition for
review before the CTA.[7]

After trial, the CTA-First Division disallowed the deficiency VAT

assessment because the subsidized advertising expense paid by Sony which was
duly covered by a VAT invoice resulted in an input VAT credit. As regards the
EWT, the CTA-First Division maintained the deficiency EWT assessment on
Sonys motor vehicles and on professional fees paid to general professional
partnerships. It also assessed the amounts paid to sales agents as commissions
with five percent (5%) EWT pursuant to Section 1(g) of Revenue Regulations No.
6-85. The CTA-First Division, however, disallowed the EWT assessment on rental
expense since it found that the total rental deposit of P10,523,821.99 was incurred
from January to March 1998 which was again beyond the coverage of LOA 19734.
Except for the compromise penalties, the CTA-First Division also upheld the
penalties for the late payment of VAT on royalties, for late remittance of final
withholding tax on royalty as of December 1997 and for the late remittance of
EWT by some of Sonys branches.[8] In sum, the CTA-First Division partly granted
Sonys petition by cancelling the deficiency VAT assessment but upheld a
modified deficiency EWT assessment as well as the penalties. Thus, the
dispositive portion reads:

WHEREFORE, the petition for review is hereby

PARTIALLY GRANTED. Respondent is ORDERED to CANCEL
and WITHDRAW the deficiency assessment for value-added tax
for 1997 for lack of merit. However, the deficiency assessments for
expanded withholding tax and penalties for late remittance of
internal revenue taxes are UPHELD.
Accordingly, petitioner is DIRECTED to PAY the
respondent the deficiency expanded withholding tax in the
amount of P1,035,879.70 and the following penalties for late
remittance of internal revenue taxes in the sum of P1,269,593.90:

1. VAT on Royalty P 429,242.07

2. Withholding Tax on Royalty 831,428.20
3. EWT of Petitioners Branches 8,923.63
Total P 1,269,593.90
 Plus 20% delinquency interest from January 17, 2000 until fully
paid pursuant to Section 249(C)(3) of the 1997 Tax Code.

SO ORDERED.[9]

The CIR sought a reconsideration of the above decision and submitted the
following grounds in support thereof:

A. The Honorable Court committed reversible error in holding

that petitioner is not liable for the deficiency VAT in the
amount of P11,141,014.41;

B. The Honorable court committed reversible error in holding

that the commission expense in the amount of
P2,894,797.00 should be subjected to 5% withholding tax
instead of the 10% tax rate;

C. The Honorable Court committed a reversible error in

holding that the withholding tax assessment with respect to
the 5% withholding tax on rental deposit in the amount
of P10,523,821.99 should be cancelled; and

D. The Honorable Court committed reversible error in holding

that the remittance of final withholding tax on royalties
covering the period January to March 1998 was filed on
time.[10]

On April 28, 2005, the CTA-First Division denied the motion for
reconsideration. Unfazed, the CIR filed a petition for review with the CTA-EB
raising identical issues:

1. Whether or not respondent (Sony) is liable for the deficiency

VAT in the amount of P11,141,014.41;

2. Whether or not the commission expense in the amount

of P2,894,797.00 should be subjected to 10% withholding tax
instead of the 5% tax rate;
 3. Whether or not the withholding assessment with respect to the
5% withholding tax on rental deposit in the amount
of P10,523,821.99 is proper; and

4. Whether or not the remittance of final withholding tax on

royalties covering the period January to March 1998 was filed
outside of time.[11]

Finding no cogent reason to reverse the decision of the CTA-First Division,

the CTA-EB dismissed CIRs petition on May 17, 2007. CIRs motion for
reconsideration was denied by the CTA-EB on July 5, 2007.

The CIR is now before this Court via this petition for review relying on the
very same grounds it raised before the CTA-First Division and the CTA-EB. The
said grounds are reproduced below:

GROUNDS FOR THE ALLOWANCE OF THE

PETITION

THE CTA EN BANC ERRED IN RULING THAT

RESPONDENT IS NOT LIABLE FOR DEFICIENCY VAT IN
THE AMOUNT OF PHP11,141,014.41.

II

AS TO RESPONDENTS DEFICIENCY EXPANDED

WITHHOLDING TAX IN THE AMOUNT OF PHP1,992,462.72:

A. THE CTA EN BANC ERRED IN RULING THAT THE

COMMISSION EXPENSE IN THE AMOUNT OF
PHP2,894,797.00 SHOULD BE SUBJECTED TO A
WITHHOLDING TAX OF 5% INSTEAD OF THE 10% TAX
RATE.

B. THE CTA EN BANC ERRED IN RULING THAT THE

ASSESSMENT WITH RESPECT TO THE 5%
WITHHOLDING TAX ON RENTAL DEPOSIT IN THE
AMOUNT OF PHP10,523,821.99 IS NOT PROPER.
 III

THE CTA EN BANC ERRED IN RULING THAT THE

FINAL WITHHOLDING TAX ON ROYALTIES COVERING
THE PERIOD JANUARY TO MARCH 1998 WAS FILED ON
TIME.[12]

Upon filing of Sonys comment, the Court ordered the CIR to file its reply
thereto. The CIR subsequently filed a manifestation informing the Court that it
would no longer file a reply. Thus, on December 3, 2008, the Court resolved to
give due course to the petition and to decide the case on the basis of the pleadings
filed.[13]

The Court finds no merit in the petition.

The CIR insists that LOA 19734, although it states the period 1997 and
unverified prior years, should be understood to mean the fiscal year ending in
March 31, 1998.[14] The Court cannot agree.

Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the

authority given to the appropriate revenue officer assigned to perform assessment
functions. It empowers or enables said revenue officer to examine the books of
account and other accounting records of a taxpayer for the purpose of collecting
the correct amount of tax.[15] The very provision of the Tax Code that the CIR
relies on is unequivocal with regard to its power to grant authority to examine and
assess a taxpayer.

SEC. 6. Power of the Commissioner to Make Assessments

and Prescribe Additional Requirements for Tax Administration
and Enforcement.

(A)Examination of Returns and Determination of tax Due.

After a return has been filed as required under the provisions of
this Code, the Commissioner or his duly authorized
representative may authorize the examination of any taxpayer and
the assessment of the correct amount of tax: Provided, however,
 That failure to file a return shall not prevent the Commissioner
from authorizing the examination of any taxpayer. x x x [Emphases
supplied]

Clearly, there must be a grant of authority before any revenue officer can
conduct an examination or assessment. Equally important is that the revenue
officer so authorized must not go beyond the authority given. In the absence of
such an authority, the assessment or examination is a nullity.

As earlier stated, LOA 19734 covered the period 1997 and unverified prior
years. For said reason, the CIR acting through its revenue officers went beyond
the scope of their authority because the deficiency VAT assessment they arrived at
was based on records from January to March 1998 or using the fiscal year which
ended in March 31, 1998. As pointed out by the CTA-First Division in its April 28,
2005 Resolution, the CIR knew which period should be covered by the
investigation. Thus, if CIR wanted or intended the investigation to include the year
1998, it should have done so by including it in the LOA or issuing another LOA.

Upon review, the CTA-EB even added that the coverage of LOA 19734,
particularly the phrase and unverified prior years, violated Section C of Revenue
Memorandum Order No. 43-90 dated September 20, 1990, the pertinent portion of
which reads:

3. A Letter of Authority should cover a taxable period not

exceeding one taxable year. The practice of issuing L/As
covering audit of unverified prior years is hereby prohibited. If
the audit of a taxpayer shall include more than one taxable
period, the other periods or years shall be specifically indicated
in the L/A.[16] [Emphasis supplied]

On this point alone, the deficiency VAT assessment should have been
disallowed. Be that as it may, the CIRs argument, that Sonys advertising expense
could not be considered as an input VAT credit because the same was eventually
reimbursed by Sony International Singapore (SIS), is also erroneous.

The CIR contends that since Sonys advertising expense was reimbursed by
SIS, the former never incurred any advertising expense. As a result, Sony is not
entitled to a tax credit. At most, the CIR continues, the said advertising expense
should be for the account of SIS, and not Sony.[17]

The Court is not persuaded. As aptly found by the CTA-First Division and
later affirmed by the CTA-EB, Sonys deficiency VAT assessment stemmed from
the CIRs disallowance of the input VAT credits that should have been realized
from the advertising expense of the latter.[18] It is evident under Section 110[19] of
the 1997 Tax Code that an advertising expense duly covered by a VAT invoice is a
legitimate business expense. This is confirmed by no less than CIRs own witness,
Revenue Officer Antonio Aluquin.[20] There is also no denying that Sony incurred
advertising expense. Aluquin testified that advertising companies issued invoices
in the name of Sony and the latter paid for the same.[21] Indubitably, Sony incurred
and paid for advertising expense/ services. Where the money came from is another
matter all together but will definitely not change said fact.

The CIR further argues that Sony itself admitted that the reimbursement
from SIS was income and, thus, taxable. In support of this, the CIR cited a portion
of Sonys protest filed before it:

The fact that due to adverse economic conditions, Sony-

Singapore has granted to our client a subsidy equivalent to the
latters advertising expenses will not affect the validity of the input
taxes from such expenses. Thus, at the most, this is an additional
income of our client subject to income tax. We submit further that
our client is not subject to VAT on the subsidy income as this was
not derived from the sale of goods or services.[22]

Insofar as the above-mentioned subsidy may be considered as income and,

therefore, subject to income tax, the Court agrees. However, the Court does not
agree that the same subsidy should be subject to the 10% VAT. To begin with, the
said subsidy termed by the CIR as reimbursement was not even exclusively
earmarked for Sonys advertising expense for it was but an assistance or aid in
view of Sonys dire or adverse economic conditions, and was only equivalent to
the latters (Sonys) advertising expenses.

Section 106 of the Tax Code explains when VAT may be imposed or
exacted. Thus:
 SEC. 106. Value-added Tax on Sale of Goods or
Properties.

(A) Rate and Base of Tax. There shall be levied, assessed

and collected on every sale, barter or exchange of goods or
properties, value-added tax equivalent to ten percent (10%) of the
gross selling price or gross value in money of the goods or
properties sold, bartered or exchanged, such tax to be paid by the
seller or transferor.

Thus, there must be a sale, barter or exchange of goods or properties before

any VAT may be levied. Certainly, there was no such sale, barter or exchange in
the subsidy given by SIS to Sony. It was but a dole out by SIS and not in payment
for goods or properties sold, bartered or exchanged by Sony.

In the case of CIR v. Court of Appeals (CA),[23] the Court had the occasion to
rule that services rendered for a fee even on reimbursement-on-cost basis only and
without realizing profit are also subject to VAT. The case, however, is not
applicable to the present case. In that case, COMASERCO rendered service to its
affiliates and, in turn, the affiliates paid the former reimbursement-on-cost which
means that it was paid the cost or expense that it incurred although without profit.
This is not true in the present case. Sony did not render any service to SIS at all.
The services rendered by the advertising companies, paid for by Sony using SIS
dole-out, were for Sony and not SIS. SIS just gave assistance to Sony in the
amount equivalent to the latters advertising expense but never received any goods,
properties or service from Sony.

Regarding the deficiency EWT assessment, more particularly Sonys

commission expense, the CIR insists that said deficiency EWT assessment is
subject to the ten percent (10%) rate instead of the five percent (5%) citing
Revenue Regulation No. 2-98 dated April 17, 1998.[24] The said revenue regulation
provides that the 10% rate is applied when the recipient of the commission income
is a natural person. According to the CIR, Sonys schedule of Selling, General and
Administrative expenses shows the commission expense as commission/dealer
salesman incentive, emphasizing the word salesman.
 On the other hand, the application of the five percent (5%) rate by the CTA-
First Division is based on Section 1(g) of Revenue Regulations No. 6-85
which provides:

(g) Amounts paid to certain Brokers and Agents. On gross

payments to customs, insurance, real estate and commercial
brokers and agents of professional entertainers five per centum
(5%).[25]

In denying the very same argument of the CIR in its motion for
reconsideration, the CTA-First Division, held:

x x x, commission expense is indeed subject to 10%

withholding tax but payments made to broker is subject to 5%
withholding tax pursuant to Section 1(g) of Revenue Regulations
No. 6-85. While the commission expense in the schedule of
Selling, General and Administrative expenses submitted by
petitioner (SPI) to the BIR is captioned as commission/dealer
salesman incentive the same does not justify the automatic
imposition of flat 10% rate. As itemized by petitioner, such
expense is composed of Commission Expense in the amount of
P10,200.00 and Broker Dealer of P2,894,797.00.[26]

The Court agrees with the CTA-EB when it affirmed the CTA-First Division
decision. Indeed, the applicable rule is Revenue Regulations No. 6-85, as
amended by Revenue Regulations No. 12-94, which was the applicable rule during
the subject period of examination and assessment as specified in the
LOA. Revenue Regulations No. 2-98, cited by the CIR, was only adopted in April
1998 and, therefore, cannot be applied in the present case. Besides, the
withholding tax on brokers and agents was only increased to 10% much later or by
the end of July 2001 under Revenue Regulations No. 6-2001.[27] Until then, the
rate was only 5%.

The Court also affirms the findings of both the CTA-First Division and the
CTA-EB on the deficiency EWT assessment on the rental deposit. According to
their findings, Sony incurred the subject rental deposit in the amount
ofP10,523,821.99 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 3[28] of Revenue Regulations No. 5-
[29]
82 and Sections 2.57.4 and 2.58(A)(2)(a) of Revenue Regulations No. 2-98,
Sony should also be made liable for the FWT on royalties from January to March
of 1998. At the same time, it downplays the relevance of the Manufacturing
License Agreement (MLA) between Sony and Sony-Japan, particularly in the
payment of royalties.

The above revenue regulations provide the manner of withholding

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

Under Article X(5) of the MLA between Sony and Sony-Japan, the
following terms of royalty payments were agreed upon:
(5)Within two (2) months following each semi-annual
period ending June 30 and December 31, the LICENSEE shall
furnish to the LICENSOR a statement, certified by an officer of the
LICENSEE, showing quantities of the MODELS sold, leased or
otherwise disposed of by the LICENSEE during such respective
semi-annual period and amount of royalty due pursuant this
ARTICLE X therefore, and the LICENSEE shall pay the royalty
hereunder to the LICENSOR concurrently with the furnishing of
the above statement.[30]
 Withal, Sony was to pay Sony-Japan royalty within two (2) months after
every semi-annual period which ends in June 30 and December 31. However, the
CTA-First Division found that there was accrual of royalty by the end of December
1997 as well as by the end of June 1998. Given this, the FWTs should have been
paid or remitted by Sony to the CIR on January 10, 1998 and July 10, 1998. Thus,
it was correct for the CTA-First Division and the CTA-EB in ruling that the FWT
for the royalty from January to March 1998 was seasonably filed. Although the
royalty from January to March 1998 was well within the semi-annual period
ending June 30, which meant that the royalty may be payable until August 1998
pursuant to the MLA, the FWT for said royalty had to be paid on or before July 10,
1998 or 10 days from its accrual at the end of June 1998. Thus, when Sony
remitted the same on July 8, 1998, it was not yet late.

In view of the foregoing, the Court finds no reason to disturb the findings of
the CTA-EB.

WHEREFORE, the petition is DENIED.

SO ORDERED.
 THIRD DIVISION

COMMISSIONER OF G.R. No. 146984

INTERNAL REVENUE
Petitioner,
Present:

QUISUMBING,
- versus - Chairperson,
CARPIO,
CARPIO MORALES,
TINGA, and
MAGSAYSAY LINES, INC., VELASCO, JR., JJ.
BALIWAG NAVIGATION, INC.,
FIM LIMITED OF THE MARDEN
GROUP (HK) and NATIONAL
DEVELOPMENT COMPANY,
Respondents. Promulgated:

July 28, 2006

x---------------------------------------------------------------------------------x

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. [3] On 3 June
1988, private respondent Magsaysay Lines, Inc. (Magsaysay Lines) offered to buy
the shares and the vessels for P168,000,000.00. The bid was made by Magsaysay
Lines, purportedly for a new company still to be formed composed of itself,
Baliwag Navigation, Inc., and FIM Limited of the Marden Group based in
Hongkong (collectively, private respondents).[4] The bid was approved by the
Committee on Privatization, and a Notice of Award dated 1 July 1988 was issued
to Magsaysay Lines.

On 28 September 1988, the implementing Contract of Sale was executed

between NDC, on one hand, and Magsaysay Lines, Baliwag Navigation, and FIM
Limited, on the other. Paragraph 11.02 of the contract stipulated that [v]alue-
added tax, if any, shall be for the account of the PURCHASER.[5] Per
arrangement, an irrevocable confirmed Letter of Credit previously filed as bidders
bond was accepted by NDC as security for the payment of VAT, if any. By this
time, a formal request for a ruling on whether or not the sale of the vessels was
subject to VAT had already been filed 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 services [16] who in
turn may credit their own VAT liability (or input VAT) from the VAT payments
they receive from the final consumer (or output VAT).[17] The final purchase by the
end consumer represents the final link in a production chain that itself involves
several transactions and several acts of consumption. The VAT system assures
fiscal adequacy through the collection of taxes on every level of
consumption,[18] yet assuages the manufacturers or providers of goods and services
by enabling them to pass on their respective VAT liabilities to the next link of the
chain until finally the end consumer shoulders the entire tax liability.

Yet VAT is not a singular-minded tax on every transactional level. Its

assessment bears direct relevance to the taxpayers role or link in the production
chain. Hence, as affirmed by Section 99 of the Tax Code and its subsequent
incarnations,[19] the tax is levied only on the sale, barter or exchange of goods or
services by persons who engage in such activities, in the course of trade or
business. These transactions outside the course of trade or business may invariably
contribute to the production chain, but they do so only as a matter of accident or
incident. As the sales of goods or services do not occur within the course of trade
or business, the providers of such goods or services would hardly, if at all, have the
opportunity to appropriately credit any VAT liability as against their own
accumulated VAT collections since the accumulation of output VAT arises in the
first place only through the ordinary course of trade or business.

That the sale of the vessels was not in the ordinary course of trade or
business of NDC was appreciated by both the CTA and the Court of Appeals, the
latter doing so even in its first decision which it eventually reconsidered.[20] We
cite with approval the CTAs explanation on this point:

In Imperial v. Collector of Internal Revenue, G.R. No. L-7924,

September 30, 1955 (97 Phil. 992), the term carrying on business does not
mean the performance of a single disconnected act, but means conducting,
prosecuting and continuing business by performing progressively all the acts
normally incident thereof; while doing business conveys the idea of business
 being done, not from time to time, but all the time. [J. Aranas, UPDATED
NATIONAL INTERNAL REVENUE CODE (WITH ANNOTATIONS), p. 608-9
(1988)]. Course of business is what is usually done in the management of trade
or business. [Idmi v. Weeks & Russel, 99 So. 761, 764, 135 Miss. 65, cited in
Words & Phrases, Vol. 10, (1984)].

What is clear therefore, based on the aforecited jurisprudence, is that

course of business or doing business connotes regularity of activity. In the
instant case, the sale was an isolated transaction. The sale which was involuntary
and made pursuant to the declared policy of Government for privatization could no
longer be repeated or carried on with regularity. It should be emphasized that the
normal VAT-registered activity of NDC is leasing personal property.[21]

This finding is confirmed by the Revised Charter[22] of the NDC which bears
no indication that the NDC was created for the primary purpose of selling real
property.[23]

The conclusion that the sale was not in the course of trade or business, which
the CIR does not dispute before this Court,[24] should have definitively settled the
matter. Any sale, barter or exchange of goods or services not in the course of
trade or business is not subject to VAT.

Section 100 of the Tax Code, which is implemented by Section 4(E)(i) of

R.R. No. 5-87 now relied upon by the CIR, is captioned Value-added tax on sale
of goods, and it expressly states that [t]here shall be levied, assessed and
collected on every sale, barter or exchange of goods, a value added tax x x x.
Section 100 should be read in light of Section 99, which lays down the general rule
on which persons are liable for VAT in the first place and on what transaction if at
all. It may even be noted that Section 99 is the very first provision in Title IV of
the Tax Code, the Title that covers VAT in the law. Before any portion of Section
100, or the rest of the law for that matter, may be applied in order to subject a
transaction to VAT, it must first be satisfied that the taxpayer and transaction
involved is liable for VAT in the first place under Section 99.
 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.[25] Indeed, Section 4(E) of R.R. No. 5-87 expressly characterizes the
change of ownership of business as only a circumstance that attends those
transactions deemed sale, which are otherwise stated in the same section.[26]

WHEREFORE, the petition is DENIED. No costs.

SO ORDERED.
SECOND DIVISION

EXXONMOBIL PETROLEUM AND G.R. No. 180909

CHEMICAL HOLDINGS, INC.
PHILIPPINE BRANCH, Present:
Petitioner,
CARPIO, J., Chairperson,
NACHURA,
PERALTA,
- versus - ABAD, and
MENDOZA, JJ.

COMMISSIONER OF INTERNAL
REVENUE, Promulgated:
Respondent.
January 19, 2011
x ---------------------------------------------------------------------------------------- x

DECISION

MENDOZA, J.:

This is a petition for review on certiorari under Rule 45 filed by

petitioner Exxonmobil Petroleum and Chemical Holdings, Inc. - Philippine
Branch (Exxon) to set aside the September 7, 2007 Decision[1] of the Court of
Tax Appeals En Banc (CTA-En Banc) in CTA E.B. No. 204, and its
[2]
November 27, 2007 Resolution denying petitioners motion for reconsideration.

THE FACTS

Petitioner Exxon is a foreign corporation duly organized and existing under

the laws of the State of Delaware, United States of America.[3] It is authorized to
do business in the Philippines through its Philippine Branch, with principal office
address at the 17/F The Orient Square, Emerald
Avenue, Ortigas Center, Pasig City.[4]

Exxon is engaged in the business of selling petroleum products to domestic

and international carriers.[5] In pursuit of its business, Exxon purchased from
Caltex Philippines, Inc. (Caltex) and Petron Corporation (Petron) Jet A-1 fuel and
other petroleum products, the excise taxes on which were paid for and remitted by
both Caltex and Petron.[6] Said taxes, however, were passed on to Exxon which
ultimately shouldered the excise taxes on the fuel and petroleum products.[7]

From November 2001 to June 2002, Exxon sold a total of 28,635,841 liters
of Jet A-1 fuel to international carriers, free of excise taxes amounting to
Php105,093,536.47.[8] On various dates, it filed administrative claims for refund
with the Bureau of Internal Revenue (BIR) amounting to Php105,093,536.47.[9]

On October 30, 2003, Exxon filed a petition for review with the
[10]
CTA claiming a refund or tax credit in the amount of Php105,093,536.47,
representing the amount of excise taxes paid on Jet A-1 fuel and other petroleum
products it sold to international carriers from November 2001 to June 2002.[11]

Exxon and the Commissioner of Internal Revenue (CIR) filed their Joint
Stipulation of Facts and Issues on June 24, 2004, presenting a total of fourteen (14)
issues for resolution.[12]

During Exxons preparation of evidence, the CIR filed a motion

dated January 28, 2005 to first resolve the issue of whether or not Exxon was the
proper party to ask for a refund.[13] Exxon filed its opposition to the motion
onMarch 15, 2005.

On July 27, 2005, the CTA First Division issued a resolution[14] sustaining
the CIRs position and dismissing Exxons claim for refund. Exxon filed a motion
for reconsideration, but this was denied on July 27, 2006.[15]

Exxon filed a petition for review[16] with the CTA En Banc assailing the July
27, 2005 Resolution of the CTA First Division which dismissed the petition for
review, and the July 27, 2006 Resolution[17] which affirmed the said ruling.

RULING OF THE COURT OF TAX APPEALS EN BANC

 In its Decision dated September 7, 2007, the CTA En Banc dismissed the
petition for review and affirmed the two resolutions of the First Division dated July
27, 2005 and July 27, 2006. Exxon filed a motion for reconsideration, but it was
denied on November 27, 2007.

Citing Sections 130 (A)(2)[18] and 204 (C) in relation to Section 135 (a)[19] of
the National Internal Revenue Code of 1997 (NIRC), the CTA ruled that in
consonance with its ruling in several cases,[20] only the taxpayer or the
manufacturer of the petroleum products sold has the legal personality to claim the
refund of excise taxes paid on petroleum products sold to international carriers.[21]

The CTA stated that Section 130(A)(2) makes the manufacturer or producer
of the petroleum products directly liable for the payment of excise
taxes.[22] Therefore, it follows that the manufacturer or producer is the taxpayer.[23]

This determination of the identity of the taxpayer designated by law is

pivotal as the NIRC provides that it is only the taxpayer who has the legal
personality to ask for a refund in case of erroneous payment of taxes.[24]

Further, the excise tax imposed on manufacturers upon the removal of

petroleum products by oil companies is an indirect tax, or a tax which is primarily
paid by persons who can shift the burden upon someone else.[25] The CTA cited the
cases of Philippine Acetylene Co., Inc. v. Commissioner of Internal
Revenue,[26] Contex Corporation v. Commissioner of Internal
[27]
Revenue, and Commissioner of Internal Revenue v. Philippine Long Distance
Telephone Company,[28] and explained that with indirect taxes, although the
burden of an indirect tax can be shifted or passed on to the purchaser of the goods,
the liability for the indirect tax remains with the manufacturer. [29]Moreover, the
manufacturer has the option whether or not to shift the burden of the tax to the
purchaser. When shifted, the amount added by the manufacturer becomes a part of
the price, therefore, the purchaser does not really pay the tax per se but only the
price of the commodity.[30]

Going by such logic, the CTA concluded that a refund of erroneously paid or
illegally received tax can only be made in favor of the taxpayer, pursuant to
Section 204(C) of the NIRC.[31] As categorically ruled in the Cebu Portland
Cement[32] and Contex[33] cases, in the case of indirect taxes, it is the manufacturer
of the goods who is entitled to claim any refund thereof.[34] Therefore, it follows
that the indirect taxes paid by the manufacturers or producers of the goods cannot
be refunded to the purchasers of the goods because the purchasers are not the
taxpayers.[35]

The CTA also emphasized that tax refunds are in the nature of tax
exemptions and are, thus, regarded as in derogation of sovereign authority and
construed strictissimi juris against the person or entity claiming the exemption.[36]

Finally, the CTA disregarded Exxons argument that in effectively holding

that only petroleum products purchased directly from the manufacturers or
producers are exempt from excise taxes, the First Division of [the CTA] sanctioned
a universal amendment of existing bilateral agreements which the Philippines have
with other countries, in violation of the basic principle of pacta sunt
servanda.[37] The CTA explained that the findings of fact of the First Division
(that when Exxon sold the Jet A-1 fuel to international carriers, it did so free of
tax) negated any violation of the exemption from excise tax of the petroleum
products sold to international carriers. Second, the right of international carriers to
invoke the exemption granted under Section 135(a) of the NIRC was neither
affected nor restricted in any way by the ruling of the First Division. At the point
of sale, the international carriers were free to invoke the exemption from excise
taxes of the petroleum products sold to them. Lastly, the lawmaking body was
presumed to have enacted a later law with the knowledge of all other laws
involving the same subject matter.[38]

THE ISSUES

Petitioner now raises the following issues in its petition for review:

I.

WHETHER THE ASSAILED DECISION AND RESOLUTION

ERRONEOUSLY PROHIBITED PETITIONER, AS THE
DISTRIBUTOR AND VENDOR OF PETROLEUM PRODUCTS TO
INTERNATIONAL CARRIERS REGISTERED IN FOREIGN
COUNTRIES WHICH HAVE EXISTING BILATERAL
 AGREEMENTS WITH THE PHILIPPINES, FROM CLAIMING A
REFUND OF THE EXCISE TAXES PAID THEREON; AND

II.

WHETHER THE ASSAILED DECISIONS ERRED IN

AFFIRMING THE DISMISSAL OF PETITIONERS CLAIM FOR
REFUND BASED ON RESPONDENTS MOTION TO RESOLVE
FIRST THE ISSUE OF WHETHER OR NOT THE PETITIONER IS
THE PROPER PARTY THAT MAY ASK FOR A REFUND, SINCE
SAID MOTION IS ESSENTIALLY A MOTION TO DISMISS,
WHICH SHOULD HAVE BEEN DENIED OUTRIGHT BY THE
COURT OF TAX APPEALS FOR HAVING BEEN FILED OUT OF
TIME.

RULING OF THE COURT

I. On respondents motion to resolve first the

issue of whether or not the petitioner is the proper
party that may ask for a refund.

For a logical resolution of the issues, the court will tackle first the issue of
whether or not the CTA erred in granting respondents Motion to Resolve First the
Issue of Whether or Not the Petitioner is the Proper Party that may Ask for a
Refund.[39] In said motion, the CIR prayed that the CTA First Division resolve
ahead of the other stipulated issues the sole issue of whether petitioner was the
proper party to ask for a refund.[40]

Exxon opines that the CIRs motion is essentially a motion to dismiss filed
out of time,[41] as it was filed after petitioner began presenting evidence[42] more
than a year after the filing of the Answer.[43] By praying that Exxon be declared as
not the proper party to ask for a refund, the CIR asked for the dismissal of the
petition, as the grant of the Motion to Resolve would bring trial to a close.[44]

Moreover, Exxon states that the motion should have also complied with the
three-day notice and ten-day hearing rules provided in Rule 15 of the Rules of
Court.[45] Since the CIR failed to set its motion for any hearing before the filing of
the Answer, the motion should have been considered a mere scrap of paper.[46]
 Finally, citing Maruhom v. Commission on Elections and
[47]
Dimaporo, Exxon argues that a defendant who desires a preliminary hearing on
special and affirmative defenses must file a motion to that effect at the time of
filing of his answer.[48]

The CIR, on the other hand, counters that it did not file a motion to
dismiss.[49] Instead, the grounds for dismissal of the case were pleaded as special
and affirmative defenses in its Answer filed on December 15, 2003.[50]Therefore,
the issue of whether or not petitioner is the proper party to claim for a tax refund
of the excise taxes allegedly passed on by Caltex and Petron was included as one
of the issues in the Joint Stipulation of Facts and Issues dated June 24, 2004 signed
by petitioner and respondent.[51]

The CIR now argues that nothing in the Rules requires the preliminary
hearing to be held before the filing of an Answer.[52] However, a preliminary
hearing cannot be held before the filing of the Answer precisely because any
ground raised as an affirmative defense is pleaded in the Answer itself.[53]

Further, the CIR contends that the case cited by petitioner, Maruhom v.
Comelec,[54] does not apply here. In the said case, a motion to dismiss was filed
after the filing of the answer.[55] And, the said motion to dismiss
was
found to be a frivolous motion designed to prevent the early termination of the
proceedings in the election case therein.[56] Here, the Motion to Resolve was filed
not to delay the disposition of the case, but rather, to expedite proceedings.[57]

Rule 16, Section 6 of the 1997 Rules of Civil Procedure provides:

SEC. 6. Pleading grounds as affirmative defenses. - If no motion to

dismiss has been filed, any of the grounds for dismissal provided for in
this Rule may be pleaded as an affirmative defense in the answer, and in
the discretion of the court, a preliminary hearing may be had thereon as if
a motion to dismiss had been filed.

The dismissal of the complaint under this section shall be without

prejudice to the prosecution in the same or separate action of a
counterclaim pleaded in the answer. (Underscoring supplied.)

This case is a clear cut application of the above provision. The CIR did not
file a motion to dismiss. Thus, he pleaded the grounds for dismissal as affirmative
defenses in its Answer and thereafter prayed for the conduct of a preliminary
hearing to determine whether petitioner was the proper party to apply for the
refund of excise taxes paid.

The determination of this question was the keystone on which the entire case
was leaning. If Exxon was not the proper party to apply for the refund of excise
taxes paid, then it would be useless to proceed with the case. It would not make
any sense to proceed to try a case when petitioner had no standing to pursue it.

In the case of California and Hawaiian Sugar Company v. Pioneer

Insurance and Surety Corporation,[58] the Court held that:

Considering that there was only one question, which may even be
deemed to be the very touchstone of the whole case, the trial court had no
cogent reason to deny the Motion for Preliminary Hearing. Indeed, it
committed grave abuse of discretion when it denied a preliminary hearing
on a simple issue of fact that could have possibly settled the entire
case. Verily, where a preliminary hearing appears to suffice, there is no
reason to go on to trial. One reason why dockets of trial courts are
clogged is the unreasonable refusal to use a process or procedure, like a
 motion to dismiss, which is designed to abbreviate the resolution of a
case.[59](Underscoring supplied.)

II. On whether petitioner, as the distributor and

vendor of petroleum products to international
carriers registered in foreign countries which
have existing bilateral agreements with the
Philippines, can claim a refund of the excise
taxes paid thereon

This brings us now to the substantive issue of whether Exxon, as the

distributor and vendor of petroleum products to international carriers registered in
foreign countries which have existing bilateral agreements with the Philippines, is
the proper party to claim a tax refund for the excise taxes paid by the
manufacturers, Caltex and Petron, and passed on to it as part of the purchase price.

Exxon argues that having paid the excise taxes on the petroleum products
sold to international carriers, it is a real party in interest consistent with the rules
and jurisprudence.[60]

It reasons out that the subject of the exemption is neither the seller nor the
buyer of the petroleum products, but the products themselves, so long as they are
sold to international carriers for use in international flight operations, or to exempt
entities covered by tax treaties, conventions and other international agreements for
their use or consumption, among other conditions.[61]

Thus, as the exemption granted under Section 135 attaches to the petroleum
products and not to the seller, the exemption will apply regardless of whether the
same were sold by its manufacturer or its distributor for two reasons. [62] First,
Section 135 does not require that to be exempt from excise tax, the products should
be sold by the manufacturer or producer.[63] Second, the legislative intent was
precisely to make Section 135 independent from Sections 129 and 130 of the
NIRC,[64] stemming from the fact that unlike other products subject to excise tax,
petroleum products of this nature have become subject to preferential tax treatment
by virtue of either specific international agreements or simply of international
reciprocity.[65]
 Respondent CIR, on the other hand, posits that Exxon is not the proper party
to seek a refund of excise taxes paid on the petroleum products.[66] In so arguing,
the CIR states that excise taxes are indirect taxes, the liability for payment of which
falls on one person, but the burden of payment may be shifted to another. [67] Here,
the sellers of the petroleum products or Jet A-1 fuel subject to excise tax are Petron
and Caltex, while Exxon was the buyer to whom the burden of paying excise tax
was shifted.[68] While the impact or burden of taxation falls on Exxon, as the tax is
shifted to it as part of the purchase price, the persons statutorily liable to pay the tax
are Petron and Caltex.[69] As Exxon is not the taxpayer primarily liable to pay, and
not exempted from paying, excise tax, it is not the proper party to claim for the
refund of excise taxes paid.[70]

The excise tax, when passed on to the

purchaser, becomes part of the purchase
price.

Excise taxes are imposed under Title VI of the NIRC. They apply to specific
goods manufactured or produced in the Philippines for domestic sale or
consumption or for any other disposition, and to those that are imported.[71] In
effect, these taxes are imposed when two conditions concur: first, that the articles
subject to tax belong to any of the categories of goods enumerated in Title VI of the
NIRC; and second, that said articles are for domestic sale or consumption,
excluding those that are actually exported.[72]

There are, however, certain exemptions to the coverage of excise taxes, such
as petroleum products sold to international carriers and exempt entities or agencies.
Section 135 of the NIRC provides:

SEC. 135. Petroleum Products Sold to International Carriers

and Exempt Entities or Agencies. - Petroleum products sold to the
following are exempt from excise tax:

(a) International carriers of Philippine or foreign registry on their

use or consumption outside the Philippines: Provided, That the petroleum
products sold to these international carriers shall be stored in a bonded
storage tank and may be disposed of only in accordance with the rules and
regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner;
 (b) Exempt entities or agencies covered by tax treaties, conventions
and other international agreements for their use of consumption:
Provided, however, That the country of said foreign international carrier
or exempt entities or agencies exempts from similar taxes petroleum
products sold to Philippine carriers, entities or agencies; and

(c) Entities which are by law exempt from direct and indirect taxes.
(Underscoring supplied.)

Thus, under Section 135, petroleum products sold to international carriers of

foreign registry on their use or consumption outside the Philippines are exempt
from excise tax, provided that the petroleum products sold to such international
carriers shall be stored in a bonded storage tank and may be disposed of only in
accordance with the rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner.[73]

The confusion here stems from the fact that excise taxes are of the nature of
indirect taxes, the liability for payment of which may fall on a person other than he
who actually bears the burden of the tax.

In Commissioner of Internal Revenue v. Philippine Long Distance Telephone

Company,[74] the Court discussed the nature of indirect taxes as follows:

[I]ndirect taxes are those that are demanded, in the first instance,
from, or are paid by, one person to someone else. Stated elsewise, indirect
taxes are taxes wherein the liability for the payment of the tax falls on one
person but the burden thereof can be shifted or passed on to another
person, such as when the tax is imposed upon goods before reaching the
consumer who ultimately pays for it. When the seller passes on the tax to
his buyer, he, in effect, shifts the tax burden, not the liability to pay it, to
the purchaser, as part of the goods sold or services rendered.

Accordingly, the party liable for the tax can shift the burden to another, as
part of the purchase price of the goods or services. Although the
manufacturer/seller is the one who is statutorily liable for the tax, it is the buyer
who actually shoulders or bears the burden of the tax, albeit not in the nature of a
tax, but part of the purchase price or the cost of the goods or services sold.

As petitioner is not the statutory taxpayer, it

is not entitled to claim a refund of excise
taxes paid.
 The question we are faced with now is, if the party statutorily liable for the
tax is different from the party who bears the burden of such tax, who is entitled to
claim a refund of the tax paid?

Sections 129 and 130 of the NIRC provide:

SEC. 129. Goods subject to Excise Taxes. - Excise taxes apply to

goods manufactured or produced in the Philippines for domestic sales or
consumption or for any other disposition and to things imported. The
excise tax imposed herein shall be in addition to the value-added tax
imposed under Title IV.

For purposes of this Title, excise taxes herein imposed and based on
weight or volume capacity or any other physical unit of measurement shall
be referred to as 'specific tax' and an excise tax herein imposed and based
on selling price or other specified value of the good shall be referred to as
'ad valorem tax.'

SEC. 130. Filing of Return and Payment of Excise Tax on Domestic

Products. -

(A) Persons Liable to File a Return, Filing of Return on Removal and

Payment of Tax. -

(1) Persons Liable to File a Return. - Every person liable to pay

excise tax imposed under this Title shall file a separate return for each
place of production setting forth, among others the description and
quantity or volume of products to be removed, the applicable tax base and
the amount of tax due thereon: Provided, however, That in the case of
indigenous petroleum, natural gas or liquefied natural gas, the excise tax
shall be paid by the first buyer, purchaser or transferee for local sale,
barter or transfer, while the excise tax on exported products shall be paid
by the owner, lessee, concessionaire or operator of the mining claim.

Should domestic products be removed from the place of production

without the payment of the tax, the owner or person having possession
thereof shall be liable for the tax due thereon.

(2) Time for Filing of Return and Payment of the Tax. - Unless
otherwise specifically allowed, the return shall be filed and the excise tax
paid by the manufacturer or producer before removal of domestic
products from place of production: Provided, That the tax excise on
locally manufactured petroleum products and indigenous
petroleum/levied under Sections 148 and 151(A)(4), respectively, of this
 Title shall be paid within ten (10) days from the date of removal of such
products for the period from January 1, 1998 to June 30, 1998; within five
(5) days from the date of removal of such products for the period from
July 1, 1998 to December 31, 1998; and, before removal from the place of
production of such products from January 1, 1999 and thereafter:
Provided, further, That the excise tax on nonmetallic mineral or mineral
products, or quarry resources shall be due and payable upon removal of
such products from the locality where mined or extracted, but with
respect to the excise tax on locally produced or extracted metallic mineral
or mineral products, the person liable shall file a return and pay the tax
within fifteen (15) days after the end of the calendar quarter when such
products were removed subject to such conditions as may be prescribed
by rules and regulations to be promulgated by the Secretary of Finance,
upon recommendation of the Commissioner. For this purpose, the
taxpayer shall file a bond in an amount which approximates the amount of
excise tax due on the removals for the said quarter. The foregoing rules
notwithstanding, for imported mineral or mineral products, whether
metallic or nonmetallic, the excise tax due thereon shall be paid before
their removal from customs custody.

xxx

(Italics and underscoring supplied.)

As early as the 1960s, this Court has ruled that the proper party to question,
or to seek a refund of, an indirect tax, is the statutory taxpayer, or the person on
whom the tax is imposed by law and who paid the same, even if he shifts the
burden thereof to another.[75]

In Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue,[76] the

Court held that the sales tax is imposed on the manufacturer or producer and not on
the purchaser, except probably in a very remote and inconsequential
sense.[77] Discussing the passing on of the sales tax to the purchaser, the Court
therein cited Justice Oliver Wendell Holmes opinion in Lashs Products v. United
States[78] wherein he said:

The phrase passed the tax on is inaccurate, as obviously the tax is

laid and remains on the manufacturer and on him alone. The purchaser
does not really pay the tax. He pays or may pay the seller more for the
goods because of the sellers obligation, but that is all. x x x The price is
the sum total paid for the goods. The amount added because of the tax is
 paid to get the goods and for nothing else. Therefore it is part of the price
x x x.[79]

Proceeding from this discussion, the Court went on to state:

It may indeed be that the economic burden of the tax finally

falls on the purchaser; when it does the tax becomes a part of the price
which the purchaser must pay. It does not matter that an additional
amount is billed as tax to the purchaser. x x x The effect is still the same,
namely, that the purchaser does not pay the tax. He pays or may pay the
seller more for the goods because of the sellers obligation, but that is all
and the amount added because of the tax is paid to get the goods and for
nothing else.

But the tax burden may not even be shifted to the purchaser
at all. A decision to absorb the burden of the tax is largely a matter of
economics. Then it can no longer be contended that a sales tax is a tax on
the purchaser.[80]

The above case was cited in the later case of Cebu Portland Cement Company
v. Collector (now Commissioner) of Internal Revenue,[81] where the Court ruled that
as the sales tax is imposed upon the manufacturer or producer and not on the
purchaser, it is petitioner and not its customers, who may ask for a refund of
whatever amount it is entitled for the percentage or sales taxes it paid before the
amendment of section 246 of the Tax Code.[82]

The Philippine Acetylene case was also cited in the first Silkair (Singapore)
Pte, Ltd. v. Commissioner of Internal Revenue[83] case, where the Court held that
the proper party to question, or to seek a refund of, an indirect tax is the statutory
taxpayer, the person on whom the tax is imposed by law and who paid the same
even if he shifts the burden thereof to another.[84]

In the Silkair cases,[85] petitioner Silkair (Singapore) Pte, Ltd. (Silkair), filed
with the BIR a written application for the refund of excise taxes it claimed to have
paid on its purchase of jet fuel from Petron. As the BIR did not act on the
application, Silkair filed a Petition for Review before the CTA.

In both cases, the CIR argued that the excise tax on petroleum products is the
direct liability of the manufacturer/producer, and when added to the cost of the
goods sold to the buyer, it is no longer a tax but part of the price which the buyer
has to pay to obtain the article.

In the first Silkair case, the Court ruled:

The proper party to question, or seek a refund of, an indirect

tax is the statutory taxpayer, the person on whom the tax is imposed
by law and who paid the same even if he shifts the burden thereof to
another. Section 130 (A) (2) of the NIRC provides that "[u]nless
otherwise specifically allowed, the return shall be filed and the
excise tax paid by the manufacturer or producer before removal of
domestic products from place of production." Thus, Petron
Corporation, not Silkair, is the statutory taxpayer which is
entitled to claim a refund based on Section 135 of the NIRC of
1997 and Article 4(2) of the Air Transport Agreement between RP
and Singapore.

Even if Petron Corporation passed on to Silkair the burden of

the tax, the additional amount billed to Silkair for jet fuel is not a
tax but part of the price which Silkair had to pay as a
purchaser.[86] (Emphasis and underscoring supplied.)

Citing the above case, the second Silkair case was promulgated a few
months after the first, and stated:

The issue presented is not novel. In a similar case involving the

same parties, this Court has categorically ruled that "the proper party to
question, or seek a refund of an indirect tax is the statutory taxpayer, the
person on whom the tax is imposed by law and who paid the same even if
he shifts the burden thereof to another." The Court added that "even if
Petron Corporation passed on to Silkair the burden of the tax, the
additional amount billed to Silkair for jet fuel is not a tax but part of the
price which Silkair had to pay as a purchaser."[87]

The CTA En Banc, thus, held that:

 The determination of who is the taxpayer plays a pivotal role in
claims for refund because the same law provides that it is only the
taxpayer who has the legal personality to ask for a refund in case of
erroneous payment of taxes. Section 204 (C) of the 1997 NIRC, [provides]
in part, as follows:

SEC. 204. Authority of the Commissioner to

Compromise, Abate, and Refund or Credit Taxes. The
Commissioner may

xxx xxx xxx

(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 the payment of the tax or penalty: Provided,
however, That a return showing an overpayment shall be
considered as a written claim for credit or refund.

xxx xxx xxx

(Emphasis shown supplied by the CTA.)[88]

Therefore, as Exxon is not the party statutorily liable for payment of excise
taxes under Section 130, in relation to Section 129 of the NIRC, it is not the proper
party to claim a refund of any taxes erroneously paid.

There is no unilateral amendment of

existing bilateral agreements of
the Philippines with other countries.

Exxon also argues that in effectively holding that only petroleum products
purchased directly from the manufacturers or producers are exempt from excise
taxes, the CTA En Banc sanctioned a unilateral amendment of existing bilateral
agreements which the Philippines has with other countries, in violation of the basic
international law principle of pacta sunt servanda.[89] The Court does not agree.
As correctly held by the CTA En Banc:

One final point, petitioners argument that in effectively holding

that only petroleum products purchased directly from the manufacturers
or producers are exempt from excise taxes, the First Division of this Court
sanctioned a unilateral amendment of existing bilateral agreements which
the Philippines have (sic) with other countries, in violation of the basic
international principle of pacta sunt servanda is misplaced. First, the
findings of fact of the First Division of this Court that when petitioner
sold the Jet A-1 fuel to international carriers, it did so free of tax negates
any violation of the exemption from excise tax of the petroleum products
sold to international carriers insofar as this case is concerned. Secondly,
the right of international carriers to invoke the exemption granted under
Section 135 (a) of the 1997 NIRC has neither been affected nor restricted
in any way by the ruling of the First Division of this Court. At the point of
sale, the international carriers are free to invoke the exemption from
excise taxes of the petroleum products sold to them. Lastly, the law-
making body is presumed to have enacted a later law with the knowledge
of all other laws involving the same subject matter.[90] (Underscoring
supplied.)

WHEREFORE, the petition is DENIED.

SO ORDERED.