G.R. No. 193007 July 19, 2011
At any
RENATO V. DIAZ and AURORA MA. F. TIMBOL, Petitioners,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF
INTERNAL REVENUE, Respondents.
DECISION
ABAD, J.:
May toll fees collected by tollway operators be subjected to value-
added tax?
The Facts and the Case
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners)
filed this petition for declaratory relief 1 assailing the validity of the
impending imposition of value-added tax (VAT) by the Bureau of
Internal Revenue (BIR) on the collections of tollway operators.
Petitioners claim that, since the VAT would result in increased toll
fees, they have an interest as regular users of tollways in stopping
the BIR action. Additionally, Diaz claims that he sponsored the
approval of Republic Act 7716 (the 1994 Expanded VAT Law or
EVAT Law) and Republic Act 8424 (the 1997 National Internal
Revenue Code or the NIRC) at the House of Representatives.
Timbol, on the other hand, claims that she served as Assistant
Secretary of the Department of Trade and Industry and consultant
of the Toll Regulatory Board (TRB) in the past administration.
Petitioners allege that the BIR attempted during the administration
of President Gloria Macapagal-Arroyo to impose VAT on toll fees.
The imposition was deferred, however, in view of the consistent
opposition of Diaz and other sectors to such move. But, upon
President Benigno C. Aquino III’s assumption of office in 2010, the
BIR revived the idea and would impose the challenged tax on toll
fees beginning August 16, 2010 unless judicially enjoined.
Petitioners hold the view that Congress did not, when it enacted
the NIRC, intend to include toll fees within the meaning of "sale of
services" that are subject to VAT; that a toll fee is a "user’s tax,"
not a sale of services; that to impose VAT on toll fees would
amount to a tax on public service; and that, since VAT was never
factored into the formula for computing toll fees, its imposition
would violate the non-impairment clause of the constitution.
On August 13, 2010 the Court issued a temporary restraining order
(TRO), enjoining the implementation of the VAT. The Court
required the government, represented by respondents Cesar V.
Purisima, Secretary of the Department of Finance, and Kim S.
Jacinto-Henares, Commissioner of Internal Revenue, to comment
on the petition within 10 days from notice. 2 Later, the Court issued
another resolution treating the petition as one for prohibition. 3
On August 23, 2010 the Office of the Solicitor General filed the
government’s comment.4 The government avers that the NIRC
imposes VAT on all kinds of services of franchise grantees,
including tollway operations, except where the law provides
otherwise; that the Court should seek the meaning and intent of
the law from the words used in the statute; and that the imposition
of VAT on tollway operations has been the subject as early as
2003 of several BIR rulings and circulars. 5
The government also argues that petitioners have no right to
invoke the non-impairment of contracts clause since they clearly
have no personal interest in existing toll operating agreements
(TOAs) between the government and tollway operators.
rate, the non-impairment clause cannot limit the State’s sovereign
taxing power which is generally read into contracts.
Finally, the government contends that the non-inclusion of VAT in
the parametric formula for computing toll rates cannot exempt
tollway operators from VAT. In any event, it cannot be claimed that
the rights of tollway operators to a reasonable rate of return will be
impaired by the VAT since this is imposed on top of the toll rate.
Further, the imposition of VAT on toll fees would have very minimal
effect on motorists using the tollways.
In their reply6 to the government’s comment, petitioners point out
that tollway operators cannot be regarded as franchise grantees
under the NIRC since they do not hold legislative franchises.
Further, the BIR intends to collect the VAT by rounding off the toll
rate and putting any excess collection in an escrow account. But
this would be illegal since only the Congress can modify VAT rates
and authorize its disbursement. Finally, BIR Revenue
Memorandum Circular 63-2010 (BIR RMC 63-2010), which directs
toll companies to record an accumulated input VAT of zero
balance in their books as of August 16, 2010, contravenes Section
111 of the NIRC which grants entities that first become liable to
VAT a transitional input tax credit of 2% on beginning inventory.
For this reason, the VAT on toll fees cannot be implemented.
The Issues Presented
The case presents two procedural issues:
1. Whether or not the Court may treat the petition for
declaratory relief as one for prohibition; and
2. Whether or not petitioners Diaz and Timbol have legal
standing to file the action.
The case also presents two substantive issues:
1. Whether or not the government is unlawfully
expanding VAT coverage by including tollway operators
and tollway operations in the terms "franchise grantees"
and "sale of services" under Section 108 of the Code;
and
2. Whether or not the imposition of VAT on tollway
operators a) amounts to a tax on tax and not a tax on
services; b) will impair the tollway operators’ right to a
reasonable return of investment under their TOAs; and c)
is not administratively feasible and cannot be
implemented.
The Court’s Rulings
A. On the Procedural Issues:
On August 24, 2010 the Court issued a resolution, treating the
petition as one for prohibition rather than one for declaratory relief,
the characterization that petitioners Diaz and Timbol gave their
action. The government has sought reconsideration of the Court’s
resolution,7 however, arguing that petitioners’ allegations clearly
made out a case for declaratory relief, an action over which the
Court has no original jurisdiction. The government adds, moreover,
that the petition does not meet the requirements of Rule 65 for
actions for prohibition since the BIR did not exercise judicial, quasi-
judicial, or ministerial functions when it sought to impose VAT on
toll fees. Besides, petitioners Diaz and Timbol has a plain, speedy,
1|BATCH SUBJECT FULLTEXT
and adequate remedy in the ordinary course of law against the BIR
action in the form of an appeal to the Secretary of Finance.
But there are precedents for treating a petition for declaratory relief
as one for prohibition if the case has far-reaching implications and
raises questions that need to be resolved for the public good.8 The
Court has also held that a petition for prohibition is a proper
remedy to prohibit or nullify acts of executive officials that amount
to usurpation of legislative authority. 9
Here, the imposition of VAT on toll fees has far-reaching
implications. Its imposition would impact, not only on the more than
half a million motorists who use the tollways everyday, but more so
on the government’s effort to raise revenue for funding various
projects and for reducing budgetary deficits.
To dismiss the petition and resolve the issues later, after the
challenged VAT has been imposed, could cause more mischief
both to the tax-paying public and the government. A belated
declaration of nullity of the BIR action would make any attempt to
refund to the motorists what they paid an administrative nightmare
with no solution. Consequently, it is not only the right, but the duty
of the Court to take cognizance of and resolve the issues that the
petition raises.
Although the petition does not strictly comply with the requirements
of Rule 65, the Court has ample power to waive such technical
requirements when the legal questions to be resolved are of great
importance to the public. The same may be said of the requirement
of locus standi which is a mere procedural requisite. 10
B. On the Substantive Issues:
One. The relevant law in this case is Section 108 of the NIRC, as
amended. VAT is levied, assessed, and collected, according to
Section 108, on the gross receipts derived from the sale or
exchange of services as well as from the use or lease of
properties. The third paragraph of Section 108 defines "sale or
exchange of services" as follows:
The phrase ‘sale or exchange of services’ means the performance
of all kinds of services in the Philippines for others for a fee,
remuneration or consideration, including those performed or
rendered by construction and service contractors; stock, real
estate, commercial, customs and immigration brokers; lessors of
property, whether personal or real; warehousing services; lessors
or distributors of cinematographic films; persons engaged in
milling, processing, manufacturing or repacking goods for others;
proprietors, operators or keepers of hotels, motels, resthouses,
pension houses, inns, resorts; proprietors or operators of
restaurants, refreshment parlors, cafes and other eating places,
including clubs and caterers; dealers in securities; lending
investors; transportation contractors on their transport of goods or
cargoes, including persons who transport goods or cargoes for hire
and other domestic common carriers by land relative to their
transport of goods or cargoes; common carriers by air and sea
relative to their transport of passengers, goods or cargoes from
one place in the Philippines to another place in the Philippines;
sales of electricity by generation companies, transmission, and
distribution companies; services of franchise grantees of electric
utilities, telephone and telegraph, radio and television broadcasting
and all other franchise grantees except those under Section 119 of
this Code and non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity and bonding
companies; and similar services regardless of whether or not the
performance thereof calls for the exercise or use of the physical or
mental faculties. (Underscoring supplied)
It is plain from the above that the law imposes VAT on "all kinds of
services" rendered in the Philippines for a fee, including those
specified in the list. The enumeration of affected services is not
exclusive.11 By qualifying "services" with the words "all kinds,"
Congress has given the term "services" an all-encompassing
meaning. The listing of specific services are intended to illustrate
how pervasive and broad is the VAT’s reach rather than establish
concrete limits to its application. Thus, every activity that can be
imagined as a form of "service" rendered for a fee should be
deemed included unless some provision of law especially excludes
it.
Now, do tollway operators render services for a fee? Presidential
Decree (P.D.) 1112 or the Toll Operation Decree establishes the
legal basis for the services that tollway operators render.
Essentially, tollway operators construct, maintain, and operate
expressways, also called tollways, at the operators’ expense.
Tollways serve as alternatives to regular public highways that
meander through populated areas and branch out to local roads.
Traffic in the regular public highways is for this reason slow-
moving. In consideration for constructing tollways at their expense,
the operators are allowed to collect government-approved fees
from motorists using the tollways until such operators could fully
recover their expenses and earn reasonable returns from their
investments.
When a tollway operator takes a toll fee from a motorist, the fee is
in effect for the latter’s use of the tollway facilities over which the
operator enjoys private proprietary rights12 that its contract and the
law recognize. In this sense, the tollway operator is no different
from the following service providers under Section 108 who allow
others to use their properties or facilities for a fee:
1. Lessors of property, whether personal or real;
2. Warehousing service operators;
3. Lessors or distributors of cinematographic films;
4. Proprietors, operators or keepers of hotels, motels,
resthouses, pension houses, inns, resorts;
5. Lending investors (for use of money);
6. Transportation contractors on their transport of goods
or cargoes, including persons who transport goods or
cargoes for hire and other domestic common carriers by
land relative to their transport of goods or cargoes; and
7. Common carriers by air and sea relative to their
transport of passengers, goods or cargoes from one
place in the Philippines to another place in the
Philippines.
It does not help petitioners’ cause that Section 108 subjects to
VAT "all kinds of services" rendered for a fee "regardless of
whether or not the performance thereof calls for the exercise or
use of the physical or mental faculties." This means that "services"
to be subject to VAT need not fall under the traditional concept of
services, the personal or professional kinds that require the use of
human knowledge and skills.
And not only do tollway operators come under the broad term "all
kinds of services," they also come under the specific class
described in Section 108 as "all other franchise grantees" who are
subject to VAT, "except those under Section 119 of this Code."
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Tollway operators are franchise grantees and they do not belong
to exceptions (the low-income radio and/or television broadcasting
companies with gross annual incomes of less than ₱10 million and
gas and water utilities) that Section 11913 spares from the payment
of VAT. The word "franchise" broadly covers government grants of
a special right to do an act or series of acts of public concern. 14
Petitioners of course contend that tollway operators cannot be
considered "franchise grantees" under Section 108 since they do
not hold legislative franchises. But nothing in Section 108 indicates
that the "franchise grantees" it speaks of are those who hold
legislative franchises. Petitioners give no reason, and the Court
cannot surmise any, for making a distinction between franchises
granted by Congress and franchises granted by some other
government agency. The latter, properly constituted, may grant
franchises. Indeed, franchises conferred or granted by local
authorities, as agents of the state, constitute as much a legislative
franchise as though the grant had been made by Congress
itself.15 The term "franchise" has been broadly construed as
referring, not only to authorizations that Congress directly issues in
the form of a special law, but also to those granted by
administrative agencies to which the power to grant franchises has
been delegated by Congress.16
Tollway operators are, owing to the nature and object of their
business, "franchise grantees." The construction, operation, and
maintenance of toll facilities on public improvements are activities
of public consequence that necessarily require a special grant of
authority from the state. Indeed, Congress granted special
franchise for the operation of tollways to the Philippine National
Construction Company, the former tollway concessionaire for the
North and South Luzon Expressways. Apart from Congress,
tollway franchises may also be granted by the TRB, pursuant to
the exercise of its delegated powers under P.D. 1112. 17 The
franchise in this case is evidenced by a "Toll Operation
Certificate."18
Petitioners contend that the public nature of the services rendered
by tollway operators excludes such services from the term "sale of
services" under Section 108 of the Code. But, again, nothing in
Section 108 supports this contention. The reverse is true. In
specifically including by way of example electric utilities, telephone,
telegraph, and broadcasting companies in its list of VAT-covered
businesses, Section 108 opens other companies rendering public
service for a fee to the imposition of VAT. Businesses of a public
nature such as public utilities and the collection of tolls or charges
for its use or service is a franchise.19
Nor can petitioners cite as binding on the Court statements made
by certain lawmakers in the course of congressional deliberations
of the would-be law. As the Court said in South African Airways v.
Commissioner of Internal Revenue,20 "statements made by
individual members of Congress in the consideration of a bill do
not necessarily reflect the sense of that body and are,
consequently, not controlling in the interpretation of law." The
congressional will is ultimately determined by the language of the
law that the lawmakers voted on. Consequently, the meaning and
intention of the law must first be sought "in the words of the statute
itself, read and considered in their natural, ordinary, commonly
accepted and most obvious significations, according to good and
approved usage and without resorting to forced or subtle
construction."
Two. Petitioners argue that a toll fee is a "user’s tax" and to impose
VAT on toll fees is tantamount to taxing a tax.21Actually, petitioners
base this argument on the following discussion in Manila
International Airport Authority (MIAA) v. Court of Appeals: 22
No one can dispute that properties of public dominion mentioned in
Article 420 of the Civil Code, like "roads, canals, rivers, torrents,
ports and bridges constructed by the State," are owned by the
State. The term "ports" includes seaports and airports. The MIAA
Airport Lands and Buildings constitute a "port" constructed by the
State. Under Article 420 of the Civil Code, the MIAA Airport Lands
and Buildings are properties of public dominion and thus owned by
the State or the Republic of the Philippines.
x x x The operation by the government of a tollway does not
change the character of the road as one for public use. Someone
must pay for the maintenance of the road, either the public
indirectly through the taxes they pay the government, or only those
among the public who actually use the road through the toll fees
they pay upon using the road. The tollway system is even a more
efficient and equitable manner of taxing the public for the
maintenance of public roads.
The charging of fees to the public does not determine the
character of the property whether it is for public dominion or not.
Article 420 of the Civil Code defines property of public dominion as
"one intended for public use." Even if the government collects toll
fees, the road is still "intended for public use" if anyone can use the
road under the same terms and conditions as the rest of the
public. The charging of fees, the limitation on the kind of vehicles
that can use the road, the speed restrictions and other conditions
for the use of the road do not affect the public character of the
road.
The terminal fees MIAA charges to passengers, as well as the
landing fees MIAA charges to airlines, constitute the bulk of the
income that maintains the operations of MIAA. The collection of
such fees does not change the character of MIAA as an airport for
public use. Such fees are often termed user’s tax. This means
taxing those among the public who actually use a public facility
instead of taxing all the public including those who never use the
particular public facility. A user’s tax is more equitable – a principle
of taxation mandated in the 1987 Constitution."23(Underscoring
supplied)
Petitioners assume that what the Court said above, equating
terminal fees to a "user’s tax" must also pertain to tollway fees. But
the main issue in the MIAA case was whether or not Parañaque
City could sell airport lands and buildings under MIAA
administration at public auction to satisfy unpaid real estate taxes.
Since local governments have no power to tax the national
government, the Court held that the City could not proceed with
the auction sale. MIAA forms part of the national government
although not integrated in the department framework." 24 Thus, its
airport lands and buildings are properties of public dominion
beyond the commerce of man under Article 420(1) 25 of the Civil
Code and could not be sold at public auction.
As can be seen, the discussion in the MIAA case on toll roads and
toll fees was made, not to establish a rule that tollway fees are
user’s tax, but to make the point that airport lands and buildings
are properties of public dominion and that the collection of terminal
fees for their use does not make them private properties. Tollway
fees are not taxes. Indeed, they are not assessed and collected by
the BIR and do not go to the general coffers of the government.
It would of course be another matter if Congress enacts a law
imposing a user’s tax, collectible from motorists, for the
construction and maintenance of certain roadways. The tax in such
a case goes directly to the government for the replenishment of
resources it spends for the roadways. This is not the case here.
What the government seeks to tax here are fees collected from
tollways that are constructed, maintained, and operated by private
tollway operators at their own expense under the build, operate,
and transfer scheme that the government has adopted for
expressways.26 Except for a fraction given to the government, the
toll fees essentially end up as earnings of the tollway operators.
3|BATCH SUBJECT FULLTEXT
In sum, fees paid by the public to tollway operators for use of the
tollways, are not taxes in any sense. A tax is imposed under the
taxing power of the government principally for the purpose of
raising revenues to fund public expenditures. 27 Toll fees, on the
other hand, are collected by private tollway operators as
reimbursement for the costs and expenses incurred in the
construction, maintenance and operation of the tollways, as well as
to assure them a reasonable margin of income. Although toll fees
are charged for the use of public facilities, therefore, they are not
government exactions that can be properly treated as a tax. Taxes
may be imposed only by the government under its sovereign
authority, toll fees may be demanded by either the government or
private individuals or entities, as an attribute of ownership. 28
Parenthetically, VAT on tollway operations cannot be deemed a
tax on tax due to the nature of VAT as an indirect tax. In indirect
taxation, a distinction is made between the liability for the tax and
burden of the tax. The seller who is liable for the VAT may shift or
pass on the amount of VAT it paid on goods, properties or services
to the buyer. In such a case, what is transferred is not the seller’s
liability but merely the burden of the VAT. 29
Thus, the seller remains directly and legally liable for payment of
the VAT, but the buyer bears its burden since the amount of VAT
paid by the former is added to the selling price. Once shifted, the
VAT ceases to be a tax30 and simply becomes part of the cost that
the buyer must pay in order to purchase the good, property or
service.
Consequently, VAT on tollway operations is not really a tax on the
tollway user, but on the tollway operator. Under Section 105 of the
Code, 31 VAT is imposed on any person who, in the course of trade
or business, sells or renders services for a fee. In other words, the
seller of services, who in this case is the tollway operator, is the
person liable for VAT. The latter merely shifts the burden of VAT to
the tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax
even if toll fees were deemed as a "user’s tax." VAT is assessed
against the tollway operator’s gross receipts and not necessarily
on the toll fees. Although the tollway operator may shift the VAT
burden to the tollway user, it will not make the latter directly liable
for the VAT. The shifted VAT burden simply becomes part of the
toll fees that one has to pay in order to use the tollways. 32
Three. Petitioner Timbol has no personality to invoke the non-
impairment of contract clause on behalf of private investors in the
tollway projects. She will neither be prejudiced by nor be affected
by the alleged diminution in return of investments that may result
from the VAT imposition. She has no interest at all in the profits to
be earned under the TOAs. The interest in and right to recover
investments solely belongs to the private tollway investors.
Besides, her allegation that the private investors’ rate of recovery
will be adversely affected by imposing VAT on tollway operations is
purely speculative. Equally presumptuous is her assertion that a
stipulation in the TOAs known as the Material Adverse Grantor
Action will be activated if VAT is thus imposed. The Court cannot
rule on matters that are manifestly conjectural. Neither can it
prohibit the State from exercising its sovereign taxing power based
on uncertain, prophetic grounds.
Four. Finally, petitioners assert that the substantiation
requirements for claiming input VAT make the VAT on tollway
operations impractical and incapable of implementation. They cite
the fact that, in order to claim input VAT, the name, address and
tax identification number of the tollway user must be indicated in
the VAT receipt or invoice. The manner by which the BIR intends
to implement the VAT – by rounding off the toll rate and putting
any excess collection in an escrow account – is also illegal, while
the alternative of giving "change" to thousands of motorists in order
to meet the exact toll rate would be a logistical nightmare. Thus,
according to them, the VAT on tollway operations is not
administratively feasible.33
Administrative feasibility is one of the canons of a sound tax
system. It simply means that the tax system should be capable of
being effectively administered and enforced with the least
inconvenience to the taxpayer. Non-observance of the canon,
however, will not render a tax imposition invalid "except to the
extent that specific constitutional or statutory limitations are
impaired."34 Thus, even if the imposition of VAT on tollway
operations may seem burdensome to implement, it is not
necessarily invalid unless some aspect of it is shown to violate any
law or the Constitution.
Here, it remains to be seen how the taxing authority will actually
implement the VAT on tollway operations. Any declaration by the
Court that the manner of its implementation is illegal or
unconstitutional would be premature. Although the transcript of the
August 12, 2010 Senate hearing provides some clue as to how the
BIR intends to go about it,35 the facts pertaining to the matter are
not sufficiently established for the Court to pass judgment on.
Besides, any concern about how the VAT on tollway operations
will be enforced must first be addressed to the BIR on whom the
task of implementing tax laws primarily and exclusively rests. The
Court cannot preempt the BIR’s discretion on the matter, absent
any clear violation of law or the Constitution.
For the same reason, the Court cannot prematurely declare as
illegal, BIR RMC 63-2010 which directs toll companies to record an
accumulated input VAT of zero balance in their books as of August
16, 2010, the date when the VAT imposition was supposed to take
effect. The issuance allegedly violates Section 111(A) 36 of the
Code which grants first time VAT payers a transitional input VAT of
2% on beginning inventory.
In this connection, the BIR explained that BIR RMC 63-2010 is
actually the product of negotiations with tollway operators who
have been assessed VAT as early as 2005, but failed to charge
VAT-inclusive toll fees which by now can no longer be collected.
The tollway operators agreed to waive the 2% transitional input
VAT, in exchange for cancellation of their past due VAT liabilities.
Notably, the right to claim the 2% transitional input VAT belongs to
the tollway operators who have not questioned the circular’s
validity. They are thus the ones who have a right to challenge the
circular in a direct and proper action brought for the purpose.
Conclusion
In fine, the Commissioner of Internal Revenue did not usurp
legislative prerogative or expand the VAT law’s coverage when
she sought to impose VAT on tollway operations. Section 108(A)
of the Code clearly states that services of all other franchise
grantees are subject to VAT, except as may be provided under
Section 119 of the Code. Tollway operators are not among the
franchise grantees subject to franchise tax under the latter
provision. Neither are their services among the VAT-exempt
transactions under Section 109 of the Code.
If the legislative intent was to exempt tollway operations from VAT,
as petitioners so strongly allege, then it would have been well for
the law to clearly say so. Tax exemptions must be justified by clear
statutory grant and based on language in the law too plain to be
mistaken.37 But as the law is written, no such exemption obtains for
tollway operators. The Court is thus duty-bound to simply apply the
law as it is found.1avvphi1
4|BATCH SUBJECT FULLTEXT
Lastly, the grant of tax exemption is a matter of legislative policy
that is within the exclusive prerogative of Congress. The Court’s
role is to merely uphold this legislative policy, as reflected first and
foremost in the language of the tax statute. Thus, any unwarranted
burden that may be perceived to result from enforcing such policy
must be properly referred to Congress. The Court has no
discretion on the matter but simply applies the law.

The VAT on franchise grantees has been in the statute books

since 1994 when R.A. 7716 or the Expanded Value-Added Tax law
was passed. It is only now, however, that the executive has
earnestly pursued the VAT imposition against tollway operators.
The executive exercises exclusive discretion in matters pertaining
to the implementation and execution of tax laws. Consequently,
the executive is more properly suited to deal with the immediate
and practical consequences of the VAT imposition.

WHEREFORE, the Court DENIES respondents Secretary of

Finance and Commissioner of Internal Revenue’s motion for
reconsideration of its August 24, 2010 resolution, DISMISSES the
petitioners Renato V. Diaz and Aurora Ma. F. Timbol’s petition for
lack of merit, and SETS ASIDE the Court’s temporary restraining
order dated August 13, 2010.

SO ORDERED.

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G.R. No. 157594 March 9, 2010
TOSHIBA INFORMATION EQUIPMENT (PHILS.),
INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
In this Petition for Review on Certiorari1 under Rule 45 of the Rules
of Court, petitioner Toshiba Information Equipment (Philippines),
Inc. (Toshiba) seeks the reversal and setting aside of (1) the
Decision2 dated August 29, 2002 of the Court of Appeals in CA-
G.R. SP No. 63047, which found that Toshiba was not entitled to
the credit/refund of its unutilized input Value-Added Tax (VAT)
payments attributable to its export sales, because it was a tax-
exempt entity and its export sales were VAT-exempt transactions;
and (2) the Resolution3 dated February 19, 2003 of the appellate
court in the same case, which denied the Motion for
Reconsideration of Toshiba. The herein assailed judgment of the
Court of Appeals reversed and set aside the Decision 4 dated
October 16, 2000 of the Court of Tax Appeals (CTA) in CTA Case
No. 5762 granting the claim for credit/refund of Toshiba in the
amount of ₱1,385,282.08.
Toshiba is a domestic corporation principally engaged in the
business of manufacturing and exporting of electric machinery,
equipment systems, accessories, parts, components, materials
and goods of all kinds, including those relating to office automation
and information technology and all types of computer hardware
and software, such as but not limited to HDD-CD-ROM and
personal computer printed circuit board.5 It is registered with the
Philippine Economic Zone Authority (PEZA) as an Economic Zone
(ECOZONE) export enterprise in the Laguna Technopark, Inc., as
evidenced by Certificate of Registration No. 95-99 dated
September 27, 1995.6 It is also registered with Regional District
Office No. 57 of the Bureau of Internal Revenue (BIR) in San
Pedro, Laguna, as a VAT-taxpayer with Taxpayer Identification No.
(TIN) 004-739-137.7
In its VAT returns for the first and second quarters of 1997, 8 filed
on April 14, 1997 and July 21, 1997, respectively, Toshiba
declared input VAT payments on its domestic purchases of taxable
goods and services in the aggregate sum of ₱3,875,139.65, 9 with
no zero-rated sales. Toshiba subsequently submitted to the BIR on
July 23, 1997 its amended VAT returns for the first and second
quarters of 1997,10 reporting the same amount of input VAT
payments but, this time, with zero-rated sales totaling
₱7,494,677,000.00.11
On March 30, 1999, Toshiba filed with the One-Stop Shop Inter-
Agency Tax Credit and Duty Drawback Center of the Department
of Finance (DOF One-Stop Shop) two separate applications for tax
credit/refund12 of its unutilized input VAT payments for the first half
of 1997 in the total amount of ₱3,685,446.73. 13
The next day, on March 31, 1999, Toshiba likewise filed with the
CTA a Petition for Review14 to toll the running of the two-year
prescriptive period under Section 230 of the Tax Code of
1977,15 as amended.16 In said Petition, docketed as CTA Case No.
5762, Toshiba prayed that –
[A]fter due hearing, judgment be rendered ordering [herein
respondent Commissioner of Internal Revenue (CIR)] to refund or
issue to [Toshiba] a tax refund/tax credit certificate in the amount
of P3,875,139.65 representing unutilized input taxes paid on its
purchase of taxable goods and services for the period January 1 to
June 30, 1997.17
The Commissioner of Internal Revenue (CIR) opposed the claim
for tax refund/credit of Toshiba, setting up the following special and
affirmative defenses in his Answer18 –
5. [Toshiba’s] alleged claim for refund/tax credit is subject
to administrative routinary investigation/examination by
[CIR’s] Bureau;
6. [Toshiba] failed miserably to show that the total
amount of ₱3,875,139.65 claimed as VAT input taxes,
were erroneously or illegally collected, or that the same
are properly documented;
7. Taxes paid and collected are presumed to have been
made in accordance with law; hence, not refundable;
8. In an action for tax refund, the burden is on the
taxpayer to establish its right to refund, and failure to
sustain the burden is fatal to the claim for refund;
9. It is incumbent upon [Toshiba] to show that it has
complied with the provisions of Section 204 in relation to
Section 229 of the Tax Code;
10. Well-established is the rule that claims for refund/tax
credit are construed in strictissimi juris against the
taxpayer as it partakes the nature of exemption from
tax.19
Upon being advised by the CTA, 20 Toshiba and the CIR filed a
Joint Stipulation of Facts and Issues,21 wherein the opposing
parties "agreed and admitted" that –
1. [Toshiba] is a duly registered value-added tax entity in
accordance with Section 107 of the Tax Code, as
amended.
2. [Toshiba] is subject to zero percent (0%) value-added
tax on its export sales in accordance with then Section
100(a)(2)(A) of the Tax Code, as amended.
3. [Toshiba] filed its quarterly VAT returns for the first two
quarters of 1997 within the legally prescribed period.
xxxx
7. [Toshiba] is subject to zero percent (0%) value-added
tax on its export sales.
8. [Toshiba] has duly filed the instant Petition for Review
within the two-year prescriptive period prescribed by then
Section 230 of the Tax Code.22
In the same pleading, Toshiba and the CIR jointly submitted the
following issues for determination by the CTA –
Whether or not [Toshiba] has incurred input taxes in the amount of
₱3,875,139.65 for the period January 1 to June 30, 1997 which are
directly attributable to its export sales[.]
6|BATCH SUBJECT FULLTEXT
Whether or not the input taxes incurred by [Toshiba] for the period Toshiba asserted in its Motion for Reconsideration25 that it had
January 1 to June 30, 1997 have not been carried over to the presented proper substantiation for the ₱1,887,545.65 input VAT
succeeding quarters[.] disallowed by the CTA.

Whether or not input taxes incurred by [Toshiba] for the first two
quarters of 1997 have not been offset against any output tax[.]
Whether or not input taxes incurred by [Toshiba] for the first two
quarters of 1997 are properly substantiated by official receipts and
invoices.23
During the trial before the CTA, Toshiba presented documentary
evidence in support of its claim for tax credit/refund, while the CIR
did not present any evidence at all.
With both parties waiving the right to submit their respective
memoranda, the CTA rendered its Decision in CTA Case No. 5762
on October 16, 2000 favoring Toshiba. According to the CTA, the
CIR himself admitted that the export sales of Toshiba were subject
to zero percent (0%) VAT based on Section 100(a)(2)(A)(i) of the
Tax Code of 1977, as amended. Toshiba could then claim tax
credit or refund of input VAT paid on its purchases of goods,
properties, or services, directly attributable to such zero-rated
sales, in accordance with Section 4.102-2 of Revenue Regulations
No. 7-95. The CTA, though, reduced the amount to be credited or
refunded to Toshiba to ₱1,385,292.02.
The dispositive portion of the October 16, 2000 Decision of the
CTA fully reads –
WHEREFORE, [Toshiba’s] claim for refund of unutilized input VAT
payments is hereby GRANTED but in a reduced amount of
₱1,385,282.08 computed as follows:
The CIR, on the other hand, argued in his Motion for
Reconsideration26 that Toshiba was not entitled to the credit/refund
of its input VAT payments because as a PEZA-registered
ECOZONE export enterprise, Toshiba was not subject to VAT. The
CIR invoked the following statutory and regulatory provisions –
Section 24 of Republic Act No. 791627
SECTION 24. Exemption from Taxes Under the National Internal
Revenue Code. – Any provision of existing laws, rules and
regulations to the contrary notwithstanding, no taxes, local and
national, shall be imposed on business establishments operating
within the ECOZONE. In lieu of paying taxes, five percent (5%) of
the gross income earned by all businesses and enterprises within
the ECOZONE shall be remitted to the national government. x x x.
Section 103(q) of the Tax Code of 1977, as amended
Sec. 103. Exempt transactions. – The following shall be exempt
from the value-added tax:
xxxx
(q) Transactions which are exempt under special laws, except
those granted under Presidential Decree Nos. 66, 529, 972, 1491,
and 1950, and non-electric cooperatives under Republic Act No.
6938, or international agreements to which the Philippines is a
signatory.

Section 4.103-1 of Revenue Regulations No. 7-95

1st Quarter 2nd Total
Quarter SEC. 4.103-1. Exemptions. – (A) In general. – An exemption
means that the sale of goods or properties and/or services and the
Amount of claimed use or lease of properties is not subject to VAT (output tax) and
input taxes filed with the seller is not allowed any tax credit on VAT (input tax)
the DOF One Stop P3,268,682. P416,764. P3,685,446. previously paid.
Shop Center 34 39 73

Less: 1) Input taxes not The person making the exempt sale of goods, properties or
properly services shall not bill any output tax to his customers because the
supported by VAT said transaction is not subject to VAT. On the other hand, a VAT-
invoices and official registered purchaser of VAT-exempt goods, properties or services
receipts which are exempt from VAT is not entitled to any input tax on such
a. Per SGV’s purchase despite the issuance of a VAT invoice or receipt.
verification ₱ ₱154,391. ₱
(Exh. I) 242,491.45 13 396,882.58 The CIR contended that under Section 24 of Republic Act No.
7916, a special law, all businesses and establishments within the
b. Per this court’s ECOZONE were to remit to the government five percent (5%) of
further verification
₱1,852,437. ₱ ₱1,887,545. their gross income earned within the zone, in lieu of all taxes,
(Annex A) including VAT. This placed Toshiba within the ambit of Section
65 35,108.00 65
₱189,499.13 ₱2,300 103(q) of the Tax Code of 1977, as amended, which exempted
,164.65 from VAT the transactions that were exempted under special laws.
Following Section 4.103-1(A) of Revenue Regulations No. 7-95,
₱1,158,016. ₱227,265. ₱1,385,282.
Amount Refundable the VAT-exemption of Toshiba meant that its sale of goods was
82 26 08
not subject to output VAT and Toshiba as seller was not allowed
any tax credit on the input VAT it had previously paid.
Respondent Commissioner of Internal Revenue is ORDERED to
REFUND to [Toshiba] or in the alternative, ISSUE a TAX CREDIT On January 17, 2001, the CTA issued a Resolution28 denying both
CERTIFICATE in the amount of ₱1,385,282.08 representing Motions for Reconsideration of Toshiba and the CIR.
unutilized input taxes paid by [Toshiba] on its purchases of taxable
goods and services for the period January 1 to June 30, 1997. 24 The CTA took note that the pieces of evidence referred to by
Toshiba in its Motion for Reconsideration were insufficient
Both Toshiba and the CIR sought reconsideration of the foregoing substantiation, being mere schedules of input VAT payments it had
CTA Decision. purportedly paid for the first and second quarters of 1997. While
7|BATCH SUBJECT FULLTEXT
the CTA gives credence to the report of its commissioned certified
public accountant (CPA), it does not render its decision based on
the findings of the said CPA alone. The CTA has its own CPA and
the tax court itself conducts an investigation/examination of the
documents presented. The CTA stood by its earlier disallowance of
the amount of ₱1,887,545.65 as tax credit/refund because it was
not supported by VAT invoices and/or official receipts.1avvphi1
The CTA refused to consider the argument that Toshiba was not
entitled to a tax credit/refund under Section 24 of Republic Act No.
7916 because it was only raised by the CIR for the first time in his
Motion for Reconsideration. Also, contrary to the assertions of the
CIR, the CTA held that Section 23, and not Section 24, of Republic
Act No. 7916, applied to Toshiba. According to Section 23 of
Republic Act No. 7916 –
SECTION 23. Fiscal Incentives. – Business establishments
operating within the ECOZONES shall be entitled to the fiscal
incentives as provided for under Presidential Decree No. 66, the
law creating the Export Processing Zone Authority, or those
provided under Book VI of Executive Order No. 226, otherwise
known as the Omnibus Investment Code of 1987.
Furthermore, tax credits for exporters using local materials as
inputs shall enjoy the benefits provided for in the Export
Development Act of 1994.
Among the fiscal incentives granted to PEZA-registered
enterprises by the Omnibus Investments Code of 1987 was the
income tax holiday, to wit –
Art. 39. Incentives to Registered Enterprises. – All registered
enterprises shall be granted the following incentives to the extent
engaged in a preferred area of investment:
(a) Income Tax Holiday. —
(1) For six (6) years from commercial operation
for pioneer firms and four (4) years for non-
pioneer firms, new registered firms shall be fully
exempt from income taxes levied by the
national government. Subject to such
guidelines as may be prescribed by the Board,
the income tax exemption will be extended for
another year in each of the following cases:
(i) The project meets the prescribed
ratio of capital equipment to number
of workers set by the Board;
(ii) Utilization of indigenous raw
materials at rates set by the Board;
(iii) The net foreign exchange savings
or earnings amount to at least
US$500,000.00 annually during the
first three (3) years of operation.
The preceding paragraph notwithstanding, no
registered pioneer firm may avail of this
incentive for a period exceeding eight (8) years.
(2) For a period of three (3) years from
commercial operation, registered expanding
firms shall be entitled to an exemption from
income taxes levied by the National
Government proportionate to their expansion
under such terms and conditions as the Board
may determine: Provided, however, That during
the period within which this incentive is availed
of by the expanding firm it shall not be entitled
to additional deduction for incremental labor
expense.
(3) The provision of Article 7(14)
notwithstanding, registered firms shall not be
entitled to any extension of this incentive.
The CTA pointed out that Toshiba availed itself of the income tax
holiday under the Omnibus Investments Code of 1987, so Toshiba
was exempt only from income tax but not from other taxes such as
VAT. As a result, Toshiba was liable for output VAT on its export
sales, but at zero percent (0%) rate, and entitled to the
credit/refund of the input VAT paid on its purchases of goods and
services relative to such zero-rated export sales.
Unsatisfied, the CIR filed a Petition for Review29 with the Court of
Appeals, docketed as CA-G.R. SP No. 63047.
In its Decision dated August 29, 2002, the Court of Appeals
granted the appeal of the CIR, and reversed and set aside the
Decision dated October 16, 2000 and the Resolution dated
January 17, 2001 of the CTA. The appellate court ruled that
Toshiba was not entitled to the refund of its alleged unused input
VAT payments because it was a tax-exempt entity under Section
24 of Republic Act No. 7916. As a PEZA-registered corporation,
Toshiba was liable for remitting to the national government the five
percent (5%) preferential rate on its gross income earned within
the ECOZONE, in lieu of all other national and local taxes,
including VAT.
The Court of Appeals further adjudged that the export sales of
Toshiba were VAT-exempt, not zero-rated, transactions. The
appellate court found that the Answer filed by the CIR in CTA Case
No. 5762 did not contain any admission that the export sales of
Toshiba were zero-rated transactions under Section 100(a)(2)(A)
of the Tax Code of 1977, as amended. At the least, what was
admitted by the CIR in said Answer was that the Tax Code
provisions cited in the Petition for Review of Toshiba in CTA Case
No. 5762 were correct. As to the Joint Stipulation of Facts and
Issues filed by the parties in CTA Case No. 5762, which stated that
Toshiba was subject to zero percent (0%) VAT on its export sales,
the appellate court declared that the CIR signed the said pleading
through palpable mistake. This palpable mistake in the stipulation
of facts should not be taken against the CIR, for to do otherwise
would result in suppressing the truth through falsehood. In
addition, the State could not be put in estoppel by the mistakes or
errors of its officials or agents.
Given that Toshiba was a tax-exempt entity under Republic Act
No. 7916, a special law, the Court of Appeals concluded that the
export sales of Toshiba were VAT-exempt transactions under
Section 109(q) of the Tax Code of 1997, formerly Section 103(q) of
the Tax Code of 1977. Therefore, Toshiba could not claim refund
of its input VAT payments on its domestic purchases of goods and
services.
The Court of Appeals decreed at the end of its August 29, 2002
Decision –
WHEREFORE, premises considered, the appealed decision of the
Court of Tax Appeals in CTA Case No. 5762, is hereby
REVERSED and SET ASIDE, and a new one is hereby rendered
finding [Toshiba], being a tax exempt entity under R.A. No. 7916,
not entitled to refund the VAT payments made in its domestic
purchases of goods and services.30
8|BATCH SUBJECT FULLTEXT
Toshiba filed a Motion for Reconsideration31 of the aforementioned
Decision, anchored on the following arguments: (a) the CIR never
raised as an issue before the CTA that Toshiba was tax-exempt
under Section 24 of Republic Act No. 7916; (b) Section 24 of
Republic Act No. 7916, subjecting the gross income earned by a
PEZA-registered enterprise within the ECOZONE to a preferential
rate of five percent (5%), in lieu of all taxes, did not apply to
Toshiba, which availed itself of the income tax holiday under
Section 23 of the same statute; (c) the conclusion of the CTA that
the export sales of Toshiba were zero-rated was supported by
substantial evidence, other than the admission of the CIR in the
Joint Stipulation of Facts and Issues; and (d) the judgment of the
CTA granting the refund of the input VAT payments was supported
by substantial evidence and should not have been set aside by the
Court of Appeals.
In a Resolution dated February 19, 2003, the Court of Appeals
denied the Motion for Reconsideration of Toshiba since the
arguments presented therein were mere reiterations of those
already passed upon and found to be without merit by the
appellate court in its earlier Decision. The Court of Appeals,
however, mentioned that it was incorrect for Toshiba to say that
the issue of the applicability of Section 24 of Republic Act No.
7916 was only raised for the first time on appeal before the
appellate court. The said issue was adequately raised by the CIR
in his Motion for Reconsideration before the CTA, and was even
ruled upon by the tax court.
Hence, Toshiba filed the instant Petition for Review with the
following assignment of errors –
5.1 THE HONORABLE COURT OF APPEALS ERRED
WHEN IT RULED THAT [TOSHIBA], BEING A PEZA-
REGISTERED ENTERPRISE, IS EXEMPT FROM VAT
UNDER SECTION 24 OF R.A. 7916, AND FURTHER
HOLDING THAT [TOSHIBA’S] EXPORT SALES ARE
EXEMPT TRANSACTIONS UNDER SECTION 109 OF
THE TAX CODE.
5.2 THE HONORABLE COURT OF APPEALS ERRED
WHEN IT FAILED TO DISMISS OUTRIGHT AND GAVE
DUE COURSE TO [CIR’S] PETITION
NOTWITHSTANDING [CIR’S] FAILURE TO
ADEQUATELY RAISE IN ISSUE DURING THE TRIAL
IN THE COURT OF TAX APPEALS THE
APPLICABILITY OF SECTION 24 OF R.A. 7916 TO
[TOSHIBA’S] CLAIM FOR REFUND.
5.3 THE HONORABLE COURT OF APPEALS ERRED
WHEN [IT] RULED THAT THE COURT OF TAX
APPEALS’ FINDINGS, WITH REGARD [TOSHIBA’S]
EXPORT SALES BEING ZERO RATED SALES FOR
VAT PURPOSES, WERE BASED MERELY ON THE
ADMISSIONS MADE BY [CIR’S] COUNSEL AND NOT
SUPPORTED BY SUBSTANTIAL EVIDENCE.
5.4 THE HONORABLE COURT OF APPEALS ERRED
WHEN IT REVERSED THE DECISION OF THE COURT
OF TAX APPEALS GRANTING [TOSHIBA’S] CLAIM
FOR REFUND[;]32
and the following prayer –
WHEREFORE, premises considered, Petitioner TOSHIBA
INFORMATION EQUIPMENT (PHILS.), INC. most respectfully
prays that the decision and resolution of the Honorable Court of
Appeals, reversing the decision of the CTA in CTA Case No. 5762,
be set aside and further prays that a new one be rendered
AFFIRMING AND UPHOLDING the Decision of the CTA
promulgated on October 16, 2000 in CTA Case No. 5762.
Other reliefs, which the Honorable Court may deem just and
equitable under the circumstances, are likewise prayed for. 33
The Petition is impressed with merit.
The CIR did not timely raise before the CTA the issues on the
VAT-exemptions of Toshiba and its export sales.
Upon the failure of the CIR to timely plead and prove before the
CTA the defenses or objections that Toshiba was VAT-exempt
under Section 24 of Republic Act No. 7916, and that its export
sales were VAT-exempt transactions under Section 103(q) of the
Tax Code of 1977, as amended, the CIR is deemed to have
waived the same.
During the pendency of CTA Case No. 5762, the proceedings
before the CTA were governed by the Rules of the Court of Tax
Appeals,34 while the Rules of Court were applied suppletorily.35
Rule 9, Section 1 of the Rules of Court provides:
SECTION 1. Defenses and objections not pleaded. – Defenses
and objections not pleaded either in a motion to dismiss or in the
answer are deemed waived. However, when it appears from the
pleadings or the evidence on record that the court has no
jurisdiction over the subject matter, that there is another action
pending between the same parties for the same cause, or that the
action is barred by a prior judgment or by statute of limitations, the
court shall dismiss the claim.
The CIR did not argue straight away in his Answer in CTA Case
No. 5762 that Toshiba had no right to the credit/refund of its input
VAT payments because the latter was VAT-exempt and its export
sales were VAT-exempt transactions. The Pre-Trial Brief36 of the
CIR was equally bereft of such allegations or arguments. The CIR
passed up the opportunity to prove the supposed VAT-exemptions
of Toshiba and its export sales when the CIR chose not to present
any evidence at all during the trial before the CTA. 37 He missed
another opportunity to present the said issues before the CTA
when he waived the submission of a Memorandum.38 The CIR had
waited until the CTA already rendered its Decision dated October
16, 2000 in CTA Case No. 5762, which granted the claim for
credit/refund of Toshiba, before asserting in his Motion for
Reconsideration that Toshiba was VAT-exempt and its export
sales were VAT-exempt transactions.
The CIR did not offer any explanation as to why he did not argue
the VAT-exemptions of Toshiba and its export sales before and
during the trial held by the CTA, only doing so in his Motion for
Reconsideration of the adverse CTA judgment. Surely, said
defenses or objections were already available to the CIR when the
CIR filed his Answer to the Petition for Review of Toshiba in CTA
Case No. 5762.
It is axiomatic in pleadings and practice that no new issue in a
case can be raised in a pleading which by due diligence could
have been raised in previous pleadings. 39 The Court cannot simply
grant the plea of the CIR that the procedural rules be relaxed
based on the general averment of the interest of substantive
justice. It should not be forgotten that the first and fundamental
concern of the rules of procedure is to secure a just determination
of every action.40 Procedural rules are designed to facilitate the
adjudication of cases. Courts and litigants alike are enjoined to
abide strictly by the rules. While in certain instances, the Court
allows a relaxation in the application of the rules, it never intends
9|BATCH SUBJECT FULLTEXT
to forge a weapon for erring litigants to violate the rules with
impunity. The liberal interpretation and application of rules apply
only in proper cases of demonstrable merit and under justifiable
causes and circumstances. While it is true that litigation is not a
game of technicalities, it is equally true that every case must be
prosecuted in accordance with the prescribed procedure to ensure
an orderly and speedy administration of justice. Party litigants and
their counsel are well advised to abide by, rather than flaunt,
procedural rules for these rules illumine the path of the law and
rationalize the pursuit of justice.41
The CIR judicially admitted that Toshiba was VAT-registered and
its export sales were subject to VAT at zero percent (0%) rate.
More importantly, the arguments of the CIR that Toshiba was VAT-
exempt and the latter’s export sales were VAT-exempt
transactions are inconsistent with the explicit admissions of the
CIR in the Joint Stipulation of Facts and Issues (Joint Stipulation)
that Toshiba was a registered VAT entity and that it was subject to
zero percent (0%) VAT on its export sales.
The Joint Stipulation was executed and submitted by Toshiba and
the CIR upon being advised to do so by the CTA at the end of the
pre-trial conference held on June 23, 1999. 42 The approval of the
Joint Stipulation by the CTA, in its Resolution43 dated July 12,
1999, marked the culmination of the pre-trial process in CTA Case
No. 5762.
Pre-trial is an answer to the clarion call for the speedy disposition
of cases. Although it was discretionary under the 1940 Rules of
Court, it was made mandatory under the 1964 Rules and the
subsequent amendments in 1997. It has been hailed as "the most
important procedural innovation in Anglo-Saxon justice in the
nineteenth century."44
The nature and purpose of a pre-trial have been laid down in Rule
18, Section 2 of the Rules of Court:
SECTION 2. Nature and purpose. – The pre-trial is mandatory.
The court shall consider:
(a) The possibility of an amicable settlement or of a
submission to alternative modes of dispute resolution;
(b) The simplification of the issues;
(c) The necessity or desirability of amendments to the
pleadings;
(d) The possibility of obtaining stipulations or admissions
of facts and of documents to avoid unnecessary proof;
(e) The limitation of the number of witnesses;
(f) The advisability of a preliminary reference of issues to
a commissioner;
(g) The propriety of rendering judgment on the pleadings,
or summary judgment, or of dismissing the action should
a valid ground therefor be found to exist;
(h) The advisability or necessity of suspending the
proceedings; and
(i) Such other matters as may aid in the prompt
disposition of the action. (Emphasis ours.)
The admission having been made in a stipulation of facts at pre-
trial by the parties, it must be treated as a judicial
admission.45 Under Section 4, Rule 129 of the Rules of Court, a
judicial admission requires no proof. The admission may be
contradicted only by a showing that it was made through palpable
mistake or that no such admission was made. The Court cannot
lightly set aside a judicial admission especially when the opposing
party relied upon the same and accordingly dispensed with further
proof of the fact already admitted. An admission made by a party
in the course of the proceedings does not require proof. 46
In the instant case, among the facts expressly admitted by the CIR
and Toshiba in their CTA-approved Joint Stipulation are that
Toshiba "is a duly registered value-added tax entity in accordance
with Section 107 of the Tax Code, as amended[,]"47 that "is subject
to zero percent (0%) value-added tax on its export sales in
accordance with then Section 100(a)(2)(A) of the Tax Code, as
amended."48 The CIR was bound by these admissions, which he
could not eventually contradict in his Motion for Reconsideration of
the CTA Decision dated October 16, 2000, by arguing that Toshiba
was actually a VAT-exempt entity and its export sales were VAT-
exempt transactions. Obviously, Toshiba could not have been
subject to VAT and exempt from VAT at the same time. Similarly,
the export sales of Toshiba could not have been subject to zero
percent (0%) VAT and exempt from VAT as well.
The CIR cannot escape the binding effect of his judicial
admissions.
The Court disagrees with the Court of Appeals when it ruled in its
Decision dated August 29, 2002 that the CIR could not be bound
by his admissions in the Joint Stipulation because (1) the said
admissions were "made through palpable mistake"49 which, if
countenanced, "would result in falsehood, unfairness and
injustice";50 and (2) the State could not be put in estoppel by the
mistakes of its officials or agents. This ruling of the Court of
Appeals is rooted in its conclusion that a "palpable mistake" had
been committed by the CIR in the signing of the Joint Stipulation.
However, this Court finds no evidence of the commission of a
mistake, much more, of a palpable one.
The CIR does not deny that his counsel, Atty. Joselito F. Biazon,
Revenue Attorney II of the BIR, signed the Joint Stipulation,
together with the counsel of Toshiba, Atty. Patricia B. Bisda.
Considering the presumption of regularity in the performance of
official duty,51 Atty. Biazon is presumed to have read, studied, and
understood the contents of the Joint Stipulation before he signed
the same. It rests on the CIR to present evidence to the contrary.
Yet, the Court observes that the CIR himself never alleged in his
Motion for Reconsideration of the CTA Decision dated October 16,
2000, nor in his Petition for Review before the Court of Appeals,
that Atty. Biazon committed a mistake in signing the Joint
Stipulation. Since the CIR did not make such an allegation, neither
did he present any proof in support thereof. The CIR began to aver
the existence of a palpable mistake only after the Court of Appeals
made such a declaration in its Decision dated August 29, 2002.
Despite the absence of allegation and evidence by the CIR, the
Court of Appeals, on its own, concluded that the admissions of the
CIR in the Joint Stipulation were due to a palpable mistake based
on the following deduction –
Scrutinizing the Answer filed by [the CIR], we rule that the Joint
Stipulation of Facts and Issues signed by [the CIR] was made
through palpable mistake. Quoting paragraph 4 of its Answer, [the
CIR] states:
10 | B A T C H SUBJECT FULLTEXT
"4. He ADMITS the allegations contained in paragraph 5 of the
petition only insofar as the cited provisions of Tax Code is
concerned, but SPECIFICALLY DENIES the rest of the allegations
therein for being mere opinions, arguments or gratuitous
assertions on the part of [Toshiba] and/or because they are mere
erroneous conclusions or interpretations of the quoted law
involved, the truth of the matter being those stated hereunder
x x x x"
And paragraph 5 of the petition for review filed by [Toshiba] before
the CTA states:
"5. Petitioner is subject to zero percent (0%) value-added tax on its
export sales in accordance with then Section 100(a)(2)(A) of the
Tax Code x x x.
x x x x"
As we see it, nothing in said Answer did [the CIR] admit that the
export sales of [Toshiba] were indeed zero-rated transactions. At
the least, what was admitted only by [the CIR] concerning
paragraph 4 of his Answer, is the fact that the provisions of the Tax
Code, as cited by [Toshiba] in its petition for review filed before the
CTA were correct.52
The Court of Appeals provided no explanation as to why the
admissions of the CIR in his Answer in CTA Case No. 5762
deserved more weight and credence than those he made in the
Joint Stipulation. The appellate court failed to appreciate that the
CIR, through counsel, Atty. Biazon, also signed the Joint
Stipulation; and that absent evidence to the contrary, Atty. Biazon
is presumed to have signed the Joint Stipulation willingly and
knowingly, in the regular performance of his official duties.
Additionally, the Joint Stipulation 53 of Toshiba and the CIR was a
more recent pleading than the Answer54 of the CIR. It was
submitted by the parties after the pre-trial conference held by the
CTA, and subsequently approved by the tax court. If there was any
discrepancy between the admissions of the CIR in his Answer and
in the Joint Stipulation, the more logical and reasonable
explanation would be that the CIR changed his mind or conceded
some points to Toshiba during the pre-trial conference which
immediately preceded the execution of the Joint Stipulation. To
automatically construe that the discrepancy was the result of a
palpable mistake is a wide leap which this Court is not prepared to
take without substantial basis.
The judicial admissions of the CIR in the Joint Stipulation are not
intrinsically false, wrong, or illegal, and are consistent with the
ruling on the VAT treatment of PEZA-registered enterprises in the
previous Toshiba case.
There is no basis for believing that to bind the CIR to his judicial
admissions in the Joint Stipulation – that Toshiba was a VAT-
registered entity and its export sales were zero-rated VAT
transactions – would result in "falsehood, unfairness and injustice."
The judicial admissions of the CIR are not intrinsically false, wrong,
or illegal. On the contrary, they are consistent with the ruling of this
Court in a previous case involving the same parties, Commissioner
of Internal Revenue v. Toshiba Information Equipment (Phils.)
Inc.55 (Toshiba case), explaining the VAT treatment of PEZA-
registered enterprises.
In the Toshiba case, Toshiba sought the refund of its unutilized
input VAT on its purchase of capital goods and services for the first
and second quarters of 1996, based on Section 106(b) of the Tax
Code of 1977, as amended.56In the Petition at bar, Toshiba is
claiming refund of its unutilized input VAT on its local purchase of
goods and services which are attributable to its export sales for the
first and second quarters of 1997, pursuant to Section 106(a), in
relation to Section 100(a)(1)(A)(i) of the Tax Code of 1977, as
amended, which read –
SEC. 106. Refunds or tax credits of creditable input tax. – (a) Any
VAT-registered person, whose sales are zero-rated or effectively
zero-rated, may, within two (2) years after the close of the taxable
quarter when the sales were made, apply for the issuance of a tax
credit certificate or refund of creditable input tax due or paid
attributable to such sales, except transitional input tax, to the
extent that such input tax has not been applied against output
tax: Provided, however, That in the case of zero-rated sales under
Section 100(a)(2)(A)(i),(ii) and (b) and Section 102(b)(1) and (2),
the acceptable foreign currency exchange proceeds thereof has
been duly accounted for in accordance with the regulations of the
Bangko Sentral ng Pilipinas (BSP): Provided, further, That where
the taxpayer is engaged in zero-rated or effectively zero-rated sale
and also in taxable or exempt sale of goods or properties of
services, and the amount of creditable input tax due or paid cannot
be directly and entirely attributed to any one of the transactions, it
shall be allocated proportionately on the basis of the volume sales.
SEC. 100. Value-added tax on sale of goods or properties. – (a)
Rate and base of tax. – x x x
xxxx
(2) The following sales by VAT-registered persons shall
be subject to 0%:
(A) Export sales. – The term "export sales" means:
(i) The sale and actual shipment of goods from the
Philippines to a foreign country, irrespective of any
shipping arrangement that may be agreed upon which
may influence or determine the transfer of ownership of
the goods so exported and paid for in acceptable foreign
currency or its equivalent in goods or services, and
accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipnas (BSP).
Despite the difference in the legal bases for the claims for
credit/refund in the Toshiba case and the case at bar, the CIR
raised the very same defense or objection in both – that Toshiba
and its transactions were VAT-exempt. Hence, the ruling of the
Court in the former case is relevant to the present case.
At the outset, the Court establishes that there is a basic distinction
in the VAT-exemption of a person and the VAT-exemption of a
transaction –
It would seem that petitioner CIR failed to differentiate between
VAT-exempt transactions from VAT-exempt entities. In the case of
Commissioner of Internal Revenue v. Seagate Technology
(Philippines), this Court already made such distinction –
An exempt transaction, on the one hand, involves goods or
services which, by their nature, are specifically listed in and
expressly exempted from the VAT under the Tax Code, without
regard to the tax status – VAT-exempt or not – of the party to the
transaction…
An exempt party, on the other hand, is a person or entity granted
VAT exemption under the Tax Code, a special law or an
international agreement to which the Philippines is a signatory, and
by virtue of which its taxable transactions become exempt from
VAT x x x.57
11 | B A T C H SUBJECT FULLTEXT
In effect, the CIR is opposing the claim for credit/refund of input
VAT of Toshiba on two grounds: (1) that Toshiba was a VAT-
exempt entity; and (2) that its export sales were VAT-exempt
transactions.
It is now a settled rule that based on the Cross Border Doctrine,
PEZA-registered enterprises, such as Toshiba, are VAT-exempt
and no VAT can be passed on to them. The Court explained in the
Toshiba case that –
PEZA-registered enterprise, which would necessarily be located
within ECOZONES, are VAT-exempt entities, not because of
Section 24 of Rep. Act No. 7916, as amended, which imposes the
five percent (5%) preferential tax rate on gross income of PEZA-
registered enterprises, in lieu of all taxes; but, rather, because of
Section 8 of the same statute which establishes the fiction that
ECOZONES are foreign territory.
xxxx
The Philippine VAT system adheres to the Cross Border Doctrine,
according to which, no VAT shall be imposed to form part of the
cost of goods destined for consumption outside of the territorial
border of the taxing authority. Hence, actual export of goods and
services from the Philippines to a foreign country must be free of
VAT; while, those destined for use or consumption within the
Philippines shall be imposed with ten percent (10%) VAT.
Applying said doctrine to the sale of goods, properties, and
services to and from the ECOZONES, the BIR issued Revenue
Memorandum Circular (RMC) No. 74-99, on 15 October 1999. Of
particular interest to the present Petition is Section 3 thereof, which
reads –
SECTION 3. Tax Treatment of Sales Made by a VAT Registered
Supplier from the Customs Territory, to a PEZA Registered
Enterprise. –
(1) If the Buyer is a PEZA registered enterprise which is
subject to the 5% special tax regime, in lieu of all taxes,
except real property tax, pursuant to R.A. No. 7916, as
amended:
(a) Sale of goods (i.e., merchandise). – This
shall be treated as indirect export hence,
considered subject to zero percent (0%) VAT,
pursuant to Sec. 106(A)(2)(a)(5), NIRC and
Sec. 23 of R.A. No. 7916, in relation to ART.
77(2) of the Omnibus Investments Code.
(b) Sale of service. – This shall be treated
subject to zero percent (0%) VAT under the
"cross border doctrine" of the VAT System,
pursuant to VAT Ruling No. 032-98 dated Nov.
5, 1998.
(2) If Buyer is a PEZA registered enterprise which is not
embraced by the 5% special tax regime, hence, subject
to taxes under the NIRC, e.g., Service Establishments
which are subject to taxes under the NIRC rather than
the 5% special tax regime:
(a) Sale of goods (i.e., merchandise). – This
shall be treated as indirect export hence,
considered subject to zero percent (0%) VAT,
pursuant to Sec. 106(A)(2)(a)(5), NIRC and
Sec. 23 of R.A. No. 7916 in relation to ART.
77(2) of the Omnibus Investments Code.
(b) Sale of Service. – This shall be treated
subject to zero percent (0%) VAT under the
"cross border doctrine" of the VAT System,
pursuant to VAT Ruling No. 032-98 dated Nov.
5, 1998.
(3) In the final analysis, any sale of goods, property or
services made by a VAT registered supplier from the
Customs Territory to any registered enterprise operating
in the ecozone, regardless of the class or type of the
latter’s PEZA registration, is actually qualified and thus
legally entitled to the zero percent (0%) VAT.
Accordingly, all sales of goods or property to such
enterprise made by a VAT registered supplier from the
Customs Territory shall be treated subject to 0% VAT,
pursuant to Sec. 106(A)(2)(a)(5), NIRC, in relation to
ART. 77(2) of the Omnibus Investments Code, while all
sales of services to the said enterprises, made by VAT
registered suppliers from the Customs Territory, shall be
treated effectively subject to the 0% VAT, pursuant to
Section 108(B)(3), NIRC, in relation to the provisions of
R.A. No. 7916 and the "Cross Border Doctrine" of the
VAT system.
This Circular shall serve as a sufficient basis to entitle such
supplier of goods, property or services to the benefit of the zero
percent (0%) VAT for sales made to the aforementioned
ECOZONE enterprises and shall serve as sufficient compliance to
the requirement for prior approval of zero-rating imposed by
Revenue Regulations No. 7-95 effective as of the date of the
issuance of this Circular.
Indubitably, no output VAT may be passed on to an ECOZONE
enterprise since it is a VAT-exempt entity. x x x.58
The Court, nevertheless, noted in the Toshiba case that the rule
which considers any sale by a supplier from the Customs Territory
to a PEZA-registered enterprise as export sale, which should not
be burdened by output VAT, was only clearly established on
October 15, 1999, upon the issuance by the BIR of RMC No. 74-
99. Prior to October 15, 1999, whether a PEZA-registered
enterprise was exempt or subject to VAT depended on the type of
fiscal incentives availed of by the said enterprise. 59 The old rule,
then followed by the BIR, and recognized and affirmed by the CTA,
the Court of Appeals, and this Court, was described as follows –
According to the old rule, Section 23 of Rep. Act No. 7916, as
amended, gives the PEZA-registered enterprise the option to
choose between two sets of fiscal incentives: (a) The five percent
(5%) preferential tax rate on its gross income under Rep. Act No.
7916, as amended; and (b) the income tax holiday provided under
Executive Order No. 226, otherwise known as the Omnibus
Investment Code of 1987, as amended.
The five percent (5%) preferential tax rate on gross income under
Rep. Act No. 7916, as amended, is in lieu of all taxes. Except for
real property taxes, no other national or local tax may be imposed
on a PEZA-registered enterprise availing of this particular fiscal
incentive, not even an indirect tax like VAT.
Alternatively, Book VI of Exec. Order No. 226, as amended, grants
income tax holiday to registered pioneer and non-pioneer
enterprises for six-year and four-year periods, respectively. Those
availing of this incentive are exempt only from income tax, but shall
be subject to all other taxes, including the ten percent (10%) VAT.
This old rule clearly did not take into consideration the Cross
Border Doctrine essential to the VAT system or the fiction of the
ECOZONE as a foreign territory. It relied totally on the choice of
12 | B A T C H SUBJECT FULLTEXT
fiscal incentives of the PEZA-registered enterprise. Again, for
emphasis, the old VAT rule for PEZA-registered enterprises was
based on their choice of fiscal incentives: (1) If the PEZA-
registered enterprise chose the five percent (5%) preferential tax
on its gross income, in lieu of all taxes, as provided by Rep. Act
No. 7916, as amended, then it would be VAT-exempt; (2) If the
PEZA-registered enterprise availed of the income tax holiday
under Exec. Order No. 226, as amended, it shall be subject to VAT
at ten percent (10%). Such distinction was abolished by RMC No.
74-99, which categorically declared that all sales of goods,
properties, and services made by a VAT-registered supplier from
the Customs Territory to an ECOZONE enterprise shall be subject
to VAT, at zero percent (0%) rate, regardless of the latter’s type or
class of PEZA registration; and, thus, affirming the nature of a
PEZA-registered or an ECOZONE enterprise as a VAT-exempt
entity.60
To recall, Toshiba is herein claiming the refund of unutilized input
VAT payments on its local purchases of goods and services
attributable to its export sales for the first and second quarters of
1997. Such export sales took place before October 15, 1999, when
the old rule on the VAT treatment of PEZA-registered enterprises
still applied. Under this old rule, it was not only possible, but even
acceptable, for Toshiba, availing itself of the income tax holiday
option under Section 23 of Republic Act No. 7916, in relation to
Section 39 of the Omnibus Investments Code of 1987, to be
subject to VAT, both indirectly (as purchaser to whom the seller
shifts the VAT burden) and directly (as seller whose sales were
subject to VAT, either at ten percent [10%] or zero percent [0%]).
A VAT-registered seller of goods and/or services who made zero-
rated sales can claim tax credit or refund of the input VAT paid on
its purchases of goods, properties, or services relative to such
zero-rated sales, in accordance with Section 4.102-2 of Revenue
Regulations No. 7-95, which provides –
Sec. 4.102-2. Zero-rating. – (a) In general. - A zero-rated sale by a
VAT-registered person, which is a taxable transaction for VAT
purposes, shall not result in any output tax. However, the input tax
on his purchases of goods, properties or services related to such
zero-rated sale shall be available as tax credit or refund in
accordance with these regulations.
The BIR, as late as July 15, 2003, when it issued RMC No. 42-
2003, accepted applications for credit/refund of input VAT on
purchases prior to RMC No. 74-99, filed by PEZA-registered
enterprises which availed themselves of the income tax holiday.
The BIR answered Question Q-5(1) of RMC No. 42-2003 in this
wise –
Q-5: Under Revenue Memorandum Circular (RMC) No. 74-99,
purchases by PEZA-registered firms automatically qualify as zero-
rated without seeking prior approval from the BIR effective October
1999.
1) Will the OSS-DOF Center still accept applications from
PEZA-registered claimants who were allegedly billed
VAT by their suppliers before and during the effectivity of
the RMC by issuing VAT invoices/receipts?
xxxx
A-5(1): If the PEZA-registered enterprise is
paying the 5% preferential tax in lieu of all other
taxes, the said PEZA-registered taxpayer
cannot claim TCC or refund for the VAT paid on
purchases. However, if the taxpayer is availing
of the income tax holiday, it can claim VAT
credit provided:
a. The taxpayer-claimant is VAT-
registered;
b. Purchases are evidenced by VAT
invoices or receipts, whichever is
applicable, with shifted VAT to the
purchaser prior to the implementation
of RMC No. 74-99; and
c. The supplier issues a sworn
statement under penalties of perjury
that it shifted the VAT and declared
the sales to the PEZA-registered
purchaser as taxable sales in its VAT
returns.
For invoices/receipts issued upon the effectivity of RMC No. 74-99,
the claims for input VAT by PEZA-registered companies,
regardless of the type or class of PEZA-registration, should be
denied. (Emphases ours.)
Consequently, the CIR cannot herein insist that all PEZA-
registered enterprises are VAT-exempt in every instance. RMC No.
42-2003 contains an express acknowledgement by the BIR that
prior to RMC No. 74-99, there were PEZA-registered enterprises
liable for VAT and entitled to credit/refund of input VAT paid under
certain conditions.
This Court already rejected in the Toshiba case the argument that
sale transactions of a PEZA-registered enterprise were VAT-
exempt under Section 103(q) of the Tax Code of 1977, as
amended, ratiocinating that –
Section 103(q) of the Tax Code of 1977, as amended, relied upon
by petitioner CIR, relates to VAT-exempt transactions. These are
transactions exempted from VAT by special laws or international
agreements to which the Philippines is a signatory. Since such
transactions are not subject to VAT, the sellers cannot pass on any
output VAT to the purchasers of goods, properties, or services,
and they may not claim tax credit/refund of the input VAT they had
paid thereon.
Section 103(q) of the Tax Code of 1977, as amended, cannot
apply to transactions of respondent Toshiba because although the
said section recognizes that transactions covered by special laws
may be exempt from VAT, the very same section provides that
those falling under Presidential Decree No. 66 are not. Presidential
Decree No. 66, creating the Export Processing Zone Authority
(EPZA), is the precursor of Rep. Act No. 7916, as amended, under
which the EPZA evolved into the PEZA. Consequently, the
exception of Presidential Decree No. 66 from Section 103(q) of the
Tax Code of 1977, as amended, extends likewise to Rep. Act No.
7916, as amended.61 (Emphasis ours.)
In light of the judicial admissions of Toshiba, the CTA correctly
confined itself to the other factual issues submitted for resolution
by the parties.
In accord with the admitted facts – that Toshiba was a VAT-
registered entity and that its export sales were zero-rated
transactions – the stated issues in the Joint Stipulation were
limited to other factual matters, particularly, on the compliance by
Toshiba with the rest of the requirements for credit/refund of input
VAT on zero-rated transactions. Thus, during trial, Toshiba
concentrated on presenting evidence to establish that it incurred
₱3,875,139.65 of input VAT for the first and second quarters of
1997 which were directly attributable to its export sales; that said
amount of input VAT were not carried over to the succeeding
13 | B A T C H SUBJECT FULLTEXT
quarters; that said amount of input VAT has not been applied or
offset against any output VAT liability; and that said amount of
input VAT was properly substantiated by official receipts and
invoices.
After what truly appears to be an exhaustive review of the
evidence presented by Toshiba, the CTA made the following
findings –
(1) The amended quarterly VAT returns of Toshiba for
1997 showed that it made no other sales, except zero-
rated export sales, for the entire year, in the sum of
₱2,083,305,000.00 for the first quarter and
₱5,411,372,000.00 for the second quarter. That being
the case, all input VAT allegedly incurred by Toshiba for
the first two quarters of 1997, in the amount of
₱3,875,139.65, was directly attributable to its zero-rated
sales for the same period.
(2) Toshiba did carry-over the ₱3,875,139.65 input VAT it
reportedly incurred during the first two quarters of 1997
to succeeding quarters, until the first quarter of 1999.
Despite the carry-over of the subject input VAT of
₱3,875,139.65, the claim of Toshiba was not affected
because it later on deducted the said amount as "VAT
Refund/TCC Claimed" from its total available input VAT
of ₱6,841,468.17 for the first quarter of 1999.
Jurisprudence has consistently shown that this Court accords the
findings of fact by the CTA with the highest respect. In Sea-Land
Service Inc. v. Court of Appeals [G.R. No. 122605, 30 April 2001,
357 SCRA 441, 445-446], this Court recognizes that the Court of
Tax Appeals, which by the very nature of its function is dedicated
exclusively to the consideration of tax problems, has necessarily
developed an expertise on the subject, and its conclusions will not
be overturned unless there has been an abuse or improvident
exercise of authority. Such findings can only be disturbed on
appeal if they are not supported by substantial evidence or there is
a showing of gross error or abuse on the part of the Tax Court. In
the absence of any clear and convincing proof to the contrary, this
Court must presume that the CTA rendered a decision which is
valid in every respect.
WHEREFORE, the assailed Decision dated August 29, 2002 and
the Resolution dated February 19, 2003 of the Court of Appeals in
CA-G.R. SP No. 63047 are REVERSED and SET ASIDE, and the
Decision dated October 16, 2000 of the Court of Tax Appeals in
CTA Case No. 5762 is REINSTATED. Respondent Commissioner
of Internal Revenue is ORDERED to REFUND or, in the
alternative, to ISSUE a TAX CREDIT CERTIFICATE in favor of
petitioner Toshiba Information Equipment (Phils.), Inc. in the
amount of ₱1,385,282.08, representing the latter’s unutilized input
VAT payments for the first and second quarters of 1997. No
pronouncement as to costs.
SO ORDERED.

(3) Still, the CTA could not allow the credit/refund of the
total input VAT of ₱3,875,139.65 being claimed by
Toshiba because not all of said amount was actually
incurred by the company and duly substantiated by
invoices and official receipts. From the ₱3,875,139.65
claim, the CTA deducted the amounts of (a)
₱189,692.92, which was in excess of the ₱3,685,446.23
input VAT Toshiba originally claimed in its application for
credit/refund filed with the DOF One-Stop Shop; (b)
₱396,882.58, which SGV & Co., the commissioned CPA,
disallowed for being improperly substantiated, i.e.,
supported only by provisional acknowledgement receipts,
or by documents other than official receipts, or not
supported by TIN or TIN VAT or by any document at all;
(c) ₱1,887,545.65, which the CTA itself verified as not
being substantiated in accordance with Section 4.104-
562 of Revenue Regulations No. 7-95, in relation to
Sections 10863 and 23864 of the Tax Code of 1977, as
amended; and (d) ₱15,736.42, which Toshiba already
applied to its output VAT liability for the fourth quarter of
1998.

(4) Ultimately, Toshiba was entitled to the credit/refund of

unutilized input VAT payments attributable to its zero-
rated sales in the amounts of ₱1,158,016.82 and
₱227,265.26, for the first and second quarters of 1997,
respectively, or in the total amount of ₱1,385,282.08.

Since the aforementioned findings of fact of the CTA are borne by

substantial evidence on record, unrefuted by the CIR, and
untouched by the Court of Appeals, they are given utmost respect
by this Court.

The Court will not lightly set aside the conclusions reached by the
CTA which, by the very nature of its functions, is dedicated
exclusively to the resolution of tax problems and has accordingly
developed an expertise on the subject unless there has been an
abuse or improvident exercise of authority. 65 In Barcelon, Roxas
Securities, Inc. (now known as UBP Securities, Inc.) v.
Commissioner of Internal Revenue,66 this Court more explicitly
pronounced –

14 | B A T C H SUBJECT FULLTEXT
G.R. No. 125355 March 30, 2000
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
COURT OF APPEALS and COMMONWEALTH MANAGEMENT
AND SERVICES CORPORATION, respondents.
PARDO, J.:
What is before the Court is a petition for review on certiorari of the
decision of the Court of Appeals,1 reversing that of the Court of Tax
Appeals,2 which affirmed with modification the decision of the
Commissioner of Internal Revenue ruling that Commonwealth
Management and Services Corporation, is liable for value added
tax for services to clients during taxable year 1988.
Commonwealth Management and Services Corporation
(COMASERCO, for brevity), is a corporation duly organized and
existing under the laws of the Philippines. It is an affiliate of
Philippine American Life Insurance Co. (Philamlife), organized by
the letter to perform collection, consultative and other technical
services, including functioning as an internal auditor, of Philamlife
and its other affiliates.1âwphi1.nêt
On January 24, 1992, the Bureau of Internal Revenue (BIR) issued
an assessment to private respondent COMASERCO for deficiency
value-added tax (VAT) amounting to P351,851.01, for taxable year
1988, computed as follows:
P1,679,155.00
Taxable sale/receipt ===========
=
10% tax due thereon 167,915.50
25% surcharge 41,978.88
20% interest per annum 125,936.63
Compromise penalty for late
16,000.00
payment
TOTAL AMOUNT DUE AND
P351,831.01
COLLECTIBLE
============
COMASERCO's annual corporate income tax return ending
December 31, 1988 indicated a net loss in its operations in the
amount of P6,077.00.
On February 10, 1992, COMASERCO filed with the BIR, a letter-
protest objecting to the latter's finding of deficiency VAT. On
August 20, 1992, the Commissioner of Internal Revenue sent a
collection letter to COMASERCO demanding payment of the
deficiency VAT.
On September 29, 1992, COMASERCO filed with the Court of Tax
Appeals4 a petition for review contesting the Commissioner's
assessment. COMASERCO asserted that the services it rendered
to Philamlife and its affiliates, relating to collections, consultative
and other technical assistance, including functioning as an internal
auditor, were on a "no-profit, reimbursement-of-cost-only" basis. It
averred that it was not engaged in the business of providing
services to Philamlife and its affiliates. COMASERCO was
established to ensure operational orderliness and administrative
efficiency of Philamlife and its affiliates, and not in the sale of
services. COMASERCO stressed that it was not profit-motivated,
thus not engaged in business. In fact, it did not generate profit but
suffered a net loss in taxable year 1988. COMASERCO averred
that since it was not engaged in business, it was not liable to pay
VAT.
On June 22, 1995, the Court of Tax Appeals rendered decision in
favor of the Commissioner of Internal Revenue, the dispositive
portion of which reads:
WHEREFORE, the decision of the Commissioner of
Internal Revenue assessing petitioner deficiency value-
added tax for the taxable year 1988 is AFFIRMED with
slight modifications. Accordingly, petitioner is ordered to
pay respondent Commissioner of Internal Revenue the
amount of P335,831.01 inclusive of the 25% surcharge
and interest plus 20% interest from January 24, 1992
until fully paid pursuant to Section 248 and 249 of the
Tax Code.
The compromise penalty of P16,000.00 imposed by the
respondent in her assessment letter shall not be included
in the payment as there was no compromise agreement
entered into between petitioner and respondent with
respect to the value-added tax deficiency.5
On July 26, 1995, respondent filed with the Court of Appeals, a
petition for review of the decision of the Court of Appeals.
After due proceedings, on May 13, 1996, the Court of Appeals
rendered decision reversing that of the Court of Tax Appeals, the
dispositive portion of which reads:
WHEREFORE, in view of the foregoing, judgment is
hereby rendered REVERSING and SETTING ASIDE the
questioned Decision promulgated on 22 June 1995. The
assessment for deficiency value-added tax for the
taxable year 1988 inclusive of surcharge, interest and
penalty charges are ordered CANCELLED for lack of
legal and factual basis. 6
The Court of Appeals anchored its decision on the ratiocination in
another tax case involving the same parties, 7where it was held that
COMASERCO was not liable to pay fixed and contractor's tax for
3
services rendered to Philamlife and its affiliates. The Court of
Appeals, in that case, reasoned that COMASERCO was not
engaged in business of providing services to Philamlife and its
affiliates. In the same manner, the Court of Appeals held that
COMASERCO was not liable to pay VAT for it was not engaged in
the business of selling services.
On July 16, 1996, the Commissioner of Internal Revenue filed with
this Court a petition for review on certiorariassailing the decision of
the Court of Appeals.
On August 7, 1996, we required respondent COMASERCO to file
comment on the petition, and on September 26, 1996,
COMASERCO complied with the resolution.8
We give due course to the petition.
At issue in this case is whether COMASERCO was engaged in the
sale of services, and thus liable to pay VAT thereon.
Petitioner avers that to "engage in business" and to "engage in the
sale of services" are two different things. Petitioner maintains that
the services rendered by COMASERCO to Philamlife and its
affiliates, for a fee or consideration, are subject to VAT. VAT is a
15 | B A T C H SUBJECT FULLTEXT
tax on the value added by the performance of the service. It is
immaterial whether profit is derived from rendering the service.
We agree with the Commissioner.
Sec. 99 of the National Internal Revenue Code of 1986, as
amended by Executive Order (E. O.) No. 273 in 1988, provides
that:
Sec. 99. Persons liable. — Any person who, in the
course of trade or business, sells, barters or exchanges
goods, renders services, or engages in similar
transactions and any person who, imports goods shall be
subject to the value-added tax (VAT) imposed in
Sections 100 to 102 of this Code. 9
COMASERCO contends that the term "in the course of trade or
business" requires that the "business" is carried on with a view to
profit or livelihood. It avers that the activities of the entity must be
profit-oriented. COMASERCO submits that it is not motivated by
profit, as defined by its primary purpose in the articles of
incorporation, stating that it is operating "only on reimbursement-
of-cost basis, without any profit." Private respondent argues that
profit motive is material in ascertaining who to tax for purposes of
determining liability for VAT.
We disagree.
On May 28, 1994, Congress enacted Republic Act No. 7716, the
Expanded VAT Law (EVAT), amending among other sections,
Section 99 of the Tax Code. On January 1, 1998, Republic Act
8424, the National Internal Revenue Code of 1997, took effect.
The amended law provides that:
Sec. 105. Persons Liable. — Any person who, in the
course of trade or business, sells, barters, exchanges,
leases goods or properties, renders services, and any
person who imports goods shall be subject to the value-
added tax (VAT) imposed in Sections 106 and 108 of this
Code.
The value-added tax is an indirect tax and the amount of
tax may be shifted or passed on to the buyer, transferee
or lessee of the goods, properties or services. This rule
shall likewise apply to existing sale or lease of goods,
properties or services at the time of the effectivity of
Republic Act No. 7716.
The phrase "in the course of trade or business" means
the regular conduct or pursuit of a commercial or an
economic activity, including transactions incidental
thereto, by any person regardless of whether or not the
person engaged therein is a nonstock, nonprofit
organization (irrespective of the disposition of its net
income and whether or not it sells exclusively to
members of their guests), or government entity.
The rule of regularity, to the contrary notwithstanding,
services as defined in this Code rendered in the
Philippines by nonresident foreign persons shall be
considered as being rendered in the course of trade or
business.
Contrary to COMASERCO's contention the above provision
clarifies that even a non-stock, non-profit, organization or
government entity, is liable to pay VAT on the sale of goods or
services. VAT is a tax on transactions, imposed at every stage of
the distribution process on the sale, barter, exchange of goods or
property, and on the performance of services, even in the absence
of profit attributable thereto. The term "in the course of trade or
business" requires the regular conduct or pursuit of a commercial
or an economic activity regardless of whether or not the entity is
profit-oriented.
The definition of the term "in the course of trade or business"
present law applies to all transactions even to those made prior to
its enactment. Executive Order No. 273 stated that any person
who, in the course of trade or business, sells, barters or exchanges
goods and services, was already liable to pay VAT. The present
law merely stresses that even a nonstock, nonprofit organization or
government entity is liable to pay VAT for the sale of goods and
services.
Sec. 108 of the National Internal Revenue Code of 1997 10 defines
the phrase "sale of services" as the "performance of all kinds of
services for others for a fee, remuneration or consideration." It
includes "the supply of technical advice, assistance or services
rendered in connection with technical management or
administration of any scientific, industrial or commercial
undertaking or project." 11
On February 5, 1998, the Commissioner of Internal Revenue
issued BIR Ruling No. 010-98 12 emphasizing that a domestic
corporation that provided technical, research, management and
technical assistance to its affiliated companies and received
payments on a reimbursement-of-cost basis, without any intention
of realizing profit, was subject to VAT on services rendered. In fact,
even if such corporation was organized without any intention
realizing profit, any income or profit generated by the entity in the
conduct of its activities was subject to income tax.
Hence, it is immaterial whether the primary purpose of a
corporation indicates that it receives payments for services
rendered to its affiliates on a reimbursement-on-cost basis only,
without realizing profit, for purposes of determining liability for VAT
on services rendered. As long as the entity provides service for a
fee, remuneration or consideration, then the service rendered is
subject to VAT.1awp++i1
At any rate, it is a rule that because taxes are the lifeblood of the
nation, statutes that allow exemptions are construed strictly against
the grantee and liberally in favor of the government. Otherwise
stated, any exemption from the payment of a tax must be clearly
stated in the language of the law; it cannot be merely implied
therefrom. 13 In the case of VAT, Section 109, Republic Act 8424
clearly enumerates the transactions exempted from VAT. The
services rendered by COMASERCO do not fall within the
exemptions.
Both the Commissioner of Internal Revenue and the Court of Tax
Appeals correctly ruled that the services rendered by
COMASERCO to Philamlife and its affiliates are subject to VAT. As
pointed out by the Commissioner, the performance of all kinds of
services for others for a fee, remuneration or consideration is
considered as sale of services subject to VAT. As the government
agency charged with the enforcement of the law, the opinion of the
Commissioner of Internal Revenue, in the absence of any showing
that it is plainly wrong, is entitled to great weight. 14 Also, it has
been the long standing policy and practice of this Court to respect
the conclusions of quasi-judicial agencies, such as the Court of
Tax Appeals which, by the nature of its functions, is dedicated
exclusively to the study and consideration of tax cases and has
necessarily developed an expertise on the subject, unless there
has been an abuse or improvident exercise of its authority. 15
There is no merit to respondent's contention that the Court of
Appeals' decision in CA-G.R. No. 34042, declaring the
16 | B A T C H SUBJECT FULLTEXT
COMASERCO as not engaged in business and not liable for the
payment of fixed and percentage taxes, binds petitioner. The issue
in CA-G.R. No. 34042 is different from the present case, which
involves COMASERCO's liability for VAT. As heretofore stated,
every person who sells, barters, or exchanges goods and services,
in the course of trade or business, as defined by law, is subject to
VAT.

WHEREFORE, the Court GRANTS the petition and REVERSES

the decision of the Court of Appeals in CA-G.R. SP No. 37930.
The Court hereby REINSTATES the decision of the Court of Tax
Appeals in C. T. A. Case No. 4853.

No costs.

SO ORDERED.1âwphi1.nêt

17 | B A T C H SUBJECT FULLTEXT
G.R. No. 153205 January 22, 2007
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR
MINDANAO, INC., Respondent.
DECISION
CARPIO, J.:
The Case
1
This petition for review seeks to set aside the 16 April 2002
Decision2 of the Court of Appeals in CA-G.R. SP No. 66341
affirming the 8 August 2001 Decision3 of the Court of Tax Appeals
(CTA). The CTA ordered the Commissioner of Internal Revenue
(petitioner) to issue a tax credit certificate for P6,994,659.67 in
favor of Burmeister and Wain Scandinavian Contractor Mindanao,
Inc. (respondent).
The Antecedents
The CTA summarized the facts, which the Court of Appeals
adopted, as follows:
[Respondent] is a domestic corporation duly organized and
existing under and by virtue of the laws of the Philippines with
principal address located at Daruma Building, Jose P. Laurel
Avenue, Lanang, Davao City.
It is represented that a foreign consortium composed of Burmeister
and Wain Scandinavian Contractor A/S (BWSC-Denmark), Mitsui
Engineering and Shipbuilding, Ltd., and Mitsui and Co., Ltd.
entered into a contract with the National Power Corporation
(NAPOCOR) for the operation and maintenance of [NAPOCOR’s]
two power barges. The Consortium appointed BWSC-Denmark as
its coordination manager.
BWSC-Denmark established [respondent] which subcontracted the
actual operation and maintenance of NAPOCOR’s two power
barges as well as the performance of other duties and acts which
necessarily have to be done in the Philippines.
NAPOCOR paid capacity and energy fees to the Consortium in a
mixture of currencies (Mark, Yen, and Peso). The freely convertible
non-Peso component is deposited directly to the Consortium’s
bank accounts in Denmark and Japan, while the Peso-
denominated component is deposited in a separate and special
designated bank account in the Philippines. On the other hand, the
Consortium pays [respondent] in foreign currency inwardly remitted
to the Philippines through the banking system.
In order to ascertain the tax implications of the above transactions,
[respondent] sought a ruling from the BIR which responded with
BIR Ruling No. 023-95 dated February 14, 1995, declaring therein
that if [respondent] chooses to register as a VAT person and the
consideration for its services is paid for in acceptable foreign
currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas, the aforesaid
services shall be subject to VAT at zero-rate.
[Respondent] chose to register as a VAT taxpayer. On May 26,
1995, the Certificate of Registration bearing RDO Control No. 95-
113-007556 was issued in favor of [respondent] by the Revenue
District Office No. 113 of Davao City.
For the year 1996, [respondent] seasonably filed its quarterly
Value-Added Tax Returns reflecting, among others, a total zero-
rated sales of P147,317,189.62 with VAT input taxes
of P3,361,174.14, detailed as follows:
Date Zero-Rated
Qtr. Exh. VAT Input Tax
Filed Sales
04-18-
1st E P 33,019,651.07 P608,953.48
96
07-16-
2nd F 37,108,863.33 756,802.66
96
10-14-
3rd G 34,196,372.35 930,279.14
96
01-20-
4th H 42,992,302.87 1,065,138.86
97
Totals P147,317,189.62 P3,361,174.14
On December 29, 1997, [respondent] availed of the Voluntary
Assessment Program (VAP) of the BIR. It allegedly misinterpreted
Revenue Regulations No. 5-96 dated February 20, 1996 to be
applicable to its case. Revenue Regulations No. 5-96 provides in
part thus:
SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue
Regulations No. 7-95 are hereby amended to read as follows:
Section 4.102-2(b)(2) – "Services other than processing,
manufacturing or repacking for other persons doing business
outside the Philippines for goods which are subsequently exported,
as well as services by a resident to a non-resident foreign client
such as project studies, information services, engineering and
architectural designs and other similar services, the consideration
for which is paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the BSP."
x x x x x x x x x x.
In [conformity] with the aforecited Revenue Regulations,
[respondent] subjected its sale of services to the Consortium to the
10% VAT in the total amount of P103,558,338.11 representing
April to December 1996 sales since said Revenue Regulations No.
5-96 became effective only on April 1996. The sum
of P43,893,951.07, representing January to March 1996 sales was
subjected to zero rate. Consequently, [respondent] filed its 1996
amended VAT return consolidating therein the VAT output and
input taxes for the four calendar quarters of 1996. It paid the
amount of P6,994,659.67 through BIR’s collecting agent, PCIBank,
as its output tax liability for the year 1996, computed as follows:
Amount subject to 10% VAT P103,558,338.11
Multiply by 10%
VAT Output Tax P 10,355,833.81
Less: 1996 Input VAT P 3,361,174.14
VAT Output Tax Payable P 6,994,659.67
18 | B A T C H SUBJECT FULLTEXT
On January 7,1999, [respondent] was able to secure VAT Ruling
No. 003-99 from the VAT Review Committee which reconfirmed
BIR Ruling No. 023-95 "insofar as it held that the services being
rendered by BWSCMI is subject to VAT at zero percent (0%)."
On the strength of the aforementioned rulings, [respondent] on
April 22,1999, filed a claim for the issuance of a tax credit
certificate with Revenue District No. 113 of the BIR. [Respondent]
believed that it erroneously paid the output VAT for 1996 due to its
availment of the Voluntary Assessment Program (VAP) of the
BIR.4
On 27 December 1999, respondent filed a petition for review with
the CTA in order to toll the running of the two-year prescriptive
period under the Tax Code.
The Ruling of the Court of Tax Appeals
In its 8 August 2001 Decision, the CTA ordered petitioner to issue
a tax credit certificate for P6,994,659.67 in favor of respondent.
The CTA’s ruling stated:
[Respondent’s] sale of services to the Consortium [was] paid for in
acceptable foreign currency inwardly remitted to the Philippines
and accounted for in accordance with the rules and regulations of
Bangko Sentral ng Pilipinas. These were established by various
BPI Credit Memos showing remittances in Danish Kroner (DKK)
and US dollars (US$) as payments for the specific invoices billed
by [respondent] to the consortium. These remittances were further
certified by the Branch Manager x x x of BPI-Davao Lanang
Branch to represent payments for sub-contract fees that came
from Den Danske Aktieselskab Bank-Denmark for the account of
[respondent]. Clearly, [respondent’s] sale of services to the
Consortium is subject to VAT at 0% pursuant to Section 108(B)(2)
of the Tax Code.
xxxx
The zero-rating of [respondent’s] sale of services to the
Consortium was even confirmed by the [petitioner] in BIR Ruling
No. 023-95 dated February 15, 1995, and later by VAT Ruling No.
003-99 dated January 7,1999, x x x.
Since it is apparent that the payments for the services rendered by
[respondent] were indeed subject to VAT at zero percent, it follows
that it mistakenly availed of the Voluntary Assessment Program by
paying output tax for its sale of services. x x x
x x x Considering the principle of solutio indebiti which requires the
return of what has been delivered by mistake, the [petitioner] is
obligated to issue the tax credit certificate prayed for by
[respondent]. x x x5
Petitioner filed a petition for review with the Court of Appeals,
which dismissed the petition for lack of merit and affirmed the CTA
decision.6
Hence, this petition.
The Court of Appeals’ Ruling
In affirming the CTA, the Court of Appeals rejected petitioner’s
view that since respondent’s services are not destined for
consumption abroad, they are not of the same nature as project
studies, information services, engineering and architectural
designs, and other similar services mentioned in Section 4.102-
2(b)(2) of Revenue Regulations No. 5-967 as subject to 0% VAT.
Thus, according to petitioner, respondent’s services cannot legally
qualify for 0% VAT but are subject to the regular 10% VAT. 8
The Court of Appeals found untenable petitioner’s contention that
under VAT Ruling No. 040-98, respondent’s services should be
destined for consumption abroad to enjoy zero-rating. Contrary to
petitioner’s interpretation, there are two kinds of transactions or
services subject to zero percent VAT under VAT Ruling No. 040-
98. These are (a) services other than repacking goods for other
persons doing business outside the Philippines which goods are
subsequently exported; and (b) services by a resident to a non-
resident foreign client, such as project studies, information
services, engineering and architectural designs and other similar
services, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas (BSP).9
The Court of Appeals stated that "only the first classification is
required by the provision to be consumed abroad in order to be
taxed at zero rate. In x x x the absence of such express or implied
stipulation in the statute, the second classification need not be
consumed abroad."10
The Court of Appeals further held that assuming petitioner’s
interpretation of Section 4.102-2(b)(2) of Revenue Regulations No.
5-96 is correct, such administrative provision is void being an
amendment to the Tax Code. Petitioner went beyond merely
providing the implementing details by adding another requirement
to zero-rating. "This is indicated by the additional phrase ‘as well
as services by a resident to a non-resident foreign client, such as
project studies, information services and engineering and
architectural designs and other similar services.’ In effect, this
phrase adds not just one but two requisites: (a) services must be
rendered by a resident to a non-resident; and (b) these must be in
the nature of project studies, information services, etc."11
The Court of Appeals explained that under Section 108(b)(2) of the
Tax Code,12 for services which were performed in the Philippines
to enjoy zero-rating, these must comply only with two requisites, to
wit: (1) payment in acceptable foreign currency and (2) accounted
for in accordance with the rules of the BSP. Section 108(b)(2) of
the Tax Code does not provide that services must be "destined for
consumption abroad" in order to be VAT zero-rated.13
The Court of Appeals disagreed with petitioner’s argument that our
VAT law generally follows the destination principle (i.e., exports
exempt, imports taxable).14 The Court of Appeals stated that "if
indeed the ‘destination principle’ underlies and is the basis of the
VAT laws, then petitioner’s proper remedy would be to recommend
an amendment of Section 108(b)(2) to Congress. Without such
amendment, however, petitioner should apply the terms of the
basic law. Petitioner could not resort to administrative legislation,
as what [he] had done in this case."15
The Issue
The lone issue for resolution is whether respondent is entitled to
the refund of P6,994,659.67 as erroneously paid output VAT for
the year 1996.16
The Ruling of the Court
We deny the petition.
At the outset, the Court declares that the denial of the instant
petition is not on the ground that respondent’s services are subject
to 0% VAT. Rather, it is based on the non-retroactivity of the
prejudicial revocation of BIR Ruling No. 023-9517 and VAT Ruling
19 | B A T C H SUBJECT FULLTEXT
No. 003-99,18 which held that respondent’s services are subject to
0% VAT and which respondent invoked in applying for refund of
the output VAT.
Section 102(b) of the Tax Code, 19 the applicable provision in 1996
when respondent rendered the services and paid the VAT in
question, enumerates which services are zero-rated, thus:
(b) Transactions subject to zero-rate. ― The following services
performed in the Philippines by VAT-registered persons shall be
subject to 0%:
(1) Processing, manufacturing or repacking goods for
other persons doing business outside the
Philippines which goods are subsequently exported,
where the services are paid for in acceptable foreign
currency and accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas(BSP);
(2) Services other than those mentioned in the
preceding sub-paragraph, the consideration for which
is paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP);
(3) Services rendered to persons or entities whose
exemption under special laws or international
agreements to which the Philippines is a signatory
effectively subjects the supply of such services to zero
rate;
(4) Services rendered to vessels engaged exclusively in
international shipping; and
(5) Services performed by subcontractors and/or
contractors in processing, converting, or manufacturing
goods for an enterprise whose export sales exceed
seventy percent (70%) of total annual production.
(Emphasis supplied)
In insisting that its services should be zero-rated, respondent
claims that it complied with the requirements of the Tax Code for
zero rating under the second paragraph of Section 102(b).
Respondent asserts that (1) the payment of its service fees was in
acceptable foreign currency, (2) there was inward remittance of the
foreign currency into the Philippines, and (3) accounting of such
remittance was in accordance with BSP rules. Moreover,
respondent contends that its services which "constitute the actual
operation and management of two (2) power barges in Mindanao"
are not "even remotely similar to project studies, information
services and engineering and architectural designs under Section
4.102-2(b)(2) of Revenue Regulations No. 5-96." As such,
respondent’s services need not be "destined to be consumed
abroad in order to be VAT zero-rated."
Respondent is mistaken.
The Tax Code not only requires that the services be other than
"processing, manufacturing or repacking of goods" and that
payment for such services be in acceptable foreign currency
accounted for in accordance with BSP rules. Another essential
condition for qualification to zero-rating under Section 102(b)(2) is
that the recipient of such services is doing business outside the
Philippines. While this requirement is not expressly stated in the
second paragraph of Section 102(b), this is clearly provided in the
first paragraph of Section 102(b) where the listed services must be
"for other persons doing business outside the Philippines." The
phrase "for other persons doing business outside the Philippines"
not only refers to the services enumerated in the first paragraph of
Section 102(b), but also pertains to the general term "services"
appearing in the second paragraph of Section 102(b). In short,
services other than processing, manufacturing, or repacking of
goods must likewise be performed for persons doing business
outside the Philippines.
This can only be the logical interpretation of Section 102(b)(2). If
the provider and recipient of the "other services" are both doing
business in the Philippines, the payment of foreign currency is
irrelevant. Otherwise, those subject to the regular VAT under
Section 102(a) can avoid paying the VAT by simply stipulating
payment in foreign currency inwardly remitted by the recipient of
services. To interpret Section 102(b)(2) to apply to a payer-
recipient of services doing business in the Philippines is to make
the payment of the regular VAT under Section 102(a) dependent
on the generosity of the taxpayer. The provider of services can
choose to pay the regular VAT or avoid it by stipulating payment in
foreign currency inwardly remitted by the payer-recipient. Such
interpretation removes Section 102(a) as a tax measure in the Tax
Code, an interpretation this Court cannot sanction. A tax is a
mandatory exaction, not a voluntary contribution.
When Section 102(b)(2) stipulates payment in "acceptable foreign
currency" under BSP rules, the law clearly envisions the payer-
recipient of services to be doing business outside the Philippines.
Only those not doing business in the Philippines can be required
under BSP rules20 to pay in acceptable foreign currency for their
purchase of goods or services from the Philippines. In a domestic
transaction, where the provider and recipient of services are both
doing business in the Philippines, the BSP cannot require any
party to make payment in foreign currency.
Services covered by Section 102(b) (1) and (2) are in the nature of
export sales since the payer-recipient of services is doing business
outside the Philippines. Under BSP rules, 21 the proceeds of export
sales must be reported to the Bangko Sentral ng Pilipinas. Thus,
there is reason to require the provider of services under Section
102(b) (1) and (2) to account for the foreign currency proceeds to
the BSP. The same rationale does not apply if the provider and
recipient of the services are both doing business in the Philippines
since their transaction is not in the nature of an export sale even if
payment is denominated in foreign currency.
Further, when the provider and recipient of services are both doing
business in the Philippines, their transaction falls squarely under
Section 102(a) governing domestic sale or exchange of services.
Indeed, this is a purely local sale or exchange of services subject
to the regular VAT, unless of course the transaction falls under the
other provisions of Section 102(b).
Thus, when Section 102(b)(2) speaks of "[s]ervices other than
those mentioned in the preceding subparagraph," the
legislative intent is that only the services are different between
subparagraphs 1 and 2. The requirements for zero-rating,
including the essential condition that the recipient of services is
doing business outside the Philippines, remain the same under
both subparagraphs.
Significantly, the amended Section 108(b) 22 [previously Section
102(b)] of the present Tax Code clarifies this legislative intent.
Expressly included among the transactions subject to 0% VAT are
"[s]ervices other than those mentioned in the [first] paragraph [of
Section 108(b)] rendered to a person engaged in business
conducted outside the Philippines or to a nonresident person not
engaged in business who is outside the Philippines when the
services are performed, the consideration for which is paid for in
acceptable foreign currency and accounted for in accordance with
the rules and regulations of the BSP."
20 | B A T C H SUBJECT FULLTEXT
In this case, the payer-recipient of respondent’s services is the
Consortium which is a joint-venture doing business in the
Philippines. While the Consortium’s principal members are non-
resident foreign corporations, the Consortium itself is doing
business in the Philippines. This is shown clearly in BIR Ruling No.
023-95 which states that the contract between the Consortium and
NAPOCOR is for a 15-year term, thus:
This refers to your letter dated January 14, 1994 requesting for a
clarification of the tax implications of a contract between a
consortium composed of Burmeister & Wain Scandinavian
Contractor A/S ("BWSC"), Mitsui Engineering & Shipbuilding, Ltd.
(MES), and Mitsui & Co., Ltd. ("MITSUI"), all referred to hereinafter
as the "Consortium", and the National Power Corporation
("NAPOCOR") for the operation and maintenance of two 100-
Megawatt power barges ("Power Barges") acquired by
NAPOCOR for a 15-year term.23 (Emphasis supplied)
Considering this length of time, the Consortium’s operation and
maintenance of NAPOCOR’s power barges cannot be classified as
a single or isolated transaction. The Consortium does not fall
under Section 102(b)(2) which requires that the recipient of the
services must be a person doing business outside the Philippines.
Therefore, respondent’s services to the Consortium, not being
supplied to a person doing business outside the Philippines,
cannot legally qualify for 0% VAT.
Respondent, as subcontractor of the Consortium, operates and
maintains NAPOCOR’s power barges in the Philippines.
NAPOCOR pays the Consortium, through its non-resident
partners, partly in foreign currency outwardly remitted. In turn, the
Consortium pays respondent also in foreign currency inwardly
remitted and accounted for in accordance with BSP rules. This
payment scheme does not entitle respondent to 0% VAT. As the
Court held in Commissioner of Internal Revenue v. American
Express International, Inc. (Philippine Branch), 24 the place of
payment is immaterial, much less is the place where the output of
the service is ultimately used. An essential condition for entitlement
to 0% VAT under Section 102(b)(1) and (2) is that the recipient of
the services is a person doing business outside the Philippines. In
this case, the recipient of the services is the Consortium, which is
doing business not outside, but within the Philippines because it
has a 15-year contract to operate and maintain NAPOCOR’s two
100-megawatt power barges in Mindanao.
In contrast, this case involves a recipient of services – the
Consortium – which is doing business in the Philippines. Hence,
American Express’ services were subject to 0% VAT, while
respondent’s services should be subject to 10% VAT.
Nevertheless, in seeking a refund of its excess output tax,
respondent relied on VAT Ruling No. 003-99,28 which reconfirmed
BIR Ruling No. 023-9529 "insofar as it held that the services being
rendered by BWSCMI is subject to VAT at zero percent (0%)."
Respondent’s reliance on these BIR rulings binds petitioner.
Petitioner’s filing of his Answer before the CTA challenging
respondent’s claim for refund effectively serves as a revocation of
VAT Ruling No. 003-99 and BIR Ruling No. 023-95. However, such
revocation cannot be given retroactive effect since it will prejudice
respondent. Changing respondent’s status will deprive respondent
of a refund of a substantial amount representing excess output
tax.30 Section 246 of the Tax Code provides that any revocation of
a ruling by the Commissioner of Internal Revenue shall not be
given retroactive application if the revocation will prejudice the
taxpayer. Further, there is no showing of the existence of any of
the exceptions enumerated in Section 246 of the Tax Code for the
retroactive application of such revocation.
However, upon the filing of petitioner’s Answer dated 2 March
2000 before the CTA contesting respondent’s claim for refund,
respondent’s services shall be subject to the regular 10%
VAT.31 Such filing is deemed a revocation of VAT Ruling No. 003-
99 and BIR Ruling No. 023-95.
WHEREFORE, the Court DENIES the petition.
SO ORDERED.

The Court recognizes the rule that the VAT system generally
follows the "destination principle" (exports are zero-rated whereas
imports are taxed). However, as the Court stated in American
Express, there is an exception to this rule.25 This exception refers
to the 0% VAT on services enumerated in Section 102 and
performed in the Philippines. For services covered by Section
102(b)(1) and (2), the recipient of the services must be a person
doing business outside the Philippines. Thus, to be exempt from
the destination principle under Section 102(b)(1) and (2), the
services must be (a) performed in the Philippines; (b) for a person
doing business outside the Philippines; and (c) paid in acceptable
foreign currency accounted for in accordance with BSP rules.

Respondent’s reliance on the ruling in American Express 26 is

misplaced. That case involved a recipient of services, specifically
American Express International, Inc. (Hongkong Branch), doing
business outside the Philippines. There, the Court stated:

Respondent [American Express International, Inc. (Philippine

Branch)] is a VAT-registered person that facilitates the collection
and payment of receivables belonging to its non-resident foreign
client [American Express International, Inc. (Hongkong Branch)],
for which it gets paid in acceptable foreign currency inwardly
remitted and accounted for in accordance with BSP rules and
regulations. x x x x27 (Emphasis supplied)
21 | B A T C H SUBJECT FULLTEXT
G.R. No. 178697 November 17, 2010 Basic Tax Due

COMMISSIONER OF INTERNAL REVENUE, Petitioner, Add: Penalties

vs.
Surcharge
SONY PHILIPPINES, INC., Respondent.
Interest up to 3-31-2000
DECISION
Compromise

MENDOZA, J.: Penalties Due

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 LATE REMITTANCE OF FINAL WITHHOLDING TAX
Appeals – En Banc1 (CTA-EB), in C.T.A. EB No. 90, affirming the
October 26, 2004 Decision of the CTA-First Division2 which, in (Assessment No. ST-LR2-97-0127-2000)
turn, partially granted the petition for review of respondent Sony
Basic Tax Due
Philippines, Inc. (Sony). The CTA-First Division decision cancelled
the deficiency assessment issued by petitioner Commissioner of Add: Penalties
Internal Revenue (CIR) against Sony for Value Added
Tax (VAT) but upheld the deficiency assessment for expanded Surcharge
withholding tax (EWT) in the amount of ₱1,035,879.70 and the
penalties for late remittance of internal revenue taxes in the Interest up to 3-31-2000
amount of ₱1,269, 593.90.3
Compromise

THE FACTS: Penalties Due

On November 24, 1998, the CIR issued Letter of Authority No.

000019734 (LOA 19734) authorizing certain revenue officers to LATE REMITTANCE OF INCOME PAYMENTS
examine Sony’s books of accounts and other accounting records
regarding revenue taxes for "the period 1997 and unverified (Assessment No. ST-LR3-97-0128-2000)
prior years." On December 6, 1999, a preliminary assessment for
1997 deficiency taxes and penalties was issued by the CIR which Basic Tax Due
Sony protested. Thereafter, acting on the protest, the CIR issued Add: Penalties
final assessment notices, the formal letter of demand and the
details of discrepancies.4 Said details of the deficiency taxes and 25 % Surcharge
penalties for late remittance of internal revenue taxes are as
follows: Interest up to 3-31-2000

Compromise
DEFICIENCY VALUE -ADDED TAX (VAT)
Penalties Due
(Assessment No. ST-VAT-97-0124-2000)

Basic Tax Due P 7,958,700.00

Add: Penalties
GRAND TOTAL
Interest up to 3-31-2000 P 3,157,314.41

Compromise 25,000.00 3,182,314.41

Deficiency VAT Due Sony sought re-evaluation of P the aforementioned

11,141,014.41assessment 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
DEFICIENCY EXPANDED WITHHOLDING TAX (EWT)

(Assessment No. ST-EWT-97-0125-2000) On October 24, 2000, within 30 days after the lapse of 180 days
from submission of the said supporting documents to the CIR,
Basic Tax Due P before 1,416,976.90
Sony filed a petition for review the CTA. 7
Add: Penalties
After trial, the CTA-First Division disallowed the deficiency VAT
Interest up to 3-31-2000 P
assessment 550,485.82
because the subsidized advertising expense paid by
Sony which was duly covered by a VAT invoice resulted in an input
Compromise 25,000.00
VAT credit. As regards 575,485.82
the EWT, the CTA-First Division maintained
Deficiency EWT Due the deficiency EWT assessment P on Sony’s
1,992,462.72vehicles and on
motor
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
DEFICIENCY OF VAT ON ROYALTY PAYMENTS Regulations No. 6-85. The CTA-First Division, however, disallowed
the EWT assessment on rental expense since it found that the
(Assessment No. ST-LR1-97-0126-2000) total rental deposit of ₱10,523,821.99 was incurred from January
to March 1998 which was again beyond the coverage of LOA
22 | B A T C H SUBJECT FULLTEXT
19734. Except for the compromise penalties, the CTA-First
Division also upheld the penalties for the late payment of VAT on
royalties, for late remittance of final withholding tax on royalty as of
December 1997 and for the late remittance of EWT by some of
Sony’s branches.8 In sum, the CTA-First Division partly granted
Sony’s petition by cancelling the deficiency VAT assessment but
upheld a modified deficiency EWT assessment as well as the
penalties. Thus, the dispositive portion reads:
WHEREFORE, the petition for review is hereby PARTIALLY
GRANTED. Respondent is ORDERED to CANCEL and
WITHDRAW the deficiency assessment for value-added tax for
1997 for lack of merit. However, the deficiency assessments for
expanded withholding tax and penalties for late remittance of
internal revenue taxes are UPHELD.
Accordingly, petitioner is DIRECTED to PAY the respondent the
deficiency expanded withholding tax in the amount of
₱1,035,879.70 and the following penalties for late remittance of
internal revenue taxes in the sum of ₱1,269,593.90:
1. VAT on Royalty P 429,242.07
2. Withholding Tax on Royalty 831,428.20
3. EWT of Petitioner's Branches 8,923.63
Total P 1,269,593.90
Plus 20% delinquency interest from January 17, 2000 until fully
paid pursuant to Section 249(C)(3) of the 1997 Tax Code.
SO ORDERED.9
The CIR sought a reconsideration of the above decision and
submitted the following grounds in support thereof:
A. The Honorable Court committed reversible error in
holding that petitioner is not liable for the deficiency VAT
in the amount of ₱11,141,014.41;
B. The Honorable court committed reversible error in
holding that the commission expense in the amount of
P2,894,797.00 should be subjected to 5% withholding tax
instead of the 10% tax rate;
C. The Honorable Court committed a reversible error in
holding that the withholding tax assessment with respect
to the 5% withholding tax on rental deposit in the amount
of ₱10,523,821.99 should be cancelled; and
D. The Honorable Court committed reversible error in
holding that the remittance of final withholding tax on
royalties covering the period January to March 1998 was
filed on time.10
On April 28, 2005, the CTA-First Division denied the motion for
reconsideration.1avvphi1 Unfazed, the CIR filed a petition for
review with the CTA-EB raising identical issues:
1. Whether or not respondent (Sony) is liable for the
deficiency VAT in the amount of P11,141,014.41;
2. Whether or not the commission expense in the amount
of ₱2,894,797.00 should be subjected to 10%
withholding tax instead of the 5% tax rate;
3. Whether or not the withholding assessment with
respect to the 5% withholding tax on rental deposit in the
amount of ₱10,523,821.99 is proper; and
4. Whether or not the remittance of final withholding tax
on royalties covering the period January to March 1998
was filed outside of time.11
Finding no cogent reason to reverse the decision of the CTA-First
Division, the CTA-EB dismissed CIR’s petition on May 17, 2007.
CIR’s motion for reconsideration was denied by the CTA-EB on
July 5, 2007.
The CIR is now before this Court via this petition for review relying
on the very same grounds it raised before the CTA-First Division
and the CTA-EB. The said grounds are reproduced below:
GROUNDS FOR THE ALLOWANCE OF THE PETITION
I
THE CTA EN BANC ERRED IN RULING THAT RESPONDENT
IS NOT LIABLE FOR DEFICIENCY VAT IN THE AMOUNT OF
PHP11,141,014.41.
II
AS TO RESPONDENT’S DEFICIENCY EXPANDED
WITHHOLDING TAX IN THE AMOUNT OF PHP1,992,462.72:
A. THE CTA EN BANC ERRED IN RULING
THAT THE COMMISSION EXPENSE IN THE
AMOUNT OF PHP2,894,797.00 SHOULD BE
SUBJECTED TO A WITHHOLDING TAX OF
5% INSTEAD OF THE 10% TAX RATE.
B. THE CTA EN BANC ERRED IN RULING
THAT THE ASSESSMENT WITH RESPECT
TO THE 5% WITHHOLDING TAX ON
RENTAL DEPOSIT IN THE AMOUNT OF
PHP10,523,821.99 IS NOT PROPER.
III
THE CTA EN BANC ERRED IN RULING THAT THE FINAL
WITHHOLDING TAX ON ROYALTIES COVERING THE PERIOD
JANUARY TO MARCH 1998 WAS FILED ON TIME.12
Upon filing of Sony’s comment, the Court ordered the CIR to file its
reply thereto. The CIR subsequently filed a manifestation informing
the Court that it would no longer file a reply. Thus, on December 3,
2008, the Court resolved to give due course to the petition and to
decide the case on the basis of the pleadings filed. 13
The Court finds no merit in the petition.
The CIR insists that LOA 19734, although it states "the period
1997 and unverified prior years," should be understood to mean
the fiscal year ending in March 31, 1998.14 The Court cannot
agree.
Based on Section 13 of the Tax Code, a Letter of Authority or LOA
is the authority given to the appropriate revenue officer assigned to
perform assessment functions. It empowers or enables said
revenue officer to examine the books of account and other
23 | B A T C H SUBJECT FULLTEXT
accounting records of a taxpayer for the purpose of collecting the
correct amount of tax.15 The very provision of the Tax Code that
the CIR relies on is unequivocal with regard to its power to grant
authority to examine and assess a taxpayer.
SEC. 6. Power of the Commissioner to Make Assessments and
Prescribe Additional Requirements for Tax Administration and
Enforcement. –
(A)Examination of Returns and Determination of tax Due. – After a
return has been filed as required under the provisions of this Code,
the Commissioner or his duly authorized representative may
authorize the examination of any taxpayer and the assessment of
the correct amount of tax: Provided, however, That failure to file a
return shall not prevent the Commissioner from authorizing the
examination of any taxpayer. x x x [Emphases supplied]
Clearly, there must be a grant of authority before any revenue
officer can conduct an examination or assessment. Equally
important is that the revenue officer so authorized must not go
beyond the authority given. In the absence of such an authority,
the assessment or examination is a nullity.
As earlier stated, LOA 19734 covered "the period 1997 and
unverified prior years." For said reason, the CIR acting through its
revenue officers went beyond the scope of their authority because
the deficiency VAT assessment they arrived at was based on
records from January to March 1998 or using the fiscal year which
ended in March 31, 1998. As pointed out by the CTA-First Division
in its April 28, 2005 Resolution, the CIR knew which period should
be covered by the investigation. Thus, if CIR wanted or intended
the investigation to include the year 1998, it should have done so
by including it in the LOA or issuing another LOA.
Upon review, the CTA-EB even added that the coverage of LOA
19734, particularly the phrase "and unverified prior years," violated
Section C of Revenue Memorandum Order No. 43-90 dated
September 20, 1990, the pertinent portion of which reads:
3. A Letter of Authority should cover a taxable period not
exceeding one taxable year. The practice of issuing L/As
covering audit of "unverified prior years is hereby prohibited. If the
audit of a taxpayer shall include more than one taxable period, the
other periods or years shall be specifically indicated in the
L/A.16 [Emphasis supplied]
On this point alone, the deficiency VAT assessment should have
been disallowed. Be that as it may, the CIR’s argument, that
Sony’s advertising expense could not be considered as an input
VAT credit because the same was eventually reimbursed by Sony
International Singapore (SIS), is also erroneous.
The CIR contends that since Sony’s advertising expense was
reimbursed by SIS, the former never incurred any advertising
expense. As a result, Sony is not entitled to a tax credit. At most,
the CIR continues, the said advertising expense should be for the
account of SIS, and not Sony.17
The Court is not persuaded. As aptly found by the CTA-First
Division and later affirmed by the CTA-EB, Sony’s deficiency VAT
assessment stemmed from the CIR’s disallowance of the input
VAT credits that should have been realized from the advertising
expense of the latter.18 It is evident under Section 11019 of the
1997 Tax Code that an advertising expense duly covered by a
VAT invoice is a legitimate business expense. This is confirmed by
no less than CIR’s own witness, Revenue Officer Antonio
Aluquin.20 There is also no denying that Sony incurred advertising
expense. Aluquin testified that advertising companies issued
invoices in the name of Sony and the latter paid for the
same.21 Indubitably, Sony incurred and paid for advertising
expense/ services. Where the money came from is another matter
all together but will definitely not change said fact.
The CIR further argues that Sony itself admitted that the
reimbursement from SIS was income and, thus, taxable. In support
of this, the CIR cited a portion of Sony’s protest filed before it:
The fact that due to adverse economic conditions, Sony-Singapore
has granted to our client a subsidy equivalent to the latter’s
advertising expenses will not affect the validity of the input taxes
from such expenses. Thus, at the most, this is an additional
income of our client subject to income tax. We submit further that
our client is not subject to VAT on the subsidy income as this was
not derived from the sale of goods or services.22
Insofar as the above-mentioned subsidy may be considered as
income and, therefore, subject to income tax, the Court agrees.
However, the Court does not agree that the same subsidy should
be subject to the 10% VAT. To begin with, the said subsidy termed
by the CIR as reimbursement was not even exclusively earmarked
for Sony’s advertising expense for it was but an assistance or aid
in view of Sony’s dire or adverse economic conditions, and was
only "equivalent to the latter’s (Sony’s) advertising expenses."
Section 106 of the Tax Code explains when VAT may be imposed
or exacted. Thus:
SEC. 106. Value-added Tax on Sale of Goods or Properties. –
(A) Rate and Base of Tax. – There shall be levied, assessed and
collected on every sale, barter or exchange of goods or properties,
value-added tax equivalent to ten percent (10%) of the gross
selling price or gross value in money of the goods or properties
sold, bartered or exchanged, such tax to be paid by the seller or
transferor.
Thus, there must be a sale, barter or exchange of goods or
properties before any VAT may be levied. Certainly, there was no
such sale, barter or exchange in the subsidy given by SIS to Sony.
It was but a dole out by SIS and not in payment for goods or
properties sold, bartered or exchanged by Sony.
In the case of CIR v. Court of Appeals (CA),23 the Court had the
occasion to rule that services rendered for a fee even on
reimbursement-on-cost basis only and without realizing profit are
also subject to VAT. The case, however, is not applicable to the
present case. In that case, COMASERCO rendered service to its
affiliates and, in turn, the affiliates paid the former reimbursement-
on-cost which means that it was paid the cost or expense that it
incurred although without profit. This is not true in the present
case. Sony did not render any service to SIS at all. The services
rendered by the advertising companies, paid for by Sony using SIS
dole-out, were for Sony and not SIS. SIS just gave assistance to
Sony in the amount equivalent to the latter’s advertising expense
but never received any goods, properties or service from Sony.
Regarding the deficiency EWT assessment, more particularly
Sony’s commission expense, the CIR insists that said deficiency
EWT assessment is subject to the ten percent (10%) rate instead
of the five percent (5%) citing Revenue Regulation No. 2-98 dated
April 17, 1998.24 The said revenue regulation provides that the
10% rate is applied when the recipient of the commission income
is a natural person. According to the CIR, Sony’s schedule of
Selling, General and Administrative expenses shows the
commission expense as "commission/dealer salesman incentive,"
emphasizing the word salesman.
24 | B A T C H SUBJECT FULLTEXT
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%.
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.

The Court also affirms the findings of both the CTA-First Division WHEREFORE, the petition is DENIED.
and the CTA-EB on the deficiency EWT assessment on the rental
deposit. According to their findings, Sony incurred the subject SO ORDERED.
rental deposit in the amount of ₱10,523,821.99 only from January
to March 1998. As stated earlier, in the absence of the appropriate
LOA specifying the coverage, the CIR’s deficiency EWT
assessment from January to March 1998, is not valid and must be
disallowed.

Finally, the Court now proceeds to the third ground relied upon by
the CIR.

The CIR initially assessed Sony to be liable for penalties for

belated remittance of its FWT on royalties (i) as of December
1997; and (ii) for the period from January to March 1998. Again,
the Court agrees with the CTA-First Division when it upheld the
CIR with respect to the royalties for December 1997 but cancelled
that from January to March 1998.

The CIR insists that under Section 328 of Revenue Regulations No.
5-82 and Sections 2.57.4 and 2.58(A)(2)(a)29 of Revenue
Regulations No. 2-98, Sony should also be made liable for the
FWT on royalties from January to March of 1998. At the same
time, it downplays the relevance of the Manufacturing License
Agreement (MLA) between Sony and Sony-Japan, particularly in
the payment of royalties.

The above revenue regulations provide the manner of withholding

remittance as well as the payment of final tax on royalty. Based on
the same, Sony is required to deduct and withhold final taxes on
royalty payments when the royalty is paid or is payable. After
which, the corresponding return and remittance must be made

25 | B A T C H SUBJECT FULLTEXT
G.R. No. 158885 October 2, 2009
FORT BONIFACIO DEVELOPMENT CORPORATION Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, REGIONAL
DIRECTOR, REVENUE REGION NO. 8, and CHIEF,
ASSESSMENT DIVISION, REVENUE REGION NO. 8,
BIR, Respondents.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 170680
FORT BONIFACIO DEVELOPMENT CORPORATION Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, REVENUE
DISTRICT OFFICER, REVENUE DISTRICT NO. 44, TAGUIG and
PATEROS, BUREAU OF INTERNAL REVENUE. Respondents.
RESOLUTION
LEONARDO-DE CASTRO, J.:
Before us is respondents’ Motion for Reconsideration of our
Decision dated April 2, 2009 which granted the consolidated
petitions of petitioner Fort Bonifacio Development Corporation, the
dispositive portion of which reads:
WHEREFORE, the petitions are GRANTED. The assailed
decisions of the Court of Tax Appeals and the Court of Appeals
are REVERSED and SET ASIDE. Respondents are hereby (1)
restrained from collecting from petitioner the amount of
₱28,413,783.00 representing the transitional input tax credit due it
for the fourth quarter of 1996; and (2) directed to refund to
petitioner the amount of ₱347,741,695.74 paid as output VAT for
the third quarter of 1997 in light of the persisting transitional input
tax credit available to petitioner for the said quarter, or to issue a
tax credit corresponding to such amount. No pronouncement as to
costs.
The Motion for Reconsideration raises the following arguments:
I Internal Revenue Code of 1997 (New NIRC), also officially known
SECTION 100 OF THE OLD NATIONAL INTERNAL REVENUE
CODE (OLD NIRC), AS AMENDED BY REPUBLIC ACT (R.A.)
NO. 7716, COULD NOT HAVE SUPPLIED THE DISTINCTION
BETWEEN THE TREATMENT OF REAL PROPERTIES OR REAL
ESTATE DEALERS ON THE ONE HAND, AND THE
TREATMENT OF TRANSACTIONS INVOLVING OTHER
COMMERCIAL GOODS ON THE OTHER HAND, AS SAID
DISTINCTION IS FOUND IN SECTION 105 AND,
SUBSEQUENTLY, REVENUE REGULATIONS NO. 7-95 WHICH
DEFINES THE INPUT TAX CREDITABLE TO A REAL ESTATE
DEALER WHO BECOMES SUBJECT TO VAT FOR THE FIRST
TIME.
II
SECTION 4.105.1 AND PARAGRAPH (A) (III) OF THE
TRANSITORY PROVISIONS OF REVENUE REGULATIONS NO.
7-95 VALIDLY LIMIT THE 8% TRANSITIONAL INPUT TAX TO
THE IMPROVEMENTS ON REAL PROPERTIES.
III
REVENUE REGULATIONS NO. 6-97 DID NOT REPEAL
REVENUE REGULATIONS NO. 7-95.
The instant motion for reconsideration lacks merit.
The first VAT law, found in Executive Order (EO) No. 273 [1987],
took effect on January 1, 1988. It amended several provisions of
the National Internal Revenue Code of 1986 (Old NIRC). EO 273
likewise accommodated the potential burdens of the shift to the
VAT system by allowing newly VAT-registered persons to avail of a
transitional input tax credit as provided for in Section 105 of the
Old NIRC. Section 105 as amended by EO 273 reads:
Sec. 105. Transitional Input Tax Credits. — A person who
becomes liable to value-added tax or any person who elects to be
a VAT-registered person shall, subject to the filing of an inventory
as prescribed by regulations, be allowed input tax on his beginning
inventory of goods, materials and supplies equivalent to 8% of the
value of such inventory or the actual value-added tax paid on such
goods, materials and supplies, whichever is higher, which shall be
creditable against the output tax.
RA 7716 took effect on January 1, 1996. It amended Section 100
of the Old NIRC by imposing for the first time value-added-tax on
sale of real properties. The amendment reads:
Sec. 100. Value-added-tax on sale of goods or properties. — (a)
Rate and base of tax. — There shall be levied, assessed and
collected on every sale, barter or exchange of goods or properties,
a value-added tax equivalent to 10% of the gross selling price or
gross value in money of the goods, or properties sold, bartered or
exchanged, such tax to be paid by the seller or transferor.1avvph!1
(1) The term 'goods or properties' shall mean all tangible and
intangible objects which are capable of pecuniary estimation and
shall include:
(A) Real properties held primarily for sale to customers or held for
lease in the ordinary course of trade or business; xxx
The provisions of Section 105 of the NIRC, on the transitional input
tax credit, remain intact despite the enactment of RA 7716. Section
105 however was amended with the passage of the new National
as Republic Act (RA) 8424. The provisions on the transitional input
tax credit are now embodied in Section 111(A) of the New NIRC,
which reads:
Section 111. Transitional/Presumptive Input Tax Credits. –
(A) Transitional Input Tax Credits. - A person who becomes liable
to value-added tax or any person who elects to be a VAT-
registered person shall, subject to the filing of an inventory
according to rules and regulations prescribed by the Secretary of
finance, upon recommendation of the Commissioner, be allowed
input tax on his beginning inventory of goods, materials and
supplies equivalent for 8% of the value of such inventory or the
actual value-added tax paid on such goods, materials and
supplies, whichever is higher, which shall be creditable against the
output tax. [Emphasis ours.]
The Commissioner of Internal Revenue (CIR) disallowed Fort
Bonifacio Development Corporation’s (FBDC) presumptive input
tax credit arising from the land inventory on the basis of Revenue
Regulation 7-95 (RR 7-95) and Revenue Memorandum Circular 3-
96 (RMC 3-96). Specifically, Section 4.105-1 of RR 7-95 provides:
26 | B A T C H SUBJECT FULLTEXT
Sec. 4.105-1. Transitional input tax on beginning inventories. –
Taxpayers who became VAT-registered persons upon effectivity of
RA No. 7716 who have exceeded the minimum turnover of
₱500,000.00 or who voluntarily register even if their turnover does
not exceed ₱500,000.00 shall be entitled to a presumptive input
tax on the inventory on hand as of December 31, 1995 on the
following: (a) goods purchased for resale in their present condition;
(b) materials purchased for further processing, but which have not
yet undergone processing; (c) goods which have been
manufactured by the taxpayer; (d) goods in process and supplies,
all of which are for sale or for use in the course of the taxpayer’s
trade or business as a VAT-registered person.
However, in the case of real estate dealers, the basis of the
presumptive input tax shall be the improvements, such as
buildings, roads, drainage systems, and other similar structures,
constructed on or after the effectivity of EO 273 (January 1, 1988).
The transitional input tax shall be 8% of the value of the inventory
or actual VAT paid, whichever is higher, which amount may be
allowed as tax credit against the output tax of the VAT-registered
person.
In the April 2, 2009 Decision sought to be reconsidered, the Court
struck down Section 4.105-1 of RR 7-95 for being in conflict with
the law. It held that the CIR had no power to limit the meaning and
coverage of the term "goods" in Section 105 of the Old NIRC sans
statutory authority or basis and justification to make such limitation.
This it did when it restricted the application of Section 105 in the
case of real estate dealers only to improvements on the real
property belonging to their beginning inventory.
A law must not be read in truncated parts; its provisions must be
read in relation to the whole law. It is the cardinal rule in statutory
construction that a statute’s clauses and phrases must not be
taken as detached and isolated expressions, but the whole and
every part thereof must be considered in fixing the meaning of any
of its parts in order to produce a harmonious whole. Every part of
the statute must be interpreted with reference to the context, i.e.,
that every part of the statute must be considered together with
other parts of the statute and kept subservient to the general intent
of the whole enactment.1
In construing a statute, courts have to take the thought conveyed
by the statute as a whole; construe the constituent parts together;
ascertain the legislative intent from the whole act; consider each
and every provision thereof in the light of the general purpose of
the statute; and endeavor to make every part effective,
harmonious and sensible.2
The statutory definition of the term "goods or properties" leaves no
room for doubt. It states:
Sec. 100. Value-added tax on sale of goods or properties. – (a)
Rate and base of tax. – xxx.
(1) The term ‘goods or properties’ shall mean all tangible and
intangible objects which are capable of pecuniary estimation and
shall include:
(A) Real properties held primarily for sale to customers or held for
lease in the ordinary course of trade or business; xxx.
The amendatory provision of Section 105 of the NIRC, as
introduced by RA 7716, states:
Sec. 105. Transitional Input tax Credits. – A person who becomes
liable to value-added tax or any person who elects to be a VAT-
registered person shall, subject to the filing of an inventory as
prescribed by regulations, be allowed input tax on his beginning
inventory of goods, materials and supplies equivalent to 8% of the
value of such inventory or the actual value-added tax paid on such
goods, materials and supplies, whichever is higher, which shall be
creditable against the output tax.
The term "goods or properties" by the unambiguous terms of
Section 100 includes "real properties held primarily for sale to
costumers or held for lease in the ordinary course of business."
Having been defined in Section 100 of the NIRC, the term "goods"
as used in Section 105 of the same code could not have a different
meaning. This has been explained in the Decision dated April 2,
2009, thus:
Under Section 105, the beginning inventory of "goods" forms part
of the valuation of the transitional input tax credit. Goods, as
commonly understood in the business sense, refers to the product
which the VAT-registered person offers for sale to the public. With
respect to real estate dealers, it is the real properties themselves
which constitute their "goods." Such real properties are the
operating assets of the real estate dealer.
Section 4.100-1 of RR No. 7-95 itself includes in its enumeration of
"goods or properties" such "real properties held primarily for sale to
customers or held for lease in the ordinary course of trade or
business." Said definition was taken from the very statutory
language of Section 100 of the Old NIRC. By limiting the definition
of goods to "improvements" in Section 4.105-1, the BIR not only
contravened the definition of "goods" as provided in the Old NIRC,
but also the definition which the same revenue regulation itself has
provided.
Section 4.105-1 of RR 7-95 restricted the definition of "goods", viz:
However, in the case of real estate dealers, the basis of the
presumptive input tax shall be the improvements, such as
buildings, roads, drainage systems, and other similar structures,
constructed on or after the effectivity of EO 273 (January 1, 1988).
As mandated by Article 7 of the Civil Code,3 an administrative rule
or regulation cannot contravene the law on which it is based. RR
7-95 is inconsistent with Section 105 insofar as the definition of the
term "goods" is concerned. This is a legislative act beyond the
authority of the CIR and the Secretary of Finance. The rules and
regulations that administrative agencies promulgate, which are the
product of a delegated legislative power to create new and
additional legal provisions that have the effect of law, should be
within the scope of the statutory authority granted by the
legislature to the objects and purposes of the law, and should not
be in contradiction to, but in conformity with, the standards
prescribed by law.
To be valid, an administrative rule or regulation must conform, not
contradict, the provisions of the enabling law. An implementing rule
or regulation cannot modify, expand, or subtract from the law it is
intended to implement. Any rule that is not consistent with the
statute itself is null and void. 4
While administrative agencies, such as the Bureau of Internal
Revenue, may issue regulations to implement statutes, they are
without authority to limit the scope of the statute to less than what
it provides, or extend or expand the statute beyond its terms, or in
any way modify explicit provisions of the law. Indeed, a quasi-
judicial body or an administrative agency for that matter cannot
amend an act of Congress. Hence, in case of a discrepancy
between the basic law and an interpretative or administrative
ruling, the basic law prevails.5
27 | B A T C H SUBJECT FULLTEXT
To recapitulate, RR 7-95, insofar as it restricts the definition of
"goods" as basis of transitional input tax credit under Section 105
is a nullity.
On January 1, 1997, RR 6-97 was issued by the Commissioner of
Internal Revenue. RR 6-97 was basically a reiteration of the same
Section 4.105-1 of RR 7-95, except that the RR 6-97 deleted the
following paragraph:
However, in the case of real estate dealers, the basis of the
presumptive input tax shall be the improvements, such as
buildings, roads, drainage systems, and other similar structures,
constructed on or after the effectivity of E.O. 273 (January 1,
1988).
VAT. The transitional input tax credit mitigates this initial diminution
of the taxpayer’s income by affording the opportunity to offset the
losses incurred through the remittance of the output VAT at a
stage when the person is yet unable to credit input VAT payments.
As pointed out in Our Decision of April 2, 2009, to give Section 105
a restrictive construction that transitional input tax credit applies
only when taxes were previously paid on the properties in the
beginning inventory and there is a law imposing the tax which is
presumed to have been paid, is to impose conditions or requisites
to the application of the transitional tax input credit which are not
found in the law. The courts must not read into the law what is not
there. To do so will violate the principle of separation of powers
which prohibits this Court from engaging in judicial legislation.6

It is clear, therefore, that under RR 6-97, the allowable transitional WHEREFORE, premises considered, the Motion for
input tax credit is not limited to improvements on real properties. Reconsideration is DENIED WITH FINALITY for lack of merit.
The particular provision of RR 7-95 has effectively been repealed
by RR 6-97 which is now in consonance with Section 100 of the SO ORDERED.
NIRC, insofar as the definition of real properties as goods is
concerned. The failure to add a specific repealing clause would not TERESITA J. LEONARDO-DE CASTRO
necessarily indicate that there was no intent to repeal RR 7-95. Associate Justice
The fact that the aforequoted paragraph was deleted created an
irreconcilable inconsistency and repugnancy between the
provisions of RR 6-97 and RR 7-95. WE CONCUR:

We now address the points raised in the dissenting opinion of the REYNATO S. PUNO
Honorable Justice Antonio T. Carpio. Chief Justice

At the outset, it must be stressed that FBDC sought the refund of

the total amount of ₱347,741,695.74 which it had itself paid in (On official leave)
CONSUELO YNARES-
cash to the BIR. It is argued that the transitional input tax credit LEONARDO A.
SANTIAGO
applies only when taxes were previously paid on the properties in QUISUMBING*
Associate Justice
the beginning inventory and that there should be a law imposing Associate Justice
the tax presumed to have been paid. The thesis is anchored on the
argument that without any VAT or other input business tax
ANTONIO T. CARPIO RENATO C. CORONA
imposed by law on the real properties at the time of the sale, the
Associate Justice Associate Justice
8% transitional input tax cannot be presumed to have been paid.

The language of Section 105 is explicit. It precludes reading into CONCHITA CARPIO MINITA V. CHICO-
the law that the transitional input tax credit is limited to the amount MORALES NAZARIO
of VAT previously paid. When the aforesaid section speaks of Associate Justice Associate Justice
"eight percent (8%) of the value of such inventory" followed by the
clause "or the actual value-added tax paid on such goods, PRESBITERO J. ANTONIO EDUARDO B.
materials and supplies," the implication is clear that under the first VELASCO, JR. NACHURA
clause, "eight percent (8%) of the value of such inventory," the law Associate Justice Associate Justice
does not contemplate the payment of any prior tax on such
inventory. This is distinguished from the second clause, "the actual
value-added tax paid on the goods, materials and supplies" where (On leave)
actual payment of VAT on the goods, materials and supplies is LUCAS P. BERSAMIN
ARTURO D. BRION**
assumed. Had the intention of the law been to limit the amount to Associate Justice
Associate Justice
the actual VAT paid, there would have been no need to explicitly
allow a claim based on 8% of the value of such inventory.
MARIANO C. DEL
DIOSDADO M. PERALTA
CASTILLO
The contention that the 8% transitional input tax credit in Section Associate Justice
Associate Justice
105 presumes that a previous tax was paid, whether or not it was
actually paid, requires a transaction where a tax has been imposed
by law, is utterly without basis in law. The rationale behind the
provisions of Section 105 was aptly elucidated in the Decision ROBERTO A. ABAD
sought to be reconsidered, thus: Associate Justice

It is apparent that the transitional input tax credit operates to CERTIFICATION

benefit newly VAT-registered persons, whether or not they
previously paid taxes in the acquisition of their beginning inventory Pursuant to Section 13, Article VIII of the Constitution, I certify that
of goods, materials and supplies. During that period of transition the conclusions in the above decision had been reached in
from non-VAT to VAT status, the transitional input tax credit serves consultation before the case was assigned to the writer of the
to alleviate the impact of the VAT on the taxpayer. At the very opinion of the Court.
beginning, the VAT-registered taxpayer is obliged to remit a
significant portion of the income it derived from its sales as output
28 | B A T C H SUBJECT FULLTEXT
REYNATO S. PUNO
Chief Justice
Footnotes
* On official leave.
** On sick leave.
1
The Civil Service Commission v. Joson, G.R. No.
154674, May 27, 2004, 429 SCRA 773,786.
2
Republic v. Reyes, No. L- 22550, May 19, 1966, 17
SCRA 170,173.
3
Art. 7. xxx
Administrative or executive acts, orders and
regulations shall be valid only when they are
not contrary to the laws or the constitution.
4
Francel Realty Corporation v. Sycip, G.R. No. 154684,
September 8, 2005, 469 SCRA 424, 436.
5 VAT. However, since the land itself was not subject to VAT or to
Sunga v. Commission on Elections, G.R. No. 125629,
March 25, 1998, 288 SCRA 78, 87.
6 Thus, the 8% transitional input tax should apply only to
Alagad (Partido ng Maralitang-Lungsod) v. Commission
on Elections, G.R. No. 136795, October 6, 2000, 342
SCRA 244, 291
The Lawphil Project - Arellano Law Foundation
DISSENTING OPINION
CARPIO, J.:
I vote to grant the motion for reconsideration filed by the
Commissioner of Internal Revenue.
The decision dated 2 April 2009 grants to petitioner a tax
credit or refund of ₱347,741,695.74 when petitioner never in
fact paid a single centavo of tax to the Bureau of Internal
Revenue. A tax credit or tax refund requires that a previous
tax was paid by the taxpayer. There can be no tax credit or
refund if no prior tax was paid. In this case, the decision dated
2 April 2009 grants to petitioner hundreds of millions in tax
credit or refund without the taxpayer ever having paid any
previous tax to the government. Who will bear this burden of
tax credit or refund? It is all taxpayers in this country except,
of course, petitioner. What makes petitioner so privileged?
The Constitution mandates that "the rule of taxation shall be
uniform and equitable."1 There is certainly neither uniformity nor
equity if this Court grants petitioner a ₱347,741,695.74 tax credit
or refund when all other taxpayers seeking a tax credit or refund
must first show prior payment of a tax, or at least the existence of a
law imposing the tax for which a credit or refund is sought.
The transitional input tax credit was placed in the tax law to pave
the smooth transition from the non-VAT to the VAT system. This
input VAT works by deducting previously paid taxes from the
output VAT liability in subsequent transactions involving the same
product. The term "transitional" was placed to distinguish this from
an ordinary input tax.
In 1995, when petitioner bought the Global City land from the
national government, the sale was under a tax-free transaction and
without any VAT component. Being tax-exempt, the national
government did not pass on any previous input business tax,
whether in the form of sales tax or VAT, to petitioner as part of the
purchase price.1avvphi1
The 8% transitional input tax credit in Section 105 presumes
that a previous tax was paid, whether or not it was actually
paid. Such presumption assumes the existence of a law
imposing the tax presumed to have been paid. This can be
inferred from the provision that a taxpayer is "allowed input
tax on his beginning inventory xxx equivalent to 8% xxx, or
the actual value-added tax paid xxx, whichever is higher." The
transitional input tax requires a transaction where a tax has
been imposed by law. Otherwise, the presumption that the tax
has been paid will have no basis. Without any VAT or other
input business tax imposed by law on real properties at the
time of the sale in the present case, the 8% transitional input
tax cannot be presumed to have been paid.
Also, even before real estate dealers became subject to VAT
under RA 7716, improvements on the land were already subject to
any input tax prior to RA 7716, the land then could not be
considered part of the beginning inventory under Section 105.
improvements on land and not on the land itself.
To repeat, at the time of the sale by the government of the Global
City land in 1995, there was no VAT on the sale of land. In
addition, the government, as seller, was not subject to VAT. Even if
the sale transaction happens today with the VAT on real properties
already in existence, and petitioner subsequently resells the land,
petitioner will still not be entitled to any input tax credit. This is
because the sale by the national government of government-
owned land is not subject to VAT.2 Petitioner cannot now claim any
input tax credit if it buys the same land today, and resells the same
the following day.
Thus, if a real estate dealer like petitioner cannot claim an input tax
today on its purchase of government land, when VAT on real
properties is already in effect, then all the more petitioner cannot
claim any input tax for its 1995 purchase of government land when
the E-VAT law was still inexistent and petitioner had not yet been
subjected to VAT.
Accordingly, I vote to GRANT the Motion for Reconsideration.
29 | B A T C H SUBJECT FULLTEXT
G.R. No. 153866 February 11, 2005
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
SEAGATE TECHNOLOGY (PHILIPPINES), respondent.
DECISION
PANGANIBAN, J.:
Business companies registered in and operating from the Special
Economic Zone in Naga, Cebu -- like herein respondent --
are entities exempt from all internal revenue taxes and the
implementing rules relevant thereto, including the value-added
taxes or VAT. Although export sales are not deemed
exempt transactions, they are nonetheless zero-rated. Hence, in
the present case, the distinction between exempt entities and
exempt transactions has little significance, because the net result
is that the taxpayer is not liable for the VAT. Respondent, a VAT-
registered enterprise, has complied with all requisites for claiming
a tax refund of or credit for the input VAT it paid on capital goods it
purchased. Thus, the Court of Tax Appeals and the Court of
Appeals did not err in ruling that it is entitled to such refund or
credit.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of
Court, seeking to set aside the May 27, 2002 Decision2 of the
Court of Appeals (CA) in CA-GR SP No. 66093. The decretal
portion of the Decision reads as follows:
"WHEREFORE, foregoing premises considered, the petition for
review is DENIED for lack of merit."3
The Facts
The CA quoted the facts narrated by the Court of Tax Appeals
(CTA), as follows:
"As jointly stipulated by the parties, the pertinent facts x x x
involved in this case are as follows:
1. [Respondent] is a resident foreign corporation duly registered
with the Securities and Exchange Commission to do business in
the Philippines, with principal office address at the new Cebu
Township One, Special Economic Zone, Barangay Cantao-an,
Naga, Cebu;
2. [Petitioner] is sued in his official capacity, having been duly
appointed and empowered to perform the duties of his office,
including, among others, the duty to act and approve claims for
refund or tax credit;
3. [Respondent] is registered with the Philippine Export Zone
Authority (PEZA) and has been issued PEZA Certificate No. 97-
044 pursuant to Presidential Decree No. 66, as amended, to
engage in the manufacture of recording components primarily
used in computers for export. Such registration was made on 6
June 1997;
4. [Respondent] is VAT [(Value Added Tax)]-registered entity as
evidenced by VAT Registration Certification No. 97-083-000600-V
issued on 2 April 1997;
5. VAT returns for the period 1 April 1998 to 30 June 1999 have
been filed by [respondent];
6. An administrative claim for refund of VAT input taxes in the
amount of P28,369,226.38 with supporting documents (inclusive of
the P12,267,981.04 VAT input taxes subject of this Petition for
Review), was filed on 4 October 1999 with Revenue District Office
No. 83, Talisay Cebu;
7. No final action has been received by [respondent] from
[petitioner] on [respondent’s] claim for VAT refund.
"The administrative claim for refund by the [respondent] on
October 4, 1999 was not acted upon by the [petitioner] prompting
the [respondent] to elevate the case to [the CTA] on July 21, 2000
by way of Petition for Review in order to toll the running of the two-
year prescriptive period.
"For his part, [petitioner] x x x raised the following Special and
Affirmative Defenses, to wit:
1. [Respondent’s] alleged claim for tax refund/credit is subject to
administrative routinary investigation/examination by [petitioner’s]
Bureau;
2. Since ‘taxes are presumed to have been collected in
accordance with laws and regulations,’ the [respondent] has the
burden of proof that the taxes sought to be refunded were
erroneously or illegally collected x x x;
3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997),
the Supreme Court ruled that:
"A claimant has the burden of proof to establish the factual basis of
his or her claim for tax credit/refund."
4. Claims for tax refund/tax credit are construed in ‘strictissimi juris’
against the taxpayer. This is due to the fact that claims for
refund/credit [partake of] the nature of an exemption from tax.
Thus, it is incumbent upon the [respondent] to prove that it is
indeed entitled to the refund/credit sought. Failure on the part of
the [respondent] to prove the same is fatal to its claim for tax
credit. He who claims exemption must be able to justify his claim
by the clearest grant of organic or statutory law. An exemption
from the common burden cannot be permitted to exist upon vague
implications;
5. Granting, without admitting, that [respondent] is a Philippine
Economic Zone Authority (PEZA) registered Ecozone Enterprise,
then its business is not subject to VAT pursuant to Section 24 of
Republic Act No. ([RA]) 7916 in relation to Section 103 of the Tax
Code, as amended. As [respondent’s] business is not subject to
VAT, the capital goods and services it alleged to have purchased
are considered not used in VAT taxable business. As such,
[respondent] is not entitled to refund of input taxes on such capital
goods pursuant to Section 4.106.1 of Revenue Regulations No.
([RR])7-95, and of input taxes on services pursuant to Section
4.103 of said regulations.
6. [Respondent] must show compliance with the provisions of
Section 204 (C) and 229 of the 1997 Tax Code on filing of a written
claim for refund within two (2) years from the date of payment of
tax.’
"On July 19, 2001, the Tax Court rendered a decision granting the
claim for refund."4
30 | B A T C H SUBJECT FULLTEXT
 Ruling of the Court of Appeals
The CA affirmed the Decision of the CTA granting the claim for
refund or issuance of a tax credit certificate (TCC) in favor of
respondent in the reduced amount of P12,122,922.66. This sum
represented the unutilized but substantiated input VAT paid on
capital goods purchased for the period covering April 1, 1998 to
June 30, 1999.
The appellate court reasoned that respondent had availed itself
only of the fiscal incentives under Executive Order No. (EO) 226
(otherwise known as the Omnibus Investment Code of 1987), not
of those under both Presidential Decree No. (PD) 66, as amended,
and Section 24 of RA 7916. Respondent was, therefore,
considered exempt only from the payment of income tax when it
opted for the income tax holiday in lieu of the 5 percent preferential
tax on gross income earned. As a VAT-registered entity, though, it
was still subject to the payment of other national internal revenue
taxes, like the VAT.
Moreover, the CA held that neither Section 109 of the Tax Code
nor Sections 4.106-1 and 4.103-1 of RR 7-95 were applicable.
Having paid the input VAT on the capital goods it purchased,
respondent correctly filed the administrative and judicial claims for
its refund within the two-year prescriptive period. Such payments
were -- to the extent of the refundable value -- duly supported by
VAT invoices or official receipts, and were not yet offset against
any output VAT liability.
Hence this Petition. 5 negotiable tax credits24 for locally-produced materials used as
Sole Issue
Petitioner submits this sole issue for our consideration:
"Whether or not respondent is entitled to the refund or issuance of
Tax Credit Certificate in the amount of P12,122,922.66
representing alleged unutilized input VAT paid on capital goods
purchased for the period April 1, 1998 to June 30, 1999." 6
The Court’s Ruling
The Petition is unmeritorious.
Sole Issue:
Entitlement of a VAT-Registered PEZA Enterprise to a Refund of
or Credit for Input VAT
No doubt, as a PEZA-registered enterprise within a special
economic zone,7 respondent is entitled to the fiscal incentives and
benefits8 provided for in either PD 669 or EO 226.10 It shall,
moreover, enjoy all privileges, benefits, advantages or exemptions
under both Republic Act Nos. (RA) 722711 and 7844.12
Preferential Tax Treatment Under Special Laws
If it avails itself of PD 66, notwithstanding the provisions of other
laws to the contrary, respondent shall not be subject to internal
revenue laws and regulations for raw materials, supplies, articles,
equipment, machineries, spare parts and wares, except those
prohibited by law, brought into the zone to be stored, broken up,
repacked, assembled, installed, sorted, cleaned, graded or
otherwise processed, manipulated, manufactured, mixed or used
directly or indirectly in such activities.13 Even so, respondent would
enjoy a net-operating loss carry over; accelerated depreciation;
foreign exchange and financial assistance; and exemption from
export taxes, local taxes and licenses.14
Comparatively, the same exemption from internal revenue laws
and regulations applies if EO 22615 is chosen. Under this law,
respondent shall further be entitled to an income tax holiday;
additional deduction for labor expense; simplification of customs
procedure; unrestricted use of consigned equipment; access to a
bonded manufacturing warehouse system; privileges for foreign
nationals employed; tax credits on domestic capital equipment, as
well as for taxes and duties on raw materials; and exemption from
contractors’ taxes, wharfage dues, taxes and duties on imported
capital equipment and spare parts, export taxes, duties, imposts
and fees,16 local taxes and licenses, and real property taxes. 17
A privilege available to respondent under the provision in RA 7227
on tax and duty-free importation of raw materials, capital and
equipment18 -- is, ipso facto, also accorded to the zone19 under RA
7916. Furthermore, the latter law -- notwithstanding other existing
laws, rules and regulations to the contrary -- extends20 to that zone
the provision stating that no local or national taxes shall be
imposed therein.21 No exchange control policy shall be applied;
and free markets for foreign exchange, gold, securities and future
shall be allowed and maintained.22 Banking and finance shall also
be liberalized under minimum Bangko Sentral regulation with the
establishment of foreign currency depository units of local
commercial banks and offshore banking units of foreign banks.23
In the same vein, respondent benefits under RA 7844 from
inputs. Aside from the other incentives possibly already granted to
it by the Board of Investments, it also enjoys preferential credit
facilities25 and exemption from PD 1853.26
From the above-cited laws, it is immediately clear that petitioner
enjoys preferential tax treatment.27 It is not subject to internal
revenue laws and regulations and is even entitled to tax credits.
The VAT on capital goods is an internal revenue tax from which
petitioner as an entity is exempt. Although
the transactions involving such tax are not exempt, petitioner as a
VAT-registered person,28 however, is entitled to their credits.
Nature of the VAT and the Tax Credit Method
Viewed broadly, the VAT is a uniform tax ranging, at present, from
0 percent to 10 percent levied on every importation of goods,
whether or not in the course of trade or business, or imposed on
each sale, barter, exchange or lease of goods or properties or on
each rendition of services in the course of trade or business 29 as
they pass along the production and distribution chain, the tax being
limited only to the value added30 to such goods, properties or
services by the seller, transferor or lessor.31 It is an indirect tax that
may be shifted or passed on to the buyer, transferee or lessee of
the goods, properties or services.32 As such, it should be
understood not in the context of the person or entity that is
primarily, directly and legally liable for its payment, but in terms of
its nature as a tax on consumption.33 In either case, though, the
same conclusion is arrived at.
The law34 that originally imposed the VAT in the country, as well as
the subsequent amendments of that law, has been drawn from
the tax credit method.35 Such method adopted the mechanics and
self-enforcement features of the VAT as first implemented and
practiced in Europe and subsequently adopted in New Zealand
and Canada.36 Under the present method that relies on invoices,
an entity can credit against or subtract from the VAT charged on its
sales or outputs the VAT paid on its purchases, inputs and
imports.37
31 | B A T C H SUBJECT FULLTEXT
If at the end of a taxable quarter the output taxes 38 charged by a
seller39 are equal to the input taxes40 passed on by the suppliers,
no payment is required. It is when the output taxes exceed the
input taxes that the excess has to be paid. 41 If, however, the input
taxes exceed the output taxes, the excess shall be carried over to
the succeeding quarter or quarters.42 Should the input taxes result
from zero-rated or effectively zero-rated transactions or from the
acquisition of capital goods,43 any excess over the output taxes
shall instead be refunded44 to the taxpayer or credited45 against
other internal revenue taxes.46
Zero-Rated and Effectively Zero-Rated Transactions
Although both are taxable and similar in effect, zero-rated
transactions differ from effectively zero-rated transactions as to
their source.
Zero-rated transactions generally refer to the export sale of goods
and supply of services.47 The tax rate is set at zero.48 When applied
to the tax base, such rate obviously results in no tax chargeable
against the purchaser. The seller of such transactions charges no
output tax,49 but can claim a refund of or a tax credit certificate for
the VAT previously charged by suppliers.
Effectively zero-rated transactions, however, refer to the sale of
goods50 or supply of services51 to persons or entities whose
exemption under special laws or international agreements to which
the Philippines is a signatory effectively subjects such transactions
to a zero rate.52 Again, as applied to the tax base, such rate does
not yield any tax chargeable against the purchaser. The seller who
charges zero output tax on such transactions can also claim a
refund of or a tax credit certificate for the VAT previously charged
by suppliers.
Zero Rating and Exemption
In terms of the VAT computation, zero rating and exemption are
the same, but the extent of relief that results from either one of
them is not.
Applying the destination principle53 to the exportation of goods,
automatic zero rating54 is primarily intended to be enjoyed by the
seller who is directly and legally liable for the VAT, making such
seller internationally competitive by allowing the refund or credit of
input taxes that are attributable to export sales.55 Effective zero
rating, on the contrary, is intended to benefit the purchaser who,
not being directly and legally liable for the payment of the VAT, will
ultimately bear the burden of the tax shifted by the suppliers.
In both instances of zero rating, there is total relief for the
purchaser from the burden of the tax.56 But in an exemption there
is only partial relief,57 because the purchaser is not allowed any tax
refund of or credit for input taxes paid.58
Exempt Transaction >and Exempt Party
The object of exemption from the VAT may either be the
transaction itself or any of the parties to the transaction. 59
An exempt transaction, on the one hand, involves goods or
services which, by their nature, are specifically listed in and
expressly exempted from the VAT under the Tax Code, without
regard to the tax status -- VAT-exempt or not -- of the party to
the transaction.60 Indeed, such transaction is not subject to the
VAT, but the seller is not allowed any tax refund of or credit for any
input taxes paid.
An exempt party, on the other hand, is a person or entity granted
VAT exemption under the Tax Code, a special law or an
international agreement to which the Philippines is a signatory, and
by virtue of which its taxable transactions become exempt from the
VAT.61 Such party is also not subject to the VAT, but may be
allowed a tax refund of or credit for input taxes paid, depending on
its registration as a VAT or non-VAT taxpayer.
As mentioned earlier, the VAT is a tax on consumption, the
amount of which may be shifted or passed on by the seller to the
purchaser of the goods, properties or services.62 While
the liability is imposed on one person, the burden may be passed
on to another. Therefore, if a special law merely exempts a party
as a seller from its direct liability for payment of the VAT, but does
not relieve the same party as a purchaser from its indirect burden
of the VAT shifted to it by its VAT-registered suppliers, the
purchase transaction is not exempt. Applying this principle to the
case at bar, the purchase transactions entered into by respondent
are not VAT-exempt.
Special laws may certainly exempt transactions from the
VAT.63 However, the Tax Code provides that those falling under
PD 66 are not. PD 66 is the precursor of RA 7916 -- the special
law under which respondent was registered. The
purchase transactions it entered into are, therefore, not VAT-
exempt. These are subject to the VAT; respondent is required to
register.
Its sales transactions, however, will either be zero-rated or taxed at
the standard rate of 10 percent,64 depending again on the
application of the destination principle.65
If respondent enters into such sales transactions with a purchaser -
- usually in a foreign country -- for use or consumption outside the
Philippines, these shall be subject to 0 percent. 66 If entered into
with a purchaser for use or consumption in the Philippines, then
these shall be subject to 10 percent,67 unless the purchaser is
exempt from the indirect burden of the VAT, in which case it shall
also be zero-rated.
Since the purchases of respondent are not exempt from the VAT,
the rate to be applied is zero. Its exemption under both PD 66 and
RA 7916 effectively subjects such transactions to a zero
rate,68 because the ecozone within which it is registered is
managed and operated by the PEZA as a separate customs
territory.69 This means that in such zone is created the legal fiction
of foreign territory.70 Under the cross-border principle71 of the VAT
system being enforced by the Bureau of Internal Revenue
(BIR),72 no VAT shall be imposed to form part of the cost of goods
destined for consumption outside of the territorial border of the
taxing authority. If exports of goods and services from the
Philippines to a foreign country are free of the VAT, 73 then the
same rule holds for such exports from the national territory --
except specifically declared areas -- to an ecozone.
Sales made by a VAT-registered person in the customs territory to
a PEZA-registered entity are considered exports to a foreign
country; conversely, sales by a PEZA-registered entity to a VAT-
registered person in the customs territory are deemed imports from
a foreign country.74 An ecozone -- indubitably a geographical
territory of the Philippines -- is, however, regarded in law as foreign
soil.75 This legal fiction is necessary to give meaningful effect to the
policies of the special law creating the zone. 76 If respondent is
located in an export processing zone77 within that ecozone, sales
to the export processing zone, even without being actually
exported, shall in fact be viewed as constructively exported under
EO 226.78 Considered as export sales,79 such purchase
transactions by respondent would indeed be subject to a zero
rate.80
32 | B A T C H SUBJECT FULLTEXT
Tax Exemptions Broad and Express
Applying the special laws we have earlier discussed, respondent
as an entity is exempt from internal revenue laws and regulations.
This exemption covers both direct and indirect taxes, stemming
from the very nature of the VAT as a tax on consumption, for which
the direct liability is imposed on one person but the
indirect burden is passed on to another. Respondent, as an
exempt entity, can neither be directly charged for the VAT on its
sales nor indirectly made to bear, as added cost to such sales, the
equivalent VAT on its purchases. Ubi lex non distinguit, nec nos
distinguere debemus. Where the law does not distinguish, we
ought not to distinguish.
Moreover, the exemption is both express and pervasive for the
following reasons:
First, RA 7916 states that "no taxes, local and national, shall be
imposed on business establishments operating within the
ecozone."81 Since this law does not exclude the VAT from the
prohibition, it is deemed included. Exceptio firmat regulam in
casibus non exceptis. An exception confirms the rule in cases not
excepted; that is, a thing not being excepted must be regarded as
coming within the purview of the general rule.
Moreover, even though the VAT is not imposed on the entity but
on the transaction, it may still be passed on and, therefore,
indirectly imposed on the same entity -- a patent circumvention of
the law. That no VAT shall be imposed directly upon business
establishments operating within the ecozone under RA 7916 also
means that no VAT may be passed on and imposed
indirectly. Quando aliquid prohibetur ex directo prohibetur et per
obliquum. When anything is prohibited directly, it is also prohibited
indirectly.
Second, when RA 8748 was enacted to amend RA 7916, the
same prohibition applied, except for real property taxes that
presently are imposed on land owned by developers. 82 This similar
and repeated prohibition is an unambiguous ratification of the law’s
intent in not imposing local or national taxes on business
enterprises within the ecozone.
Third, foreign and domestic merchandise, raw materials,
equipment and the like "shall not be subject to x x x internal
revenue laws and regulations" under PD 6683 -- the original charter
of PEZA (then EPZA) that was later amended by RA 7916. 84 No
provisions in the latter law modify such exemption.
Although this exemption puts the government at an initial
disadvantage, the reduced tax collection ultimately redounds to the
benefit of the national economy by enticing more business
investments and creating more employment opportunities. 85
Fourth, even the rules implementing the PEZA law clearly reiterate
that merchandise -- except those prohibited by law -- "shall not be
subject to x x x internal revenue laws and regulations x x x" 86 if
brought to the ecozone’s restricted area87 for manufacturing by
registered export enterprises,88 of which respondent is one. These
rules also apply to all enterprises registered with the EPZA prior to
the effectivity of such rules.89
Fifth, export processing zone enterprises registered90 with the
Board of Investments (BOI) under EO 226 patently enjoy
exemption from national internal revenue taxes on imported capital
equipment reasonably needed and exclusively used for the
manufacture of their products;91 on required supplies and spare
part for consigned equipment;92 and on foreign and domestic
merchandise, raw materials, equipment and the like -- except
those prohibited by law -- brought into the zone for
manufacturing.93 In addition, they are given credits for the value of
the national internal revenue taxes imposed on domestic capital
equipment also reasonably needed and exclusively used for the
manufacture of their products,94 as well as for the value of such
taxes imposed on domestic raw materials and supplies that are
used in the manufacture of their export products and that form part
thereof.95
Sixth, the exemption from local and national taxes granted under
RA 722796 are ipso facto accorded to ecozones.97In case of doubt,
conflicts with respect to such tax exemption privilege shall be
resolved in favor of the ecozone.98
And seventh, the tax credits under RA 7844 -- given for imported
raw materials primarily used in the production of export
goods,99 and for locally produced raw materials, capital equipment
and spare parts used by exporters of non-traditional products100 --
shall also be continuously enjoyed by similar exporters within the
ecozone.101 Indeed, the latter exporters are likewise entitled to
such tax exemptions and credits.
Tax Refund as Tax Exemption
To be sure, statutes that grant tax exemptions are
construed strictissimi juris102 against the taxpayer103 and liberally in
favor of the taxing authority.104
Tax refunds are in the nature of such exemptions. 105 Accordingly,
the claimants of those refunds bear the burden of proving the
factual basis of their claims;106 and of showing, by words too plain
to be mistaken, that the legislature intended to exempt them. 107 In
the present case, all the cited legal provisions are teeming with life
with respect to the grant of tax exemptions too vivid to pass
unnoticed. In addition, respondent easily meets the challenge.
Respondent, which as an entity is exempt, is different from its
transactions which are not exempt. The end result, however, is that
it is not subject to the VAT. The non-taxability of transactions that
are otherwise taxable is merely a necessary incident to the tax
exemption conferred by law upon it as an entity, not upon the
transactions themselves.108 Nonetheless, its exemption as an entity
and the non-exemption of its transactions lead to the same result
for the following considerations:
First, the contemporaneous construction of our tax laws by BIR
authorities who are called upon to execute or administer such
laws109 will have to be adopted. Their prior tax issuances have held
inconsistent positions brought about by their probable failure to
comprehend and fully appreciate the nature of the VAT as a tax on
consumption and the application of the destination
principle.110 Revenue Memorandum Circular No. (RMC) 74-99,
however, now clearly and correctly provides that any VAT-
registered supplier’s sale of goods, property or services from the
customs territory to any registered enterprise operating in the
ecozone -- regardless of the class or type of the latter’s PEZA
registration -- is legally entitled to a zero rate.111
Second, the policies of the law should prevail. Ratio legis est
anima. The reason for the law is its very soul.
In PD 66, the urgent creation of the EPZA which preceded the
PEZA, as well as the establishment of export processing zones,
seeks "to encourage and promote foreign commerce as a means
of x x x strengthening our export trade and foreign exchange
position, of hastening industrialization, of reducing domestic
33 | B A T C H SUBJECT FULLTEXT
unemployment, and of accelerating the development of the
country."112
RA 7916, as amended by RA 8748, declared that by creating the
PEZA and integrating the special economic zones, "the
government shall actively encourage, promote, induce and
accelerate a sound and balanced industrial, economic and social
development of the country x x x through the establishment,
among others, of special economic zones x x x that shall
effectively attract legitimate and productive foreign investments." 113
Under EO 226, the "State shall encourage x x x foreign
investments in industry x x x which shall x x x meet the tests of
international competitiveness[,] accelerate development of less
developed regions of the country[,] and result in increased volume
and value of exports for the economy."114 Fiscal incentives that are
cost-efficient and simple to administer shall be devised and
extended to significant projects "to compensate for market
imperfections, to reward performance contributing to economic
development,"115 and "to stimulate the establishment and assist
initial operations of the enterprise."116
Wisely accorded to ecozones created under RA 7916117 was the
government’s policy -- spelled out earlier in RA 7227 -- of
converting into alternative productive uses118 the former military
reservations and their extensions,119 as well as of providing them
incentives120 to enhance the benefits that would be derived from
them121 in promoting economic and social development.122
Finally, under RA 7844, the State declares the need "to evolve
export development into a national effort"123 in order to win
international markets. By providing many export and tax
incentives,124 the State is able to drive home the point that
exporting is indeed "the key to national survival and the means
through which the economic goals of increased employment and
enhanced incomes can most expeditiously be achieved." 125
The Tax Code itself seeks to "promote sustainable economic
growth x x x; x x x increase economic activity; and x x x create a
robust environment for business to enable firms to compete better
in the regional as well as the global market." 126 After all,
international competitiveness requires economic and tax incentives
to lower the cost of goods produced for export. State actions that
affect global competition need to be specific and selective in the
pricing of particular goods or services. 127
All these statutory policies are congruent to the constitutional
mandates of providing incentives to needed investments, 128 as well
as of promoting the preferential use of domestic materials and
locally produced goods and adopting measures to help make
these competitive.129 Tax credits for domestic inputs strengthen
backward linkages. Rightly so, "the rule of law and the existence of
credible and efficient public institutions are essential prerequisites
for sustainable economic development."130
VAT Registration, Not Application for Effective Zero Rating,
Indispensable to VAT Refund
Registration is an indispensable requirement under our VAT
law.131 Petitioner alleges that respondent did register for VAT
purposes with the appropriate Revenue District Office. However, it
is now too late in the day for petitioner to challenge the VAT-
registered status of respondent, given the latter’s prior
representation before the lower courts and the mode of appeal
taken by petitioner before this Court.
The PEZA law, which carried over the provisions of the EPZA law,
is clear in exempting from internal revenue laws and regulations
the equipment -- including capital goods -- that registered
enterprises will use, directly or indirectly, in manufacturing. 132 EO
226 even reiterates this privilege among the incentives it gives to
such enterprises.133Petitioner merely asserts that by virtue of the
PEZA registration alone of respondent, the latter is not subject to
the VAT. Consequently, the capital goods and services respondent
has purchased are not considered used in the VAT business, and
no VAT refund or credit is due.134 This is a non sequitur. By the
VAT’s very nature as a tax on consumption, the capital goods and
services respondent has purchased are subject to the VAT,
although at zero rate. Registration does not determine taxability
under the VAT law.
Moreover, the facts have already been determined by the lower
courts. Having failed to present evidence to support its contentions
against the income tax holiday privilege of respondent,135 petitioner
is deemed to have conceded. It is a cardinal rule that "issues and
arguments not adequately and seriously brought below cannot be
raised for the first time on appeal."136 This is a "matter of
procedure"137 and a "question of fairness."138 Failure to assert
"within a reasonable time warrants a presumption that the party
entitled to assert it either has abandoned or declined to assert
it."139
The BIR regulations additionally requiring an approved prior
application for effective zero rating140 cannot prevail over the clear
VAT nature of respondent’s transactions. The scope of such
regulations is not "within the statutory authority x x x granted by the
legislature.141
First, a mere administrative issuance, like a BIR regulation, cannot
amend the law; the former cannot purport to do any more than
interpret the latter.142 The courts will not countenance one that
overrides the statute it seeks to apply and implement. 143
Other than the general registration of a taxpayer the VAT status of
which is aptly determined, no provision under our VAT law requires
an additional application to be made for such taxpayer’s
transactions to be considered effectively zero-rated. An effectively
zero-rated transaction does not and cannot become exempt simply
because an application therefor was not made or, if made, was
denied. To allow the additional requirement is to give unfettered
discretion to those officials or agents who, without fluid
consideration, are bent on denying a valid application. Moreover,
the State can never be estopped by the omissions, mistakes or
errors of its officials or agents.144
Second, grantia argumenti that such an application is required by
law, there is still the presumption of regularity in the performance
of official duty.145 Respondent’s registration carries with it the
presumption that, in the absence of contradictory evidence, an
application for effective zero rating was also filed and approval
thereof given. Besides, it is also presumed that the law has been
obeyed146 by both the administrative officials and the applicant.
Third, even though such an application was not made, all the
special laws we have tackled exempt respondent not only from
internal revenue laws but also from the regulations issued
pursuant thereto. Leniency in the implementation of the VAT in
ecozones is an imperative, precisely to spur economic growth in
the country and attain global competitiveness as envisioned in
those laws.
A VAT-registered status, as well as compliance with the invoicing
requirements,147 is sufficient for the effective zero rating of the
transactions of a taxpayer. The nature of its business and
transactions can easily be perused from, as already clearly
indicated in, its VAT registration papers and photocopied
documents attached thereto. Hence, its transactions cannot be
34 | B A T C H SUBJECT FULLTEXT
exempted by its mere failure to apply for their effective zero rating.
Otherwise, their VAT exemption would be determined, not by their
nature, but by the taxpayer’s negligence -- a result not at all
contemplated. Administrative convenience cannot thwart
legislative mandate.
Tax Refund or Credit in Order
sponsorship speeches in Congress during the second reading of
House Bill No. 14295, which later became RA 7916, as shown
below:
"MR. RECTO. x x x Some of the incentives that this bill provides
are exemption from national and local taxes; x x x tax credit for
locally-sourced inputs x x x."

Having determined that respondent’s purchase transactions are xxxxxxxxx

subject to a zero VAT rate, the tax refund or credit is in order.
As correctly held by both the CA and the Tax Court, respondent
had chosen the fiscal incentives in EO 226 over those in RA 7916
and PD 66. It opted for the income tax holiday regime instead of
the 5 percent preferential tax regime.
The latter scheme is not a perfunctory aftermath of a simple
registration under the PEZA law, 148 for EO 226149 also has
provisions to contend with. These two regimes are in fact
incompatible and cannot be availed of simultaneously by the same
entity. While EO 226 merely exempts it from income taxes, the
PEZA law exempts it from all taxes.
Therefore, respondent can be considered exempt, not from the
VAT, but only from the payment of income tax for a certain number
of years, depending on its registration as a pioneer or a non-
pioneer enterprise. Besides, the remittance of the aforesaid 5
percent of gross income earned in lieu of local and national taxes
imposable upon business establishments within the ecozone
cannot outrightly determine a VAT exemption. Being subject to
VAT, payments erroneously collected thereon may then be
refunded or credited.
Even if it is argued that respondent is subject to the 5
percent preferential tax regime in RA 7916, Section 24 thereof
does not preclude the VAT. One can, therefore, counterargue that
such provision merely exempts respondent from taxes imposed on
business. To repeat, the VAT is a tax imposed on consumption,
not on business. Although respondent as an entity is exempt, the
transactions it enters into are not necessarily so. The VAT
payments made in excess of the zero rate that is imposable may
certainly be refunded or credited.
"MR. DEL MAR. x x x To advance its cause in encouraging
investments and creating an environment conducive for investors,
the bill offers incentives such as the exemption from local and
national taxes, x x x tax credits for locally sourced inputs x x x."153
And third, no question as to either the filing of such claims within
the prescriptive period or the validity of the VAT returns has been
raised. Even if such a question were raised, the tax exemption
under all the special laws cited above is broad enough to cover
even the enforcement of internal revenue laws, including
prescription.154
Summary
To summarize, special laws expressly grant preferential tax
treatment to business establishments registered and operating
within an ecozone, which by law is considered as a separate
customs territory. As such, respondent is exempt from all internal
revenue taxes, including the VAT, and regulations pertaining
thereto. It has opted for the income tax holiday regime, instead of
the 5 percent preferential tax regime. As a matter of law and
procedure, its registration status entitling it to such tax holiday can
no longer be questioned. Its sales transactions intended for export
may not be exempt, but like its purchase transactions, they are
zero-rated. No prior application for the effective zero rating of its
transactions is necessary. Being VAT-registered and having
satisfactorily complied with all the requisites for claiming a tax
refund of or credit for the input VAT paid on capital goods
purchased, respondent is entitled to such VAT refund or credit.
WHEREFORE, the Petition is DENIED and the
Decision AFFIRMED. No pronouncement as to costs.

Compliance with All Requisites for VAT Refund or Credit SO ORDERED.

As further enunciated by the Tax Court, respondent complied with

all the requisites for claiming a VAT refund or credit. 150

First, respondent is a VAT-registered entity. This fact alone

distinguishes the present case from Contex, in which this Court
held that the petitioner therein was registered as a non-VAT
taxpayer.151 Hence, for being merely VAT-exempt, the petitioner in
that case cannot claim any VAT refund or credit.

Second, the input taxes paid on the capital goods of respondent

are duly supported by VAT invoices and have not been offset
against any output taxes. Although enterprises registered with the
BOI after December 31, 1994 would no longer enjoy the tax credit
incentives on domestic capital equipment -- as provided for under
Article 39(d), Title III, Book I of EO 226152 -- starting January 1,
1996, respondent would still have the same benefit under a
general and express exemption contained in both Article 77(1),
Book VI of EO 226; and Section 12, paragraph 2 (c) of RA 7227,
extended to the ecozones by RA 7916.

There was a very clear intent on the part of our legislators, not only
to exempt investors in ecozones from national and local taxes, but
also to grant them tax credits. This fact was revealed by the
35 | B A T C H SUBJECT FULLTEXT
G.R. No. 152609 June 29, 2005
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
AMERICAN EXPRESS INTERNATIONAL, INC. (PHILIPPINE
BRANCH), Respondent.
DECISION
PANGANIBAN, J.:
As a general rule, the value-added tax (VAT) system uses the
destination principle. However, our VAT law itself provides for a
clear exception, under which the supply of service shall be zero-
rated when the following requirements are met: (1) the service is
performed in the Philippines; (2) the service falls under any of the
categories provided in Section 102(b) of the Tax Code; and (3) it is
paid for in acceptable foreign currency that is accounted for in
accordance with the regulations of the Bangko Sentral ng Pilipinas.
Since respondent’s services meet these requirements, they are
zero-rated. Petitioner’s Revenue Regulations that alter or revoke
the above requirements are ultra vires and invalid.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of
Court, assailing the February 28, 2002 Decision2of the Court of
Appeals (CA) in CA-GR SP No. 62727. The assailed Decision
disposed as follows:
"WHEREFORE, premises considered, the petition is
hereby DISMISSED for lack of merit. The assailed decision of the
Court of Tax Appeals (CTA) is AFFIRMED in toto."3
The Facts
Quoting the CTA, the CA narrated the undisputed facts as follows:
"[Respondent] is a Philippine branch of American Express
International, Inc., a corporation duly organized and existing under
and by virtue of the laws of the State of Delaware, U.S.A., with
office in the Philippines at the Ground Floor, ACE Building, corner
Rada and de la Rosa Streets, Legaspi Village, Makati City. It is a
servicing unit of American Express International, Inc. - Hongkong
Branch (Amex-HK) and is engaged primarily to facilitate the
collections of Amex-HK receivables from card members situated in
the Philippines and payment to service establishments in the
Philippines.
"Amex Philippines registered itself with the Bureau of Internal
Revenue (BIR), Revenue District Office No. 47 (East Makati) as a
value-added tax (VAT) taxpayer effective March 1988 and was
issued VAT Registration Certificate No. 088445 bearing VAT
Registration No. 32A-3-004868. For the period January 1, 1997 to
December 31, 1997, [respondent] filed with the BIR its quarterly
VAT returns as follows:
Exhibit Period Covered Date Filed
D 1997 1st Qtr. April 18, 1997
F 2nd Qtr. July 21, 1997
G 3rd Qtr. October 2, 1997
H 4th Qtr. January 20, 1998
"On March 23, 1999, however, [respondent] amended the
aforesaid returns and declared the following:
Exh 1997 Taxable Sales Output Zero-rate
VAT Sales
I 1st qtr ₱59,597.20 ₱5,959.72 ₱17,513,8
J 2nd qtr 67,517.20 6,751.72 17,937,3
K 3rd qtr 51,936.60 5,193.66 19,627,2
L 4th qtr 67,994.30 6,799.43 25,231,2
Total ₱247,045.30 ₱24,704.53 ₱80,309,6
"On April 13, 1999, [respondent] filed with the BIR a letter-request
for the refund of its 1997 excess input taxes in the amount of
₱3,751,067.04, which amount was arrived at after deducting from
its total input VAT paid of ₱3,763,060.43 its applied output VAT
liabilities only for the third and fourth quarters of 1997 amounting to
₱5,193.66 and ₱6,799.43, respectively. [Respondent] cites as
basis therefor, Section 110 (B) of the 1997 Tax Code, to state:
‘Section 110. Tax Credits. -
xxxxxxxxx
‘(B) Excess Output or Input Tax. - If at the end of any taxable
quarter the output tax exceeds the input tax, the excess shall be
paid by the VAT-registered person. If the input tax exceeds the
output tax, the excess shall be carried over to the succeeding
quarter or quarters. Any input tax attributable to the purchase of
capital goods or to zero-rated sales by a VAT-registered person
may at his option be refunded or credited against other internal
revenue taxes, subject to the provisions of Section 112.’
"There being no immediate action on the part of the [petitioner],
[respondent’s] petition was filed on April 15, 1999.
"In support of its Petition for Review, the following arguments were
raised by [respondent]:
A. Export sales by a VAT-registered person, the consideration for
which is paid for in acceptable foreign currency inwardly remitted
to the Philippines and accounted for in accordance with existing
regulations of the Bangko Sentral ng Pilipinas, are subject to [VAT]
at zero percent (0%). According to [respondent], being a VAT-
registered entity, it is subject to the VAT imposed under Title IV of
the Tax Code, to wit:
‘Section 102.(sic) Value-added tax on sale of services.-
(a) Rate and base of tax. - There shall be levied, assessed and
collected, a value-added tax equivalent to 10% percent of gross
receipts derived by any person engaged in the sale of services.
The phrase "sale of services" means the performance of all kinds
of services for others for a fee, remuneration or consideration,
including those performed or rendered by construction and service
contractors: stock, real estate, commercial, customs and
immigration brokers; lessors of personal property; lessors or
distributors of cinematographic films; persons engaged in milling,
processing, manufacturing or repacking goods for others; and
similar services regardless of whether o[r] not the performance
thereof calls for the exercise or use of the physical or mental
faculties: Provided That the following services performed in the
Philippines by VAT-registered persons shall be subject to 0%:
36 | B A T C H SUBJECT FULLTEXT
 (1) x x x
(2) Services other than those mentioned in the preceding
subparagraph, the consideration is paid for in acceptable
foreign currency which is remitted inwardly to the
Philippines and accounted for in accordance with the
rules and regulations of the BSP. x x x.’
In addition, [respondent] relied on VAT Ruling No. 080-89, dated
April 3, 1989, the pertinent portion of which reads as follows:
‘In Reply, please be informed that, as a VAT registered entity
whose service is paid for in acceptable foreign currency which is
remitted inwardly to the Philippines and accounted for in
accordance with the rules and regulations of the Central [B]ank of
the Philippines, your service income is automatically zero rated
effective January 1, 1998. [Section 102(a)(2) of the Tax Code as
amended].4 For this, there is no need to file an application for zero-
rate.’
B. Input taxes on domestic purchases of taxable goods and
services related to zero-rated revenues are available as tax refund
in accordance with Section 106 (now Section 112) of the [Tax
Code] and Section 8(a) of [Revenue] Regulations [(RR)] No. 5-87,
to state:
‘Section 106. Refunds or tax credits of input tax. -
(A) Zero-rated or effectively Zero-rated Sales. - Any VAT-
registered person, except those covered by paragraph (a) above,
whose sales are zero-rated or are effectively zero-rated, may,
within two (2) years after the close of the taxable quarter when
such sales were made, apply for the issuance of tax credit
certificate or refund of the input taxes due or attributable to such
sales, to the extent that such input tax has not been applied
against output tax. x x x. [Section 106(a) of the Tax Code]’ 5
‘Section 8. Zero-rating. - (a) In general. - A zero-rated sale is a
taxable transaction for value-added tax purposes. A sale by a
VAT-registered person of goods and/or services taxed at zero rate
shall not result in any output tax. The input tax on his purchases of
goods or services related to such zero-rated sale shall be available
as tax credit or refundable in accordance with Section 16 of these
Regulations. x x x.’ [Section 8(a), [RR] 5-87].’6
"[Petitioner], in his Answer filed on May 6, 1999, claimed by way of
Special and Affirmative Defenses that:
7. The claim for refund is subject to investigation by the Bureau of
Internal Revenue;
8. Taxes paid and collected are presumed to have been made in
accordance with laws and regulations, hence, not refundable.
Claims for tax refund are construed strictly against the claimant as
they partake of the nature of tax exemption from tax and it is
incumbent upon the [respondent] to prove that it is entitled thereto
under the law and he who claims exemption must be able to justify
his claim by the clearest grant of organic or statu[t]e law. An
exemption from the common burden [cannot] be permitted to exist
upon vague implications;
9. Moreover, [respondent] must prove that it has complied with the
governing rules with reference to tax recovery or refund, which are
found in Sections 204(c) and 229 of the Tax Code, as amended,
which are quoted as follows:
‘Section 204. Authority of the Commissioner to Compromise,
Abate and Refund or Credit Taxes. - The Commissioner may - x x
x.
(C) Credit or refund taxes erroneously or illegally received or
penalties imposed without authority, refund the value of internal
revenue stamps when they are returned in good condition by the
purchaser, and, in his discretion, redeem or change unused
stamps that have been rendered unfit for use and refund their
value upon proof of destruction. No credit or refund of taxes or
penalties shall be allowed unless the taxpayer files in writing with
the Commissioner a claim for credit or refund within two (2) years
after payment of the tax or penalty: Provided, however, That a
return filed with an overpayment shall be considered a written
claim for credit or refund.’
‘Section 229. Recovery of tax erroneously or illegally
collected.- No suit or proceeding shall be maintained in any court
for the recovery of any national internal revenue tax hereafter
alleged to have been erroneously or illegally assessed or
collected, or of any penalty claimed to have been collected without
authority, or of any sum alleged to have been excessively or in any
manner wrongfully collected, until a claim for refund or credit has
been duly filed with the Commissioner; but such suit or proceeding
may be maintained, whether or not such tax, penalty or sum has
been paid under protest or duress.
In any case, no such suit or proceeding shall be begun (sic) after
the expiration of two (2) years from the date of payment of the tax
or penalty regardless of any supervening cause that may arise
after payment: Provided, however, That the Commissioner may,
even without written claim therefor, refund or credit any tax, where
on the face of the return upon which payment was made, such
payment appears clearly to have been erroneously paid.’
"From the foregoing, the [CTA], through the Presiding Judge
Ernesto D. Acosta rendered a decision7 in favor of the herein
respondent holding that its services are subject to zero-rate
pursuant to Section 108(b) of the Tax Reform Act of 1997 and
Section 4.102-2 (b)(2) of Revenue Regulations 5-96, the decretal
portion of which reads as follows:
‘WHEREFORE, in view of all the foregoing, this Court finds the
[petition] meritorious and in accordance with law. Accordingly,
[petitioner] is hereby ORDERED to REFUND to [respondent] the
amount of ₱3,352,406.59 representing the latter’s excess input
VAT paid for the year 1997.’"8
Ruling of the Court of Appeals
In affirming the CTA, the CA held that respondent’s services fell
under the first type enumerated in Section 4.102-2(b)(2) of RR 7-
95, as amended by RR 5-96. More particularly, its "services were
not of the same class or of the same nature as project studies,
information, or engineering and architectural designs" for non-
resident foreign clients; rather, they were "services other than the
processing, manufacturing or repacking of goods for persons doing
business outside the Philippines." The consideration in both types
of service, however, was paid for in acceptable foreign currency
and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas.
Furthermore, the CA reasoned that reliance on VAT Ruling No.
040-98 was unwarranted. By requiring that respondent’s services
be consumed abroad in order to be zero-rated, petitioner went
beyond the sphere of interpretation and into that of legislation.
Even granting that it is valid, the ruling cannot be given retroactive
effect, for it will be harsh and oppressive to respondent, which has
already relied upon VAT Ruling No. 080-89 for zero rating.
37 | B A T C H SUBJECT FULLTEXT
Hence, this Petition.9
The Issue
Petitioner raises this sole issue for our consideration:
"Whether or not the Court of Appeals committed reversible error in
holding that respondent is entitled to the refund of the amount of
₱3,352,406.59 allegedly representing excess input VAT for the
year 1997."10
The Court’s Ruling
The Petition is unmeritorious.
Sole Issue:
Entitlement to Tax Refund
Section 102 of the Tax Code11 provides:
"Sec. 102. Value-added tax on sale of services and use or lease of
properties. -- (a) Rate and base of tax. -- There shall be levied,
assessed and collected, a value-added tax equivalent to ten
percent (10%) of gross receipts derived from the sale or exchange
of services x x x.
"The phrase 'sale or exchange of services' means the performance
of all kinds of services in the Philippines for others for a fee,
remuneration or consideration, including those performed or
rendered by x x x persons engaged in milling, processing,
manufacturing or repacking goods for others; x x x services of
banks, non-bank financial intermediaries and finance companies; x
x x and similar services regardless of whether or not the
performance thereof calls for the exercise or use of the physical or
mental faculties. The phrase 'sale or exchange of services' shall
likewise include:
xxxxxxxxx
‘(3) The supply of x x x commercial knowledge or information;
‘(4) The supply of any assistance that is ancillary and subsidiary to
and is furnished as a means of enabling the application or
enjoyment of x x x any such knowledge or information as is
mentioned in subparagraph (3);
xxxxxxxxx
‘(6) The supply of technical advice, assistance or services
rendered in connection with technical management or
administration of any x x x commercial undertaking, venture,
project or scheme;
xxxxxxxxx
"The term 'gross receipts’ means the total amount of money or its
equivalent representing the contract price, compensation, service
fee, rental or royalty, including the amount charged for materials
supplied with the services and deposits and advanced payments
actually or constructively received during the taxable quarter for
the services performed or to be performed for another person,
excluding value-added tax.
"(b) Transactions subject to zero percent (0%) rate. -- The
following services performed in the Philippines by VAT-registered
persons shall be subject to zero percent (0%) rate[:]
‘(1) Processing, manufacturing or repacking goods for other
persons doing business outside the Philippines which goods are
subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance with
the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
‘(2) Services other than those mentioned in the preceding
subparagraph, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules
and regulations of the [BSP];’"
xxxxxxxxx
Zero Rating of "Other" Services
The law is very clear. Under the last paragraph quoted above,
services performed by VAT-registered persons in the Philippines
(other than the processing, manufacturing or repacking of goods
for persons doing business outside the Philippines), when paid in
acceptable foreign currency and accounted for in accordance with
the rules and regulations of the BSP, are zero-rated.
Respondent is a VAT-registered person that facilitates the
collection and payment of receivables belonging to its non-resident
foreign client, for which it gets paid in acceptable foreign currency
inwardly remitted and accounted for in conformity with BSP rules
and regulations. Certainly, the service it renders in the Philippines
is not in the same category as "processing, manufacturing or
repacking of goods" and should, therefore, be zero-rated. In reply
to a query of respondent, the BIR opined in VAT Ruling No. 080-89
that the income respondent earned from its parent company’s
regional operating centers (ROCs) was automatically zero-rated
effective January 1, 1988.12
Service has been defined as "the art of doing something useful for
a person or company for a fee"13 or "useful labor or work rendered
or to be rendered by one person to another."14 For facilitating in the
Philippines the collection and payment of receivables belonging to
its Hong Kong-based foreign client, and getting paid for it in duly
accounted acceptable foreign currency, respondent renders
service falling under the category of zero rating. Pursuant to the
Tax Code, a VAT of zero percent should, therefore, be levied upon
the supply of that service.15
The Credit Card System and Its Components
For sure, the ancillary business of facilitating the said collection is
different from the main business of issuing credit cards.16 Under
the credit card system, the credit card company extends credit
accommodations to its card holders for the purchase of goods and
services from its member establishments, to be reimbursed by
them later on upon proper billing. Given the complexities of
present-day business transactions, the components of this system
can certainly function as separate billable services.
Under RA 8484,17 the credit card that is issued by banks 18 in
general, or by non-banks in particular, refers to "any card x x x or
other credit device existing for the purpose of obtaining x x x goods
x x x or services x x x on credit;"19and is being used "usually on a
revolving basis."20 This means that the consumer-credit
arrangement that exists between the issuer and the holder of the
credit card enables the latter to procure goods or services "on a
continuing basis as long as the outstanding balance does not
exceed a specified limit."21 The card holder is, therefore, given "the
38 | B A T C H SUBJECT FULLTEXT
power to obtain present control of goods or service on a promise to
pay for them in the future."22
Business establishments may extend credit sales through the use
of the credit card facilities of a non-bank credit card company to
avoid the risk of uncollectible accounts from their customers.
Under this system, the establishments do not deposit in their bank
accounts the credit card drafts23 that arise from the credit sales.
Instead, they merely record their receivables from the credit card
company and periodically send the drafts evidencing those
receivables to the latter.
The credit card company, in turn, sends checks as payment to
these business establishments, but it does not redeem the drafts
at full price. The agreement between them usually provides for
discounts to be taken by the company upon its redemption of the
drafts.24 At the end of each month, it then bills its credit card
holders for their respective drafts redeemed during the previous
month. If the holders fail to pay the amounts owed, the company
sustains the loss.25
In the present case, respondent’s role in the consumer
credit26 process described above primarily consists of gathering
the bills and credit card drafts of different service establishments
located in the Philippines and forwarding them to the ROCs
outside the country. Servicing the bill is not the same as billing. For
the former type of service alone, respondent already gets paid.
The parent company -- to which the ROCs and respondent belong
-- takes charge not only of redeeming the drafts from the ROCs
and sending the checks to the service establishments, but also of
billing the credit card holders for their respective drafts that it has
redeemed. While it usually imposes finance charges 27 upon the
holders, none may be exacted by respondent upon either the
ROCs or the card holders.
Branch and Home Office
By designation alone, respondent and the ROCs are operated as
branches. This means that each of them is a unit, "an offshoot,
lateral extension, or division"28 located at some distance from the
home office29 of the parent company; carrying separate
inventories; incurring their own expenses; and generating their
respective incomes. Each may conduct sales operations in any
locality as an extension of the principal office. 30
The extent of accounting activity at any of these branches depends
upon company policy,31 but the financial reports of the entire
business enterprise -- the credit card company to which they all
belong -- must always show its financial position, results of
operation, and changes in its financial position as a single
unit.32 Reciprocal accounts are reconciled or eliminated, because
they lose all significance when the branches and home office are
viewed as a single entity.33 In like manner, intra-company profits or
losses must be offset against each other for accounting purposes.
Contrary to petitioner’s assertion,34 respondent can sell its services
to another branch of the same parent company.35 In fact, the
business concept of a transfer price allows goods and services to
be sold between and among intra-company units at cost or above
cost.36 A branch may be operated as a revenue center, cost
center, profit center or investment center, depending upon the
policies and accounting system of its parent
company.37Furthermore, the latter may choose not to make any
sale itself, but merely to function as a control center, where most or
all of its expenses are allocated to any of its branches.38
Gratia argumenti that the sending of drafts and bills by service
establishments to respondent is equivalent to the act of sending
them directly to its parent company abroad, and that the parent
company’s subsequent redemption of these drafts and billings of
credit card holders is also attributable to respondent, then with
greater reason should the service rendered by respondent be
zero-rated under our VAT system. The service partakes of the
nature of export sales as applied to goods, 39 especially when
rendered in the Philippines by a VAT-registered person40 that gets
paid in acceptable foreign currency accounted for in accordance
with BSP rules and regulations.
VAT Requirements for the Supply of Service
The VAT is a tax on consumption41 "expressed as a percentage of
the value added to goods or services"42purchased by the producer
or taxpayer.43 As an indirect tax44 on services,45 its main object is
the transaction46itself or, more concretely, the performance of all
kinds of services47 conducted in the course of trade or business in
the Philippines.48 These services must be regularly conducted in
this country; undertaken in "pursuit of a commercial or an
economic activity;"49 for a valuable consideration; and not exempt
under the Tax Code, other special laws, or any international
agreement.50
Without doubt, the transactions respondent entered into with its
Hong Kong-based client meet all these requirements.
First, respondent regularly renders in the Philippines the
service of facilitating the collection and payment of
receivables belonging to a foreign company that is a
clearly separate and distinct entity.
Second, such service is commercial in nature; carried on
over a sustained period of time; on a significant scale;
with a reasonable degree of frequency; and not at
random, fortuitous or attenuated.
Third, for this service, respondent definitely receives
consideration in foreign currency that is accounted for in
conformity with law.
Finally, respondent is not an entity exempt under any of
our laws or international agreements.
Services Subject to Zero VAT
As a general rule, the VAT system uses the destination principle as
a basis for the jurisdictional reach of the tax. 51Goods and services
are taxed only in the country where they are consumed. Thus,
exports are zero-rated, while imports are taxed.
Confusion in zero rating arises because petitioner equates
the performance of a particular type of service with
the consumption of its output abroad. In the present case,
the facilitation of the collection of receivables is different from
the utilization or consumption of the outcome of such service.
While the facilitation is done in the Philippines, the consumption is
not. Respondent renders assistance to its foreign clients -- the
ROCs outside the country -- by receiving the bills of service
establishments located here in the country and forwarding them to
the ROCs abroad. The consumption contemplated by law, contrary
to petitioner’s administrative interpretation, 52 does not imply that
the service be done abroad in order to be zero-rated.
Consumption is "the use of a thing in a way that thereby exhausts
it."53 Applied to services, the term means the performance or
"successful completion of a contractual duty, usually resulting in
39 | B A T C H SUBJECT FULLTEXT
the performer’s release from any past or future liability x x x." 54 The
services rendered by respondent are performed or successfully
completed upon its sending to its foreign client the drafts and bills
it has gathered from service establishments here. Its services,
having been performed in the Philippines, are therefore also
consumed in the Philippines.
Unlike goods, services cannot be physically used in or bound for a
specific place when their destination is determined. Instead, there
can only be a "predetermined end of a course"55 when determining
the service "location or position x x x for legal
purposes."56 Respondent’s facilitation service has no physical
existence, yet takes place upon rendition, and therefore upon
consumption, in the Philippines. Under the destination principle, as
petitioner asserts, such service is subject to VAT at the rate of 10
percent.
Respondent’s Services Exempt from the Destination Principle
However, the law clearly provides for an exception to the
destination principle; that is, for a zero percent VAT rate for
services that are performed in the Philippines, "paid for in
acceptable foreign currency and accounted for in accordance with
the rules and regulations of the [BSP]."57 Thus, for the supply of
service to be zero-rated as an exception, the law merely requires
that first, the service be performed in the Philippines; second, the
service fall under any of the categories in Section 102(b) of the
Tax Code; and, third, it be paid in acceptable foreign currency
accounted for in accordance with BSP rules and regulations.
Indeed, these three requirements for exemption from the
destination principle are met by respondent. Its facilitation service
is performed in the Philippines. It falls under the second category
found in Section 102(b) of the Tax Code, because it is a service
other than "processing, manufacturing or repacking of goods" as
mentioned in the provision. Undisputed is the fact that such service
meets the statutory condition that it be paid in acceptable foreign
currency duly accounted for in accordance with BSP rules. Thus, it
should be zero-rated.
Performance of Service versus Product Arising from
Performance
Again, contrary to petitioner’s stand, for the cost of respondent’s
service to be zero-rated, it need not be tacked in as part of the cost
of goods exported.58 The law neither imposes such requirement
nor associates services with exported goods. It simply states that
the services performed by VAT-registered persons in the
Philippines -- services other than the processing, manufacturing or
repacking of goods for persons doing business outside this country
-- if paid in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP, are zero-
rated. The service rendered by respondent is clearly different from
the product that arises from the rendition of such service. The
activity that creates the income must not be confused with the
main business in the course of which that income is realized. 59
Tax Situs of a Zero-Rated Service
The law neither makes a qualification nor adds a condition in
determining the tax situs of a zero-rated service. Under this
criterion, the place where the service is rendered determines the
jurisdiction60 to impose the VAT.61 Performed in the Philippines,
such service is necessarily subject to its jurisdiction, 62 for the State
necessarily has to have "a substantial connection" 63 to it, in order
to enforce a zero rate.64 The place of payment is
immaterial;65 much less is the place where the output of the service
will be further or ultimately used.
Statutory Construction or Interpretation Unnecessary
As mentioned at the outset, Section 102(b)(2) of the Tax Code is
very clear. Therefore, no statutory construction or interpretation is
needed. Neither can conditions or limitations be introduced where
none is provided for. Rewriting the law is a forbidden ground that
only Congress may tread upon.
The Court may not construe a statute that is free from
doubt.66 "[W]here the law speaks in clear and categorical
language, there is no room for interpretation. There is only room
for application."67 The Court has no choice but to "see to it that its
mandate is obeyed."68
No Qualifications Under RR 5-87
In implementing the VAT provisions of the Tax Code, RR 5-87
provides for the zero rating of services other than the processing,
manufacturing or repacking of goods -- in general and without
qualifications -- when paid for by the person to whom such
services are rendered in acceptable foreign currency inwardly
remitted and duly accounted for in accordance with the BSP (then
Central Bank) regulations. Section 8 of RR 5-87 states:
"SECTION 8. Zero-rating. -- (a) In general. -- A zero-rated sale is a
taxable transaction for value-added tax purposes. A sale by a
VAT-registered person of goods and/or services taxed at zero rate
shall not result in any output tax. The input tax on his purchases of
goods or services related to such zero-rated sale shall be available
as tax credit or refundable in accordance with Section 16 of these
Regulations.
xxxxxxxxx
" (c) Zero-rated sales of services. -- The following services
rendered by VAT-registered persons are zero-rated:
‘(1) Services in connection with the processing, manufacturing or
repacking of goods for persons doing business outside the
Philippines, where such goods are actually shipped out of the
Philippines to said persons or their assignees and the services are
paid for in acceptable foreign currency inwardly remitted and duly
accounted for under the regulations of the Central Bank of the
Philippines.
xxxxxxxxx
‘(3) Services performed in the Philippines other than those
mentioned in subparagraph (1) above which are paid for by the
person or entity to whom the service is rendered in acceptable
foreign currency inwardly remitted and duly accounted for in
accordance with Central Bank regulations. Where the contract
involves payment in both foreign and local currency, only the
service corresponding to that paid in foreign currency shall enjoy
zero-rating. The portion paid for in local currency shall be subject
to VAT at the rate of 10%.’"
RR 7-95 Broad Enough
RR 7-95, otherwise known as the "Consolidated VAT
Regulations,"69 reiterates the above-quoted provision and further
presents as examples only the services performed in the
Philippines by VAT-registered hotels and other service
establishments. Again, the condition remains that these services
must be paid in acceptable foreign currency inwardly remitted and
accounted for in accordance with the rules and regulations of the
BSP. The term "other service establishments" is obviously broad
40 | B A T C H SUBJECT FULLTEXT
enough to cover respondent’s facilitation service. Section 4.102-2
of RR 7-95 provides thus:
"SECTION 4.102-2. Zero-Rating. -- (a) In general. -- A zero-rated
sale by a VAT registered person, which is a taxable transaction for
VAT purposes, shall not result in any output tax. However, the
input tax on his purchases of goods, properties or services related
to such zero-rated sale shall be available as tax credit or refund in
accordance with these regulations.
"(b) Transaction subject to zero-rate. -- The following services
performed in the Philippines by VAT-registered persons shall be
subject to 0%:
‘(1) Processing, manufacturing or repacking goods for
other persons doing business outside the Philippines
which goods are subsequently exported, where the
services are paid for in acceptable foreign currency and
accounted for in accordance with the rules and
regulations of the BSP;
‘(2) Services other than those mentioned in the preceding
subparagraph, e.g. those rendered by hotels and other
service establishments, the consideration for which is
paid for in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the BSP;’"
xxxxxxxxx
Meaning of "as well as" in RR 5-96
Section 4.102-2(b)(2) of RR 7-95 was subsequently amended by
RR 5-96 to read as follows:
"Section 4.102-2(b)(2) -- ‘Services other than processing,
manufacturing or repacking for other persons doing business
outside the Philippines for goods which are subsequently exported,
as well as services by a resident to a non-resident foreign client
such as project studies, information services, engineering and
architectural designs and other similar services, the consideration
for which is paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the BSP.’"
Aside from the already scopious coverage of services in Section
4.102-2(b)(2) of RR 7-95, the amendment introduced by RR 5-96
further enumerates specific services entitled to zero rating.
Although superfluous, these sample services are meant to be
merely illustrative. In this provision, the use of the term "as well as"
is not restrictive. As a prepositional phrase with an adverbial
relation to some other word, it simply means "in addition to,
besides, also or too."70
Neither the law nor any of the implementing revenue regulations
aforequoted categorically defines or limits the services that may be
sold or exchanged for a fee, remuneration or consideration.
Rather, both merely enumerate the items of service that fall under
the term "sale or exchange of services."71
Ejusdem Generis
Inapplicable
The canon of statutory construction known as ejusdem generis or
"of the same kind or specie" does not apply to Section 4.102-
2(b)(2) of RR 7-95 as amended by RR 5-96.
First, although the regulatory provision contains an
enumeration of particular or specific words, followed by
the general phrase "and other similar services," such
words do not constitute a readily discernible class and
are patently not of the same kind.72 Project studies
involve investments or marketing; information services
focus on data technology; engineering and architectural
designs require creativity. Aside from calling for the
exercise or use of mental faculties or perhaps producing
written technical outputs, no common denominator to the
exclusion of all others characterizes these three services.
Nothing sets them apart from other and similar general
services that may involve advertising, computers,
consultancy, health care, management, messengerial
work -- to name only a few.
Second, there is the regulatory intent to give the general
phrase "and other similar services" a broader
meaning.73 Clearly, the preceding phrase "as well as" is
not meant to limit the effect of "and other similar
services."
Third, and most important, the statutory provision upon
which this regulation is based is by itself not restrictive.
The scope of the word "services" in Section 102(b)(2) of
the Tax Code is broad; it is not susceptible of narrow
interpretation.741avvphi1.zw+
VAT Ruling Nos. 040-98 and 080-89
VAT Ruling No. 040-98 relied upon by petitioner is a less general
interpretation at the administrative level, 75rendered by the BIR
commissioner upon request of a taxpayer to clarify certain
provisions of the VAT law. As correctly held by the CA, when this
ruling states that the service must be "destined for consumption
outside of the Philippines"76 in order to qualify for zero rating, it
contravenes both the law and the regulations issued pursuant to
it.77 This portion of VAT Ruling No. 040-98 is clearly ultra vires and
invalid.78
Although "[i]t is widely accepted that the interpretation placed upon
a statute by the executive officers, whose duty is to enforce it, is
entitled to great respect by the courts,"79 this interpretation is not
conclusive and will have to be "ignored if judicially found to be
erroneous"80 and "clearly absurd x x x or improper."81 An
administrative issuance that overrides the law it merely seeks to
interpret, instead of remaining consistent and in harmony with it,
will not be countenanced by this Court.82
In the present case, respondent has relied upon VAT Ruling No.
080-89, which clearly recognizes its zero rating. Changing this
status will certainly deprive respondent of a refund of the
substantial amount of excess input taxes to which it is entitled.
Again, assuming arguendo that VAT Ruling No. 040-98 revoked
VAT Ruling No. 080-89, such revocation could not be given
retroactive effect if the application of the latter ruling would only be
prejudicial to respondent.83 Section 246 of the Tax Code
categorically declares that "[a]ny revocation x x x of x x x any of
the rulings x x x promulgated by the Commissioner shall not be
given retroactive application if the revocation x x x will be
prejudicial to the taxpayers."84
It is also basic in law that "no x x x rule x x x shall be given
retrospective effect85 unless explicitly stated."86 No indication of
such retroactive application to respondent does the Court find in
VAT Ruling No. 040-98. Neither do the exceptions enumerated in
Section 24687 of the Tax Code apply.
41 | B A T C H SUBJECT FULLTEXT
Though vested with the power to interpret the provisions of the Tax
Code88 and not bound by predecessors’ acts or rulings, the BIR
commissioner may render a different construction to a
statute89 only if the new interpretation is in congruence with the
law. Otherwise, no amount of interpretation can ever revoke,
repeal or modify what the law says.
"Consumed Abroad" Not Required by Legislature
Interpellations on the subject in the halls of the Senate also reveal
a clear intent on the part of the legislators not to impose the
condition of being "consumed abroad" in order
for services performed in the Philippines by a VAT-registered
person to be zero-rated. We quote the relevant portions of the
proceedings:
"Senator Maceda: Going back to Section 102 just for the moment.
Will the Gentleman kindly explain to me - I am referring to the
lower part of the first paragraph with the ‘Provided’. Section
102. ‘Provided that the following services performed in the
Philippines by VAT registered persons shall be subject to zero
percent.’ There are three here. What is the difference between the
three here which is subject to zero percent and Section 103 which
is exempt transactions, to being with?
"Senator Herrera: Mr. President, in the case of processing and
manufacturing or repacking goods for persons doing business
outside the Philippines which are subsequently exported, and
where the services are paid for in acceptable foreign currencies
inwardly remitted, this is considered as subject to 0%. But if these
conditions are not complied with, they are subject to the VAT.
"In the case of No. 2, again, as the Gentleman pointed out, these
three are zero-rated and the other one that he indicated are
exempted from the very beginning. These three enumerations
under Section 102 are zero-rated provided that these conditions
indicated in these three paragraphs are also complied with. If they
are not complied with, then they are not entitled to the zero ratings.
Just like in the export of minerals, if these are not exported, then
they cannot qualify under this provision of zero rating.
"Senator Maceda: Mr. President, just one small item so we can
leave this. Under the proviso, it is required that the following
services be performed in the Philippines.
"Under No. 2, services other than those mentioned above includes,
let us say, manufacturing computers and computer chips or
repacking goods for persons doing business outside the
Philippines. Meaning to say, we ship the goods to them in Chicago
or Washington and they send the payment inwardly to the
Philippines in foreign currency, and that is, of course, zero-
rated.lawphil.net
"Now, when we say ‘services other than those mentioned in the
preceding subsection[,’] may I have some examples of these?
"Senator Herrera: Which portion is the Gentleman referring to?
"Senator Maceda: I am referring to the second paragraph, in the
same Section 102. The first paragraph is when one manufactures
or packages something here and he sends it abroad and they pay
him, that is covered. That is clear to me. The second paragraph
says ‘Services other than those mentioned in the preceding
subparagraph, the consideration of which is paid for in acceptable
foreign currency…’
"One example I could immediately think of -- I do not know why
this comes to my mind tonight -- is for tourism or escort services.
For example, the services of the tour operator or tour escort -- just
a good name for all kinds of activities -- is made here at the
Midtown Ramada Hotel or at the Philippine Plaza, but the payment
is made from outside and remitted into the country.
"Senator Herrera: What is important here is that these services
are paid in acceptable foreign currency remitted inwardly to the
Philippines.
"Senator Maceda: Yes, Mr. President. Like those Japanese tours
which include $50 for the services of a woman or a tourist guide, it
is zero-rated when it is remitted here.
"Senator Herrera: I guess it can be interpreted that way, although
this tourist guide should also be considered as among the
professionals. If they earn more than ₱200,000, they should be
covered.
xxxxxxxxx
Senator Maceda: So, the services by Filipino citizens outside the
Philippines are subject to VAT, and I am talking of all services. Do
big contractual engineers in Saudi Arabia pay VAT?
"Senator Herrera: This provision applies to a VAT-registered
person. When he performs services in the Philippines, that is zero-
rated.
"Senator Maceda: That is right."90
Legislative Approval By Reenactment
Finally, upon the enactment of RA 8424, which substantially
carries over the particular provisions on zero rating of services
under Section 102(b) of the Tax Code, the principle of legislative
approval of administrative interpretation by reenactment clearly
obtains. This principle means that "the reenactment of a statute
substantially unchanged is persuasive indication of the adoption by
Congress of a prior executive construction."91
The legislature is presumed to have reenacted the law with full
knowledge of the contents of the revenue regulations then in force
regarding the VAT, and to have approved or confirmed them
because they would carry out the legislative purpose. The
particular provisions of the regulations we have mentioned earlier
are, therefore, re-enforced. "When a statute is susceptible of the
meaning placed upon it by a ruling of the government agency
charged with its enforcement and the [l]egislature thereafter
[reenacts] the provisions [without] substantial change, such action
is to some extent confirmatory that the ruling carries out the
legislative purpose."92
In sum, having resolved that transactions of respondent are zero-
rated, the Court upholds the former’s entitlement to the refund as
determined by the appellate court. Moreover, there is no conflict
between the decisions of the CTA and CA. This Court respects the
findings and conclusions of a specialized court like the CTA
"which, by the nature of its functions, is dedicated exclusively to
the study and consideration of tax cases and has necessarily
developed an expertise on the subject."93
Furthermore, under a zero-rating scheme, the sale or exchange of
a particular service is completely freed from the VAT, because the
seller is entitled to recover, by way of a refund or as an input tax
credit, the tax that is included in the cost of purchases attributable
to the sale or exchange.94 "[T]he tax paid or withheld is not
42 | B A T C H SUBJECT FULLTEXT
deducted from the tax base."95 Having been applied for within the
reglementary period,96 respondent’s refund is in order.

WHEREFORE, the Petition is hereby DENIED, and the assailed

Decision AFFIRMED. No pronouncement as to costs.

SO ORDERED.

43 | B A T C H SUBJECT FULLTEXT
G.R. No. 154028. July 29, 2005
PHILIPPINE GEOTHERMAL, INC., Petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, Respondents.
DECISION
QUISUMBING, J.:
The present petition for review on certiorari assails the September
14, 2001 Decision1 and June 14, 2002 Resolution2 of the Court of
Appeals in CA-G.R. SP No. 54730, which affirmed the April 21,
1999 Decision3 of the Court of Tax Appeals in C.T.A. Case No.
5541.
The facts of the case as found by the Court of Appeals and Court
of Tax Appeals are as follows:
Petitioner is a resident foreign corporation licensed by the
Securities and Exchange Commission (SEC) to engage in the
exploration, development and exploitation of geothermal energy
and resources in the Philippines. In September 1971, it entered
into a service contract with the National Power Corporation (NPC)
to supply steam to the latter.
From September 1995 to February 1996, petitioner billed NPC,
Value Added Tax (VAT) computed at ten percent of the service fee
charged on the supply of steam. NPC did not pay the VAT. To
avoid any possible tax deficiency, petitioner remitted VAT
equivalent to 1/11 of the fees received from NPC or
₱39,328,775.41, broken down as follows:
Exhibit Period covered Payment Date
C 7/95 to 9/95
H 10/95 to 12/95
M 11/95
S 1/96
W 2/96
Petitioner filed an administrative claim for refund with the Bureau of
Internal Revenue on July 10, 1996. According to petitioner, the
sale of steam to NPC is a VAT-exempt transaction under Sec. 103
of the Tax Code.4 Petitioner claimed that Fiscal Incentives Review
Board (FIRB) Resolution No. 17-87, approved by President Aquino
pursuant to Executive Order No. 93,5 expressly exempted NPC
from VAT.
Since respondent failed to act on the claim, on July 2, 1997,
petitioner filed a petition to toll the running of the two-year
prescriptive period before the Court of Tax Appeals.
Respondent, in his Answer,6 averred:
...
4. The claim of petitioner Philippine Geothermal Incorporated (PGI
for short) for Value-Added Tax refund has no legal basis.
...
6. Fiscal Incentives Review Board (FIRB) Resolution 17-87
specifically restored the tax and duty exemption privileges of the
NPC, including those pertaining to its domestic purchases of
petroleum and petroleum products granted under the terms and
conditions of Commonwealth Act 120 as amended, effective March
10, 1987.
However, the restoration of the tax and duty exemption privileges
does not apply to importations of fuel oil (crude equivalents) and
coal, commercially-funded importations (i.e. importations which
include but are not limited to those foreign-based private financial
institutions, etc.) and interest income derived from any source.
Such exemption also does not include purchases of goods and
services. Hence, any contracting services of NPC is not qualified
for zero-rated VAT (VAT Ruling 250-89, October, 1989).
7. It is clear from the aforecited FIRB resolution that the tax
exemption privilege granted to NPC does not include purchases of
goods and services, such as the supply of steam to NPC.
...
10. The subject taxes have been paid and collected in accordance
with law and regulation.
11. In a claim for refund, it is incumbent upon petitioner to show
that it is indubitably entitled thereto. Petitioner’s failure to establish
the same is fatal to its claim for refund.
12. .The present case is no exception to the basic rule that claims
for refund are construed strictly against claimant for the same
partake of the nature of exemption from taxation.
Simply put, the sole issue in this case is whether petitioner’s
supply of steam to NPC is a VAT-exempt transaction.
VAT Paid
10/18/95FIRB Resolution No. 17-87 dated June 24, 1987, on which
P 8,977,117.26
petitioner anchors its claim for tax exemption, provides as follows:
1/18/96 11,248,194.31
12/13/95 8,243,090.27
BE IT RESOLVED, AS IT IS HEREBY RESOLVED, That the tax
2/19/96and duty exemption
5,213,400.45
privileges of the National Power Corporation,
3/18/96including those
5,646,973.12
pertaining to its domestic purchases of petroleum
and petroleum P products, granted under the terms and conditions of
39,328,775.41
Commonwealth Act No. 120 (Creating the National Power
Corporation, defining its powers, objectives and functions, and for
other purposes), as amended, are restored effective March 10,
1987, subject to the following conditions:
1. The restoration of the tax and duty exemption privileges does
not apply to the following:
1.1 Importation of fuel oil (crude equivalent) and coal;
1.2 Commercially-funded importations (i.e., importations which
include but are not limited to those financed by the NPC’s own
internal funds, domestic borrowings from any source whatsoever,
borrowing from foreign-based private financial institutions, etc.);
and
1.3 Interest income derived from any source. 7
This Supreme Court has confirmed this exemption. In Maceda v.
Macaraig, Jr.,8 this Court ruled that Republic Act No. 3589 exempts
the NPC from all taxes, duties, fees, imposts, charges, and
restrictions of the Republic of the Philippines, and its provinces,
cities and municipalities. This exemption is broad enough to
include both direct and indirect taxes the NPC may be required to
pay. To limit the exemption granted the NPC to direct taxes,
44 | B A T C H SUBJECT FULLTEXT
notwithstanding the general and broad language of the statute, will
be to thwart the legislative intention in giving exemption from all
forms of taxes and impositions, without distinguishing between
those that are direct and those that are not.
A chronological review of the NPC laws will show that it has been
the lawmakers’ intention that the NPC is to be completely tax
exempt from all forms of taxes - both direct and indirect.10
The ruling dated March 15, 1996, issued to petitioner by Assistant
Commissioner Alicia P. Clemeno of the Bureau of Internal
Revenue, likewise confirms this exemption:
In view of the foregoing, this Office is of the opinion as it hereby
holds, that the supply of steam by your client, Philippine
Geothermal, Inc. (PGI) to National Power Corporation
NPC/NAPOCOR to be used in generating electricity is exempt
from the value-added tax. (BIR Ruling No. 078-95 dated April 26,
1995)11
On April 21, 1999, the CTA ruled that the supply of steam to NPC
by petitioner being a VAT-exempt transaction, neither petitioner
nor NPC is liable to pay VAT. Petitioner, therefore, may rightfully
claim for a refund of the value-added tax paid. The CTA held,
WHEREFORE, in the light of the foregoing, RESPONDENT is
hereby ORDERED to REFUND or in the alternative, ISSUE A TAX
CREDIT CERTIFICATE to PETITIONER the sum of P9,012,310.26
representing erroneously paid value added tax.
SO ORDERED.12
According to the CTA, based on the evidence presented by
petitioner, out of the refund claim of ₱39,328,775.41, only
₱9,012,310.2613 or that pertaining to output tax paid for September
1995 and the interest on late payment on peso cash call, were not
paid by NPC. As to the rest of petitioner’s claim, it appears that the
official receipts petitioner issued to NPC included the VAT payable
shown in the Summary of Payments Received from NPC for each
production period.
Petitioner raised the matter before the Court of Appeals praying
that the respondent be ordered to refund the sum of
₱39,328,775.41 or issue a tax credit certificate representing
erroneous payments of VAT from September 1995 to February
1996.
The Court of Appeals denied the petition and affirmed the assailed
decision of the Court of Tax Appeals.
Hence this appeal. Petitioner assigns the following errors to the
appellate court:
THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR
IN AFFIRMING IN TOTO THE DECISION OF THE COURT OF
TAX APPEALS, BECAUSE:
A). THE DECISION OF THE COURT OF TAX APPEALS WAS
BASED ON A MISAPPREHENSION OF FACTS, NAMELY, THAT
THE NPC PAID ₱30,316,465.15 AS VAT;
B). THE PETITIONER HAD ESTABLISHED BY UNDISPUTABLE
EVIDENCE THAT IT PAID THE VAT ON THE SUPPLY OF
STEAM TO NPC; ACCORDINGLY, IT IS ENTITLED TO THE
REIMBURSEMENT OF THE FULL AMOUNT OF VAT
ERRONEOUSLY PAID.14
The CTA Decision stated categorically that the supply of steam to
NPC is exempt from VAT. However, it only granted a partial VAT
refund of ₱9,012,310.26, believing that only this amount was not
reimbursed by NPC. The CTA ruled that petitioner was no longer
entitled to a refund of the remaining balance of ₱30,316,465.15,
since it appears that the official receipts petitioner issued to NPC
included the VAT payable shown in the Summary of Payments
Received from NPC for each production period.
We disagree with the CTA. In this case, the only issue is the
amount of refund to be granted based on the amount of tax
erroneously paid. Tax refunds are in the nature of tax exemptions,
and are to be construed strictissimi jurisagainst the entity claiming
the same.15 Thus, the burden of proof rests upon the taxpayer to
establish by sufficient and competent evidence, its entitlement to a
claim for refund. In the Bureau of Internal Revenue’s Ruling dated
March 15, 1996, that the supply of steam by petitioner to NPC is
exempt from VAT, petitioner has indubitably established its basis
for claiming a refund.
That NPC may have reimbursed petitioner the 10% VAT is not a
ground for the denial of the claim for refund. The CTA overlooked
the fact that it was petitioner who paid the VAT out of its own
service fee. The erroneous payments of the VAT were only
discontinued when the BIR issued its Ruling No. DA-111-96 in
favor of petitioner on March 15, 1996. By then, petitioner had
already remitted a sizeable amount of ₱39,328,775.41 to the
Government. The only recourse of petitioner is the complete
restitution of the erroneous payments of taxes.
The amount of refund should have been based on the VAT
Returns filed by the taxpayer. Whether NPC had reimbursed
petitioner is not the concern of the CTA. It is solely a matter
between petitioner and NPC.16 For indirect taxes like VAT, the
proper party to question or seek a refund of the tax is the statutory
taxpayer, the person on whom the tax is imposed by law and who
paid the same even when he shifts the burden thereof to another. 17
Petitioner has the legal personality to apply for a refund since it is
the one who made the erroneous VAT payments and who will
suffer financially by paying in good faith what it had believed to be
its potential VAT liability.
Under the principle of solutio indebiti,18 the government has to
restore to petitioner the sums representing erroneous payments of
taxes.19 It is of no moment whether NPC had already reimbursed
petitioner or not because in this case, there should have been no
VAT paid at all.
The Summary of Payments and Official Receipts issued by a
supplier is not a reliable basis for determining the VAT payments of
said supplier. The CTA grossly misappreciated the evidence and
erroneously concluded in this case that NPC paid the VAT. The
CTA should have relied on the VAT Returns filed by the taxpayer
to determine the actual amount remitted to the BIR for the purpose
of ascertaining the refund due. The presentation of the VAT
Returns is considered sufficient to ascertain the amount of the
refund. Thus, upon finding that the supply of steam to NPC is
exempt from VAT, the CTA should have ordered respondent to
reimburse petitioner the full amount of ₱39,328,775.41 as
erroneously paid VAT.
WHEREFORE, the petition is hereby GRANTED. Respondent is
ORDERED to refund or in the alternative, issue a Tax Credit
Certificate to petitioner in the sum of ₱39,328,775.41 as
erroneously paid VAT.
SO ORDERED.
45 | B A T C H SUBJECT FULLTEXT
46 | B A T C H SUBJECT FULLTEXT
G.R. No. 166732 April 27, 2007
INTEL TECHNOLOGY PHILIPPINES, INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
CALLEJO, SR., J.:
Before the Court is a Petition for Review on Certiorari filed by Intel
Technology Philippines, Inc. (petitioner) seeking to reverse and set
aside the Decision1 dated August 12, 2004 of the Court of Appeals
(CA) in CA-G.R. SP No. 79327. The assailed decision affirmed that
of the Court of Tax Appeals denying petitioner’s claim for a refund
or issuance of a tax credit certificate in the amount of
₱11,770,181.70, allegedly representing the value-added input
taxes it had paid on domestic purchases of goods and services for
the period of April 1, 1998 to June 30, 1998. Likewise sought to be
reversed and set aside is the appellate court’s Resolution 2 dated
January 14, 2005 denying petitioner’s Motion for Reconsideration.
The Antecedents
Petitioner is a domestic corporation engaged primarily in the
business of designing, developing, manufacturing and exporting
advanced and large- scale integrated circuit components (ICs).3 It
is registered with the Bureau of Internal Revenue (BIR) as a value-
added tax (VAT) entity in 1996 under Certificate of Registration
RDO Control No. 96-540-000713.4 It is likewise registered with the
Philippine Economic Zone Authority (PEZA) as an Ecozone export
enterprise.5
As a VAT-registered entity, petitioner filed with the Commission of
Internal Revenue its Monthly VAT Declarations and Quarterly VAT
Return for the second quarter of 1998 declaring zero-rated export
sales of ₱2,538,906,840.16 and VAT input taxes from domestic
purchases of goods and services in the total amount of
₱11,770,181.70. Petitioner alleged that its zero-rated export sales
were paid for in acceptable foreign currency and were inwardly
remitted in accordance with the regulations of the Bangko Sentral
ng Pilipinas (BSP).
On May 18, 1999, petitioner filed with the Commission of Internal
Revenue, through its One-Stop Shop Inter-Agency Tax Credit and
Duty Drawback Center of the Department of Finance, a claim for
tax credit/refund of VAT input taxes on its domestic purchases of
goods and services directly used in its commercial operations.
Petitioner’s claim for refund amounted to ₱11,770,181.70 covering
the period April 1, 1998 to June 30, 1998. 6
On June 30, 2000, when the two-year prescriptive period to file a
refund was about to lapse without any action by the Commission of
Internal Revenue on its claim, petitioner filed with the Court of Tax
Appeals (CTA) a petition for review with the Commissioner of
Internal Revenue (Commissioner) as respondent. 7 Petitioner
alleged therein that:
3. Petitioner is engaged primarily in the business of
designing, developing, manufacturing and exporting
advanced and large-scale integrated circuit components,
commonly referred to in the industry as Integrated
Circuits or "ICs." As such, [it] has registered itself as a
value-added tax entity pursuant to Section 107 of the Tax
Code effective January 30, 1996, pursuant to which it
was issued Certificate of Registration No. 96-540-
000713. Being engaged in said business, Petitioner
registered itself with the Philippine Economic Zone
Authority (PEZA) as an export enterprise and was issued
Certificate of Registration No. 95-133 by the Philippine
Economic Zone Authority. Photocopies of Petitioner’s
Certificate of Registration (BIR Form 1556) and PEZA
Certificate of Registration are hereto attached as
Annexes "A" and "B," and made as integral parts hereof;
4. For the period covering April 01 to June 30, 1998,
petitioner generated and recorded zero-rated export
sales in the amount of PhP2,538,906,840.16, Philippine
Currency;
5. The above amount of ₱2,538,906,840.16 was paid to
petitioner in acceptable foreign currency and was
inwardly remitted in accordance with existing regulations
of the Central Bank of the Philippines pursuant to Sec.
106(A)(2)(a)(1) of the Tax Code;
6. For the period covering April 01, 1998 to June 30,
1998, petitioner paid VAT input taxes amounting to
PhP11,770,181.70 for domestic purchases of goods and
services which were attributable to petitioner’s zero-rated
sales of PhP2,538,906,840.16. Photocopies of
petitioner’s quarterly VAT returns and monthly
declarations for the second taxable quarter of 1998 which
was duly filed with the Respondent, and received by
Respondent’s collection agents, RCBC – Gateway
Branch are hereto attached as Annex "C," "D," "E" and
"F" forming as integral parts hereof;
7. The above VAT input taxes were paid in connection
with the Petitioner’s trade or business and were duly
supported by invoices and/or receipts showing the
information required under Sections 113 and 237 of the
Tax Code, and had not been applied against any VAT
output tax liability of the Petitioner during the same
period from April 1, 1998 to June 30, 1998, or any
succeeding period or periods;
xxxx
8. Being a VAT-registered entity, Petitioner is subject to
the Value-Added Tax imposed under Title IV of the Tax
Code.
xxxx
9. The export sales of the petitioner are not subject to
10% value-added tax but are zero-rated. Hence, such
zero-rated sales will not result to any VAT output tax
pursuant to Sec. 106(A)(2)(a)(1) and Sec. 108(B)(1) of
the Tax Code;
10. Petitioner, for the period covering April 01, 1998 to
June 30, 1998, having generated zero-rated sales and
paid VAT input taxes in the course of its trade or
business, which VAT input taxes are attributable to the
zero-rated sales and have not been applied to any VAT
output tax liability of the Petitioner for said period or any
succeeding quarter or quarters nor has been issued any
tax credit certificate, it follows that petitioner is entitled to
the issuance of a tax credit certificate for VAT input taxes
in the amount of PhP11,770,181.70 x x x.
xxxx
11. On May 18, 1999, petitioner in compliance with the
requisites provided for by law for the issuance of a tax
47 | B A T C H SUBJECT FULLTEXT
 credit certificate filed a claim for tax credit in the total
amount of PhP11,770,181.70, with respondent through
the One Stop Shop Inter-Agency Tax Credit and Duty
Drawback Center per BIR Form No. 2552 entitled
‘APPLICATION FOR TAX CREDIT/REFUND OR
VALUE-ADDED TAX PAID’ and Claimant Information
Sheet No. 35418. x x x
12. Respondent, however, despite such application for
the issuance of a tax credit certificate above-mentioned
and notwithstanding presentation of documentary
evidences in support of such application, failed to grant
the tax credit applied for. x x x8
Petitioner prayed that, after due proceedings, judgment be
rendered in its favor, as follows:
WHEREFORE, it is respectfully prayed that this Honorable Court
after trial render judgment:
1. Declaring Petitioner entitled to the issuance of tax
credit certificate in the amount of PhP11,770,181.70
representing VAT input taxes paid by it during the period
from April 01, 1998 to June 30, 1998, for which no tax
credit certificate was issued;
2. Ordering respondent to issue the tax credit certificate
in favor of petitioner in the amount of PhP11,770,181.70
referred to above; and
3. Granting petitioner such other reliefs as may be just
and equitable under the premises.9
The Commissioner, as respondent, opposed the petition
and prayed for its dismissal. The following special and
affirmative defenses were raised:
4. Petitioner, being allegedly registered with the
Philippine Economic Zone Authority, is exempt from all
taxes, including value-added tax, pursuant to Section 24
of Republic Act No. 7916, in relation to Section 103 of the
Tax Code, as amended by RA 7716. Since its sales are
not zero-rated but are exempt from VAT, petitioner is not
entitled to refund of input tax pursuant to Section 4.106-1
and 4.103-1 of Revenue Regulations No. 7-95;
5. Petitioner’s alleged claim for refund is subject to
administrative routinary investigation/examination by the
Bureau;
6. The amount of ₱47,582,813.72 being claimed by
petitioner as alleged VAT input taxes for the period of 01
July 1997 to 31 December 1997 was not properly
documented;
7. In an action for refund the burden of proof is on the
taxpayer to establish its right to refund, and failure to
sustain the burden is fatal to the claim for refund/credit;
8. Petitioner must show that it has complied with the
provisions of Sections 204(c) and 229 of the Tax Code
on the prescriptive period for claiming tax refund/credit;
9. Claims for refund are construed strictly against the
claimant for the same partake the nature of exemption
from taxation.10
The CTA commissioned the services of an independent auditor,
Eliseo Aurellado, to conduct an audit and evaluate petitioner’s
claim. On March 22, 2001, he submitted a Report to the CTA with
the following conclusion:
In performing the above procedures, except for the net effect of the
Input VAT paid on its purchases as compared to the results of my
review of supporting documents, as shown in Annex "B" no other
matters came to my attention that cause me to believe that the
attached Schedule of Input VAT Paid should be adjusted. We
believe that only the amounts of ₱9,688,809.39 is a valid claim for
tax credit. This report relates only to the application of Intel
Technology Philippines, Inc. for tax credit/refund specified on page
1 of this report and does not extend to the Financial Statements,
taken as a whole, for any period where the aforementioned tax
refund is present.11
Appended thereto were the summary of purchases, statements of
input VAT exception, and statements of zero-rated export sales.12
Petitioner adduced testimonial evidence and offered the following
documents in evidence:
EXHIBIT DESCRIPTION
"A" A copy of Petitioner’s Certificate of Registration No
95-133 issued by Philippine Economic Zone
Authority (PEZA). This was already subject of
stipulation of facts.
"B" A copy of Petitioner’s BIR Certificate of Registration
with RDO Control No. 96-540-000713 issued on
January 30, 1996 by Revenue District Office No.
54.
This was already subject of stipulation of facts.
"C" & "D" Copies of the Monthly VAT Returns for the month o
April and May of 1998. These were already subject
of stipulation of facts.
"C-1" & "D-1"
Signature of Pablo V. Pablo.
"E" Copies of Petitioner’s Quarterly VAT Return for the
"E-1" second quarter of 1998.
Signature of Pablo V. Pablo
This was already subject to
stipulation of facts
"F" & "F-2" Copies of Petitioner’s Amended Quarterly VAT
"F-1" Return for the second quarter of 1998.
Signature of Pablo V. Pablo
This was already subject to stipulation of facts.
"F-3" Box No. 16A of the Amended Quarterly VAT return
for the second quarter of 1998.
"F-4" Box No. 16B of the Amended Quarterly VAT return
for the second quarter of 1998.
48 | B A T C H SUBJECT FULLTEXT
"F-5" Box No. 17 of the Amended Quarter VAT return for To prove
"S" that petitionerCopy
property
of thereported
summary itsof purchases attached as
the second quarter of 1998 export sales subject toAnnex
zero-rated
"A" tofor
thethe
Certification marked as "Annex
second quarter of 1998 "Q."
in the amount of
₱2,538,906,840.160.
"T" Copy of schedule of input VAT paid with exception
"F-6" Box No. 22B of the Amended Quarterly VAT return To prove
"T-1"that petitioner
attached
incurredasanAnnex
input "B" to the Certification marked
for the second quarter of 1998. taxes on its domestic purchases
as "Annex of "Q."
goods and
services for the second quarter of 1998 in the
amount of ₱11,770,181.70.
The total amount of exception is ₱2,081,372.31.
"G" to "L" and Copies of Petitioner’s Quarterly VAT Returns for the To prove that Petitioner filed its Quarterly
"H-2" and "K- third and fourth quarters of 1998 and first and VAT Returns
"U-1" to for
"U-the third and of
Copies fourth quarterssupplier invoices and official
Petitioner’s
2" second quarters of 1999 including the amended of 1998 and first and second quarters of 1999quarter of 1998.
375," "V-1" to receipts for the second
"G-1" to "L-1" returns for the third quarter and first quarter of 1998 including theand
V-665" amended returns for the third
and 1999, respectively. and first quarters
"W-1" to "W-of 1998 and 1999,
respectively.
424"
Signature of Pablo V. Pablo.
To prove that the Quarterly Copies of Petitioner’s
VAT returns were summary of export sales,
These were already subject of stipulation of facts. properly
"X" signed
to "X-669"by Petitioner’s duly official receipts, airway bills, export
sales invoices,
authorized representative. declarations and certification of inward remittances
for the second quarter of 1998.
"H-3," "I-2," Box No. 34 or 35 of the Quarterly VAT returns for To prove that the Petitioner always has
"K3" & "L-2" the third and fourth quarters of 1998 and first and excess "Y"input VAT and Copy of thewas
the same summary
not export sales consisting of 13
second quarters of 1999. utilized in the succeeding pages attached
quarter as Annex "C" to the Certification
or quarters.
marked as Exhibit "Q."
"M" & "N" Copies of Petitioner’s Claimant Information Sheet To prove that Petitioner filed a claim for
"M-1" & "N-1" No. 35418 including BIR Form No. 2552 for the refund of input taxes in the total amount of
period April 1, 1998 to June 30, 1998 filed with the ₱11,770,181.70 with the One-Stop-Shop
One-Stop-Shop Inter-Agency Tax Credit and Duty On April 21, 2003,Tax
Inter-Agency theCredit
CTA rendered Drawbackdenying petitioner’s
and Dutyjudgment
Drawback Center of the Department of Finance claimCenter for refund
of theorDepartment
issuance of of a tax creditlast
Finance certificate.
05- The tax court
duly stamped received last 05-18-99. acknowledged
18-99. that petitioner is legally entitled to a refund or
issuance of a tax credit certificate of its unutilized VAT input taxes
on domestic purchases of goods and service attributable to its
Signature of Pablo V. Pablo To prove that the claimant information sheet
zero-rated sales. However, the export invoices adduced in
and BIR form 2552 were signed by
evidence by petitioner could not be considered as competent
Petitioner’s duly authorized representative.
These were already subject of stipulation of facts. evidence to prove its zero-rated sales of goods for VAT purposes
and for refund or issuance of a tax credit certificate because no
"O" Certification of inward remittance dated March 08, BIR To prove to
authority that thesaid
print proceeds
invoicesof export sales ofthereon. The CTA
was indicated
"O-1" 2000 issued by CITIBANK alsopetitioner
observed were properly
that some remitted
of the in US
invoices do dollars
not contain the
"O-2" in accordance
Taxpayer’s with the
Identification regulations (TIN-V)
Number-VAT of the of petitioner as
Signature of Pepper M. Lopez, CitiService Officer requiredBangko Sentral113,
in Section ng Pilipinas.
in conjunction with Section 237, of the Tax
Code. The dispositive portion of the CTA decision reads:
Amount of inward remittance in the amount of To prove that the Certification was properly
signed by Citibank’s
WHEREFORE, in view ofauthorized
the foregoing, petitioner’s claim for
US$98,000,000.00
representative.
issuance of a tax credit certificate in the amount of ₱11,770,181.70
allegedly representing its VAT input taxes on domestic purchases
of goods and services
To prove the amount for of
theinward
periodremittance
April 1, 1998
in to June 30, 1998
is hereby DENIED.
the amount of US$98,000,000.00.

"P" Certification of inward remittance dated March 09, SO ORDERED.

To prove that 14 the proceeds of export sales of
"P-1" 2000 issued by RCBC petitioner were properly remitted in US dollars
"P-2" in accordance with the regulations of the15
Petitioner
Bangko filed a Motion
Sentral for Reconsideration alleging that it was
ng Pilipinas.
Signture of Ms. Araceli V. able to prove its export sales by the following documentary
evidence:
Dyoco, Head Export Dept. To prove that the Certification was properly
signed by RCBC’s authorized representative.
(1) Certifications of inward remittances marked as
Amount of inward remittance in the amount of Exhibits "O" and "P" for the Petitioner.
US$102,499,965.00 To prove the amount of inward remittance in
the amount of US$102,499,965.00.
(2) Airway bills.
"Q" Copy of the Certification issued by Mr. Eliseo A. To prove that Mr. Eliseo A. Aurellado has
"Q-1" and "Q- Aurellado, independent CPA commissioned by the issued(3)a Export
certification with regards to the
declarations.
2" Honorable Court of Tax Appeals. correctness of Petitioner’s summary input
VAT paid and summary of zero-rated sales.
(4) Certifications of Mr. Eliseo Aurellado (Exhibit "Q" for
Signature and PTR No. of Mr. Eliseo A. Aurellado. the Petitioner), the independent CPA duly commissioned
To prove
by thisthatHonorable
Mr. EliseoCourt,
A. Aurellado is thethat the petitioner
to the effect
one who
made issued
exportthesales
above-mentioned
for the period covered in the amount
Certification and that
of Php2,538, he has the
906,840.16. 16 authority to
act as such.

49 | B A T C H SUBJECT FULLTEXT
Petitioner also alleged the following in its Supplemental Motion for
Reconsideration:
The petitioner truly believes that although the invoicing
requirements prescribed under Section 113 (A)(1), in relation to
Section 237 of the 1997 Tax Code, should be applied strictly in the
use of invoices or receipts for purposes of substantiating input VAT
incurred, the same stringent application is not called for when the
invoices or receipts are used for purposes of substantiating actual
export sales.
While the invoices or receipts being used to substantiate claim for
input VAT pertain to domestic sales, the invoices or receipts
presented by the petitioner, and which were invalidated by this
Honorable Court pertain to export sales. There should be a
marked difference because in domestic sales, there results a
corresponding input VAT which may be possibly claimed by the
purchaser, whereas in export sales, such as those done by the
petitioner, the purchaser incurs no input VAT which it may
eventually claim. Thus, for purposes of substantiation in the claim
for input VAT resulting from domestic sales the stern application of
the mentioned invoicing requirements is naturally demanded. But
for simple purposes of substantiating export sales, as in the case
of petitioner, it should not be as exacting especially considering
that the petitioner still has to substantiate its input VAT, which, this
time, needs to hurdle the aforesaid invoicing requirements under
the 1997 Tax Code.
Moreover, unlike in the substantiation of input VAT, which can only
be done through the submission of domestic sales invoices, there
are other documents to show the fact of export sales such as
export declarations, inward remittances and airway bills. This gives
more plausible reason why invoices or receipts being used to
prove input VAT need to comply with the invoice requirements set
forth under Section 113(A)(1), in relation to Section 237, of the
1997 Tax Code.17
Petitioner appended thereto a letter-authority dated April 17, 1997
signed by BIR Regional Director Sol Hubahib of Region No. 9
approving its request to use computerized sales invoices.
On September 1, 2003, the CTA denied petitioner’s Motion for
Reconsideration and Supplemental Motion for Reconsideration.
Aggrieved, petitioner filed before the CA a petition for review of the
tax court’s decision. Petitioner averred that, under Sections
113(A)(1) and 237 of the 1997 Tax Code, the following information
is required to be indicated in the invoice or receipt: (1) a statement
that the seller is VAT-registered; (2) the seller’s TIN; and (3) the
name, business style, if any, and address of the purchaser,
customer or client. However, petitioner averred, such requirements
apply only to domestic or local sales, considering that the output
tax (the input tax on the part of the local purchaser), may be
claimed by the latter as a credit against its output VAT. Thus,
according to petitioner, the invoices or receipts being issued by the
local seller are required to indicate the information listed under the
aforementioned provisions of the Tax Code so that the local
purchaser would have a valid basis in its claim for the crediting of
the input VAT. On the other hand, such requirements do not apply
to its export sales, since no input VAT may be claimed thereon.
Petitioner further pointed out that the transaction is subject to 0%
rate; there is no input VAT to be claimed by its foreign purchaser;
and the latter is not a VAT-registered entity in the Philippines.
Considering that no refundable or creditable input VAT results from
its export sales transactions, it should not be subjected to strict
compliance with the invoicing requirements.
Petitioner also claimed that the absence of BIR authority to print its
TIN-V in some of the invoices is not fatal to its claim for refund or
issuance of a tax credit certificate as to invalidate the documents
used to prove its export sales. It declared that it used
computerized accounting forms as sales invoices in its export
sales based on the letter-authority dated April 17, 1997 of the BIR.
It was only through plain mistake and inadvertence that the sales
invoices it used had no authority to print. Such omission should not
allegedly render the said sales invoices altogether invalid or
inadmissible for purposes of substantiating petitioner’s actual
export sales covering the period April 1, 1998 to June 30, 1998.
Petitioner opined that its failure to adduce in evidence the said
letter-authority of the BIR was due to its honest belief that it had
already adduced sufficient evidence to prove its actual export
sales.
Petitioner submitted that while the CTA ruled that the invoices
which did not indicate TIN-V were not sufficient proof of its export
sales, this constituted only a small part of the hundreds of invoices
it had submitted. These defective invoices, therefore, relate to a
small chunk of the export sales it made for the covered period. If at
all, the invalid invoices could only mean that only a small part of its
claim was being disallowed, not the entire claim.
On August 12, 2004, the CA rendered its Decision18 affirming the
CTA ruling. The CA ruled that while under Section 106(A)(2)(a)(1)
of the Tax Code, VAT-registered entities are entitled to claim VAT
refund on their input taxes if their export sales are zero-rated, the
claim is nevertheless subject to the invoicing and accounting
requirements of VAT-registered persons under Section 113 in
relation to Section 237 of the Tax Code. It is therefore clear, the
appellate court concluded, that what should be proven are not only
the export sales but also compliance with the requirements under
the aforesaid sections of the Tax Code.19
The CA further ruled that Revenue Regulations (RR) No. 7-95
requires VAT-registered persons to issue duly registered receipts,
and enumerates the entries that should be contained in the said
duly registered receipts. Section 237 of the Tax Code further
mandates that persons required to issue receipts or invoices
should register these documents with the BIR. In fact, RR No. 2-90
restored the requirement to register and stamp receipts and
invoices prior to their use.20 Thus, VAT-registered persons are
directed to issue duly registered invoices for every sale or lease of
goods, properties or services, containing the required information
under the law.21
According to the CA, since petitioner issued invoices with the BIR’s
authority to print, it must be concluded that these invoices were not
registered as they did not comply with the invoicing requirements
under Section 113, and the requirements for issuance of receipts
or sales or commercial invoices under Section 237. The CA
declared that an unregistered receipt could not be used as
supporting document for input tax.22 It further explained that
Revenue Memorandum Circular (RMC) No. 42-2003 already
clarified that failure to comply with invoicing requirements would
result in the disallowance of the claim for input tax by the
purchaser-claimant. Hence, the CA ruled, if the claim for refund or
issuance of a tax credit certificate is based on the taxpayer’s zero-
rated sales, but the invoicing requirements in the issuance of sales
invoices are not complied with, the claim for tax credit/refund of
VAT on its purchases shall be denied. This is because the invoices
issued to its customers failed to depict that the taxpayer is VAT-
registered and that its sales are classified as zero-rated. According
to the appellate court, however, this treatment is without prejudice
to the right of the taxpayer to charge the input taxes to the
appropriate expense account or asset account subject to
depreciation, whichever is applicable.23
The CA further declared that petitioner failed to establish that its
computer-generated sales invoices were duly stamped with the
approval of the BIR as shown by the letter-authority dated April 17,
50 | B A T C H SUBJECT FULLTEXT
1997, considering that the said letter-authority was not presented
during the trial of the case, much less attached to the petition filed
before it.24 The fallo of the CA decision reads:
WHEREFORE, in view of the foregoing, the instant petition is
DENIED. The Decision of the Court of Tax Appeals in CTA Case
No. 6128 is hereby AFFIRMED. No pronouncement as to costs.
SO ORDERED.25
Undaunted by the adverse ruling of the appellate court, petitioner
now seeks recourse to this Court on the following grounds:
I.
THE DECISION OF THE COURT OF APPEALS AFFIRMING THE
DENIAL OF PETITIONER’S CLAIM FOR TAX CREDIT/REFUND
IS CONTRARY TO PROVISIONS OF THE TAX CODE AND
APPLICABLE REGULATIONS AND DECISIONS OF THE
HONORABLE SUPREME COURT.
II.
SECTIONS 113 AND 237 OF THE TAX CODE DO NOT
REQUIRE PETITIONER TO REFLECT ITS AUTHORITY TO
PRINT IN ITS INVOICES. PETITIONER IS NOT REQUIRED BY
ANY LAW OR REGULATION TO REFLECT ITS AUTHORITY TO
PRINT UPON ITS INVOICES. NEITHER IS THE FAILURE
PENALIZED BY ANY LAW OR STATUTE SUCH THAT THE
INVOICES ARE RENDERED INADMISSIBLE.
III.
THE FAILURE TO STATE THE TIN-V IN PETITIONER’S EXPORT
SALES INVOICES SHOULD NOT INVALIDATE PETITIONER’S
CLAIM. PETITIONER’S EXPORT SALES INVOICES, WHICH
ARE ADMISSIBLE, COMPETENT AND MATERIAL EVIDENCE,
SUFFICIENTLY PROVE PETITIONER’S EXPORT SALES.26
The Issues
The issues to be resolved in the instant case are (1) whether the
absence of the BIR authority to print or the absence of the TIN-V in
petitioner’s export sales invoices operates to forfeit its entitlement
to a tax refund/credit of its unutilized input VAT attributable to its
zero-rated sales; and (2) whether petitioner’s failure to indicate
"TIN-V" in its sales invoices automatically invalidates its claim for a
tax credit certification.
Petitioner’s Arguments
Petitioner contends that Sections 113 and 237 of the Tax Code,
and even RR 7-95, do not require the taxpayer to reflect its
authority to print in its invoices.27 Failure to print such authority is
not even penalized by any law or statute such that the invoices
which do not contain the BIR authority for petitioner to print its
sales are rendered inadmissible in evidence. 28 Further, the
authority to print under Section 238 of the Tax Code is a
requirement that is separate from and independent of the
information that ought to be reflected in the invoice or official
receipt as mandated by Section 113, in relation to Section 237 of
the Tax Code.29 The BIR has even ruled, in BIR Ruling DA-375-03,
that receipts which do not reflect that the taxpayer is VAT-
registered do not automatically invalidate the claim for an input tax
credit.30 Moreover, RR 2-90 (which the appellate court cited in the
assailed decision) does not state that failure to reflect the authority
to print on the face of a sales invoice or receipt results in the
outright invalidation of such sales invoice or of the claim for tax
credit/refund.31 It insists that RMC No. 42-03, which the CA
likewise relied on in the assailed decision, does not apply, for it
relates to non-compliance with invoicing requirements; the
authority to print is not among the information required by law or
any regulation to be reflected in petitioner’s invoices.32
Petitioner asserts that even if it were assumed for the sake of
argument that the BIR has issued a regulation to the effect that
failure to indicate the authority to print on the face of a sales
invoice would render it invalid, such regulation cannot prevail over
the law that it seeks to implement. It insists that any additional
requirement imposed by the BIR for a valid claim other than those
mandated by law is invalid,33 and that the provisions of a taxing act
are not to be extended by implication.34
Further, petitioner contends that it was authorized by the BIR to
use a computerized accounting system35 through the letter-
authority dated April 17, 1997.36 It avers that even if the letter-
authority was not offered in evidence, the Court ought to take
judicial notice thereof as an official act of the Executive
Branch.37 Petitioner asserts that since its export sales invoices
were computer-generated under an approved computerized
accounting system, it is no longer mandated to comply with the
requirements under Section 19 of RR No. 2-90 on the
authentication and registration of books, registers or records,
authority to print receipts, sales or commercial invoices; and
registration and stamping of receipts and invoices. Such
requirements apply only to manually generated receipts and
invoices. Even granting arguendo that it was still required by RR
No. 7-95 to indicate its authority to print in its invoices, it was not
mandated to obtain an authority to print as the burden of securing
the same falls upon the printer of the receipts. 38
Petitioner further contends that the invoicing requirement of stating
the TIN-V applies only to domestic or local sales, given that the
output tax (the input tax on the part of the local purchaser), may be
claimed by the latter as a credit against its output VAT. In such a
case, the invoicing requirements should be complied with in order
for the local purchaser to have a valid basis in its claim for crediting
of input VAT. This, however, does not apply in the instant case for
the following reasons: petitioner’s export sales with its foreign
purchaser is subject to zero-rated VAT; its foreign purchaser
cannot claim input VAT as it is governed by a foreign taxing
jurisdiction; and the latter is not a VAT-registered entity in the
Philippines.39 To buttress its claim, petitioner cites the decision of
the CA in Intel Technology Philippines, Inc. v. CIR. 40
In any case, petitioner argues, it sufficiently proved its export sales
since, other than the subject invoices, it also submitted in evidence
the following: certifications of inward remittances; airway bills;
export declarations; certification by Eliseo Aurellado, the
independent CPA duly commissioned by the tax court, attesting
that petitioner made export sales of ₱2,538,906,840.16 during the
second quarter of 1998.
Petitioner pleads that its application for tax credit/refund should be
granted to serve the higher interest of justice, equity and fairness,
and claims that technicalities should give way to its substantive
rights.41 While it may be true that taxes are the lifeblood of the
government, 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.
The Respondent’s Counter-Arguments
For his part, respondent Commissioner, through the Office of the
Solicitor General, maintains that the absence of the BIR authority
51 | B A T C H SUBJECT FULLTEXT
to print and the TIN-V in its export sales invoices is fatal to
petitioner’s claim for refund.42 Section 113 of the Tax Code
enumerates the invoicing requirements for VAT-registered
persons, which include, among others, a statement that the seller
is VAT-registered and the seller’s TIN.43 Section 237 of the same
Code, and Section 4.108.1 of RR No. 7-95, further require the
issuance of duly registered receipts or invoices for every sale or
transaction, indicating thereon the purchaser’s TIN. 44
A VAT-registered person is, therefore, required to issue a receipt
or invoice with a TIN for every consummated sale, and which,
following Section 19 of RR No. 2-90,45 must be duly registered with
the BIR as evidenced by a stamp of the taxpayer’s authority to
print.46 Respondent stresses that Section 238 of the Tax Code
mandates all persons engaged in business to secure an authority
to print receipts or invoices from the BIR. 47 There is an additional
requirement that such authority to print must be stamped on every
receipt or invoice of a VAT-registered person. While it is not
explicitly enumerated in Sections 113 and 237 of the Tax Code as
one of the invoicing requirements, it can be implied from said
provisions that such information must be reflected on the receipt or
invoice, as the stamping of the said BIR authority to print is a proof
of the invoice being BIR-registered.48 Absent the said authority to
print, therefore, petitioner’s invoices are considered unregistered,
and thus cannot be used as supporting documents to prove its
input tax and eventually, its claim for tax refund.49
Respondent Commissioner further emphasizes that tax refunds/
credits are in the nature of tax exemptions; hence, laws relating to
them call for a strict application against the claimant. 50 The burden
to prove the entitlement to the refund also rests on the taxpayer,
which, in this case, was not proven by petitioner.51 Moreover,
petitioner’s argument, that it was authorized by the BIR to use a
computerized accounting system and as such is no longer required
to secure an authority to print, has no leg to stand on because the
April 17, 1997 letter-authority52 from the BIR was not formally
offered in evidence.53 It insists that since the letter-authority is a
mere correspondence containing matters that are not of public
knowledge and incapable of unquestionable demonstration, the
Court cannot take judicial notice thereof. 54 And even if petitioner
was authorized to use computerized invoices, it was not excused
from complying with the stamping and invoicing requirements. 55
Lastly, respondent contends that it is incorrect for petitioner to
state that the invoicing requirement under the Tax Code finds
relevance only in domestic or local sales. The provisions of the law
and the BIR regulations on invoicing do not distinguish whether the
transaction is an export or local sale.56
The Court’s Ruling
The petition is partially granted.
Since the issues are interrelated, the Court shall delve into and
resolve them simultaneously.
The pertinent provision of the Tax Code on VAT on the sale of
goods or properties, particularly with respect to export sales, is
Section 106(A)(2)(a)(1).57 The provision reads:
Section 106. Value-added Tax on Sale of Goods or Properties.
(A) Rate and Base of Tax.-- xxx
xxxx
(2) The following sales by VAT-registered persons shall be subject
to zero percent (0%) rate:
(a) Export Sales.--The term ‘export sales’ means:
(1) The sale and actual shipment of goods from the Philippines to
a foreign country, irrespective of any shipping arrangement that
may be agreed upon which may influence or determine the
transfer of ownership of the goods so exported and paid for in
acceptable foreign currency or its equivalent in goods or services,
and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP).
Based on the above provision, export sales, or sales outside the
Philippines, are subject to VAT at 0% rate if made by a VAT-
registered person.58 When applied to the tax base, the 0% rate
obviously results in no tax chargeable against the purchaser. The
seller of such transactions charges no output tax, but can claim a
refund or tax credit certificate for the VAT previously charged by
suppliers.59
In the instant case, petitioner, as a VAT-registered as well as
PEZA-registered entity engaged in the export of advanced and
large-scale ICs, is claiming a refund or issuance of a tax credit
certificate in the amount of ₱11,770,181.70 for VAT input taxes it
paid on its domestic purchases of goods and services covering the
period April 1, 1998 to June 30, 1998. For petitioner (or other VAT-
registered persons or entities whose sales are zero-rated or
effectively zero-rated) to validly claim a refund or tax credit,
Section 112(A) of the Tax Code provides:
Section 112. Refunds or Tax Credits of Input Tax.-
(A) Zero-rated or Effectively Zero-rated Sales. - Any VAT-
registered person, whose sales are zero-rated or effectively zero-
rated may within two (2) years after the close of the taxable quarter
when the sales were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable
to such sales, except transitional input tax, to the extent that such
input tax has not been applied against output tax: Provided,
however, That in the case of zero-rated sales under Section
106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the
acceptable foreign currency exchange proceeds thereof had been
duly accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP): Provided, further, That
where the taxpayer is engaged in zero-rated or effectively zero-
rated sale and also in taxable or exempt sale of goods or
properties or services, and the amount of creditable input tax due
or paid cannot be directly and entirely attributed to any one of the
transactions, it shall be allocated proportionately on the basis of
the volume of sales.60
Under Sections 106 (A)(2)(a)(1) in relation to 112(A) of the Tax
Code, a taxpayer engaged in zero-rated or effectively zero-rated
transactions may apply for a refund or issuance of a tax credit
certificate for input taxes paid attributable to such sales upon
complying with the following requisites: (1) the taxpayer is
engaged in sales which are zero-rated (like export sales) or
effectively zero-rated; (2) the taxpayer is VAT-registered; (3) the
claim must be filed within two years after the close of the taxable
quarter when such sales were made; (4) the creditable input tax
due or paid must be attributable to such sales, except the
transitional input tax, to the extent that such input tax has not been
applied against the output tax; and (5) in case of zero-rated sales
under Section 106(A)(2)(a)(1) and (2), Section 106(B), and Section
108(B)(1) and (2), the acceptable foreign currency exchange
proceeds thereof had been duly accounted for in accordance with
BSP rules and regulations. It is added that, "where the taxpayer is
engaged in zero-rated or effectively zero-rated sale and also in
taxable or exempt sale of goods or properties or services, and the
amount of creditable input tax due or paid cannot be directly or
entirely attributed to any one of the transactions, it shall be
allocated proportionately on the basis of the volume of the sales."
52 | B A T C H SUBJECT FULLTEXT
In this connection, petitioner, in order to prove that it was engaged
in export sales during the second quarter of 1998, offered in
evidence copies of summary of export sales, sales invoices, official
receipts, airway bills, export declarations and certification of inward
remittances during the said period.61 In addition, petitioner’s
Certificate of Registration with RDO Control No. 96-540-
00071362 issued by the BIR and Certificate of Registration No. 95-
13363issued by the PEZA were likewise offered in evidence to
prove that it is a VAT-registered entity as well as an Ecozone
export enterprise.
To the mind of the Court, these documentary evidence submitted
by petitioner, e.g., summary of export sales, sales invoices, official
receipts, airway bills and export declarations, prove that it is
engaged in the "sale and actual shipment of goods from the
Philippines to a foreign country." In short, petitioner is considered
engaged in export sales (a zero-rated transaction) if made by a
VAT-registered entity. Moreover, the certification of inward
remittances attests to the fact of payment "in acceptable foreign
currency or its equivalent in goods or services, and accounted for
in accordance with the rules and regulations of the BSP." Thus,
petitioner’s evidence, juxtaposed with the requirements of Sections
106 (A)(2)(a)(1) and 112(A) of the Tax Code, as enumerated
earlier, sufficiently establish that it is entitled to a claim for refund
or issuance of a tax credit certificate for creditable input taxes.
Significantly, the CTA and the CA have similarly found petitioner to
be legally entitled to a claim for refund or issuance of tax credit
certificate of its unutilized VAT input taxes on domestic purchases
of goods and services attributable to its zero-rated sales. They
denied petitioner’s claim, however, on the ground that it
purportedly failed to comply with the invoicing requirements under
Sections 113 and 237 of the Tax Code since its sales invoices do
not bear the BIR authority to print, and several of the invoices do
not indicate the TIN-V.
On the latter point, the Court disagrees with the CTA and CA. As
correctly argued by petitioner, there is no law or BIR rule or
regulation requiring petitioner’s authority from the BIR to print its
sales invoices (BIR authority to print) to be reflected or indicated
therein. Sections 113, 237 and 238 of the Tax Code provide:
Sec. 113. Invoicing and Accounting Requirements for VAT-
Registered Persons. –
(A) Invoicing Requirements. – A VAT-registered person
shall, for every sale, issue an invoice or receipt. In
addition to the information required under Section 237,
the following information shall be indicated in the invoice
or receipt:
(1) A statement that the seller is a VAT-
registered person, followed by his taxpayer’s
identification number; and
(2) The total amount which the purchaser pays
or is obligated to pay to the seller with the
indication that such amount includes the value-
added tax.
(B) Accounting Requirements. – Notwithstanding the
provisions of Section 233, all persons subject to the
value-added tax under Sections 106 and 108 shall, in
addition to the regular accounting records required,
maintain a subsidiary sales journal and subsidiary
purchase journal on which the daily sales and purchases
are recorded. The subsidiary journals shall contain such
information as may be required by the Secretary of
Finance.64 (emphasis supplied)
Sec. 237. Issuance of Receipts or Sales or Commercial Invoices. –
All persons subject to an internal revenue tax shall, for each sale
or transfer of merchandise or for services rendered valued at
Twenty-five pesos (P25.00) or more, issue duly registered receipts
or sales or commercial invoices, prepared at least in duplicate,
showing the date of transaction, quantity, unit cost and description
of merchandise or nature of service: Provided, however, That in
the case of sales, receipts or transfers in the amount of One
Hundred Pesos (P100.00) or more, or regardless of amount, where
the sale or transfer is made by a person liable to value-added tax
to another person also liable to value-added tax; or where the
receipt is issued to cover payment made as rentals, commissions,
compensations or fees, receipts or invoices shall be issued which
shall show the name, business style, if any, and address of the
purchaser, customer or client; Provided, further, That where the
purchaser is a VAT-registered person, in addition to the
information herein required, the invoice or receipt shall further
show the Taxpayer Identification Number (TIN) of the purchaser.
The original of each receipt or invoice shall be issued to the
purchaser, customer or client at the time the transaction is
effected, who, if engaged in business or in the exercise of
profession, shall keep and preserve the same in his place of
business for a period of three (3) years from the close of the
taxable year in which such invoice or receipt was issued, while the
duplicate shall be kept and preserved by the issuer, also in his
place of business, for a like period.
The Commissioner may, in meritorious cases, exempt any person
subject to an internal revenue tax from compliance with the
provisions of this Section.65 (emphasis supplied)
Sec. 238. Printing of Receipts or Sales or Commercial Invoices. –
All persons who are engaged in business shall secure from the
Bureau of Internal Revenue an authority to print receipts or sales
or commercial invoices before a printer can print the same.
No authority to print receipts or sales or commercial invoices shall
be granted unless the receipts or invoices to be printed are serially
numbered and shall show, among other things, the name,
business style, Taxpayer Identification Number (TIN) and business
address of the person or entity to use the same, and such other
information that may be required by rules and regulations to be
promulgated by the Secretary of Finance, upon recommendation
of the Commissioner.
All persons who print receipt or sales or commercial invoices shall
maintain a logbook/register of taxpayer who availed of their
printing services. The logbook/register shall contain the following
information:
(1) Names, Taxpayer Identification Numbers of the
persons or entities for whom the receipts or sales or
commercial invoices are printed; and
(2) Number of booklets, number of sets per booklet,
number of copies per set and the serial numbers of the
receipts or invoices in each booklet. (emphasis supplied)
RR 2-90, as cited by respondent Commissioner, also states in its
Section 19(d) that:
Section 19. Authentication and registration of books, register, or
records; authority to print receipts, sales or commercial invoices;
and registration and stamping of receipts and invoices.
xxxx
53 | B A T C H SUBJECT FULLTEXT
(d) Registration and stamping of receipts and invoices
Before being used, the printed receipts, sales or commercial
invoices shall be registered with the revenue district officer where
the principal place of business of the taxpayer is located within
thirty (30) days from the date of printing the same. The registration
of the printed receipts or invoices shall be evidenced by an
appropriate stamp on the face of the taxpayer’s copy of the
authority to print as well as on the front cover, on the back of the
middle invoice or receipt and on the back of the last invoice or
receipt of the registered booklet or pad, authenticated by the
signature of the officer authorized to place the stamp thereon.
(emphasis supplied)
RR 7-95, the Consolidated VAT Regulations, also states in Section
4.108-1 that:
Section 4.108-1. Invoicing Requirements. – All VAT-registered
persons shall, for every sale or lease of goods or properties or
services, issue duly registered receipts or sales or commercial
invoices which must show:
1. the name, TIN and address of seller;
2. date of transaction;
3. quantity, unit cost and description of merchandise or
nature of service;
4. the name, TIN, business style, if any, and address of
the VAT-registered purchaser, customer or client;
5. the word "zero-rated" imprinted on the invoice covering
zero-rated sales; and
6. the invoice value or consideration.
In the case of sale of real property subject to VAT and where the
zonal or market value is higher than the actual consideration, the
VAT shall be separately indicated in the invoice or receipt.
Only VAT-registered persons are required to print their TIN
followed by the word "VAT" in their invoices or receipts and this
shall be considered as a "VAT-invoice." All purchases covered by
invoices other than "VAT Invoice" shall not give rise to any input
tax.
If the taxable person is also engaged in exempt operations, he
should issue separate invoices or receipts for the taxable and
exempt operations. A "VAT-invoice" shall be issued only for sales
of goods, properties or services subject to VAT imposed in
Sections 100 and 102 of the Code.
The invoice or receipt shall be prepared at least in duplicate, the
original to be given to the buyer and the duplicate to be retained by
the seller as part of his accounting records.
It is clear from the foregoing that while entities engaged in
business are required to secure from the BIR an authority to print
receipts or invoices and to issue duly registered receipts or
invoices, it is not required that the BIR authority to print be
reflected or indicated therein. Only the following items are required
to be indicated in the receipts or invoices: (1) a statement that the
seller is a VAT-registered entity followed by its TIN-V; (2) the total
amount which the purchaser pays or is obligated to pay to the
seller with the indication that such amount includes the value-
added tax; (3) date of the transaction; (4) quantity of merchandise;
(5) unit cost; (6) description of merchandise or nature of service;
(7) the name, business style, if any, and address of the purchaser,
customer or client in the case of sales, receipt or transfers in the
amount of ₱100.00 or more, or regardless of the amount, where
the sale or transfer is made by a person liable to VAT to another
person also liable to VAT, or where the receipt is issued to cover
payment made as rentals, commissions, compensations or fees;
and (8) the TIN of the purchaser where the purchaser is a VAT-
registered person.
It should be noted that petitioner is engaged in export sales, such
that the purchasers of its goods are foreign entities, which are,
logically, not VAT-registered in our country or liable to pay VAT in
our jurisdiction. Items (7) and (8) in the above enumeration do not,
thus, apply to petitioner; that is, they need not be reflected or
indicated in the invoices or receipts, given that it is an entity
engaged in export sales, and the purchasers of its goods which
are foreign entities are not VAT-registered in our country nor liable
to pay VAT in our jurisdiction.
In any case, the above cited provisions of law and revenue
regulations do not provide that failure to reflect or indicate in the
invoices or receipts the BIR authority to print, as well as the TIN-V,
would result in the outright invalidation of these invoices or
receipts. Neither is it provided therein that such omission or failure
would result in the outright denial of a claim for tax credit/refund.
Instead, Section 264 of the Tax Code imposes the penalty of fine
and imprisonment for, among others, invoices or receipts that do
not truly reflect or contain all the required information, to wit:
Section 264. Failure or Refusal to Issue Receipts or Sales or
Commercial Invoices, Violations Related to the Printing of such
Receipts or Invoices or Other Violations. –
(a) Any person who, being required under Section 237 to
issue receipts or sales or commercial invoices, fails or
refuses to issue such receipts or invoices, issues receipts
or invoices that do not truly reflect and/or contain all the
informations required to be shown therein or uses
multiple or double receipts or invoices, shall, upon
conviction for each act or omission, be punished by a fine
of not less than One thousand pesos (P1,000) but not
more than Fifty thousand pesos (P50,000) and suffer
imprisonment of not less than two (2) years but not more
than four (4) years.
(b) Any person who commits any of the acts enumerated
hereunder shall be penalized in the same manner and to
the same extent as provided for in this Section:
(1) Printing of receipts or sales or commercial
invoices without authority from the Bureau of
Internal Revenue; or
(2) Printing of double or multiple sets of
invoices or receipts;
(3) Printing of unnumbered receipts or sales or
commercial invoices, not bearing the name,
business style, Taxpayer Identification Number,
and business address of the person or entity.
The appellate court’s reliance on RMC No. 42-2003 is misplaced.
The said Circular clarified, inter alia, that failure to comply with the
invoicing requirements on the documents supporting the sale of
goods and services would result in the disallowance of the claim
for refund or issuance of a tax credit certificate of creditable input
54 | B A T C H SUBJECT FULLTEXT
taxes. The said Circular mentioned as an example the failure to
state the TIN of the taxpayer in the invoice or receipt. However, in
petitioner’s case, the principal ground for the denial of its claim for
refund or issuance of a tax credit certificate is its failure to reflect or
indicate in its invoices the BIR authority to print. As earlier
discussed, the BIR authority to print is not one of the items
required by law to be reflected or indicated in the invoices or
receipts. In any case, the said Circular was issued on July 15,
2003 by then Commissioner Guillermo L. Parayno, Jr., while
petitioner’s claim was filed on May 18, 1999. Hence, RMC No. 42-
2003 cannot be applied retroactively because to do so would be
prejudicial to petitioner. In a long line of cases, 66 the Court has
affirmed that the rulings, circulars, rules and regulations
promulgated by the Commissioner on Internal Revenue would
have no retroactive application if to so apply them would be
prejudicial to the taxpayers.
It bears reiterating that while the pertinent provisions of the Tax
Code and the rules and regulations implementing them require
entities engaged in business to secure a BIR authority to print
invoices or receipts and to issue duly registered invoices or
receipts, it is not specifically required that the BIR authority to print
be reflected or indicated therein. Indeed, what is important with
respect to the BIR authority to print is that it has been secured or
obtained by the taxpayer, and that invoices or receipts are duly
registered.
Even as the Court now holds that petitioner is legally entitled to a
refund or issuance of a tax credit certificate of its unutilized VAT
input taxes on domestic purchases of goods and services
attributable to its zero-rated sales, the case shall nevertheless be
remanded to the CTA for proper determination and computation of
petitioner’s tax credit/refund, considering that in the Report 71 of the
independent auditor, Eliseo Aurellado, only the amount of
₱9,688,809.00 was deemed as petitioner’s valid claim for tax
credit.72 According to Aurellado, the difference of ₱2,081,372.32
from petitioner’s input VAT claim of ₱11,770,181.70 was not
supported by sufficient documentary proof. 73 The Court, not being
a trier of facts, cannot certainly decide this factual circumstance.
WHEREFORE, premises considered, the petition is PARTIALLY
GRANTED. The Decision dated August 12, 2004 of the CA in CA-
G.R. SP No. 79327 is REVERSED and SET ASIDE. The instant
case is REMANDED to the Court of Tax Appeals for the
determination and computation of petitioner’s tax credit/refund.
SO ORDERED.

To stress, petitioner, as a VAT-registered entity, is engaged in

export sales of advanced and large-scale ICs and, as such, under
Section 106 (A)(2)(a)(1) of the Tax Code, its sales or transactions
are subject to VAT at 0% rate. Further, subject to the requirements
stated in Section 112(A), it is entitled to claim refund or issuance of
a tax credit certificate for input VAT taxes attributable to its export
sales. As the Court had the occasion to explain since no output
VAT was imposed on the zero-rated export sales, what the
government reimburses or refunds to the claimant is the input VAT
paid – thus, the necessity for the input VAT paid to be
substantiated by purchase invoices or official receipts. 67 These
sales invoices or receipts issued by the supplier are necessary to
substantiate the actual amount or quality of goods sold and their
selling price, and, taken collectively, are the best means to prove
the input VAT payments of the claimant.68

In a claim for refund or issuance of a tax credit certificate

attributable to zero-rated sales, what is to be closely scrutinized is
the documentary substantiation of the input VAT paid, as may be
proven by other export documents, rather than the supporting
documents for the zero-rated export sales. And since petitioner
has established by sufficient evidence that it is entitled to a refund
or issuance of a tax credit certificate, in accordance with the
requirements of Sections 106 (A)(2)(a)(1) and 112(A) of the Tax
Code, then its claim should not be denied, notwithstanding its
failure to state on the invoices the BIR authority to print and the
TIN-V. Worthy of mentioning again is the fact that even the CTA
and the CA have found petitioner to be legally entitled to a claim
for refund or issuance of a tax credit certificate of its unutilized VAT
input taxes on domestic purchases of goods and services
attributable to its zero-rated sales.

What applies to petitioner, as a PEZA-registered export enterprise,

is the Court’s pronouncement that leniency in the implementation
of the VAT is an imperative, precisely to spur economic growth in
the country and attain global competitiveness as envisioned in our
laws.69 The incentives offered to PEZA enterprises, among which
are tax exemptions and tax credits, ultimately redound to the
benefit of the national economy, enticing as they do more
enterprises to invest and do business within the zones, thus
creating more employment opportunities and infusing more
dynamism to the vibrant interplay of market forces.70

55 | B A T C H SUBJECT FULLTEXT
G.R. No. 182364 August 3, 2010
AT&T COMMUNICATIONS SERVICES PHILIPPINES,
INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
CARPIO MORALES, J.:
AT&T Communications Services Philippines, Inc. (petitioner) is a
domestic corporation primarily engaged in the business of
providing information, promotional, supportive and liaison services
to foreign corporations such as AT&T Communications Services
International Inc., AT&T Solutions, Inc., AT&T Singapore, Pte.
Ltd.,, AT&T Global Communications Services, Inc. and Acer, Inc.,
an enterprise registered with the Philippine Economic Zone
Authority (PEZA).
Under Service Agreements forged by petitioner with the above-
named corporations, remuneration is paid in U.S. Dollars and
inwardly remitted in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP).
For the calendar year 2002, petitioner incurred input VAT when it
generated and recorded zero-rated sales in connection with its
Service Agreements in the peso equivalent of ₱56,898,744.05.
Petitioner also incurred input VAT from purchases of capital goods
and other taxable goods and services, and importation of capital
goods.
Despite the application of petitioner’s input VAT against its output
VAT, an excess of unutilized input VAT in the amount of
₱2,050,736.69 remained. As petitioner’s unutilized input VAT could
not be directly and exclusively attributed to either of its zero-rated
sales or its domestic sales, an allocation of the input VAT was
made which resulted in the amount of ₱1,801,826.82 as
petitioner’s claim attributable to its zero-rated sales.
On March 26, 2004, petitioner filed with the Commissioner of
Internal Revenue (respondent) an application for tax refund and/or
tax credit of its excess/unutilized input VAT from zero-rated sales
in the said amount of ₱1,801,826.82.1
To prevent the running of the prescriptive period, petitioner
subsequently filed a petition for review with the Court of Tax
Appeals (CTA) which was docketed as CTA Case No. 6907 and
lodged before its First Division.
In support of its claim, petitioner presented documents including its
Summary of Zero-Rated Sales (Exhibit "DD") with corresponding
supporting documents; VAT invoices on which were stamped
"zero-rated" and bank credit advices (Exhibits "EE-1" to "EE-56");
copies of Service Agreements (Exhibits "N" to "Q"); and report of
the commissioned certified public accountant (Exhibit "AA" to "AA-
22").
After petitioner presented its evidence, respondent did not, despite
notice, proffer any opposition to it. He was eventually declared to
have waived his right to present evidence.1avvphi1
By Decision of February 23, 2007,2 the CTA First Division,
conceding that petitioner’s transactions fall under the classification
of zero-rated sales, nevertheless denied petitioner’s claim "for lack
of substantiation," disposing as follows:
In reiteration, considering that the subject revenues pertain to
gross receipts from services rendered by petitioner, valid VAT
official receipts and not mere sales invoices should have been
submitted in support thereof. Without proper VAT official receipts,
the foreign currency payments received by petitioner from services
rendered for the four (4) quarters of taxable year 2002 in the sum
of US$1,102,315.48 with the peso equivalent of ₱56,898,744.05
cannot qualify for zero-rating for VAT purposes. Consequently, the
claimed input VAT payments allegedly attributable thereto in the
amount of ₱1,801,826.82 cannot be granted. It is clear from the
provisions of Section 112 (A) of the NIRC of 1997 that there must
be zero-rated or effectively zero-rated sales in order that a refund
of input VAT could prosper.
x x x x3 (emphasis and underscoring supplied)
The CTA First Division, relying on Sections 1064 and 1085 of the
Tax Code, held that since petitioner is engaged in sale of services,
VAT Official Receipts should have been presented in order to
substantiate its claim of zero-rated sales, not VAT invoices which
pertain to sale of goods or properties.
On petition for review, the CTA En Banc, by Decision of February
18, 2008,6 affirmed that of the CTA First Division. Petitioner’s
motion for reconsideration having been denied by Resolution of
April 2, 2008, the present petition for review was filed.
The petition is impressed with merit.
A taxpayer engaged in zero-rated transactions may apply for tax
refund or issuance of tax credit certificate for unutilized input VAT,
subject to the following requirements: (1) the taxpayer is engaged
in sales which are zero-rated (i.e., export sales) or effectively zero-
rated; (2) the taxpayer is VAT-registered; (3) the claim must be
filed within two years after the close of the taxable quarter when
such sales were made; (4) the creditable input tax due or paid
must be attributable to such sales, except the transitional input tax,
to the extent that such input tax has not been applied against the
output tax; and (5) in case of zero-rated sales under Section 106
(A) (2) (a) (1) and (2), Section 106 (B) and Section 108 (B) (1) and
(2), the acceptable foreign currency exchange proceeds thereof
have been duly accounted for in accordance with BSP rules and
regulations.7
Commissioner of Internal Revenue v. Seagate Technology
(Philippines)8 teaches that petitioner, as zero-rated seller, hence,
directly and legally liable for VAT, can claim a refund or tax credit
certificate.
Zero-rated transactions generally refer to the export sale of goods
and supply of services. The tax rate is set at zero. When applied to
the tax base, such rate obviously results in no tax chargeable
against the purchaser. The seller of such transactions charges no
output tax but can claim a refund or a tax credit certificate for the
VAT previously charged by suppliers. x x x
Applying the destination principle to the exportation of
goods, automatic zero rating is primarily intended to be enjoyed by
the seller who is directly and legally liable for the VAT, making
such seller internationally competitive by allowing the refund or
credit of input taxes that are attributable to export sales. (emphasis
and underscoring supplied)
Revenue Regulation No. 3-88 amending Revenue Regulation No.
5-87 provides the requirements in claiming tax credits/refunds:
Sec. 2. Section 16 of Revenue Regulations 5-87 is hereby
amended to read as follows: x x x
56 | B A T C H SUBJECT FULLTEXT
(c) Claims for tax credits/refunds – Application for Tax
Credit/Refund of Value-Added Tax Paid (BIR Form No. 2552) shall
be filed with the Revenue District Office of the city or municipality
where the principal place of business of the applicant is located or
directly with the Commissioner, Attention: VAT Division.
WHEREFORE, the petition is GRANTED. The Decision of
February 18, 2008 of the Court of Tax Appeals En
Bancis REVERSED and SET ASIDE. Let the case
be REMANDED to the Court of Tax Appeals First Division for the
determination of petitioner’s tax credit/refund.

A photocopy of the purchase invoice or receipt evidencing the SO ORDERED.

value added tax paid shall be submitted together with the
application. The original copy of the said invoice/receipt, however
shall be presented for cancellation prior to the issuance of the Tax
Credit Certificate or refund. x x x (emphasis and underscoring
supplied)

Section 113 of the Tax Code does not create a distinction between
a sales invoice and an official receipt.

Sec. 113. Invoicing and Accounting Requirements for VAT-

Registered Persons. –

(A) Invoicing Requirements. – A VAT-registered person

shall, for every sale, issue an invoice or receipt. In
addition to the information required under Section 237,
the following information shall be indicated in the invoice
or receipt:

(1) A statement that the seller is a VAT-

registered person, followed by his taxpayer’s
identification number (TIN); and

(2) The total amount which the purchaser pays

or is obligated to pay to the seller with the
indication that such amount includes the value-
added tax. (emphasis, italics and underscoring
supplied)

Section 110 of the 1997 Tax Code in fact provides:

Section 110. Tax Credits –

A. Creditable Input Tax. –

(1) Any input tax evidenced by a VAT invoice or official receipt

issued in accordance with Section 113 hereof on the following
transactions shall be creditable against the output tax:

(b) Purchase of services on which a value-added tax has actually

been paid. (emphasis, italics and underscoring supplied)

Parenthetically, to determine the validity of petitioner’s claim as to

unutilized input VAT, an invoice would suffice provided the
requirements under Sections 113 and 237 of the Tax Code are
met.1avvphi1

Sales invoices are recognized commercial documents to facilitate

trade or credit transactions. They are proofs that a business
transaction has been concluded, hence, should not be considered
bereft of probative value.9 Only the preponderance of evidence
threshold as applied in ordinary civil cases is needed to
substantiate a claim for tax refund proper. 10

IN FINE, the Court finds that petitioner has complied with the
substantiation requirements to prove entitlement to refund/tax
credit. The Court is not a trier of facts, however, hence the need to
remand the case to the CTA for determination and computation of
petitioner’s refund/tax credit.

57 | B A T C H SUBJECT FULLTEXT
G.R. No. 180043 July 14, 2009
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
PHILIPPINE AIRLINES, INC., Respondent.
DECISION
CHICO-NAZARIO, J.:
In this Petition for Review on Certiorari, under Rule 45 of the
Revised Rules of Court, petitioner Commissioner of Internal
Revenue assails the Decision1 of the Court of Tax Appeals (CTA)
En Banc dated 9 August 2007 in CTA EB No. 221, affirming the
Decision2 dated 14 June 2006 of the CTA First Division in CTA
Case No. 6735, which granted the claim of respondent Philippine
Airlines, Inc. (PAL) for the refund of its Overseas Communications
Tax (OCT) for the period April to December 2001.
Petitioner, as the Commissioner of the Bureau of Internal Revenue
(BIR), is responsible for the assessment and collection of all
national internal revenue taxes, fees, and charges, including the
10% Overseas Communications Tax (OCT), imposed by Section
120 of the National Internal Revenue Code (NIRC) of 1997, which
reads:
SEC. 120. Tax on Overseas Dispatch, Message or Conversation
Originating from the Philippines. -
(A) Persons Liable—There shall be collected upon every overseas
dispatch, message or conversation transmitted from the
Philippines by telephone, telegraph, telewriter exchange, wireless
and other communication equipment service, a tax of ten percent
(10%) on the amount paid of [the transaction involving overseas
dispatch, message or conversation] such services. The tax
imposed in this Section shall be payable by the person paying for
the services rendered and shall be paid to the person rendering
the services who is required to collect and pay the tax within
twenty (20) days after the end of each quarter.
On the other hand, respondent is a domestic corporation
organized under the corporate laws of the Republic of the
Philippines; declared the national flag carrier of the country; and
the grantee under Presidential Decree No. 15903 of a franchise to
establish, operate, and maintain transport services for the carriage
of passengers, mail, and property by air, in and between any and
all points and places throughout the Philippines, and between the
Philippines and other countries.41avvphi1
For the period January to December 2001, the Philippine Long
Distance Telephone Company (PLDT) collected from respondent
the 10% OCT on the amount paid by the latter for overseas
telephone calls it had made through the former. In all, PLDT
collected from respondent the amount of ₱202,471.18 as OCT for
2001, summarized as follows5:
PERIOD AMOUNT
January to March 2001 ₱ 75,332.26
April to June 2001 50,271.43
July to September 2001 43,313.96
October to December 2001 33,553.53
Total ₱ 202,471.18
On 8 April 2003, respondent filed with the BIR an administrative
claim for refund of the ₱202,471.18 OCT it alleged to have
erroneously paid in 2001. In a letter 6 dated 4 April 2003, addressed
to petitioner, Ma. Stella L. Diaz (Diaz), the Assistant Vice-President
for Financial Planning & Analysis of respondent, explained that the
claim for refund of respondent was based on its franchise, Section
13 of Presidential Decree No. 1590, which granted it (1) the option
to pay either the basic corporate income tax on its annual net
taxable income or the two percent franchise tax on its gross
revenues, whichever was lower; and (2) the exemption from all
other taxes, duties, royalties, registration, license and other fees
and charges imposed by any municipal, city, provincial or national
authority or government agency, now or in the future, except only
real property tax. Also invoking BIR Ruling No. 97-947 dated 13
April 1994, Diaz maintained that, other than being liable for basic
corporate income tax or the franchise tax, whichever was lower,
respondent was clearly exempted from all other taxes, including
OCT, by virtue of the "in lieu of all taxes" clause in Section 13 of
Presidential Decree No. 1590.
Petitioner failed to act on the request for refund of respondent,
which prompted respondent to file on 4 June 2003, with the CTA in
Division, a Petition for Review, docketed as CTA Case No. 6735.
Respondent sought the refund of the amount ₱127,138.92,
representing OCT, which PLDT erroneously collected from
respondent for the second, third and fourth quarters of 2001.8 The
claim of respondent for the refund of the OCT for the first quarter of
2001, amounting to ₱75,323.26, had already prescribed after the
passing of more than two years since said amount was paid.
Respondent alleged in its Petition that per its computation,
reflected in its annual income tax return, it incurred a net loss in
2001 resulting in zero basic corporate income tax liability, which
was necessarily lower than the franchise tax due on its gross
revenues. Respondent argued that in opting for the basic
corporate income tax, regardless of whether or not it actually paid
any amount as tax, it was already entitled to the exemption from all
other taxes granted to it by Section 13 of Presidential Decree No.
1590. 9
After a hearing on the merits, the CTA First Division rendered a
Decision10 dated 14 June 2006, the dispositive part of which reads:
WHEREFORE, the Petition for Review is hereby GRANTED.
Respondent is ORDERED to refund to the petitioner the
substantiated amount of ₱126,243.80 representing the erroneously
collected 10% Overseas Communications Tax for the period April
to December 2001.
The CTA First Division reasoned that under Section 13 of
Presidential Decree No. 1590, respondent had the option to
choose between two alternatives: the basic corporate income tax
and the franchise tax, whichever would result in a lower amount of
tax, and this would be in lieu of all other taxes, with the exception
only of tax on real property. In the event that respondent incurred a
net loss for the taxable year resulting in zero basic corporate
income tax liability, respondent could not be required to pay the
franchise tax before it could avail itself of the exemption from all
other taxes under Section 13 of Presidential Decree No. 1590. The
possibility that respondent would incur a net loss for a given
taxable period and, thus, have zero liability for basic corporate
income tax, was already anticipated by Section 13 of Presidential
Decree No. 1590, the very same section granting respondent tax
exemption, since it authorized respondent to carry over its excess
net loss as a deduction for the next five taxable years.
However, the CTA First Division held that out of the total amount of
₱127,138.92 respondent sought to refund, only the amount of
₱126,243.80 was supported by either original or photocopied
PLDT billing statements, original office receipts, and original copies
58 | B A T C H SUBJECT FULLTEXT
of check vouchers of respondent. Respondent was also able to
prove, through testimonial evidence, that the OCT collected by
PLDT from it was included in the quarterly percentage tax returns
of PLDT for the second, third, and fourth quarters of 2001, which
were submitted to and received by an authorized agent bank of the
BIR.11
Not satisfied with the foregoing Decision dated 14 June 2006,
petitioner filed a Motion for Reconsideration, which was denied by
the CTA First Division in a Resolution dated 17 October 2006. 12
Petitioner filed an appeal with the CTA en banc, docketed as CTA
EB No. 221. The latter promulgated its Decision13on 9 August 2007
denying petitioner’s appeal. The CTA En Banc found that
Presidential Decree No. 1590 does not provide that only the actual
payment of basic corporate income tax or franchise tax by
respondent would entitle it to the tax exemption provided under
Section 13 of the latter’s franchise. Like the CTA First Division, the
CTA en banc ruled that by providing for net loss carry-over,
Presidential Decree No. 1590 recognized the possibility that
respondent would end up with a net loss in the computation of its
taxable income, which would mean zero liability for basic corporate
income tax. The CTA En Banc further cited Commissioner of
Internal Revenue v. Philippine Airlines, Inc.14 (PAL case) to support
its conclusions. In the said case, this Court declared that despite
the fact that respondent did not pay any basic corporate income
tax, given its net loss position for the taxable years concerned, it
was still exempted from paying all other taxes, including final
withholding tax on interest income, pursuant to Section 13 of
Presidential Decree No. 1590. Lastly, the CTA en banc sustained
the finding of the CTA First Division that respondent was only able
to establish its claim for OCT refund in the amount of ₱126,243.80.
The CTA En Banc denied petitioner’s Motion for Reconsideration
in a Resolution dated 11 October 2007.15
Hence, the present Petition for Review where the petitioner raises
the following issues:
I will not reveal any provision therein limiting the tax exemption of
THE COURT OF TAX APPEALS EN BANC ERRED IN HOLDING
THAT THE PHRASE "IN LIEU OF ALL OTHER TAXES" IN
SECTIONS 13 AND 14 OF PRESIDENTIAL DECREE NO. 1590
DOES NOT CONTEMPLATE THE FULFILLMENT OF A
CONDITION BEFORE THE EXEMPTION FROM ALL OTHER
TAXES MAY BE APPLIED; AND
II
TAX REFUNDS ARE IN THE NATURE OF TAX EXEMPTIONS.
AS SUCH, THEY SHOULD BE CONSTRUED STRICTISSIMI
JURIS AGAINST THE PERSON OR ENTITY CLAIMING THE
EXEMPTION.16
The present Petition is without merit.
Petitioner argues that the PAL case is not applicable to the case at
bar, since the former involves final withholding tax on interest
income, while the latter concerns another type of tax, the OCT. 17
Petitioner’s argument is untenable.
Pertinent portions of Section 13 of Presidential Decree No. 1590
are quoted hereunder:
Section 13. In consideration of the franchise and rights hereby
granted, the grantee shall pay to the Philippine Government during
the life of this franchise, whichever of subsections (a) and (b)
hereunder will result in a lower tax:
(a) The basic corporate income tax based on the
grantee’s annual net taxable income computed in
accordance with the provisions of the National Internal
Revenue Code; or
(b) A franchise tax of two per cent (2%) of the gross
revenues, derived by the grantee from all sources,
without distinction as to transport or non-transport
operations; provided, that with respect to international
air-transport service, only the gross passenger, mail and
freight revenues from its outgoing flights shall be subject
to this tax.
The tax paid by grantee under either of the above alternatives shall
be in lieu of all other taxes, duties, royalties, registration, license,
and other fees and charges of any kind, nature, or description
imposed, levied, established, assessed or collected by any
municipal, city, provincial, or national authority or government
agency, now or in the future x x x
xxxx
The grantee, shall, however, pay the tax on its real property in
conformity with existing law.
The language used in Section 13 of Presidential Decree No. 1590,
granting respondent tax exemption, is clearly all-inclusive. The
basic corporate income tax or franchise tax paid by respondent
shall be "in lieu of all other taxes, duties, royalties, registration,
license, and other fees and charges of any kind, nature, or
description imposed, levied, established, assessed or collected by
any municipal, city, provincial, or national authority or government
agency, now or in the future x x x," except only real property tax.
Even a meticulous examination of Presidential Decree No. 1590
respondent to final withholding tax on interest income or excluding
from said exemption the OCT.
Moreover, although the PAL case may involve a different type of
tax, certain pronouncements made by the Court therein are still
significant in the instant case.
In the PAL case, petitioner likewise opposed the claim for refund of
respondent based on the argument that the latter was not
exempted from final withholding tax on interest income, because
said tax should be deemed part of the basic corporate income tax,
which respondent had opted to pay. This Court was unconvinced
by petitioner’s argument, ratiocinating that "basic corporate income
tax," under Section 13(a) of Presidential Decree No. 1590, relates
to the general rate of 35% (reduced to 32% by the year 2000)
imposed on taxable income by Section 27(A) of the NIRC.
Although the definition of "gross income" is broad enough to
include all passive incomes, the passive incomes already
subjected to different rates of final tax to be withheld at source
shall no longer be included in the computation of gross income,
which shall be used in the determination of taxable income. The
interest income of respondent is already subject to final
withholding tax of 20%, and no longer to the basic corporate
income tax of 35%. Having established that final tax on interest
income is not part of the basic corporate income tax, then the
former is considered as among "all other taxes" from which
respondent is exempted under Section 13 of Presidential Decree
No. 1590.
59 | B A T C H SUBJECT FULLTEXT
It is true that the discussion in the PAL case on "gross income" is
immaterial to the case at bar. OCT is not even an income tax. It is
a business tax, which the government imposes on the gross
annual sales of operators of communication equipment sending
overseas dispatches, messages or conversations from the
Philippines. According to Section 120 of the NIRC, the person
paying for the services rendered (respondent, in this case) shall
pay the OCT to the person rendering the service (PLDT); the latter,
in turn, shall remit the amount to the BIR. If this Court deems that
final tax on interest income – which is also an income tax, but
distinct from basic corporate income tax – is included among "all
other taxes" from which respondent is exempt, then with all the
more reason should the Court consider OCT, which is altogether a
different type of tax, as also covered by the said exemption.
Petitioner further avers that respondent cannot avail itself of the
benefit of the "in lieu of all other taxes" proviso in Section 13 of
Presidential Decree No. 1590 when it made no actual payment of
either the basic corporate income tax or the franchise tax.
Petitioner made the same averment in the PAL case, which the
Court rejected for the following reasons:
A careful reading of Section 13 rebuts the argument of the CIR that
the "in lieu of all other taxes" proviso is a mere incentive that
applies only when PAL actually pays something. It is clear that PD
1590 intended to give respondent the option to avail itself of
Subsection (a) or (b) as consideration for its franchise. Either
option excludes the payment of other taxes and dues imposed or
collected by the national or the local government. PAL has the
option to choose the alternative that results in lower taxes. It is not
the fact of tax payment that exempts it, but the exercise of its
option.
Under Subsection (a), the basis for the tax rate is respondent’s
annual net taxable income, which (as earlier discussed) is
computed by subtracting allowable deductions and exemptions
from gross income. By basing the tax rate on the annual net
taxable income, PD 1590 necessarily recognized the situation in
which taxable income may result in a negative amount and thus
translate into a zero tax liability.
xxxx
The fallacy of the CIR’s argument is evident from the fact that the
payment of a measly sum of one peso would suffice to exempt
PAL from other taxes, whereas a zero liability arising from its
losses would not. There is no substantial distinction between a
zero tax and a one-peso tax liability.18 (Emphases ours.)
In insisting that respondent needs to actually pay a certain amount
as basic corporate income tax or franchise tax, before it can enjoy
the tax exemption granted to it, petitioner places too much reliance
on the use of the word "pay" in the first line of Section 13 of
Presidential Decree No. 1590.
It must do well for petitioner to remember that a statute’s clauses
and phrases should not be taken as detached and isolated
expressions, but the whole and every part thereof must be
considered in fixing the meaning of any of its parts.19 A strict
interpretation of the word "pay" in Section 13 of Presidential
Decree No. 1590 would effectively render nugatory the other rights
categorically conferred upon the respondent by its franchise.
Section 13 of Presidential Decree No. 1590 clearly gives
respondent the option to "pay" either basic corporate income tax
on its net taxable income or franchise tax on its gross revenues,
whichever would result in lower tax. The rationale for giving
respondent such an option is explained in the PAL case, to wit:
Notably, PAL was owned and operated by the government at the
time the franchise was last amended. It can reasonably be
contemplated that PD 1590 sought to assist the finances of the
government corporation in the form of lower taxes. When the
respondent operates at a loss (as in the instant case), no taxes are
due; in this [sic] instances, it has a lower tax liability than that
provided by Subsection (b).20
In the event that respondent incurs a net loss, it shall have zero
liability for basic corporate income tax, the lowest possible tax
liability. There being no qualification to the exercise of its options
under Section 13 of Presidential Decree No. 1590, then
respondent is free to choose basic corporate income tax, even if it
would have zero liability for the same in light of its net loss position
for the taxable year. Additionally, a ruling by this Court compelling
respondent to pay a franchise tax when it incurs a net loss and is,
thus, not liable for any basic corporate income tax would be
contrary to the evident intent of the law to give respondent options
and to make the latter liable for the least amount of tax.
Moreover, then President Ferdinand E. Marcos, the author of
Presidential Decree No. 1590, was mindful of the possibility that
respondent would incur a net loss for a taxable year, resulting in
zero tax liability for basic corporate income tax, when he included
in the franchise of respondent the following provisions:
For the purposes of computing the basic corporate income tax as
provided herein, the grantee is authorized:
xxxx
(2) To carry over as a deduction from taxable income any net loss
incurred in any year up to five years following the year of such
loss.
In allowing respondent to carry over its net loss for five consecutive
years following the year said loss was incurred, Presidential
Decree No. 1590 takes into account the possibility that respondent
shall be in a net loss position for six years straight, during which it
shall have zero basic corporate income tax liability. The Court also
notes that net loss carry-over may only be used in the computation
of basic corporate income tax. Hence, if respondent is required to
pay a franchise tax every time it has zero basic corporate income
tax liability due to net loss, then it shall never have the opportunity
to avail itself of the benefit of net loss carry-over.
Finally, petitioner contends that according to well-established
doctrine, a tax refund, which is in the nature of a tax exemption,
should be construed strictissimi juris against the
taxpayer.21 However, when the claim for refund has clear legal
basis and is sufficiently supported by evidence, as in the present
case, then the Court shall not hesitate to grant the same.
In its previous discussion, the Court has already established that
by merely exercising its option to pay for basic corporate income
tax – even if it had zero liability for the same due to its net loss
position in 2001 – respondent was already exempted from all other
taxes, including the OCT. Therefore, respondent is entitled to
recover the amount of OCT erroneously collected from it in 2001.
Also, the CTA, both in Division and en banc, found that respondent
submitted ample evidence to prove its payment of OCT to PLDT
during the second, third, and fourth quarters of 2001, in the total
amount of ₱126,243.80, which, in turn, was paid by PLDT to the
BIR. Said finding by the CTA, being factual in nature, is already
conclusively binding upon this Court. Under our tax system, the
60 | B A T C H SUBJECT FULLTEXT
CTA acts as a highly specialized body specifically created for the
purpose of reviewing tax cases. Accordingly, its findings of fact are
generally regarded as final, binding, and conclusive on this Court,
and will not ordinarily be reviewed or disturbed on appeal when
supported by substantial evidence, in the absence of gross error or
abuse on its part.22

WHEREFORE, the instant Petition for Review is DENIED. The

Decision of the Court of Tax Appeals En Banc dated 9 August
2007 in CTA EB No. 221, affirming the Decision dated 14 June
2006 of the CTA First Division in CTA Case No. 6735, which
granted the claim of Philippine Airlines, Inc. for a refund of
Overseas Communications Tax erroneously collected from it for
the period April to December 2001, in the amount of ₱126,243.80,
is AFFIRMED. No costs.

SO ORDERED.

61 | B A T C H SUBJECT FULLTEXT
G.R. No. 180345 November 25, 2009
SAN ROQUE POWER CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
CHICO-NAZARIO, J.:
In this Petition for Review on Certiorari, under Rule 45 of the
Revised Rules of Court, petitioner San Roque Power Corporation
assails the Decision1 of the Court of Tax Appeals (CTA) En Banc
dated 20 September 2007 in CTA EB No. 248, affirming the
Decision2 dated 23 March 2006 of the CTA Second Division in
CTA Case No. 6916, which dismissed the claim of petitioner for the
refund and/or issuance of a tax credit certificate in the amount of
Two Hundred Forty-Nine Million Three Hundred Ninety-Seven
Thousand Six Hundred Twenty Pesos and 18/100
(₱249,397,620.18) allegedly representing unutilized input Value
Added Tax (VAT) for the period covering January to December
2002.
Respondent, as the Commissioner of the Bureau of Internal
Revenue (BIR), is responsible for the assessment and collection of
all national internal revenue taxes, fees, and charges, including the
Value Added Tax (VAT), imposed by Section 1083 of the National
Internal Revenue Code (NIRC) of 1997. Moreover, it is empowered
to grant refunds or issue tax credit certificates in accordance with
Section 112 of the NIRC of 1997 for unutilized input VAT paid on
zero-rated or effectively zero-rated sales and purchases of capital
goods, to wit:
SEC. 112. Refunds or Tax Credits of Input Tax. -
(A) Zero-rated or Effectively Zero-rated Sales—Any VAT-
registered person, whose sales are zero-rated or
effectively zero-rated may, within two (2) years after the
close of the taxable quarter when the sales were made,
apply for the issuance of a tax credit certificate or refund
of creditable input tax due or paid attributable to such
sales, except transitional input tax, to the extent that such
input tax has not been applied against output tax:
Provided, however, That in the case of zero-rated sales
under Section 106(A)(2)(a)(1), (2) and (B) and Section
108 (B)(1) and (2), the acceptable foreign currency
exchange proceeds thereof had been duly accounted for
in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP): Provided, further,
That where the taxpayer is engaged in zero-rated or
effectively zero-rated sale and also in taxable or exempt
sale of goods or properties or services, and the amount
of creditable input tax due or paid cannot be directly and
entirely attributed to any one of the transactions, it shall
be allocated proportionately on the basis of the volume of
sales.
(B) Capital Goods—A VAT-registered person may apply
for the issuance of a tax credit certificate or refund of
input taxes paid on capital goods imported or locally
purchased, to the extent the such input taxes have not
been applied against output taxes. The application may
be made only within two (2) years after the close of the
taxable quarter when the importation or purchase was
made.
On the other hand, petitioner is a domestic corporation organized
under the corporate laws of the Republic of the Philippines. On 14
October 1997, it was incorporated for the sole purpose of building
and operating the San Roque Multipurpose Project in San Manuel,
Pangasinan, which is an indivisible project consisting of the power
station, the dam, spillway, and other related facilities.4 It is
registered with the Board of Investments (BOI) on a preferred
pioneer status to engage in the design, construction, erection,
assembly, as well as own, commission, and operate electric
power-generating plants and related activities, for which it was
issued the Certificate of Registration No. 97-356 dated 11
February 1998.5 As a seller of services, petitioner is registered with
the BIR as a VAT taxpayer under Certificate of Registration No.
OCN-98-006-007394.6
On 11 October 1997, petitioner entered into a Power Purchase
Agreement (PPA) with the National Power Corporation (NPC) to
develop the hydro potential of the Lower Agno River, and to be
able to generate additional power and energy for the Luzon Power
Grid, by developing and operating the San Roque Multipurpose
Project. The PPA provides that petitioner shall be responsible for
the design, construction, installation, completion and testing and
commissioning of the Power Station and it shall operate and
maintain the same, subject to the instructions of the NPC. During
the cooperation period of 25 years commencing from the
completion date of the Power Station, the NPC shall purchase all
the electricity generated by the Power Plant. 7
Because of the exclusive nature of the PPA between petitioner and
the NPC, petitioner applied for and was granted five Certificates of
Zero Rate by the BIR, through the Chief Regulatory Operations
Monitoring Division, now the Audit Information, Tax Exemption &
Incentive Division. Based on these certificates, the zero-rated
status of petitioner commenced on 27 September 1998 and
continued throughout the year 2002.8
For the period January to December 2002, petitioner filed with the
respondent its Monthly VAT Declarations and Quarterly VAT
Returns. Its Quarterly VAT Returns showed excess input VAT
payments on account of its importation and domestic purchases of
goods and services, as follows9 :
Period Covered Date Filed Partic
1st Quarter April 20, 2002 Tax Due for the Quarter (
Input Tax carried over from
(January 1, 2002 to
Input VAT on Domestic P
March 31, 2002)
(22D)
Input VAT on Importation
(22F)
Total Available Input tax (
VAT Refund/TCC Claime
Net Creditable Input Tax (
VAT payable (Excess Inp
Tax Payable (overpaymen
2nd Quarter July 24, 2002 Tax Due for the Quarter (
Input Tax carried over from
(April 1, 2002 to
Input VAT on Domestic P
June 30, 2002) (22D)
Input VAT on Importation
62 | B A T C H SUBJECT FULLTEXT
 (22F) quarter of 2002; (2) Input VAT on18,485,758.00
Domestic Purchases for the
fourth quarter of 2002; and (3) Input VAT on Importation of Goods
for the fourth quarter of 2002. The
Total Available Input tax (23) amendments read as follows12 :
321,643,021.02

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

Period Covered Date Filed Partic
Net Creditable Input Tax (25) 83,692,257.83
1st Quarter April 24, 2003 Tax Due for the Quarter (B
VAT payable (Excess Input Tax) (26) (83,692,257.83)
Input Tax carried over from
Tax Payable (overpayment) (28) (January 1, 2002 to (83,692,257.83)
Input VAT on Domestic Pu
3rd Quarter October 25, Tax Due for the Quarter (Box 13C) P blank
2002 Input Tax carried over from previous qtr March
(22B) 31, 2002) 199,428,027.47 (22D)
(July 1, 2002 to Input VAT on Domestic Purchases for the Qtr
(22D) 28,924,020.79
September 30, 2002) Input VAT on Importation of Goods for the Qtr (22F)
(22F) 1,465,875.00
Total Available Input tax (23) 229,817,923.26 Total Available Input tax (2
VAT Refund/TCC Claimed (24A) Blank VAT Refund/TCC Claimed
Net Creditable Input Tax (25) 229,817,923.26
VAT payable (Excess Input Tax) (26) (229,817,923.26) Net Creditable Input Tax (2
Tax Payable (overpayment) (28) (229,817,923.26) VAT payable (Excess Inpu
4th Quarter January 23, Tax Due for the Quarter (Box 13C) P 34,996.36
2003 Input Tax carried over from previous qtr (22B) 114,082,153.62 Tax Payable (overpaymen
(October 1, 2002 to Input VAT on Domestic Purchases for the 2ndQtr Quarter April 24, 2003 Tax Due for the Quarter (B
(22D) 18,166,330.54
Input Tax carried over from
December 31, 2002) Input VAT on Importation of Goods for the Qtr 1, 2002 to
(April
(22F) 2,308,837.00 Input VAT on Domestic Pu
Total Available Input tax (23) June 30, 2002) 134,557,321.16
(22D)
VAT Refund/TCC Claimed (24A) 83,692,257.83
Net Creditable Input Tax (25) 50,865,063.33 Input VAT on Importation o
VAT payable (Excess Input Tax) (26) (50,830,066.97) (22F)
Tax Payable (overpayment) (28) (50,830,066.97)
Total Available Input tax (2
On 19 June 2002, 25 October 2002, 27 February 2003, and 29 VAT Refund/TCC Claimed
May 2003, petitioner filed with the BIR four separate administrative
claims for refund of Unutilized Input VAT paid for the period Net Creditable Input Tax (2
January to March 2002, April to June 2002, July to September
2002, and October to December 2002, respectively. In these VAT payable (Excess Inpu
letters addressed to the BIR, Carlos Echevarria (Echevarria), the Tax Payable (overpaymen
Vice President and Director of Finance of petitioner, explained that
petitioner’s sale of power to NPC are subject to VAT at zero 3rd Quarter October 25, 2002 Tax Due for the Quarte
percent rate, in accordance with Section 108(B)(3) of the
NIRC.10Petitioner sought to recover the total amount of Input Tax carried over f
₱250,258,094.25, representing its unutilized excess VAT on its (July 1, 2002 to
importation of capital and other taxable goods and services for the Input VAT on Domestic
year 2002, broken down as follows11 : September 30,
(22D)
2002)
Input VAT on Importatio
Qtr Output Tax Input Tax
(22F)
Involved
Total Available Input ta
Domestic Purchases Importations Excess Input Tax
VAT Refund/TCC Claim
(A) (B) (C) (D) = (B) + (C) –(A)
Net Creditable Input Ta
1st P 26,247.27 P95,003,348.91 P20,758,668.00 P115,735,769.84
VAT payable (Excess I
2nd - 65,206,499.83 18,485,758.00 83,692,257.83
Tax Payable (overpaym
3rd - 28,924,020.79 1,465,875.00 4th Quarter
30,389,895.79
January 23, 2003 Tax Due for the Quarte
4th 34,996.36 18,166,330.54 2,308,837.00 20,440,171.18 Input Tax carried over
(October 1, 2002 to Input VAT on Domestic
P61,243.63 P207,300,200.07 P43,019,138.00 P250,258,094.44
(22D)
December 31, 2002) Input VAT on Importati
Petitioner amended its Quarterly VAT Returns, particularly the (22F)
items on (1) Input VAT on Domestic Purchases during the first
63 | B A T C H SUBJECT FULLTEXT
 Total Available Input tax (23) 4. Whether or not petitioner’s133,573,214.12
input taxes are sufficiently
VAT Refund/TCC Claimed (24A) substantiated with VAT invoices or official receipts;
83,692,257.83
Net Creditable Input Tax (25) 49,880,956.29
VAT payable (Excess Input Tax)5.(26)
Whether or not the VAT input taxes being claimed for
(49,845,959.93)
refund/tax credit by petitioner (had) been credited or
Tax Payable (overpayment) (28)utilized against any output taxes
(49,845,959.93)
or (had) been carried
forward to the succeeding quarter or quarters; and
On 30 May 2003 and 31 July 2003, petitioner filed two letters with
the BIR to amend its claims for tax refund or credit for the first and 6. Whether or not petitioner is entitled to a refund of VAT
fourth quarter of 2002, respectively. Petitioner sought to recover a input taxes it paid from January 1, 2002 to December 31,
total amount of ₱249,397,620.18 representing its unutilized excess 2002 in the total amount of Two Hundred Forty Nine
VAT on its importation and domestic purchases of goods and Million Three Hundred Ninety Seven Thousand Six
services for the year 2002, broken down as follows13 : Hundred Twenty and 18/100 Pesos (₱249,397,620.18).

Qtr Date Filed Output Tax Simply put, theTax

Input issue is: whether or not petitioner is entitled to
refund or tax credit in the amount of ₱249,397,620.18 representing
its unutilized input VAT paid on importation and purchases of
Involved
capital and other taxable goods and services from January 1 to
Domestic Purchases December 31, 2002.
Importations Excess Input Tax

(A) (B) After a hearing(C) on the merits,

(D) =the
(B)CTA –(A) Division rendered a
+ (C)Second

1st 30-May-03 P26,247.27 Decision

P95,126,981.69
16
dated 23
P20,758,668.00 March 2006 denying petitioner’s claim for tax
P115,859,402.42
refund or credit. The CTA noted that petitioner based its claim on
2nd 25-Oct-02 - creditable18,185,758.00
65,206,499.83 input VAT paid, which is attributable to (1) zero-rated or
83,692,257.83
effectively zero-rated sale, as provided under Section 112(A) of the
3rd 27-Feb-03 - 28,924,920.79
NIRC, and1,465,875,00 30,389,895.79
(2) purchases of capital goods, in accordance with
Section 112(B) of the NIRC. The court ruled that in order for
4th 31-Jul-03 34,996.36 17,918,056.50 1,573,004.00
petitioner to be entitled to the refund 19,456,064.14
or issuance of a tax credit
certificate on the basis of Section 112(A) of the NIRC, it must
P61,243.63 P207,175,558.81 P42,283,305.00 P249,397,620.18
establish that it had incurred zero-rated sales or effectively zero-
rated sales for the taxable year 2002. Since records show that
Respondent failed to act on the request for tax refund or credit of petitioner did not make any zero-rated or effectively-zero rated
petitioner, which prompted the latter to file on 5 April 2004, with the sales for the taxable year 2002, the CTA reasoned that petitioner’s
CTA in Division, a Petition for Review, docketed as CTA Case No. claim must be denied. Parenthetically, the court declared that the
6916 before it could be barred by the two-year prescriptive period claim for tax refund or credit based on Section 112(B) of the NIRC
within which to file its claim. Petitioner sought the refund of the requires petitioner to prove that it paid input VAT on capital goods
amount of ₱249,397,620.18 representing its unutilized excess VAT purchased, based on the definition of capital goods provided under
on its importation and local purchases of various goods and Section 4.112-1(b) of Revenue Regulations No. 7-95—i.e., goods
services for the year 2002.14 or properties which have an estimated useful life of greater than
one year, are treated as depreciable assets under Section 34(F) of
the NIRC, and are used directly or indirectly in the production or
During the proceedings before the CTA Second Division, petitioner sale of taxable goods and services. The CTA found that the
presented the following documents, among other pieces of evidence offered by petitioner—the suppliers’ invoices and official
evidence: (1) Petitioner’s Amended Quarterly VAT return for the receipts and Import Entries and Internal Revenue Declarations and
4th Quarter of 2002 marked as Exhibit "A," showing the amount of the audit report of the Court-commissioned Independent Certified
₱42,500,000.00 paid by NTC to petitioner for all the electricity Public Accountant (CPA) are insufficient to prove that the
produced during test runs; (2) the special audit report, prepared by importations and domestic purchases were classified as capital
the CPA firm of Punongbayan and Araullo through a partner, Angel goods and properties entered as part of the "Property, Plant and
A. Aguilar (Aguilar), and the attached schedules, marked as Equipment" account of the petitioner. The dispositive part of the
Exhibits "J-2" to "J-21"; (3) Sales Invoices and Official Receipts said Decision reads:
and related documents issued to petitioner for the year 2002,
marked as Exhibits "J-4-A1" to "J-4-L265"; (4) Audited Financial
Statements of Petitioner for the year 2002, with comparative WHEREFORE, the instant Petition for Review is DENIED for lack
figures for 2001, marked as Exhibit "K"; and (5) the Affidavit of of merit.17
15
Echevarria dated 9 February 2005, marked as Exhibit "L".
Not satisfied with the foregoing Decision dated 23 March 2006,
During the hearings, the parties jointly stipulated on the issues petitioner filed a Motion for Reconsideration which was denied by
involved: the CTA Second Division in a Resolution dated 4 January 2007.18

1. Whether or not petitioner’s sales are subject to value-
added taxes at effectively zero percent (0%) rate;
2. Whether or not petitioner incurred input taxes which
are attributable to its effectively zero-rated transactions;
3. Whether or not petitioner’s importation and purchases
of capital goods and related services are within the scope
and meaning of "capital goods" under Revenue
Regulations No. 7-95;
Petitioner filed an appeal with the CTA En Banc, docketed as CTA
EB No. 248. The CTA En Banc promulgated its Decision19 on 20
September 2007 denying petitioner’s appeal. The CTA En Banc
reiterated the ruling of the Division that petitioner’s claim based on
Section 112(A) of the NIRC should be denied since it did not
present any records of any zero-rated or effectively zero-rated
transactions. It clarified that since petitioner failed to prove that any
sale of its electricity had transpired, petitioner may base its claim
only on Section 112(B) of the NIRC, the provision governing the
purchase of capital goods. The court noted that the report of the
Court-commissioned auditing firm, Punongbayan & Araullo, dealt

64 | B A T C H SUBJECT FULLTEXT
specifically with the unutilized input taxes paid or incurred by
petitioner on its local and foreign purchases of goods and services
attributable to its zero-rated sales, and not to purchases of capital
goods. It decided that petitioner failed to prove that the purchases
evidenced by the invoices and receipts, which petitioner
presented, were classified as capital goods which formed part of its
"Property, Plant and Equipment," especially since petitioner failed
to present its books of account. The dispositive part of the said
Decision reads:
WHEREFORE, premises considered, the instant petition is hereby
DISMISSED. Accordingly, the assailed Decision and Resolution
are hereby AFFIRMED.20
The CTA En Banc denied petitioner’s Motion for Reconsideration
in a Resolution dated 22 October 2007.21
Hence, the present Petition for Review where the petitioner raises
the following errors allegedly committed by the CTA En banc:
I registered; (2) the taxpayer is engaged in zero-rated or effectively
THE COURT OF TAX APPEALS EN BANC COMMITTED
SERIOUS ERROR AND ACTED WITH GRAVE ABUSE OF
DISCRETION TANTAMOUNT TO LACK OR EXCESS OF
JURISDICTION IN FAILING OR REFUSING TO APPRECIATE
THE OVERWHELMING AND UNCONTROVERTED EVIDENCE
SUBMITTED BY THE PETITIONER, THUS DEPRIVING
PETITIONER OF ITS PROPERTY WITHOUT DUE PROCESS;
AND
II
THE COURT OF TAX APPEALS COMMITTED SERIOUS ERROR
AND ACTED WITH GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN
RULING THAT THE ABSENCE OF ZERO-RATED SALES BY
PETITIONER DURING THE YEAR COVERED BY THE CLAIM
FOR REFUND DOES NOT ENTITLE PETITIONER TO A
REFUND OF ITS EXCESS VAT INPUT TAXES ATTRIBUTABLE
TO ZERO-RATED SALES, CONTRARY TO PROVISIONS OF
LAW.22
The present Petition is meritorious.
The main issue in this case is whether or not petitioner may claim
a tax refund or credit in the amount of ₱249,397,620.18 for
creditable input tax attributable to zero-rated or effectively zero-
rated sales pursuant to Section 112(A) of the NIRC or for input
taxes paid on capital goods as provided under Section 112(B) of
the NIRC.
To resolve the issue, this Court must re-examine the facts and the
evidence offered by the parties. It is an accepted doctrine that this
Court is not a trier of facts. It is not its function to review, examine
and evaluate or weigh the probative value of the evidence
presented. However, this rule does not apply where the judgment
is premised on a misapprehension of facts, or when the appellate
court failed to notice certain relevant facts which if considered
would justify a different conclusion.23
After reviewing the records, this Court finds that petitioner’s claim
for refund or credit is justified under Section 112(A) of the NIRC
which states that:
SEC. 112. Refunds or Tax Credits of Input Tax.—
(A) Zero-rated or Effectively Zero-rated Sales—Any VAT-
registered person, whose sales are zero-rated or effectively zero-
rated may, within two (2) years after the close of the taxable
quarter when the sales were made, apply for the issuance of a tax
credit certificate or refund of creditable input tax due or paid
attributable to such sales, except transitional input tax, to the
extent that such input tax has not been applied against output tax:
Provided, however, That in the case of zero-rated sales under
Section 106(A)(2)(a)(1), (2) and (B) and Section 108(B)(1) and (2),
the acceptable foreign currency exchange proceeds thereof had
been duly accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP): Provided,
further, That where the taxpayer is engaged in zero-rated or
effectively zero-rated sale and also in taxable or exempt sale of
goods or properties or services, and the amount of creditable input
tax due or paid cannot be directly and entirely attributed to any one
of the transactions, it shall be allocated proportionately on the
basis of the volume of sales.
To claim refund or tax credit under Section 112(A), petitioner must
comply with the following criteria: (1) the taxpayer is VAT
zero-rated sales; (3) the input taxes are due or paid; (4) the input
taxes are not transitional input taxes; (5) the input taxes have not
been applied against output taxes during and in the succeeding
quarters; (6) the input taxes claimed are attributable to zero-rated
or effectively zero-rated sales; (7) for zero-rated sales under
Section 106(A)(2)(1) and (2); 106(B); and 108(B)(1) and (2), the
acceptable foreign currency exchange proceeds have been duly
accounted for in accordance with BSP rules and regulations; (8)
where there are both zero-rated or effectively zero-rated sales and
taxable or exempt sales, and the input taxes cannot be directly and
entirely attributable to any of these sales, the input taxes shall be
proportionately allocated on the basis of sales volume; and (9) the
claim is filed within two years after the close of the taxable quarter
when such sales were made.24
Based on the evidence presented, petitioner complied with the
abovementioned requirements. Firstly, petitioner had adequately
proved that it is a VAT registered taxpayer when it presented
Certificate of Registration No. OCN-98-006-007394, which it
attached to its Petition for Review dated 29 March 2004 filed
before the CTA in Division. Secondly, it is unquestioned that
petitioner is engaged in providing electricity for NPC, an activity
which is subject to zero rate, under Section 108(B)(3) of the NIRC.
Thirdly, petitioner offered as evidence suppliers’ VAT invoices or
official receipts, as well as Import Entries and Internal Revenue
Declarations (Exhibits "J-4-A1" to "J-4-L265"), which were
examined in the audit conducted by Aguilar, the Court-
commissioned Independent CPA. Significantly, Aguilar noted in his
audit report (Exhibit "J-2") that of the ₱249,397,620.18 claimed by
petitioner, he identified items with incomplete documentation and
errors in computation with a total amount of ₱3,266,009.78. Based
on these findings, the remaining input VAT of ₱246,131,610.40
was properly documented and recorded in the books. The said
report reads:
In performing the procedures referred under the Procedures
Performed section of this report, no matters came to our attention
that cause us to believe that the amount of input VAT applied for
as tax credit certificate/refund of P249,397,620.18 for the period
January 1, 2002 to December 31, 2002 should be adjusted except
for input VAT claimed with incomplete documentation, those with
various and other exceptions on the supporting documents and
those with errors in computation totaling P3,266,009.78, as
discussed in the Findings and Results of the Agreed-Upon Audit
Procedures Performed sections of this report. We have also
ascertained that the input VAT claimed are properly recorded in
the books and, except as specifically identified in the Findings and
Results of the Agreed-Upon Audit Procedures Performed sections
65 | B A T C H SUBJECT FULLTEXT
of this report, are properly supported by original and appropriate
suppliers’ VAT invoices and/or official receipts.25
Fourthly, the input taxes claimed, which consisted of local
purchases and importations made in 2002, are not transitional
input taxes, which Section 111 of the NIRC defines as input taxes
allowed on the beginning inventory of goods, materials and
supplies.26 Fifthly, the audit report of Aguilar affirms that the input
VAT being claimed for tax refund or credit is net of the input VAT
that was already offset against output VAT amounting to
₱26,247.27 for the first quarter of 2002 and ₱34,996.36 for the
fourth quarter of 2002,27 as reflected in the Quarterly VAT
Returns.28
The main dispute in this case is whether or not petitioner’s claim
complied with the sixth requirement—the existence of zero-rated or
effectively zero-rated sales, to which creditable input taxes may be
attributed. The CTA in Division and en banc denied petitioner’s
claim solely on this ground. The tax courts based this conclusion
on the audited report, marked as Exhibit "J-2," stating that
petitioner made no sale of electricity to NPC in 2002. 29 Moreover,
the affidavit of Echevarria (Exhibit "L"), petitioner’s Vice President
and Director for Finance, contained an admission that no
commercial sale of electricity had been made in favor of NPC in
2002 since the project was still under construction at that time. 30
However, upon closer examination of the records, it appears that
on 2002, petitioner carried out a "sale" of electricity to NPC. The
fourth quarter return for the year 2002, which petitioner filed,
reported a zero-rated sale in the amount of ₱42,500,000.00. 31 In
the Affidavit of Echevarria dated 9 February 2005 (Exhibit "L"),
which was uncontroverted by respondent, the affiant stated that
although no commercial sale was made in 2002, petitioner
produced and transferred electricity to NPC during the testing
period in exchange for the amount of ₱42,500,000.00, to wit: 32
A: San Roque Power Corporation has had no sale yet during 2002.
The ₱42,500,000.00 which was paid to us by Napocor was
something similar to a more cost recovery scheme. The pre-
agreed amount would be about equal to our costs for producing
the electricity during the testing period and we just reflected this in
our 4th quarter return as a zero-rated sale. x x x.
The Court is not unmindful of the fact that the transaction
described hereinabove was not a commercial sale. In granting the
tax benefit to VAT-registered zero-rated or effectively zero-rated
taxpayers, Section 112(A) of the NIRC does not limit the definition
of "sale" to commercial transactions in the normal course of
business. Conspicuously, Section 106(B) of the NIRC, which deals
with the imposition of the VAT, does not limit the term "sale" to
commercial sales, rather it extends the term to transactions that
are "deemed" sale, which are thus enumerated:
SEC 106. Value-Added Tax on Sale of Goods or Properties.
xxxx
(B) Transactions Deemed Sale.—The following transactions shall
be deemed sale:
(1) Transfer, use or consumption not in the course of
business of goods or properties originally intended for
sale or for use in the course of business;
(2) Distribution or transfer to:
(a) Shareholders or investors as share in the
profits of the VAT-registered persons; or
(b) Creditors in payment of debt;
(3) Consignment of goods if actual sale is not made
within sixty (60) days following the date such goods were
consigned; and
(4) Retirement from or cessation of business, with
respect to inventories of taxable goods existing as of
such retirement or cessation. (Our emphasis.)
After carefully examining this provision, this Court finds it an
equitable construction of the law that when the term "sale" is made
to include certain transactions for the purpose of imposing a tax,
these same transactions should be included in the term "sale"
when considering the availability of an exemption or tax benefit
from the same revenue measures. It is undisputed that during the
fourth quarter of 2002, petitioner transferred to NPC all the
electricity that was produced during the trial period. The fact that it
was not transferred through a commercial sale or in the normal
course of business does not deflect from the fact that such
transaction is deemed as a sale under the law.
The seventh requirement regarding foreign currency exchange
proceeds is inapplicable where petitioner’s zero-rated sale of
electricity to NPC did not involve foreign exchange and consisted
only of a single transaction wherein NPC paid petitioner
₱42,500,000.00 in exchange for the electricity transferred to it by
petitioner. Similarly, the eighth requirement is inapplicable to this
case, where the only sale transaction consisted of an effectively
zero-rated sale and there are no exempt or taxable sales that
transpired, which will require the proportionate allocation of the
creditable input tax paid.
The last requirement determines that the claim should be filed
within two years after the close of the taxable quarter when such
sales were made. The sale of electricity to NPC was reported at
the fourth quarter of 2002, which closed on 31 December 2002.
Petitioner had until 30 December 2004 to file its claim for refund or
credit. For the period January to March 2002, petitioner filed an
amended request for refund or tax credit on 30 May 2003; for the
period July 2002 to September 2002, on 27 February 2003; and for
the period October 2002 to December 2002, on 31 July 2003. 33 In
these three quarters, petitioners seasonably filed its requests for
refund and tax credit. However, for the period April 2002 to May
2002, the claim was filed prematurely on 25 October 2002, before
the last quarter had closed on 31 December 2002. 34
Despite this lapse in procedure, this Court notes that petitioner
was able to positively show that it was able to accumulate excess
input taxes on various importations and local purchases in the
amount of ₱246,131,610.40, which were attributable to a transfer
of electricity in favor of NPC. The fact that it had filed its claim for
refund or credit during the quarter when the transfer of electricity
had taken place, instead of at the close of the said quarter does
not make petitioner any less entitled to its claim. Given the special
circumstances of this case, wherein petitioner was incorporated for
the sole purpose of constructing or operating a power plant that
will transfer all the electricity it generates to NPC, there is no
danger that petitioner would try to fraudulently claim input tax paid
on purchases that will be attributed to sale transactions that are
not zero-rated. Substantial justice, equity and fair play are on the
side of the petitioner. Technicalities and legalisms, however,
exalted, should not be misused by the government to keep money
not belonging to it, thereby enriching itself at the expense of its law
abiding citizens.
Substantial justice, equity and fair play are on the side of
petitioner. Technicalities and legalisms, however exalted, should
not be misused by the government to keep money not belonging to
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it, thereby enriching itself at the expense of its law-abiding citizens.
Under the principle of solutio indebiti provided in Art. 2154, Civil
Code, the BIR received something "when there [was] no right to
demand it," and thus, it has the obligation to return it. Heavily
militating against respondent Commissioner is the ancient principle
that no one, not even the State, shall enrich oneself at the expense
of another. Indeed, simple justice requires the speedy refund of the
wrongly held taxes.35
It bears emphasis that effective zero-rating is not intended as a
benefit to the person legally liable to pay the tax, such as
petitioner, but to relieve certain exempt entities, such as the NPC,
from the burden of indirect tax so as to encourage the
development of particular industries. Before, as well as after, the
adoption of the VAT, certain special laws were enacted for the
benefit of various entities and international agreements were
entered into by the Philippines with foreign governments and
institutions exempting sale of goods or supply of services from
indirect taxes at the level of their suppliers. Effective zero-rating
was intended to relieve the exempt entity from being burdened
with the indirect tax which is or which will be shifted to it had there
been no exemption. In this case, petitioner is being exempted from
paying VAT on its purchases to relieve NPC of the burden of
additional costs that petitioner may shift to NPC by adding to the
cost of the electricity sold to the latter. 36
Section 13 of Republic Act No. 6395, otherwise known as the NPC
Charter, further clarifies that it is the lawmakers’ intention that NPC
be made completely exempt from all taxes, both direct and indirect:
Sec. 13. Non-profit Character of the Corporation; Exemption from
all Taxes, Duties, Fees, Imposts and Other Charges by
Government and Governmental Instrumentalities. - The
corporation shall be non-profit and shall devote all its returns from
its capital investment, as well as excess revenues from its
operation, for expansion. To enable the corporation to pay its
indebtedness and obligations and in furtherance and effective
implementation of the policy enunciated in Section 1 of this Act,
the corporation is hereby declared exempt:
(a) From the payment of all taxes, duties, fees, imposts,
charges, costs and service fees in any court or
administrative proceedings in which it may be a party,
restrictions and duties to the Republic of the Philippines,
its provinces, cities, municipalities, and other government
agencies and instrumentalities;
(b) From all income taxes, franchise taxes, and realty
taxes to be paid to the National Government, its
provinces, cities, municipalities and other government
agencies and instrumentalities;
(c) From all import duties, compensating taxes and
advanced sales tax and wharfage fees on import of
foreign goods, required for its operations and projects;
and
(d) From all taxes, duties, fees, imposts, and all other
charges imposed by the Republic of the Philippines, its
provinces, cities, municipalities and other government
agencies and instrumentalities, on all petroleum products
used by the corporation in the generation, transmission,
utilization, and sale of electric power.
To limit the exemption granted to the NPC to direct taxes,
notwithstanding the general and broad language of the statute will
be to thwart the legislative intention in giving exemption from all
forms of taxes and impositions, without distinguishing between
those that are direct and those that are not.37
Congress granted NPC a comprehensive tax exemption because
of the significant public interest involved. This is enunciated in
Section 1 of Republic Act No. 6395:
Section 1. Declaration of Policy. Congress hereby declares that (1)
the comprehensive development, utilization and conservation of
Philippine water resources for all beneficial uses, including power
generation, and (2) the total electrification of the Philippines
through the development of power from all sources to meet the
needs of industrial development and dispersal and the needs of
rural electrification are primary objectives of the nation which shall
be pursued coordinately and supported by all instrumentalities and
agencies of government, including its financial institutions.
The ability of the NPC to provide sufficient and affordable
electricity throughout the country greatly affects our industrial and
rural development. Erroneously and unjustly depriving industries
that generate electrical power of tax benefits that the law clearly
grants will have an immediate effect on consumers of electricity
and long term effects on our economy.
In the same breath, we cannot lose sight of the fact that it is the
declared policy of the State, expressed in Section 2 of Republic
Act No. 9136, otherwise known as the EPIRA Law, "to ensure and
accelerate the total electrification of the country;" "to enhance the
inflow of private capital and broaden the ownership base of the
power generation, transmission and distribution sectors;" and "to
promote the utilization of indigenous and new and renewable
energy resources in power generation in order to reduce
dependence on imported energy." Further, Section 6 provides that
"pursuant to the objective of lowering electricity rates to end-users,
sales of generated power by generation companies shall be value-
added tax zero-rated.
Section 75 of said law succinctly declares that "this Act shall,
unless the context indicates otherwise, be construed in favor of the
establishment, promotion, preservation of competition and power
empowerment so that the widest participation of the people,
whether directly or indirectly is ensured."
The objectives as set forth in the EPIRA Law can only be achieved
if government were to allow petitioner and others similarly situated
to obtain the input tax credits available under the law. Denying
petitioner such credits would go against the declared policies of
the EPIRA Law.1 a vv p h i 1
The legislative grant of tax relief (whether in the EPIRA Law or the
Tax Code) constitutes a sovereign commitment of Government to
taxpayers that the latter can avail themselves of certain tax reliefs
and incentives in the course of their business activities here. Such
a commitment is particularly vital to foreign investors who have
been enticed to invest heavily in our country’s infrastructure, and
who have done so on the firm assurance that certain tax reliefs
and incentives can be availed of in order to enable them to achieve
their projected returns on these very long-term and heavily funded
investments. While the government’s ability to keep its
commitment is put in doubt, credit rating turns to worse; the costs
of borrowing becomes higher and the harder it will be to attract
foreign investors. The country’s earnest efforts to move forward will
all be put to naught.
Having decided that petitioner is entitled to claim refund or tax
credit under Section 112(A) of the NIRC or on the basis of
effectively zero-rated sales in the amount of ₱246,131,610.40,
there is no more need to establish its right to make the same claim
under Section 112(B) of the NIRC or on the basis of purchase of
capital goods.
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Finally, respondent contends that according to well-established
doctrine, a tax refund, which is in the nature of a tax exemption,
should be construed strictissimi juris against the
taxpayer.38 However, when the claim for refund has clear legal
basis and is sufficiently supported by evidence, as in the present
case, then the Court shall not hesitate to grant the same. 39

WHEREFORE, the instant Petition for Review is GRANTED. The

Decision of the Court of Tax Appeals En Banc dated 20
September 2007 in CTA EB Case No. 248, affirming the Decision
dated 23 March 2006 of the CTA Second Division in CTA Case
No. 6916, is REVERSED. Respondent Commissioner of Internal
Revenue is ordered to refund, or in the alternative, to issue a tax
credit certificate to petitioner San Roque Power Corporation in the
amount of Two Hundred Forty-Six Million One Hundred Thirty-One
Thousand Six Hundred Ten Pesos and 40/100 (₱246,131,610.40),
representing unutilized input VAT for the period 1 January 2002 to
31 December 2002. No costs.

SO ORDERED.

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