FIRST DIVISION

[G.R. No. 125355. March 30, 2000]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF
APPEALS and COMMONWEALTH MANAGEMENT AND SERVICES
CORPORATION, respondents. Court
DECISION
PARDO, J.:
What is before the Court is a petition for review on certiorari of the decision of
the Court of Appeals, reversing that of the Court of Tax Appeals, 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.
[1]

[2]

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.
On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an
assessment to private respondent COMASERCO for deficiency value-added
tax (VAT) amounting to P351,851.01, for taxable year 1988, computed as
follows:
"Taxable sale/receipt P1,679,155.00
10% tax due thereon 167,915.50
25% surcharge 41,978.88
20% interest per annum 125,936.63
Compromise penalty for late payment 16,000.00
TOTAL AMOUNT DUE AND COLLECTIBLE P 351,831.01"

[3]

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. J lexj
On February 10, 1992, COMASERCO filed with the BIR, a letter-protest
objecting to the latter's finding of deficiency VAT. On August 20, 1992, the
Commissioner of Internal Revenue sent a collection letter to COMASERCO
demanding payment of the deficiency VAT.
On September 29,1992, COMASERCO filed with the Court of Tax Appeals 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 id 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.
[4]

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 valueadded tax deficiency."
[5]

On July 26, 1995, respondent filed with the Court of Appeals, 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: Lexj uris
"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, where it was held that COMASERCO was
not liable to pay fixed and contractor's tax for services rendered to Philamlife
and its affiliates. The Court of Appeals, in that case, reasoned that
COMASERCO was not engaged in business of providing services to
Philamlife and its affiliates. In the same manner, the Court of Appeals held
that COMASERCO was not liable to pay VAT for it was not engaged in the
business of selling services.
[7]

On July 16, 1996, the Commissioner of Internal Revenue filed with this Court
a petition for review on certiorari assailing the decision of the Court of
Appeals.
On August 7, 1996, we required respondent COMASERCO to file comment
on the petition, and on September 26, 1996, COMASERCO complied with the
resolution.
[8]

We give due course to the petition.

At issue in this case is whether COMASERCO was engaged in the sale of
services, and thus liable to pay VAT thereon.
Petitioner avers that to "engage in business" and to "engage in the sale of
services" are two different things. Petitioner maintains that the services
rendered by COMASERCO to Philamlife and its affiliates, for a fee or
consideration, are subject to VAT. VAT is a tax on the value added by the
performance of the service. It is immaterial whether profit is derived from
rendering the service. Juri smis
We agree with the Commissioner.

Section 99 of the National Internal Revenue Code of 1986, as amended by

Executive Order (E.O.) No. 273 in 1988, provides that:
"Section 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. Jjj uris
"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" incorporated in
the 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.
Section 108 of the National Internal Revenue Code of 1997 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."
[10]

[11]

On February 5, 1998, the Commissioner of Internal Revenue issued BIR

Ruling No. 010-98 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 of realizing
profit, any income or profit generated by the entity in the conduct of its
activities was subject to income tax. lex
[12]

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.
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. 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.
[13]

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. Also, it has been the long
standing policy and practice of this Court to respect the conclusions of quasijudicial 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.
[14]

[15]

There is no merit to respondent's contention that the Court of Appeals'

decision in CA-G. R. No. 34042, declaring the COMASERCO as not engaged
in business and not liable for the payment of fixed and percentage taxes,
binds petitioner. The issue in CA-G. R. No. 34042 is different from the present
case, which involves COMASERCO's liability for VAT. As heretofore stated,
every person who sells, barters, or exchanges goods and services, in the
course of trade or business, as defined by law, is subject to VAT. Jksm
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.
Davide, Jr., C.J.,(Chairman), Puno, Kapunan, and Ynares-Santiago,
JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
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 respondents services meet these requirements, they are zerorated. Petitioners Revenue Regulations that alter or revoke the above requirements areultra
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

1997 1st Qtr.

April 18, 1997

2nd Qtr.

July 21, 1997

3rd Qtr.

October 2, 1997

4th Qtr.

January 20, 1998

"On March 23, 1999, however, [respondent] amended the aforesaid returns and declared the
following:
Exh 1997

Taxable Sales

I 1st qtr

P59,597.20

P5,959.72

P17,513,801.11

P6,778,182.30

P677,818.23

J 2nd qtr

67,517.20

6,751.72

17,937,361.51

9,333,242.90

933,324.29

K 3rd qtr

51,936.60

5,193.66

19,627,245.36

8,438,357.00

843,835.70

L 4th qtr

67,994.30

6,799.43

25,231,225.22

13,080,822.10

1,308,082.21

P247,045.30

P24,704.53

P80,309,633.20

P37,630,604.30

P3,763,060.43

Total

Output
VAT

Zero-rated
Sales

Domestic
Purchases

Input
VAT

"On April 13, 1999, [respondent] filed with the BIR a letter-request for the refund of its 1997 excess
input taxes in the amount of P3,751,067.04, which amount was arrived at after deducting from its
total input VAT paid ofP3,763,060.43 its applied output VAT liabilities only for the third and fourth
quarters of 1997 amounting to P5,193.66 and P6,799.43, respectively. [Respondent] cites as basis
therefor, Section 110 (B) of the 1997 Tax Code, to state:
Section 110. Tax Credits. xxxxxxxxx
(B) Excess Output or Input Tax. - If at the end of any taxable quarter the output tax exceeds the
input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output
tax, the excess shall be carried over to the succeeding quarter or quarters. Any input tax attributable
to the purchase of capital goods or to zero-rated sales by a VAT-registered person may at his option
be refunded or credited against other internal revenue taxes, subject to the provisions of Section
112.

"There being no immediate action on the part of the [petitioner], [respondents] petition was filed on
April 15, 1999.
"In support of its Petition for Review, the following arguments were raised by [respondent]:
A. Export sales by a VAT-registered person, the consideration for which is paid for in acceptable
foreign currency inwardly remitted to the Philippines and accounted for in accordance with existing
regulations of the Bangko Sentral ng Pilipinas, are subject to [VAT] at zero percent (0%). According
to [respondent], being a VAT-registered entity, it is subject to the VAT imposed under Title IV of the
Tax Code, to wit:
Section 102.(sic) Value-added tax on sale of services.- (a) Rate and base of tax. - There shall be
levied, assessed and collected, a value-added tax equivalent to 10% percent of gross receipts
derived by any person engaged in the sale of services. The phrase "sale of services" means the
performance of all kinds of services for others for a fee, remuneration or consideration, including
those performed or rendered by construction and service contractors: stock, real estate, commercial,
customs and immigration brokers; lessors of personal property; lessors or distributors of
cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods
for others; and similar services regardless of whether o[r] not the performance thereof calls for the
exercise or use of the physical or mental faculties: Provided That the following services performed in
the Philippines by VAT-registered persons shall be subject to 0%:
(1) x x x
(2) Services other than those mentioned in the preceding subparagraph, the consideration is
paid for in acceptable foreign currency which is remitted inwardly to the Philippines and
accounted for in accordance with the rules and regulations of the BSP. x x x.
In addition, [respondent] relied on VAT Ruling No. 080-89, dated April 3, 1989, the pertinent portion
of which reads as follows:
In Reply, please be informed that, as a VAT registered entity whose service is paid for in acceptable
foreign currency which is remitted inwardly to the Philippines and accounted for in accordance with
the rules and regulations of the Central [B]ank of the Philippines, your service income is
automatically zero rated effective January 1, 1998. [Section 102(a)(2) of the Tax Code as
amended].4 For this, there is no need to file an application for zero-rate.
B. Input taxes on domestic purchases of taxable goods and services related to zero-rated revenues
are available as tax refund in accordance with Section 106 (now Section 112) of the [Tax Code] and
Section 8(a) of [Revenue] Regulations [(RR)] No. 5-87, to state:
Section 106. Refunds or tax credits of input tax. (A) Zero-rated or effectively Zero-rated Sales. - Any VAT-registered person, except those covered by
paragraph (a) above, whose sales are zero-rated or are effectively zero-rated, may, within two (2)
years after the close of the taxable quarter when such sales were made, apply for the issuance of
tax credit certificate or refund of the input taxes due or attributable to such sales, to the extent that
such input tax has not been applied against output tax. x x x. [Section 106(a) of the Tax Code]5
Section 8. Zero-rating. - (a) In general. - A zero-rated sale is a taxable transaction for value-added
tax purposes. A sale by a VAT-registered person of goods and/or services taxed at zero rate shall

not result in any output tax. The input tax on his purchases of goods or services related to such zerorated sale shall be available as tax credit or refundable in accordance with Section 16 of these
Regulations. x x x. [Section 8(a), [RR] 5-87].6
"[Petitioner], in his Answer filed on May 6, 1999, claimed by way of Special and Affirmative Defenses
that:
7. The claim for refund is subject to investigation by the Bureau of Internal Revenue;
8. Taxes paid and collected are presumed to have been made in accordance with laws and
regulations, hence, not refundable. Claims for tax refund are construed strictly against the claimant
as they partake of the nature of tax exemption from tax and it is incumbent upon the [respondent] to
prove that it is entitled thereto under the law and he who claims exemption must be able to justify his
claim by the clearest grant of organic or statu[t]e law. An exemption from the common burden
[cannot] be permitted to exist upon vague implications;
9. Moreover, [respondent] must prove that it has complied with the governing rules with reference to
tax recovery or refund, which are found in Sections 204(c) and 229 of the Tax Code, as amended,
which are quoted as follows:
Section 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. The Commissioner may - x x x.
(C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority,
refund the value of internal revenue stamps when they are returned in good condition by the
purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit
for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties
shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or
refund within two (2) years after payment of the tax or penalty: Provided, however, That a return filed
with an overpayment shall be considered a written claim for credit or refund.
Section 229. Recovery of tax erroneously or illegally collected.- No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to
have been erroneously or illegally assessed or collected, or of any penalty claimed to have been
collected without authority, or of any sum alleged to have been excessively or in any manner
wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but
such suit or proceeding may be maintained, whether or not such tax, penalty or sum has been paid
under protest or duress.
In any case, no such suit or proceeding shall be begun (sic) after the expiration of two (2) years from
the date of payment of the tax or penalty regardless of any supervening cause that may arise after
payment: Provided, however, That the Commissioner may, even without written claim therefor,
refund or credit any tax, where on the face of the return upon which payment was made, such
payment appears clearly to have been erroneously paid.
"From the foregoing, the [CTA], through the Presiding Judge Ernesto D. Acosta rendered a
decision7 in favor of the herein respondent holding that its services are subject to zero-rate pursuant
to Section 108(b) of the Tax Reform Act of 1997 and Section 4.102-2 (b)(2) of Revenue Regulations
5-96, the decretal portion of which reads as follows:

WHEREFORE, in view of all the foregoing, this Court finds the [petition] meritorious and in
accordance with law. Accordingly, [petitioner] is hereby ORDERED to REFUND to [respondent] the
amount of P3,352,406.59 representing the latters excess input VAT paid for the year 1997."8
Ruling of the Court of Appeals
In affirming the CTA, the CA held that respondents services fell under the first type enumerated in
Section 4.102-2(b)(2) of RR 7-95, as amended by RR 5-96. More particularly, its "services were not
of the same class or of the same nature as project studies, information, or engineering and
architectural designs" for non-resident foreign clients; rather, they were "services other than the
processing, manufacturing or repacking of goods for persons doing business outside the
Philippines." The consideration in both types of service, however, was paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas.
Furthermore, the CA reasoned that reliance on VAT Ruling No. 040-98 was unwarranted. By
requiring that respondents services be consumed abroad in order to be zero-rated, petitioner went
beyond the sphere of interpretation and into that of legislation. Even granting that it is valid, the
ruling cannot be given retroactive effect, for it will be harsh and oppressive to respondent, which has
already relied upon VAT Ruling No. 080-89 for zero rating.
Hence, this Petition.9
The Issue
Petitioner raises this sole issue for our consideration:
"Whether or not the Court of Appeals committed reversible error in holding that respondent is entitled
to the refund of the amount of P3,352,406.59 allegedly representing excess input VAT for the year
1997."10
The Courts Ruling
The Petition is unmeritorious.
Sole Issue:
Entitlement to Tax Refund
Section 102 of the Tax Code11 provides:
"Sec. 102. Value-added tax on sale of services and use or lease of properties. -- (a) Rate and base
of tax. -- There shall be levied, assessed and collected, a value-added tax equivalent to ten percent
(10%) of gross receipts derived from the sale or exchange of services x x x.
"The phrase 'sale or exchange of services' means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or
rendered by x x x persons engaged in milling, processing, manufacturing or repacking goods for
others; x x x services of banks, non-bank financial intermediaries and finance companies; x x x and
similar services regardless of whether or not the performance thereof calls for the exercise or use of
the physical or mental faculties. The phrase 'sale or exchange of services' shall likewise include:

xxxxxxxxx
(3) The supply of x x x commercial knowledge or information;
(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of
enabling the application or enjoyment of x x x any such knowledge or information as is mentioned in
subparagraph (3);
xxxxxxxxx
(6) The supply of technical advice, assistance or services rendered in connection with technical
management or administration of any x x x commercial undertaking, venture, project or scheme;
xxxxxxxxx
"The term 'gross receipts means the total amount of money or its equivalent representing the
contract price, compensation, service fee, rental or royalty, including the amount charged for
materials supplied with the services and deposits and advanced payments actually or constructively
received during the taxable quarter for the services performed or to be performed for another
person, excluding value-added tax.
"(b) Transactions subject to zero percent (0%) rate. -- The following services performed in the
Philippines by VAT-registered persons shall be subject to zero percent (0%) rate[:]
(1) Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
(2) Services other than those mentioned in the preceding subparagraph, the consideration for which
is paid for in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the [BSP];"
xxxxxxxxx
Zero Rating of "Other" Services
The law is very clear. Under the last paragraph quoted above, services performed by VAT-registered
persons in the Philippines (other than the processing, manufacturing or repacking of goods for
persons doing business outside the Philippines), when paid in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP, are zero-rated.
Respondent is a VAT-registered person that facilitates the collection and payment of receivables
belonging to its non-resident foreign client, for which it gets paid in acceptable foreign currency
inwardly remitted and accounted for in conformity with BSP rules and regulations. Certainly, the
service it renders in the Philippines is not in the same category as "processing, manufacturing or
repacking of goods" and should, therefore, be zero-rated. In reply to a query of respondent, the BIR
opined in VAT Ruling No. 080-89 that the income respondent earned from its parent companys
regional operating centers (ROCs) was automatically 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 banks18 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 power to obtain
present control of goods or service on a promise to pay for them in the future."22
Business establishments may extend credit sales through the use of the credit card facilities of a
non-bank credit card company to avoid the risk of uncollectible accounts from their customers.
Under this system, the establishments do not deposit in their bank accounts the credit card
drafts23 that arise from the credit sales. Instead, they merely record their receivables from the credit
card company and periodically send the drafts evidencing those receivables to the latter.
The credit card company, in turn, sends checks as payment to these business establishments, but it
does not redeem the drafts at full price. The agreement between them usually provides for discounts
to be taken by the company upon its redemption of the drafts.24 At the end of each month, it then bills
its credit card holders for their respective drafts redeemed during the previous month. If the holders
fail to pay the amounts owed, the company sustains the loss.25
In the present case, respondents role in the consumer credit26 process described above primarily
consists of gathering the bills and credit card drafts of different service establishments located in the
Philippines and forwarding them to the ROCs outside the country. Servicing the bill is not the same
as billing. For the former type of service alone, respondent already gets paid.
The parent company -- to which the ROCs and respondent belong -- takes charge not only of
redeeming the drafts from the ROCs and sending the checks to the service establishments, but also
of billing the credit card holders for their respective drafts that it has redeemed. While it usually
imposes finance charges27 upon the holders, none may be exacted by respondent upon either the
ROCs or the card holders.
Branch and Home Office
By designation alone, respondent and the ROCs are operated as branches. This means that each of
them is a unit, "an offshoot, lateral extension, or division"28 located at some distance from the home
office29 of the parent company; carrying separate inventories; incurring their own expenses; and

generating their respective incomes. Each may conduct sales operations in any locality as an
extension of the principal office.30
The extent of accounting activity at any of these branches depends upon company policy,31 but the
financial reports of the entire business enterprise -- the credit card company to which they all belong
-- must always show its financial position, results of operation, and changes in its financial position
as a single unit.32 Reciprocal accounts are reconciled or eliminated, because they lose all
significance when the branches and home office are viewed as a single entity.33 In like manner, intracompany profits or losses must be offset against each other for accounting purposes.
Contrary to petitioners assertion,34 respondent can sell its services to another branch of the same
parent company.35 In fact, the business concept of a transfer price allows goods and services to be
sold between and among intra-company units at cost or above cost.36 A branch may be operated as
a revenue center, cost center, profit center or investment center, depending upon the policies and
accounting system of its parent company.37Furthermore, the latter may choose not to make any sale
itself, but merely to function as a control center, where most or all of its expenses are allocated to
any of its branches.38
Gratia argumenti that the sending of drafts and bills by service establishments to respondent is
equivalent to the act of sending them directly to its parent company abroad, and that the parent
companys subsequent redemption of these drafts and billings of credit card holders is also
attributable to respondent, then with greater reason should the service rendered by respondent be
zero-rated under our VAT system. The service partakes of the nature of export sales as applied to
goods,39 especially when rendered in the Philippines by a VAT-registered person40 that gets paid in
acceptable foreign currency accounted for in accordance with BSP rules and regulations.
VAT Requirements for the Supply of Service
The VAT is a tax on consumption41 "expressed as a percentage of the value added to goods or
services"42purchased by the producer or taxpayer.43 As an indirect tax44 on services,45 its main object
is the transaction46itself or, more concretely, the performance of all kinds of services47 conducted in
the course of trade or business in the Philippines.48 These services must be regularly conducted in
this country; undertaken in "pursuit of a commercial or an economic activity;"49 for a valuable
consideration; and not exempt under the Tax Code, other special laws, or any international
agreement.50
Without doubt, the transactions respondent entered into with its Hong 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 theconsumption of its output abroad. In the present case, the facilitation of the
collection of receivables is different from the utilization or consumption of the outcome of such
service. While the facilitation is done in the Philippines, theconsumption is not. Respondent renders
assistance to its foreign clients -- the ROCs outside the country -- by receiving the bills of service
establishments located here in the country and forwarding them to the ROCs abroad.
The consumption contemplated by law, contrary to petitioners administrative interpretation,52 does
not imply that the service be done abroad in order to be zero-rated.
Consumption is "the use of a thing in a way that thereby exhausts it."53 Applied to services, the term
means the performance or "successful completion of a contractual duty, usually resulting in the
performers release from any past or future liability x x x."54 The services rendered by respondent are
performed or successfully completed upon its sending to its foreign client the drafts and bills it has
gathered from service establishments here. Its services, having been performed in the Philippines,
are therefore also consumed in the Philippines.
Unlike goods, services cannot be physically used in or bound for a specific place when their
destination is determined. Instead, there can only be a "predetermined end of a course"55 when
determining the service "location or position x x x for legal purposes."56 Respondents facilitation
service has no physical existence, yet takes place upon rendition, and therefore upon consumption,
in the Philippines. Under the destination principle, as petitioner asserts, such service is subject to
VAT at the rate of 10 percent.
Respondents Services Exempt from the Destination Principle
However, the law clearly provides for an exception to the destination principle; that is, for a zero
percent VAT rate for services that are performed in the Philippines, "paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the [BSP]."57 Thus, for
the supply of service to be zero-rated as an exception, the law merely requires that first, the service
be performed in the Philippines; second, the service fall under any of the categories in Section
102(b) of the Tax Code; and, third, it be paid in acceptable foreign currency accounted for in
accordance with BSP rules and regulations.
Indeed, these three requirements for exemption from the destination principle are met by
respondent. Its facilitation service is performed in the Philippines. It falls under the second category
found in Section 102(b) of the Tax Code, because it is a service other than "processing,
manufacturing or repacking of goods" as mentioned in the provision. Undisputed is the fact that such
service meets the statutory condition that it be paid in acceptable foreign currency duly accounted
for in accordance with BSP rules. Thus, it should be zero-rated.
Performance of Service versus Product Arising from Performance
Again, contrary to petitioners stand, for the cost of respondents service to be zero-rated, it need not
be tacked in as part of the cost of goods exported.58 The law neither imposes such requirement nor
associates services with exported goods. It simply states that the services performed by VATregistered 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 zerorated 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 valueadded 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 VATregistered hotels and other service establishments. Again, the condition remains that these services
must be paid in acceptable foreign currency inwardly remitted and accounted for in accordance with
the rules and regulations of the BSP. The term "other service establishments" is obviously broad
enough to cover respondents facilitation service. Section 4.102-2 of RR 7-95 provides thus:
"SECTION 4.102-2. Zero-Rating. -- (a) In general. -- A zero-rated sale by a VAT registered person,
which is a taxable transaction for VAT purposes, shall not result in any output tax. However, the
input tax on his purchases of goods, properties or services related to such zero-rated sale shall be
available as tax credit or refund in accordance with these regulations.
"(b) Transaction subject to zero-rate. -- The following services performed in the Philippines by VATregistered 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.74
1avv phi 1.zw+

VAT Ruling Nos. 040-98 and 080-89

VAT Ruling No. 040-98 relied upon by petitioner is a less general interpretation at the administrative
level,75rendered by the BIR commissioner upon request of a taxpayer to clarify certain provisions of
the VAT law. As correctly held by the CA, when this ruling states that the service must be "destined
for consumption outside of the Philippines"76 in order to qualify for zero rating, it contravenes both the
law and the regulations issued pursuant to it.77 This portion of VAT Ruling No. 040-98 is clearly ultra
vires and invalid.78
Although "[i]t is widely accepted that the interpretation placed upon a statute by the executive
officers, whose duty is to enforce it, is entitled to great respect by the courts,"79 this interpretation is
not conclusive and will have to be "ignored if judicially found to be erroneous"80 and "clearly absurd x
x x or improper."81 An administrative issuance that overrides the law it merely seeks to interpret,
instead of remaining consistent and in harmony with it, will not be countenanced by this Court.82
In the present case, respondent has relied upon VAT Ruling No. 080-89, which clearly recognizes its
zero rating. Changing this status will certainly deprive respondent of a refund of the substantial
amount of excess input taxes to which it is entitled.

Again, assuming arguendo that VAT Ruling No. 040-98 revoked VAT Ruling No. 080-89, such
revocation could not be given retroactive effect if the application of the latter ruling would only be
prejudicial to respondent.83 Section 246 of the Tax Code categorically declares that "[a]ny revocation
x x x of x x x any of the rulings x x x promulgated by the Commissioner shall not be given retroactive
application if the revocation x x x will be prejudicial to the taxpayers."84
It is also basic in law that "no x x x rule x x x shall be given retrospective effect85 unless explicitly
stated."86 No indication of such retroactive application to respondent does the Court find in VAT
Ruling No. 040-98. Neither do the exceptions enumerated in Section 24687 of the Tax Code apply.
Though vested with the power to interpret the provisions of the Tax Code88 and not bound by
predecessors acts or rulings, the BIR commissioner may render a different construction to a
statute89 only if the new interpretation is in congruence with the law. Otherwise, no amount of
interpretation can ever revoke, repeal or modify what the law says.
"Consumed Abroad" Not Required by Legislature
Interpellations on the subject in the halls of the Senate also reveal a clear intent on the part of the
legislators not to impose the condition of being "consumed abroad" in order for services performed in
the Philippines by a VAT-registered person to be zero-rated. We quote the relevant portions of the
proceedings:
"Senator Maceda: Going back to Section 102 just for the moment. Will the Gentleman kindly explain
to me - I am referring to the lower part of the first paragraph with the Provided. Section
102. Provided that the following services performed in the Philippines by VAT registered persons
shall be subject to zero percent. There are three here. What is the difference between the three
here which is subject to zero percent and Section 103 which is exempt transactions, to being with?
"Senator Herrera: Mr. President, in the case of processing and manufacturing or repacking goods
for persons doing business outside the Philippines which are subsequently exported, and where the
services are paid for in acceptable foreign currencies inwardly remitted, this is considered as subject
to 0%. But if these conditions are not complied with, they are subject to the VAT.
"In the case of No. 2, again, as the Gentleman pointed out, these three are 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 P200,000, they should be covered.
xxxxxxxxx
Senator Maceda: So, the services by Filipino citizens outside the Philippines are subject to VAT,
and I am talking of all services. Do big contractual engineers in Saudi Arabia pay VAT?
"Senator Herrera: This provision applies to a VAT-registered person. When he performs services in
the Philippines, that is zero-rated.
"Senator Maceda: That is right."90
Legislative Approval By Reenactment
Finally, upon the enactment of RA 8424, which substantially carries over the particular provisions on
zero rating of services under Section 102(b) of the Tax Code, the principle of legislative approval of
administrative interpretation by reenactment clearly obtains. This principle means that "the
reenactment of a statute substantially unchanged is persuasive indication of the adoption by
Congress of a prior executive construction."91
The legislature is presumed to have reenacted the law with full knowledge of the contents of the
revenue regulations then in force regarding the VAT, and to have approved or confirmed them
because they would carry out the legislative purpose. The particular provisions of the regulations we
have mentioned earlier are, therefore, re-enforced. "When a statute is susceptible of the meaning
placed upon it by a ruling of the government agency charged with its enforcement and the
[l]egislature thereafter [reenacts] the provisions [without] substantial change, such action is to some
extent confirmatory that the ruling carries out the legislative purpose."92
In sum, having resolved that transactions of respondent are zero-rated, the Court upholds the
formers entitlement to the refund as determined by the appellate court. Moreover, there is no conflict
between the decisions of the CTA and CA. This Court respects the findings and conclusions of a

specialized court like the CTA "which, by the nature of its functions, is dedicated exclusively to the
study and consideration of tax cases and has necessarily developed an expertise on the subject."93
Furthermore, under a zero-rating scheme, the sale or exchange of a particular service is completely
freed from the VAT, because the seller is entitled to recover, by way of a refund or as an input tax
credit, the tax that is included in the cost of purchases attributable to the sale or exchange.94 "[T]he
tax paid or withheld is not deducted from the tax base."95 Having been applied for within the
reglementary period,96 respondents refund is in order.
WHEREFORE, the Petition is hereby DENIED, and the assailed Decision AFFIRMED. No
pronouncement as to costs.
SO ORDERED.

ECOND DIVISION

COMMISSIONER OF G.R. No. 153205

INTERNAL REVENUE,
Petitioner, Present:
QUISUMBING, J.
- versus - Chairperson,
CARPIO,
CARPIO MORALES,
TINGA, and
BURMEISTER AND WAIN VELASCO, JR., JJ.
SCANDINAVIAN CONTRACTOR
MINDANAO, INC., Promulgated:
Respondent.
January 22, 2007
x----------------------------------------------------------------------------------------x

DECISION
CARPIO, J.:

The Case

This petition for review[1] seeks to set aside the 16 April 2002 Decision[2] of the
Court of Appeals in CA-G.R. SP No. 66341 affirming the 8 August
2001Decision[3] of the Court of Tax Appeals (CTA). The CTA ordered the
Commissioner of Internal Revenue (petitioner) to issue a tax credit certificate
forP6,994,659.67 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
[NAPOCORs] two power barges.The Consortium appointed BWSCDenmark as its coordination manager.
BWSC-Denmark established [respondent] which subcontracted the
actual operation and maintenance of NAPOCORs 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 Consortiums 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 ValueAdded 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:
Qtr. Exh. Date Filed Zero-Rated Sales VAT Input Tax
---------------------------------------------------------------------------------1st E 04-18-96 P 33,019,651.07 P608,953.48
2nd F 07-16-96 37,108,863.33 756,802.66
3rd G 10-14-96 34,196,372.35 930,279.14
4th H 01-20-97 42,992,302.87 1,065,138.86
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 datedFebruary 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 ofP103,558,338.11 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 BIRs 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
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 CTAs ruling stated:
[Respondents] 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-DavaoLanang Branch to represent
payments
for
sub-contract
fees
that
came
from
Den Danske Aktieselskab Bank-Denmark
for
the
account
of
[respondent]. Clearly, [respondents] 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 [respondents] 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 theVoluntary 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 x[5]

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 petitioners view that
since respondents 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. 5-96[7] as subject to 0% VAT. Thus, according to
petitioner, respondents services cannot legally qualify for 0% VAT but are subject
to the regular 10% VAT.[8]
The Court of Appeals found untenable petitioners contention that under VAT
Ruling No. 040-98, respondents services should be destined for consumption
abroad to enjoy zero-rating. Contrary to petitioners 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 BangkoSentral 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 petitioners 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) servicesmust
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 petitioners 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 petitioners 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 respondents services are subject to 0% VAT. Rather, it is based on the
non-retroactivity of the prejudicial revocation of BIR Ruling No. 023-95[17] and

VAT Ruling No. 003-99,[18] which held that respondents 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 subparagraph, 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 serviceswhich 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, respondents 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 rules[20] 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 zerorating, 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.

In this case, the payer-recipient of respondents services is the Consortium which is

a joint-venture doing business in the Philippines. While the Consortiums 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 15year 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 & WainScandinavian 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
[23]
term.
(Emphasis supplied)

Considering this length of time, the Consortiums operation and

maintenance of NAPOCORs 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, respondents 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 NAPOCORs 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 NAPOCORs two 100-megawatt power barges in Mindanao.
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.
Respondents 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 itsnon-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 x[27] (Emphasis
supplied)

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 respondents 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. 023-95[29]insofar
as it held that the services being rendered by BWSCMI is subject to VAT at zero
percent (0%). Respondents reliance on these BIR rulings binds petitioner.
Petitioners filing of his Answer before the CTA challenging respondents 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 respondents 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 petitioners Answer dated 2 March 2000 before the
CTA contesting respondents claim for refund, respondents 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.

THIRD DIVISION
COMMISSIONER OF G.R. No. 146984
INTERNAL REVENUE
Petitioner,
Present:
QUISUMBING,
- versus - Chairperson,
CARPIO,
CARPIO MORALES,
TINGA, and
MAGSAYSAY LINES, INC., VELASCO, JR., JJ.
BALIWAG NAVIGATION, INC.,

FIM LIMITED OF THE MARDEN

GROUP (HK) and NATIONAL
DEVELOPMENT COMPANY,
Respondents. Promulgated:
July 28, 2006
x---------------------------------------------------------------------------------x

DECISION
TINGA, J.:
The issue in this present petition is whether the sale by the National Development
Company (NDC) of five (5) of its vessels to the private respondents is subject to
value-added tax (VAT) under the National Internal Revenue Code of 1986 (Tax
Code) then prevailing at the time of the sale. The Court of Tax Appeals (CTA) and
the Court of Appeals commonly ruled that the sale is not subject to VAT. We
affirm, though on a more unequivocal rationale than that utilized by the rulings
under review. The fact that the sale was not in the course of the trade or business of
NDC is sufficient in itself to declare the sale as outside the coverage of VAT.
The facts are culled primarily from the ruling of the CTA.
Pursuant to a government program of privatization, NDC decided to sell to
private enterprise all of its shares in its wholly-owned subsidiary the National
Marine Corporation (NMC). The NDC decided to sell in one lot its NMC shares
and five (5) of its ships, which are 3,700 DWT Tween-Decker, Kloeckner type
vessels.[1] The vessels were constructed for the NDC between 1981 and 1984, then
initially leased to Luzon Stevedoring Company, also its wholly-owned subsidiary.
Subsequently, the vessels were transferred and leased, on a bareboat basis, to the
NMC.[2]

The NMC shares and the vessels were offered for public bidding. Among the
stipulated terms and conditions for the public auction was that the winning bidder
was to pay a value added tax of 10% on the value of the vessels.[3] On 3 June 1988,
private respondent Magsaysay Lines, Inc. (Magsaysay Lines) offered to buy the
shares and the vessels for P168,000,000.00. The bid was made by Magsaysay
Lines, purportedly for a new company still to be formed composed of itself,
Baliwag Navigation, Inc., and FIM Limited of the Marden Group based in
Hongkong (collectively, private respondents).[4] The bid was approved by the
Committee on Privatization, and a Notice of Award dated 1 July 1988 was issued
to Magsaysay Lines.
On 28 September 1988, the implementing Contract of Sale was executed between
NDC, on one hand, and Magsaysay Lines, Baliwag Navigation, and FIM Limited,
on the other. Paragraph 11.02 of the contract stipulated that [v]alue-added tax, if
any, shall be for the account of the PURCHASER.[5] Per arrangement, an
irrevocable confirmed Letter of Credit previously filed as bidders bond was
accepted by NDC as security for the payment of VAT, if any. By this time, a
formal request for a ruling on whether or not the sale of the vessels was subject to
VAT had already been filed with the Bureau of Internal Revenue (BIR) by the law
firm of Sycip Salazar Hernandez & Gatmaitan, presumably in behalf of private
respondents. Thus, the parties agreed that should no favorable ruling be received
from the BIR, NDC was authorized to draw on the Letter of Credit upon written
demand the amount needed for the payment of the VAT on the stipulated due date,
20 December 1988.[6]
In January of 1989, private respondents through counsel received VAT Ruling No.
568-88 dated 14 December 1988 from the BIR, holding that the sale of the vessels
was subject to the 10% VAT. The ruling cited the fact that NDC was a VATregistered enterprise, and thus its transactions incident to its normal VAT

registered activity of leasing out personal property including sale of its own assets
that are movable, tangible objects which are appropriable or transferable are
subject to the 10% [VAT].[7]
Private respondents moved for the reconsideration of VAT Ruling No. 568-88, as
well as VAT Ruling No. 395-88 (dated 18 August 1988), which made a similar
ruling on the sale of the same vessels in response to an inquiry from the Chairman
of the Senate Blue Ribbon Committee. Their motion was denied when the BIR
issued VAT Ruling Nos. 007-89 dated 24 February 1989, reiterating the earlier
VAT rulings. At this point, NDC drew on the Letter of Credit to pay for the VAT,
and the amount of P15,120,000.00 in taxes was paid on 16 March 1989.
On 10 April 1989, private respondents filed an Appeal and Petition for Refund
with the CTA, followed by a Supplemental Petition for Review on 14 July 1989.
They prayed for the reversal of VAT Rulings No. 395-88, 568-88 and 007-89, as
well as the refund of the VAT payment made amounting to P15,120,000.00.[8]The
Commissioner of Internal Revenue (CIR) opposed the petition, first arguing that
private respondents were not the real parties in interest as they were not the
transferors or sellers as contemplated in Sections 99 and 100 of the then Tax Code.
The CIR also squarely defended the VAT rulings holding the sale of the vessels
liable for VAT, especially citing Section 3 of Revenue Regulation No. 5-87 (R.R.
No. 5-87), which provided that [VAT] is imposed on any sale or transactions
deemed sale of taxable goods (including capital goods, irrespective of the date of
acquisition). The CIR argued that the sale of the vessels were among those
transactions deemed sale, as enumerated in Section 4 of R.R. No. 5-87. It seems
that the CIR particularly emphasized Section 4(E)(i) of the Regulation, which
classified change of ownership of business as a circumstance that gave rise to a
transaction deemed sale.

In a Decision dated 27 April 1992, the CTA rejected the CIRs arguments and
granted the petition.[9] The CTA ruled that the sale of a vessel was an isolated
transaction, not done in the ordinary course of NDCs business, and was thus not
subject to VAT, which under Section 99 of the Tax Code, was applied only to sales
in the course of trade or business. The CTA further held that the sale of the vessels
could not be deemed sale, and thus subject to VAT, as the transaction did not fall
under the enumeration of transactions deemed sale as listed either in Section
100(b) of the Tax Code, or Section 4 of R.R. No. 5-87. Finally, the CTA ruled that
any case of doubt should be resolved in favor of private respondents since Section
99 of the Tax Code which implemented VAT is not an exemption provision, but a
classification provision which warranted the resolution of doubts in favor of the
taxpayer.

The CIR appealed the CTA Decision to the Court of Appeals,[10] which
on 11 March 1997, rendered a Decision reversing the CTA.[11] While the appellate
court agreed that the sale was an isolated transaction, not made in the course of
NDCs regular trade or business, it nonetheless found that the transaction fell within
the classification of those deemed sale under R.R. No. 5-87, since the sale of the
vessels together with the NMC shares brought about a change of ownership in
NMC. The Court of Appeals also applied the principle governing tax exemptions
that such should be strictly construed against the taxpayer, and liberally in favor of
the government.[12]
However, the Court of Appeals reversed itself upon reconsidering the case, through
a Resolution dated 5 February 2001.[13] This time, the appellate court ruled that the
change of ownership of business as contemplated in R.R. No. 5-87 must be a
consequence of the retirement from or cessation of business by the owner of the

goods, as provided for in Section 100 of the Tax Code. The Court of Appeals also
agreed with the CTA that the classification of transactions deemed sale was a
classification statute, and not an exemption statute, thus warranting the resolution
of any doubt in favor of the taxpayer.[14]
To the mind of the Court, the arguments raised in the present petition have already
been adequately discussed and refuted in the rulings assailed before us. Evidently,
the petition should be denied. Yet the Court finds that Section 99 of the Tax Code
is sufficient reason for upholding the refund of VAT payments, and the subsequent
disquisitions by the lower courts on the applicability of Section 100 of the Tax
Code and Section 4 of R.R. No. 5-87 are ultimately irrelevant.
A brief reiteration of the basic principles governing VAT is in order. VAT is
ultimately a tax on consumption, even though it is assessed on many levels of
transactions on the basis of a fixed percentage.[15] It is the end user of consumer
goods or services which ultimately shoulders the tax, as the liability therefrom is
passed on to the end users by the providers of these goods or services [16] who in
turn may credit their own VAT liability (or input VAT) from the VAT payments
they receive from the final consumer (or output VAT).[17] The final purchase by the
end consumer represents the final link in a production chain that itself involves
several transactions and several acts of consumption. The VAT system assures
fiscal adequacy through the collection of taxes on every level of
consumption,[18] yet assuages the manufacturers or providers of goods and services
by enabling them to pass on their respective VAT liabilities to the next link of the
chain until finally the end consumer shoulders the entire tax liability.
Yet VAT is not a singular-minded tax on every transactional level. Its assessment
bears direct relevance to the taxpayers role or link in the production chain. Hence,
as affirmed by Section 99 of the Tax Code and its subsequent incarnations,[19] the
tax is levied only on the sale, barter or exchange of goods or services by persons

who engage in such activities, in the course of trade or business. These

transactions outside the course of trade or business may invariably contribute to the
production chain, but they do so only as a matter of accident or incident. As the
sales of goods or services do not occur within the course of trade or business, the
providers of such goods or services would hardly, if at all, have the opportunity to
appropriately credit any VAT liability as against their own accumulated VAT
collections since the accumulation of output VAT arises in the first place only
through the ordinary course of trade or business.

That the sale of the vessels was not in the ordinary course of trade or business of
NDC was appreciated by both the CTA and the Court of Appeals, the latter doing
so even in its first decision which it eventually reconsidered.[20] We cite with
approval the CTAs explanation on this point:
In Imperial v. Collector of Internal Revenue, G.R. No. L-7924,
September 30, 1955 (97 Phil. 992), the term carrying on business does not mean
the performance of a single disconnected act, but means conducting, prosecuting
and continuing business by performing progressively all the acts normally incident
thereof; while doing business conveys the idea of business being done, not from
time to time, but all the time. [J. Aranas, UPDATED NATIONAL INTERNAL
REVENUE CODE (WITH ANNOTATIONS), p. 608-9 (1988)]. Course of
business is what is usually done in the management of trade or business. [Idmi v.
Weeks & Russel, 99 So. 761, 764, 135 Miss. 65, cited in Words & Phrases, Vol.
10, (1984)].
What is clear therefore, based on the aforecited jurisprudence, is that course
of business or doing business connotes regularity of activity. In the instant case,
the sale was an isolated transaction. The sale which was involuntary and made
pursuant to the declared policy of Government for privatization could no longer be
repeated or carried on with regularity. It should be emphasized that the normal
VAT-registered activity of NDC is leasing personal property.[21]

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

The conclusion that the sale was not in the course of trade or business, which
the CIR does not dispute before this Court,[24] should have definitively settled the
matter. Any sale, barter or exchange of goods or services not in the course of
trade or business is not subject to VAT.
Section 100 of the Tax Code, which is implemented by Section 4(E)(i) of R.R. No.
5-87 now relied upon by the CIR, is captioned Value-added tax on sale of goods,
and it expressly states that [t]here shall be levied, assessed and collected on every
sale, barter or exchange of goods, a value added tax x x x. Section 100 should be
read in light of Section 99, which lays down the general rule on which persons are
liable for VAT in the first place and on what transaction if at all. It may even be
noted that Section 99 is the very first provision in Title IV of the Tax Code, the
Title that covers VAT in the law. Before any portion of Section 100, or the rest of
the law for that matter, may be applied in order to subject a transaction to VAT, it
must first be satisfied that the taxpayer and transaction involved is liable for VAT
in the first place under Section 99.

It would have been a different matter if Section 100 purported to define the phrase
in the course of trade or business as expressed in Section 99. If that were so,
reference to Section 100 would have been necessary as a means of ascertaining
whether the sale of the vessels was in the course of trade or business, and thus
subject to
VAT. But that is not the case. What Section 100 and Section 4(E)(i) of R.R. No. 587 elaborate on is not the meaning of in the course of trade or business, but instead
the identification of the transactions which may be deemed as sale. It would
become necessary to ascertain whether under those two provisions the transaction
may be deemed a sale, only if it is settled that the transaction occurred in the
course of trade or business in the first place. If the transaction transpired outside
the course of trade or business, it would be irrelevant for the purpose of

determining VAT liability whether the transaction may be deemed sale, since it
anyway is not subject to VAT.
Accordingly, the Court rules that given the undisputed finding that the transaction
in question was not made in the course of trade or business of the seller, NDC that
is, the sale is not subject to VAT pursuant to Section 99 of the Tax Code, no matter
how the said sale may hew to those transactions deemed sale as defined under
Section 100.
In any event, even if Section 100 or Section 4 of R.R. No. 5-87 were to find
application in this case, the Court finds the discussions offered on this point by the
CTA and the Court of Appeals (in its subsequent Resolution) essentially correct.
Section 4 (E)(i) of R.R. No. 5-87 does classify as among the transactions deemed
sale those involving change of ownership of business. However, Section 4(E) of
R.R. No. 5-87, reflecting Section 100 of the Tax Code, clarifies that such change of
ownership is only an attending circumstance to retirement from or cessation of
business[, ] with respect to all goods on hand [as] of the date of such retirement or
cessation.[25] Indeed, Section 4(E) of R.R. No. 5-87 expressly characterizes the
change of ownership of business as only a circumstance that attends those
transactions deemed sale, which are otherwise stated in the same section.[26]

WHEREFORE, the petition is DENIED. No costs.

SO ORDERED.
THIRD DIVISION

[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 Review[1] under Rule 45 of the Rules of Court,
seeking to set aside the May 27, 2002 Decision[2] of the Court of Appeals (CA)
in CA-GR SP No. 66093. The decretal portion of the Decision reads as
follows:
WHEREFORE, foregoing premises considered, the petition for review
is DENIED for lack of merit.[3]
The Facts
The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as
follows:
As jointly stipulated by the parties, the pertinent facts x x x involved in this case are as
follows:
1. [Respondent] is a resident foreign corporation duly registered with the Securities and
Exchange Commission to do business in the Philippines, with principal office
address at the new Cebu Township One, Special Economic Zone, Barangay
Cantao-an, Naga, Cebu;

2. [Petitioner] is sued in his official capacity, having been duly appointed and
empowered to perform the duties of his office, including, among others, the duty to
act and approve claims for refund or tax credit;
3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and has
been issued PEZA Certificate No. 97-044 pursuant to Presidential Decree No. 66,
as amended, to engage in the manufacture of recording components primarily used
in computers for export. Such registration was made on 6 June 1997;
4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT
Registration Certification No. 97-083-000600-V issued on 2 April 1997;
5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by
[respondent];
6. An administrative claim for refund of VAT input taxes in the amount
of P28,369,226.38 with supporting documents (inclusive of the P12,267,981.04 VAT
input taxes subject of this Petition for Review), was filed on 4 October 1999 with
Revenue District Office No. 83, Talisay Cebu;
7. No final action has been received by [respondent] from [petitioner] on [respondents]
claim for VAT refund.

The administrative claim for refund by the [respondent] on October 4, 1999 was not
acted upon by the [petitioner] prompting the [respondent] to elevate the case to [the
CTA] on July 21, 2000 by way of Petition for Review in order to toll the running of
the two-year prescriptive period.
For his part, [petitioner] x x x raised the following Special and Affirmative Defenses,
to wit:
1. [Respondents] alleged claim for tax refund/credit is subject to administrative
routinary investigation/examination by [petitioners] Bureau;
2. Since taxes are presumed to have been collected in accordance with laws and
regulations, the [respondent] has the burden of proof that the taxes sought to be
refunded were erroneously or illegally collected x x x;
3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court
ruled that:
A claimant has the burden of proof to establish the factual
basis of his or her claim for tax credit/refund.
4. Claims for tax refund/tax credit are construed in strictissimi juris against the
taxpayer. This is due to the fact that claims for refund/credit [partake of] the nature
of an exemption from tax. Thus, it is incumbent upon the [respondent] to prove that
it is indeed entitled to the refund/credit sought. Failure on the part of the
[respondent] to prove the same is fatal to its claim for tax credit. He who claims
exemption must be able to justify his claim by the clearest grant of organic or
statutory law. An exemption from the common burden cannot be permitted to exist
upon vague implications;

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

Authority (PEZA) registered Ecozone Enterprise, then its business is not subject to
VAT pursuant to Section 24 of Republic Act No. ([RA]) 7916 in relation to Section
103 of the Tax Code, as amended. As [respondents] business is not subject to VAT,
the capital goods and services it alleged to have purchased are considered not used
in VAT taxable business. As such, [respondent] is not entitled to refund of input
taxes on such capital goods pursuant to Section 4.106.1 of Revenue Regulations
No. ([RR])7-95, and of input taxes on services pursuant to Section 4.103 of said
regulations.
6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229
of the 1997 Tax Code on filing of a written claim for refund within two (2) years from
the date of payment of tax.

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

Whether or not respondent is entitled to the refund or issuance of Tax Credit

Certificate in the amount 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 Courts Ruling
The Petition is unmeritorious.
Sole Issue:
Entitlement of a VAT-Registered PEZA Enterprise to
a Refund of or Credit for Input VAT
No doubt, as a PEZA-registered enterprise within a special economic
zone,[7] respondent is entitled to the fiscal incentives and benefits[8] provided
for in either PD 66[9] or EO 226.[10] It shall, moreover, enjoy all privileges,
benefits, advantages or exemptions under both Republic Act Nos. (RA)
7227[11] and 7844.[12]
Preferential Tax Treatment
Under Special Laws
If it avails itself of PD 66, notwithstanding the provisions of other laws to
the contrary, respondent shall not be subject to internal revenue laws and
regulations for raw materials, supplies, articles, equipment, machineries,
spare parts and wares, except those prohibited by law, brought into the zone
to be stored, broken up, repacked, assembled, installed, sorted, cleaned,
graded or otherwise processed, manipulated, manufactured, mixed or used
directly or indirectly in such activities.[13] Even so, respondent would enjoy a
net-operating loss carry over; accelerated depreciation; foreign exchange and
financial assistance; and exemption from export taxes, local taxes and
licenses.[14]
Comparatively, the same exemption from internal revenue laws and
regulations applies if EO 226[15] is chosen. Under this law, respondent shall
further be entitled to an income tax holiday; additional deduction for labor
expense; simplification of customs procedure; unrestricted use of consigned
equipment; access to a bonded manufacturing warehouse system; privileges
for foreign nationals employed; tax credits on domestic capital equipment, as
well as for taxes and duties on raw materials; and exemption from contractors
taxes, wharfage dues, taxes and duties on imported capital equipment and

spare parts, export taxes, duties, imposts and fees,[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 equipment[18] -- is, ipso
facto, also accorded to the zone[19] under RA 7916. Furthermore, the latter law
-- notwithstanding other existing laws, rules and regulations to the contrary -extends[20] to that zone the provision stating that no local or national taxes
shall be imposed therein.[21] No exchange control policy shall be applied; and
free markets for foreign exchange, gold, securities and future shall be allowed
and maintained.[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 negotiable tax
credits[24] for locally-produced materials used as inputs. Aside from the other
incentives possibly already granted to it by the Board of Investments, it also
enjoys preferential credit facilities[25] and exemption from PD 1853.[26]
From the above-cited laws, it is immediately clear that petitioner enjoys
preferential tax treatment.[27] It is not subject to internal revenue laws and
regulations and is even entitled to tax credits. The VAT on capital goods is an
internal revenue tax from which petitioner as an entity is exempt. Although
the transactions involving such tax are not exempt, petitioner as a VATregistered 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 added[30] to such goods, properties or
services by the seller, transferor or lessor.[31] It is an indirect tax that may be
shifted or passed on to the buyer, transferee or lessee of the goods,
properties or services.[32] As such, it should be understood not in the context of
the person or entity that is primarily, directly and legally liable for its payment,
but in terms of its nature as a tax on consumption.[33] In either case, though,
the same conclusion is arrived at.

The law[34] 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]
If at the end of a taxable quarter the output taxes[38] charged by a
seller[39] are equal to the input taxes[40] passed on by the suppliers, no payment
is required. It is when the output taxes exceed the input taxes that the excess
has to be paid.[41] If, however, the input taxes exceed the output taxes, the
excess shall be carried over to the succeeding quarter or quarters.[42] Should
the input taxes result from zero-rated or effectively zero-rated transactions or
from the acquisition of capital goods,[43] any excess over the output taxes shall
instead be refunded[44] to the taxpayer or credited[45] against other internal
revenue taxes.[46]
Zero-Rated and Effectively
Zero-Rated Transactions
Although both are taxable and similar in effect, zero-rated transactions
differ from effectively zero-rated transactions as to their source.
Zero-rated transactions generally refer to the export sale of goods and
supply of services.[47] The tax rate is set at zero.[48] When applied to the tax
base, such rate obviously results in no tax chargeable against the purchaser.
The seller of such transactions charges no output tax,[49] but can claim a
refund of or a tax credit certificate for the VAT previously charged by
suppliers.
Effectively zero-rated transactions, however, refer to the sale of
goods[50] or supply of services[51] 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 principle[53] to the exportation of goods, automatic
zero rating[54] is primarily intended to be enjoyed by the seller who is directly
and legally liable for the VAT, making such seller internationally competitive
by allowing the refund or credit of input taxes that are attributable to export
sales.[55] Effective zero rating, on the contrary, is intended to benefit the
purchaser who, not being directly and legally liable for the payment of the
VAT, will ultimately bear the burden of the tax shifted by the suppliers.
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 VATexempt. These are subject to the VAT; respondent is required to register.
Its sales transactions, however, will either be zero-rated or taxed at the
standard rate of 10 percent,[64] depending again on the application of
the destination principle.[65]
If respondent enters into such sales transactions with a purchaser -usually in a foreign country -- for use or consumption outside the Philippines,
these shall be subject to 0 percent.[66] If entered into with a purchaser for use
or consumption in the Philippines, then these shall be subject to 10
percent,[67] unless the purchaser is exempt from the indirect burden of the
VAT, in which case it shall also be zero-rated.
Since the purchases of respondent are not exempt from the VAT, the rate
to be applied is zero. Its exemption under both PD 66 and RA 7916 effectively
subjects such transactions to a zero rate,[68] because the ecozone within which
it is registered is managed and operated by the PEZA as a separate customs
territory.[69] This means that in such zone is created the legal fiction of foreign
territory.[70] Under the cross-border principle[71] 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 zone[77] within that ecozone,
sales to the export processing zone, even without being actually exported,
shall in fact be viewed as constructively exported under EO

226.[78] Considered as export sales,[79] such purchase transactions by

respondent would indeed be subject to a zero rate.[80]
Tax Exemptions
Broad and Express
Applying the special laws we have earlier discussed, respondent as an
entity is exempt from internal revenue laws and regulations.
This exemption covers both direct and indirect taxes, stemming from the
very nature of the VAT as a tax on consumption, for which the direct liability is
imposed on one person but the indirect burden is passed on to another.
Respondent, as an exempt entity, can neither be directly charged for the VAT
on its sales nor indirectly made to bear, as added cost to such sales, the
equivalent VAT on its purchases. Ubi lex non distinguit, nec nos distinguere
debemus. Where the law does not distinguish, we ought not to distinguish.
Moreover, the exemption is both express and pervasive for the following
reasons:
First, RA 7916 states that no taxes, local and national, shall be imposed
on business establishments operating within the ecozone.[81] Since this law
does not exclude the VAT from the prohibition, it is deemed included. Exceptio
firmat regulam in casibus non exceptis. An exception confirms the rule in
cases not excepted; that is, a thing not being excepted must be regarded as
coming within the purview of the general rule.
Moreover, even though the VAT is not imposed on the entity but on the
transaction, it may still be passed on and, therefore, indirectly imposed on the
same entity -- a patent circumvention of the law. That no VAT shall be
imposed directly upon business establishments operating within the ecozone
under RA 7916 also means that no VAT may be passed on and imposed
indirectly. Quando aliquid prohibetur ex directo prohibetur et per obliquum.
When anything is prohibited directly, it is also prohibited indirectly.
Second, when RA 8748 was enacted to amend RA 7916, the same
prohibition applied, except for real property taxes that presently are imposed
on land owned by developers.[82] This similar and repeated prohibition is an
unambiguous ratification of the laws intent in not imposing local or national
taxes on business enterprises within the ecozone.
Third, foreign and domestic merchandise, raw materials, equipment and
the like shall not be subject to x x x internal revenue laws and regulations
under PD 66[83] -- the original charter of PEZA (then EPZA) that was later

amended by RA 7916.[84] No provisions in the latter law modify such

exemption.
Although this exemption puts the government at an initial disadvantage,
the reduced tax collection ultimately redounds to the benefit of the national
economy by enticing more business investments and creating more
employment opportunities.[85]
Fourth, even the rules implementing the PEZA law clearly reiterate that
merchandise -- except those prohibited by law -- shall not be subject to x x x
internal revenue laws and regulations x x x[86] if brought to the ecozones
restricted area[87] for manufacturing by registered export enterprises,[88] of
which respondent is one. These rules also apply to all enterprises registered
with the EPZA prior to the effectivity of such rules.[89]
Fifth, export processing zone enterprises registered[90] with the Board of
Investments (BOI) under EO 226 patently enjoy exemption from national
internal revenue taxes on imported capital equipment reasonably needed and
exclusively used for the manufacture of their products;[91] on required supplies
and spare part for consigned equipment;[92] and on foreign and domestic
merchandise, raw materials, equipment and the like -- except those prohibited
by law -- brought into the zone for manufacturing.[93] In addition, they are given
credits for the value of the national internal revenue taxes imposed on
domestic capital equipment also reasonably needed and exclusively used for
the manufacture of their products,[94] as well as for the value of such taxes
imposed on domestic raw materials and supplies that are used in the
manufacture of their export products and that form part thereof.[95]
Sixth, the exemption from local and national taxes granted under RA
7227[96] are ipso facto accorded to ecozones.[97] In case of doubt, conflicts with
respect to such tax exemption privilege shall be resolved in favor of the
ecozone.[98]
And seventh, the tax credits under RA 7844 -- given for imported raw
materials primarily used in the production of export goods,[99] and for locally
produced raw materials, capital equipment and spare parts used by exporters
of non-traditional products[100] -- shall also be continuously enjoyed by similar
exporters within the ecozone.[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

juris[102] against the taxpayer[103] and liberally in favor of the taxing authority.[104]
Tax refunds are in the nature of such exemptions.[105] Accordingly, the
claimants of those refunds bear the burden of proving the factual basis of their
claims;[106] and of showing, by words too plain to be mistaken, that the
legislature intended to exempt them.[107] In the present case, all the cited legal
provisions are teeming with life with respect to the grant of tax exemptions too
vivid to pass unnoticed. In addition, respondent easily meets the challenge.
Respondent, which as an entity is exempt, is different from its transactions
which are not exempt. The end result, however, is that it is not subject to the
VAT. The non-taxability of transactions that are otherwise taxable is merely a
necessary incident to the tax exemption conferred by law upon it as an entity,
not upon the transactions themselves.[108] Nonetheless, its exemption as an
entity and the non-exemption of its transactions lead to the same result for the
following considerations:
First, the contemporaneous construction of our tax laws by BIR authorities
who are called upon to execute or administer such laws[109] will have to be
adopted. Their prior tax issuances have held inconsistent positions brought
about by their probable failure to comprehend and fully appreciate the nature
of the VAT as a tax on consumption and the application of the destination
principle.[110] Revenue Memorandum Circular No. (RMC) 74-99, however, now
clearly and correctly provides that any VAT-registered suppliers sale of goods,
property or services from the customs territory to any registered enterprise
operating in the ecozone -- regardless of the class or type of the latters PEZA
registration -- is legally entitled to a zero rate.[111]
Second, the policies of the law should prevail. Ratio legis est anima. The
reason for the law is its very soul.
In PD 66, the urgent creation of the EPZA which preceded the PEZA, as
well as the establishment of export processing zones, seeks to encourage and
promote foreign commerce as a means of x x x strengthening our export trade
and foreign exchange position, of hastening industrialization, of reducing
domestic unemployment, and of accelerating the development of the
country.[112]
RA 7916, as amended by RA 8748, declared that by creating the PEZA
and integrating the special economic zones, the government shall actively
encourage, promote, induce and accelerate a sound and balanced industrial,
economic and social development of the country x x x through the

establishment, among others, of special economic zones x x x that shall

effectively attract legitimate and productive foreign investments.[113]
Under EO 226, the State shall encourage x x x foreign investments in
industry x x x which shall x x x meet the tests of international
competitiveness[,] accelerate development of less developed regions of the
country[,] and result in increased volume and value of exports for the
economy.[114] Fiscal incentives that are cost-efficient and simple to administer
shall be devised and extended to significant projects to compensate for
market imperfections, to reward performance contributing to economic
development,[115] and to stimulate the establishment and assist initial
operations of the enterprise.[116]
Wisely accorded to ecozones created under RA 7916[117] was the
governments policy -- spelled out earlier in RA 7227 -- of converting into
alternative productive uses[118] the former military reservations and their
extensions,[119] as well as of providing them incentives[120] to enhance the
benefits that would be derived from them[121] in promoting economic and social
development.[122]
Finally, under RA 7844, the State declares the need to evolve export
development into a national effort[123] in order to win international markets. By
providing many export and tax incentives,[124] the State is able to drive home
the point that exporting is indeed the key to national survival and the means
through which the economic goals of increased employment and enhanced
incomes can most expeditiously be achieved.[125]
The Tax Code itself seeks to promote sustainable economic growth x x x;
x x x increase economic activity; and x x x create a robust environment for
business to enable firms to compete better in the regional as well as the
global market.[126] After all, international competitiveness requires economic
and tax incentives to lower the cost of goods produced for export. State
actions that affect global competition need to be specific and selective in the
pricing of particular goods or services.[127]
All these statutory policies are congruent to the constitutional mandates of
providing incentives to needed investments,[128] as well as of promoting the
preferential use of domestic materials and locally produced goods and
adopting measures to help make these competitive.[129] Tax credits for
domestic inputs strengthen backward linkages. Rightly so, the rule of law and
the existence of credible and efficient public institutions are essential
prerequisites for sustainable economic development.[130]
VAT Registration, Not Application

for Effective Zero Rating,

Indispensable to VAT Refund
Registration is an indispensable requirement under our VAT
law.[131] Petitioner alleges that respondent did register for VAT purposes with
the appropriate Revenue District Office. However, it is now too late in the day
for petitioner to challenge the VAT-registered status of respondent, given the
latters prior representation before the lower courts and the mode of appeal
taken by petitioner before this Court.
The PEZA law, which carried over the provisions of the EPZA law, is clear
in exempting from internal revenue laws and regulations the equipment -including capital goods -- that registered enterprises will use, directly or
indirectly, in manufacturing.[132] EO 226 even reiterates this privilege among
the incentives it gives to such enterprises.[133] Petitioner merely asserts that by
virtue of the PEZA registration alone of respondent, the latter is not subject to
the VAT. Consequently, the capital goods and services respondent has
purchased are not considered used in the VAT business, and no VAT refund
or credit is due.[134] This is a non sequitur. By the VATs very nature as a tax on
consumption, the capital goods and services respondent has purchased are
subject to the VAT, although at zero rate. Registration does not determine
taxability under the VAT law.
Moreover, the facts have already been determined by the lower courts.
Having failed to present evidence to support its contentions against
the income tax holidayprivilege 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 rating[140] cannot prevail over the clear VAT nature of
respondents transactions. The scope of such regulations is not within the
statutory authority x x x granted by the legislature.[141]
First, a mere administrative issuance, like a BIR regulation, cannot amend
the law; the former cannot purport to do any more than interpret the
latter.[142] The courts will not countenance one that overrides the statute it
seeks to apply and implement.[143]
Other than the general registration of a taxpayer the VAT status of which
is aptly determined, no provision under our VAT law requires an additional

application to be made for such taxpayers transactions to be considered

effectively zero-rated. An effectively zero-rated transaction does not and
cannot become exempt simply because an application therefor was not made
or, if made, was denied. To allow the additional requirement is to give
unfettered discretion to those officials or agents who, without fluid
consideration, are bent on denying a valid application. Moreover, the State
can never be estopped by the omissions, mistakes or errors of its officials or
agents.[144]
Second, grantia argumenti that such an application is required by law,
there is still the presumption of regularity in the performance of official
duty.[145] Respondents registration carries with it the presumption that, in the
absence of contradictory evidence, an application for effective zero rating was
also filed and approval thereof given. Besides, it is also presumed that the law
has been obeyed[146] 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 theregulations issued pursuant thereto. Leniency
in the implementation of the VAT in ecozones is an imperative, precisely to
spur economic growth in the country and attain global competitiveness as
envisioned in those laws.
A VAT-registered status, as well as compliance with the invoicing
requirements,[147] is sufficient for the effective zero rating of the transactions of
a taxpayer. The nature of its business and transactions can easily be perused
from, as already clearly indicated in, its VAT registration papers and
photocopied documents attached thereto. Hence, its transactions cannot be
exempted by its mere failure to apply for their effective zero rating. Otherwise,
their VAT exemption would be determined, not by their nature, but by the
taxpayers negligence -- a result not at all contemplated. Administrative
convenience cannot thwart legislative mandate.
Tax Refund or
Credit in Order
Having determined that respondents purchase transactions are subject to
a zero VAT rate, the tax refund or credit is in order.
As correctly held by both the CA and the Tax Court, respondent had
chosen the fiscal incentives in EO 226 over those in RA 7916 and PD 66. It
opted for the income tax holiday regime instead of the 5 percent preferential
tax regime.

The latter scheme is not a perfunctory aftermath of a simple registration

under the PEZA law,[148] for EO 226[149] 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.
Compliance with All Requisites
for VAT Refund or Credit
As further enunciated by the Tax Court, respondent complied with all the
requisites for claiming a VAT refund or credit.[150]
First, respondent is a VAT-registered entity. This fact alone distinguishes
the present case from Contex, in which this Court held that the petitioner
therein was registered as a non-VAT taxpayer.[151] Hence, for being merely
VAT-exempt, the petitioner in that case cannot claim any VAT refund or credit.
Second, the input taxes paid on the capital goods of respondent are duly
supported by VAT invoices and have not been offset against any output taxes.
Although enterprises registered with the BOI after December 31, 1994 would
no longer enjoy the tax credit incentives on domestic capital equipment -- as
provided for under Article 39(d), Title III, Book I of EO 226[152] -- starting
January 1, 1996, respondent would still have the same benefit under a
general and express exemption contained in both Article 77(1), Book VI of EO
226; and Section 12, paragraph 2 (c) of RA 7227, extended to the ecozones
by RA 7916.

There was a very clear intent on the part of our legislators, not only to
exempt investors in ecozones from national and local taxes, but also to grant
them tax credits. This fact was revealed by the sponsorship speeches in
Congress during the second reading of House Bill No. 14295, which later
became RA 7916, as shown below:
MR. RECTO. x x x Some of the incentives that this bill provides are exemption from
national and local taxes; x x x tax credit for locally-sourced inputs x x x.
xxxxxxxxx
MR. DEL MAR. x x x To advance its cause in encouraging investments and creating
an environment conducive for investors, the bill offers incentives such as the
exemption from local and national taxes, x x x tax credits for locally sourced inputs x
x x.[153]
And third, no question as to either the filing of such claims within the
prescriptive period or the validity of the VAT returns has been raised. Even if
such a question were raised, the tax exemption under all the special laws
cited above is broad enough to cover even the enforcement of internal
revenue laws, including prescription.[154]
Summary
To summarize, special laws expressly grant preferential tax treatment to
business establishments registered and operating within an ecozone, which
by law is considered as a separate customs territory. As such, respondent is
exempt from all internal revenue taxes, including the VAT, and regulations
pertaining thereto. It has opted for the income tax holiday regime, instead of
the 5 percent preferential tax regime. As a matter of law and procedure, its
registration status entitling it to such tax holiday can no longer be questioned.
Its sales transactions intended for export may not be exempt, but like its
purchase transactions, they are zero-rated. No prior application for the
effective zero rating of its transactions is necessary. Being VAT-registered
and having satisfactorily complied with all the requisites for claiming a tax
refund of or credit for the input VAT paid on capital goods purchased,
respondent is entitled to such VAT refund or credit.
WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No
pronouncement as to costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 180173

April 6, 2011

MICROSOFT PHILIPPINES, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
CARPIO, J.:
The Case
Before the Court is a petition1 for review on certiorari assailing the Decision2 dated 24 October 2007
of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 258, which affirmed the Decision3 dated
31 August 2006 and Resolution4 dated 8 January 2007 of the CTA Second Division in CTA Case No.
6681.
The Facts
Petitioner Microsoft Philippines, Inc. (Microsoft) is a value-added tax (VAT) taxpayer duly registered
with the Bureau of Internal Revenue (BIR). Microsoft renders marketing services to Microsoft
Operations Pte Ltd. (MOP) and Microsoft Licensing, Inc. (MLI), both affiliated non-resident foreign
corporations. The services are paid for in acceptable foreign currency and qualify as zero-rated
sales for VAT purposes under Section 108(B)(2) of the National Internal Revenue Code (NIRC) of
1997,5 as amended. Section 108(B)(2) states:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties.
(B) Transactions Subject to Zero Percent (0%) Rate. The following services performed in the
Philippines by VAT-registered persons shall be subject to zero percent (0%) rate:
(1) Processing, manufacturing or repacking goods for other persons doing business outside
the Philippines which goods are subsequently exported x x x;
(2) Services other than those mentioned in the preceding paragraph, the consideration for
which is paid for in acceptable foreign currency and accounted for in accordance with the
rules and regulations of the Bangko Sentral ng Pilipinas (BSP); x x x
For the year 2001, Microsoft yielded total sales in the amount of P261,901,858.99. Of this
amount, P235,724,614.68 pertain to sales derived from services rendered to MOP and MLI
while P26,177,244.31 refer to sales to various local customers. Microsoft paid VAT input taxes in the
amount of P11,449,814.99 on its domestic purchases of taxable goods and services.

On 27 December 2002, Microsoft filed an administrative claim for tax credit of VAT input taxes in the
amount ofP11,449,814.99 with the BIR. The administrative claim for tax credit was filed within two
years from the close of the taxable quarters when the zero-rated sales were made.
On 23 April 2003, due to the BIR's inaction, Microsoft filed a petition for review with the
CTA.6 Microsoft claimed to be entitled to a refund of unutilized input VAT attributable to its zero-rated
sales and prayed that judgment be rendered directing the claim for tax credit or refund of VAT input
taxes for taxable year 2001.
On 16 June 2003, respondent Commissioner of Internal Revenue (CIR) filed his answer and prayed
for the dismissal of the petition for review.
In a Decision dated 31 August 2006, the CTA Second Division denied the claim for tax credit of VAT
input taxes. The CTA explained that Microsoft failed to comply with the invoicing requirements of
Sections 113 and 237 of the NIRC as well as Section 4.108-1 of Revenue Regulations No. 7-957 (RR
7-95). The CTA stated that Microsoft's official receipts do not bear the imprinted word "zero-rated" on
its face, thus, the official receipts cannot be considered as valid evidence to prove zero-rated sales
for VAT purposes.
Microsoft filed a motion for reconsideration which was denied by the CTA Second Division in a
Resolution dated 8 January 2007.
Microsoft then filed a petition for review with the CTA En Banc.8 In a Decision dated 24 October
2007, the CTA En Banc denied the petition for review and affirmed in toto the Decision dated 31
August 2006 and Resolution dated 8 January 2007 of the CTA Second Division. The CTA En
Banc found no new matters that have not been considered and passed upon by the CTA Second
Division and stated that the petition had only been a mere rehash of the arguments earlier raised.
Hence, this petition.
The Issue
The main issue is whether Microsoft is entitled to a claim for a tax credit or refund of VAT input taxes
on domestic purchases of goods or services attributable to zero-rated sales for the year 2001 even if
the word "zero-rated" is not imprinted on Microsoft's official receipts.
The Courts Ruling
The petition lacks merit.
Microsoft insists that Sections 113 and 237 of the NIRC and Section 4.108-1 of RR 7-95 do not
provide that failure to indicate the word "zero-rated" in the invoices or receipts would result in the
outright invalidation of these invoices or receipts and the disallowance of a claim for tax credit or
refund.
At the outset, a tax credit or refund, like tax exemption, is strictly construed against the
taxpayer.9 The taxpayer claiming the tax credit or refund has the burden of proving that he is entitled
to the refund or credit, in this case VAT input tax, by submitting evidence that he has complied with
the requirements laid down in the tax code and the BIR's revenue regulations under which such
privilege of credit or refund is accorded.

Sections 113(A) and 237 of the NIRC which provide for the invoicing requirements for VATregistered persons state:
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. x x x
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 the amount, where the sale
or transfer is made by a person liable to value-added tax to another person also liable to valueadded 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 internal revenue tax
from compliance with the provisions of this Section.
Related to these provisions, Section 4.108-1 of RR 7-95 enumerates the information which must
appear on the face of the official receipts or invoices for every sale of goods by VAT-registered
persons. At the time Microsoft filed its claim for credit of VAT input tax, RR 7-95 was already in
effect. The provision states:
Sec. 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.
xxx
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 a "VAT invoice" shall not give rise to any input tax. (Emphasis
supplied)
The invoicing requirements for a VAT-registered taxpayer as provided in the NIRC and revenue
regulations are clear. A VAT-registered taxpayer is required to comply with all the VAT invoicing
requirements to be able to file a claim for input taxes on domestic purchases for goods or services
attributable to zero-rated sales. A "VAT invoice" is an invoice that meets the requirements of Section
4.108-1 of RR 7-95. Contrary to Microsoft's claim, RR 7-95 expressly states that "[A]ll purchases
covered by invoices other than a VAT invoice shall not give rise to any input tax." Microsoft's
invoice, lacking the word "zero-rated," is not a "VAT invoice," and thus cannot give rise to any input
tax.
The subsequent enactment of Republic Act No. 933710 on 1 November 2005 elevating provisions of
RR 7-95 into law merely codified into law administrative regulations that already had the force and
effect of law. Such codification does not mean that prior to the codification the administrative
regulations were not enforceable.
We have ruled in several cases11 that the printing of the word "zero-rated" is required to be placed on
VAT invoices or receipts covering zero-rated sales in order to be entitled to claim for tax credit or
refund. In Panasonic v. Commissioner of Internal Revenue,12 we held that the appearance of the
word "zero-rated" on the face of invoices covering zero-rated sales prevents buyers from falsely
claiming input VAT from their purchases when no VAT is actually paid. Absent such word, the
government may be refunding taxes it did not collect.
Here, both the CTA Second Division and CTA En Banc found that Microsoft's receipts did not
indicate the word "zero-rated" on its official receipts. The findings of fact of the CTA are not to be
disturbed unless clearly shown to be unsupported by substantial evidence.13 We see no reason to
disturb the CTA's findings. Indisputably, Microsoft failed to comply with the invoicing requirements of
the NIRC and its implementing revenue regulation to claim a tax credit or refund of VAT input tax for
taxable year 2001.
WHEREFORE, we DENY the petition. We AFFIRM the Decision dated 24 October 2007 of the Court
of Tax AppealsEn Banc in CTA EB No. 258.
SO ORDERED.
ANTONIO T. CARPIO
Associate Justice
WE CONCUR:

DIOSDADO M. PERALTA
Associate Justice
ROBERTO A. ABAD
Associate Justice

JOSE CATRAL MENDOZA

Associate Justice

MARIA LOURDES P. A. SERENO*

Associate Justice
ATTESTATION
I attest that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court's Division.
ANTONIO T. CARPIO
Associate Justice
Chairperson
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I
certify that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court's Division.
RENATO C. CORONA
Chief Justice

SECOND DIVISION
COMMISSIONER OF
INTERNAL REVENUE,
Petitioner,

- versus -

SONY PHILIPPINES, INC.,

G.R. No. 178697

Present:
CARPIO, J., Chairperson,
LEONARDO-DE CASTRO,
PERALTA,
ABAD, and
MENDOZA, JJ.

Promulgated:

Respondent.

November 17, 2010

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

DECISION
MENDOZA, J.:
This petition for review on certiorari seeks to set aside the May 17, 2007
Decision and the July 5, 2007 Resolution of the Court of Tax Appeals En
Banc[1](CTA-EB), in C.T.A. EB No. 90, affirming the October 26, 2004 Decision
of the CTA-First Division[2] which, in turn, partially granted the petition for review
of respondent Sony Philippines, Inc. (Sony). The CTA-First Division decision
cancelled the deficiency assessment issued by petitioner Commissioner of Internal
Revenue (CIR) against Sony for Value Added Tax (VAT) but upheld the deficiency
assessment for expanded withholding tax (EWT) in the amount ofP1,035,879.70
and the penalties for late remittance of internal revenue taxes in the amount
of P1,269, 593.90.[3]
THE FACTS:
On November 24, 1998, the CIR issued Letter of Authority No.
000019734 (LOA 19734) authorizing certain revenue officers to examine Sonys
books of accounts and other accounting records regarding revenue taxes for the
period 1997 and unverified prior years. On December 6, 1999, a preliminary
assessment for 1997 deficiency taxes and penalties was issued by the CIR which
Sony protested. Thereafter, acting on the protest, the CIR issued final assessment
notices, the formal letter of demand and the details of discrepancies.[4] Said details
of the deficiency taxes and penalties for late remittance of internal revenue taxes
are as follows:
DEFICIENCY VALUE -ADDED TAX (VAT)
(Assessment No. ST-VAT-97-0124-2000)
Basic Tax Due

Add: Penalties
Interest up to 3-31-2000

3,157,314.41

7,958,700.00

Compromise

25,000.00

Deficiency VAT Due

3,182,314.41
P

11,141,014.41

1,416,976.90

DEFICIENCY EXPANDED WITHHOLDING TAX (EWT)

(Assessment No. ST-EWT-97-0125-2000)
Basic Tax Due
Add: Penalties
Interest up to 3-31-2000

Compromise

550,485.82
25,000.00

Deficiency EWT Due

575,485.82
P

1,992,462.72

DEFICIENCY OF VAT ON ROYALTY PAYMENTS

(Assessment No. ST-LR1-97-0126-2000)
Basic Tax Due

Add: Penalties
Surcharge

359,177.80

Interest up to 3-31-2000

87,580.34

Compromise

16,000.00

Penalties Due

462,758.14
P

462,758.14

LATE REMITTANCE OF FINAL WITHHOLDING TAX

(Assessment No. ST-LR2-97-0127-2000)
Basic Tax Due

Add: Penalties
Surcharge
Interest up to 3-31-2000
Compromise
Penalties Due

LATE REMITTANCE OF INCOME PAYMENTS

(Assessment No. ST-LR3-97-0128-2000)

1,729,690.71
508,783.07
50,000.00

2,288,473.78
P

2,288,473.78

Basic Tax Due

Add: Penalties
25 % Surcharge
Interest up to 3-31-2000
Compromise

8,865.34
58.29
2,000.00

10,923.60

Penalties Due

10,923.60

GRAND TOTAL

15,895,632.65[5]

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

protest on February 2, 2000. Sony submitted relevant documents in support of its
protest on the 16th of that same month.[6]
On October 24, 2000, within 30 days after the lapse of 180 days from
submission of the said supporting documents to the CIR, Sony filed a petition for
review before the CTA.[7]
After trial, the CTA-First Division disallowed the deficiency VAT
assessment because the subsidized advertising expense paid by Sony which was
duly covered by a VAT invoice resulted in an input VAT credit. As regards the
EWT, the CTA-First Division maintained the deficiency EWT assessment on
Sonys motor vehicles and on professional fees paid to general professional
partnerships. It also assessed the amounts paid to sales agents as commissions with
five percent (5%) EWT pursuant to Section 1(g) of Revenue Regulations No. 6-85.
The CTA-First Division, however, disallowed the EWT assessment on rental
expense since it found that the total rental deposit of P10,523,821.99 was incurred
from January to March 1998 which was again beyond the coverage of LOA 19734.
Except for the compromise penalties, the CTA-First Division also upheld the
penalties for the late payment of VAT on royalties, for late remittance of final
withholding tax on royalty as of December 1997 and for the late remittance of

EWT by some of Sonys branches.[8] In sum, the CTA-First Division partly granted
Sonys petition by cancelling the deficiency VAT assessment but upheld a modified
deficiency EWT assessment as well as the penalties. Thus, the dispositive portion
reads:
WHEREFORE, the petition for review is hereby
PARTIALLY GRANTED. Respondent is ORDERED to CANCEL
and WITHDRAW the deficiency assessment for value-added tax
for 1997 for lack of merit. However, the deficiency assessments for
expanded withholding tax and penalties for late remittance of
internal revenue taxes are UPHELD.
Accordingly, petitioner is DIRECTED to PAY the
respondent the deficiency expanded withholding tax in the
amount of P1,035,879.70 and the following penalties for late
remittance of internal revenue taxes in the sum of P1,269,593.90:
1. VAT on Royalty P 429,242.07
2. Withholding Tax on Royalty 831,428.20
3. EWT of Petitioners Branches 8,923.63
Total P 1,269,593.90
Plus 20% delinquency interest from January 17, 2000 until fully
paid pursuant to Section 249(C)(3) of the 1997 Tax Code.
SO ORDERED.[9]

The CIR sought a reconsideration of the above decision and submitted the
following grounds in support thereof:
A. The Honorable Court committed reversible error in holding
that petitioner is not liable for the deficiency VAT in the
amount of P11,141,014.41;
B. The Honorable court committed reversible error in holding
that the commission expense in the amount of
P2,894,797.00 should be subjected to 5% withholding tax
instead of the 10% tax rate;
C. The Honorable Court committed a reversible error in
holding that the withholding tax assessment with respect to

the 5% withholding tax on rental deposit in the amount

of P10,523,821.99 should be cancelled; and

D. The Honorable Court committed reversible error in holding

that the remittance of final withholding tax on royalties
covering the period January to March 1998 was filed on
time.[10]
On April 28, 2005, the CTA-First Division denied the motion for
reconsideration. Unfazed, the CIR filed a petition for review with the CTA-EB
raising identical issues:
1. Whether or not respondent (Sony) is liable for the deficiency
VAT in the amount of P11,141,014.41;
2. Whether or not the commission expense in the amount
of P2,894,797.00 should be subjected to 10% withholding tax
instead of the 5% tax rate;
3. Whether or not the withholding assessment with respect to the
5% withholding tax on rental deposit in the amount
of P10,523,821.99 is proper; and

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

royalties covering the period January to March 1998 was filed
outside of time.[11]
Finding no cogent reason to reverse the decision of the CTA-First Division,
the CTA-EB dismissed CIRs petition on May 17, 2007. CIRs motion for
reconsideration was denied by the CTA-EB on July 5, 2007.
The CIR is now before this Court via this petition for review relying on the
very same grounds it raised before the CTA-First Division and the CTA-EB. The
said grounds are reproduced below:
GROUNDS FOR THE ALLOWANCE OF THE
PETITION
I

THE CTA EN BANC ERRED IN RULING THAT

RESPONDENT IS NOT LIABLE FOR DEFICIENCY VAT IN
THE AMOUNT OF PHP11,141,014.41.
II
AS TO RESPONDENTS DEFICIENCY EXPANDED
WITHHOLDING TAX IN THE AMOUNT OF PHP1,992,462.72:
A. THE CTA EN BANC ERRED IN RULING THAT THE
COMMISSION EXPENSE IN THE AMOUNT OF
PHP2,894,797.00 SHOULD BE SUBJECTED TO A
WITHHOLDING TAX OF 5% INSTEAD OF THE 10% TAX
RATE.
B. THE CTA EN BANC ERRED IN RULING THAT THE
ASSESSMENT
WITH
RESPECT
TO
THE
5%
WITHHOLDING TAX ON RENTAL DEPOSIT IN THE
AMOUNT OF PHP10,523,821.99 IS NOT PROPER.

III
THE CTA EN BANC ERRED IN RULING THAT THE
FINAL WITHHOLDING TAX ON ROYALTIES COVERING
THE PERIOD JANUARY TO MARCH 1998 WAS FILED ON
TIME.[12]

Upon filing of Sonys comment, the Court ordered the CIR to file its reply
thereto. The CIR subsequently filed a manifestation informing the Court that it
would no longer file a reply. Thus, on December 3, 2008, the Court resolved to
give due course to the petition and to decide the case on the basis of the pleadings
filed.[13]
The Court finds no merit in the petition.
The CIR insists that LOA 19734, although it states the period 1997 and
unverified prior years, should be understood to mean the fiscal year ending in
March 31, 1998.[14] The Court cannot agree.

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

authority given to the appropriate revenue officer assigned to perform assessment
functions. It empowers or enables said revenue officer to examine the books of
account and other accounting records of a taxpayer for the purpose of collecting
the correct amount of tax.[15] The very provision of the Tax Code that the CIR
relies on is unequivocal with regard to its power to grant authority to examine and
assess a taxpayer.
SEC. 6. Power of the Commissioner to Make Assessments
and Prescribe Additional Requirements for Tax Administration and
Enforcement.
(A)Examination of Returns and Determination of tax Due.
After a return has been filed as required under the provisions of
this Code, the Commissioner or his duly authorized
representative may authorize the examination of any taxpayer and
the assessment of the correct amount of tax: Provided,however,
That failure to file a return shall not prevent the Commissioner
from authorizing the examination of any taxpayer. x x x [Emphases
supplied]

Clearly, there must be a grant of authority before any revenue officer can
conduct an examination or assessment. Equally important is that the revenue
officer so authorized must not go beyond the authority given. In the absence of
such an authority, the assessment or examination is a nullity.
As earlier stated, LOA 19734 covered the period 1997 and unverified prior
years. For said reason, the CIR acting through its revenue officers went beyond the
scope of their authority because the deficiency VAT assessment they arrived at
was based on records from January to March 1998 or using the fiscal year which
ended in March 31, 1998. As pointed out by the CTA-First Division in its April 28,
2005 Resolution, the CIR knew which period should be covered by the
investigation. Thus, if CIR wanted or intended the investigation to include the year
1998, it should have done so by including it in the LOA or issuing another LOA.
Upon review, the CTA-EB even added that the coverage of LOA 19734,
particularly the phrase and unverified prior years, violated Section C of Revenue

Memorandum Order No. 43-90 dated September 20, 1990, the pertinent portion of
which reads:
3. A Letter of Authority should cover a taxable period not
exceeding one taxable year. The practice of issuing L/As
covering audit of unverified prior years is hereby prohibited. If
the audit of a taxpayer shall include more than one taxable
period, the other periods or years shall be specifically indicated
in the L/A.[16] [Emphasis supplied]

On this point alone, the deficiency VAT assessment should have been
disallowed. Be that as it may, the CIRs argument, that Sonys advertising expense
could not be considered as an input VAT credit because the same was eventually
reimbursed by Sony International Singapore (SIS), is also erroneous.
The CIR contends that since Sonys advertising expense was reimbursed by
SIS, the former never incurred any advertising expense. As a result, Sony is not
entitled to a tax credit. At most, the CIR continues, the said advertising expense
should be for the account of SIS, and not Sony.[17]
The Court is not persuaded. As aptly found by the CTA-First Division and
later affirmed by the CTA-EB, Sonys deficiency VAT assessment stemmed from
the CIRs disallowance of the input VAT credits that should have been realized
from the advertising expense of the latter.[18] It is evident under Section 110[19]of
the 1997 Tax Code that an advertising expense duly covered by a VAT invoice is a
legitimate business expense. This is confirmed by no less than CIRs own witness,
Revenue Officer Antonio Aluquin.[20] There is also no denying that Sony incurred
advertising expense. Aluquin testified that advertising companies issued invoices
in the name of Sony and the latter paid for the same.[21] Indubitably, Sony incurred
and paid for advertising expense/ services. Where the money came from is another
matter all together but will definitely not change said fact.
The CIR further argues that Sony itself admitted that the reimbursement
from SIS was income and, thus, taxable. In support of this, the CIR cited a portion
of Sonys protest filed before it:
The fact that due to adverse economic conditions, SonySingapore has granted to our client a subsidy equivalent to the

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

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

therefore, subject to income tax, the Court agrees. However, the Court does not
agree that the same subsidy should be subject to the 10% VAT. To begin with, the
said subsidy termed by the CIR as reimbursement was not even exclusively
earmarked for Sonys advertising expense for it was but an assistance or aid in view
of Sonys dire or adverse economic conditions, and was only equivalent to the
latters (Sonys) advertising expenses.
Section 106 of the Tax Code explains when VAT may be imposed or
exacted. Thus:
SEC. 106. Value-added Tax on Sale of Goods or
Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and
collected on every sale, barter or exchange of goods or properties,
value-added tax equivalent to ten percent (10%) of the gross
selling price or gross value in money of the goods or properties
sold, bartered or exchanged, such tax to be paid by the seller or
transferor.

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

any VAT may be levied. Certainly, there was no such sale, barter or exchange in
the subsidy given by SIS to Sony. It was but a dole out by SIS and not in payment
for goods or properties sold, bartered or exchanged by Sony.
In the case of CIR v. Court of Appeals (CA),[23] the Court had the occasion to
rule that services rendered for a fee even on reimbursement-on-cost basis only and
without realizing profit are also subject to VAT. The case, however, is not
applicable to the present case. In that case, COMASERCO rendered service to its
affiliates and, in turn, the affiliates paid the former reimbursement-on-cost which
means that it was paid the cost or expense that it incurred although without profit.

This is not true in the present case. Sony did not render any service to SIS at all.
The services rendered by the advertising companies, paid for by Sony using SIS
dole-out, were for Sony and not SIS. SIS just gave assistance to Sony in the
amount equivalent to the latters advertising expense but never received any goods,
properties or service from Sony.
Regarding the deficiency EWT assessment, more particularly Sonys
commission expense, the CIR insists that said deficiency EWT assessment is
subject to the ten percent (10%) rate instead of the five percent (5%) citing
Revenue Regulation No. 2-98 dated April 17, 1998.[24] The said revenue regulation
provides that the 10% rate is applied when the recipient of the commission income
is a natural person. According to the CIR, Sonys schedule of Selling, General and
Administrative expenses shows the commission expense as commission/dealer
salesman incentive, emphasizing the word salesman.
On the other hand, the application of the five percent (5%) rate by the CTAFirst Division is based on Section 1(g) of Revenue Regulations No. 6-85 which
provides:
(g) Amounts paid to certain Brokers and Agents. On gross
payments to customs, insurance, real estate and commercial
brokers and agents of professional entertainers five per centum
(5%).[25]

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

The Court agrees with the CTA-EB when it affirmed the CTA-First Division
decision. Indeed, the applicable rule is Revenue Regulations No. 6-85, as amended
by Revenue Regulations No. 12-94, which was the applicable rule during the
subject period of examination and assessment as specified in the LOA.Revenue
Regulations No. 2-98, cited by the CIR, was only adopted in April 1998 and,
therefore, cannot be applied in the present case. Besides, the withholding tax on
brokers and agents was only increased to 10% much later or by the end of July
2001 under Revenue Regulations No. 6-2001.[27] Until then, the rate was only 5%.
The Court also affirms the findings of both the CTA-First Division and the
CTA-EB on the deficiency EWT assessment on the rental deposit. According to
their findings, Sony incurred the subject rental deposit in the amount
of P10,523,821.99 only from January to March 1998. As stated earlier, in the
absence of the appropriate LOA specifying the coverage, the CIRs deficiency
EWT assessment from January to March 1998, is not valid and must be disallowed.
Finally, the Court now proceeds to the third ground relied upon by the CIR.
The CIR initially assessed Sony to be liable for penalties for belated
remittance of its FWT on royalties (i) as of December 1997; and (ii) for the period
from January to March 1998. Again, the Court agrees with the CTA-First Division
when it upheld the CIR with respect to the royalties for December 1997 but
cancelled that from January to March 1998.
The CIR insists that under Section 3[28] of Revenue Regulations No. 5-82
and Sections 2.57.4 and 2.58(A)(2)(a)[29] of Revenue Regulations No. 2-98, Sony
should also be made liable for the FWT on royalties from January to March of
1998. At the same time, it downplays the relevance of the Manufacturing License
Agreement (MLA) between Sony and Sony-Japan, particularly in the payment of
royalties.
The above revenue regulations provide the manner of withholding
remittance as well as the payment of final tax on royalty. Based on the same, Sony
is required to deduct and withhold final taxes on royalty payments when the
royalty is paid or is payable. After which, the corresponding return and remittance
must be made within 10 days after the end of each month. The question now is
when does the royalty become payable?

Under Article X(5) of the MLA between Sony and Sony-Japan, the
following terms of royalty payments were agreed upon:
(5)Within two (2) months following each semi-annual
period ending June 30 and December 31, the LICENSEE shall
furnish to the LICENSOR a statement, certified by an officer of the
LICENSEE, showing quantities of the MODELS sold, leased or
otherwise disposed of by the LICENSEE during such respective
semi-annual period and amount of royalty due pursuant this
ARTICLE X therefore, and the LICENSEE shall pay the royalty
hereunder to the LICENSOR concurrently with the furnishing of
the above statement.[30]

Withal, Sony was to pay Sony-Japan royalty within two (2) months after
every semi-annual period which ends in June 30 and December 31. However, the
CTA-First Division found that there was accrual of royalty by the end of December
1997 as well as by the end of June 1998. Given this, the FWTs should have been
paid or remitted by Sony to the CIR on January 10, 1998 and July 10, 1998. Thus,
it was correct for the CTA-First Division and the CTA-EB in ruling that the FWT
for the royalty from January to March 1998 was seasonably filed. Although the
royalty from January to March 1998 was well within the semi-annual period
ending June 30, which meant that the royalty may be payable until August 1998
pursuant to the MLA, the FWT for said royalty had to be paid on or before July 10,
1998 or 10 days from its accrual at the end of June 1998. Thus, when Sony
remitted the same on July 8, 1998, it was not yet late.
In view of the foregoing, the Court finds no reason to disturb the findings of
the CTA-EB.
WHEREFORE, the petition is DENIED.
SO ORDERED.

SECOND DIVISION

KEPCO PHILIPPINES
CORPORATION,
Petitioner,

G.R. No. 181858

Present:

- versus -

CARPIO, J., Chairperson,

NACHURA,
PERALTA,
ABAD, and
MENDOZA, JJ.

Promulgated:
COMMISSIONER OF INTERNAL
REVENUE,
Respondent.
November 24, 2010
x -------------------------------------------------------------------------------------------------------x

DECISION
MENDOZA, J.:
This is a petition for review on certiorari[1] under Rule 45 of the Rules of
Court seeking reversal of the February 20, 2008 Decision[2] of the Court of Tax
Appeals En Banc (CTA) in C.T.A. EB No. 299, which ruled that in order for
petitioner to be entitled to its claim for refund/issuance of tax credit certificate
representing unutilized input VAT attributable to its zero-rated sales for taxable
year 2002, it must comply with the substantiation requirements under the
appropriate Revenue Regulations.
Petitioner KEPCO Philippines Corporation (Kepco) is a VAT-registered
independent power producer engaged in the business of generating electricity. It
exclusively sells electricity to National Power Corporation (NPC), an entity
exempt from taxes under Section 13 of Republic Act No. 6395 (RA No. 6395).[3]

Records show that on December 4, 2001, Kepco filed an application for

zero-rated sales with the Revenue District Office (RDO) No. 54 of the Bureau of
Internal Revenue (BIR). Kepcos application was approved under VAT Ruling 6401. Accordingly, for taxable year 2002, it filed four Quarterly VAT Returns
declaring zero-rated sales in the aggregate amount of P3,285,308,055.85 itemized
as follows:
Exhibit
B
C

Quarter Involved
1st Quarter
2nd Quarter

3rd Quarter

4th Quarter
Total

Zero-Rated Sales
P651,672,672.47
725,104,468.99
952,053,527.29
956,477,387.10
________________
P3,285,308,055.85[4]

In the course of doing business with NPC, Kepco claimed expenses

reportedly sustained in connection with the production and sale of electricity with
NPC. Based on Kepcos calculation, it paid input VAT amounting
to P11,710,868.86 attributing the same to its zero-rated sales of electricity with
NPC. The table shows the purchases and corresponding input VAT it paid.

Exhibit
B
C
D
E

Quarter Involved
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter

Purchases
P6,063,184.90
18,410,193.20
16,811,819.21
75,823,491.20

Input VAT
P606,318.49
1,841,019.32
1,681,181.93
7,582,349.12

P117,108,688.51

P11,710,868.86[5]

Thus, on April 20, 2004, Kepco filed before the Commissioner of Internal
Revenue (CIR) a claim for tax refund covering unutilized input VAT payments
attributable to its zero-rated sales transactions for taxable year 2002.[6] Two days
later, on April 22, 2004, it filed a petition for review before the CTA. The case was
docketed as C.T.A. Case No. 6965.[7]

In its Answer,[8] respondent CIR averred that claims for refund were strictly
construed against the taxpayer as it was similar to a tax exemption. It asserted that
the burden to show that the taxes were erroneous or illegal lay upon the
taxpayer. Thus, failure on the part of Kepco to prove the same was fatal to its cause
of action because it was its duty to prove the legal basis of the amount being
claimed as a tax refund.
During the hearing, Kepco presented court-commissioned Independent
Certified Public Accountant, Victor O. Machacon, who audited their bulky
documentary evidence consisting of official receipts, invoices and vouchers, to
prove its claim for refund of unutilized input VAT.[9]
On February 26, 2007, the CTA Second Division ruled that out of the total
declared zero-rated sales of P3,285,308,055.85, Kepco was only able to properly
substantiate P1,451,788,865.52 as its zero-rated sales. After factoring, only 44.19%
of the validly supported input VAT payments being claimed could be
considered.[10] The CTA Division used the following computation in determining
Kepcos total allowable input VAT:
Substantiated zero-rated sales to NPC
P1,451,788,865.52
Divided by the total declared zero-rated 3,285,308,055.85
sales
Rate of substantiated zero-rated sales
44.19%[11]

Total Input VAT Claimed

Less:Disallowance
(a) Per verification of the

P11,710,868.86
P125,556.40

independent CPA
(b) Per Courts verification
5,045,357.80
Validly Supported Input VAT
Multiply
by
Rate
of
Substantiated
Zero-Rated
Sales
Total Allowed Input VAT

5,170,914.20
P6,539,954.66
44.19%

P2,890,005.96[12]

The CTA Second Division likewise disallowed the P5,170,914.20 of

Kepcos claimed input VAT due to its failure to comply with the substantiation
requirement. Specifically, the CTA Second Division wrote:
[i]nput VAT on purchases supported by invoices or official
receipts stamped with TIN-VAT shall be disallowed because these
purchases are not supported by VAT Invoices under the
contemplation of the aforequoted invoicing requirement. To be
considered a VAT Invoice, the TIN-VAT must be printed, and not
merely stamped. Consequently, purchases supported by invoices
or official receipts, wherein the TIN-VAT are not printed thereon,
shall not give rise to any input VAT. Likewise, input VAT on
purchases supported by invoices or official receipts which are not
NON-VAT are disallowed because these invoices or official
receipts are not considered as VAT Invoices. Hence, the claims for
input VAT on purchases referred to in item (e) are properly
disallowed.[13]

Accordingly, the CTA Second Division partially granted Kepcos claim for
refund of unutilized input VAT for taxable year 2002. The dispositive portion of
the decision[14] of the CTA Second Division reads:
WHEREFORE, petitioners claim for refund is hereby PARTIALLY
GRANTED. Accordingly, respondent is ORDERED to REFUND
petitioner the reduced amount of TWO MILLION EIGHT
HUNDRED NINETY THOUSAND FIVE PESOS AND 96/100
(P2,890,005.96) representing unutilized input value-added tax for
taxable year 2002.
SO ORDERED.[15]

Kepco moved for partial reconsideration, but the CTA Second Division
denied it in its June 28, 2007 Resolution.[16]
On appeal to the CTA En Banc,[17] Kepco argued that the CTA Second Division
erred in not considering P8,691,873.81 in addition to P2,890,005.96 as refundable
tax credit for Kepcos zero-rated sales to NPC for taxable year 2002.

On February 20, 2008, the CTA En Banc dismissed the petition[18] and ruled
that in order for Kepco to be entitled to its claim for refund/issuance of tax credit
certificate representing unutilized input VAT attributable to its zero-rated sales for
taxable year 2002, it must comply with the substantiation requirements under the
appropriate Revenue Regulations, i.e. Revenue Regulations 7-95.[19] Thus, it
concluded that the Court in Division was correct in disallowing a portion of
Kepcos claim for refund on the ground that input taxes on Kepcos purchase of
goods and services were not supported by invoices and receipts printed with TINVAT.[20]
CTA Presiding Justice Ernesto Acosta concurred with the majority in finding that
Kepcos claim could not be allowed for lack of proper substantiation but expressed
his dissent on the denial of certain claims,[21] to wit:
[I] dissent with regard to the denial of the
amount P4,720,725.63 for nothing in the law allows the automatic
invalidation of official receipts/invoices which were not imprinted
with TIN-VAT; and further reduction of petitioners claim
representing input VAT on purchase of goods not supported by
invoices in the amount of P64,509.50 and input VAT on purchase
of services not supported by official receipts in the amount
of P256,689.98, because the law makes use of invoices and official
receipts interchangeably. Both can validly substantiate petitioners
claim.[22]
Hence, this petition alleging the following errors:
ASSIGNMENT OF ERRORS
I.
THE COURT OF TAX APPEALS EN BANC GRAVELY ABUSED
ITS DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION WHEN IT HELD THAT NON-COMPLIANCE
WITH THE INVOICING REQUIREMENT SHALL RESULT IN
THE AUTOMATIC DENIAL OF THE CLAIM.

II.

THE COURT OF TAX APPEALS EN BANC GRAVELY ABUSED

ITS DISCRETION AMOUNTING TO LACK OF EXCESS OF
JURISDICTION
WHEN
IT
DISALLOWED
PETITIONERS CLAIM ON THE GROUND THAT TIN-VAT IS
NOT IMPRINTED ON THE INVOICES AND OFFICIAL
RECEIPTS.
III.

THE COURT OF TAX APPEALS EN BANC GRAVELY ABUSED

ITS DISCRETION WHEN IT MADE A DISTINCTION
BETWEEN INVOICES AND OFFICIAL RECEIPTS AS
SUPPORTING DOCUMENTS TO CLAIM FOR AN INPUT VAT
REFUND.[23]

At the outset, the Court has noticed that although this petition is
denominated as Petition for Review on Certiorari under Rule 45 of the Rules of
Court, Kepco, in its assignment of errors, impugns against the CTA En Banc grave
abuse of discretion amounting to lack or excess of jurisdiction, which are grounds
in a petition for certiorari under Rule 65 of the Rules of Court. Time and again, the
Court has emphasized that there is a whale of difference between a Rule 45
petition (Petition for Review on Certiorari) and a Rule 65 petition (Petition for
Certiorari.) A Rule 65 petition is an original action that dwells on jurisdictional
errors of whether a lower court acted without or in excess of its jurisdiction or with
grave abuse of discretion.[24] A Rule 45 petition, on the other hand, is a mode of
appeal which centers on the review on the merits of a judgment, final order or
award rendered by a lower court involving purely questions of law. [25]Thus,
imputing jurisdictional errors against the CTA is not proper in this Rule 45
petition. Kepco failed to follow the correct procedure. On this point alone, the
Court can deny the subject petition outright.
At any rate, even if the Court would disregard this procedural flaw, the
petition would still fail.
Kepco argues that the 1997 National Internal Revenue Code (NIRC) does not
require the imprinting of the word zero-rated on invoices and/or official receipts

covering zero-rated sales.[26] It claims that Section 113 in relation to Section 237 of
the 1997 NIRC does not mention the requirement of imprinting the words zerorated to purchases covering zero-rated transactions.[27] Only Section 4.108-1 of
Revenue Regulation No. 7-95 (RR No. 7-95) required the imprinting of the word
zero-rated on the VAT invoice or receipt.[28] Thus, Section 4.108-1 of RR No. 7-95
cannot be considered as a valid legislation considering the long settled rule that
administrative rules and regulations cannot expand the letter and spirit of the law
they seek to enforce.[29]
The Court does not agree.
The issue of whether the word zero-rated should be imprinted on invoices and/or
official receipts as part of the invoicing requirement has been settled in the case
of Panasonic Communications Imaging Corporation of the Philippines vs.
Commissioner of Internal Revenue[30] and restated in the later case of J.R.A.
Philippines, Inc. v. Commissioner.[31] In the first case, Panasonic Communications
Imaging Corporation (Panasonic), a VAT-registered entity, was engaged in the
production and exportation of plain paper copiers and their parts and
accessories. From April 1998 to March 31, 1999, Panasonic generated export sales
amounting
to
US$12,819,475.15
and
US$11,859,489.78
totaling
US$24,678,964.93. Thus, it paid input VAT of P9,368,482.40 that it attributed to
its zero-rated sales. It filed applications for refund or tax credit on what it had
paid. The CTA denied its application. Panasonics export sales were subject to 0%
VAT under Section 106(A)(2)(a)(1) of the 1997 NIRC but it did not qualify for
zero-rating because the word zero-rated was not printed on Panasonics export
invoices. This omission, according to the CTA, violated the invoicing
requirements of Section 4.108-1 of RR No. 7-95. Panasonic argued, however, that
in requiring the printing on its sales invoices of the word zero-rated, the Secretary
of Finance unduly expanded, amended, and modified by a mere regulation (Section
4.108-1 of RR No. 7-95) the letter and spirit of Sections 113 and 237 of the 1997
NIRC, prior to their amendment by R.A. 9337.[32] Panasonic stressed that Sections
113 and 237 did not necessitate the imprinting of the word zero-rated for its zerorated sales receipts or invoices. The BIR integrated this requirement only after the
enactment of R.A. No. 9337 on November 1, 2005, a law that was still inexistent at
the time of the transactions. Denying Panasonicsclaim for refund, the Court stated:

Section 4.108-1 of RR 7-95 proceeds from the rule-making

authority granted to the Secretary of Finance under Section 245 of
the 1977 NIRC (Presidential Decree 1158) for the efficient
enforcement of the tax code and of course its amendments. The
requirement is reasonable and is in accord with the efficient
collection of VAT from the covered sales of goods and services. As
aptly explained by the CTAs First Division, the appearance of the
word zero-rated on the face of invoices covering zero-rated sales
prevents buyers from falsely claiming input VAT from their
purchases when no VAT was actually paid. If, absent such word, a
successful claim for input VAT is made, the government would be
refunding money it did not collect.
Further, the printing of the word zero-rated on the invoice
helps segregate sales that are subject to 10% (now 12%) VAT from
those sales that are zero-rated. Unable to submit the proper
invoices, petitioner Panasonic has been unable to substantiate its
claim for refund.[33]

Following said ruling, Section 4.108-1 of RR 7-95[34] neither expanded nor

supplanted the tax code but merely supplemented what the tax code already
defined and discussed. In fact, the necessity of indicating zero-rated into VAT
invoices/receipts became more apparent when the provisions of this revenue
regulation was later integrated into RA No. 9337,[35] the amendatory law of the
1997 NIRC. Section 113, in relation to Section 237 of the 1997 NIRC, as amended
by RA No. 9337, now reads:
SEC. 113. Invoicing and Accounting Requirements for VATRegistered Persons. (A) Invoicing Requirements. - A VAT-registered person
shall issue:
(1) A VAT invoice for every sale, barter or exchange of goods
or properties; and
(2) A VAT official receipt for every lease of goods or
properties, and for every sale, barter or exchange of services.
(B) Information Contained in the VAT Invoice or VAT
Official Receipt. - The following information shall be indicated in
the VAT invoice or VAT official receipt:

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

followed by his taxpayer's identification number (TIN);
(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:Provided, That:
(a) The amount of the tax shall be shown as a
separate item in the invoice or receipt;
(b) If the sale is exempt from value-added tax, the
term "VAT-exempt sale" shall be written or printed
prominently on the invoice or receipt;
(c) If the sale is subject to zero percent (0%) valueadded tax, the term "zero-rated sale" shall be written or
printed prominently on the invoice or receipt;
(d) If the sale involves goods, properties or services
some of which are subject to and some of which are VAT
zero-rated or VAT-exempt, the invoice or receipt shall
clearly indicate the breakdown of the sale price between its
taxable, exempt and zero-rated components, and the
calculation of the value-added tax on each portion of the
sale
shall
be
shown
on
the
invoice
or
receipt: Provided, That the seller may issue separate
invoices or receipts for the taxable, exempt, and zero-rated
components of the sale.
(3) The date of transaction, quantity, unit cost and
description of the goods or properties or nature of the service; and
(4) In the case of sales in the amount of one thousand pesos
(P1,000) or more where the sale or transfer is made to a VATregistered person, the name, business style, if any, address and
taxpayer identification number (TIN) of the purchaser, customer
or client.
(C) 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.
xxxx

SEC. 237. Issuance of Receipts or Sales or Commercial

Invoices. - All persons subject to an internal revenue tax shall, for
each sale and transfer of merchandise or for services rendered
valued at Twenty-five pesos (P25.00) or more, issue duly
registered receipts or sale 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 where the receipt is issued to cover
payment made as rentals, commissions, compensation 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.
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. [Emphases supplied]

Evidently, as it failed to indicate in its VAT invoices and receipts that the
transactions were zero-rated, Kepco failed to comply with the correct
substantiation requirement for zero-rated transactions.
Kepco then argues that non-compliance of invoicing requirements should
not result in the denial of the taxpayers refund claim. Citing Atlas Consolidated
Mining & Development Corporation vs. Commissioner of Internal Revenue,[36] it
claims that a party who fails to issue VAT official receipts/invoices for its sales
should only be imposed penalties as provided under Section 264 of the 1997
NIRC.[37]
The Court has read the Atlas decision, and has not come across any
categorical ruling that refund should be allowed for those who had not

complied with the substantiation requirements. It merely recited Section 263

which provided for penalties in case of Failure or refusal to Issue Receipts or
Sales or Commercial Invoices, Violations related to the Printing of such Receipts
or Invoices and Other Violations. It does not categorically say that the claimant
should be refunded. At any rate, Section 264 (formerly Section 263)[38] of the
1997 NIRC was not intended to excuse the compliance of the substantive invoicing
requirement needed to justify a claim for refund on input VAT payments.
Furthermore, Kepco insists that Section 4.108.1 of Revenue Regulation 0795 does not require the word TIN-VAT to be imprinted on a VAT-registered
persons supporting invoices and official receipts[39] and so there is no reason for the
denial of its P4,720,725.63 claim of input tax.[40]
In this regard, Internal Revenue Regulation 7-95 (Consolidated ValueAdded Tax Regulations) is clear. Section 4.108-1 thereof reads:
Only VAT registered persons are required to print their TIN
followed by the word VAT in their invoice 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.

Contrary to Kepcos allegation, the regulation specifically requires the VAT

registered person to imprint TIN-VAT on its invoices or receipts. Thus, the Court
agrees with the CTA when it wrote: [T]o be considered a VAT invoice, the TINVAT must be printed, and not merely stamped. Consequently, purchases supported
by invoices or official receipts, wherein the TIN-VAT is not printed thereon, shall
not give rise to any input VAT. Likewise, input VAT on purchases supported by
invoices or official receipts which are NON-VAT are disallowed because these
invoices or official receipts are not considered as VAT Invoices.[41]
Kepco further argues that under Section 113(A) of the 1997 NIRC, invoices
and official receipts are used interchangeably for purposes of substantiating input

VAT.[42] Hence, it claims that the CTA should have accepted its substantiation of
input VAT on (1) P64,509.50 on purchases of goods with official receipts and
(2) P256,689.98 on purchases of services with invoices.[43]
The Court is not persuaded.
Under the law, a VAT invoice is necessary for every sale, barter or exchange
of goods or properties while a VAT official receipt properly pertains to every lease
of goods or properties, and for every sale, barter or exchange of
services.[44] In Commissioner of Internal Revenue v. Manila Mining
Corporation,[45] the Court distinguished an invoice from a receipt, thus:
A sales or commercial invoice is a written account of goods
sold or services rendered indicating the prices charged therefor or
a list by whatever name it is known which is used in the ordinary
course of business evidencing sale and transfer or agreement to
sell or transfer goods and services.
A receipt on the other hand is a written acknowledgment of
the fact of payment in money or other settlement between seller
and buyer of goods, debtor or creditor, or person rendering
services and client or customer.

In other words, the VAT invoice is the sellers best proof of the sale of the
goods or services to the buyer while the VAT receipt is the buyers best evidence of
the payment of goods or services received from the seller. Even though VAT
invoices and receipts are normally issued by the supplier/seller alone, the said
invoices and receipts, taken collectively, are necessary to substantiate the actual
amount or quantity of goods sold and their selling price (proof of transaction), and
the best means to prove the input VAT payments (proof of payment).[46] Hence,
VAT invoice and VAT receipt should not be confused as referring to one and the
same thing. Certainly, neither does the law intend the two to be used alternatively.
Although it is true that the CTA is not strictly governed by technical rules of
evidence,[47] the invoicing and substantiation requirements must, nevertheless, be

followed because it is the only way to determine the veracity of Kepcos

claims. Verily, the CTA En Banc correctly disallowed the input VAT that did not
meet the required standard of substantiation.
The CTA is devoted exclusively to the resolution of tax-related issues and
has unmistakably acquired an expertise on the subject matter. In the absence of
abuse or reckless exercise of authority,[48] the CTA En Bancs decision should be
upheld.
The Court has always decreed that tax refunds are in the nature of tax
exemptions which represent a loss of revenue to the government. These
exemptions, therefore, must not rest on vague, uncertain or indefinite inference, but
should be granted only by a clear and unequivocal provision of law on the basis of
language too plain to be mistaken. Such exemptions must be strictly construed
against the taxpayer, as taxes are the lifeblood of the government.[49]
WHEREFORE, the petition is DENIED.
SO ORDERED.

THIRD DIVISION
AT&T COMMUNICATIONS
SERVICES PHILIPPINES, INC.,
Petitioner,

- versus -

G.R. No. 182364

Present:
CARPIO MORALES, J.,
Chairperson,
BRION,
BERSAMIN,
ABAD,* and
VILLARAMA, JR., JJ.

COMMISSIONER OF
INTERNAL REVENUE,
Respondent.

Promulgated:
August 3, 2010

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

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 P56,898,744.05. 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 petitioners input VAT against its output VAT, an
excess of unutilized input VAT in the amount of P2,050,736.69 remained. As
petitioners 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 P1,801,826.82 as petitioners 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 P1,801,826.82.[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 AA22).
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.
By Decision of February 23, 2007,[2] the CTA First Division, conceding that
petitioners transactions fall under the classification of zero-rated sales, nevertheless
denied petitioners 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 P56,898,744.05 cannot qualify for zerorating for VAT purposes. Consequently, the claimed input VAT
payments allegedly attributable thereto in the amount of P1,801,826.82
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 x[3] (emphasis and underscoring supplied)

The CTA First Division, relying on Sections 106[4] and 108[5] of the Tax Code,
held that since petitioner is engaged in sale of services, VAT Official
Receiptsshould 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, affirmed that of the CTA First Division. Petitioners motion for
reconsideration having been denied by Resolution of April 2, 2008, the present
petition for review was filed.
[6]

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
[8]
(Philippines) 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
(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.
A photocopy of the purchase invoice or receipt evidencing the
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
taxpayers 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 valueadded 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 petitioners claim as to unutilized

input VAT, an invoice would suffice provided the requirements under Sections 113
and 237 of the Tax Code are met.
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 petitioners refund/tax credit.

WHEREFORE, the petition is GRANTED. The Decision of February 18,

2008 of the Court of Tax Appeals En Banc is REVERSED and SET ASIDE. Let
the case be REMANDED to the Court of Tax Appeals First Division for the
determination of petitioners tax credit/refund.
SO ORDERED.

Republic of the Philippines

Supreme Court
Manila
FIRST DIVISION
SILICON
PHILIPPINES,
INC.,
(Formerly INTEL PHILIPPINES
MANUFACTURING, INC.),
Petitioner,

- versus -

G.R. No. 172378

Present:
CORONA, C.J., Chairperson,
VELASCO, JR.,
LEONARDO-DE CASTRO,
DEL CASTILLO, and
PEREZ, JJ.

COMMISSIONER
OF
Promulgated:
INTERNALREVENUE,
Respondent.
January 17, 2011
x----------------------------------------------------------x

DECISION
DEL CASTILLO, J.:
The burden of proving entitlement to a refund lies with the claimant.
This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks
to set aside the September 30, 2005 Decision[1] and the April 20, 2006 Resolution[2]of the
Court of Tax Appeals (CTA) En Banc.
Factual Antecedents
Petitioner Silicon Philippines, Inc., a corporation duly organized and existing
under and by virtue of the laws of the Republic of the Philippines, is engaged in the
business of designing, developing, manufacturing and exporting advance and large-scale
integrated circuit components or ICs.[3] Petitioner is registered with the Bureau of Internal
Revenue (BIR) as a Value Added Tax (VAT) taxpayer [4] and with the Board of
Investments (BOI) as a preferred pioneer enterprise.[5]
On May 21, 1999, petitioner filed with the respondent Commissioner of Internal
Revenue (CIR), through the One-Stop Shop Inter-Agency Tax Credit
and DutyDrawback Center of the Department of Finance (DOF), an application for
credit/refund of unutilized input VAT for the period October 1, 1998 to December 31,
1998 in the amount of P31,902,507.50, broken down as follows:
Amount
Tax Paid on Imported/Locally Purchased
Capital Equipment
Total VAT paid on Purchases per Invoices
Received During the Period for which
this Application is Filed
Amount of Tax Credit/Refund Applied For

Proceedings before the CTA Division

P 15,170,082.00

16,732,425.50
P 31,902,507.50[6]

On December 27, 2000, due to the inaction of the respondent, petitioner filed a
Petition for Review with the CTA Division, docketed as CTA Case No. 6212. Petitioner
alleged that for the 4th quarter of 1998, it generated and recorded zero-rated export sales
in the amount of P3,027,880,818.42, paid to petitioner in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas;[7] and that for the said period, petitioner paid input VAT in the total amount
of P31,902,507.50,[8] which have not been applied to any output VAT.[9]
To this, respondent filed an Answer[10] raising the following special and
affirmative defenses, to wit:
8. The petition states no cause of action as it does not allege the dates
when the taxes sought to be refunded/credited were actually paid;
9. It is incumbent upon herein petitioner to show that it complied with
the provisions of Section 229 of the Tax Code as amended;
10. Claims for refund are construed strictly against the claimant, the
same being in the nature of exemption from taxes (Commissioner of Internal
Revenue vs. Ledesma, 31 SCRA 95; Manila Electric Co. vs. Commissioner of
Internal Revenue, 67 SCRA 35);
11. One who claims to be exempt from payment of a particular tax
must do so under clear and unmistakable terms found in the statute (Asiatic
Petroleum vs. Llanes, 49 Phil. 466; Union Garment Co. vs. Court of Tax
Appeals, 4 SCRA 304);
12. In an action for refund, the burden is upon the taxpayer to prove
that he is entitled thereto, and failure to sustain the same is fatal to the action
for refund. Furthermore, as pointed out in the case of William Li Yao vs.
Collector (L-11875, December 28, 1963), amounts sought to be recovered or
credited should be shown to be taxes which are erroneously or illegally
collected; that is to say, their payment was an independent single act of
voluntary payment of a tax believed to be due and collectible and accepted by
the government, which had therefor become part of the State moneys subject
to expenditure and perhaps already spent or appropriated; and
13. Taxes paid and collected are presumed to have been made in
accordance with the law and regulations, hence not refundable.[11]

On November 18, 2003, the CTA Division rendered a Decision[12] partially

granting petitioners claim for refund of unutilized input VAT on capital goods. Out of the
amount of P15,170,082.00, only P9,898,867.00 was allowed to be refunded because
training materials, office supplies, posters, banners, T-shirts, books, and other similar
items purchased by petitioner were not considered capital goods under Section 4.106-1(b)
of Revenue Regulations (RR) No. 7-95 (Consolidated Value-Added Tax
Regulations).[13] With regard to petitioners claim for credit/refund of input VAT
attributable to its zero-rated export sales, the CTA Division denied the same because
petitioner failed to present an Authority to Print (ATP) from the BIR;[14] neither did it
print on its export sales invoices the ATP and the word zero-rated.[15] Thus, the CTA
Division disposed of the case in this wise:
WHEREFORE, in view of the foregoing the instant petition for review
is hereby PARTIALLY GRANTED. Respondent is ORDERED to ISSUE A
TAX CREDIT CERTIFICATE in favor of petitioner in the reduced amount of
P9,898,867.00 representing input VAT on importation of capital goods.
However, the claim for refund of input VAT attributable to petitioner's alleged
zero-rated sales in the amount of P16,732,425.50 is hereby DENIED for lack
of merit.
SO ORDERED.[16]

Not satisfied with the Decision, petitioner moved for reconsideration.[17] It claimed
that it is not required to secure an ATP since it has a Permit to Adopt Computerized
Accounting Documents such as Sales Invoice and Official Receipts from the
BIR.[18] Petitioner further argued that because all its finished products are exported to its
mother company, Intel Corporation, a non-resident corporation and a non-VAT
registered entity, the printing of the word zero-rated on its export sales invoices is not
necessary.[19]
On its part, respondent filed a Motion for Partial Reconsideration[20] contending
that petitioner is not entitled to a credit/refund of unutilized input VAT on capital goods
because it failed to show that the goods imported/purchased are indeed capital goods as
defined in Section 4.106-1 of RR No. 7-95.[21]
The CTA Division denied both motions in a Resolution[22] dated August 10, 2004.
It noted that:

[P]etitioners request for Permit to Adopt Computerized Accounting

Documents such as Sales Invoice and Official Receipt was approved on
August 31, 2001 while the period involved in this case was October 31, 1998
to December 31, 1998 x x x. While it appears that petitioner was previously
issued a permit by the BIR Makati Branch, such permit was only limited to the
use of computerized books of account x x x. It was only on August 31, 2001
that petitioner was permitted to generate computerized sales invoices and
official receipts [provided that the BIR Permit Number is printed] in the
header of the document x x x.
xxxx
Thus, petitioners contention that it is not required to show its BIR
permit number on the sales invoices runs counter to the requirements under the
said Permit. This court also wonders why petitioner was issuing computer
generated sales invoices during the period involved (October 1998 to
December 1998) when it did not have an authority or permit. Therefore, we
are convinced that such documents lack probative value and should be treated
as inadmissible, incompetent and immaterial to prove petitioners export sales
transaction.
xxxx
ACCORDINGLY, the Motion for Reconsideration and the
Supplemental Motion for Reconsideration filed by petitioner as well as the
Motion for Partial Reconsideration of respondent are hereby DENIED for
lack of merit. The pronouncement in the assailed decision is REITERATED.
SO ORDERED [23]

Ruling of the CTA En Banc

Undaunted, petitioner elevated the case to the CTA En Banc via a Petition for
Review,[24] docketed as EB Case No. 23.
On September 30, 2005, the CTA En Banc issued the assailed
Decision[25] denying the petition for lack of merit. Pertinent portions of the Decision read:

This Court notes that petitioner raised the same issues which have
already been thoroughly discussed in the assailed Decision, as well as, in the
Resolution denying petitioner's Motion for Partial Reconsideration.
With regard to the first assigned error, this Court reiterates that, the
requirement of [printing] the BIR permit to print on the face of the sales
invoices and official receipts is a control mechanism adopted by the Bureau of
Internal Revenue to safeguard the interest of the government.
This requirement is clearly mandated under Section 238 of the 1997
National Internal Revenue Code, which provides that:
SEC. 238. Printing of Receipts or Sales or Commercial Invoice. 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.

The above mentioned provision seeks to eliminate the use of

unregistered and double or multiple sets of receipts by striking at the very root
of the problem the printer (H. S. de Leon, The National Internal Revenue Code
Annotated, 7th Ed., p. 901). And what better way to prove that the required
permit to print was secured from the Bureau of Internal Revenue than to show
or print the same on the face of the invoices. There can be no other valid proof
of compliance with the above provision than to show the Authority to Print
Permit number [printed] on the sales invoices and official receipts.
With regard to petitioners failure to print the word zero-rated on the
face of its export sales invoices, it must be emphasized that Section 4.108-1 of
Revenue Regulations No. 7-95 specifically requires that all value-added tax
registered persons shall, for every sale or lease of goods or properties or
services, issue duly registered invoices which must show the word zero-rated
[printed] on the invoices covering zero-rated sales.
It is not enough that petitioner prove[s] that it is entitled to its claim for
refund by way of substantial evidence. Well settled in our jurisprudence [is]
that tax refunds are in the nature of tax exemptions and as such, they are
regarded as in derogation of sovereign authority (Commissioner of Internal
Revenue vs. Ledesma, 31 SCRA 95). Thus, tax refunds are construed in
strictissimi juris against the person or entity claiming the same (Commissioner
of Internal Revenue vs. Procter & Gamble Philippines Manufacturing
Corporation, 204 SCRA 377; Commissioner of Internal Revenue vs. Tokyo
Shipping Co., Ltd., 244 SCRA 332).

In this case, not only should petitioner establish that it is entitled to the
claim but it must most importantly show proof of compliance with the
substantiation requirements as mandated by law or regulations.
The rest of the assigned errors pertain to the alleged errors of the First
Division: in finding that the petitioner failed to comply with the substantiation
requirements provided by law in proving its claim for refund; in reducing the
amount of petitioners tax credit for input vat on importation of capital goods;
and in denying petitioners claim for refund of input vat attributable to
petitioners zero-rated sales.
It is petitioners contention that it has clearly established its right to the
tax credit or refund by way of substantial evidence in the form of material and
documentary evidence and it would be improper to set aside with haste the
claimed input VAT on capital goods expended for training materials, office
supplies, posters, banners, t-shirts, books and the like because Revenue
Regulations No. 7-95 defines capital goods as to include even those goods
which are indirectly used in the production or sale of taxable goods or services.
Capital goods or properties, as defined under Section 4.106-1(b) of
Revenue Regulations No. 7-95, refer to goods or properties with estimated
useful life greater than one year and which are treated as depreciable assets
under Section 29 (f), used directly or indirectly in the production or sale of
taxable goods or services.
Considering that the items (training materials, office supplies, posters,
banners, t-shirts, books and the like) purchased by petitioner as reflected in the
summary were not duly proven to have been used, directly or indirectly[,] in
the production or sale of taxable goods or services, the same cannot be
considered as capital goods as defined above[. Consequently,] the same may
not x x x then [be] claimed as such.
WHEREFORE, in view of the foregoing, this instant Petition for
Review is hereby DENIED DUE COURSE and hereby DISMISSED for
lack of merit. This Court's Decision of November 18, 2003 and Resolution of
August 10, 2004 are hereby AFFIRMED in all respects.
SO ORDERED.[26]

Petitioner sought reconsideration of the assailed Decision but the CTA En

Banc denied the Motion[27] in a Resolution[28] dated April 20, 2006.
Issues
Hence, the instant Petition raising the following issues for resolution:
(1) whether the CTA En Banc erred in denying petitioners claim for credit/
refund of input VAT attributable to its zero-rated sales in the amount
of P16,732,425.00 due to its failure:
(a) to show that it secured an ATP from the BIR and to indicate the same
in its export sales invoices; and
(b) to print the word zero-rated in its export sales invoices.[29]
(2) whether the CTA En Banc erred in ruling that only the amount
of P9,898,867.00 can be classified as input VAT paid on capital goods.[30]

Petitioners Arguments
Petitioner posits that the denial by the CTA En Banc of its claim for refund of
input VAT attributable to its zero-rated sales has no legal basis because the printing of the
ATP and the word zero-rated on the export sales invoices are not required under Sections
113 and 237 of the National Internal Revenue Code (NIRC).[31] And since there is no law
requiring the ATP and the word zero-rated to be indicated on the sales invoices,[32] the
absence of such information in the sales invoices should not invalidate the petition[33] nor
result in the outright denial of a claim for tax credit/refund.[34] To support its position,
petitioner cites Intel Technology Philippines, Inc. v. Commissioner of Internal
Revenue,[35] where Intels failure to print the ATP on the sales invoices or receipts did not
result in the outright denial of its claim for tax credit/refund.[36] Although the cited case
only dealt with the printing of the ATP, petitioner submits that the reasoning in that case
should also apply to the printing of the word zero-rated.[37] Hence, failure to print of the
word zero-rated on the sales invoices should not result in the denial of a claim.
As to the claim for refund of input VAT on capital goods, petitioner insists that it has
sufficiently proven through testimonial and documentary evidence that all the goods

purchased were used in the production and manufacture of its finished products which
were sold and exported.[38]
Respondents Arguments
To refute petitioners arguments, respondent asserts that the printing of the ATP on the
export sales invoices, which serves as a control mechanism for the BIR, is mandated by
Section 238 of the NIRC;[39] while the printing of the word zero-rated on the export sales
invoices, which seeks to prevent purchasers of zero-rated sales or services from claiming
non-existent input VAT credit/refund,[40] is required under RR No. 7-95, promulgated
pursuant to Section 244 of the NIRC.[41] With regard to the unutilized input VAT on
capital goods, respondent counters that petitioner failed to show that the goods it
purchased/imported are capital goods as defined in Section 4.106-1 of RR No. 7-95.[42]
Our Ruling
The petition is bereft of merit.
Before us are two types of input VAT credits. One is a credit/refund of input VAT
attributable to zero-rated sales under Section 112 (A) of the NIRC, and the other is a
credit/refund of input VAT on capital goods pursuant to Section 112 (B) of the same
Code.
Credit/refund of input VAT on zero-rated sales
In a claim for credit/refund of input VAT attributable to zero-rated sales, Section 112
(A)[43] of the NIRC lays down four requisites, to wit:
1) the taxpayer must be VAT-registered;
2) the taxpayer must be engaged in sales which are zero-rated or effectively
zero-rated;
3) the claim must be filed within two years after the close of the taxable
quarter when such sales were made; and

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.

To prove that it is engaged in zero-rated sales, petitioner presented export sales

invoices, certifications of inward remittance, export declarations, and airway bills of
lading for the fourth quarter of 1998. The CTA Division, however, found the export sales
invoices of no probative value in establishing petitioners zero-rated sales for the purpose
of claiming credit/refund of input VAT because petitioner failed to show that it has an
ATP from the BIR and to indicate the ATP and the word zero-rated in its export sales
invoices.[44] The CTA Division cited as basis Sections 113,[45] 237[46] and 238[47] of the
NIRC, in relation to Section 4.108-1 of RR No. 7-95.[48]
We partly agree with the CTA.
Printing the ATP on the invoices or receipts is
not required

It has been settled in Intel Technology Philippines, Inc. v. Commissioner of

Internal Revenue[49] that the ATP need not be reflected or indicated in the invoices or
receipts because there is no law or regulation requiring it.[50] Thus, in the absence of such
law or regulation, failure to print the ATP on the invoices or receipts should not result in
the outright denial of a claim or the invalidation of the invoices or receipts for purposes of
claiming a refund.[51]
ATP must be secured from the BIR

But while there is no law requiring the ATP to be printed on the invoices or
receipts, Section 238 of the NIRC expressly requires persons engaged in business to
secure an ATP from the BIR prior to printing invoices or receipts. Failure to do so makes
the person liable under Section 264[52] of the NIRC.
This brings us to the question of whether a claimant for unutilized input VAT on
zero-rated sales is required to present proof that it has secured an ATP from the BIR prior
to the printing of its invoices or receipts.

We rule in the affirmative.

Under Section 112 (A) of the NIRC, a claimant must be engaged in sales which
are zero-rated or effectively zero-rated. To prove this, duly registered invoices or receipts
evidencing zero-rated sales must be presented. However, since the ATP is not indicated
in the invoices or receipts, the only way to verify whether the invoices or receipts are duly
registered is by requiring the claimant to present its ATP from the BIR. Without this
proof, the invoices or receipts would have no probative value for the purpose of
refund. In the case of Intel, we emphasized that:

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.[53] (Emphasis supplied)

Failure to print the word zero-rated on the

sales invoices is fatal to a claim for refund of
input VAT

Similarly, failure to print the word zero-rated on the sales invoices or receipts is fatal to a
claim for credit/refund of input VAT on zero-rated sales.
In Panasonic Communications Imaging Corporation of the Philippines (formerly
Matsushita Business Machine Corporation of the Philippines) v. Commissioner of
Internal Revenue,[54] we upheld the denial of Panasonics claim for tax credit/refund due to
the absence of the word zero-rated in its invoices. We explained that compliance with
Section 4.108-1 of RR 7-95, requiring the printing of the word zero rated on the invoice
covering zero-rated sales, is essential as this regulation proceeds from the rule-making
authority of the Secretary of Finance under Section 244[55] of the NIRC.

All told, the non-presentation of the ATP and the failure to indicate the word zerorated in the invoices or receipts are fatal to a claim for credit/refund of input VAT on
zero-rated sales. The failure to indicate the ATP in the sales invoices or receipts, on the
other hand, is not. In this case, petitioner failed to present its ATP and to print the word
zero-rated on its export sales invoices. Thus, we find no error on the part of the CTA in
denying outright petitioners claim for credit/refund of input VAT attributable to its zerorated sales.
Credit/refund of input VAT on capital goods
Capital goods are defined under Section
4.106-1(b) of RR No. 7-95
To claim a refund of input VAT on capital goods, Section 112 (B)[56] of the NIRC
requires that:
1. the claimant must be a VAT registered person;
2. the input taxes claimed must have been paid on capital goods;
3. the input taxes must not have been applied against any output tax liability;
and
4. the administrative claim for refund must have been filed within two (2)
years after the close of the taxable quarter when the importation or
purchase was made.

Corollarily, Section 4.106-1 (b) of RR No. 7-95 defines capital goods as follows:
Capital goods or properties refer to goods or properties with estimated useful
life greater that one year and which are treated as depreciable assets under
Section 29 (f),[57] used directly or indirectly in the production or sale of taxable
goods or services.

Based on the foregoing definition, we find no reason to deviate from the findings of the
CTA that training materials, office supplies, posters, banners, T-shirts, books, and the
other similar items reflected in petitioners Summary of Importation of Goods are not

capital goods. A reduction in the refundable input VAT on capital goods

fromP15,170,082.00 to P9,898,867.00 is therefore in order.
WHEREFORE, the Petition is hereby DENIED. The assailed Decision dated
September 30, 2005 and the Resolution dated April 20, 2006 of the Court of Tax
Appeals En Banc are hereby AFFIRMED.
SO ORDERED.

EN BANC
RENATO V. DIAZ and G.R. No. 193007
AURORA MA. F. TIMBOL,
Petitioners, Present:
CORONA, C.J.,
CARPIO,
VELASCO, JR.,
LEONARDO-DE CASTRO,
BRION,
- versus - PERALTA,
BERSAMIN,*
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ,
MENDOZA, and
SERENO,** JJ.
THE SECRETARY OF FINANCE
and THE COMMISSIONER OF Promulgated:
INTERNAL REVENUE,
Respondents. July 19, 2011
x ---------------------------------------------------------------------------------------- x

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 IIIs assumption of
office in 2010, the BIR revived the idea and would impose the challenged tax on
toll fees beginning August 16, 2010 unless judicially enjoined.
Petitioners hold the view that Congress did not, when it enacted the NIRC,
intend to include toll fees within the meaning of sale of services that are subject to
VAT; that a toll fee is a users tax, not a sale of services; that to impose VAT on toll
fees would amount to a tax on public service; and that, since VAT was never
factored into the formula for computing toll fees, its imposition would violate the
non-impairment clause of the constitution.

On August 13, 2010 the Court issued a temporary restraining order (TRO),
enjoining the implementation of the VAT. The Court required the government,
represented by respondents Cesar V. Purisima, Secretary of the Department of
Finance, and Kim S. Jacinto-Henares, Commissioner of Internal Revenue, to
comment on the petition within 10 days from notice.[2] Later, the Court issued
another resolution treating the petition as one for prohibition.[3]
On August 23, 2010 the Office of the Solicitor General filed the governments
comment.[4] The government avers that the NIRC imposes VAT on all kinds of
services of franchise grantees, including tollway operations, except where the law
provides otherwise; that the Court should seek the meaning and intent of the law
from the words used in the statute; and that the imposition of VAT on tollway
operations has been the subject as early as 2003 of several BIR rulings and
circulars.[5]
The government also argues that petitioners have no right to invoke the nonimpairment of contracts clause since they clearly have no personal interest in
existing toll operating agreements (TOAs) between the government and tollway
operators. At any rate, the non-impairment clause cannot limit the States sovereign
taxing power which is generally read into contracts.
Finally, the government contends that the non-inclusion of VAT in the parametric
formula for computing toll rates cannot exempt tollway operators from VAT. In
any event, it cannot be claimed that the rights of tollway operators to a reasonable
rate of return will be impaired by the VAT since this is imposed on top of the toll
rate. Further, the imposition of VAT on toll fees would have very minimal effect
on motorists using the tollways.
In their reply[6] to the governments comment, petitioners point out that
tollway operators cannot be regarded as franchise grantees under the NIRC since
they do not hold legislative franchises. Further, the BIR intends to collect the VAT
by rounding off the toll rate and putting any excess collection in an escrow
account. But this would be illegal since only the Congress can modify VAT rates
and authorize its disbursement. Finally, BIR Revenue Memorandum Circular 632010 (BIR RMC 63-2010), which directs toll companies to record an accumulated
input VAT of zero balance in their books as of August 16, 2010, contravenes
Section 111 of the NIRC which grants entities that first become liable to VAT a

transitional input tax credit of 2% on beginning inventory. For this reason, the
VAT on toll fees cannot be implemented.
The Issues Presented
The case presents two procedural issues:
1. Whether or not the Court may treat the petition for declaratory relief as
one for prohibition; and
2. Whether or not petitioners Diaz and Timbol have legal standing to file the
action.
The case also presents two substantive issues:
1. Whether or not the government is unlawfully expanding VAT coverage
by including tollway operators and tollway operations in the terms franchise
grantees and sale of services under Section 108 of the Code; and
2. Whether or not the imposition of VAT on tollway operators a) amounts to
a tax on tax and not a tax on services; b) will impair the tollway operators right to a
reasonable return of investment under their TOAs; and c) is not administratively
feasible and cannot be implemented.
The Courts Rulings
A. On the Procedural Issues:
On August 24, 2010 the Court issued a resolution, treating the petition as
one for prohibition rather than one for declaratory relief, the characterization that
petitioners Diaz and Timbol gave their action. The government has sought
reconsideration of the Courts resolution,[7] however, arguing that petitioners
allegations clearly made out a case for declaratory relief, an action over which the
Court has no original jurisdiction. The government adds, moreover, that the
petition does not meet the requirements of Rule 65 for actions for prohibition since
the BIR did not exercise judicial, quasi-judicial, or ministerial functions when it
sought to impose VAT on toll fees. Besides, petitioners Diaz and Timbol has a

plain, speedy, and adequate remedy in the ordinary course of law against the BIR
action in the form of an appeal to the Secretary of Finance.
But there are precedents for treating a petition for declaratory relief as one for
prohibition if the case has far-reaching implications and raises questions that need
to be resolved for the public good.[8] The Court has also held that a petition for
prohibition is a proper remedy to prohibit or nullify acts of executive officials that
amount to usurpation of legislative authority.[9]
Here, the imposition of VAT on toll fees has far-reaching implications. Its
imposition would impact, not only on the more than half a million motorists who
use the tollways everyday, but more so on the governments effort to raise revenue
for funding various projects and for reducing budgetary deficits.
To dismiss the petition and resolve the issues later, after the challenged VAT
has been imposed, could cause more mischief both to the tax-paying public and the
government. A belated declaration of nullity of the BIR action would make any
attempt to refund to the motorists what they paid an administrative nightmare with
no solution. Consequently, it is not only the right, but the duty of the Court to take
cognizance of and resolve the issues that the petition raises.
Although the petition does not strictly comply with the requirements of Rule
65, the Court has ample power to waive such technical requirements when the
legal questions to be resolved are of great importance to the public. The same may
be said of the requirement of locus standi which is a mere procedural requisite.[10]
B. On the Substantive Issues:
One. The relevant law in this case is Section 108 of the NIRC, as
amended. VAT is levied, assessed, and collected, according to Section 108, on the
gross receipts derived from the sale or exchange of services as well as from the use
or lease of properties. The third paragraph of Section 108 defines sale or exchange
of services as follows:
The phrase sale or exchange of services means the
performance of all kinds of services in the Philippines for others for
a fee, remuneration or consideration, including those performed or

rendered by construction and service contractors; stock, real estate,

commercial, customs and immigration brokers; lessors of property,
whether personal or real; warehousing services; lessors or
distributors of cinematographic films; persons engaged in milling,
processing, manufacturing or repacking goods for others;
proprietors, operators or keepers of hotels, motels, resthouses,
pension houses, inns, resorts; proprietors or operators of
restaurants, refreshment parlors, cafes and other eating places,
including clubs and caterers; dealers in securities; lending investors;
transportation contractors on their transport of goods or cargoes,
including persons who transport goods or cargoes for hire and other
domestic common carriers by land relative to their transport of
goods or cargoes; common carriers by air and sea relative to their
transport of passengers, goods or cargoes from one place in the
Philippines to another place in the Philippines; sales of electricity by
generation
companies,
transmission,
and
distribution
companies; services of franchise grantees of electric utilities,
telephone and telegraph, radio and television broadcasting and all
other franchise grantees except those under Section 119 of this
Code and non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity and bonding
companies; and similar services regardless of whether or not the
performance thereof calls for the exercise or use of the physical or
mental faculties. (Underscoring supplied)

It is plain from the above that the law imposes VAT on all kinds of services
rendered in the Philippines for a fee, including those specified in the list. The
enumeration of affected services is not exclusive.[11] By qualifying services with
the words all kinds, Congress has given the term services an all-encompassing
meaning. The listing of specific services are intended to illustrate how pervasive
and broad is the VATs reach rather than establish concrete limits to its
application. Thus, every activity that can be imagined as a form of service rendered
for a fee should be deemed included unless some provision of law especially
excludes it.
Now, do tollway operators render services for a fee? Presidential Decree (P.D.)
1112 or the Toll Operation Decree establishes the legal basis for the services that
tollway operators render. Essentially, tollway operators construct, maintain, and
operate expressways, also called tollways, at the operators expense. Tollways serve

as alternatives to regular public highways that meander through populated areas

and branch out to local roads. Traffic in the regular public highways is for this
reason slow-moving. In consideration for constructing tollways at their expense,
the operators are allowed to collect government-approved fees from motorists
using the tollways until such operators could fully recover their expenses and earn
reasonable returns from their investments.
When a tollway operator takes a toll fee from a motorist, the fee is in effect for the
latters use of the tollway facilities over which the operator enjoys private
proprietary rights[12] that its contract and the law recognize. In this sense, the
tollway operator is no different from the following service providers under Section
108 who allow others to use their properties or facilities for a fee:
1. Lessors of property, whether personal or real;
2. Warehousing service operators;
3. Lessors or distributors of cinematographic films;
4. Proprietors, operators or keepers of hotels, motels,
resthouses, pension houses, inns, resorts;
5. Lending investors (for use of money);
6. Transportation contractors on their transport of goods or
cargoes, including persons who transport goods or cargoes for hire
and other domestic common carriers by land relative to their transport
of goods or cargoes; and
7. Common carriers by air and sea relative to their transport of
passengers, goods or cargoes from one place in the Philippines to
another place in the Philippines.
It does not help petitioners cause that Section 108 subjects to VAT all kinds
of services rendered for a fee regardless of whether or not the performance thereof
calls for the exercise or use of the physical or mental faculties. This means that
services to be subject to VAT need not fall under the traditional concept of
services, the personal or professional kinds that require the use of human
knowledge and skills.
And not only do tollway operators come under the broad term all kinds of services,
they also come under the specific class described in Section 108 as all other

franchise grantees who are subject to VAT, except those under Section 119 of this
Code.
Tollway operators are franchise grantees and they do not belong to
exceptions (the low-income radio and/or television broadcasting companies with
gross annual incomes of less than P10 million and gas and water utilities) that
Section 119[13] spares from the payment of VAT. The word franchise broadly
covers government grants of a special right to do an act or series of acts of public
concern.[14]
Petitioners of course contend that tollway operators cannot be considered
franchise grantees under Section 108 since they do not hold legislative
franchises. But nothing in Section 108 indicates that the franchise grantees it
speaks of are those who hold legislative franchises. Petitioners give no reason, and
the Court cannot surmise any, for making a distinction between franchises granted
by Congress and franchises granted by some other government agency. The latter,
properly constituted, may grant franchises. Indeed, franchises conferred or granted
by local authorities, as agents of the state, constitute as much a legislative franchise
as though the grant had been made by Congress itself.[15] The term franchise has
been broadly construed as referring, not only to authorizations that Congress
directly issues in the form of a special law, but also to those granted by
administrative agencies to which the power to grant franchises has been delegated
by Congress.[16]
Tollway operators are, owing to the nature and object of their business,
franchise grantees. The construction, operation, and maintenance of toll facilities
on public improvements are activities of public consequence that necessarily
require a special grant of authority from the state. Indeed, Congress granted special
franchise for the operation of tollways to the Philippine National Construction
Company, the former tollway concessionaire for the North and South Luzon
Expressways. Apart from Congress, tollway franchises may also be granted by the
TRB, pursuant to the exercise of its delegated powers under P.D. 1112.[17]The
franchise in this case is evidenced by a Toll Operation Certificate.[18]
Petitioners contend that the public nature of the services rendered by tollway
operators excludes such services from the term sale of services under Section 108

of the Code. But, again, nothing in Section 108 supports this contention. The
reverse is true. In specifically including by way of example electric utilities,
telephone, telegraph, and broadcasting companies in its list of VAT-covered
businesses, Section 108 opens other companies rendering public service for a fee to
the imposition of VAT. Businesses of a public nature such as public utilities and
the collection of tolls or charges for its use or service is a franchise.[19]
Nor can petitioners cite as binding on the Court statements made by certain
lawmakers in the course of congressional deliberations of the would-be law. As the
Court said in South African Airways v. Commissioner of Internal
Revenue,[20] statements made by individual members of Congress in the
consideration of a bill do not necessarily reflect the sense of that body and are,
consequently, not controlling in the interpretation of law. The congressional will is
ultimately determined by the language of the law that the lawmakers voted
on. Consequently, the meaning and intention of the law must first be sought in the
words of the statute itself, read and considered in their natural, ordinary, commonly
accepted and most obvious significations, according to good and approved usage
and without resorting to forced or subtle construction.
Two. Petitioners argue that a toll fee is a users tax and to impose VAT on
toll fees is tantamount to taxing a tax.[21] Actually, petitioners base this argument
on the following discussion in Manila International Airport Authority (MIAA) v.
Court of Appeals:[22]
No one can dispute that properties of public dominion
mentioned in Article 420 of the Civil Code, like roads, canals, rivers,
torrents, ports and bridges constructed by the State, are owned by the
State. The term ports includes seaports and airports.
The MIAA Airport Lands and Buildings constitute a port
constructed by the State. Under Article 420 of the Civil Code,
the MIAA Airport Lands and Buildings are properties of public
dominion and thus owned by the State or the Republic of
the Philippines.
x x x The operation by the government of a tollway does not
change the character of the road as one for public use. Someone
must pay for the maintenance of the road, either the public

indirectly through the taxes they pay the government, or only those
among the public who actually use the road through the toll fees
they pay upon using the road. The tollway system is even a more
efficient and equitable manner of taxing the public for the
maintenance of public roads.
The charging of fees to the public does not determine the
character of the property whether it is for public dominion or not.
Article 420 of the Civil Code defines property of public dominion as
one intended for public use. Even if the government collects toll fees,
the road is still intended for public use if anyone can use the road
under the same terms and conditions as the rest of the public. The
charging of fees, the limitation on the kind of vehicles that can use
the road, the speed restrictions and other conditions for the use of
the road do not affect the public character of the road.
The terminal fees MIAA charges to passengers, as well as the
landing fees MIAA charges to airlines, constitute the bulk of the
income that maintains the operations of MIAA. The collection of
such fees does not change the character of MIAA as an airport for
public use. Such fees are often termed users tax. This means taxing
those among the public who actually use a public facility instead of
taxing all the public including those who never use the particular
public facility. A users tax is more equitable a principle of taxation
mandated in the 1987 Constitution.[23] (Underscoring supplied)

Petitioners assume that what the Court said above, equating terminal fees to
a users tax must also pertain to tollway fees. But the main issue in the MIAAcase
was whether or not Paraaque City could sell airport lands and buildings under
MIAA administration at public auction to satisfy unpaid real estate taxes. Since
local governments have no power to tax the national government, the Court held
that the City could not proceed with the auction sale. MIAA forms part of the
national government although not integrated in the department
framework.[24] Thus, its airport lands and buildings are properties of public
dominion beyond the commerce of man under Article 420(1)[25] of the Civil Code
and could not be sold at public auction.
As can be seen, the discussion in the MIAA case on toll roads and toll fees
was made, not to establish a rule that tollway fees are users tax, but to make the

point that airport lands and buildings are properties of public dominion and that the
collection of terminal fees for their use does not make them private
properties. Tollway fees are not taxes. Indeed, they are not assessed and collected
by the BIR and do not go to the general coffers of the government.
It would of course be another matter if Congress enacts a law imposing a
users tax, collectible from motorists, for the construction and maintenance of
certain roadways. The tax in such a case goes directly to the government for the
replenishment of resources it spends for the roadways. This is not the case
here.What the government seeks to tax here are fees collected from tollways that
are constructed, maintained, and operated by private tollway operators at their own
expense under the build, operate, and transfer scheme that the government has
adopted for expressways.[26] Except for a fraction given to the government, the toll
fees essentially end up as earnings of the tollway operators.
In sum, fees paid by the public to tollway operators for use of the tollways, are not
taxes in any sense. A tax is imposed under the taxing power of the government
principally for the purpose of raising revenues to fund public expenditures. [27] Toll
fees, on the other hand, are collected by private tollway operators as
reimbursement for the costs and expenses incurred in the construction,
maintenance and operation of the tollways, as well as to assure them a reasonable
margin of income. Although toll fees are charged for the use of public facilities,
therefore, they are not government exactions that can be properly treated as a
tax. Taxes may be imposed only by the government under its sovereign authority,
toll fees may be demanded by either the government or private individuals or
entities, as an attribute of ownership.[28]
Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to
the nature of VAT as an indirect tax. In indirect taxation, a distinction is made
between the liability for the tax and burden of the tax. The seller who is liable for
the VAT may shift or pass on the amount of VAT it paid on goods, properties or
services to the buyer. In such a case, what is transferred is not the sellers liability
but merely the burden of the VAT.[29]
Thus, the seller remains directly and legally liable for payment of the VAT,
but the buyer bears its burden since the amount of VAT paid by the former is
added to the selling price. Once shifted, the VAT ceases to be a tax [30] and simply

becomes part of the cost that the buyer must pay in order to purchase the good,
property or service.
Consequently, VAT on tollway operations is not really a tax on the tollway
user, but on the tollway operator. Under Section 105 of the Code, [31] VAT is
imposed on any person who, in the course of trade or business, sells or renders
services for a fee. In other words, the seller of services, who in this case is the
tollway operator, is the person liable for VAT. The latter merely shifts the burden
of VAT to the tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even if
toll fees were deemed as a users tax. VAT is assessed against the tollway operators
gross receipts and not necessarily on the toll fees. Although the tollway operator
may shift the VAT burden to the tollway user, it will not make the latter directly
liable for the VAT. The shifted VAT burden simply becomes part of the toll fees
that one has to pay in order to use the tollways.[32]
Three. Petitioner Timbol has no personality to invoke the non-impairment of
contract clause on behalf of private investors in the tollway projects. She will
neither be prejudiced by nor be affected by the alleged diminution in return of
investments that may result from the VAT imposition. She has no interest at all in
the profits to be earned under the TOAs. The interest in and right to recover
investments solely belongs to the private tollway investors.
Besides, her allegation that the private investors rate of recovery will be
adversely affected by imposing VAT on tollway operations is purely speculative.
Equally presumptuous is her assertion that a stipulation in the TOAs known as the
Material Adverse Grantor Action will be activated if VAT is thus imposed. The
Court cannot rule on matters that are manifestly conjectural. Neither can it prohibit
the State from exercising its sovereign taxing power based on uncertain, prophetic
grounds.
Four. Finally, petitioners assert that the substantiation requirements for
claiming input VAT make the VAT on tollway operations impractical and
incapable of implementation. They cite the fact that, in order to claim input VAT,
the name, address and tax identification number of the tollway user must be
indicated in the VAT receipt or invoice. The manner by which the BIR intends to

implement the VAT by rounding off the toll rate and putting any excess collection
in an escrow account is also illegal, while the alternative of giving change to
thousands of motorists in order to meet the exact toll rate would be a logistical
nightmare. Thus, according to them, the VAT on tollway operations is not
administratively feasible.[33]
Administrative feasibility is one of the canons of a sound tax system. It
simply means that the tax system should be capable of being effectively
administered and enforced with the least inconvenience to the taxpayer. Nonobservance of the canon, however, will not render a tax imposition invalid except
to the extent that specific constitutional or statutory limitations are
impaired.[34] Thus, even if the imposition of VAT on tollway operations may seem
burdensome to implement, it is not necessarily invalid unless some aspect of it is
shown to violate any law or the Constitution.
Here, it remains to be seen how the taxing authority will actually implement
the VAT on tollway operations. Any declaration by the Court that the manner of its
implementation is illegal or unconstitutional would be premature. Although the
transcript of the August 12, 2010 Senate hearing provides some clue as to how the
BIR intends to go about it,[35] the facts pertaining to the matter are not sufficiently
established for the Court to pass judgment on. Besides, any concern about how the
VAT on tollway operations will be enforced must first be addressed to the BIR on
whom the task of implementing tax laws primarily and exclusively rests. The Court
cannot preempt the BIRs discretion on the matter, absent any clear violation of law
or the Constitution.
For the same reason, the Court cannot prematurely declare as illegal, BIR
RMC 63-2010 which directs toll companies to record an accumulated input VAT
of zero balance in their books as of August 16, 2010, the date when the VAT
imposition was supposed to take effect. The issuance allegedly violates Section
111(A)[36] of the Code which grants first time VAT payers a transitional input VAT
of 2% on beginning inventory.
In this connection, the BIR explained that BIR RMC 63-2010 is actually the
product of negotiations with tollway operators who have been assessed VAT as
early as 2005, but failed to charge VAT-inclusive toll fees which by now can no

longer be collected. The tollway operators agreed to waive the 2% transitional

input VAT, in exchange for cancellation of their past due VAT liabilities. Notably,
the right to claim the 2% transitional input VAT belongs to the tollway operators
who have not questioned the circulars validity. They are thus the ones who have a
right to challenge the circular in a direct and proper action brought for the purpose.
Conclusion
In fine, the Commissioner of Internal Revenue did not usurp legislative
prerogative or expand the VAT laws coverage when she sought to impose VAT on
tollway operations. Section 108(A) of the Code clearly states that services of all
other franchise grantees are subject to VAT, except as may be provided under
Section 119 of the Code. Tollway operators are not among the franchise grantees
subject to franchise tax under the latter provision. Neither are their services among
the VAT-exempt transactions under Section 109 of the Code.
If the legislative intent was to exempt tollway operations from VAT, as
petitioners so strongly allege, then it would have been well for the law to clearly
say so. Tax exemptions must be justified by clear statutory grant and based on
language in the law too plain to be mistaken.[37] But as the law is written, no such
exemption obtains for tollway operators. The Court is thus duty-bound to simply
apply the law as it is found.
Lastly, the grant of tax exemption is a matter of legislative policy that is
within the exclusive prerogative of Congress. The Courts role is to merely uphold
this legislative policy, as reflected first and foremost in the language of the tax
statute. Thus, any unwarranted burden that may be perceived to result from
enforcing such policy must be properly referred to Congress. The Court has no
discretion on the matter but simply applies the law.
The VAT on franchise grantees has been in the statute books since 1994
when R.A. 7716 or the Expanded Value-Added Tax law was passed. It is only
now, however, that the executive has earnestly pursued the VAT imposition
against tollway operators. The executive exercises exclusive discretion in matters
pertaining to the implementation and execution of tax laws. Consequently, the

executive is more properly suited to deal with the immediate and practical
consequences of the VAT imposition.
WHEREFORE, the Court DENIES respondents Secretary of Finance and
Commissioner of Internal Revenues motion for reconsideration of its August 24,
2010 resolution, DISMISSES the petitioners Renato V. Diaz and Aurora Ma. F.
Timbols petition for lack of merit, and SETS ASIDE the Courts temporary
restraining order dated August 13, 2010.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 172087

March 15, 2011

PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR), Petitioner,

vs.
THE BUREAU OF INTERNAL REVENUE (BIR), represented herein by HON. JOSE MARIO
BUAG, in his official capacity as COMMISSIONER OF INTERNAL REVENUE, Public
Respondent,
JOHN DOE and JANE DOE, who are persons acting for, in behalf, or under the authority of
Respondent.Public and Private Respondents.
DECISION
PERALTA, J.:
For resolution of this Court is the Petition for Certiorari and Prohibition1 with prayer for the issuance
of a Temporary Restraining Order and/or Preliminary Injunction, dated April 17, 2006, of petitioner
Philippine Amusement and Gaming Corporation (PAGCOR), seeking the declaration of nullity of
Section 1 of Republic Act (R.A.) No. 9337 insofar as it amends Section 27 (c) of the National Internal
Revenue Code of 1997, by excluding petitioner from exemption from corporate income tax for being
repugnant to Sections 1 and 10 of Article III of the Constitution. Petitioner further seeks to prohibit
the implementation of Bureau of Internal Revenue (BIR) Revenue Regulations No. 16-2005 for being
contrary to law.
The undisputed facts follow.
PAGCOR was created pursuant to Presidential Decree (P.D.) No. 1067-A2 on January 1, 1977.
Simultaneous to its creation, P.D. No. 1067-B3 (supplementing P.D. No. 1067-A) was issued
exempting PAGCOR from the payment of any type of tax, except a franchise tax of five percent (5%)

of the gross revenue.4 Thereafter, on June 2, 1978, P.D. No. 1399 was issued expanding the scope
of PAGCOR's exemption.5
To consolidate the laws pertaining to the franchise and powers of PAGCOR, P.D. No. 18696 was
issued. Section 13 thereof reads as follows:
Sec. 13. Exemptions. x x x
(1) Customs Duties, taxes and other imposts on importations. - All importations of
equipment, vehicles, automobiles, boats, ships, barges, aircraft and such other gambling
paraphernalia, including accessories or related facilities, for the sole and exclusive use of the
casinos, the proper and efficient management and administration thereof and such other
clubs, recreation or amusement places to be established under and by virtue of this
Franchise shall be exempt from the payment of duties, taxes and other imposts, including all
kinds of fees, levies, or charges of any kind or nature.
Vessels and/or accessory ferry boats imported or to be imported by any corporation having
existing contractual arrangements with the Corporation, for the sole and exclusive use of the
casino or to be used to service the operations and requirements of the casino, shall likewise
be totally exempt from the payment of all customs duties, taxes and other imposts, including
all kinds of fees, levies, assessments or charges of any kind or nature, whether National or
Local.
(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or form, income or
otherwise, as well as fees, charges, or levies of whatever nature, whether National or Local,
shall be assessed and collected under this Franchise from the Corporation; nor shall any
form of tax or charge attach in any way to the earnings of the Corporation, except a
Franchise Tax of five percent (5%)of the gross revenue or earnings derived by the
Corporation from its operation under this Franchise. Such tax shall be due and payable
quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or
assessments of any kind, nature or description, levied, established, or collected by any
municipal, provincial or national government authority.
(b) Others: The exemption herein granted for earnings derived from the operations
conducted under the franchise, specifically from the payment of any tax, income or
otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of
and extend to corporation(s), association(s), agency(ies), or individual(s) with whom
the Corporation or operator has any contractual relationship in connection with the
operations of the casino(s) authorized to be conducted under this Franchise and to
those receiving compensation or other remuneration from the Corporation as a result
of essential facilities furnished and/or technical services rendered to the Corporation
or operator.
The fee or remuneration of foreign entertainers contracted by the Corporation or operator in
pursuance of this provision shall be free of any tax.
(3) Dividend Income. Notwithstanding any provision of law to the contrary, in the event the
Corporation should declare a cash dividend income corresponding to the participation of the
private sector shall, as an incentive to the beneficiaries, be subject only to a final flat income
rate of ten percent (10%) of the regular income tax rates. The dividend income shall not in
such case be considered as part of the beneficiaries' taxable income; provided, however,

that such dividend income shall be totally exempted from income or other form of taxes if
invested within six (6) months from the date the dividend income is received in the following:
(a) operation of the casino(s) or investments in any affiliate activity that will ultimately
redound to the benefit of the Corporation; or any other corporation with whom the
Corporation has any existing arrangements in connection with or related to the
operations of the casino(s);
(b) Government bonds, securities, treasury notes, or government debentures; or
(c) BOI-registered or export-oriented corporation(s).7
PAGCOR's tax exemption was removed in June 1984 through P.D. No. 1931, but it was later
restored by Letter of Instruction No. 1430, which was issued in September 1984.
On January 1, 1998, R.A. No. 8424,8 otherwise known as the National Internal Revenue Code of
1997, took effect. Section 27 (c) of R.A. No. 8424 provides that government-owned and controlled
corporations (GOCCs) shall pay corporate income tax, except petitioner PAGCOR, the Government
Service and Insurance Corporation, the Social Security System, the Philippine Health Insurance
Corporation, and the Philippine Charity Sweepstakes Office, thus:
(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of
existing special general laws to the contrary notwithstanding, all corporations, agencies or
instrumentalities owned and controlled by the Government, except the Government Service and
Insurance Corporation (GSIS), the Social Security System (SSS), the Philippine Health Insurance
Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO), and the Philippine
Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable
income as are imposed by this Section upon corporations or associations engaged in similar
business, industry, or activity.9
With the enactment of R.A. No. 933710 on May 24, 2005, certain sections of the National Internal
Revenue Code of 1997 were amended. The particular amendment that is at issue in this case is
Section 1 of R.A. No. 9337, which amended Section 27 (c) of the National Internal Revenue Code of
1997 by excluding PAGCOR from the enumeration of GOCCs that are exempt from payment of
corporate income tax, thus:
(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of
existing special general laws to the contrary notwithstanding, all corporations, agencies, or
instrumentalities owned and controlled by the Government, except the Government Service and
Insurance Corporation (GSIS), the Social Security System (SSS), the Philippine Health Insurance
Corporation (PHIC), and the Philippine Charity Sweepstakes Office (PCSO), shall pay such rate of
tax upon their taxable income as are imposed by this Section upon corporations or associations
engaged in similar business, industry, or activity.
Different groups came to this Court via petitions for certiorari and prohibition11 assailing the validity
and constitutionality of R.A. No. 9337, in particular:
1) Section 4, which imposes a 10% Value Added Tax (VAT) on sale of goods and properties;
Section 5, which imposes a 10% VAT on importation of goods; and Section 6, which imposes
a 10% VAT on sale of services and use or lease of properties, all contain a uniform
proviso authorizing the President, upon the recommendation of the Secretary of Finance, to
raise the VAT rate to 12%. The said provisions were alleged to be violative of Section 28 (2),

Article VI of the Constitution, which section vests in Congress the exclusive authority to fix
the rate of taxes, and of Section 1, Article III of the Constitution on due process, as well as of
Section 26 (2), Article VI of the Constitution, which section provides for the "no amendment
rule" upon the last reading of a bill;
2) Sections 8 and 12 were alleged to be violative of Section 1, Article III of the Constitution,
or the guarantee of equal protection of the laws, and Section 28 (1), Article VI of the
Constitution; and
3) other technical aspects of the passage of the law, questioning the manner it was passed.
On September 1, 2005, the Court dismissed all the petitions and upheld the constitutionality of R.A.
No. 9337.12
On the same date, respondent BIR issued Revenue Regulations (RR) No. 16-2005,13 specifically
identifying PAGCOR as one of the franchisees subject to 10% VAT imposed under Section 108 of
the National Internal Revenue Code of 1997, as amended by R.A. No. 9337. The said revenue
regulation, in part, reads:
Sec. 4. 108-3. Definitions and Specific Rules on Selected Services.
xxxx
(h) x x x
Gross Receipts of all other franchisees, other than those covered by Sec. 119 of the Tax Code,
regardless of how their franchisees may have been granted, shall be subject to the 10% VAT
imposed under Sec.108 of the Tax Code. This includes, among others, the Philippine Amusement
and Gaming Corporation (PAGCOR), and its licensees or franchisees.
Hence, the present petition for certiorari.
PAGCOR raises the following issues:
I
WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB INITIO FOR BEING
REPUGNANT TO THE EQUAL PROTECTION [CLAUSE] EMBODIED IN SECTION 1, ARTICLE III
OF THE 1987 CONSTITUTION.
II
WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB INITIO FOR BEING
REPUGNANT TO THE NON-IMPAIRMENT [CLAUSE] EMBODIED IN SECTION 10, ARTICLE III
OF THE 1987 CONSTITUTION.
III
WHETHER OR NOT RR 16-2005, SECTION 4.108-3, PARAGRAPH (H) IS NULL AND VOID AB
INITIO FOR BEING BEYOND THE SCOPE OF THE BASIC LAW, RA 8424, SECTION 108,
INSOFAR AS THE SAID REGULATION IMPOSED VAT ON THE SERVICES OF THE PETITIONER

AS WELL AS PETITIONERS LICENSEES OR FRANCHISEES WHEN THE BASIC LAW, AS

INTERPRETED BY APPLICABLE JURISPRUDENCE, DOES NOT IMPOSE VAT ON PETITIONER
OR ON PETITIONERS LICENSEES OR FRANCHISEES.14
The BIR, in its Comment15 dated December 29, 2006, counters:
I
SECTION 1 OF R.A. NO. 9337 AND SECTION 13 (2) OF P.D. 1869 ARE BOTH VALID AND
CONSTITUTIONAL PROVISIONS OF LAWS THAT SHOULD BE HARMONIOUSLY CONSTRUED
TOGETHER SO AS TO GIVE EFFECT TO ALL OF THEIR PROVISIONS WHENEVER POSSIBLE.
II
SECTION 1 OF R.A. NO. 9337 IS NOT VIOLATIVE OF SECTION 1 AND SECTION 10, ARTICLE III
OF THE 1987 CONSTITUTION.
III
BIR REVENUE REGULATIONS ARE PRESUMED VALID AND CONSTITUTIONAL UNTIL
STRICKEN DOWN BY LAWFUL AUTHORITIES.
The Office of the Solicitor General (OSG), by way of Manifestation In Lieu of Comment,16 concurred
with the arguments of the petitioner. It added that although the State is free to select the subjects of
taxation and that the inequity resulting from singling out a particular class for taxation or exemption is
not an infringement of the constitutional limitation, a tax law must operate with the same force and
effect to all persons, firms and corporations placed in a similar situation. Furthermore, according to
the OSG, public respondent BIR exceeded its statutory authority when it enacted RR No. 16-2005,
because the latter's provisions are contrary to the mandates of P.D. No. 1869 in relation to R.A. No.
9337.
The main issue is whether or not PAGCOR is still exempt from corporate income tax and VAT with
the enactment of R.A. No. 9337.
After a careful study of the positions presented by the parties, this Court finds the petition partly
meritorious.
Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the National Internal Revenue Code
of 1977, petitioner is no longer exempt from corporate income tax as it has been effectively omitted
from the list of GOCCs that are exempt from it. Petitioner argues that such omission is
unconstitutional, as it is violative of its right to equal protection of the laws under Section 1, Article III
of the Constitution:
Sec. 1. No person shall be deprived of life, liberty, or property without due process of law, nor shall
any person be denied the equal protection of the laws.
In City of Manila v. Laguio, Jr.,17 this Court expounded the meaning and scope of equal protection,
thus:
Equal protection requires that all persons or things similarly situated should be treated alike, both as
to rights conferred and responsibilities imposed. Similar subjects, in other words, should not be

treated differently, so as to give undue favor to some and unjustly discriminate against others. The
guarantee means that no person or class of persons shall be denied the same protection of laws
which is enjoyed by other persons or other classes in like circumstances. The "equal protection of
the laws is a pledge of the protection of equal laws." It limits governmental discrimination. The equal
protection clause extends to artificial persons but only insofar as their property is concerned.
xxxx
Legislative bodies are allowed to classify the subjects of legislation. If the classification is
reasonable, the law may operate only on some and not all of the people without violating the equal
protection clause. The classification must, as an indispensable requisite, not be arbitrary. To be
valid, it must conform to the following requirements:
1) It must be based on substantial distinctions.
2) It must be germane to the purposes of the law.
3) It must not be limited to existing conditions only.
4) It must apply equally to all members of the class.18
It is not contested that before the enactment of R.A. No. 9337, petitioner was one of the five GOCCs
exempted from payment of corporate income tax as shown in R.A. No. 8424, Section 27 (c) of
which, reads:
(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of
existing special or general laws to the contrary notwithstanding, all corporations, agencies or
instrumentalities owned and controlled by the Government, except the Government Service and
Insurance Corporation (GSIS), the Social Security System (SSS), the Philippine Health Insurance
Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO), and the Philippine
Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable
income as are imposed by this Section upon corporations or associations engaged in similar
business, industry, or activity.19
A perusal of the legislative records of the Bicameral Conference Meeting of the Committee on Ways
on Means dated October 27, 1997 would show that the exemption of PAGCOR from the payment of
corporate income tax was due to the acquiescence of the Committee on Ways on Means to the
request of PAGCOR that it be exempt from such tax.20 The records of the Bicameral Conference
Meeting reveal:
HON. R. DIAZ. The other thing, sir, is we --- I noticed we imposed a tax on lotto winnings.
CHAIRMAN ENRILE. Wala na, tinanggal na namin yon.
HON. R. DIAZ. Tinanggal na ba natin yon?
CHAIRMAN ENRILE. Oo.
HON. R. DIAZ. Because I was wondering whether we covered the tax on --- Whether on a universal
basis, we included a tax on cockfighting winnings.

CHAIRMAN ENRILE. No, we removed the --HON. R. DIAZ. I . . . (inaudible) natin yong lotto?
CHAIRMAN ENRILE. Pati PAGCOR tinanggal upon request.
CHAIRMAN JAVIER. Yeah, Philippine Insurance Commission.
CHAIRMAN ENRILE. Philippine Insurance --- Health, health ba. Yon ang request ng Chairman, I will
accept. (laughter) Pag-Pag-ibig yon, maliliit na sa tao yon.
HON. ROXAS. Mr. Chairman, I wonder if in the revenue gainers if we factored in an amount that
would reflect the VAT and other sales taxes--CHAIRMAN ENRILE. No, were talking of this measure only. We will not --- (discontinued)
HON. ROXAS. No, no, no, no, from the --- arising from the exemption. Assuming that when we
release the money into the hands of the public, they will not use that to --- for wallpaper. They will
spend that eh, Mr. Chairman. So when they spend that--CHAIRMAN ENRILE. Theres a VAT.
HON. ROXAS. There will be a VAT and there will be other sales taxes no. Is there a quantification?
Is there an approximation?
CHAIRMAN JAVIER. Not anything.
HON. ROXAS. So, in effect, we have sterilized that entire seven billion. In effect, it is not circulating
in the economy which is unrealistic.
CHAIRMAN ENRILE. It does, it does, because this is taken and spent by government, somebody
receives it in the form of wages and supplies and other services and other goods. They are not being
taken from the public and stored in a vault.
CHAIRMAN JAVIER. That 7.7 loss because of tax exemption. That will be extra income for the
taxpayers.
HON. ROXAS. Precisely, so they will be spending it.21
The discussion above bears out that under R.A. No. 8424, the exemption of PAGCOR from paying
corporate income tax was not based on a classification showing substantial distinctions which make
for real differences, but to reiterate, the exemption was granted upon the request of PAGCOR that it
be exempt from the payment of corporate income tax.
With the subsequent enactment of R.A. No. 9337, amending R.A. No. 8424, PAGCOR has been
excluded from the enumeration of GOCCs that are exempt from paying corporate income tax. The
records of the Bicameral Conference Meeting dated April 18, 2005, of the Committee on the
Disagreeing Provisions of Senate Bill No. 1950 and House Bill No. 3555, show that it is the
legislative intent that PAGCOR be subject to the payment of corporate income tax, thus:

THE CHAIRMAN (SEN. RECTO). Yes, Osmea, the proponent of the amendment.
SEN. OSMEA. Yeah. Mr. Chairman, one of the reasons why we're even considering this VAT bill is
we want to show the world who our creditors, that we are increasing official revenues that go to the
national budget. Unfortunately today, Pagcor is unofficial.
Now, in 2003, I took a quick look this morning, Pagcor had a net income of 9.7 billion after paying
some small taxes that they are subjected to. Of the 9.7 billion, they claim they remitted to national
government seven billion. Pagkatapos, there are other specific remittances like to the Philippine
Sports Commission, etc., as mandated by various laws, and then about 400 million to the President's
Social Fund. But all in all, their net profit today should be about 12 billion. That's why I am
questioning this two billion. Because while essentially they claim that the money goes to
government, and I will accept that just for the sake of argument. It does not pass through the
appropriation process. And I think that at least if we can capture 35 percent or 32 percent
through the budgetary process, first, it is reflected in our official income of government
which is applied to the national budget, and secondly, it goes through what is constitutionally
mandated as Congress appropriating and defining where the money is spent and not through
a board of directors that has absolutely no accountability.
REP. PUENTEBELLA. Well, with all due respect, Mr. Chairman, follow up lang.
There is wisdom in the comments of my good friend from Cebu, Senator Osmea.
SEN. OSMEA. And Negros.
REP. PUENTEBELLA. And Negros at the same time ay Kasimanwa. But I would not want to put my
friends from the Department of Finance in a difficult position, but may we know your comments on
this knowing that as Senator Osmea just mentioned, he said, "I accept that that a lot of it is going to
spending for basic services," you know, going to most, I think, supposedly a lot or most of it should
go to government spending, social services and the like. What is your comment on this? This is
going to affect a lot of services on the government side.
THE CHAIRMAN (REP. LAPUS). Mr. Chair, Mr. Chair.
SEN. OSMEA. It goes from pocket to the other, Monico.
REP. PUENTEBELLA. I know that. But I wanted to ask them, Mr. Senator, because you may have
your own pre-judgment on this and I don't blame you. I don't blame you. And I know you have your
own research. But will this not affect a lot, the disbursements on social services and other?
REP. LOCSIN. Mr. Chairman. Mr. Chairman, if I can add to that question also. Wouldn't it be easier
for you to explain to, say, foreign creditors, how do you explain to them that if there is a fiscal gap
some of our richest corporations has [been] spared [from] taxation by the government which is one
rich source of revenues. Now, why do you save, why do you spare certain government corporations
on that, like Pagcor? So, would it be easier for you to make an argument if everything was exposed
to taxation?
REP. TEVES. Mr. Chair, please.
THE CHAIRMAN (REP. LAPUS). Can we ask the DOF to respond to those before we call
Congressman Teves?

MR. PURISIMA. Thank you, Mr. Chair.

Yes, from definitely improving the collection, it will help us because it will then enter as an
official revenue although when dividends declare it also goes in as other income. (sic)
xxxx
REP. TEVES. Mr. Chairman.
xxxx
THE CHAIRMAN (REP. LAPUS). Congressman Teves.
REP. TEVES. Yeah. Pagcor is controlled under Section 27, that is on income tax. Now, we are
talking here on value-added tax. Do you mean to say we are going to amend it from income
tax to value-added tax, as far as Pagcor is concerned?
THE CHAIRMAN (SEN. RECTO). No. We are just amending that section with regard to the
exemption from income tax of Pagcor.
xxxx
REP. NOGRALES. Mr. Chairman, Mr. Chairman. Mr. Chairman.
THE CHAIRMAN (REP. LAPUS). Congressman Nograles.
REP. NOGRALES. Just a point of inquiry from the Chair. What exactly are the functions of Pagcor
that are VATable? What will we VAT in Pagcor?
THE CHAIRMAN (REP. LAPUS). This is on own income tax. This is Pagcor income tax.
REP. NOGRALES. No, that's why. Anong i-va-Vat natin sa kanya. Sale of what?
xxxx
REP. VILLAFUERTE. Mr. Chairman, my question is, what are we VATing Pagcor with, is it the . . .
REP. NOGRALES. Mr. Chairman, this is a secret agreement or the way they craft their contract,
which basis?
THE CHAIRMAN (SEN. RECTO). Congressman Nograles, the Senate version does not discuss
a VAT on Pagcor but it just takes away their exemption from non-payment of income tax.22
Taxation is the rule and exemption is the exception.23 The burden of proof rests upon the party
claiming exemption to prove that it is, in fact, covered by the exemption so claimed.24 As a rule, tax
exemptions are construed strongly against the claimant.25 Exemptions must be shown to exist clearly
and categorically, and supported by clear legal provision.26
In this case, PAGCOR failed to prove that it is still exempt from the payment of corporate income
tax, considering that Section 1 of R.A. No. 9337 amended Section 27 (c) of the National Internal

Revenue Code of 1997 by omitting PAGCOR from the exemption. The legislative intent, as shown
by the discussions in the Bicameral Conference Meeting, is to require PAGCOR to pay corporate
income tax; hence, the omission or removal of PAGCOR from exemption from the payment of
corporate income tax. It is a basic precept of statutory construction that the express mention of one
person, thing, act, or consequence excludes all others as expressed in the familiar maxim expressio
unius est exclusio alterius.27 Thus, the express mention of the GOCCs exempted from payment of
corporate income tax excludes all others. Not being excepted, petitioner PAGCOR must be regarded
as coming within the purview of the general rule that GOCCs shall pay corporate income tax,
expressed in the maxim: exceptio firmat regulam in casibus non exceptis.28
PAGCOR cannot find support in the equal protection clause of the Constitution, as the legislative
records of the Bicameral Conference Meeting dated October 27, 1997, of the Committee on Ways
and Means, show that PAGCORs exemption from payment of corporate income tax, as provided in
Section 27 (c) of R.A. No. 8424, or the National Internal Revenue Code of 1997, was not made
pursuant to a valid classification based on substantial distinctions and the other requirements of a
reasonable classification by legislative bodies, so that the law may operate only on some, and not
all, without violating the equal protection clause. The legislative records show that the basis of the
grant of exemption to PAGCOR from corporate income tax was PAGCORs own request to be
exempted.
Petitioner further contends that Section 1 (c) of R.A. No. 9337 is null and void ab initio for violating
the non-impairment clause of the Constitution. Petitioner avers that laws form part of, and is read
into, the contract even without the parties expressly saying so. Petitioner states that the private
parties/investors transacting with it considered the tax exemptions, which inure to their benefit, as
the main consideration and inducement for their decision to transact/invest with it. Petitioner argues
that the withdrawal of its exemption from corporate income tax by R.A. No. 9337 has the effect of
changing the main consideration and inducement for the transactions of private parties with it; thus,
the amendatory provision is violative of the non-impairment clause of the Constitution.
Petitioners contention lacks merit.
The non-impairment clause is contained in Section 10, Article III of the Constitution, which provides
that no law impairing the obligation of contracts shall be passed. The non-impairment clause is
limited in application to laws that derogate from prior acts or contracts by enlarging, abridging or in
any manner changing the intention of the parties.29 There is impairment if a subsequent law changes
the terms of a contract between the parties, imposes new conditions, dispenses with those agreed
upon or withdraws remedies for the enforcement of the rights of the parties.30
As regards franchises, Section 11, Article XII of the Constitution31 provides that no franchise or right
shall be granted except under the condition that it shall be subject to amendment, alteration, or
repeal by the Congress when the common good so requires.32
In Manila Electric Company v. Province of Laguna,33 the Court held that a franchise partakes the
nature of a grant, which is beyond the purview of the non-impairment clause of the
Constitution.34 The pertinent portion of the case states:
While the Court has, not too infrequently, referred to tax exemptions contained in special franchises
as being in the nature of contracts and a part of the inducement for carrying on the franchise, these
exemptions, nevertheless, are far from being strictly contractual in nature. Contractual tax
exemptions, in the real sense of the term and where the non-impairment clause of the Constitution
can rightly be invoked, are those agreed to by the taxing authority in contracts, such as those
contained in government bonds or debentures, lawfully entered into by them under enabling laws in

which the government, acting in its private capacity, sheds its cloak of authority and waives its
governmental immunity. Truly, tax exemptions of this kind may not be revoked without impairing the
obligations of contracts. These contractual tax exemptions, however, are not to be confused with tax
exemptions granted under franchises. A franchise partakes the nature of a grant which is beyond the
purview of the non-impairment clause of the Constitution. Indeed, Article XII, Section 11, of the 1987
Constitution, like its precursor provisions in the 1935 and the 1973 Constitutions, is explicit that no
franchise for the operation of a public utility shall be granted except under the condition that such
privilege shall be subject to amendment, alteration or repeal by Congress as and when the common
good so requires.35
In this case, PAGCOR was granted a franchise to operate and maintain gambling casinos, clubs and
other recreation or amusement places, sports, gaming pools, i.e., basketball, football, lotteries, etc.,
whether on land or sea, within the territorial jurisdiction of the Republic of the Philippines.36 Under
Section 11, Article XII of the Constitution, PAGCORs franchise is subject to amendment, alteration
or repeal by Congress such as the amendment under Section 1 of R.A. No. 9377. Hence, the
provision in Section 1 of R.A. No. 9337, amending Section 27 (c) of R.A. No. 8424 by withdrawing
the exemption of PAGCOR from corporate income tax, which may affect any benefits to PAGCORs
transactions with private parties, is not violative of the non-impairment clause of the Constitution.
Anent the validity of RR No. 16-2005, the Court holds that the provision subjecting PAGCOR to 10%
VAT is invalid for being contrary to R.A. No. 9337. Nowhere in R.A. No. 9337 is it provided that
petitioner can be subjected to VAT. R.A. No. 9337 is clear only as to the removal of petitioner's
exemption from the payment of corporate income tax, which was already addressed above by this
Court.
As pointed out by the OSG, R.A. No. 9337 itself exempts petitioner from VAT pursuant to Section 7
(k) thereof, which reads:
Sec. 7. Section 109 of the same Code, as amended, is hereby further amended to read as follows:
Section 109. Exempt Transactions. - (1) Subject to the provisions of Subsection (2) hereof, the
following transactions shall be exempt from the value-added tax:
xxxx
(k) Transactions which are exempt under international agreements to which the Philippines is a
signatory or under special laws, except Presidential Decree No. 529.37
Petitioner is exempt from the payment of VAT, because PAGCORs charter, P.D. No. 1869, is a
special law that grants petitioner exemption from taxes.
Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A. No. 9337, which
retained Section 108 (B) (3) of R.A. No. 8424, thus:
[R.A. No. 9337], SEC. 6. Section 108 of the same Code (R.A. No. 8424), as amended, is hereby
further amended to read as follows:
SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties.

(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax
equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services,
including the use or lease of properties: x x x
xxxx
(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;
xxxx
(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 percent (0%) rate;
x x x x38
As pointed out by petitioner, although R.A. No. 9337 introduced amendments to Section 108 of R.A.
No. 8424 by imposing VAT on other services not previously covered, it did not amend the portion of
Section 108 (B) (3) that subjects to zero percent rate services performed by VAT-registered persons
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 0% rate.
Petitioner's exemption from VAT under Section 108 (B) (3) of R.A. No. 8424 has been thoroughly
and extensively discussed in Commissioner of Internal Revenue v. Acesite (Philippines) Hotel
Corporation.39 Acesite was the owner and operator of the Holiday Inn Manila Pavilion Hotel. It leased
a portion of the hotels premises to PAGCOR. It incurred VAT amounting to P30,152,892.02 from its
rental income and sale of food and beverages to PAGCOR from January 1996 to April 1997. Acesite
tried to shift the said taxes to PAGCOR by incorporating it in the amount assessed to PAGCOR.
However, PAGCOR refused to pay the taxes because of its tax-exempt status. PAGCOR paid only
the amount due to Acesite minus VAT in the sum of P30,152,892.02. Acesite paid VAT in the
amount ofP30,152,892.02 to the Commissioner of Internal Revenue, fearing the legal consequences
of its non-payment. In May 1998, Acesite sought the refund of the amount it paid as VAT on the
ground that its transaction with PAGCOR was subject to zero rate as it was rendered to a taxexempt entity. The Court ruled that PAGCOR and Acesite were both exempt from paying VAT, thus:
xxxx
PAGCOR is exempt from payment of indirect taxes
It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter an exemption from
the payment of taxes. Section 13 of P.D. 1869 pertinently provides:
Sec. 13. Exemptions.
xxxx
(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or form, income or otherwise,
as well as fees, charges or levies of whatever nature, whether National or Local, shall be assessed
and collected under this Franchise from the Corporation; nor shall any form of tax or charge attach in
any way to the earnings of the Corporation, except a Franchise Tax of five (5%) percent of the gross

revenue or earnings derived by the Corporation from its operation under this Franchise. Such tax
shall be due and payable quarterly to the National Government and shall be in lieu of all kinds of
taxes, levies, fees or assessments of any kind, nature or description, levied, established or collected
by any municipal, provincial, or national government authority.
(b) Others: The exemptions herein granted for earnings derived from the operations conducted
under the franchise specifically from the payment of any tax, income or otherwise, as well as any
form of charges, fees or levies, shall inure to the benefit of and extend to corporation(s),
association(s), agency(ies), or individual(s) with whom the Corporation or operator has any
contractual relationship in connection with the operations of the casino(s) authorized to be
conducted under this Franchise and to those receiving compensation or other remuneration from the
Corporation or operator as a result of essential facilities furnished and/or technical services rendered
to the Corporation or operator.
Petitioner contends that the above tax exemption refers only to PAGCOR's direct tax liability and not
to indirect taxes, like the VAT.
We disagree.
A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes with no
distinction on whether the taxes are direct or indirect. We are one with the CA ruling that PAGCOR is
also exempt from indirect taxes, like VAT, as follows:
Under the above provision [Section 13 (2) (b) of P.D. 1869], the term "Corporation" or operator refers
to PAGCOR. Although the law does not specifically mention PAGCOR's exemption from indirect
taxes, PAGCOR is undoubtedly exempt from such taxes because the law exempts from taxes
persons or entities contracting with PAGCOR in casino operations. Although, differently worded, the
provision clearly exempts PAGCOR from indirect taxes. In fact, it goes one step further by granting
tax exempt status to persons dealing with PAGCOR in casino operations. The unmistakable
conclusion is that PAGCOR is not liable for the P30, 152,892.02 VAT and neither is Acesite as the
latter is effectively subject to zero percent rate under Sec. 108 B (3), R.A. 8424. (Emphasis
supplied.)
Indeed, by extending the exemption to entities or individuals dealing with PAGCOR, the legislature
clearly granted exemption also from indirect taxes. It must be noted that the indirect tax of VAT, as in
the instant case, can be shifted or passed to the buyer, transferee, or lessee of the goods,
properties, or services subject to VAT. Thus, by extending the tax exemption to entities or
individuals dealing with PAGCOR in casino operations, it is exempting PAGCOR from being
liable to indirect taxes.
The manner of charging VAT does not make PAGCOR liable to said tax.
It is true that VAT can either be incorporated in the value of the goods, properties, or services sold or
leased, in which case it is computed as 1/11 of such value, or charged as an additional 10% to the
value. Verily, the seller or lessor has the option to follow either way in charging its clients and
customer. In the instant case, Acesite followed the latter method, that is, charging an additional 10%
of the gross sales and rentals. Be that as it may, the use of either method, and in particular, the first
method, does not denigrate the fact that PAGCOR is exempt from an indirect tax, like VAT.
VAT exemption extends to Acesite

Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by Acesite, the latter is not
liable for the payment of it as it is exempt in this particular transaction by operation of law to pay the
indirect tax. Such exemption falls within the former Section 102 (b) (3) of the 1977 Tax Code, as
amended (now Sec. 108 [b] [3] of R.A. 8424), which provides:
Section 102. Value-added tax on sale of services.- (a) Rate and base of tax - There shall be levied,
assessed and collected, a value-added tax equivalent to 10% of gross receipts derived by any
person engaged in the sale of services x x x; Provided, that the following services performed in the
Philippines by VAT registered persons shall be subject to 0%.
xxxx
(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 (0%) rate (emphasis supplied).
The rationale for the exemption from indirect taxes provided for in P.D. 1869 and the extension of
such exemption to entities or individuals dealing with PAGCOR in casino operations are best
elucidated from the 1987 case ofCommissioner of Internal Revenue v. John Gotamco & Sons,
Inc., where the absolute tax exemption of the World Health Organization (WHO) upon an
international agreement was upheld. We held in said case that the exemption of contractee WHO
should be implemented to mean that the entity or person exempt is the contractor itself who
constructed the building owned by contractee WHO, and such does not violate the rule that tax
exemptions are personal because the manifest intention of the agreement is to exempt the
contractor so that no contractor's tax may be shifted to the contractee WHO. Thus, the proviso in
P.D. 1869, extending the exemption to entities or individuals dealing with PAGCOR in casino
operations, is clearly to proscribe any indirect tax, like VAT, that may be shifted to PAGCOR.40
Although the basis of the exemption of PAGCOR and Acesite from VAT in the case of The
Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation was Section 102 (b) of
the 1977 Tax Code, as amended, which section was retained as Section 108 (B) (3) in R.A. No.
8424,41 it is still applicable to this case, since the provision relied upon has been retained in R.A. No.
9337.42
1avvphi 1

It is settled rule that in case of discrepancy between the basic law and a rule or regulation issued to
implement said law, the basic law prevails, because the said rule or regulation cannot go beyond the
terms and provisions of the basic law.43 RR No. 16-2005, therefore, cannot go beyond the provisions
of R.A. No. 9337. Since PAGCOR is exempt from VAT under R.A. No. 9337, the BIR exceeded its
authority in subjecting PAGCOR to 10% VAT under RR No. 16-2005; hence, the said regulatory
provision is hereby nullified.
WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337, amending
Section 27 (c) of the National Internal Revenue Code of 1997, by excluding petitioner Philippine
Amusement and Gaming Corporation from the enumeration of government-owned and controlled
corporations exempted from corporate income tax is valid and constitutional, while BIR Revenue
Regulations No. 16-2005 insofar as it subjects PAGCOR to 10% VAT is null and void for being
contrary to the National Internal Revenue Code of 1997, as amended by Republic Act No. 9337.
No costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 184823

October 6, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
AICHI FORGING COMPANY OF ASIA, INC., Respondent.
DECISION
DEL CASTILLO, J.:
A taxpayer is entitled to a refund either by authority of a statute expressly granting such right,
privilege, or incentive in his favor, or under the principle of solutio indebiti requiring the return of
taxes erroneously or illegally collected. In both cases, a taxpayer must prove not only his entitlement
to a refund but also his compliance with the procedural due process as non-observance of the
prescriptive periods within which to file the administrative and the judicial claims would result in the
denial of his claim.
This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside the July
30, 2008 Decision1 and the October 6, 2008 Resolution2 of the Court of Tax Appeals (CTA) En Banc.
Factual Antecedents
Respondent Aichi Forging Company of Asia, Inc., a corporation duly organized and existing under
the laws of the Republic of the Philippines, is engaged in the manufacturing, producing, and
processing of steel and its by-products.3 It is registered with the Bureau of Internal Revenue (BIR) as
a Value-Added Tax (VAT) entity4 and its products, "close impression die steel forgings" and "tool and
dies," are registered with the Board of Investments (BOI) as a pioneer status.5
On September 30, 2004, respondent filed a claim for refund/credit of input VAT for the period July 1,
2002 to September 30, 2002 in the total amount of P3,891,123.82 with the petitioner Commissioner
of Internal Revenue (CIR), through the Department of Finance (DOF) One-Stop Shop Inter-Agency
Tax Credit and Duty Drawback Center.6
Proceedings before the Second Division of the CTA
On even date, respondent filed a Petition for Review7 with the CTA for the refund/credit of the same
input VAT. The case was docketed as CTA Case No. 7065 and was raffled to the Second Division of
the CTA.
In the Petition for Review, respondent alleged that for the period July 1, 2002 to September 30,
2002, it generated and recorded zero-rated sales in the amount of P131,791,399.00,8 which was
paid pursuant to Section 106(A) (2) (a) (1), (2) and (3) of the National Internal Revenue Code of
1997 (NIRC);9 that for the said period, it incurred and paid input VAT amounting to P3,912,088.14
from purchases and importation attributable to its zero-rated sales;10and that in its application for

refund/credit filed with the DOF One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center,
it only claimed the amount of P3,891,123.82.11
In response, petitioner filed his Answer12 raising the following special and affirmative defenses, to
wit:
4. Petitioners alleged claim for refund is subject to administrative investigation by the
Bureau;
5. Petitioner must prove that it paid VAT input taxes for the period in question;
6. Petitioner must prove that its sales are export sales contemplated under Sections 106(A)
(2) (a), and 108(B) (1) of the Tax Code of 1997;
7. Petitioner must prove that the claim was filed within the two (2) year period prescribed in
Section 229 of the Tax Code;
8. 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; and
9. Claims for refund are construed strictly against the claimant for the same partake of the
nature of exemption from taxation.13
Trial ensued, after which, on January 4, 2008, the Second Division of the CTA rendered a Decision
partially granting respondents claim for refund/credit. Pertinent portions of the Decision read:
For a VAT registered entity whose sales are zero-rated, to validly claim a refund, Section 112 (A) of
the NIRC of 1997, as amended, provides:
SEC. 112. Refunds or Tax Credits of Input Tax.
(A) Zero-rated or Effectively Zero-rated Sales. Any VAT-registered person, whose sales are zerorated 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: x x x
Pursuant to the above provision, petitioner must comply with the following requisites: (1) the
taxpayer is engaged in sales which are zero-rated or effectively zero-rated; (2) the taxpayer is VATregistered; (3) the claim must be filed within two years after the close of the taxable quarter when
such sales were made; and (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.
The Court finds that the first three requirements have been complied [with] by petitioner.
With regard to the first requisite, the evidence presented by petitioner, such as the Sales Invoices
(Exhibits "II" to "II-262," "JJ" to "JJ-431," "KK" to "KK-394" and "LL") shows that it is engaged in sales
which are zero-rated.

The second requisite has likewise been complied with. The Certificate of Registration with OCN
1RC0000148499 (Exhibit "C") with the BIR proves that petitioner is a registered VAT taxpayer.
In compliance with the third requisite, petitioner filed its administrative claim for refund on September
30, 2004 (Exhibit "N") and the present Petition for Review on September 30, 2004, both within the
two (2) year prescriptive period from the close of the taxable quarter when the sales were made,
which is from September 30, 2002.
As regards, the fourth requirement, the Court finds that there are some documents and claims of
petitioner that are baseless and have not been satisfactorily substantiated.
xxxx
In sum, petitioner has sufficiently proved that it is entitled to a refund or issuance of a tax credit
certificate representing unutilized excess input VAT payments for the period July 1, 2002 to
September 30, 2002, which are attributable to its zero-rated sales for the same period, but in the
reduced amount of P3,239,119.25, computed as follows:
Amount of Claimed Input VAT
Less:
Exceptions as found by the ICPA

P 3,891,123.82

Net Creditable Input VAT

Less:
Output VAT Due
Excess Creditable Input VAT

P 3,850,103.45

41,020.37

610,984.20
P 3,239,119.25

WHEREFORE, premises considered, the present Petition for Review is PARTIALLY GRANTED.
Accordingly, respondent is hereby ORDERED TO REFUND OR ISSUE A TAX CREDIT
CERTIFICATE in favor of petitioner [in] the reduced amount of THREE MILLION TWO HUNDRED
THIRTY NINE THOUSAND ONE HUNDRED NINETEEN AND 25/100 PESOS (P3,239,119.25),
representing the unutilized input VAT incurred for the months of July to September 2002.
SO ORDERED.14
Dissatisfied with the above-quoted Decision, petitioner filed a Motion for Partial
Reconsideration,15 insisting that the administrative and the judicial claims were filed beyond the twoyear period to claim a tax refund/credit provided for under Sections 112(A) and 229 of the NIRC. He
reasoned that since the year 2004 was a leap year, the filing of the claim for tax refund/credit on
September 30, 2004 was beyond the two-year period, which expired on September 29, 2004.16 He
cited as basis Article 13 of the Civil Code,17 which provides that when the law speaks of a year, it is
equivalent to 365 days. In addition, petitioner argued that the simultaneous filing of the
administrative and the judicial claims contravenes Sections 112 and 229 of the NIRC.18 According to
the petitioner, a prior filing of an administrative claim is a "condition precedent"19 before a judicial
claim can be filed. He explained that the rationale of such requirement rests not only on the doctrine
of exhaustion of administrative remedies but also on the fact that the CTA is an appellate body which
exercises the power of judicial review over administrative actions of the BIR. 20
The Second Division of the CTA, however, denied petitioners Motion for Partial Reconsideration for
lack of merit. Petitioner thus elevated the matter to the CTA En Banc via a Petition for Review.21

Ruling of the CTA En Banc

On July 30, 2008, the CTA En Banc affirmed the Second Divisions Decision allowing the partial tax
refund/credit in favor of respondent. However, as to the reckoning point for counting the two-year
period, the CTA En Banc ruled:
Petitioner argues that the administrative and judicial claims were filed beyond the period allowed by
law and hence, the honorable Court has no jurisdiction over the same. In addition, petitioner further
contends that respondent's filing of the administrative and judicial [claims] effectively eliminates the
authority of the honorable Court to exercise jurisdiction over the judicial claim.
We are not persuaded.
Section 114 of the 1997 NIRC, and We quote, to wit:
SEC. 114. Return and Payment of Value-added Tax.
(A) In General. Every person liable to pay the value-added tax imposed under this Title shall file a
quarterly return of the amount of his gross sales or receipts within twenty-five (25) days following the
close of each taxable quarter prescribed for each taxpayer: Provided, however, That VAT-registered
persons shall pay the value-added tax on a monthly basis.
[x x x x ]
Based on the above-stated provision, a taxpayer has twenty five (25) days from the close of each
taxable quarter within which to file a quarterly return of the amount of his gross sales or receipts. In
the case at bar, the taxable quarter involved was for the period of July 1, 2002 to September 30,
2002. Applying Section 114 of the 1997 NIRC, respondent has until October 25, 2002 within which to
file its quarterly return for its gross sales or receipts [with] which it complied when it filed its VAT
Quarterly Return on October 20, 2002.
In relation to this, the reckoning of the two-year period provided under Section 229 of the 1997 NIRC
should start from the payment of tax subject claim for refund. As stated above, respondent filed its
VAT Return for the taxable third quarter of 2002 on October 20, 2002. Thus, respondent's
administrative and judicial claims for refund filed on September 30, 2004 were filed on time because
AICHI has until October 20, 2004 within which to file its claim for refund.
In addition, We do not agree with the petitioner's contention that the 1997 NIRC requires the
previous filing of an administrative claim for refund prior to the judicial claim. This should not be the
case as the law does not prohibit the simultaneous filing of the administrative and judicial claims for
refund. What is controlling is that both claims for refund must be filed within the two-year prescriptive
period.
In sum, the Court En Banc finds no cogent justification to disturb the findings and conclusion spelled
out in the assailed January 4, 2008 Decision and March 13, 2008 Resolution of the CTA Second
Division. What the instant petition seeks is for the Court En Banc to view and appreciate the
evidence in their own perspective of things, which unfortunately had already been considered and
passed upon.
WHEREFORE, the instant Petition for Review is hereby DENIED DUE COURSE and DISMISSED
for lack of merit. Accordingly, the January 4, 2008 Decision and March 13, 2008 Resolution of the

CTA Second Division in CTA Case No. 7065 entitled, "AICHI Forging Company of Asia, Inc.
petitioner vs. Commissioner of Internal Revenue, respondent" are hereby AFFIRMED in toto.
SO ORDERED.22
Petitioner sought reconsideration but the CTA En Banc denied23 his Motion for Reconsideration.
Issue
Hence, the present recourse where petitioner interposes the issue of whether respondents judicial
and administrative claims for tax refund/credit were filed within the two-year prescriptive period
provided in Sections 112(A) and 229 of
the NIRC.24
Petitioners Arguments
Petitioner maintains that respondents administrative and judicial claims for tax refund/credit were
filed in violation of Sections 112(A) and 229 of the NIRC.25 He posits that pursuant to Article 13 of the
Civil Code,26 since the year 2004 was a leap year, the filing of the claim for tax refund/credit on
September 30, 2004 was beyond the two-year period, which expired on September 29, 2004.27
Petitioner further argues that the CTA En Banc erred in applying Section 114(A) of the NIRC in
determining the start of the two-year period as the said provision pertains to the compliance
requirements in the payment of VAT.28 He asserts that it is Section 112, paragraph (A), of the same
Code that should apply because it specifically provides for the period within which a claim for tax
refund/ credit should be made.29
Petitioner likewise puts in issue the fact that the administrative claim with the BIR and the judicial
claim with the CTA were filed on the same day.30 He opines that the simultaneous filing of the
administrative and the judicial claims contravenes Section 229 of the NIRC, which requires the prior
filing of an administrative claim.31 He insists that such procedural requirement is based on the
doctrine of exhaustion of administrative remedies and the fact that the CTA is an appellate body
exercising judicial review over administrative actions of the CIR.32
Respondents Arguments
For its part, respondent claims that it is entitled to a refund/credit of its unutilized input VAT for the
period July 1, 2002 to September 30, 2002 as a matter of right because it has substantially complied
with all the requirements provided by law.33 Respondent likewise defends the CTA En Banc in
applying Section 114(A) of the NIRC in computing the prescriptive period for the claim for tax
refund/credit. Respondent believes that Section 112(A) of the NIRC must be read together with
Section 114(A) of the same Code.34
As to the alleged simultaneous filing of its administrative and judicial claims, respondent contends
that it first filed an administrative claim with the One-Stop Shop Inter-Agency Tax Credit and Duty
Drawback Center of the DOF before it filed a judicial claim with the CTA.35 To prove this, respondent
points out that its Claimant Information Sheet No. 4970236 and BIR Form No. 1914 for the third
quarter of 2002,37 which were filed with the DOF, were attached as Annexes "M" and "N,"
respectively, to the Petition for Review filed with the CTA.38 Respondent further contends that the
non-observance of the 120-day period given to the CIR to act on the claim for tax refund/credit in

Section 112(D) is not fatal because what is important is that both claims are filed within the two-year
prescriptive period.39 In support thereof, respondent cites Commissioner of Internal Revenue v.
Victorias Milling Co., Inc.40 where it was ruled that "[i]f, however, the [CIR] takes time in deciding the
claim, and the period of two years is about to end, the suit or proceeding must be started in the
[CTA] before the end of the two-year period without awaiting the decision of the [CIR]."41 Lastly,
respondent argues that even if the period had already lapsed, it may be suspended for reasons of
equity considering that it is not a jurisdictional requirement.42
Our Ruling
The petition has merit.
Unutilized input VAT must be claimed within two years after the close of the taxable quarter when
the sales were made
In computing the two-year prescriptive period for claiming a refund/credit of unutilized input VAT, the
Second Division of the CTA applied Section 112(A) of the NIRC, which states:
SEC. 112. Refunds or Tax Credits of Input Tax.
(A) Zero-rated or Effectively Zero-rated Sales Any VAT-registered person, whose sales are zerorated 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. (Emphasis supplied.)
The CTA En Banc, on the other hand, took into consideration Sections 114 and 229 of the NIRC,
which read:
SEC. 114. Return and Payment of Value-Added Tax.
(A) In General. Every person liable to pay the value-added tax imposed under this Title shall file a
quarterly return of the amount of his gross sales or receipts within twenty-five (25) days following the
close of each taxable quarter prescribed for each taxpayer: Provided, however, That VAT-registered
persons shall pay the value-added tax on a monthly basis.
Any person, whose registration has been cancelled in accordance with Section 236, shall file a
return and pay the tax due thereon within twenty-five (25) days from the date of cancellation of
registration: Provided, That only one consolidated return shall be filed by the taxpayer for his
principal place of business or head office and all branches.
xxxx
SEC. 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 filed 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. (Emphasis supplied.)
Hence, the CTA En Banc ruled that the reckoning of the two-year period for filing a claim for
refund/credit of unutilized input VAT should start from the date of payment of tax and not from the
close of the taxable quarter when the sales were made.43
The pivotal question of when to reckon the running of the two-year prescriptive period, however, has
already been resolved in Commissioner of Internal Revenue v. Mirant Pagbilao Corporation,44 where
we ruled that Section 112(A) of the NIRC is the applicable provision in determining the start of the
two-year period for claiming a refund/credit of unutilized input VAT, and that Sections 204(C) and
229 of the NIRC are inapplicable as "both provisions apply only to instances of erroneous payment
or illegal collection of internal revenue taxes."45 We explained that:
The above proviso [Section 112 (A) of the NIRC] clearly provides in no uncertain terms
that unutilized input VAT payments not otherwise used for any internal revenue tax due the
taxpayer must be claimed within two years reckoned from the close of the taxable quarter
when the relevant sales were made pertaining to the input VAT regardless of whether said tax
was paid or not. As the CA aptly puts it, albeit it erroneously applied the aforequoted Sec. 112 (A),
"[P]rescriptive period commences from the close of the taxable quarter when the sales were made
and not from the time the input VAT was paid nor from the time the official receipt was issued." Thus,
when a zero-rated VAT taxpayer pays its input VAT a year after the pertinent transaction, said
taxpayer only has a year to file a claim for refund or tax credit of the unutilized creditable input VAT.
The reckoning frame would always be the end of the quarter when the pertinent sales or transaction
was made, regardless when the input VAT was paid. Be that as it may, and given that the last
creditable input VAT due for the period covering the progress billing of September 6, 1996 is the
third quarter of 1996 ending on September 30, 1996, any claim for unutilized creditable input VAT
refund or tax credit for said quarter prescribed two years after September 30, 1996 or, to be precise,
on September 30, 1998. Consequently, MPCs claim for refund or tax credit filed on December 10,
1999 had already prescribed.
Reckoning for prescriptive period under
Secs. 204(C) and 229 of the NIRC inapplicable
To be sure, MPC cannot avail itself of the provisions of either Sec. 204(C) or 229 of the NIRC which,
for the purpose of refund, prescribes a different starting point for the two-year prescriptive limit for
the filing of a claim therefor. Secs. 204(C) and 229 respectively provide:
Sec. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. The
Commissioner may
xxxx

(c) Credit or refund taxes erroneously or illegally received or penalties imposed without authority,
refund the value of internal revenue stamps when they are returned in good condition by the
purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit
for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties
shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or
refund within two (2) years after the payment of the tax or penalty: Provided, however, That a return
filed showing an overpayment shall be considered as a written claim for credit or refund.
xxxx
Sec. 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, of any sum alleged to have been excessively or in any manner wrongfully
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 filed 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 a 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.
Notably, the above provisions also set a two-year prescriptive period, reckoned from date of
payment of the tax or penalty, for the filing of a claim of refund or tax credit. Notably too, both
provisions apply only to instances of erroneous payment or illegal collection of internal
revenue taxes.
MPCs creditable input VAT not erroneously paid
For perspective, under Sec. 105 of the NIRC, creditable input VAT is an indirect tax which can be
shifted or passed on to the buyer, transferee, or lessee of the goods, properties, or services of the
taxpayer. The fact that the subsequent sale or transaction involves a wholly-tax exempt client,
resulting in a zero-rated or effectively zero-rated transaction, does not, standing alone, deprive the
taxpayer of its right to a refund for any unutilized creditable input VAT, albeit the erroneous, illegal,
or wrongful payment angle does not enter the equation.
xxxx
Considering the foregoing discussion, it is clear that Sec. 112 (A) of the NIRC, providing a twoyear prescriptive period reckoned from the close of the taxable quarter when the relevant
sales or transactions were made pertaining to the creditable input VAT, applies to the instant
case, and not to the other actions which refer to erroneous payment of taxes.46 (Emphasis
supplied.)
In view of the foregoing, we find that the CTA En Banc erroneously applied Sections 114(A) and 229
of the NIRC in computing the two-year prescriptive period for claiming refund/credit of unutilized
input VAT. To be clear, Section 112 of the NIRC is the pertinent provision for the refund/credit of
input VAT. Thus, the two-year period should be reckoned from the close of the taxable quarter when
the sales were made.

The administrative claim was timely filed

Bearing this in mind, we shall now proceed to determine whether the administrative claim was timely
filed.
Relying on Article 13 of the Civil Code,47 which provides that a year is equivalent to 365 days, and
taking into account the fact that the year 2004 was a leap year, petitioner submits that the two-year
period to file a claim for tax refund/ credit for the period July 1, 2002 to September 30, 2002 expired
on September 29, 2004.48
We do not agree.
In Commissioner of Internal Revenue v. Primetown Property Group, Inc.,49 we said that as between
the Civil Code, which provides that a year is equivalent to 365 days, and the Administrative Code of
1987, which states that a year is composed of 12 calendar months, it is the latter that must prevail
following the legal maxim, Lex posteriori derogat priori.50 Thus:
Both Article 13 of the Civil Code and Section 31, Chapter VIII, Book I of the Administrative Code of
1987 deal with the same subject matter the computation of legal periods. Under the Civil Code, a
year is equivalent to 365 days whether it be a regular year or a leap year. Under the Administrative
Code of 1987, however, a year is composed of 12 calendar months. Needless to state, under the
Administrative Code of 1987, the number of days is irrelevant.
There obviously exists a manifest incompatibility in the manner of
computing legal periods under the Civil Code and the Administrative Code of 1987. For this reason,
we hold that Section 31, Chapter VIII, Book I of the Administrative Code of 1987, being the more
recent law, governs the computation of legal periods. Lex posteriori derogat priori.
Applying Section 31, Chapter VIII, Book I of the Administrative Code of 1987 to this case, the twoyear prescriptive period (reckoned from the time respondent filed its final adjusted return on April 14,
1998) consisted of 24 calendar months, computed as follows:
Year 1 1st calendar month April 15, 1998 to May 14, 1998
2nd calendar month May 15, 1998 to June 14, 1998
3rd calendar month June 15, 1998 to July 14, 1998
4th calendar month July 15, 1998 to August 14, 1998
5th calendar month August 15, 1998 to September 14, 1998
6th calendar month September 15, 1998 to October 14, 1998
7th calendar month October 15, 1998 to November 14, 1998
8th calendar month November 15, 1998 to December 14, 1998
9th calendar month December 15, 1998 to January 14, 1999
10th calendar month January 15, 1999 to February 14, 1999
11th calendar month February 15, 1999 to March 14, 1999

12th calendar month March 15, 1999 to April 14, 1999

Year 2 13th calendar month April 15, 1999 to May 14, 1999
14th calendar month May 15, 1999 to June 14, 1999
15th calendar month June 15, 1999 to July 14, 1999
16th calendar month July 15, 1999 to August 14, 1999
17th calendar month August 15, 1999 to September 14, 1999
18th calendar month September 15, 1999 to October 14, 1999
19th calendar month October 15, 1999 to November 14, 1999
20th calendar month November 15, 1999 to December 14, 1999
21st calendar month December 15, 1999 to January 14, 2000
22nd calendar month January 15, 2000 to February 14, 2000
23rd calendar month February 15, 2000 to March 14, 2000
24th calendar month March 15, 2000 to April 14, 2000
We therefore hold that respondent's petition (filed on April 14, 2000) was filed on the last day of the
24th calendar month from the day respondent filed its final adjusted return. Hence, it was filed within
the reglementary period.51
Applying this to the present case, the two-year period to file a claim for tax refund/credit for the
period July 1, 2002 to September 30, 2002 expired on September 30, 2004. Hence, respondents
administrative claim was timely filed.
The filing of the judicial claim was premature
However, notwithstanding the timely filing of the administrative claim, we
are constrained to deny respondents claim for tax refund/credit for having been filed in violation of
Section 112(D) of the NIRC, which provides that:
SEC. 112. Refunds or Tax Credits of Input Tax.
xxxx
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. In proper cases, the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within
one hundred twenty (120) days from the date of submission of complete documents in support of the
application filed in accordance with Subsections (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the period prescribed above, the taxpayer affected
may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration
of the one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax
Appeals. (Emphasis supplied.)

Section 112(D) of the NIRC clearly provides that the CIR has "120 days, from the date of the
submission of the complete documents in support of the application [for tax refund/credit]," within
which to grant or deny the claim. In case of full or partial denial by the CIR, the taxpayers recourse
is to file an appeal before the CTA within 30 days from receipt of the decision of the CIR. However, if
after the 120-day period the CIR fails to act on the application for tax refund/credit, the remedy of the
taxpayer is to appeal the inaction of the CIR to CTA within 30 days.
In this case, the administrative and the judicial claims were simultaneously filed on September 30,
2004. Obviously, respondent did not wait for the decision of the CIR or the lapse of the 120-day
period. For this reason, we find the filing of the judicial claim with the CTA premature.
Respondents assertion that the non-observance of the 120-day period is not fatal to the filing of a
judicial claim as long as both the administrative and the judicial claims are filed within the two-year
prescriptive period52 has no legal basis.
There is nothing in Section 112 of the NIRC to support respondents view. Subsection (A) of the said
provision states that "any VAT-registered person, whose sales are zero-rated or effectively zerorated may, within two 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." The phrase "within two (2) years x x x apply for the issuance of a tax credit certificate or
refund" refers to applications for refund/credit filed with the CIR and not to appeals made to the CTA.
This is apparent in the first paragraph of subsection (D) of the same provision, which states that the
CIR has "120 days from the submission of complete documents in support of the application filed in
accordance with Subsections (A) and (B)" within which to decide on the claim.
In fact, applying the two-year period to judicial claims would render nugatory Section 112(D) of the
NIRC, which already provides for a specific period within which a taxpayer should appeal the
decision or inaction of the CIR. The second paragraph of Section 112(D) of the NIRC envisions two
scenarios: (1) when a decision is issued by the CIR before the lapse of the 120-day period; and (2)
when no decision is made after the 120-day period. In both instances, the taxpayer has 30 days
within which to file an appeal with the CTA. As we see it then, the 120-day period is crucial in filing
an appeal with the CTA.
With regard to Commissioner of Internal Revenue v. Victorias Milling, Co., Inc.53 relied upon by
respondent, we find the same inapplicable as the tax provision involved in that case is Section 306,
now Section 229 of the NIRC. And as already discussed, Section 229 does not apply to
refunds/credits of input VAT, such as the instant case.
In fine, the premature filing of respondents claim for refund/credit of input VAT before the CTA
warrants a dismissal inasmuch as no jurisdiction was acquired by the CTA.
WHEREFORE, the Petition is hereby GRANTED. The assailed July 30, 2008 Decision and the
October 6, 2008 Resolution of the Court of Tax Appeals are hereby REVERSED and SET ASIDE.
The Court of Tax Appeals Second Division is DIRECTED to dismiss CTA Case No. 7065 for having
been prematurely filed.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 158885

April 2, 2009

FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, REGIONAL DIRECTOR, REVENUE REGION NO. 8,
CHIEF, ASSESSMENT DIVISION, REVENUE REGION NO. 8, BIR, Respondents.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 170680

April 2, 2009

FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE and REVENUE DISTRICT OFFICER, REVENUE
DISTRICT NO. 44, TAGUIG and PATEROS, BUREAU OF INTERNAL REVENUE, Respondents.
DECISION
TINGA, J.:
The value-added tax (VAT) system was first introduced in the Philippines on 1 January 1988, with
the tax imposable on "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."1 The first VAT law is found in Executive Order No. 273 (E.O. 273), which amended several
provisions of the then National Internal Revenue Code of 1986 (Old NIRC). E.O. No. 273 likewise
accommodated the potential burdens of the shift to the VAT system by allowing newly liable VATregistered persons to avail of a transitional input tax credit, as provided for in Section 105 of the old
NIRC, as amended by E.O. No. 273. Said Section 105 is quoted, thus:
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.2
There are other measures contained in E.O. No. 273 which were similarly intended to ease the shift
to the VAT system. These measures also took the form of "transitional input taxes which can be
credited against output tax,"3and are found in Section 25 of E.O. No. 273, the section entitled
"Transitory Provisions." Said transitory provisions, which were never incorporated in the Old NIRC,
read:
Sec. 25. Transitory provisions. (a) All VAT-registered persons shall be allowed transitional input
taxes which can be credited against output tax in the same manner as provided in Sections 104 of
the National Internal Revenue Code as follows:

1) The balance of the deferred sales tax credit account as of December 31, 1987 which are
accounted for in accordance with regulations prescribed therefor;
2) A presumptive input tax equivalent to 8% of the value of the inventory as of December 31,
1987 of materials and supplies which are not for sale, the tax on which was not taken up or
claimed as deferred sales tax credit; and
3) A presumptive input tax equivalent to 8% of the value of the inventory as of December 31,
1987 as goods for sale, the tax on which was not taken up or claimed as deferred sales tax
credit.
Tax credit prescribed in paragraphs (2) and (3) above shall be allowed only to a VAT-registered
person who files an inventory of the goods referred to in said paragraphs as provided in regulations.
(b) Any unused tax credit certificate issued prior to January 1, 1988 for excess tax credits which are
applicable against advance sales tax shall be surrendered to, and replaced by the Commissioner
with new tax credit certificates which can be used in payment for value-added tax liabilities.
(c) Any person already engaged in business whose gross sales or receipts for a 12-month period
from September 1, 1986 to August 1, 1987, exceed the amount of P200,000.00, or any person who
has been in business for less than 12 months as of August 1, 1987 but expects his gross sales or
receipts to exceed P200,000 on or before December 31, 1987, shall apply for registration on or
before October 29, 1987.4
On 1 January 1996, Republic Act (Rep. Act) No. 7716 took effect.5 It amended provisions of the Old
NIRC principally by restructuring the VAT system. It was under Rep. Act No. 7716 that VAT was
imposed for the first time on the sale of real properties. This was accomplished by amending Section
100 of the NIRC to include "real properties" among the "goods or properties," the sale, barter or
exchange of which is made subject to VAT. The relevant portions of Section 100, as amended by
Rep. Act No. 7716, thus read:
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.
(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; xxx6
The provisions of Section 105 of the NIRC, on the transitional input tax credit, had remained intact
despite the enactment of Rep. Act No. 7716. Said provisions would however be amended following
the passage of the new National Internal Revenue Code of 1997 (New NIRC), also officially known
as Rep Act No. 8424. The section on the transitional input tax credit was renumbered from Section
105 of the Old NIRC to Section 111(A) of the New NIRC. The new amendments on the transitional
input tax credit are relatively minor, hardly material to the case at bar. They are highlighted below for
easy reference:

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 eight percent (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.7 (Emphasis supplied).
Rep. Act No. 8424 also made part of the NIRC, for the first time, the concept of "presumptive input
tax credits," with Section 111(b) of the New NIRC providing as follows:
(B) Presumptive Input Tax Credits. (1) Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing
refined sugar and cooking oil, shall be allowed a presumptive input tax, creditable against the output
tax, equivalent to one and one-half percent (1 1/2%) of the gross value in money of their purchases
of primary agricultural products which are used as inputs to their production.
As used in this Subsection, the term 'processing' shall mean pasteurization, canning and activities
which through physical or chemical process alter the exterior texture or form or inner substance of a
product in such manner as to prepare it for special use to which it could not have been put in its
original form or condition.
(2) Public works contractors shall be allowed a presumptive input tax equivalent to one and one-half
percent (1 1/2%) of the contract price with respect to government contracts only in lieu of actual
input taxes therefrom.8
What we have explained above are the statutory antecedents that underlie the present petitions for
review. We now turn to the factual antecedents.
I.
Petitioner Fort Bonifacio Development Corporation (FBDC) is engaged in the development and sale
of real property. On 8 February 1995, FBDC acquired by way of sale from the national government,
a vast tract of land that formerly formed part of the Fort Bonifacio military reservation, located in what
is now the Fort Bonifacio Global City (Global City) in Taguig City.9 Since the sale was consummated
prior to the enactment of Rep. Act No. 7716, no VAT was paid thereon. FBDC then proceeded to
develop the tract of land, and from October, 1966 onwards it has been selling lots located in the
Global City to interested buyers.10
Following the effectivity of Rep. Act No. 7716, real estate transactions such as those regularly
engaged in by FBDC have since been made subject to VAT. As the vendor, FBDC from thereon has
become obliged to remit to the Bureau of Internal Revenue (BIR) output VAT payments it received
from the sale of its properties to the Bureau of Internal Revenue (BIR). FBDC likewise invoked its
right to avail of the transitional input tax credit and accordingly submitted an inventory list of real
properties it owned, with a total book value of P71,227,503,200.00.11
On 14 October 1996, FBDC executed in favor of Metro Pacific Corporation two (2) contracts to sell,
separately conveying two (2) parcels of land within the Global City in consideration of the purchase

prices atP1,526,298,949.00 and P785,009,018.00, both payable in installments.12 For the fourth
quarter of 1996, FBDC earned a total of P3,498,888,713.60 from the sale of its lots, on which the
output VAT payable to the BIR wasP318,080,792.14. In the context of remitting its output VAT
payments to the BIR, FBDC paid a total ofP269,340,469.45 and utilized (a) P28,413,783.00
representing a portion of its then total transitional/presumptive input tax credit of P5,698,200,256.00,
which petitioner allocated for the two (2) lots sold to Metro Pacific; and (b) its regular input tax credit
of P20,326,539.69 on the purchase of goods and services.13
Between July and October 1997, FBDC sent two (2) letters to the BIR requesting appropriate action
on whether its use of its presumptive input VAT on its land inventory, to the extent
of P28,413,783.00 in partial payment of its output VAT for the fourth quarter of 1996, was in order.
After investigating the matter, the BIR recommended that the claimed presumptive input tax credit be
disallowed.14 Consequently, the BIR issued to FBDC a Pre-Assessment Notice (PAN) dated 23
December 1997 for deficiency VAT for the 4th quarter of 1996. This was followed by a letter of
respondent Commissioner of Internal Revenue (CIR),15 addressed to and received by FBDC on 5
March 1998, disallowing the 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).
Section 4.105-1 of RR 7-95 provided the basis in main for the CIRs opinion, the section reading,
thus:
Sec. 4.105-1. Transitional input tax on beginning inventories. Taxpayers who became VATregistered persons upon effectivity of RA No. 7716 who have exceeded the minimum turnover
of P500,000.00 or who voluntarily register even if their turnover does not exceed P500,000.00 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 taxpayers 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.
The CIR likewise cited from the Transitory Provisions of RR 7-95, particularly the following:
(a) Presumptive Input Tax Credits xxx
(iii) For real estate dealers, the presumptive input tax of 8% of the book value of improvements on or
after January 1, 1988 (the effectivity of E.O. 273) shall be allowed.
For purposes of sub-paragraphs (i), (ii) and (iii) above, an inventory as of December 31, 1995 of
such goods or properties and improvements showing the quantity, description and amount filed with
the RDO not later than Janaury 31, 1996.
xxx

Consequently, FBDC received an Assessment Notice in the amount of P45,188,708.08,

representing deficiency VAT for the 4th quarter of 1996, including surcharge, interest and penalty.
After respondent Regional Director denied FBDCs motion for reconsideration/protest, FBDC filed a
petition for review with the Court of Tax Appeals (CTA), docketed as C.T.A. Case No. 5665.16 On 11
August 2000, the CTA rendered a decision affirming the assessment made by the
respondents.17 FBDC assailed the CTA decision through a petition for review filed with the Court of
Appeals, docketed as CA-G.R. SP No. 60477. On 15 November 2002, the Court of Appeals
rendered a decision affirming the CTA decision, but removing the surcharge, interests and penalties,
thus reducing the amount due toP28,413,783.00.18 From said decision, FBDC filed a petition for
review with this Court, the first of the two petitions now before us, seeking the reversal of the CTA
decision dated 11 August 2000 and a pronouncement that FBDC is entitled to the
transitional/presumptive input tax credit of P28,413,783.00. This petition has been docketed as G.R.
No. 158885.
The second petition, which is docketed as G.R. No. 170680, involves the same parties and legal
issues, but concerns the claim of FBDC that it is entitled to claim a similar transitional/presumptive
input tax credit, this time for the third quarter of 1997. A brief recital of the anteceding facts
underlying this second claim is in order.
For the third quarter of 1997, FBDC derived the total amount of P3,591,726,328.11 from its sales
and lease of lots, on which the output VAT payable to the BIR was P359,172,632.81.19 Accordingly,
FBDC made cash payments totaling P347,741,695.74 and utilized its regular input tax credit
of P19,743,565.73 on purchases of goods and services.20 On 11 May 1999, FBDC filed with the BIR
a claim for refund of the amount of P347,741,695.74 which it had paid as VAT for the third quarter of
1997.21 No action was taken on the refund claim, leading FBDC to file a petition for review with the
CTA, docketed as CTA Case No. 5926. Utilizing the same valuation22 of 8% of the total book value of
its beginning inventory of real properties (or P71,227,503,200.00) FBDC argued that its input tax
credit was more than enough to offset the VAT paid by it for the third quarter of 1997.23
On 17 October 2000, the CTA promulgated its decision24 in CTA Case No. 5926, denying the claim
for refund. FBDC then filed a petition for review with the Court of Appeals, docketed as CA-G.R. SP
No. 61517. On 3 October 2003, the Court of Appeals rendered a decision25 affirming the judgment of
the CTA. As a result, FBDC filed its second petition, docketed as G.R. No. 170680.
II.
The two petitions were duly consolidated26 and called for oral argument on 18 April 2006. During the
oral arguments, the parties were directed to discuss the following issues:
1. In determining the 10% value-added tax in Section 100 of the [Old NIRC] on the sale of
real properties by real estate dealers, is the 8% transitional input tax credit in Section 105
applied only to the improvements on the real property or is it applied on the value of the
entire real property?
2. Are Section 4.105.1 and paragraph (a)(III) of the Transitory Provisions of Revenue
Regulations No. 7-95 valid in limiting the 8% transitional input tax to the improvements on the
real property?
While the two issues are linked, the main issue is evidently whether Section 105 of the Old NIRC
may be interpreted in such a way as to restrict its application in the case of real estate dealers only
to the improvements on the real property belonging to their beginning inventory, and not the entire
real property itself. There would be no controversy before us if the Old NIRC had itself supplied that

limitation, yet the law is tellingly silent in that regard. RR 7-95, which imposes such restrictions on
real estate dealers, is discordant with the Old NIRC, so it is alleged.
III.
On its face, there is nothing in Section 105 of the Old NIRC that prohibits the inclusion of real
properties, together with the improvements thereon, in the beginning inventory of goods, materials
and supplies, based on which inventory the transitional input tax credit is computed. It can be
conceded that when it was drafted Section 105 could not have possibly contemplated concerns
specific to real properties, as real estate transactions were not originally subject to VAT. At the same
time, when transactions on real properties were finally made subject to VAT beginning with Rep. Act
No. 7716, no corresponding amendment was adopted as regards Section 105 to provide for a
differentiated treatment in the application of the transitional input tax credit with respect to real
properties or real estate dealers.
It was Section 100 of the Old NIRC, as amended by Rep. Act No. 7716, which made real estate
transactions subject to VAT for the first time. Prior to the amendment, Section 100 had imposed the
VAT "on every sale, barter or exchange of goods," without however specifying the kind of properties
that fall within or under the generic class "goods" subject to the tax.
Rep. Act No. 7716, which significantly is also known as the Expanded Value-Added Tax (EVAT) law,
expanded the coverage of the VAT by amending Section 100 of the Old NIRC in several respects,
some of which we will enumerate. First, it made every sale, barter or exchange of "goods or
properties" subject to VAT.27 Second, it generally defined "goods or properties" as "all tangible and
intangible objects which are capable of pecuniary estimation."28 Third, it included a non-exclusive
enumeration of various objects that fall under the class "goods or properties" subject to VAT,
including "[r]eal properties held primarily for sale to customers or held for lease in the ordinary
course of trade or business."29
From these amendments to Section 100, is there any differentiated VAT treatment on real properties
or real estate dealers that would justify the suggested limitations on the application of the transitional
input tax on them? We see none.
Rep. Act No. 7716 clarifies that it is the real properties "held primarily for sale to customers or held
for lease in the ordinary course of trade or business" that are subject to the VAT, and not when the
real estate transactions are engaged in by persons who do not sell or lease properties in the
ordinary course of trade or business. It is clear that those regularly engaged in the real estate
business are accorded the same treatment as the merchants of other goods or properties available
in the market. In the same way that a milliner considers hats as his goods and a rancher considers
cattle as his goods, a real estate dealer holds real property, whether or not it contains improvements,
as his goods.
Had Section 100 itself supplied any differentiation between the treatment of real properties or real
estate dealers and the treatment of the transactions involving other commercial goods, then such
differing treatment would have constituted the statutory basis for the CIR to engage in such
differentiation which said respondent did seek to accomplish in this case through Section 4.105-1 of
RR 7-95. Yet the amendments introduced by Rep. Act No. 7716 to Section 100, coupled with the
fact that the said law left Section 105 intact, reveal the lack of any legislative intention to make
persons or entities in the real estate business subject to a VAT treatment different from those
engaged in the sale of other goods or properties or in any other commercial trade or business.

If the plain text of Rep. Act No. 7716 fails to supply any apparent justification for limiting the
beginning inventory of real estate dealers only to the improvements on their properties, how then
were the CIR and the courts a quo able to justify such a view?
IV.
The fact alone that the denial of FBDCs claims is in accord with Section 4.105-1 of RR 7-95 does
not, of course, put this inquiry to rest. If Section 4.105-1 is itself incongruent to Rep. Act No. 7716,
the incongruence cannot by itself justify the denial of the claims. We need to inquire into the
rationale behind Section 4.105-1, as well as the question whether the interpretation of the law
embodied therein is validated by the law itself.
The CTA, in its rulings, proceeded from a thesis which is not readily apparent from the texts of the
laws we have cited. The transitional input tax credit is conditioned on the prior payment of sales
taxes or the VAT, so the CTA observed. The introduction of the VAT through E.O. No. 273 and its
subsequent expansion through Rep. Act No. 7716 subjected various persons to the tax for the very
first time, leaving them unable to claim the input tax credit based on their purchases before they
became subject to the VAT. Hence, the transitional input tax credit was designed to alleviate that
relatively iniquitous loss. Given that rationale, according to the CTA, it would be improper to allow
FBDC, which had acquired its properties through a tax-free purchase, to claim the transitional input
tax credit. The CTA added that Section 105.4.1 of RR 7-95 is consonant with its perceived rationale
behind the transitional input tax credit since the materials used for the construction of improvements
would have most likely involved the payment of VAT on their purchase.
Concededly, this theory of the CTA has some sense, extravagantly extrapolated as it is though from
the seeming silence on the part of the provisions of the law. Yet ultimately, the theory is woefully
limited in perspective.
It is correct, as pointed out by the CTA, that upon the shift from sales taxes to VAT in 1987 newlyVAT registered people would have been prejudiced by the inability to credit against the output VAT
their payments by way of sales tax on their existing stocks in trade. Yet that inequity was precisely
addressed by a transitory provision in E.O. No. 273 found in Section 25 thereof. The provision
authorized VAT-registered persons to invoke a "presumptive input tax equivalent to 8% of the value
of the inventory as of December 31, 1987 of materials and supplies which are not for sale, the tax on
which was not taken up or claimed as deferred sales tax credit", and a similar presumptive input tax
equivalent to 8% of the value of the inventory as of December 31, 1987 of goods for sale, the tax on
which was not taken up or claimed as deferred sales tax credit.30
Section 25 of E.O. No. 273 perfectly remedies the problem assumed by the CTA as the basis for the
introduction of transitional input tax credit in 1987. If the core purpose of the tax credit is only, as
hinted by the CTA, to allow for some mode of accreditation of previously-paid sales taxes, then
Section 25 alone would have sufficed. Yet E.O. No. 273 amended the Old NIRC itself by providing
for the transitional input tax credit under Section 105, thereby assuring that the tax credit would
endure long after the last goods made subject to sales tax have been consumed.
If indeed the transitional input tax credit is integrally related to previously paid sales taxes, the
purported causal link between those two would have been nonetheless extinguished long ago. Yet
Congress has reenacted the transitional input tax credit several times; that fact simply belies the
absence of any relationship between such tax credit and the long-abolished sales taxes. Obviously
then, the purpose behind the transitional input tax credit is not confined to the transition from sales
tax to VAT.

There is hardly any constricted definition of "transitional" that will limit its possible meaning to the
shift from the sales tax regime to the VAT regime. Indeed, it could also allude to the transition one
undergoes from not being a VAT-registered person to becoming a VAT-registered person. Such
transition does not take place merely by operation of law, E.O. No. 273 or Rep. Act No. 7716 in
particular. It could also occur when one decides to start a business. Section 105 states that the
transitional input tax credits become available either to (1) a person who becomes liable to VAT; or
(2) any person who elects to be VAT-registered. The clear language of the law entitles new trades or
businesses to avail of the tax credit once they become VAT-registered. The transitional input tax
credit, whether under the Old NIRC or the New NIRC, may be claimed by a newly-VAT registered
person such as when a business as it commences operations. If we view the matter from the
perspective of a starting entrepreneur, greater clarity emerges on the continued utility of the
transitional input tax credit.
Following the theory of the CTA, the new enterprise should be able to claim the transitional input tax
credit because it has presumably paid taxes, VAT in particular, in the purchase of the goods,
materials and supplies in its beginning inventory. Consequently, as the CTA held below, if the new
enterprise has not paid VAT in its purchases of such goods, materials and supplies, then it should
not be able to claim the tax credit. However, it is not always true that the acquisition of such goods,
materials and supplies entail the payment of taxes on the part of the new business. In fact, this could
occur as a matter of course by virtue of the operation of various provisions of the NIRC, and not only
on account of a specially legislated exemption.
Let us cite a few examples drawn from the New NIRC. If the goods or properties are not acquired
from a person in the course of trade or business, the transaction would not be subject to VAT under
Section 105.31 The sale would be subject to capital gains taxes under Section 24(D),32 but since
capital gains is a tax on passive income it is the seller, not the buyer, who generally would shoulder
the tax.
If the goods or properties are acquired through donation, the acquisition would not be subject to VAT
but to donors tax under Section 98 instead.33 It is the donor who would be liable to pay the donors
tax,34 and the donation would be exempt if the donors total net gifts during the calendar year does
not exceed P100,000.00.35
If the goods or properties are acquired through testate or intestate succession, the transfer would not
be subject to VAT but liable instead for estate tax under Title III of the New NIRC.36 If the net estate
does not exceedP200,000.00, no estate tax would be assessed.37
The interpretation proffered by the CTA would exclude goods and properties which are acquired
through sale not in the ordinary course of trade or business, donation or through succession, from
the beginning inventory on which the transitional input tax credit is based. This prospect all but
highlights the ultimate absurdity of the respondents' position. Again, nothing in the Old NIRC (or
even the New NIRC) speaks of such a possibility or qualifies the previous payment of VAT or any
other taxes on the goods, materials and supplies as a pre-requisite for inclusion in the beginning
inventory.
It is apparent that the transitional input tax credit operates to benefit newly VAT-registered persons,
whether or not they previously paid taxes in the acquisition of their beginning inventory of goods,
materials and supplies. During that period of transition from non-VAT to VAT status, the transitional
input tax credit serves to alleviate the impact of the VAT on the taxpayer. At the very beginning, the
VAT-registered taxpayer is obliged to remit a significant portion of the income it derived from its
sales as output VAT. The transitional input tax credit mitigates this initial diminution of the taxpayers

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.
There is another point that weighs against the CTAs interpretation. Under Section 105 of the Old
NIRC, the rate of the transitional input tax credit is "8% of the value of such inventory or the actual
value-added tax paid on such goods, materials and supplies, whichever is higher."38 If indeed the
transitional input tax credit is premised on the previous payment of VAT, then it does not make
sense to afford the taxpayer the benefit of such credit based on "8% of the value of such inventory"
should the same prove higher than the actual VAT paid. This intent that the CTA alluded to could
have been implemented with ease had the legislature shared such intent by providing the actual
VAT paid as the sole basis for the rate of the transitional input tax credit.
The CTA harped on the circumstance that FBDC was excused from paying any tax on the purchase
of its properties from the national government, even claiming that to allow the transitional input tax
credit is "tantamount to giving an undeserved bonus to real estate dealers similarly situated as
[FBDC] which the Government cannot afford to provide." Yet the tax laws in question, and all tax
laws in general, are designed to enforce uniform tax treatment to persons or classes of persons who
share minimum legislated standards. The common standard for the application of the transitional
input tax credit, as enacted by E.O. No. 273 and all subsequent tax laws which reinforced or
reintegrated the tax credit, is simply that the taxpayer in question has become liable to VAT or has
elected to be a VAT-registered person. E.O. No. 273 and the subsequent tax laws are all decidedly
neutral and accommodating in ascertaining who should be entitled to the tax credit, and it behooves
the CIR and the CTA to adopt a similarly judicious perspective.
IV.
Given the fatal flaws in the theory offered by the CTA as supposedly underlying the transitional input
tax credit, is there any other basis to justify the limitations imposed by the CIR through RR 7-95? We
discern nothing more. As seen in our discussion, there is no logic that coheres with either E.O. No.
273 or Rep. Act No. 7716 which supports the restriction imposed on real estate brokers and their
ability to claim the transitional input tax credit based on the value of their real properties. In addition,
the very idea of excluding the real properties itself from the beginning inventory simply runs counter
to what the transitional input tax credit seeks to accomplish for persons engaged in the sale of
goods, whether or not such "goods" take the form of real properties or more mundane commodities.
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.
The Court of Tax Appeals claimed that under Section 105 of the Old NIRC the basis for the inventory
of goods, materials and supplies upon which the transitional input VAT would be based "shall be left
to regulation by the appropriate administrative authority". This is based on the phrase "filing of an
inventory as prescribed by regulations" found in Section 105. Nonetheless, Section 105 does include

the particular properties to be included in the inventory, namely goods, materials and supplies. It is
questionable whether the CIR has the power to actually redefine the concept of "goods," as she did
when she excluded real properties from the class of goods which real estate companies in the
business of selling real properties may include in their inventory. The authority to prescribe
regulations can pertain to more technical matters, such as how to appraise the value of the inventory
or what papers need to be filed to properly itemize the contents of such inventory. But such authority
cannot go as far as to amend Section 105 itself, which the Commissioner had unfortunately
accomplished in this case.
It is of course axiomatic that a rule or regulation must bear upon, and be consistent with, the
provisions of the enabling statute if such rule or regulation is to be valid.39 In case of conflict between
a statute and an administrative order, the former must prevail.40 Indeed, the CIR has no power to
limit the meaning and coverage of the term "goods" in Section 105 of the Old NIRC absent statutory
authority or basis to make and justify such limitation. A contrary conclusion would mean the CIR
could very well moot the law or arrogate legislative authority unto himself by retaining sole discretion
to provide the definition and scope of the term "goods."
V.
At this juncture, we turn to some of the points raised in the dissent of the esteemed Justice Antonio
T. Carpio.
The dissent adopts the CTAs thesis that the transitional input tax credit applies only when taxes
were previously paid on the properties in the beginning inventory. Had the dissenting view won, it
would have introduced a new requisite to the application of the transitional input tax credit and
required the taxpayer to supply proof that it had previously paid taxes on the acquisition of goods,
materials and supplies comprising its beginning inventory. We have sufficiently rebutted this thesis,
but the dissent adds a twist to the argument by using the term "presumptive input tax credit" to imply
that the transitional input tax credit involves a presumption that there was a previous payment of
taxes.
Let us clarify the distinction between the presumptive input tax credit and the transitional input tax
credit. As with the transitional input tax credit, the presumptive input tax credit is creditable against
the output VAT. It necessarily has come into existence in our tax structure only after the introduction
of the VAT. As quoted earlier,41 E.O. No. 273 provided for a "presumptive input tax credit" as one of
the transitory measures in the shift from sales taxes to VAT, but such presumptive input tax credit
was never integrated in the NIRC itself. It was only in 1997, or eleven years after the VAT was first
introduced, that the presumptive input tax credit was first incorporated in the NIRC, more particularly
in Section 111(B) of the New NIRC. As borne out by the text of the provision,42 it is plain that the
presumptive input tax credit is highly limited in application as it may be claimed only by "persons or
firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar
and cooking oil;"43 and "public works contractors."44
Clearly, for more than a decade now, the term "presumptive input tax credit" has contemplated a
particularly idiosyncratic tax credit far divorced from its original usage in the transitory provisions of
E.O. No. 273. There is utterly no sense then in latching on to the term as having any significant
meaning for the purpose of the cases at bar.
The dissent, in arguing for the effectivity of Section 4.105-1 of RR 7-95, ratiocinates in this manner:
(1) Section 4.105-1 finds basis in Section 105 of the Old NIRC, which provides that the input tax is
allowed on the "beginning inventory of goods, materials and supplies;" (2) input taxes must have
been paid on such goods, materials and supplies; (3) unlike real property itself, the improvements

thereon were already subject to VAT even prior to the passage of Rep. Act No. 7716; (4) since no
VAT was paid on the real property prior to the passage of Rep. Act No. 7716, it could not form part
of the "beginning inventory of goods, materials and supplies."
This chain of premises have already been debunked. It is apparent that the dissent believes that
only those "goods, materials and supplies" on which input VAT was paid could form the basis of
valuation of the input tax credit. Thus, if the VAT-registered person acquired all the goods, materials
and supplies of the beginning inventory through a sale not in the ordinary course of trade or
business, or through succession or donation, said person would be unable to receive a transitional
input tax credit. Yet even RR 7-95, which imposes the restriction only on real estate dealers permits
such other persons who obtained their beginning inventory through tax-free means to claim the
transitional input tax credit. The dissent thus betrays a view that is even more radical and more
misaligned with the language of the law than that expressed by the CIR.
VI.
A final observation. Section 4.105.1 of RR No. 7-95, insofar as it disallows real estate dealers from
including the value of their real properties in the beginning inventory of goods, materials and
supplies, has in fact already been repealed. The offending provisions were deleted with the
enactment of Revenue Regulation No. 6-97 (RR 6-97) dated 2 January 1997, which amended RR 795.45 The repeal of the basis for the present assessments by RR 6-97 only highlights the continuing
absurdity of the position of the BIR towards FBDC.
FBDC points out that while the transactions involved in G.R. No. 158885 took place during the
effectivity of RR 7-95, the transactions involved in G.R. No. 170680 in fact took place after RR No. 697 had taken effect. Indeed, the assessments subject of G.R. No. 170680 were for the third quarter
of 1997, or several months after the effectivity of RR 6-97. That fact provides additional reason to
sustain FBDCs claim for refund of its 1997 Third Quarter VAT payments. Nevertheless, since the
assailed restrictions implemented by RR 7-95 were not sanctioned by law in the first place there is
no longer need to dwell on such fact.
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 P28,413,783.00 representing the transitional input tax credit
due it for the fourth quarter of 1996; and (2) directed to refund to petitioner the amount
of P347,741,695.74 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.
SO ORDERED.
DANTE O. TINGA
Associate Justice
WE CONCUR:
REYNATO S. PUNO
Chief Justice
LEONARDO A. QUISUMBING

CONSUELO YNARES-SANTIAGO

Associate Justice

Associate Justice

ANTONIO T. CARPIO
Associate Justice

(On Official Leave)

MA. ALICIA AUSTRIA-MARTINEZ
Associate Justice

RENATO C. CORONA
Associate Justice

CONCHITA CARPIO MORALES

Associate Justice

MINITA V. CHICO-NAZARIO
Associate Justice

PRESBITERO J. VELASCO, JR.

Associate Justice

ANTONIO EDUARDO B. NACHURA

Associate Justice

TERESITA J. LEONARDO DE CASTO

Associate Justice

ARTURO D. BRION
Associate Justice

DIOSDADO M. PERALTA
Associate Justice
CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified that the conclusions in
the above Decision were reached in consultation before the case was assigned to the writer of the
opinion of the Court.
REYNATO S. PUNO
Chief Justice

Footnotes
1

See Sec. 1, E.O. No. 273 (1987).

Sec. 105, National Internal Revenue Code of 1986, as amended by E.O. No. 273.

See Sec. 25(a), E.O. No. 273 (1987).

Sec. 25, E.O. No. 273 (1987).

See G.R. No. 158885 rollo, p. 215. The law itself was approved on 5 May 1994, but its
implementation was delayed following the legal challenges to its constitutionality, which were
finally resolved in Tolentino v. Secretary of Finance, G.R. 115455, 30 October 1995.
6

Sec. 100, National Internal Revenue Code of 1986, as amended by Rep. Act No. 7716.

Sec. 111(a), National Internal Revenue Code of 1997; since amended by Rep. Act No.
9337.

Sec. 111(b), National Internal Revenue Code of 1997. Since amended by Rep. Act No.
9337.
9

Rollo (G..R. No. 158885), p. 215.

10

Id. at 216.

11

Id. at 216.

12

Id.

13

Id. at 216.

14

Id. at 217.

15

Rollo, p. 187, the letter being signed by then Commissioner of Internal Revenue (now
Representative Liwayway Vinzons-Chato).
16

The Regional Director had denied the motion for reconsideration/protest on the ground that
FBDC was barred by the statute of limitations from raising the same. The issue of when did
the statute of limitations begin to run against FBDC was among the issues raised before the
Court of Tax Appeals, which resolved the same in favor of FBDC. Such issue is not before
this Court.
17

Decision penned by Presiding Judge Ernesto D. Acosta, and concurred in by Associate

Judge Ramon O. De Veyra. Associate Judge Amancio Q. Saga filed a Dissenting Opinion.
18

Rollo, pp. 402-411. Decision penned by Associate Justice Rodrigo Cosico, concurred in by
Associate Justices Rebecca de Guia-Salvador and Regalado Maambong. The Court of
Appeals however removed from petitioners liability, the assessment of surcharge, interests
and penalty by the BIR. See id. at 411.
19

Rollo (G.R. No. 170680), p. 130.

20

Id.

21

Id.

22

See note 11.

23

Rollo (G.R. No. 170680), p. 131.

24

Decision penned by Associate Judge Ramon O. De Veyra, and concurred in by Presiding

Judge Ernesto D. Acosta. Associate Judge Amancio Q. Saga filed a Dissenting Opinion.
25

Penned by Associate Justice Noel Tijam, and concurred in by Associate Justices Ruben T.
Reyes and Edgardo P. Cruz.
26

Through a Resolution dated 4 April 2006.

27

See Sec. 100, National Internal Revenue Code of 1986, as amended by Rep. Act No.
7716.
28

See Sec. 100(1), National Internal Revenue Code of 1986, as amended by Rep. Act No.
7716.
29

See Sec. 100(1)(a), National Internal Revenue Code of 1986, as amended by Rep. Act No.
7716, supra at 4-5.
30

See Sec. 25, E.O. No. 273 (1988).

31

See Sec. 105, New NIRC, as amended.

32

See Sec. 24(D), New NIRC, as amended.

33

See Sec. 98, New NIRC, as amended.

34

See Sec. 99, New NIRC, as amended.

35

Id.

36

See Secs. 84-97, New NIRC, as amended.

37

See Sec. 84, New NIRC, as amended.

38

See note 2.

39

Lina, Jr. v. Carino, G.R. No. 100127, 23 April 1993, 221 SCRA 515, 531; United BF
Homeowners Association v. Home Insurance and Guaranty Corp., G.R. No. 124783, 14 July
1999, 310 SCRA 304, 316.
40

Kilusang Mayo Uno Labor Center vs. Garcia, Jr., G.R. No. 115381, 239 SCRA 386, 411, 23
December 1994; Conte v. Commission on Audit, G.R. No. 116422, 4 November 1996, 126
SCRA 19, 50.
41

See note 30.

42

See note 8.

43

Id.

44

Id.

45

Such fact was commonly agreed to by the parties in their joint stipulation of facts in CTA
Case No. 5665. See Rollo (G.R. No. 158885), p. 119.

The Lawphil Project - Arellano Law Foundation

DISSENTING OPINION
CARPIO, J.:
I dissent. The majority inexplicably grants to petitioner a credit for an input value-added tax (VAT)
that petitioner never paid and could never have paid. At the time of the sale by the government of
the land, there was still no VAT on the sale of land, and the government as seller was, and still is
today, not subject to VAT. There is no dispute that if the sale were to take place today, when there is
already VAT on the sale of land, the sale transaction would still be VAT-free because the
government is not subject to VAT, and hence petitioner as buyer cannot avail of any input VAT since
petitioner can never present a VAT receipt. Ironically, the majority allows petitioner an input VAT in a
transaction that took place when there was still no VAT on the sale of land, and the government as
seller was, as it is still, not subject to VAT.
The Cases
Before the Court are two petitions for review1 filed by Fort Bonifacio Development Corporation
(FBDC).
In G.R. No. 158885, FBDC assails the Decision promulgated on 15 November 20022 by the Court of
Appeals in CA-G.R. SP No. 60477 which affirmed with modification the 11 August 20003 Decision of
the Court of Tax Appeals (CTA). The CTA ordered FBDC to pay to the Bureau of Internal Revenue
(BIR), for the fourth quarter of 1997, the assessed amount of P45,188,708.08 representing
disallowed transitional input tax claim, plus 20% delinquency interest per annum from 1 June 1998
until fully paid.
In G.R. No. 170680, FBDC assails the Decision promulgated on 30 October 20034 by the Court of
Appeals in CA-G.R. SP No. 61517 which affirmed the 17 October 2000 Decision5 of the CTA. The
CTA denied FBDCs claim for refund of overpaid value-added tax (VAT) amounting
to P347,741,695.74 covering the third quarter of 1997.
The Antecedent Facts
FBDC is owned to the extent of 45% by the Bases Conversion Development Authority (BCDA)6 and
to the extent of 55% by private domestic corporations. FBDC is engaged in the development and
sale of real properties. On 8 February 1995, FBDC acquired from the national government, under a
VAT-free sale transaction, the Fort Bonifacio Global City (Global City) located within Fort Bonifacio,
Taguig, Metro Manila. The acquisition was done by virtue of Republic Act No. 72277 and Executive
Order No. 408 dated 8 December 1992. FBDC started developing and selling lots in Global City in
October 1996.
Meanwhile, on 1 January 1996, Republic Act No. 7716 (RA 7716) took effect. RA 7716 restructured
the VAT system by further amending pertinent provisions of the National Internal Revenue Code
(NIRC). RA 7716 imposed a VAT, among others, on the sale of real properties, a transaction not
previously subject to VAT. Section 2 of RA 7716 further amended Section 100 of the NIRC, as
amended, thus:

SEC. 2. Section 100 of the National Internal Revenue Code, as amended, is hereby further
amended to read as follows:
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 valueadded 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.
(1) The term "good 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;
xxxx
The term "gross selling price" means the total amount of money or its equivalent which the
purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of
the goods or properties, excluding the value-added tax. The excise tax, if any, on such goods or
properties shall form part of the gross selling price.
Pursuant to RA 7716, the sale of parcels of land to FBDCs customers became subject to 10% VAT.
However, Section 105 of the NIRC grants to a person who becomes liable to VAT or who elects to
be a VAT-registered person a transitional input tax, as follows:
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 paid on such
goods, materials and supplies, whichever is higher, which shall be creditable against the output tax.
On 19 September 1996, in order to avail itself of the transitional input tax credit, FBDC submitted to
the BIR, Revenue District No. 44, Taguig and Pateros, an inventory of its real properties with a total
book value ofP71,227,503,200 on which it claims a transitional input tax credit of P5,698,200,256.
FBDC also registered itself as a VAT taxpayer.
G.R. No. 158885
On 14 October 1996, FBDC executed two contracts to sell in favor of Metro Pacific Corporation
(Metro Pacific) covering two lots located in Global City. The lots were both payable in installments.
For the fourth quarter of 1996, FBDC received P3,498,888,713.60 from the sale of the two lots, on
which the output VAT payable to the BIR amounted to P318,080,792.14.9 FBDC paid cash to the
BIR amounting to P269,340,469.45 and utilized (1)P28,413,783 out of its total transitional input tax
credit of P5,698,200,256 (the amount of P28,413,783 represents the portion of the total transitional
input tax credit allocated by FBDC to the two lots sold to Metro Pacific); and (2) its regular input tax
credit of P20,326,539.69 on purchases of goods and services.10
On 28 July 1997 and 29 October 1997, FBDC submitted to the BIR two letters dated 18 July
199711 and 28 October 1997,12 respectively, informing it of the transaction and computation of its
VAT payments and requesting for a ruling on whether its transitional input VAT on the land

inventory, amounting to P28,413,783, was in order. After investigation of FBDCs VAT return for the
fourth quarter of 1996, the BIR recommended the disallowance of the claimed transitional input VAT
on land inventory, and the issuance of a notice of assessment for deficiency VAT equivalent to the
disallowed amount. The BIR issued a Pre-Assessment Notice dated 23 December 1997 for
deficiency VAT for the fourth quarter of 1996.
On 5 March 1998, FBDC received an undated letter13 from then BIR Commissioner Liwayway
Vinzons-Chato disallowing the presumptive input tax arising from land inventory on the ground that
"the basis of the 8% presumptive input tax of real estate dealers shall be limited to the book value of
the improvements [made upon the land], in addition to its inventory of supplies and materials for use
in its business,"14 and not on the book value of the actual land in FBDCs inventory. The BIR
Commissioner cited Revenue Regulation No. 7-95 (RR 7-95) dated 9 December 1995 and Revenue
Memorandum Circular No. 3-96 dated 15 January 1996.15 Specifically, the BIR Commissioner
referred to Section 4.105-1 and the Transitory Provisions of RR 7-95 issued in implementation of the
amendments made by RA 7716, as follows:
Sec. 4.105-1. Transitional input tax on beginning inventories. - Taxpayers who became VATregistered persons upon effectivity of RA No. 7716 who have exceeded the minimum turnover
of P500,000.00 or who voluntarily register even if their turnover does not exceed P500,000.00 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 taxpayers 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.
xxxx
TRANSITORY PROVISIONS
(a) Presumptive Input Tax Credits xxxx
(iii) For real estate dealers, the presumptive input tax of 8% of the book value of improvements
constructed on or after January 1, 1988 (the effectivity of E.O. 273) shall be allowed.
For purposes of sub-paragraphs (i), (ii) and (iii) above, an inventory as of December 31, 1995 of
such goods or properties and improvements showing the quantity, description and amount filed with
the RDO not later than January 31, 1996.
The BIR Commissioner directed FBDC to pay VAT equivalent to the disallowed presumptive input
tax on land inventory in the amount of P28,413,783, including any surcharges, interest and penalties
by the Chief, Assessment Division, Revenue Region No. 8, Makati City, subject to audit verification.

In a letter dated 11 March 1998,16 FBDC requested the BIR Commissioner for the computation of the
surcharges, interest and penalties and for the issuance of assessment notice to enable it to pursue
its remedy under the NIRC.
In a letter dated 4 May 1998,17 Acting Assistant Chief Pascual M. De Leon of the Assessment
Division, Revenue Region 8, Makati City sent FBDC a letter informing it that the total amount due
was P45,188,708.08. An assessment notice18 was attached to the letter. In a letter dated 1 July
199819 filed on 2 July 1998, FBDC requested for "reconsideration/protest" of the 4 May 1998 letter
and the assessment notice. In a letter dated 15 July 199820 which FBDC received on 10 August
1998, Regional Director Antonio I. Ortega of Revenue Region 8 ruled that FBDCs request for
"reconsideration/protest" was barred by the statute of limitations because it was filed more than 30
days from 5 March 1998 when FBDC received the undated letter from the BIR Commissioner
disallowing the claim for transitional input tax.
On 11 August 1998, FBDC filed an appeal by certiorari before the CTA, docketed as CTA Case No.
5665.
G.R. No. 170680
For the third quarter of 1997, FBDC received from its sale and lease of lots P3,591,726,328.11 on
which output VAT payable to the BIR amounted to P359,172,623.81. FBDC made cash payments
amounting to P347,741,695.74 and utilized its regular input tax credit of P19,743,565.73 on its
purchases of goods and services.
On 11 May 1999, FBDC filed with the BIR a claim for tax refund of its output VAT cash payments for
the third quarter of 1997, amounting to P347,741,695.74. FBDC alleged that the amount was illegally
collected because the BIR did not take into account its transitional input tax credit. Earlier, on 8
October 1998, 17 November 1998, and 11 February 1999, FBDC filed claims for refunds amounting
to P269,340,469.45, P359,652,009.47, andP486,355,846.78, respectively, representing VAT paid on
proceeds received from its sale and lease of lots for the quarters ending on 31 December 1996, 31
March 1997, and 30 June 1997. After deducting P269,340,469.45,P359,652,009.47,
and P486,355,846.78 from P5,698,200,256 which FBDC claimed as its total transitional input tax
credit, the remaining input tax credit still sufficiently covered the amount of P347,741,695.74.21
The BIR did not act upon FBDCs claim. The two-year prescriptive period for actions to recover
illegally collected tax provided under Section 230 of the NIRC was to expire on 25 August 1999.
Thus, on 24 August 1999, FBDC filed a petition for review before the CTA, docketed as CTA Case
No. 5926. FBDC alleged that its input credit tax was more than enough to offset the VAT paid for the
third quarter of 1997 and as such, it was entitled to a refund or tax credit of P347,741,695.74.
The Ruling of the Court of Tax Appeals
G.R. No. 158885
In its 11 August 2000 Decision, the CTA denied the petition for review and ordered FBDC to pay to
the BIR the assessed amount of P45,188,708.08 plus 20% delinquency interest per annum from 1
June 1998 until fully paid pursuant to Section 24922 of the NIRC.
The CTA ruled that FBDCs protest was filed on time. The CTA ruled that the undated letter from the
BIR Commissioner which FBDC received on 5 March 1998 showed that FBDCs liability was not yet
definite and final because it was still subject to audit verification. The CTA ruled that it was the 4 May
1998 letter, with the assessment notice, which constituted the assessment contemplated under

Section 22823 of the NIRC. FBDC received the 4 May 1998 letter on 4 June 1998. Hence, FBDCs
request for "reconsideration/protest" filed on 2 July 1998 was timely filed.
The CTA sustained the BIRs application of Section 4.105-1 of RR 7-95 that the basis of the
transitional input tax for real estate dealers shall be the improvements constructed on or after the
effectivity of Executive Order No. 273 (EO 273). The CTA rejected FBDCs argument that Section
4.105-1 of RR 7-95 is contrary to Sections 100 and 105 of the NIRC. The CTA traced the origin of
the transitional input tax credit from the original VAT law, EO 273, until Republic Act No. 8424 or the
Tax Reform Act of 1997, which took effect on 1 January 1998. The CTA ruled that the purpose of
granting transitional input tax credit was to give recognition to the sales tax component of inventories
which would qualify as input tax credit had the goods been acquired during the effectivity of the EO
273. The CTA ruled that RA 7716 amended EO 273 to widen its tax base to include other sale of
goods and services not previously subject to VAT. However, RA 7716 did not touch Section 105 of
the NIRC on transitional input tax credit, and it remained with the same purpose as when it was
introduced by EO 273.
The CTA also ruled that FBDC purchased the lots in Global City from the national government under
a VAT-free sale transaction. The CTA noted that in 1995, sale of real properties was still exempt
from VAT. Hence, FBDC is precluded from availing of transitional input tax credit.
The dispositive portion of the CTA Decision reads:
WHEREFORE, in view of all the foregoing, the instant Petition for Review is hereby DENIED.
Petitioner is ordered to pay the assessed amount of P45,188,708.08 to the Respondent
Commissioner of Internal Revenue plus 20% delinquency interest per annum from June 1, 1998 until
fully paid pursuant to Section 249 of the 1996 Tax Code.
SO ORDERED.24
FBDC filed a petition for review before the Court of Appeals, docketed as CA-G.R. SP No. 60477.
G.R. No. 170680
In a Decision promulgated on 17 October 2000, the CTA denied FBDCs claim for tax refund. Thus:
WHEREFORE, premises considered, the instant Petition for Review on the refund of the overpaid
value-added tax in the amount of P347,741,695.74 covering the third quarter of 1997 is hereby
DENIED for lack of merit.
SO ORDERED.25
The CTA ruled that FBDC is not automatically entitled to the 8% transitional input tax allowed under
Section 105 of the NIRC. The CTA stated that FBDC purchased the land at the Global City from the
government under a VAT-free sale transaction. The government, which is a tax-exempt entity, did
not pass on any VAT or business tax upon FBDC. Thus, the CTA ruled that to allow FBDC 8%
transitional input tax to offset its output VAT liability without having paid any previous taxes has the
net effect of granting FBDC an outright bonus equivalent to the 10% VAT it may tack on to the goods
it would sell to its subsequent purchasers. The CTA also ruled that the inventory under Section 105
of the NIRC is limited to improvements, such as buildings, roads, drainage system and other similar
structures constructed on the land because in their construction, the contractors and suppliers have
presumably passed on to the owner of the land or the real estate dealer the business tax due

thereon. The CTA also ruled that Section 4.105-1 of RR 7-95 is not contrary to Sections 100 and 105
of the NIRC. The CTA also cited its 11 August 2000 Decision in CTA Case No. 5665.
FBDC filed a petition for certiorari before the Court of Appeals assailing the 17 October 2000
Decision of the CTA, docketed as CA-G.R. SP No. 61517.
The Ruling of the Court of Appeals
G.R. No. 158885
In a Decision promulgated on 15 November 2002, the Court of Appeals affirmed with modification
the CTAs 11 August 2000 Decision.
The Court of Appeals ruled that the regulations embodied in RR 7-95 were a valid exercise of the
BIRs delegated rule-making power and were consistent with the letter and spirit of substantive laws
establishing the VAT system. The Court of Appeals ruled that RA 7716 amended the governments
VAT system instituted under EO 273 and imposed, for the first time, VAT on sale of real properties.
A first-time taxpayer who becomes liable for VAT is entitled to a transitional input tax under Section
105 of the NIRC. Section 105 provides that the basis for the inventory of goods, materials and
supplies upon which the 8% input VAT will be based shall be left to the regulation by the appropriate
administrative authority. The Court of Appeals ruled that the decision of the BIR to use the
improvements introduced by the taxpayer upon real properties as the basis for the transitional input
tax credit satisfied established constitutional and legal precepts.
1avv phi 1.zw+

However, the Court of Appeals modified the CTAs 11 August 2000 Decision by deleting the
imposition of surcharge, interest and penalty upon the assessed amount of additional VAT. Thus:
WHEREFORE, premises considered, the Decision of the Court of Tax Appeals, is hereby
AFFIRMED with the MODIFICATION that the assessment of surcharge, interests and penalty by the
BIR upon the principal deficiency amount of value added taxes payable by the petitioner, to be
determined by the BIR, is hereby REMOVED from petitioners liability.
SO ORDERED.26
FBDC filed a motion for reconsideration of the Court of Appeals 15 November 2002 Decision. In its
1 July 2003 Resolution,27 the Court of Appeals denied the motion.
Hence, the petition before this Court.
G.R. No. 170680
In its 30 October 2003 Decision, the Court of Appeals denied FBDCs petition and affirmed the 17
October 2000 CTA Decision. The Court of Appeals again traced the origin of transitional input tax
from EO 273 to RA 7716. The Court of Appeals ruled that the grant of transitional input tax
presupposes that the VAT taxpayer had previously paid some form of business tax on his inventory
of goods. Here, FBDC purchased the land from the national government under a VAT-free
transaction. The Court of Appeals sustained the CTA that to allow FBDC to avail of the 8%
transitional input tax to offset its output tax liability will have the effect of granting FBDC an outright
bonus equivalent to the 10% VAT which it may tack on the purchase price of the lands it would sell
to its buyers. The Court of Appeals further ruled that RR 7-95 limiting the transitional input tax to the
value of the improvements is a valid implementation of the NIRC.

The dispositive portion of the Court of Appeals Decision reads:

WHEREFORE, the instant Petition is DENIED. The assailed Decision of the Court of Tax Appeals
dated October 17, 2000 denying petitioners claim for refund of the value-added tax it paid for the
third quarter of 1997 in the amount ofP347,741,695.74 is hereby AFFIRMED.
SO ORDERED.28
FBDC filed a motion for reconsideration. In its 12 December 2005 Resolution,29 the Court of Appeals
denied FBDCs motion.
Hence, the petition before this Court.
The Issue
The main issue is whether petitioner is entitled to transitional input tax credit under Section 105 of
the NIRC, on its Global City land inventory, which petitioner purchased from the government under a
VAT-free transaction in 1995.
Overview of the VAT Law
The VAT is essentially a tax on transactions. It is imposed at every stage of the distribution process
on the sale, barter, exchange of goods or property and in the performance of services until it finally
reaches the consumer.30Since it is a value-added tax, it is levied on the value added to goods and
services at every link of the chain of transactions in order to prevent doubly taxing a prior transaction
in the subsequent use or sale of the same product.
In computing the tax liability, the taxpayer subtracts from the tax due on sales the taxes on his
purchases of raw materials. He pays only the difference between the tax on sales (output tax) and
the tax on outlays for materials, supplies, services and capital goods (input tax). As a result,
previously paid taxes are allowed as input tax credits deductible from the output VAT liability
in subsequent transactions involving the same product. This is substantially how transitional
input tax credit works. The term "transitional" had been placed to distinguish this from an ordinary
input tax since essentially this innovative tax credits function is to pave the smooth transition from
the non-VAT to the VAT system.
The VAT traces its roots from the sales tax and under forms of percentage tax under the old Tax
Code. Since 1939, when the turnover tax was replaced by the manufacturers sales tax, the Tax
Code had provided for a single stage value-added tax on original sales by manufacturers, producers
and importers computed on the "cost deduction method" and later on the basis of the "tax credit
method." Up until 1987, the system of taxing goods consisted of (1) an excise tax on selected
articles, (2) fixed and percentage taxes on original and subsequent sales, on importations and on
milled articles, and (3) mining taxes on mineral products. Services were subjected to percentage
taxes based mainly on gross receipts.31
Beginning 1 January 1988, the multi-staged value-added tax had been adopted under EO 273.
Among the new provisions included were the persons liable,32 the VAT on sale of goods,33 and the
transitional input tax credit. The BIR released Revenue Regulation No. 5-87, the implementing rules
of EO 273, which took effect on the same date.

On 5 May 1994, Congress approved RA 7716 or the Expanded Value-Added Tax Law, commonly
known as the E-VAT. The new law was enacted in order to extend the scope of the VAT not only to
goods but also to properties. In this law, the VAT was expanded to include real properties held
primarily for sale to customers or held for lease in the ordinary course of trade or business.34 The
provision pertaining to transitional input tax credit, Section 105, was not touched and remained in
effect.
However, the constitutionality of the E-VAT law was questioned before this Court. In the
consolidated cases ofTolentino v. Secretary of Finance,35 we issued a temporary restraining order
(TRO) on the implementation of RA 7716. On 25 August 1994, this Court ruled in favor of the tax
laws validity. After the denial with finality of the motions for reconsideration assailing the
constitutionality of the E-VAT, the TRO was lifted on 30 October 1995.36
Following the release of the decision and the lifting of the TRO, the BIR released RR 7-95 dated 9
December 1995 pertaining to the consolidated VAT regulations of RA 7716. Thus, both RA 7716 and
RR 7-95 were made effective and implemented only on 1 January 1996. Another BIR-issued
directive, Revenue Memorandum Circular No. 3-96 dated 15 January 1996, followed suit. The
contents of this memorandum were the same as RR 7-95 although in question and answer form.
On 20 December 1996, Congress approved Republic Act No. 8241 which took effect on 1 January
1997. This tax law amended several provisions of RA 7716 including Section 105, which segregated
the definition of input tax credit to transitional and presumptive.37 To implement this law, the BIR
released a new ruling, Revenue Regulation No. 6-97 dated 2 January 1997.
The most recent full revision of the NIRC is Republic Act No. 8424 or the Tax Reform Act of 1997,
which took effect on 1 January 1998. From the years 2000 to 2004, several other amendments38 to
the VAT law followed and the latest one is Republic Act No. 9337, popularly called the Reformed
Value-Added Tax Law or R-VAT for short, which was approved by Congress on 24 May 2005 and
which took effect on 1 July 2005. This new law increased the tax base of the VAT from 10% to 12%.
Acquisition of the Fort Bonifacio property from the
national government under a tax-free transaction
As mentioned earlier, the Global City land was previously part of Fort Bonifacio, a military
reservation. Being part of a military reservation, the lands comprising Fort Bonifacio formed part of
the public domain. It was only in 1992 when a portion of Fort Bonifacio ceased to be part of the
public domain when Congress passed Republic Act No. 9227, classifying the lands as alienable and
disposable, and authorizing the President to sell and dispose of a portion of the military reservation,
now consisting of the Global City land.39
Petitioner contends that the CA erred in holding that there must have been previous payment of
sales tax or VAT by petitioner on its land before it may claim the input tax credit granted by Section
105 of the NIRC.
Petitioners contention has no merit.
Sections 104 (now Section 110) and 105 (now Section 111) of EO 273, as amended by RA 7716,
provide:
SEC. 104. Tax Credits. (a) Creditable input tax.

xxx
The term input tax means the value-added tax due from or paid by a VAT-registered person in the
course of his trade or business on importation of goods or local purchases of goods or services,
including lease or use of property, from a VAT-registered person. It shall also include the transitional
input tax determined in accordance with Section 105 of this Code.
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.
Petitioner is not entitled to a refund or credit of any transitional input tax since the entire Global City
land was bought by petitioner from the national government in 1995 under a tax-free sale transaction
and without any VAT component. This means that no previous business tax, whether in the form of
sales tax or VAT, was paid by petitioner on its purchase of land from the national government.
Simply put, since the national government is outside the operation of the VAT and is tax-exempt, the
national government did not pass on any VAT to petitioner as part of the purchase price.
However, petitioner asserts that the 8% input tax credit provided for in Section 105 is one that is
statutorily presumed to have been paid and as a consequence, it need not show that taxes were
previously paid on its inventory of land.
Petitioners assertion also has no merit.
True, there exists a presumption in Section 105 that tax was paid, whether or not it was actually
paid. This can be inferred from the provision that a taxpayer is "allowed input tax on his beginning
inventory x x x equivalent to 8% x x x, or the actual value-added tax paid x x x, whichever is
higher." However, such presumption assumes the existence of a law imposing the tax
presumed to have been paid. Otherwise, the presumption will have no basis because if no tax
has been imposed by law, then there can be no presumption that such a tax has been paid.
If no tax has been imposed by law, whether it be VAT or sales, percentage, excise or privilege taxes,
no such tax is legally due and payable, and thus there can be no presumption that any such tax has
been paid. When the law says "transitional input tax" or "presumptive input tax," the
presumption is that there exists a law imposing the input tax and such tax is presumed to
have been paid.
In the present case, when the national government sold the Global City land to petitioner in 1995,
VAT on real properties was not yet in existence. RA 7716 had not yet been enacted and the sale of
real properties was still exempt from VAT. Transitional or presumptive input tax necessarily requires
a transaction where a tax had been imposed by law. Without any VAT on land imposed by law at the
time, the 8% input tax credit cannot be presumed to have been paid. Thus, petitioner is not entitled
to claim input VAT on the purchase of the land against its output VAT liability.
Even if the sale transaction by the national government to petitioner 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. The simple reason is that the sale by the national
government of government-owned land is not subject to VAT.40 Thus, petitioner cannot now
claim any input tax credit if it buys the same land today, and resells the same.

To illustrate, supposing petitioner buys land from the national government today, constructs a
condominium and thereafter sells the units to third parties, will petitioner be subject to VAT? The
simple answer is YES. Indisputably, petitioner is now subject to output tax as a real estate dealer
liable to VAT. Can petitioner charge any input tax against its output tax liability for the sale? The
simple answer is NO. This is because under the present Tax Code, specifically Section 110,41 the
rule is that any input tax shall be creditable against the output tax only if it is evidenced by a VAT
invoice or official receipt. A VAT invoice can be used only for the sale of goods and services that are
subject to VAT. Petitioner will not be able to present a VAT invoice since the national government is
exempt from VAT. Without the invoice to prove that the transaction had been subjected to VAT,
petitioner cannot claim any input tax which may be offset against its output tax. 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.
Petitioner further asserts that there is nothing in Section 105 which states that the 8% transitional
input tax credit may be based only on the improvements on the land. Petitioner insists that in the
sale of real properties, VAT is imposed not only on the "improvements" but also on the land and
improvements. Thus, in issuing RR 7-95, particularly Section 4.105-1, the BIR limited the application
of Section 105 to the "improvements" on real properties, resulting in unwarranted legislation.
Again, petitioners assertion has no merit.
Section 4.105-1 of RR 7-95 and its Transitory Provisions relating to transitional input tax on
beginning inventories provide:
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 P500,000 or who voluntarily register even if their turnover does
not exceed P500,000.00 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 E.O. 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.
The value allowed for income tax purposes on inventories shall be the basis for the computation of
the 8% excluding goods that are exempt from VAT under Sec. 103. Only VAT-registered persons
shall be entitled to presumptive input tax credits.
xxx
TRANSITORY PROVISIONS

(b) Presumptive Input Tax Credits

xxx
(iii) For real estate dealers, the presumptive input tax of 8% of the book value of
improvements constructed on or after January 1, 1988 (the effectivity of E.O. 273) shall be
allowed.
For purposes of sub-paragraphs (i), (ii) and (iii) above, an inventory as of December 31, 1995 of
such goods or properties and improvements showing the quantity, description and amount filed with
the RDO not later than January 31, 1996. (Emphasis supplied)
According to RR 7-95, the basis of the 8% input tax is simply the value of the improvements on the
land and not the value of the taxpayers entire inventory of real properties. This provision finds its
basis in Section 105 which provides that input tax is allowed on the taxpayers "beginning inventory
of goods, materials and supplies." Here, the presumptive input tax contemplated by law pertains to
the input tax paid for the goods, materials or supplies passed on to the taxpayer by his suppliers,
and used to build improvements on the land. Even before real estate dealers like petitioner became
subject to VAT under RA 7716, improvements on land were already subject to VAT. However, since
the land itself was not subject to VAT or any input tax prior to RA 7716, the land then could not be
considered part of the beginning inventory under Section 105. Thus, the 8% transitional input tax
applies only to improvements on land, but not on the land itself.
In sum, petitioners cause must fail because petitioner acquired the Global City land from the
national government under a tax-free transaction. Consequently, petitioner is not entitled to a refund
or credit of any transitional input tax.
Accordingly, I vote to deny the petitions and affirm the 15 November 2002 Decision and 1 July 2003
Resolution of the Court of Appeals in CA-G.R. SP No. 60477 and the 30 October 2003 Decision and
12 December 2005 Resolution of the Court of Appeals in CA-G.R. SP No. 61517.
ANTONIO T. CARPIO
Associate Justice

Footnotes
1

Under Rule 45 of the 1997 Rules of Civil Procedure.

Rollo (G.R. No. 158885), pp. 402-411. Penned by Associate Justice Rodrigo V. Cosico with
Associate Justices Rebecca De Guia-Salvador and Regalado E. Maambong, concurring.
3

Id. at 214-234. Penned by Presiding Judge Ernesto D. Acosta with Associate Judge Ramon
O. De Veyra, concurring and Associate Judge Amancio Q. Saga, dissenting.
4

Rollo (G.R. No. 170680), pp. 316-328. Penned by Associate Justice Noel G. Tijam with
Associate Justices Ruben T. Reyes (retired) and Edgardo P. Cruz, concurring.

Id. at 127-143. Penned by Associate Judge Ramon O. De Veyra with Presiding Judge
Ernesto D. Acosta, concurring and Associate Judge Amancio Q. Saga, dissenting.
6

BCDA is a wholly-owned government corporation created by Republic Act No. 7227 for the
purpose of accelerating the conversion of military reservations into alternative productive
uses and raising funds through the sale of portions of said military reservations in order to
promote the economic and social development of the country in general.
7

An Act Accelerating the Conversion of Military Reservations into Other Productive Uses,
Creating the Bases Conversion and Development Authority for the Purpose, Providing Funds
Therefor and For Other Purposes.
8

Implementing the provisions of Republic Act No. 7227 Authorizing the Bases Conversion
and Development Authority (BCDA) to Raise Funds Through the Sale of Metro Manila
Military Camps Transferred to BCDA to Form Part of Its Capitalization and to be used for the
Purposes Stated in said Act.
9

Rollo (G.R. No. 158885), p. 31.

10

Id.

11

Id. at 184.

12

Id. at 185-186.

13

Id. at 187.

14

Id. Underscoring in the original.

The contents of RR 7-95 were reiterated in BIRs Revenue Memorandum Circular No. 3-96
dated 15 January 1996 in a question and answer format.
15

16

Rollo (G.R. No. 158885), p. 188.

17

Id. at 189.

18

Id. at 190.

19

Id. at 191-204.

20

Id. at 205-207.

21

Rollo (G.R. No. 170680), p. 29.

22

SEC. 249. Interest.

(A) In General. - There shall be assessed and collected on any unpaid amount of tax,
interest at the rate of twenty percent (20%) per annum, or such higher rate as may
be prescribed by rules and regulations, from the date prescribed for payment until the
amount is fully paid.

(B) Deficiency Interest. - Any deficiency in the tax due, as the term is defined in this
Code, shall be subject to the interest prescribed in Subsection (A) hereof, which
interest shall be assessed and collected from the date prescribed for its payment
until the full payment thereof.
(C) Delinquency Interest. - In case of failure to pay:
(1) The amount of the tax due on any return to be filed, or
(2) The amount of the tax due for which no return is required, or
(3) A deficiency tax, or any surcharge or interest thereon on the due date
appearing in the notice and demand of the Commissioner, there shall be
assessed and collected on the unpaid amount, interest at the rate prescribed
in Subsection (A) hereof until the amount is fully paid, which interest shall
form part of the tax.
(D) Interest on Extended Payment. - If any person required to pay the tax is qualified
and elects to pay the tax on installment under the provisions of this Code, but fails to
pay the tax or any installment hereof, or any part of such amount or installment on or
before the date prescribed for its payment, or where the Commissioner has
authorized an extension of time within which to pay a tax or a deficiency tax or any
part thereof, there shall be assessed and collected interest at the rate hereinabove
prescribed on the tax or deficiency tax or any part thereof unpaid from the date of
notice and demand until it is paid.
23

SEC. 228. Protesting of Assessment.

When the Commissioner or his duly authorized representative finds that proper taxes
should be assessed, he shall first notify the taxpayer of his findings: Provided,
however, That a preassessment notice shall not be required in the following cases:
(a) When the finding for any deficiency tax is the result of mathematical error
in the computation of the tax as appearing on the face of the return; or
(b) When a discrepancy has been determined between the tax withheld and
the amount actually remitted by the withholding agent; or
(c) When a taxpayer who opted to claim a refund or tax credit of excess
creditable withholding tax for a taxable period was determined to have
carried over and automatically applied the same amount claimed against the
estimated tax liabilities for the taxable quarter or quarters of the succeeding
taxable year; or
(d) When the excise tax due on exciseable articles has not been paid; or
(e) When an article locally purchased or imported by an exempt person, such
as, but not limited to, vehicles, capital equipment, machineries and spare
parts, has been sold, traded or transferred to non-exempt persons.

The taxpayers shall be informed in writing of the law and the facts on which the
assessment is made; otherwise, the assessment shall be void.
Within a period to be prescribed by implementing rules and regulations, the taxpayer
shall be required to respond to said notice. If the taxpayer fails to respond, the
Commissioner or his duly authorized representative shall issue an assessment
based on his findings.
Such assessment may be protested administratively by filing a request for
reconsideration or reinvestigation within thirty (30) days from receipt of the
assessment in such form and manner as may be prescribed by implementing rules
and regulations. Within sixty (60) days from filing of the protest, all relevant
supporting documents shall have been submitted; otherwise, the assessment shall
become final.
If the protest is denied in whole or in part, or is not acted upon within one hundred
eighty (180) days from submission of documents, the taxpayer adversely affected by
the decision or inaction may appeal to the Court of Tax Appeals within thirty (30)
days from receipt of the said decision, or from the lapse of the one hundred eighty
(180)-day period; otherwise, the decision shall become final, executory and
demandable.
24

Rollo (G.R. No. 158885), p. 233.

25

Rollo (G.R. No. 170680), p. 142.

26

Rollo (G.R. No. 158885), p. 411.

27

Id. at 505-506.

28

Rollo (G.R. No. 170680), p. 327.

29

Id. at 382-390.

30

Commissioner of Internal Revenue v. Court of Appeals, 385 Phil. 875 (2000).

31

Vitug, Jose C. and Acosta, Ernesto D., Tax Law and Jurisprudence, 2006 edition, p. 230.

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.
32

SEC. 100. Value-added tax on sale of goods. (a) Rate and base of tax. - There shall be
levied, assessed and collected on every sale, barter or exchange of goods, a value-added
tax equivalent to 10% of the gross selling price or gross value in money of the goods sold,
bartered or exchanged, such tax to be paid by the seller or transferor x x x.
33

34

Section 2 of RA 7716.

35

G.R. Nos. 115455, 115525, 115543, 115544, 115754, 115781, 115852, 115873, 115931,
25 August 1994, 235 SCRA 630.
36

319 Phil. 755 (1995).

37

SEC. 105. 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 as prescribed by regulations, be allowed input tax on his beginning
inventory of goods, materials and supplies equivalent to eight percent (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.
(b) Presumptive input tax credits.
(1) Persons or firms engaged in the processing of sardines, mackerel, and milk, and
in manufacturing refined sugar and cooking oil, shall be allowed a presumptive input
tax, creditable against the output tax, equivalent to one and one-half percent (1.5%)
of the gross value in money of their purchases of primary agricultural products which
are used as inputs to their production.
As used in this paragraph (b), the term processing shall mean pasteurization,
canning and activities which through physical or chemical process alter the exterior
texture or form or inner substance of a product in such manner as to prepare it for
special use to which it could not have been put in its original form or condition.
(2) Public works contractors shall be allowed a presumptive input tax equivalent to
one and one-half percent (1.5%) of the contract price with respect to government
contracts only in lieu of actual input taxes therefrom.

38

Republic Act No. 8761, which was approved by Congress on 15 February 2000 and took
effect on 1 January 2001; Republic Act No. 9010, approved on 27 February 2001 and
retroacted to 1 January 2001; and Republic Act No. 9238, which took effect on 1 January
2004.
39

The National Government, as the seller of the Global City land, is a tax-exempt entity and
such sale had been mandated by RA 9227 or The Bases Conversion and Development Act
of 1992, which states:
Sec. 8. Funding Scheme. The capital of the Conversion Authority shall come from
the sales proceeds and/or transfers of certain Metro Manila military camps, including
all lands covered by Proclamation No. 423, series of 1957, commonly known as Fort
Bonifacio and Villamor (Nichols) Air Base x x x
The President is hereby authorized to sell the above lands, in whole or in part, which
are hereby declared alienable and disposable pursuant to the provisions of existing
laws and regulations governing sales of government properties: Provided, That no
sale or disposition of such lands will be undertaken until a development plan
embodying projects for conversion shall be approved by the President in accordance
with Paragraph (b), Section 4, of this Act. However, six (6) months after approval of

this Act, the President shall authorize the Conversion Authority to dispose of certain
areas in Fort Bonifacio and Villamor as the latter so determines. The Conversion
Authority shall provide the President a report on any such disposition or plan for
disposition within one (1) month from such disposition or preparation of such plan. x
x x (Emphasis supplied)
40

Under Section 105 of the present NIRC, the person liable for the payment of value-added
tax is "any person who, in the course of trade or business, sells goods or properties." In
Section 22 of the same statute, the term "person" is defined as an individual, a trust, estate,
or corporation. The national government does not fall under any of the enumerated entities. It
is neither an individual or a corporation which comes under the purview of the law.
Neither can it be said that the national government, in selling the Global City land, is
engaged in "trade or business." The phrase "in the course of trade or business" as
defined in Section 105, means the regular conduct or pursuit of a commercial or an
economic activity. In this case, the objective of RA 9227 is to use the proceeds from
the sale of portions of Fort Bonifacio to finance military-related activities and provide
housing loan assistance. Accordingly, the national government, as the seller with
these policies in mind, does not fall under the definition "engaged in the regular
conduct or pursuit of an economic activity."
Thus, not being expressly included in the tax law as one liable for value-added tax,
the national government is exempt therefrom.
41

SEC. 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: xxx (Emphasis supplied)

The Lawphil Project - Arellano Law Foundation

CONCURRING OPINION
YNARES-SANTIAGO, J.:
After a careful review of the actual effects of the tax measures involved herein, and with due regard
to the intent of the framers of the law and the real benefits thereof on the taxpayer, I vote to grant the
herein consolidated petitions.
It is an undisputed fact that when petitioner acquired the lands within the Fort Bonifacio military
reservation from the national government, the latter did not have to pay any tax, be it sales or valueadded. This notwithstanding, my reading of the applicable tax laws is that petitioner may still claim
transitional input tax credit.

Prior to January 1, 1996, sales of real properties were not subject to VAT. On the said date,
Republic Act No. 7716 took effect amending portions of the National Internal Revenue Code. It was
only then that the value-added tax was imposed on the sale of real properties. Section 100 of the
NIRC was amended to read:
"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 valueadded 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.
"(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; x x x."
As can be seen, any sale that petitioner entered into before the effectivity of RA 7716 was not
subject to VAT. Beginning January 1, 1996, petitioners transactions became subject to VAT in the
full amount of 10% of the gross selling price. This imposed an unexpected burden on petitioner, and
other real property developers for that matter. Petitioner would not be able to claim creditable input
tax since its purchase of the lands from the national government was not subject to VAT. This is not
in accord with the spirit and intent of the law as will be demonstrated hereunder.
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."
To reiterate, the rate of the input tax shall be "8% of the value of such inventory or the actual valueadded tax paid on such goods, materials and supplies, whichever is higher."1 If the intent of the law
were to limit the input tax to cases where actual VAT was paid, it could have simply said that the tax
base shall be the actual value-added tax paid. Instead, the law as framed contemplates a situation
where a transitional input tax credit is claimed even if there was no actual payment of VAT in the
underlying transaction. In such cases, the tax base used shall be the value of the beginning
inventory of goods, materials and supplies.
More importantly, the benefits of Section 105 are made available to "a person who becomes liable to
value-added tax or any person who elects to be a VAT-registered person." In other words, the
provision is made to apply to persons not theretofore subject to VAT. In this manner, the law seeks
to alleviate the situation where a taxpayer who becomes liable to value-added tax may not claim the
input tax credit available to other taxpayers who are subject to the value-added tax. In other words,
Section 105 was not meant to give credit for taxes previously paid, if any, on a taxpayers inventory,
but to mitigate the burden of paying value-added tax when he sells the goods in his inventory in the
future without the benefit of an input tax.
The transitional input tax credit provided for by the above Section 105, as the name implies, was
intended to apply to a situation where a taxpayer, in the course of trade or business, transits from a
non-VAT status to a VAT status. The provision of a transitional input tax credit, even to those whose

transactions were not previously subject to VAT, was meant to soften the blow, so to speak, of
having to pay the new tax to the full extent of 10% of the gross selling price.
Pertinently, Section 104 of the NIRC, as amended by RA 7716, defines input tax in this wise:
"The term input tax means the value-added tax due from or paid by a VAT-registered persons in the
course of his trade or business on importation of goods or local purchase of goods or services,
including lease or use of property, from a VAT-registered person. It shall also include the transitional
input tax determined in accordance with Section 135 of this Code."2
On the basis of the foregoing considerations, I submit that petitioner may avail of the transitional
input tax credit provided by law notwithstanding that its purchase of the lands within Fort Bonifacio
from the government was not subject to value-added tax.
I come now to the issue of whether the inventory on which to base the transitional input tax credit
includes lands or only the improvements on lands.
Here, a plain reading of the law, specifically the statutory definition of the term "goods", is all that is
necessary to see the merit in petitioners position.
"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 valueadded 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.
"(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; x x x."
In this connection, petitioner cites the case of Victorias Milling Company, Inc. vs. Social Security
Commission,3where it was held:
"While it is true that terms or words are to be interpreted in accordance with their well-accepted
meaning in law, nevertheless, when such term or word is specifically defined in a particular law, such
interpretation must be adopted in enforcing that particular law, for it can not be gainsaid that a
particular phrase or term may have one meaning for one purpose and another meaning for some
other purpose."4
Hence, petitioner maintains that the term "goods" as used in the above-quoted Section 105 must
include "[R]eal properties (not "improvements") held primarily for sale to customers," as defined in
Section 100.
On December 9, 1995, the Commissioner of Internal Revenue issued Revenue Regulations No. 795. Section 4.105-1 thereof states, in pertinent part:
"Sec. 4.105-1. Transitional input tax on beginning inventories. Taxpayers who became VATregistered persons upon effectivity of RA No. 7716 who have exceeded the minimum turnover of
P500,000.00 or who voluntarily register even if their turnover does not exceed P500,000.00 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 taxpayers 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. x x x."
Petitioner assails the validity of the Revenue Regulations insofar as it runs counter to the statutory
definition of "goods" discussed above.
Article 7 of the Civil Code provides that "[a]dministrative or executive acts, orders and regulations
shall be valid only when they are not contrary to the laws or the Constitution." Simply put, an
administrative rule or regulation cannot contravene the law on which it is based. Thus, Rev. Regs. 795 cannot distinguish between land and improvements in regard to the computation of the
transitional input tax credit which a taxpayer may claim under Section 105. Where the law does not
distinguish, courts should not distinguish.5
Rules and regulations issued by administrative agencies in the implementation of laws they
administer shall not in any way modify, or be inconsistent with, explicit provisions of the law. 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.6 Where there is a discrepancy between the basic law and a rule or regulation issued to
implement said law, what prevails is the basic law.7
Rev. Regs. 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 Commissioner of Internal Revenue
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 administrative agency. It is required that the regulation be germane to the objects
and purposes of the law, and be not in contradiction to, but in conformity with, the standards
prescribed by law. They must conform to and be consistent with the provisions of the enabling
statute in order for such rule or regulation to be valid. Constitutional and statutory provisions control
with respect to what rules and regulations may be promulgated by an administrative body, as well as
with respect to what fields are subject to regulation by it. It may not make rules and regulations
which are inconsistent with the provisions of the Constitution or a statute, particularly the statute it is
administering or which created it, or which are in derogation of, or defeat, the purpose of a statute. In
case of conflict between a statute and an administrative order, the former must prevail.8
Furthermore, it is significant to note that, on January 1, 1997, Revenue Regulations No. 6-97 was
issued by the Commissioner of Internal Revenue. Pertinently, Section 4.105-1 of Rev. Regs. 6-97 is
a basic reiteration of the same Section 4.105-1 of Rev. Regs. 7-95, except that the later issuance
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)."
It is clear, therefore, that under Rev. Regs. 6-97, the allowable transitional input tax credit is no
longer limited to improvements on real properties. The particular provision of Rev. Regs. 7-95, on
which respondent Commissioner as well as the CTA and the CA relied in denying petitioners claim
for transitional input tax credit, has effectively been repealed by Rev. Regs. 6-97. In a sense, the
new regulation is now in consonance with Section 100 of the NIRC, insofar as the definition of real
properties as goods is concerned.
While the events subject of G.R. No. 158885 took place before the issuance of Rev. Regs. 6-97, this
regulation must be given retroactive application, it being beneficial to the taxpayer. This is more in
keeping with fairness and equity, which this Court is bound to observe in its decision. Conversely, it
is important to note that rulings or circulars promulgated by the Commissioner of Internal Revenue
which are prejudicial to taxpayers are not given retroactive effect.9
On the other hand, the transactions involved in G.R. No. 170680, occurred within the third quarter of
1997, when Rev. Reg. 6-97 was already in effect.
In sum, petitioner should be allowed to base the computation of its transitional input tax credit on the
value of its lands and improvements; and not only on the improvements.
To grant petitioner the full benefits of the transitional input tax credit would not only inure to its own
benefit. As petitioner points out in its Memorandum, it will also benefit the general buying public, who
will then enjoy lower prices for properties sold within the Global City.
Likewise, it must be borne in mind that petitioner is a partner of government in the implementation of
the national policy of converting idle or non-productive government lands into effective instruments
of economic development.10Moreover, investments in the construction and real estate industry have
catalyzed the Philippine economy and put it in high gear. They have created thousands of job
opportunities. Petitioner plays an important role in this area.
ACCORDINGLY, I vote to GRANT both petitions in these consolidated cases.
CONSUELO YNARES-SANTIAGO
Associate Justice

SECOND DIVISION
COMMISSIONER OF G.R. Nos. 134587 & 134588
INTERNAL REVENUE,
Petitioner, Present:
PUNO, J.,

Chairman,
- versus - AUSTRIA-MARTINEZ,

CALLEJO, SR.,
TINGA, and
BENGUET CORPORATION,
Respondent.

CHICO-NAZARIO, JJ.
Promulgated:

July 8, 2005
x-------------------------------------------------------------------x

DECISION
TINGA, J.:
This is a petition for the review of a consolidated Decision of
the Former Fourteenth Division of the Court of Appeals[1] ordering
the Commissioner of Internal Revenue to award tax credits to
Benguet Corporation in the amount corresponding to the input
value added taxes that the latter had incurred in relation to its sale
of gold to the Central Bank during the period of 01 August 1989 to
31 July 1991.
Petitioner is the Commissioner of Internal Revenue (petitioner)
acting in his official capacity as head of the Bureau of Internal
Revenue (BIR), an attached agency of the Department of
Finance,[2] with the authority, inter alia, to determine claims for
refunds or tax credits as provided by law.[3]
Respondent Benguet Corporation (respondent) is a domestic
corporation organized and existing by virtue of Philippine laws,
engaged in the exploration, development and operation of mineral
resources, and the sale or marketing thereof to various
entities.[4]Respondent is a value added tax (VAT) registered
enterprise.[5]

The transactions in question occurred during the period

between 1988 and 1991. Under Sec. 99 of the National Internal
Revenue Code (NIRC),[6] as amended by Executive Order (E.O.) No.
273 s. 1987, then in effect, 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
is liable for output VAT at rates of either 10% or 0% (zero-rated)
depending on the classification of the transaction under Sec. 100 of
the NIRC. Persons registered under the VAT system[7] are allowed to
recognize input VAT, or the VAT due from or paid by it in the course
of its trade or business on importation of goods or local purchases
of goods or service, including lease or use of properties, from a VATregistered person.[8]
In January of 1988, respondent applied for and was granted
by the BIR zero-rated status on its sale of gold to Central Bank.[9]On
28 August 1988, Deputy Commissioner of Internal Revenue
Eufracio D. Santos issued VAT Ruling No. 3788-88, which declared
that [t]he sale of gold to Central Bank is considered as export sale
subject to zero-rate pursuant to Section 100[[10]] of the Tax Code, as
amended by Executive Order No. 273. The BIR came out with at
least six (6) other issuances[11] reiterating the zero-rating of sale of
gold to the Central Bank, the latest of which is VAT Ruling No. 03690 dated 14 February 1990.[12]

Relying on its zero-rated status and the above issuances,

respondent sold gold to the Central Bank during the period of 1
August 1989 to 31 July 1991 and entered into transactions that
resulted in input VAT incurred in relation to the subject sales of
gold. It then filed applications for tax refunds/credits corresponding
to
input
VAT
for
the
amounts[13] of P46,177,861.12,[14]
P19,218,738.44,[15] and P84,909,247.96.[16] Respondents
applications were either unacted upon or expressly disallowed by
petitioner.[17] In addition, petitioner issued a deficiency assessment
against respondent when, after applying respondents creditable
input VAT costs against the retroactive 10% VAT levy, there
resulted a balance of excess output VAT.[18]
The express disallowance of respondents application for
refunds/credits and the issuance of deficiency assessments against
it were based on a BIR rulingBIR VAT Ruling No. 008-92 dated 23
January 1992that was issued subsequent to the consummation of
the subject sales of gold to the Central Bank which provides that
sales of gold to the Central Bank shall not be considered as export
sales and thus, shall be subject to 10% VAT. In addition, BIR VAT
Ruling No. 008-92 withdrew, modified, and superseded all
inconsistent BIR issuances. The relevant portions of the ruling
provides, thus:
1. In general, for purposes of the term export sales only direct
export sales and foreign currency denominated sales, shall be
qualified for zero-rating.
....
4. Local sales of goods, which by fiction of law are considered
export sales (e.g., the Export Duty Law considers sales of gold to
the Central Bank of the Philippines, as export sale). This

transaction shall not be considered as export sale for VAT

purposes.
....
[A]ll Orders and Memoranda issued by this Office inconsistent
herewith
are
considered
withdrawn,
modified
or
superseded. (Emphasis supplied)

The BIR also issued VAT Ruling No. 059-92 dated 28 April 1992
and Revenue Memorandum Order No. 22-92 which decreed that the
revocation of VAT Ruling No. 3788-88 by VAT Ruling No. 008-92
would not unduly prejudice mining companies and, thus, could be
applied retroactively.[19]
Respondent filed three separate petitions for review with the
Court of Tax Appeals (CTA), docketed as CTA Case No. 4945, CTA
Case No. 4627, and the consolidated cases of CTA Case Nos. 4686
and 4829.

In the three cases, respondent argued that a retroactive

application of BIR VAT Ruling No. 008-92 would violate Sec. 246 of
the NIRC, which mandates the non-retroactivity of rulings or
circulars issued by the Commissioner of Internal Revenue that
would operate to prejudice the taxpayer. Respondent then
discussed in detail the manner and extent by which it was
prejudiced by this retroactive application.[20] Petitioner on the other
hand, maintained that BIR VAT Ruling No. 008-92 is, firstly, not
void and entitled to great respect, having been issued by the body
charged with the duty of administering the VAT law, and secondly,

it may validly be given retroactive effect since it was not prejudicial

to respondent.
In three separate decisions,[21] the CTA dismissed respondents
respective petitions. It held, with Presiding Judge Ernesto D. Acosta
dissenting, that no prejudice had befallen respondent by virtue of
the retroactive application of BIR VAT Ruling No. 008-92, and that,
consequently, the application did not violate Sec. 246 of the
NIRC.[22]
The CTA decisions were appealed by respondent to the Court
of Appeals. The cases were docketed therein as CA-G.R. SP Nos.
37205, 38958, and 39435, and thereafter consolidated. The Court
of Appeals, after evaluating the arguments of the parties, rendered
the questioned Decision reversing the Court of Tax Appeals insofar
as the latter had ruled that BIR VAT Ruling No. 008-92 did not
prejudice the respondent and that the same could be given
retroactive effect.
In its Decision, the appellate court held that respondent
suffered financial damage equivalent to the sum of the disapproved
claims. It stated that had respondent known that such sales were
subject to 10% VAT, which rate was not the prevailing rate at the
time of the transactions, respondent would have passed on the cost
of the input taxes to the Central Bank. It also ruled that the
remedies which the CTA supposed would eliminate any resultant
prejudice to respondent were not sufficient palliatives as the
monetary values provided in the supposed remedies do not
approximate the monetary values of the tax credits that respondent
lost after the implementation of the VAT ruling in question. It cited

Manila Mining Corporation v. Commissioner of Internal Revenue,[23] in

which the Court of Appeals held[24] that BIR VAT Ruling No. 008-92
cannot be given retroactive effect. Lastly, the Court of Appeals
observed that R.A. 7716, the The New Expanded VAT Law, reveals
the intent of the lawmakers with regard to the treatment of sale of
gold to the Central Bank since the amended version therein of Sec.
100 of the NIRC expressly provides that the sale of gold to the
Bangko Sentral ng Pilipinas is an export sale subject to 0% VAT
rate. The appellate court thus allowed respondents claims,
decreeing in its dispositive portion, viz:
WHEREFORE, the appealed decision is hereby REVERSED. The
respondent Commissioner of Internal Revenue is ordered to award the
following tax credits to petitioner.
1) In CA-G.R. SP No. 37209 P49,611,914.00
2) in CA-G.R. SP No. 38958 - P19,218,738.44
3) in CA-G.R. SP No. 39435 - P84,909,247.96[25]

Dissatisfied with the above ruling, petitioner filed the

instant Petition for Review questioning the determination of the
Court of Appeals that the retroactive application of the subject
issuance was prejudicial to respondent and could not be applied
retroactively.
Apart from the central issue on the validity of the retroactive
application of VAT Ruling No. 008-92, the question of the validity of
the issuance itself has been touched upon in the pleadings,
including a reference made by respondent to a Court of
AppealsDecision holding that the VAT Ruling had no legal
basis.[26] For its part, as the party that raised this issue, petitioner
spiritedly defends the validity of the issuance.[27] Effectively,
however, the question is a non-issue and delving into it would be a

needless exercise for, as respondent emphatically pointed out in

its Comment, unlike petitioners formulation of the issues, the only
real issue in this case is whether VAT Ruling No. 008-92 which
revoked previous rulings of the petitioner which respondent heavily
relied upon . . . may be legally applied retroactively to
respondent.[28] This Court need not invalidate the BIR issuances,
which have the force and effect of law, unless the issue of validity is
so crucially at the heart of the controversy that the Court cannot
resolve the case without having to strike down the issuances.
Clearly, whether the subject VAT ruling may validly be given
retrospective effect is the lis mota in the case. Put in another but
specific fashion, the sole issue to be addressed is whether
respondents sale of gold to the Central Bank during the period
when such was classified by BIR issuances as zero-rated could be
taxed validly at a 10% rate after the consummation of the
transactions involved.
In a long line of cases,[29] this Court has affirmed that the
rulings, circular, rules and regulations promulgated by the
Commissioner of Internal Revenue would have no retroactive
application if to so apply them would be prejudicial to the
taxpayers. In fact, both petitioner[30] and respondent[31] agree that
the retroactive application of VAT Ruling No. 008-92 is valid only if
such application would not be prejudicial to the respondent
pursuant to the explicit mandate under Sec. 246 of the NIRC, thus:
Sec. 246. Non-retroactivity of rulings.- Any revocation,
modification
or
reversal
of
any
of
the
rules
and
regulations promulgated in accordance with the preceding Section
or any of the rulings or circulars promulgated by the
Commissioner shall not be given retroactive application if the
revocation, modification or reversal will be prejudicial to the
taxpayers except in the following cases: (a) where the taxpayer

deliberately misstates or omits material facts from his return on

any document required of him by the Bureau of Internal Revenue;
(b) where the facts subsequently gathered by the Bureau of
Internal Revenue are materially different form the facts on which
the ruling is based; or (c) where the taxpayer acted in bad faith.
(Emphasis supplied)

In that regard, petitioner submits that respondent would not

be prejudiced by a retroactive application; respondent maintains
the contrary. Consequently, the determination of the issue of
retroactivity hinges on whether respondent would suffer prejudice
from the retroactive application of VAT Ruling No. 008-92.
We agree with the Court of Appeals and the respondent.
To begin with, the determination of whether respondent had
suffered prejudice is a factual issue. It is an established rule that in
the exercise of its power of review, the Supreme Court is not a trier
of facts. Moreover, in the exercise of the Supreme Courts power of
review, the findings of facts of the Court of Appeals are conclusive
and binding on the Supreme Court.[32] An exception to this rule is
when the findings of fact a quo are conflicting,[33] as is in this case.
VAT is a percentage tax imposed at every stage of the
distribution process on the sale, barter, exchange or lease of goods
or properties and rendition of services in the course of trade or
business, or the importation of goods.[34] It is an indirect tax, which
may be shifted to the buyer, transferee, or lessee of the goods,
properties, or services.[35] However, the party directly liable for the
payment of the tax is the seller.[36]
In transactions taxed at a 10% rate, when at the end of any
given taxable quarter the output VAT exceeds the input VAT, the

excess shall be paid to the government; when the input VAT

exceeds the output VAT, the excess would be carried over to VAT
liabilities for the succeeding quarter or quarters.[37] On the other
hand, transactions which are taxed at zero-rate do not result in any
output tax. Input VAT attributable to zero-rated sales could be
refunded or credited against other internal revenue taxes at the
option of the taxpayer.[38]

To illustrate, in a zero-rated transaction, when a VATregistered person (taxpayer) purchases materials from his supplier
atP80.00, P7.30[39] of which was passed on to him by his supplier as
the latters 10% output VAT, the taxpayer is allowed to recoverP7.30
from the BIR, in addition to other input VAT he had incurred in
relation to the zero-rated transaction, through tax credits or
refunds. When the taxpayer sells his finished product in a zerorated transaction, say, for P110.00, he is not required to pay any
output VAT thereon. In the case of a transaction subject to 10%
VAT, the taxpayer is allowed to recover both the input VAT of P7.30
which he paid to his supplier and his output VAT of P2.70 (10%
the P30.00 value he has added to the P80.00 material) by passing
on both costs to the buyer. Thus, the buyer pays the total 10% VAT
cost, in this case P10.00 on the product.
In both situations, the taxpayer has the option not to carry
any VAT cost because in the zero-rated transaction, the taxpayer is
allowed to recover input tax from the BIR without need to pay
output tax, while in 10% rated VAT, the taxpayer is allowed to pass
on both input and output VAT to the buyer. Thus, there is an
elemental similarity between the two types of VAT ratings in that

the taxpayer has the option not to take on any VAT payment for his
transactions by simply exercising his right to pass on the VAT costs
in the manner discussed above.
Proceeding from the foregoing, there appears to be no upfront
economic difference in changing the sale of gold to the Central Bank
from a 0% to 10% VAT rate provided that respondent would be
allowed the choice to pass on its VAT costs to the Central Bank. In
the instant case, the retroactive application of VAT Ruling No. 00892 unilaterally forfeited or withdrew this option of respondent. The
adverse effect is that respondent became the unexpected and
unwilling debtor to the BIR of the amount equivalent to the total
VAT cost of its product, a liability it previously could have recovered
from the BIR in a zero-rated scenario or at least passed on to the
Central Bank had it known it would have been taxed at a 10% rate.
Thus, it is clear that respondent suffered economic prejudice when
its consummated sales of gold to the Central Bank were taken out
of the zero-rated category. The change in the VAT rating of
respondents transactions with the Central Bank resulted in the
twin loss of its exemption from payment of output VAT and its
opportunity to recover input VAT, and at the same time subjected it
to the 10% VAT sans the option to pass on this cost to the Central
Bank, with the total prejudice in money terms being equivalent to
the 10% VAT levied on its sales of gold to the Central Bank.

Petitioner had made its position hopelessly untenable by

arguing that the deficiency 10% that may be assessable will only be
equal to 1/11th of the amount billed to the [Central Bank] rather than
10% thereof. In short, [respondent] may only be charged based on the
tax amount actually and technically passed on to the [Central Bank]

as part of the invoiced price.[40] To the Court, the aforequoted

statement is a clear recognition that respondent would suffer
prejudice in the amount actually and technically passed on to the
[Central Bank] as part of the invoiced price. In determining the
prejudice suffered by respondent, it matters little how the amount
charged against respondent is computed,[41] the point is that the
amount (equal to 1/11th of the amount billed to the Central
Bank) was charged against respondent, resulting in damage to the
latter.
Petitioner posits that the retroactive application of BIR VAT
Ruling No. 008-92 is stripped of any prejudicial effect when viewed
in relation to several available options to recoup whatever liabilities
respondent may have incurred, i.e., respondents input VAT may
still be used (1) to offset its output VAT on the sales of gold to the
Central Bank or on its output VAT on other sales subject to 10%
VAT, and (2) as deductions on its income tax under Sec. 29 of the
Tax Code.[42]
On petitioners first suggested recoupment modality,
respondent counters that its other sales subject to 10% VAT are so
minimal that this mode is of little value. Indeed, what use would a
credit be where there is nothing to set it off against? Moreover,
respondent points out that after having been imposed with 10%
VAT sans the opportunity to pass on the same to the Central Bank,
it was issued a deficiency tax assessment because its input VAT tax
credits were not enough to offset the retroactive 10% output VAT.
The prejudice then experienced by respondent lies in the fact that
the tax refunds/credits that it expected to receive had effectively
disappeared by virtue of its newfound output VAT liability against
which petitioner had offset the expected refund/credit. Additionally,

the prejudice to respondent would not simply disappear, as

petitioner claims, when a liability (which liability was not there to
begin with) is imposed concurrently with an opportunity to reduce,
not totally eradicate, the newfound liability. In sum, contrary to
petitioners suggestion, respondents net income still decreased
corresponding to the amount it expected as its refunds/credits and
the deficiency assessments against it, which when summed up
would be the total cost of the 10% retroactive VAT levied on
respondent.
Respondent claims to have incurred further prejudice. In
computing its income taxes for the relevant years, the input VAT
cost that respondent had paid to its suppliers was not treated by
respondent as part of its cost of goods sold, which is deductible
from gross income for income tax purposes, but as an asset which
could be refunded or applied as payment for other internal revenue
taxes. In fact, Revenue Regulation No. 5-87 (VAT Implementing
Guidelines), requires input VAT to be recorded not as part of the
cost of materials or inventory purchased but as a separate entry
called input taxes, which may then be applied against output VAT,
other internal revenue taxes, or refunded as the case may be.[43] In
being denied the opportunity to deduct the input VAT from its gross
income, respondents net income was overstated by the amount of
its input VAT. This overstatement was assessed tax at the 32%
corporate income tax rate, resulting in respondents overpayment of
income taxes in the corresponding amount. Thus, respondent not
only lost its right to refund/ credit its input VAT and became liable
for deficiency VAT, it also overpaid its income tax in the amount of
32% of its input VAT.

This leads us to the second recourse that petitioner has

suggested to offset any resulting prejudice to respondent as a
consequence of giving retroactive effect to BIR VAT Ruling No. 00892. Petitioner submits that granting that respondent has no other
sale subject to 10% VAT against which its input taxes may be used
in payment, then respondent is constituted as the final entity
against which the costs of the tax passes-on shall legally stop;
hence, the input taxes may be converted as costs available as
deduction for income tax purposes.[44]
Even assuming that the right to recover respondents excess
payment of income tax has not yet prescribed, this relief would only
address respondents overpayment of income tax but not the other
burdens discussed above. Verily, this remedy is not a feasible
option for respondent because the very reason why it was issued a
deficiency tax assessment is that its input VAT was not enough to
offset its retroactive output VAT. Indeed, the burden of having to go
through an unnecessary and cumbersome refund process is
prejudice enough. Moreover, there is in fact nothing left to claim as
a deduction from income taxes.

From the foregoing it is clear that petitioners suggested

options by which prejudice would be eliminated from a retroactive

application of VAT Ruling No. 008-92 are either simply inadequate

or grossly unrealistic.
At the time when the subject transactions were consummated,
the prevailing BIR regulations relied upon by respondent ordained
that gold sales to the Central Bank were zero-rated. The BIR
interpreted Sec. 100 of the NIRC in relation to Sec. 2 of E.O. No.
581 s. 1980 which prescribed that gold sold to the Central Bank
shall be considered export and therefore shall be subject to the
export and premium duties. In coming out with this interpretation,
the BIR also considered Sec. 169 of Central Bank Circular No. 960
which states that all sales of gold to the Central Bank are
considered

constructive exports.[45] Respondent should not be faulted for

relying on the BIRs interpretation of the said laws and
regulations.[46] While it is true, as petitioner alleges, that
government is not estopped from collecting taxes which remain
unpaid on account of the errors or mistakes of its agents and/or
officials and there could be no vested right arising from an
erroneous interpretation of law, these principles must give way to
exceptions based on and in keeping with the interest of justice and
fairplay, as has been done in the instant matter. For, it is
primordial that every person must, in the exercise of his rights and
in the performance of his duties, act with justice, give everyone his
due, and observe honesty and good faith.[47]

The case of ABS-CBN Broadcasting Corporation v. Court of Tax

Appeals[48] involved
a
similar factual
milieu. There
the
Commissioner of Internal Revenue issued Memorandum Circular
No. 4-71 revoking an earlier circular for being erroneous for lack of
legal basis. When the prior circular was still in effect, petitioner
therein relied on it and consummated its transactions on the basis
thereof. We held, thus:
. . . .Petitioner was no longer in a position to withhold taxes due
from foreign corporations because it had already remitted all film
rentals and no longer had any control over them when the new
Circular was issued. . . .
....
This Court is not unaware of the well-entrenched principle
that the [g]overnment is never estopped from collecting taxes
because of mistakes or errors on the part of its agents. But, like
other principles of law, this also admits of exceptions in the
interest of justice and fairplay. . . .In fact, in the United States, . . .
it has been held that the Commissioner [of Internal Revenue] is
precluded from adopting a position inconsistent with one
previously taken where injustice would result therefrom or where
there has been a misrepresentation to the taxpayer.[49]

Respondent, in this case, has similarly been put on the

receiving end of a grossly unfair deal. Before respondent was
entitled to tax refunds or credits based on petitioners own
issuances. Then suddenly, it found itself instead being made to pay
deficiency taxes with petitioners retroactive change in the VAT
categorization of respondents transactions with the Central Bank.

This is the sort of unjust treatment of a taxpayer which the law in

Sec. 246 of the NIRC abhors and forbids.
WHEREFORE, the petition is
The Decision of the Court of
pronouncement as to costs.

DENIED
Appeals

for lack of merit.

is AFFIRMED. No

SO ORDERED.

Republic of the Philippines

Supreme Court
Manila
SECOND DIVISION
COMMISSIONER OF INTERNAL
REVENUE,
Petitioner,

- versus -

G.R. No. 183505

Present:
CARPIO, J., Chairperson,
BRION,
DEL CASTILLO,
ABAD, and
PEREZ, JJ.

SM PRIME HOLDINGS, INC.

and FIRST ASIA REALTY
Promulgated:
DEVELOPMENT CORPORATION,
Respondents.
February 26, 2010
x------------------------------------------------------------------x

DECISION
DEL CASTILLO, J.:
When the intent of the law is not apparent as worded, or when the application of
the law would lead to absurdity or injustice, legislative history is all important. In such

cases, courts may take judicial notice of the origin and history of the law,[1] the
deliberations during the enactment,[2] as well as prior laws on the same subject matter[3] to
ascertain the true intent or spirit of the law.
This Petition for Review on Certiorari under Rule 45 of the Rules of Court, in
relation to Republic Act (RA) No. 9282,[4] seeks to set aside the April 30, 2008
Decision[5] and the June 24, 2008 Resolution[6] of the Court of Tax Appeals (CTA).
Factual Antecedents
Respondents SM Prime Holdings, Inc. (SM Prime) and First Asia Realty
Development Corporation (First Asia) are domestic corporations duly organized and
existing under the laws of the Republic of the Philippines. Both are engaged in the
business of operating cinema houses, among others.[7]
CTA Case No. 7079
On September 26, 2003, the Bureau of Internal Revenue (BIR) sent SM Prime a
Preliminary Assessment Notice (PAN) for value added tax (VAT) deficiency on cinema
ticket sales in the amount of P119,276,047.40 for taxable year 2000.[8] In response, SM
Prime filed a letter-protest dated December 15, 2003.[9]
On December 12, 2003, the BIR sent SM Prime a Formal Letter of Demand for
the alleged VAT deficiency, which the latter protested in a letter dated January 14,
2004.[10]
On September 6, 2004, the BIR denied the protest filed by SM Prime and ordered
it to pay the VAT deficiency for taxable year 2000 in the amount ofP124,035,874.12.[11]
On October 15, 2004, SM Prime filed a Petition for Review before the CTA
docketed as CTA Case No. 7079.[12]
CTA Case No. 7085
On May 15, 2002, the BIR sent First Asia a PAN for VAT deficiency on
cinema ticket sales for taxable year 1999 in the total amount
of P35,823,680.93.[13] First Asia protested the PAN in a letter dated July 9, 2002.[14]

Subsequently, the BIR issued a Formal Letter of Demand for the alleged VAT
deficiency which was protested by First Asia in a letter dated December 12, 2002.[15]
On September 6, 2004, the BIR rendered a Decision denying the protest and
ordering First Asia to pay the amount of P35,823,680.93 for VAT deficiency for taxable
year 1999.[16]
Accordingly, on October 20, 2004, First Asia filed a Petition for Review before
the CTA, docketed as CTA Case No. 7085.[17]
CTA Case No. 7111
On April 16, 2004, the BIR sent a PAN to First Asia for VAT deficiency on
cinema
ticket
sales
for
taxable
year
2000
in
the
amount
of P35,840,895.78. First Asiaprotested the PAN through a letter dated April 22, 2004.[18]
Thereafter, the BIR issued a Formal Letter of Demand for alleged VAT
deficiency.[19] First Asia protested the same in a letter dated July 9, 2004.[20]
On October 5, 2004, the BIR denied the protest and ordered First Asia to pay the
VAT deficiency in the amount of P35,840,895.78 for taxable year 2000.[21]
This prompted First Asia to file a Petition for Review before the CTA
on December 16, 2004. The case was docketed as CTA Case No. 7111.[22]
CTA Case No. 7272
Re: Assessment Notice No. 008-02
A PAN for VAT deficiency on cinema ticket sales for the taxable year 2002 in the
total amount of P32,802,912.21 was issued against First Asia by the BIR. In response,
First Asia filed a protest-letter dated November 11, 2004. The BIR then sent a Formal
Letter of Demand, which was protested by First Asia on December 14, 2004.[23]
Re: Assessment Notice No. 003-03

A PAN for VAT deficiency on cinema ticket sales in the total amount
of P28,196,376.46 for the taxable year 2003 was issued by the BIR against First Asia. In
a letter dated September 23, 2004, First Asia protested the PAN. A Formal Letter of
Demand was thereafter issued by the BIR to First Asia, which the latter protested through
a letter dated November 11, 2004. [24]
On May 11, 2005, the BIR rendered a Decision denying the protests. It ordered
First Asia to pay the amounts of P33,610,202.91 and P28,590,826.50 for VAT deficiency
for taxable years 2002 and 2003, respectively.[25]
Thus, on June 22, 2005, First Asia filed a Petition for Review before the CTA,
docketed as CTA Case No. 7272.[26]
Consolidated Petitions
The Commissioner of Internal Revenue (CIR) filed his Answers to the Petitions
filed by SM Prime and First Asia.[27]
On July 1, 2005, SM Prime filed a Motion to Consolidate CTA Case Nos. 7085,
7111 and 7272 with CTA Case No. 7079 on the grounds that the issues raised therein are
identical and that SM Prime is a majority shareholder of First Asia. The motion was
granted.[28]
Upon submission of the parties respective memoranda, the consolidated cases
were submitted for decision on the sole issue of whether gross receipts derived from
admission tickets by cinema/theater operators or proprietors are subject to VAT.[29]
Ruling of the CTA First Division
On September 22, 2006, the First Division of the CTA rendered a Decision
granting the Petition for Review. Resorting to the language used and the legislative
history of the law, it ruled that the activity of showing cinematographic films is not a
service covered by VAT under the National Internal Revenue Code (NIRC) of 1997, as
amended, but an activity subject to amusement tax under RA 7160, otherwise known as
the Local Government Code (LGC) of 1991. Citing House Joint Resolution No. 13,
entitled Joint Resolution Expressing the True Intent of Congress with Respect to the

Prevailing Tax Regime in the Theater and Local Film Industry Consistent with the States
Policy to Have a Viable, Sustainable and Competitive Theater and Film Industry as One
of its Partners in National Development,[30] the CTA First Division held that the House of
Representatives resolved that there should only be one business tax applicable to theaters
and movie houses, which is the 30% amusement tax imposed by cities and provinces
under the LGC of 1991. Further, it held that consistent with the States policy to have a
viable, sustainable and competitive theater and film industry, the national government
should be precluded from imposing its own business tax in addition to that already
imposed and collected by local government units. The CTA First Division likewise found
that Revenue Memorandum Circular (RMC) No. 28-2001, which imposes VAT on gross
receipts from admission to cinema houses, cannot be given force and effect because it
failed to comply with the procedural due process for tax issuances under RMC No. 2086.[31] Thus, it disposed of the case as follows:
IN VIEW OF ALL THE FOREGOING, this Court
hereby GRANTS the Petitions for Review. Respondents Decisions denying
petitioners protests against deficiency value-added taxes are
hereby REVERSED. Accordingly, Assessment Notices Nos. VT-00-000098,
VT-99-000057,
VT-00-000122,
003-03
and
008-02
are ORDERED cancelled and set aside.
SO ORDERED.[32]

Aggrieved, the CIR moved for reconsideration which was denied by the First
Division in its Resolution dated December 14, 2006.[33]
Ruling of the CTA En Banc
Thus, the CIR appealed to the CTA En Banc.[34] The case was docketed as CTA
EB No. 244.[35] The CTA En Banc however denied[36] the Petition for Review and
dismissed[37] as well petitioners Motion for Reconsideration.
The CTA En Banc held that Section 108 of the NIRC actually sets forth an
exhaustive enumeration of what services are intended to be subject to VAT. And since
the showing or exhibition of motion pictures, films or movies by cinema operators or
proprietors is not among the enumerated activities contemplated in the phrase sale or
exchange of services, then gross receipts derived by cinema/ theater operators or
proprietors from admission tickets in showing motion pictures, film or movie are not

subject to VAT. It reiterated that the exhibition or showing of motion pictures, films, or
movies is instead subject to amusement tax under the LGC of 1991. As regards the
validity of RMC No. 28-2001, the CTA En Banc agreed with its First Division that the
same cannot be given force and effect for failure to comply with RMC No. 20-86.
Issue
Hence, the present recourse, where petitioner alleges that the CTA En
Banc seriously erred:
(1)

In not finding/holding that the gross receipts derived by

operators/proprietors of cinema houses from admission tickets [are]
subject to the 10% VAT because:
(a) THE EXHIBITION OF MOVIES BY CINEMA
OPERATORS/PROPRIETORS TO THE PAYING
PUBLIC IS A SALE OF SERVICE;
(b) UNLESS EXEMPTED BY LAW, ALL SALES OF
SERVICES ARE EXPRESSLY SUBJECT TO VAT
UNDER SECTION 108 OF THE NIRC OF 1997;
(c) SECTION 108 OF THE NIRC OF 1997 IS A CLEAR
PROVISION OF LAW AND THE APPLICATION OF
RULES OF STATUTORY CONSTRUCTION AND
EXTRINSIC AIDS IS UNWARRANTED;
(d) GRANTING WITHOUT CONCEDING THAT RULES
OF CONSTRUCTION ARE APPLICABLE HEREIN,
STILL THE HONORABLE COURT ERRONEOUSLY
APPLIED THE SAME AND PROMULGATED
DANGEROUS PRECEDENTS;
(e) THERE IS NO VALID, EXISTING PROVISION OF
LAW EXEMPTING RESPONDENTS SERVICES FROM
THE VAT IMPOSED UNDER SECTION 108 OF THE
NIRC OF 1997;

(f)

QUESTIONS ON THE WISDOM OF THE LAW ARE

NOT PROPER ISSUES TO BE TRIED BY THE
HONORABLE COURT; and

(g) RESPONDENTS WERE TAXED BASED ON THE

PROVISION OF SECTION 108 OF THE NIRC.
(2)

In ruling that the enumeration in Section 108 of the NIRC of 1997

is exhaustive in coverage;

(3)

In misconstruing the NIRC of 1997 to conclude that the showing

of motion pictures is merely subject to the amusement tax imposed by
the Local Government Code; and

(4) In invalidating Revenue Memorandum Circular (RMC) No. 28-2001.[38]

Simply put, the issue in this case is whether the gross receipts derived by operators
or proprietors of cinema/theater houses from admission tickets are subject to VAT.
Petitioners Arguments
Petitioner argues that the enumeration of services subject to VAT in Section 108
of the NIRC is not exhaustive because it covers all sales of services unless exempted by
law. He claims that the CTA erred in applying the rules on statutory construction and in
using extrinsic aids in interpreting Section 108 because the provision is clear and
unambiguous. Thus, he maintains that the exhibition of movies by cinema operators or
proprietors to the paying public, being a sale of service, is subject to VAT.
Respondents Arguments
Respondents, on the other hand, argue that a plain reading of Section 108 of the
NIRC of 1997 shows that the gross receipts of proprietors or operators of
cinemas/theaters derived from public admission are not among the services subject to
VAT. Respondents insist that gross receipts from cinema/theater admission tickets were
never intended to be subject to any tax imposed by the national government. According
to them, the absence of gross receipts from cinema/theater admission tickets from the list
of services which are subject to the national amusement tax under Section 125 of the
NIRC of 1997 reinforces this legislative intent. Respondents also highlight the fact that

RMC No. 28-2001 on which the deficiency assessments were based is an unpublished
administrative ruling.
Our Ruling
The petition is bereft of merit.

The enumeration of services subject to VAT

under Section 108 of the NIRC is not exhaustive

Section 108 of the NIRC of the 1997 reads:

SEC. 108. Value-added Tax on Sale of Services and Use or Lease of
Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected, a
value-added tax equivalent to ten percent (10%) of gross receipts derived from
the sale or exchange of services, including the use or lease of properties.
The phrase sale or exchange of services means the performance of all kinds
of services in the Philippines for others for a fee, remuneration or
consideration, including those performed or rendered by construction and
service contractors; stock, real estate, commercial, customs and immigration
brokers; lessors of property, whether personal or real; warehousing
services;lessors or distributors of cinematographic films; persons engaged
in milling, processing, manufacturing or repacking goods for others;
proprietors, operators or keepers of hotels, motels, rest houses, pension houses,
inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes
and other eating places, including clubs and caterers; dealers in securities;
lending investors; transportation contractors on their transport of goods or
cargoes, including persons who transport goods or cargoes for hire and other
domestic common carriers by land, air and water relative to their transport of
goods or cargoes; services of franchise grantees of telephone and telegraph,
radio and television broadcasting and all other franchise grantees except those
under Section 119 of this Code; services of banks, non-bank financial
intermediaries and finance companies; and non-life insurance companies
(except their crop insurances), including surety, fidelity, indemnity and
bonding companies; and similar services regardless of whether or not the

performance thereof calls for the exercise or use of the physical or mental
faculties. The phrase sale or exchange of services shall likewise include:
(1) The lease or the use of or the right or privilege to use any copyright, patent,
design or model, plan, secret formula or process, goodwill, trademark, trade
brand or other like property or right;
xxxx
(7) The lease of motion picture films, films, tapes and discs; and
(8) The lease or the use of or the right to use radio, television, satellite
transmission and cable television time.
x x x x (Emphasis supplied)
A cursory reading of the foregoing provision clearly shows that the enumeration of the
sale or exchange of services subject to VAT is not exhaustive. The words, including,
similar services, and shall likewise include, indicate that the enumeration is by way of
example only.[39]

Among those included in the enumeration is the lease of motion picture films,
films, tapes and discs. This, however, is not the same as the showing or exhibition of
motion pictures or films. As pointed out by the CTA En Banc:
Exhibition in Blacks Law Dictionary is defined as To show or display. x x x
To produce anything in public so that it may be taken into possession (6th ed.,
p. 573). While the word lease is defined as a contract by which one owning
such property grants to another the right to possess, use and enjoy it on
specified period of time in exchange for periodic payment of a stipulated price,
referred to as rent (Blacks Law Dictionary, 6th ed., p. 889). x x x[40]

Since the activity of showing motion pictures, films or movies by cinema/ theater
operators or proprietors is not included in the enumeration, it is incumbent upon the court
to the determine whether such activity falls under the phrase similar services. The intent
of the legislature must therefore be ascertained.
The legislature never intended operators
or proprietors of cinema/theater houses to be
covered by VAT

Under the NIRC of 1939,[41] the national government imposed amusement tax on
proprietors, lessees, or operators of theaters, cinematographs, concert halls, circuses,
boxing exhibitions, and other places of amusement, including cockpits, race tracks, and
cabaret.[42] In the case of theaters or cinematographs, the taxes were first deducted,
withheld, and paid by the proprietors, lessees, or operators of such theaters or
cinematographs before the gross receipts were divided between the proprietors, lessees,
or operators of the theaters or cinematographs and the distributors of the cinematographic
films. Section 11[43] of the Local Tax Code,[44] however, amended this provision by
transferring the power to impose amusement tax[45] on admission from theaters,
cinematographs, concert halls, circuses and other places of amusements exclusively to the
local government. Thus, when the NIRC of 1977[46] was enacted, the national
government imposed amusement tax only on proprietors, lessees or operators of cabarets,
day and night clubs, Jai-Alai and race tracks.[47]
On January 1, 1988, the VAT Law[48] was promulgated. It amended certain
provisions of the NIRC of 1977 by imposing a multi-stage VAT to replace the tax on
original and subsequent sales tax and percentage tax on certain services. It imposed VAT
on sales of services under Section 102 thereof, which provides:
SECTION 102. Value-added tax on sale of services. (a) Rate and base
of tax. There shall be levied, assessed and collected, a value-added tax
equivalent to 10% percent of gross receipts derived by any person engaged in
the sale of services. The phrase sale of services means the performance of all
kinds of services for others for a fee, remuneration or consideration, including
those performed or rendered by construction and service contractors; stock,
real estate, commercial, customs and immigration brokers; lessors of personal
property; lessors or distributors of cinematographic films; persons engaged
in milling, processing, manufacturing or repacking goods for others; and
similar services regardless of whether or not the performance thereof calls for
the exercise or use of the physical or mental faculties: Provided That the
following services performed in the Philippines by VAT-registered persons
shall be subject to 0%:
(1) Processing manufacturing or repacking goods for other persons
doing business outside the Philippines which goods are subsequently exported,
xxx
xxxx

Gross receipts means the total amount of money or its equivalent

representing the contract price, compensation or service fee, including the
amount charged for materials supplied with the services and deposits or
advance payments actually or constructively received during the taxable
quarter for the service performed or to be performed for another person,
excluding value-added tax.
(b) Determination of the tax. (1) Tax billed as a separate item in the
invoice. If the tax is billed as a separate item in the invoice, the tax shall be
based on the gross receipts, excluding the tax.
(2) Tax not billed separately or is billed erroneously in the invoice. If
the tax is not billed separately or is billed erroneously in the invoice, the tax
shall be determined by multiplying the gross receipts (including the amount
intended to cover the tax or the tax billed erroneously) by 1/11. (Emphasis
supplied)
Persons subject to amusement tax under the NIRC of 1977, as amended, however, were
exempted from the coverage of VAT.[49]

On February 19, 1988, then Commissioner Bienvenido A. Tan, Jr. issued RMC 888, which clarified that the power to impose amusement tax on gross receipts derived
from admission tickets was exclusive with the local government units and that only the
gross receipts of amusement places derived from sources other than from admission
tickets were subject to amusement tax under the NIRC of 1977, as amended. Pertinent
portions of RMC 8-88 read:
Under the Local Tax Code (P.D. 231, as amended), the jurisdiction to
levy amusement tax on gross receipts arising from admission to places of
amusement has been transferred to the local governments to the exclusion of
the national government.
xxxx
Since the promulgation of the Local Tax Code which took effect on
June 28, 1973 none of the amendatory laws which amended the National
Internal Revenue Code, including the value added tax law under Executive
Order No. 273, has amended the provisions of Section 11 of the Local Tax
Code. Accordingly, the sole jurisdiction for collection of amusement tax on
admission receipts in places of amusement rests exclusively on the local
government, to the exclusion of the national government. Since the Bureau of

Internal Revenue is an agency of the national government, then it follows that

it has no legal mandate to levy amusement tax on admission receipts in the
said places of amusement.
Considering the foregoing legal background, the provisions under
Section 123 of the National Internal Revenue Code as renumbered by
Executive Order No. 273 (Sec. 228, old NIRC) pertaining to amusement taxes
on places of amusement shall be implemented in accordance with BIR
RULING, dated December 4, 1973 and BIR RULING NO. 231-86
datedNovember 5, 1986 to wit:
x x x Accordingly, only the gross receipts of the amusement places
derived from sources other than from admission tickets shall be subject to
x x x amusement tax prescribed under Section 228 of the Tax Code, as
amended (now Section 123, NIRC, as amended by E.O. 273). The tax on
gross receipts derived from admission tickets shall be levied and collected
by the city government pursuant to Section 23 of Presidential Decree No.
231, as amended x x x or by the provincial government, pursuant to
Section 11 of P.D. 231, otherwise known as the Local Tax
Code. (Emphasis supplied)

On October 10, 1991, the LGC of 1991 was passed into law. The local
government retained the power to impose amusement tax on proprietors, lessees, or
operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other places of
amusement at a rate of not more than thirty percent (30%) of the gross receipts from
admission fees under Section 140 thereof.[50] In the case of theaters or cinemas, the tax
shall first be deducted and withheld by their proprietors, lessees, or operators and paid to
the local government before the gross receipts are divided between said proprietors,
lessees, or operators and the distributors of the cinematographic films. However, the
provision in the Local Tax Code expressly excluding the national government from
collecting tax from the proprietors, lessees, or operators of theaters, cinematographs,
concert halls, circuses and other places of amusements was no longer included.
In 1994, RA 7716 restructured the VAT system by widening its tax base and
enhancing its administration. Three years later, RA 7716 was amended by RA
8241.Shortly thereafter, the NIRC of 1997[51] was signed into law. Several
amendments[52] were made to expand the coverage of VAT. However, none pertain to
cinema/theater operators or proprietors. At present, only lessors or distributors of
cinematographic films are subject to VAT. While persons subject to amusement
tax[53] under the NIRC of 1997 are exempt from the coverage of VAT.[54]

Based on the foregoing, the following facts can be established:

(1)

Historically, the activity of showing motion pictures, films or

movies by cinema/theater operators or proprietors has always been
considered as a form of entertainment subject to amusement tax.

(2)

Prior to the Local Tax Code, all forms of amusement tax were
imposed by the national government.

(3)

When the Local Tax Code was enacted, amusement tax on

admission tickets from theaters, cinematographs, concert halls,
circuses and other places of amusements were transferred to the local
government.

(4)

Under the NIRC of 1977, the national government imposed

amusement tax only on proprietors, lessees or operators of cabarets,
day and night clubs, Jai-Alai and race tracks.

(5)

The VAT law was enacted to replace the tax on original and
subsequent sales tax and percentage tax on certain services.
(6)
When the VAT law was implemented, it exempted persons subject
to amusement tax under the NIRC from the coverage of VAT.
(7)

When the Local Tax Code was repealed by the LGC of 1991, the
local government continued to impose amusement tax on admission
tickets from theaters, cinematographs, concert halls, circuses and other
places of amusements.

(8)

Amendments to the VAT law have been consistent in exempting

persons subject to amusement tax under the NIRC from the coverage
of VAT.

(9)

Only lessors or distributors of cinematographic films are included in

the coverage of VAT.

These reveal the legislative intent not to impose VAT on persons already covered
by the amusement tax. This holds true even in the case of cinema/theater operators taxed
under the LGC of 1991 precisely because the VAT law was intended to replace the
percentage tax on certain services. The mere fact that they are taxed by the local
government unit and not by the national government is immaterial. The Local Tax Code,
in transferring the power to tax gross receipts derived by cinema/theater operators or
proprietor from admission tickets to the local government, did not intend to treat
cinema/theater houses as a separate class. No distinction must, therefore, be made
between the places of amusement taxed by the national government and those taxed by
the local government.
To hold otherwise would impose an unreasonable burden on cinema/theater
houses operators or proprietors, who would be paying an additional 10%[55] VAT on top
of the 30% amusement tax imposed by Section 140 of the LGC of 1991, or a total of
40% tax. Such imposition would result in injustice, as persons taxed under the NIRC of
1997 would be in a better position than those taxed under the LGC of 1991. We need not
belabor that a literal application of a law must be rejected if it will operate unjustly or lead
to absurd results.[56] Thus, we are convinced that the legislature never intended to include
cinema/theater operators or proprietors in the coverage of VAT.
On this point, it is apropos to quote the case of Roxas v. Court of Tax Appeals,[57] to wit:
The power of taxation is sometimes called also the power to destroy.
Therefore, it should be exercised with caution to minimize injury to the
proprietary rights of a taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the hen that lays the golden egg. And, in
order to maintain the general public's trust and confidence in the Government
this power must be used justly and not treacherously.

The repeal of the Local Tax Code by the LGC

of 1991 is not a legal basis for the imposition of
VAT

Petitioner, in issuing the assessment notices for deficiency VAT against

respondents, ratiocinated that:

Basically, it was acknowledged that a cinema/theater operator was then

subject to amusement tax under Section 260 of Commonwealth Act No. 466,
otherwise known as the National Internal Revenue Code of 1939, computed
on the amount paid for admission. With the enactment of the Local Tax Code
under Presidential Decree (PD) No. 231, dated June 28, 1973, the power of
imposing taxes on gross receipts from admission of persons to cinema/theater
and other places of amusement had, thereafter, been transferred to the
provincial government, to the exclusion of the national or municipal
government (Sections 11 & 13, Local Tax Code). However, the said provision
containing the exclusive power of the provincial government to impose
amusement tax, had also been repealed and/or deleted by Republic Act (RA)
No. 7160, otherwise known as the Local Government Code of 1991, enacted
into law on October 10, 1991. Accordingly, the enactment of RA No. 7160,
thus, eliminating the statutory prohibition on the national government to
impose business tax on gross receipts from admission of persons to places
of amusement, led the way to the valid imposition of the VAT pursuant to
Section 102 (now Section 108) of the old Tax Code, as amended by the
Expanded VAT Law (RA No. 7716) and which was implemented
beginning January 1, 1996.[58] (Emphasis supplied)

We disagree.
The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the
imposition of VAT on the gross receipts of cinema/theater operators or proprietors
derived from admission tickets. The removal of the prohibition under the Local Tax Code
did not grant nor restore to the national government the power to impose amusement tax
on cinema/theater operators or proprietors. Neither did it expand the coverage of
VAT. Since the imposition of a tax is a burden on the taxpayer, it cannot be presumed nor
can it be extended by implication. A law will not be construed as imposing a tax unless it
does so clearly, expressly, and unambiguously.[59] As it is, the power to impose
amusement tax on cinema/theater operators or proprietors remains with the local
government.
Revenue Memorandum Circular No. 28-2001 is
invalid

Considering that there is no provision of law imposing VAT on the gross receipts
of cinema/theater operators or proprietors derived from admission tickets, RMC No. 28-

2001 which imposes VAT on the gross receipts from admission to cinema houses must
be struck down. We cannot overemphasize that RMCs must not override, supplant, or
modify the law, but must remain consistent and in harmony with, the law they seek to
apply and implement.[60]
In view of the foregoing, there is no need to discuss whether RMC No. 28-2001
complied with the procedural due process for tax issuances as prescribed under RMC No.
20-86.
Rule on tax exemption does not apply
Moreover, contrary to the view of petitioner, respondents need not prove their
entitlement to an exemption from the coverage of VAT. The rule that tax exemptions
should be construed strictly against the taxpayer presupposes that the taxpayer is clearly
subject to the tax being levied against him.[61] The reason is obvious: it is both illogical
and impractical to determine who are exempted without first determining who are
covered by the provision.[62] Thus, unless a statute imposes a tax clearly, expressly and
unambiguously, what applies is the equally well-settled rule that the imposition of a tax
cannot be presumed.[63] In fact, in case of doubt, tax laws must be construed strictly
against the government and in favor of the taxpayer.[64]
WHEREFORE, the Petition is hereby DENIED. The assailed April 30, 2008
Decision of the Court of Tax Appeals En Banc holding that gross receipts derived by
respondents from admission tickets in showing motion pictures, films or movies are not
subject to value-added tax under Section 108 of the National Internal Revenue Code of
1997, as amended, and its June 24, 2008 Resolution denying the motion for
reconsideration are AFFIRMED.
SO ORDERED.

FIRST DIVISION

[G. R. No. 141658. March 18, 2005]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE

PHILIPPINE AMERICAN ACCIDENT INSURANCE COMPANY,
INC., THE PHILIPPINE AMERICAN ASSURANCE COMPANY,
INC., and THE PHILIPPINE AMERICAN GENERAL INSURANCE
CO., INC.,respondents.
DECISION
CARPIO, J.:

The Case
Before the Court is a petition for review[1] assailing the Decision[2] of 7 January
2000 of the Court of Appeals in CA-G.R. SP No. 36816. The Court of Appeals affirmed
the Decision[3] of 5 January 1995 of the Court of Tax Appeals (CTA) in CTA Cases
Nos. 2514, 2515 and 2516. The CTA ordered the Commissioner of Internal Revenue
(petitioner) to refund a total of P29,575.02 to respondent companies (respondents).

Antecedent Facts
Respondents are domestic corporations licensed to transact insurance business
in the country. From August 1971 to September 1972, respondents paid the Bureau of
Internal Revenue under protest the 3% tax imposed on lending investors by Section
195-A[4] of Commonwealth Act No. 466 (CA 466), as amended by Republic Act No.
6110 (RA 6110) and other laws. CA 466 was the National Internal Revenue Code
(NIRC) applicable at the time.
Respondents paid the following amounts: P7,985.25 from Philippine American
(PHILAM) Accident Insurance Company; P7,047.80 from PHILAM Assurance
Company; and P14,541.97 from PHILAM General Insurance Company. These
amounts represented 3% of each companys interest income from mortgage and other
loans. Respondents also paid the taxes required of insurance companies under CA
466.
On 31 January 1973, respondents sent a letter-claim to petitioner seeking a
refund of the taxes paid under protest. When respondents did not receive a response,
each respondent filed on 26 April 1973 a petition for review with the CTA. These three
petitions, which were later consolidated, argued that respondents were not lending
investors and as such were not subject to the 3% lending investors tax under Section
195-A.
The CTA archived respondents case for several years while another case with a
similar issue was pending before the higher courts. When respondents case was
reinstated, the CTA ruled that respondents were entitled to their refund.

The Ruling of the Court of Tax Appeals

The CTA held that respondents are not taxable as lending investors because the
term lending investors does not embrace insurance companies. The CTA traced the
history of the tax on lending investors, as follows:

Originally, a person who was engaged in lending money at interest was taxed as a
money lender. [Sec. 1464(x), Rev. Adm. Code] The term money lenders was
defined as including all persons who make a practice of lending money for
themselves or others at interest. [Sec. 1465(v), id.] Under this law, an insurance
company was not considered a money lender and was not taxable as such. To quote
from an old BIR Ruling:
The lending of money at interest by insurance companies constitutes a necessary
incident of their regular business. For this reason, insurance companies are not liable
to tax as money lenders or real estate brokers for making or negotiating loans
secured by real property. (Ruling, February 28, 1920; BIR 135.2) (The Internal
Revenue Law, Annotated, 2nd ed., 1929, by B.L. Meer, page 143)
The same rule has been applied to banks.

For making investments on salary loans, banks will not be required to pay the
money lenders tax imposed by this subsection, for the reason that money lending is
considered a mere incident of the banking business. [See Ruling No. 43, (October 8,
1926) 25 Off. Gaz. 1326) (The Internal Revenue Law, Annotated, id.)
The term money lenders was later changed to lending investors but the definition of
the term remains the same. [Sec. 1464(x), Rev. Adm. Code, as finally amended by
Com. Act No. 215, and Sec. 1465(v) of the same Code, as finally amended by Act
No. 3963] The same law is embodied in the present National Internal Revenue Code
(Com. Act No. 466) without change, except in the amount of the tax. [See Secs.
182(A) (3) (dd) and 194(u), National Internal Revenue Code.]
It is a well-settled rule that an administrative interpretation of a law which has been
followed and applied for a long time, and thereafter the law is re-enacted without
substantial change, such administrative interpretation is deemed to have received
legislative approval. In short, the administrative interpretation becomes part of the
law as it is presumed to carry out the legislative purpose.[5]
The CTA held that the practice of lending money at interest is part of the
insurance business. CA 466 already taxes the insurance business. The CTA pointed
out that the law recognizes and even regulates this practice of lending money by
insurance companies.

The CTA observed that CA 466 also treated differently insurance companies from
lending investors in regard to fixed taxes. Under Section 182(A)(3)(gg), insurance
companies were subject to the same fixed tax as banks and finance companies. The
CTA reasoned that insurance companies were grouped with banks and finance
companies because the latters lending activities were also integral to their business. In
contrast, lending investors were taxed at a different fixed tax under Section
182(A)(3)(dd) of CA 466. The CTA stated that insurance companies xxx had never
been required by respondent [CIR] to pay the fixed tax imposed on lending investors
xxx.[6]
The dispositive portion of the Decision of 5 January 1995 of the Court of Tax
Appeals (CTA Decision) reads:

WHEREFORE, premises considered, petitioners Philippine American Accident

Insurance Co., Philippine American Assurance Co., and Philippine American
General Insurance Co., Inc. are not taxable on their lending transactions
independently of their insurance business. Accordingly, respondent is hereby
ordered to refund to petitioner[s] the sum of P7,985.25,P7,047.80 and P14,541.97 in
CTA Cases No. 2514, 2515 and 2516, respectively representing the fixed and
percentage taxes when (sic) paid by petitioners as lending investor from August
1971 to September 1972.
No pronouncement as to cost.
SO ORDERED.[7]
Dissatisfied, petitioner elevated the matter to the Court of Appeals.[8]

The Ruling of the Court of Appeals

The Court of Appeals ruled that respondents are not taxable as lending investors.
In its Decision of 7 January 2000 (CA Decision), the Court of Appeals affirmed the
ruling of the CTA, thus:

WHEREFORE, premises considered, the petition is DISMISSED, hereby

AFFIRMING the decision, dated January 5, 1995, of the Court of Tax Appeals in
CTA Cases Nos. 2514, 2515 and 2516.
SO ORDERED.[9]
Petitioner appealed the CA Decision to this Court.

The Issues
Petitioner raises the sole issue:

WHETHER RESPONDENT INSURANCE COMPANIES ARE SUBJECT TO THE

3% PERCENTAGE TAX AS LENDING INVESTORS UNDER SECTIONS
182(A)(3)(DD) AND 195-A, RESPECTIVELY IN RELATION TO SECTION
194(U), ALL OF THE NIRC.[10]
The Ruling of the Court
The petition lacks merit.

On the Additional Issue Raised by Petitioner

Section 182(A)(3)(dd) of CA 466 imposes an annual fixed tax on lending
investors, depending on their location.[11] The sole question before the CTA was
whether respondents were subject to the percentage tax on lending investors under
Section 195-A. Petitioner raised for the first time the issue of the fixed tax in the
Petition for Review[12] petitioner filed before the Court of Appeals.
Ordinarily, a party cannot raise for the first time on appeal an issue not raised in
the trial court.[13] The Court of Appeals should not have taken cognizance of the issue
on respondents supposed liability under Section 182(A)(3)(dd). However, we cannot
entirely fault the Court of Appeals or petitioner. Even if the percentage tax on lending
investors was the sole issue before it, the CTA ordered petitioner to refund to the
PHILAM companies the fixed and percentage taxes [t]hen paid by petitioners as
lending investor.[14] Although the amounts for refund consisted only of what
respondents paid as percentage taxes, the CTA Decision also ordered the refund to
respondents of the fixed tax on lending investors. Respondents in their pleadings deny
any liability under Section 182(A)(3)(dd), on the same ground that they are not lending
investors.
The question of whether respondents should pay the fixed tax under Section
182(A)(3)(dd) revolves around the same issue of whether respondents are taxable as
lending investors. In similar circumstances, the Court has held that an appellate court
may consider an unassigned error if it is closely related to an error that was properly
assigned.[15] This rule properly applies to the present case. Thus, we shall consider
and rule on the issue of whether respondents are subject to the fixed tax under
Section 182(A)(3)(dd).

Whether Insurance Companies are

Taxable as Lending Investors

Invoking Sections 195-A and 182(A)(3)(dd) in relation to Section 194(u) of CA
466, petitioner argues that insurance companies are subject to two fixed taxes and
two percentage taxes. Petitioner alleges that:

As a lending investor, an insurance company is subject to an annual fixed tax

of P500.00 and another P500.00 under Section 182 (A)(3)(dd) and (gg) of the Tax
Code. As an underwriter, an insurance company is subject to the 3% tax of the total
premiums collected and another 3% on the gross receipts as a lending investor under
Sections 255 and 195-A, respectively of the same Code. xxx[16]
Petitioner also contends that the refund granted to respondents is in the nature of
a tax exemption, and cannot be allowed unless granted explicitly and categorically.
The rule that tax exemptions should be construed strictly against the taxpayer
presupposes that the taxpayer is clearly subject to the tax being levied against him.
Unless a statute imposes a tax clearly, expressly and unambiguously, what applies is
the equally well-settled rule that the imposition of a tax cannot be presumed.[17]Where
there is doubt, tax laws must be construed strictly against the government and in favor
of the taxpayer.[18] This is because taxes are burdens on the taxpayer, and should not
be unduly imposed or presumed beyond what the statutes expressly and clearly
import.[19]
Section 182(A)(3)(dd) of CA 466 also provides:

Sec. 182. Fixed taxes. (A) On business xxx

xxx
(3) Other fixed taxes. The following fixed taxes shall be collected as follows, the
amount stated being for the whole year, when not otherwise specified;
xxx
(dd) Lending investors
1. In chartered cities and first class municipalities, five hundred pesos;
2. In second and third class municipalities, two hundred and fifty pesos;
3. In fourth and fifth class municipalities and municipal districts, one
hundred and twenty-five pesos; Provided, That lending investors who
do business as such in more than one province shall pay a tax of five
hundred pesos.
Section 195-A of CA 466 provides:

Sec. 195-A. Percentage tax on dealers in securities; lending investors. Dealers in

securities and lending investors shall pay a tax equivalent to three per centum on their
gross income.

Neither Section 182(A)(3)(dd) nor Section 195-A mentions insurance companies.

Section 182(A)(3)(dd) provides for the taxation of lending investors in different localities.
Section 195-A refers to dealers in securities and lending investors. The burden is thus
on petitioner to show that insurance companies are lending investors for purposes of
taxation.
In this case, petitioner does not dispute that respondents are in the insurance
business. Petitioner merely alleges that the definition of lending investors under CA 466
is broad enough to encompass insurance companies. Petitioner insists that because of
Section 194(u), the two principal activities of the insurance business, namely,
underwriting and investment, are separately taxable.[20]
Section 194(u) of CA 466 states:

(u) Lending investor includes all persons who make a practice of lending money for
themselves or others at interest.
xxx
As can be seen, Section 194(u) does not tax the practice of lending per se. It merely
defines what lending investors are. The question is whether the lending activities of
insurance companies make them lending investors for purposes of taxation.
We agree with the CTA and Court of Appeals that it does not. Insurance companies
cannot be considered lending investors under CA 466, as amended.

Definition of Lending
Investors under CA 466 Does
Not Include Insurance
Companies.
The definition in Section 194(u) of CA 466 is not broad enough to include the
business of insurance companies. The Insurance Code of 1978 [21] is very clear on what
constitutes an insurance company. It provides that an insurer or insurance company
shall include all individuals, partnerships, associations or corporations xxx engaged as
principals in the insurance business, excepting mutual benefit associations. [22] More
specifically, respondents fall under the category of insurance corporations as defined in
Section 185 of the Insurance Code, thus:

SECTION 185. Corporations formed or organized to save any person or persons or

other corporations harmless from loss, damage, or liability arising from any unknown
or future or contingent event, or to indemnify or to compensate any person or persons
or other corporations for any such loss, damage, or liability, or to guarantee the
performance of or compliance with contractual obligations or the payment of debts of
others shall be known as insurance corporations.

Plainly, insurance companies and lending investors are different enterprises in the
eyes of the law. Lending investors cannot, for a consideration, hold anyone harmless
from loss, damage or liability, nor provide compensation or indemnity for loss. The
underwriting of risks is the prerogative of insurers, the great majority of which are
incorporated insurance companies[23] like respondents.

Granting of Mortgage and

other Loans are Investment
Practices that are Part of the
Insurance Business.
True, respondents granted mortgage and other kinds of loans. However, this was
not done independently of respondents insurance business. The granting of certain
loans is one of several means of investment allowed to insurance companies. No less
than the Insurance Code mandates and regulates this practice. [24]
Unlike the practice of lending investors, the lending activities of insurance
companies are circumscribed and strictly regulated by the State. Insurance companies
cannot freely lend to themselves or others as lending investors can,[25] nor can
insurance companies grant simply any kind of loan. Even prior to 1978, the Insurance
Code prescribed strict rules for the granting of loans by insurance companies. [26] These
provisions on mortgage, collateral and policy loans were reiterated in the Insurance
Code of 1978 and are still in force today.
Petitioner concedes that respondents investment practices are as much a part of
the insurance business as the task of underwriting. Nevertheless, petitioner argues that
such investment practices are separately taxable under CA 466.
The CTA and the Court of Appeals found that the investment of premiums and other
funds received by respondents through the granting of mortgage and other loans was
necessary to respondents business and hence, should not be taxed separately.
Insurance companies are required by law to possess and maintain substantial legal
reserves to meet their obligations to policyholders.[27] This obviously cannot be
accomplished through the collection of premiums alone, as the legal reserves and
capital and surplus insurance companies are obligated to maintain run into millions of
pesos. As such, the creation of investment income has long been held to be generally, if
not necessarily, essential to the business of insurance.[28]
The creation of investment income in the manner sanctioned by the laws on
insurance is thus part of the business of insurance, and the fruits of these investments
are essentially income from the insurance business. This is particularly true if the
invested assets are held either as reserved funds to provide for policy obligations or as
capital and surplus to provide an extra margin of safety which will be attractive to
insurance buyers.[29]
The Court has also held that when a company is taxed on its main business, it is no
longer taxable further for engaging in an activity or work which is merely a part of,

incidental to and is necessary to its main business. [30] Respondents already paid
percentage and fixed taxes on their insurance business. To require them to pay
percentage and fixed taxes again for an activity which is necessarily a part of the same
business, the law must expressly require such additional payment of tax. There is,
however, no provision of law requiring such additional payment of tax.
Sections 195-A and 182(A)(3)(dd) of CA 466 do not require insurance companies to
pay double percentage and fixed taxes. They merely tax lending investors, not lending
activities. Respondents were not transformed into lending investors by the mere fact
that they granted loans, as these investments were part of, incidental and necessary to
their insurance business.

Different Tax Treatment of

Insurance Companies and
Lending Investors.
Section 182(A)(3) of CA 466 accorded different tax treatments to lending investors
and insurance companies. The relevant portions of Section 182 state:

Sec. 182. Fixed taxes. (A) On business xxx

(3) Other fixed taxes. The following fixed taxes shall be collected as follows, the
amount stated being for the whole year, when not otherwise specified;
xxx
(dd) Lending investors
1. In chartered cities and first class municipalities, five hundred
pesos;
2. In second and third class municipalities, two hundred and fifty
pesos;
3. In fourth and fifth class municipalities and municipal districts,
one hundred and twenty-five pesos; Provided, That lending
investors who do business as such in more than one province
shall pay a tax of five hundred pesos.
xxx
(gg) Banks, insurance companies, finance and investment companies doing business
in the Philippines and franchise grantees, five hundred pesos.
xxx (Emphasis supplied.)

The separate provisions on lending investors and insurance companies

demonstrate an intention to treat these businesses differently. If Congress intended
insurance companies to be taxed as lending investors, there would be no need for
Section 182(A)(3)(gg). Section 182(A)(3)(dd) would have been sufficient. That
insurance companies were included with banks, finance and investment companies also
supports the CTAs conclusion that insurance companies had more in common with the
latter enterprises than with lending investors. As the CTA pointed out, banks also
regularly lend money at interest, but are not taxable as lending investors.
We find no merit in petitioners contention that Congress intended to subject
respondents to two percentage taxes and two fixed taxes. Petitioners argument goes
against the doctrine of strict interpretation of tax impositions.
Petitioners argument is likewise not in accord with existing jurisprudence.
In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.,[31] the
Court ruled that the different tax treatment accorded to pawnshops and lending
investors in the NIRC of 1977 and the NIRC of 1986 showed the intent of Congress to
deal with both subjects differently. The same reasoning applies squarely to the present
case.
Even the current tax law does not treat insurance companies as lending investors.
Under Section 108(A)[32] of the NIRC of 1997, lending investors and non-life insurance
companies, except for their crop insurances, are subject to value-added tax (VAT). Life
insurance companies are exempt from VAT, but are subject to percentage tax under
Section 123 of the NIRC of 1997.
Indeed, the fact that Sections 195-A and 182(A)(3)(dd) of CA 466 failed to mention
insurance companies already implies the latters exclusion from the coverage of these
provisions. When a statute enumerates the things upon which it is to operate,
everything else by implication must be excluded from its operation and effect.[33]

Definition of Lending
Investors in CA 466 is Not
New.
Petitioner does not dispute that it issued a ruling in 1920 to the effect that the
lending of money at interest was a necessary incident of the insurance business, and
that insurance companies were thus not subject to the tax on money lenders. Petitioner
argues only that the 1920 ruling does not apply to the instant case because RA 6110
introduced the definition of lending investors to CA 466 only in 1969.
The subject definition was actually introduced much earlier, at a time when lending
investors were still referred to as money lenders. Sections 45 and 46 of the Internal
Revenue Law of 1914[34] (1914 Tax Code) state:

SECTION 45. Amount of Tax on Business. Fixed taxes on business shall be collected
as follows, the amount stated being for the whole year, when not otherwise specified:

xxx
(x) Money lenders, eighty pesos;
xxx
SECTION 46. Words and Phrases Defined. In applying the provisions of the
preceding section words and phrases shall be taken in the sense and extension
indicated below:
xxx
Money lender includes all persons who make a practice of lending money for
themselves or others at interest. (Emphasis supplied)
As can be seen, the definitions of money lender under the 1914 Tax Code and
lending investor under CA 466 are identical. The term money lender was merely
changed to lending investor when Act No. 3963 amended the Revised Administrative
Code in 1932.[35] This same definition of lending investor has since appeared in Section
194(u) of CA 466 and later tax laws.
Note that insurance companies were not included among the businesses subject to
an annual fixed tax under the 1914 Tax Code. [36] That Congress later saw the need to
introduce Section 182(A)(3)(gg) in CA 466 bolsters our view that there was no
legislative intent to tax insurance companies as lending investors. If insurance
companies were already taxed as lending investors, there would have been no need for
a separate provision specifically requiring insurance companies to pay fixed taxes.

The Court Accords Great

Weight to the Factual Findings
of the CTA.
Dedicated exclusively to the study and consideration of tax problems, the CTA has
necessarily developed an expertise in the subject of taxation that this Court has
recognized time and again. For this reason, the findings of fact of the CTA, particularly
when affirmed by the Court of Appeals, are generally conclusive on this Court absent
grave abuse of discretion or palpable error,[37] which are not present in this case.
WHEREFORE, we DENY the instant petition and AFFIRM the Decision of 7
January 2000 of the Court of Appeals in CA-G.R. SP No. 36816.
SO ORDERED.
Davide,
JJ., concur.

Jr.,

C.J., (Chairman),

Quisumbing,

Ynares-Santiago, and Azcuna,