Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 173425 September 4, 2012

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

DEL CASTILLO, J.:

Courts cannot limit the application or coverage of a law, nor can it impose conditions not provided
therein. To do so constitutes judicial legislation.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court assails the July 7, 2006
Decision1 of the Court of Appeals (CA) in CA-G.R. SP No. 61436, the dispositive portion of
which reads.

WHEREFORE, the instant petition is hereby DISMISSED. ACCORDINGLY, the Decision dated
October 12, 2000 of the Court of Tax Appeals in CTA Case No. 5735, denying petitioner’s claim
for refund in the amount of Three Hundred Fifty-Nine Million Six Hundred Fifty-Two Thousand
Nine Pesos and Forty-Seven Centavos (₱ 359,652,009.47), is hereby AFFIRMED.

SO ORDERED.2

Factual Antecedents

Petitioner Fort Bonifacio Development Corporation (FBDC) is a duly registered domestic

corporation engaged in the development and sale of real property.3 The Bases Conversion
Development Authority (BCDA), a wholly owned government corporation created under Republic
Act (RA) No. 7227,4 owns 45% of petitioner’s issued and outstanding capital stock; while the
Bonifacio Land Corporation, a consortium of private domestic corporations, owns the remaining
55%.5

On February 8, 1995, by virtue of RA 7227 and Executive Order No. 40,6 dated December 8,
1992, petitioner purchased from the national government a portion of the Fort Bonifacio
reservation, now known as the Fort Bonifacio Global City (Global City).7
On January 1, 1996, RA 77168 restructured the Value-Added Tax (VAT) system by amending
certain provisions of the old National Internal Revenue Code (NIRC). RA 7716 extended the
coverage of VAT to real properties held primarily for sale to customers or held for lease in the
ordinary course of trade or business.9

On September 19, 1996, petitioner submitted to the Bureau of Internal Revenue (BIR) Revenue
District No. 44, Taguig and Pateros, an inventory of all its real properties, the book value of which
aggregated ₱ 71,227,503,200.10 Based on this value, petitioner claimed that it is entitled to a
transitional input tax credit of ₱ 5,698,200,256,11 pursuant to Section 10512 of the old NIRC.

In October 1996, petitioner started selling Global City lots to interested buyers.13

For the first quarter of 1997, petitioner generated a total amount of ₱ 3,685,356,539.50 from its
sales and lease of lots, on which the output VAT payable was ₱ 368,535,653.95.14 Petitioner paid
the output VAT by making cash payments to the BIR totalling ₱ 359,652,009.47 and crediting its
unutilized input tax credit on purchases of goods and services of ₱ 8,883,644.48.15

Realizing that its transitional input tax credit was not applied in computing its output VAT for the
first quarter of 1997, petitioner on November 17, 1998 filed with the BIR a claim for refund of the
amount of ₱ 359,652,009.47 erroneously paid as output VAT for the said period.16

Ruling of the Court of Tax Appeals

On February 24, 1999, due to the inaction of the respondent Commissioner of Internal Revenue
(CIR), petitioner elevated the matter to the Court of Tax Appeals (CTA) via a Petition for
Review.17

In opposing the claim for refund, respondents interposed the following special and affirmative
defenses:

xxxx

8. Under Revenue Regulations No. 7-95, implementing Section 105 of the Tax Code as amended
by E.O. 273, the basis of the presumptive input tax, in the case of real estate dealers, is the
improvements, such as buildings, roads, drainage systems, and other similar structures,
constructed on or after January 1, 1988.

9. Petitioner, by submitting its inventory listing of real properties only on September 19, 1996,
failed to comply with the aforesaid revenue regulations mandating that for purposes of availing the
presumptive input tax credits under its Transitory Provisions, "an inventory as of December 31,
1995, of such goods or properties and improvements showing the quantity, description, and
amount should be filed with the RDO no later than January 31, 1996. x x x"18
On October 12, 2000, the CTA denied petitioner’s claim for refund. According to the CTA, "the
benefit of transitional input tax credit comes with the condition that business taxes should have
been paid first."19 In this case, since petitioner acquired the Global City property under a VAT-
free sale transaction, it cannot avail of the transitional input tax credit.20 The CTA likewise
pointed out that under Revenue Regulations No. (RR) 7-95, implementing Section 105 of the old
NIRC, the 8% transitional input tax credit should be based on the value of the improvements on
land such as buildings, roads, drainage system and other similar structures, constructed on or after
January 1, 1998, and not on the book value of the real property.21 Thus, the CTA disposed of the
case in this manner:

WHEREFORE, in view of all the foregoing, the claim for refund representing alleged overpaid
value-added tax covering the first quarter of 1997 is hereby DENIED for lack of merit.

SO ORDERED.22

Ruling of the Court of Appeals

Aggrieved, petitioner filed a Petition for Review23 under Rule 43 of the Rules of Court before the
CA.

On July 7, 2006, the CA affirmed the decision of the CTA. The CA agreed that petitioner is not
entitled to the 8% transitional input tax credit since it did not pay any VAT when it purchased the
Global City property.24 The CA opined that transitional input tax credit is allowed only when
business taxes have been paid and passed-on as part of the purchase price.25 In arriving at this
conclusion, the CA relied heavily on the historical background of transitional input tax credit.26
As to the validity of RR 7-95, which limited the 8% transitional input tax to the value of the
improvements on the land, the CA said that it is entitled to great weight as it was issued pursuant
to Section 24527 of the old NIRC.28

Issues

Hence, the instant petition with the principal issue of whether petitioner is entitled to a refund of ₱
359,652,009.47 erroneously paid as output VAT for the first quarter of 1997, the resolution of
which depends on:

3.05.a. Whether Revenue Regulations No. 6-97 effectively repealed or repudiated Revenue
Regulations No. 7-95 insofar as the latter limited the transitional/presumptive input tax credit
which may be claimed under Section 105 of the National Internal Revenue Code to the
"improvements" on real properties.

3.05.b. Whether Revenue Regulations No. 7-95 is a valid implementation of Section 105 of the
National Internal Revenue Code.

3.05.c. Whether the issuance of Revenue Regulations No. 7-95 by the Bureau of Internal Revenue,
and declaration of validity of said Regulations by the Court of Tax Appeals and Court of Appeals,
were in violation of the fundamental principle of separation of powers.

3.05.d. Whether there is basis and necessity to interpret and construe the provisions of Section 105
of the National Internal Revenue Code.

3.05.e. Whether there must have been previous payment of business tax by petitioner on its land
before it may claim the input tax credit granted by Section 105 of the National Internal Revenue
Code.

3.05.f. Whether the Court of Appeals and Court of Tax Appeals merely speculated on the purpose
of the transitional/presumptive input tax provided for in Section 105 of the National Internal
Revenue Code.

3.05.g. Whether the economic and social objectives in the acquisition of the subject property by
petitioner from the Government should be taken into consideration.29

Petitioner’s Arguments

Petitioner claims that it is entitled to recover the amount of ₱ 359,652,009.47 erroneously paid as
output VAT for the first quarter of 1997 since its transitional input tax credit of ₱ 5,698,200,256 is
more than sufficient to cover its output VAT liability for the said period.30

Petitioner assails the pronouncement of the CA that prior payment of taxes is required to avail of
the 8% transitional input tax credit.31 Petitioner contends that there is nothing in Section 105 of
the old NIRC to support such conclusion.32

Petitioner further argues that RR 7-95, which limited the 8% transitional input tax credit to the
value of the improvements on the land, is invalid because it goes against the express provision of
Section 105 of the old NIRC, in relation to Section 10033 of the same Code, as amended by RA
7716.34

Respondents’ Arguments

Respondents, on the other hand, maintain that petitioner is not entitled to a transitional input tax
credit because no taxes were paid in the acquisition of the Global City property.35 Respondents
assert that prior payment of taxes is inherent in the nature of a transitional input tax.36 Regarding
RR 7-95, respondents insist that it is valid because it was issued by the Secretary of Finance, who
is mandated by law to promulgate all needful rules and regulations for the implementation of
Section 105 of the old NIRC.37

Our Ruling

The petition is meritorious.

The issues before us are no longer new or novel as these have been resolved in the related case of
Fort Bonifacio Development Corporation v. Commissioner of Internal Revenue.38

Prior payment of taxes is not required

for a taxpayer to avail of the 8%
transitional input tax credit

Section 105 of the old NIRC reads:

SEC. 105. Transitional input tax credits. – A person who becomes liable to value-added tax or any
person who elects to be a VAT-registered person shall, subject to the filing of an inventory as
prescribed by regulations, be allowed input tax on his beginning inventory of goods, materials and
supplies equivalent to 8% of the value of such inventory or the actual value-added tax paid on
such goods, materials and supplies, whichever is higher, which shall be creditable against the
output tax. (Emphasis supplied.)

Contrary to the view of the CTA and the CA, there is nothing in the above-quoted provision to
indicate that prior payment of taxes is necessary for the availment of the 8% transitional input tax
credit. Obviously, all that is required is for the taxpayer to file a beginning inventory with the BIR.

To require prior payment of taxes, as proposed in the Dissent is not only tantamount to judicial
legislation but would also render nugatory the provision in Section 105 of the old NIRC that the
transitional input tax credit shall be "8% of the value of [the beginning] inventory or the actual
[VAT] paid on such goods, materials and supplies, whichever is higher" because the actual VAT
(now 12%) paid on the goods, materials, and supplies would always be higher than the 8% (now
2%) of the beginning inventory which, following the view of Justice Carpio, would have to
exclude all goods, materials, and supplies where no taxes were paid. Clearly, limiting the value of
the beginning inventory only to goods, materials, and supplies, where prior taxes were paid, was
not the intention of the law. Otherwise, it would have specifically stated that the beginning
inventory excludes goods, materials, and supplies where no taxes were paid. As retired Justice
Consuelo Ynares-Santiago has pointed out in her Concurring Opinion in the earlier case of Fort
Bonifacio:

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.39

Moreover, prior payment of taxes is not required to avail of the transitional input tax credit
because it is not a tax refund per se but a tax credit. Tax credit is not synonymous to tax refund.
Tax refund is defined as the money that a taxpayer overpaid and is thus returned by the taxing
authority.40 Tax credit, on the other hand, is an amount subtracted directly from one’s total tax
liability.41 It is any amount given to a taxpayer as a subsidy, a refund, or an incentive to encourage
investment. Thus, unlike a tax refund, prior payment of taxes is not a prerequisite to avail of a tax
credit. In fact, in Commissioner of Internal Revenue v. Central Luzon Drug Corp.,42 we declared
that prior payment of taxes is not required in order to avail of a tax credit.43 Pertinent portions of
the Decision read:

While a tax liability is essential to the availment or use of any tax credit, prior tax payments are
not. On the contrary, for the existence or grant solely of such credit, neither a tax liability nor a
prior tax payment is needed. The Tax Code is in fact replete with provisions granting or allowing
tax credits, even though no taxes have been previously paid.

For example, in computing the estate tax due, Section 86(E) allows a tax credit -- subject to
certain limitations -- for estate taxes paid to a foreign country. Also found in Section 101(C) is a
similar provision for donor’s taxes -- again when paid to a foreign country -- in computing for the
donor’s tax due. The tax credits in both instances allude to the prior payment of taxes, even if not
made to our government.

Under Section 110, a VAT (Value-Added Tax) - registered person engaging in transactions --
whether or not subject to the VAT -- is also allowed a tax credit that includes a ratable portion of
any input tax not directly attributable to either activity. This input tax may either be the VAT on the
purchase or importation of goods or services that is merely due from -- not necessarily paid by --
such VAT-registered person in the course of trade or business; or the transitional input tax
determined in accordance with Section 111(A). The latter type may in fact be an amount
equivalent to only eight percent of the value of a VAT-registered person’s beginning inventory of
goods, materials and supplies, when such amount -- as computed -- is higher than the actual VAT
paid on the said items. Clearly from this provision, the tax credit refers to an input tax that is either
due only or given a value by mere comparison with the VAT actually paid -- then later prorated.
No tax is actually paid prior to the availment of such credit.

In Section 111(B), a one and a half percent input tax credit that is merely presumptive is allowed.
For the purchase of primary agricultural products used as inputs -- either in the processing of
sardines, mackerel and milk, or in the manufacture of refined sugar and cooking oil -- and for the
contract price of public works contracts entered into with the government, again, no prior tax
payments are needed for the use of the tax credit.

More important, a VAT-registered person whose sales are zero-rated or effectively zero-rated may,
under Section 112(A), apply for the issuance of a tax credit certificate for the amount of creditable
input taxes merely due -- again not necessarily paid to -- the government and attributable to such
sales, to the extent that the input taxes have not been applied against output taxes. Where a
taxpayer is engaged in zero-rated or effectively zero-rated sales and also in taxable or exempt
sales, the amount of creditable input taxes due that are not directly and entirely attributable to any
one of these transactions shall be proportionately allocated on the basis of the volume of sales.
Indeed, in availing of such tax credit for VAT purposes, this provision -- as well as the one earlier
mentioned -- shows that the prior payment of taxes is not a requisite.
It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustration of a tax credit
allowed, even though no prior tax payments are not required. Specifically, in this provision, the
imposition of a final withholding tax rate on cash and/or property dividends received by a
nonresident foreign corporation from a domestic corporation is subjected to the condition that a
foreign tax credit will be given by the domiciliary country in an amount equivalent to taxes that
are merely deemed paid. Although true, this provision actually refers to the tax credit as a
condition only for the imposition of a lower tax rate, not as a deduction from the corresponding
tax liability. Besides, it is not our government but the domiciliary country that credits against the
income tax payable to the latter by the foreign corporation, the tax to be foregone or spared.

In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically allows as credits,

against the income tax imposable under Title II, the amount of income taxes merely incurred -- not
necessarily paid -- by a domestic corporation during a taxable year in any foreign country.
Moreover, Section 34(C)(5) provides that for such taxes incurred but not paid, a tax credit may be
allowed, subject to the condition precedent that the taxpayer shall simply give a bond with sureties
satisfactory to and approved by petitioner, in such sum as may be required; and further
conditioned upon payment by the taxpayer of any tax found due, upon petitioner’s redetermination
of it.

In addition to the above-cited provisions in the Tax Code, there are also tax treaties and special
laws that grant or allow tax credits, even though no prior tax payments have been made.

Under the treaties in which the tax credit method is used as a relief to avoid double taxation,
income that is taxed in the state of source is also taxable in the state of residence, but the tax paid
in the former is merely allowed as a credit against the tax levied in the latter. Apparently, payment
is made to the state of source, not the state of residence. No tax, therefore, has been previously
paid to the latter.

Under special laws that particularly affect businesses, there can also be tax credit incentives. To
illustrate, the incentives provided for in Article 48 of Presidential Decree No. (PD) 1789, as
amended by Batas Pambansa Blg. (BP) 391, include tax credits equivalent to either five percent of
the net value earned, or five or ten percent of the net local content of export. In order to avail of
such credits under the said law and still achieve its objectives, no prior tax payments are
necessary.

From all the foregoing instances, it is evident that prior tax payments are not indispensable to the
availment of a tax credit. Thus, the CA correctly held that the availment under RA 7432 did not
require prior tax payments by private establishments concerned. However, we do not agree with
its finding that the carry-over of tax credits under the said special law to succeeding taxable
periods, and even their application against internal revenue taxes, did not necessitate the existence
of a tax liability.

The examples above show that a tax liability is certainly important in the availment or use, not the
existence or grant, of a tax credit. Regarding this matter, a private establishment reporting a net
loss in its financial statements is no different from another that presents a net income. Both are
entitled to the tax credit provided for under RA 7432, since the law itself accords that
unconditional benefit. However, for the losing establishment to immediately apply such credit,
where no tax is due, will be an improvident usance.44

In this case, when petitioner realized that its transitional input tax credit was not applied in
computing its output VAT for the 1st quarter of 1997, it filed a claim for refund to recover the
output VAT it erroneously or excessively paid for the 1st quarter of 1997. In filing a claim for tax
refund, petitioner is simply applying its transitional input tax credit against the output VAT it has
paid. Hence, it is merely availing of the tax credit incentive given by law to first time VAT
taxpayers. As we have said in the earlier case of Fort Bonifacio, the provision on transitional input
tax credit was enacted to benefit first time VAT taxpayers by mitigating the impact of VAT on the
taxpayer.45 Thus, contrary to the view of Justice Carpio, the granting of a transitional input tax
credit in favor of petitioner, which would be paid out of the general fund of the government,
would be an appropriation authorized by law, specifically Section 105 of the old NIRC.

The history of the transitional input tax credit likewise does not support the ruling of the CTA and
CA. In our Decision dated April 2, 2009, in the related case of Fort Bonifacio, we explained that:

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. The sale would be subject to capital gains taxes under Section 24 (D), 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 donor’s tax under Section 98 instead. It is the donor who would be liable to pay the
donor’s tax, and the donation would be exempt if the donor’s total net gifts during the calendar
year does not exceed ₱ 100,000.00.

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. If the net
estate does not exceed ₱ 200,000.00, no estate tax would be assessed.

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 taxpayer's income by affording the opportunity to offset the losses incurred
through the remittance of the output VAT at a stage when the person is yet unable to credit input
VAT payments.

There is another point that weighs against the CTA’s 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." 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.46

In view of the foregoing, we find petitioner entitled to the 8% transitional input tax credit provided
in Section 105 of the old NIRC. The fact that it acquired the Global City property under a tax-free
transaction makes no difference as prior payment of taxes is not a pre-requisite.

Section 4.105-1 of RR 7-95 is

inconsistent with Section 105 of the old
NIRC

As regards Section 4.105-147 of RR 7-95 which limited the 8% transitional input tax credit to the
value of the improvements on the land, the same contravenes the provision of Section 105 of the
old NIRC, in relation to Section 100 of the same Code, as amended by RA 7716, which defines
"goods or properties," to wit:

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; x x x

In fact, in our Resolution dated October 2, 2009, in the related case of Fort Bonifacio, we ruled
that Section 4.105-1 of RR 7-95, insofar as it limits the transitional input tax credit to the value of
the improvement of the real properties, is a nullity.48 Pertinent portions of the Resolution read:

As mandated by Article 7 of the Civil Code, an administrative rule or regulation cannot contravene
the law on which it is based. RR 7-95 is inconsistent with Section 105 insofar as the definition of
the term "goods" is concerned. This is a legislative act beyond the authority of the CIR and the
Secretary of Finance. The rules and regulations that administrative agencies promulgate, which are
the product of a delegated legislative power to create new and additional legal provisions that have
the effect of law, should be within the scope of the statutory authority granted by the legislature to
the objects and purposes of the law, and should not be in contradiction to, but in conformity with,
the standards prescribed by law.

To be valid, an administrative rule or regulation must conform, not contradict, the provisions of
the enabling law.1âwphi1 An implementing rule or regulation cannot modify, expand, or subtract
from the law it is intended to implement. Any rule that is not consistent with the statute itself is
null and void.

While administrative agencies, such as the Bureau of Internal Revenue, may issue regulations to
implement statutes, they are without authority to limit the scope of the statute to less than what it
provides, or extend or expand the statute beyond its terms, or in any way modify explicit
provisions of the law. Indeed, a quasi-judicial body or an administrative agency for that matter
cannot amend an act of Congress. Hence, in case of a discrepancy between the basic law and an
interpretative or administrative ruling, the basic law prevails.

To recapitulate, RR 7-95, insofar as it restricts the definition of "goods" as basis of transitional

input tax credit under Section 105 is a nullity.49

As we see it then, the 8% transitional input tax credit should not be limited to the value of the
improvements on the real properties but should include the value of the real properties as well.

In this case, since petitioner is entitled to a transitional input tax credit of ₱ 5,698,200,256, which
is more than sufficient to cover its output VAT liability for the first quarter of 1997, a refund of the
amount of ₱ 359,652,009.47 erroneously paid as output VAT for the said quarter is in order.

WHEREFORE, the petition is hereby GRANTED. The assailed Decision dated July 7, 2006 of the
Court of Appeals in CA-G.R. SP No. 61436 is REVERSED and SET ASIDE. Respondent
Commissioner of Internal Revenue is ordered to refund to petitioner Fort Bonifacio Development
Corporation the amount of ₱ 359,652,009.47 paid as output VAT for the first quarter of 1997 in
light of the transitional input tax credit available to petitioner for the said quarter, or in the
alternative, to issue a tax credit certificate corresponding to such amount.

SO ORDERED.

MARIANO C. DEL CASTILLO

Associate Justice

WE CONCUR:

MARIA LOURDES P. A. SERENO

Chief Justice

ANTONIO T. CARPIO
Associate Justice PRESBITERO J. VELASCO, JR.
Associate Justice
TERESITA J. LEONARDO-DE CASTRO
Associate Justice ARTURO D. BRION
Associate Justice
DIOSDADO M. PERALTA
Associate Justice LUCAS P. BERSAMIN
Associate Justice
ROBERTO A. ABAD
Associate Justice MARTIN S. VILLARAMA, JR.
Associate Justice
JOSE PORTUGAL PEREZ
Associate Justice JOSE CATRAL MENDOZA
Associate Justice
BIENVENDIO L. REYES
Associate Justice ESTELA M. PERLAS-BERNABE
Associate Justice
C E RT I F I CATI O N

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.

MARIA LOURDES P. A. SERENO

Chief Justice

Footnotes

1 Rollo, pp. 317-333; penned by Associate Justice Monina Arevalo-Zenarosa and concurred in by
Associate Justices Renato C. Dacudao and Rosmari D. Carandang.

2 Id. at 332.

3 Id. at 318.

4 BASES CONVERSION AND DEVELOPMENT ACT OF 1992.

5 Rollo, p. 318.

6 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.

7 Rollo, p. 319.

8 AN ACT RESTRUCTURING THE VALUE ADDED TAX (VAT) SYSTEM, WIDENING ITS
TAX BASE AND ENHANCING ITS ADMINISTRATION AND FOR THESE PURPOSES
AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL
INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES.
9 Section 2 of Republic Act No. 7716 provides:

Sec. 2. Section 100 of the National Internal Revenue Code, as amended, is hereby further
amended to read as follows:

"Section 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."

xxxx

10 Rollo, p. 320.

11 CTA rollo, p. 4.

12 Now Section 111(A) of the NATIONAL INTERNAL REVENUE CODE OF 1997 which
provides:

SEC 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 to two percent (2%) 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. [As amended by Republic Act No. 9337- An Act Amending Sections 27, 28,
34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 236, 237 and 288 of
the National Internal Revenue Code of 1997, as amended, and for other purposes.

13 Rollo, p. 319.

14 Id. at 320.

15 Id. at 320-321.
16 CTA rollo, p. 5.

17 Id. at 1-12.

18 Id. at 44.

19 Rollo, p. 148.

20 Id. at 149.

21 Id. at 149-150.

22 Id. at 150.

23 CA rollo, pp. 7-66.

24 Rollo, p. 330.

25 Id. at 329.

26 Id. at 325-328.

27 SEC. 245. Authority of Secretary of Finance to promulgate rules and regulations. — The
Secretary of Finance, upon recommendation of the Commissioner, shall promulgate all needful
rules and regulations for the effective enforcement of the provisions of this Code. x x x (Now
Section 244 of the National Internal Revenue Code of 1997.)

28 Rollo, pp. 331-332.

29 Id. at 23-24.

30 Id. at 82.

31 Id. at 84.

32 Id. at 87.

33 Now Section 106 of the National Internal Revenue Code of 1997.

34 Rollo, pp. 47-61.

35 Id. at 367.

36 Id. at 357.
37 Id. at 378.

38 G.R. Nos. 158885 & 170680, April 2, 2009, 583 SCRA 168.

39 Id. at 201.

40 Garner, Black’s Law Dictionary, 7th Edition, p. 1475.

41 Id. at 1473.

42 496 Phil. 307 (2005).

43 Id. at 322.

44 Id. at 322-325.

45 Supra note 38 at 192-193.

46 Id. at 190-193.

47 Sec. 4.105-1. Transitional input tax on beginning inventories. – Taxpayers who became VAT-
registered persons upon effectivity of RA No. 7716 who have exceeded the minimum turnover of

₱ 500,000.00 or who voluntarily register even if their turnover does not exceed ₱ 500,000.00 shall
be entitled to a presumptive input tax on the inventory on hand as of December 31, 1995 on the
following:

(a) goods purchased for resale in their present condition; (b) materials purchased for further
processing, but which have not yet undergone processing; (c) goods which have been
manufactured by the taxpayer; (d) goods in process and supplies, all of which are for sale or for
use in the course of the taxpayer’s trade or business as a VAT-registered person.

However, in the case of real estate dealers, the basis of the presumptive input tax shall be the
improvements, such as buildings, roads, drainage systems, and other similar structures,
constructed on or after the effectivity of EO 273 (January 1, 1988).

The transitional input tax shall be 8% of the value of the inventory or actual VAT paid, whichever
is higher, which amount may be allowed as tax credit against the output tax of the VAT-registered
person. x x x (Emphasis supplied.)

48 Fort Bonifacio Development Corporation v. Commissioner of Internal Revenue, G.R. Nos.

158885 & 170680, October 2, 2009, 602 SCRA 159.
49 Id. at 166-167.

The Lawphil Project - Arellano Law Foundation

DISSENTING OPINION

CARPIO, J.:

I dissent. I reiterate my view that petitioner is not entitled to a refund or credit of any input VAT, as
explained in my dissenting opinions in Fort Bonifacio Development Corporation v. Commissioner
of Internal Revenue,1 involving an input VAT refund of ₱ 347,741,695.74 and raising the same
legal issue as that raised in the present case.

The majority grants petitioner an 8o/o transitional input VAT refund or credit of ₱ 359,652,009.47
in relation to petitioner's output VAT for the first quarter of 1997. Petitioner argues that there is
nothing in Section 105 of the old National Internal Revenue Code (NIRC) to support the Court of
Appeals' conclusion that prior payment of VAT is required to avail of a refund or credit of the 8%
transitional input VAT.

Petitioner's argument has no merit.

It is hornbook doctrine that a taxpayer cannot claim a refund or credit of a tax that was never paid
because the law never imposed the tax in the first place, as in the present case. A tax refund or
credit assumes a tax was previously paid, which means there was a law that imposed the tax. The
source of the tax refund or credit is the tax that was previously paid, and this previously paid tax is
simply being returned to the taxpayer due to double, excessive, erroneous, advance or creditable
tax payment.

Without such previous tax payment as source, the tax refund or credit will be an expenditure of
public funds for the exclusive benefit of a specific private individual or entity. This violates the
fundamental principle, as ruled by this Court in several cases,2 that public funds can be used only
for a public purpose. Section 4(2) of the Government Auditing Code of the

Philippines mandates that "Government funds or property shall be spent or used solely for public
purposes." Any tax refund or credit in favor of a specific taxpayer for a tax that was never paid
will have to be sourced from government funds. This is clearly an expenditure of public funds for
a private purpose. Congress cannot validly enact a law transferring government funds, raised
through taxation, to the pocket of a private individual or entity. A well-recognized inherent
limitation on the constitutional power of the State to levy taxes is that taxes can only be used for a
public purpose.3

Even if only a tax credit is granted, it will still be an expenditure of public funds for the benefit of
a private purpose in the absence of a prior tax payment as source of the tax credit. The tax due
from a taxpayer is a public fund. If the taxpayer is allowed to keep a part of the tax as a tax credit
even in the absence of a prior tax payment as source, it is in fact giving a public fund to a private
person for a private benefit. This is a clear violation of the constitutional doctrine that taxes can
only be used for a public purpose.

Moreover, such refund or credit without prior tax payment is an expenditure of public funds
without an appropriation law. This violates Section 29(1), Article VI of the Constitution, which
mandates that "No money shall be paid out of the Treasury except in pursuance of an
appropriation made by law." Without any previous tax payment as source, a tax refund or credit
will be paid out of the general funds of the government, a payment that requires an appropriation
law. The Tax Code, particularly its provisions on the VAT, is a revenue measure, not an
appropriation law.

The VAT is a tax on transactions. The VAT is levied on the value that is added to goods and
services at every link in the chain of transactions. However, a tax credit is allowed for taxes
previously paid when the same goods and services are sold further in the chain of transactions.
The purpose of this tax crediting system is to prevent double taxation in the subsequent sale of the
same product and services that were already previously taxed. Taxes previously paid are thus
allowed as input VAT credits, which may be deducted from the output VAT liability.

The VAT is paid by the seller of goods and services, but the amount of the VAT is passed on to the
buyer as part of the purchase price. Thus, the tax burden actually falls on the buyer who is allowed
by law a tax credit or refund in the subsequent sale of the same goods and services. The 8%
transitional input VAT was introduced to ease the transition from the old VAT to the expanded VAT
system that included more goods and services, requiring new documentation not required under
the old VAT system. To simplify the transition, the law allows an 8% presumptive input VAT on
goods and services newly covered by the expanded VAT system. In short, the law grants the
taxpayer an 8% input VAT without need of substantiating the same, on the legal presumption that
the VAT imposed by law prior to the expanded VAT system had been paid, regardless of whether it
was actually paid.

Under the VAT system, a tax refund or credit requires that a previous tax was paid by a taxpayer,
or in the case of the transitional input tax, that the tax imposed by law is presumed to have been
paid. Not a single centavo of VAT was paid, or could have been paid, by anyone in the sale by the
National Government to petitioner of the Global City land for two basic reasons. First, the
National Government is not subject to any tax, including VAT, when the law authorizes it to sell
government property like the Global City land. Second, in 1995 the old VAT law did not yet
impose VAT on the sale of land and thus no VAT on the sale of land could have been paid by
anyone.

Petitioner bought the Global City land from the National Government in 1995, and this sale was of
course exempt from any kind of tax, including VAT. The National Government did not pass on to
petitioner any previous sales tax or VAT as part of the purchase price of the Global City land.
Thus, petitioner is not entitled to claim any transitional input VAT refund or credit when petitioner
subsequently sells the Global City land. In short, since petitioner will not be subject to double
taxation on its subsequent sale of the Global City land, petitioner is not entitled to a tax refund or
credit under the VAT system.

Section 105 of the old NIRC provides 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." The 8% transitional input VAT in Section 105 assumes that a previous tax was imposed by
law, whether or not it was actually paid. This is clear from the phrase "or the actual value-added
tax paid, whichever is higher," which necessarily means that the VAT was already imposed on the
previous sale. The law creates a presumption of payment of the transitional input VAT without
need of substantiating the same, provided the VAT is imposed on the previous sale. Thus, in order
to be entitled to a tax refund or credit, petitioner must point to the existence of a law imposing the
tax for which a refund or credit is sought. Since land was not yet subject to VAT or any other input
business tax at the time of the sale of the Global City land in 1995, the 8% transitional input VAT
could never be presumed to have been paid. Hence, petitioner’s argument must fail since the
transitional input VAT requires a transaction where a tax has been imposed by law.

Moreover, the ponente insists that no prior payment of tax is required to avail of the transitional
input tax since it is not a tax refund per se but a tax credit. The ponente claims that in filing a
claim for tax refund the petitioner is simply applying its transitional input tax credit against the
output VAT it has paid.

I disagree.

Availing of a tax credit and filing for a tax refund are alternative options allowed by the Tax Code.
The choice of one option precludes the other. A taxpayer may either (1) apply for a tax refund by
filing for a written claim with the BIR within the prescriptive period, or (2) avail of a tax credit
subject to verification and approval by the BIR. A claim for tax credit requires that a person who
becomes liable to VAT for the first time must submit a list of his inventories existing on the date of
commencement of his status as a VAT-registered taxable person. Both claims for a tax refund and
credit are in the nature of a claim for exemption and should be construed in strictissimi juris
against the person or entity claiming it. The burden of proof to establish the factual basis or the
sufficiency and competency of the supporting documents of the claim for tax refund or tax credit
rests on the claimant.

In the present case, petitioner actually filed with the BIR a claim for tax refund in the amount of ₱
347,741,695.74. In filing a claim for tax refund, petitioner has the burden to show that prior tax
payments were made, or at the very least, that there is an existing law imposing the input tax.
Similarly, in a claim for input tax credit, a VAT taxpayer must submit his beginning inventory
showing previously paid business taxes on his purchase of goods, materials and supplies. In both
claims, prior tax payments should have been made. Thus, in claiming for a tax refund or credit,
prior tax payment must be clearly established and duly proven by a VAT taxpayer in order to be
entitled to the claim. In a claim for transitional input tax credit, as in the present case, the VAT
taxpayer must point to a law imposing the input VAT, without need of proving such input VAT was
actually paid.Petitioner further argues that RR 7-95 is invalid since the Revenue Regulation (1)
limits the 8% transitional input VAT to the value of the improvements on the land, and (2) violates
the express provision of Section 105 of the old NIRC, in relation to Section 100, as amended by
RA 7716.

Petitioner’s contention must again fail.

Section 4.105-1 of RR 7-954 and its Transitory Provisions5 provide that the basis of the 8%
transitional input VAT is the value of the improvements on the land and not the value of the
taxpayer’s land or real properties. This Revenue Regulation finds statutory basis in Section 105 of
the old NIRC, which provides that input VAT is allowed on the taxpayer’s "beginning inventory of
goods, materials and supplies." Thus, the presumptive input VAT refers to the input VAT paid on
"goods, materials or supplies" sold by suppliers to the taxpayer, which the taxpayer used to
introduce improvements on the land.

Under RA 7716 or the Expanded Value-Added Tax Law, the VAT was expanded to include land or
real properties held primarily for sale to customers or held for lease in the ordinary course of trade
or business. Before this law was enacted, only improvements on land were subject to VAT. Since
the Global City land was not yet subject to VAT at the time of the sale in 1995, the Global City
land cannot be considered as part of the beginning inventory under Section 105. Clearly, the 8%
transitional input tax credit should only be applied to improvements on the land but not to the land
itself.

There is no dispute that if the National Government sells today a parcel of land, the sale is
completely tax-exempt. The sale is not subject to VAT, and the buyer cannot claim any input VAT
from the sale. Stated otherwise, a taxpayer like petitioner cannot claim any input VAT on its
purchase today of land from the National Government, even when VAT on land for real estate
dealers is already in effect. With greater reason, petitioner cannot claim any input VAT for its 1995
purchase of government land when VAT on land was still non-existent and petitioner, as a real
estate dealer, was still not subject to VAT on its sale of land. In short, if petitioner cannot claim a
tax refund or credit if the same transaction happened today when there is already a VAT on sales of
land by real estate developers, then with more reason petitioner cannot claim a tax refund or credit
when the transaction happened in 1995 when there was still no VAT on sales of land by real estate
developers.

In sum, granting 80/0 transitional input VAT in the amount of ₱ 359,652,009.47 to petitioner is
fraught with grave legal infirmities, namely: ( 1) violation of Section 4(2) of the Government
Auditing Code of the Philippines, which mandates that public funds shall be used only for a public
purpose; (2) violation of Section 29( 1 ), Article VI of the Constitution, which mandates that no
money in the National Treasury, which includes tax collections, shall be spent unless there is an
appropriation law authorizing such expenditure; and (3) violation of the fundamental concept of
the VAT system, as found in Section 1 05 of the old NIRC, that before there can be a VAT refund
or credit there must be a previously paid input VAT that can be deducted from the output VAT
because the purpose of the VAT crediting system is to prevent double taxation.
Accordingly, I vote to DENY the petition and AFFIRM the 7 July 2006 Decision of the Court of
Appeals in CA-G.R. SP No. 61436.

ANTONIO T. CARPIO
Associate Justice

Footnotes

1 G.R. Nos. 158885 & 170680, 2 April 2009, 583 SCRA 168; G.R. Nos. 158885 & 170680, 2
October 2009, 602 SCRA 159.

2 Francisco v. Toll Regulatory Board, G.R. No. 166910, 19 October 2010, 633 SCRA 470; Ya p v.
Commission on Audit, G.R. No. 158562, 23 April 2010, 619 SCRA 154; Strategic Alliance
Development Corporation v. Radstock Securities Limited, G.R. No. 178158, 4 December 2009,
607 SCRA 412; Pascual v. Secretary of Public Works, 110 Phil. 331 (1960).

3 Planters Product, Inc. v. Fertiphil Corporation, G.R. No. 166006, 14 March 2008, 548 SCRA
485; Pascual v. Secretary of Public Works, 110 Phil. 331 (1960).

4 SEC. 4.105-1. Transitional input tax on beginning inventories. – x x x

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 (1 January 1988). x x x

5 TRANSITORY PROVISIONS. x x x

(b) Presumptive Input Tax Credits – x x x

(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. x x x

The Lawphil Project - Arellano Law Foundation

CONCURRING OPINION

ABAD, J.:

I fully concur in Justice Mariano C. Del Castillo's ponencia and disagree with Justice Antonio T.
Carpio's points of dissent. In 1992 Congress enacted Republic Act (R.A.) 7227 creating the Bases
Conversion Development Authority (BCDA) for the purpose of raising funds through the sale to
private investors of military lands in Metro Manila. To do this, the BCDA established the Fort
Bonifacio Development Corp. (FBDC), a registered corporation, to enable the latter to develop the
214-hectare military camp in Fort Bonifacio, Taguig, for mix residential and commercial purposes.
On February 8, 1995 the Government of the Republic of the Philippines ceded the land by deed of
absolute sale to FBDC for ₱ 71.2 billion. Subsequently, cashing in on the sale, BCDA sold at a
public bidding 55o/o of its shares in FBDC to private investors, retaining ownership of the
remaining 45%.

In October 1996, after the National Internal Revenue Code (NIRC) subjected the sale and lease of
real properties to VAT, FBDC began selling and leasing lots in Fort Bonifacio. FBDC filed its first
VAT return covering those sales and leases and subsequently made cash payments for output VAT
due. After which, FBDC filed a claim for refund representing transitional input tax credit based on
8o/o of the value of its beginning inventory of lands or actual value-added tax paid on its goods,
whichever is higher, that Section 105 of the NIRC grants to first-time VAT payers like FBDC.

Because of the inaction of the Commissioner of Internal Revenue (CIR) on its claim for refund,
FBDC filed a petition for review before the Court of Tax Appeals (CTA), which court denied the
petition. On appeal, the Court of

Appeals (CA) affirmed the denial. Both the CTA and the CA premised their actions on the fact that
FBDC paid no tax on the Government’s sale of the lands to it as to entitle it to the transitional
input tax credit. Likewise, citing Revenue Regulations 7-95, which implemented Section 105 of
the NIRC, the CTA and the CA ruled that such tax credit given to real estate dealers is essentially
based on the value of improvements they made on their land holdings after January 1, 1988, rather
than on the book value of the same as FBDC proposed.

FBDC subsequently appealed the CA decision to this Court by petition for review in G.R. 158885,
"Fort Bonifacio Development Corporation v. Commissioner of Internal Revenue." Meantime,
similar actions involving subsequent FBDC sales subject to VAT, including the present action,
took the same route—CTA, CA, and lastly this Court—because of the CIR’s refusal to honor
FBDC’s claim to transitional input tax credit.

On April 2, 2009 the Court En Banc rendered judgment in G.R. 158885,1 declaring FBDC entitled
to the transitional input tax credit that Section 105 of the NIRC granted. In the same decision, the
Court also disposed of G.R. 170680, "Fort Bonifacio Development Corporation v. Commissioner
of Internal Revenue," which was consolidated with G.R. 158885. The Court directed the CIR in
that case to refund to FBDC the VAT which it paid for the third quarter of 1997. Justice Tinga
penned the decision with the concurrence of Justices Martinez, Corona, Nazario, Velasco, Jr., De
Castro, Peralta, and Santiago. Justices Carpio, Quisumbing, Morales, and Brion dissented. Chief
Justice Puno and Justice Nachura took no part.

The CIR filed a motion for reconsideration but the Court denied the same with finality on October
2, 2009.2 Justice De Castro penned the resolution of denial with the concurrence of Justices
Santiago, Corona, Nazario, Velasco, Jr., Nachura, Peralta, Bersamin, Del Castillo, and Abad.
Justices Carpio and Morales dissented. Chief Justice Puno took no part. Justices Quisumbing and
Brion were on leave.

Since the Court’s April 2, 2009 decision and October 2, 2009 resolution in G.R. 158885 and G.R.
170680 had long become final and executory, they should foreclose the identical issue in the
present cases (G.R. 173425 and G.R. 181092) of whether or not FBDC is entitled to the
transitional input tax credit granted in Section 105 of the NIRC. Indeed, the rulings in those
previous cases may be regarded as the law of the case and can no longer be changed.

Justice Del Castillo’s ponencia in the present case reiterates the Court’s rulings on exactly the
same issue between the same parties. But Justice Carpio’s dissent would have the Court flip from
its landmark ruling, take FBDC’s tax credit back, and hold that the Court grossly erred in allowing
FBDC, still 45% government-owned, to get an earlier refund of the VAT payments it made from
the sale of Fort Bonifacio lands.

A value added tax is a form of indirect sales tax paid on products and services at each stage of
production or distribution, based on the value added at that stage and included in the cost to the
ultimate consumer.3

To illustrate how VAT works, take a lumber store that sells a piece of lumber to a carpentry shop
for ₱ 100.00. The lumber store must pay a 12% VAT or ₱ 12.00 on such sale but it may charge the
carpentry shop ₱ 112.00 for the piece of lumber, passing on to the latter the burden of paying the ₱
12.00 VAT.

When the carpentry shop makes a wooden stool out of that lumber and sells the stool to a furniture
retailer for ₱ 150.00 (which would now consists of the ₱ 100.00 cost of the lumber, the ₱ 50.00
cost of shaping the lumber into a stool, and profit), the carpentry shop must pay a 12% VAT of ₱
6.00 on the ₱ 50.00 value it added to the piece of lumber that it made into a stool. But it may
charge the furniture retailer the VAT of ₱ 12.00 passed on to it by the lumber store as well as the
VAT of ₱ 6.00 that the carpentry shop itself has to pay. Its buyer, the furniture retailer, will pay ₱
150.00, the price of the wooden stool, and ₱ 18.00 (₱ 12.00 + ₱ 6.00), the passed-on VAT due on
the same.

When the furniture retailer sells the wooden stool to a customer for ₱ 200.00, it would have added
to its ₱ 150.00 acquisition cost of the stool its mark-up of ₱ 50.00 to cover its overhead and profit.
The furniture retailer must, however, pay an additional 12% VAT of ₱ 6.00 on the ₱ 50.00 add-on
value of the stool. But it could charge its customer all the accumulated VAT payments: the ₱ 12.00
paid by the lumber store, the ₱ 6.00 paid by the carpentry shop, and the other ₱ 6.00 due from the
furniture retailer, for a total of ₱ 24.00. The customer will pay ₱ 200.00 for the stool and ₱ 24.00
in passed-on 12% VAT.

Now, would the furniture retailer pay to the BIR the ₱ 24.00 VAT that it passed on to its customer
and collected from him at the store’s counter? Not all of the ₱ 24.00. The furniture retailer could
claim a credit for the ₱ 12.00 and the ₱ 6.00 in input VAT payments that the lumber store and the
carpentry shop passed on to it and that it paid for when it bought the wooden stool. The furniture
retailer would just have to pay to the BIR the output VAT of ₱ 6.00 covering its ₱ 50.00 mark-up.
This payment rounds out the 12% VAT due on the final sale of the stool for ₱ 200.00.

When the VAT law first took effect, it would have been unfair for a furniture retailer to pay all of
the 10% VAT (the old rate) on the wooden stools in its inventory at that time and not be able to
claim deduction for any tax on sale that the lumber store and the carpentry shop presumably
passed on to it when it bought those wooden stools. To remedy this unfairness, Section 105 of the
NIRC granted those who must pay VAT for the first time a transitional input tax credit of 8% of
the value of the inventory of goods they have or actual value-added tax paid on such goods when
the VAT law took effect. The furniture retailer would thus have to pay only a 2% VAT on the
wooden stools in that inventory, given the transitional input VAT tax credit of 8% allowed it under
the old 10% VAT rate.

In the case before the Court, FBDC had an inventory of Fort Bonifacio lots when the VAT law was
made to cover the sale of real properties for the first time. FBDC registered as new VAT payer and
submitted to the BIR an inventory of its lots. FBDC sought to apply the 8% transitional input tax
credit that Section 105 grants first-time VAT payers like it but the CIR would not allow it. The
dissenting opinion of Justice Carpio echoes the CIR’s reason for such disallowance. When the
Government sold the Fort Bonifacio lands to FBDC, the Government paid no sales tax whatsoever
on that sale. Consequently, it could not have passed on to FBDC what could be the basis for the
8% transitional input tax credit that Section 105 provides.

The reasoning appears sound at first glance. But Section 105 grants all first-time VAT payers such
transitional input tax credit of 8% without any precondition. It does not say that a taxpayer has to
prove that the seller, from whom he bought the goods or the lands, paid sales taxes on them.
Consequently, the CIR has no authority to insist that sales tax should have been paid beforehand
on FBDC’s inventory of lands before it could claim the 8% transitional input tax credit. The
Court’s decision in G.R. 158885 and G.R. 170680 more than amply explains this point and such
explanation need not be repeated here.

But there is a point that has apparently been missed. When the Government sold the military lands
to FBDC for development into mixed residential and commercial uses, the presumption is that in
fixing their price the Government took into account the price that private lands similarly situated
would have fetched in the market place at that time. The clear intent was to privatize ownership of
those former military lands. It would make no sense for the Government to sell the same to
intended private investors at a price lesser than the price of comparable private lands. The
presumption is that the sale did not give undue benefit to the buyers in violation of the anti-graft
and corrupt practices act.

Moreover, there is one clear evidence that the former military lands were sold to private investors
at market price. After the Government sold the lands to FBDC, then wholly owned by BCDA, the
latter sold 55% of its shares in FBDC to private investors in a public bidding where many
competed. Since FBDC had no assets other than the lands it bought from the Government, the
bidding was essentially for those lands. There can be no better way of determining the market
price of such lands than a well-publicized bidding for them, joined in by interested bona fide
bidders.

Thus, since the Government sold its lands to investors at market price like they were private lands,
the price FBDC paid to it already factored in the cost of sales tax that prices of ordinary private
lands included. This means that FBDC, which bought the lands at private-land price, should be
allowed like other real estate dealers holding private lands to claim the 8% transitional input tax
credit that Section 105 grants with no precondition to first-time VAT payers. Otherwise, FBDC
would be put at a gross disadvantage compared to other real estate dealers. It will have to sell at
higher prices than market price, to cover the 10% VAT that the BIR insists it should pay. Whereas
its competitors will pay only a 2% VAT, given the 8% transitional input tax credit of Section 105.
To deny such tax credit to FBDC would amount to a denial of its rights to fairness aqd to equal
protection.

The Court was correct in allowing FBDC the right to be refunded the VAT that it already paid,
applying instead to the VAT tax due on its sales the transitional input VAT that Section 105
provides.

Justice Carpio also argues that ifFBDC will be given a tax refund, it would be sourced from public
funds, which violates Section 4(2) of the Govenm1ent Auditing Code that govemment funds or
property cannot be used in order to benefit private individuals or entities. They shall only be spent
or used solely for public purposes.

But the records show that FBDC actually paid to the BIR the amounts for which it seeks a BIR tax
refund. The CIR does not deny this fact. FBDC was forced to pay cash on the VAT due on its sales
because the BIR refused to apply the 8% transitional input VAT tax credits that the law allowed it.
Since such tax credits were sufficient to cover the VAT due, FBDC is entitled to a refund of the
VAT it already paid. And, contrary to the dissenting opinion, if FBDC will be given a tax refund, it
would be sourced, not from public funds, but from the VAT payments which FBDC itself paid to
the BIR.

Like the previous cases before the Court, the BIR has the option to refund what FBDC paid it with
equivalent tax credits. Such tax credits have never been regarded as needing appropriation out of
government funds. Indeed, FBDC concedes in its prayers that it may get its refund in the form of a
Tax Credit Certificate.

For the above reasons, I concur with Justice Del Castillo's ponencia.

ROBERTO A. ABAD
Associate Justice

Footnotes
1 Fort Bonifacio Development Corp. v. Commissioner of Internal Revenue, 583 SCRA 168.

2 Fort Bonifacio Development Corp. v. Commissioner of Internal Revenue, G.R. Nos. 158885 and
170680, 602 SCRA 159.

3 Webster’s New World College Dictionary, Third edition, p. 1474.

THIRD DIVISION

April 5, 2017

G.R. No. 222743

MEDICARD PHILIPPINES, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

REYES,, J.:

This appeal by Petition for Review1 seeks to reverse and set aside the Decision2 dated September
2, 2015 and Resolution3 dated January 29, 2016 of the Court of Tax Appeals (CTA) en bane in
CTA EB No. 1224, affirming with modification the Decision4 dated June 5, 2014 and the
Resolution5 dated September 15, 2014.in CTA Case No. 7948 of the CTA Third Division, ordering
petitioner Medicard Philippines, Inc. (MEDICARD), to pay respondent Commissioner of Internal
Revenue (CIR) the deficiency

Value-Added Tax. (VAT) assessment in the aggregate amount of ₱220,234,609.48, plus 20%
interest per annum starting January 25, 2007, until fully paid, pursuant to Section 249(c)6 of the
National Internal Revenue Code (NIRC) of 1997.

The Facts

MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid health and
medical insurance coverage to its clients. Individuals enrolled in its health care programs pay an
annual membership fee and are entitled to various preventive, diagnostic and curative medical
services provided by duly licensed physicians, specialists and other professional technical staff
participating in the group practice health delivery system at a hospital or clinic owned, operated or
accredited by it.7
MEDICARD filed its First, Second, and Third Quarterly VAT Returns through Electronic Filing
and Payment System (EFPS) on April 20, 2006, July 25, 2006 and October 20, 2006, respectively,
and its Fourth Quarterly VAT Return on January 25, 2007.8

Upon finding some discrepancies between MEDICARD's Income Tax Returns (ITR) and VAT
Returns, the CIR informed MEDICARD and issued a Letter Notice (LN) No. 122-VT-06-00-
00020 dated

September 20, 2007. Subsequently, the CIR also issued a Preliminary Assessment Notice (PAN)
against MEDICARD for deficiency VAT. A Memorandum dated December 10, 2007 was likewise
issued recommending the issuance of a Formal Assessment Notice (FAN) against MEDICARD.9
On. January 4, 2008, MEDICARD received CIR's FAN dated December' 10, 2007 for alleged
deficiency VAT for taxable year 2006 in the total amount of Pl 96,614,476.69,10 inclusive of
penalties. 11

According to the CIR, the taxable base of HMOs for VAT purposes is its gross receipts without
any deduction under Section 4.108.3(k) of Revenue Regulation (RR) No. 16-2005. Citing
Commissioner of Internal Revenue v. Philippine Health Care Providers, Inc., 12 the CIR argued
that since MEDICARD. does not actually provide medical and/or hospital services, but merely
arranges for the same, its services are not VAT exempt.13

MEDICARD argued that: (1) the services it render is not limited merely to arranging for the
provision of medical and/or hospital services by hospitals and/or clinics but include actual and
direct rendition of medical and laboratory services; in fact, its 2006 audited balance sheet shows
that it owns x-ray and laboratory facilities which it used in providing medical and laboratory
services to its members; (2) out of the ₱l .9 Billion membership fees, ₱319 Million was received
from clients that are registered with the Philippine Export Zone Authority (PEZA) and/or Bureau
of Investments; (3) the processing fees amounting to ₱l 1.5 Million should be excluded from gross
receipts because P5.6 Million of which represent advances for professional fees due from clients
which were paid by MEDICARD while the remainder was already previously subjected to VAT;
(4) the professional fees in the amount of Pl 1 Million should also be excluded because it
represents the amount of medical services actually and directly rendered by MEDICARD and/or
its subsidiary company; and (5) even assuming that it is liable to pay for the VAT, the 12% VAT
rate should not be applied on the entire amount but only for the period when the 12% VAT rate
was already in effect, i.e., on February 1, 2006. It should not also be held liable for surcharge and
deficiency interest because it did not pass on the VAT to its members.14

On February 14, 2008, the CIR issued a Tax Verification Notice authorizing Revenue Officer
Romualdo Plocios to verify the supporting documents of MEDICARD's Protest. MEDICARD
also submitted additional supporting documentary evidence in aid of its Protest thru a letter dated
March 18, 2008.15

On June 19, 2009, MEDICARD received CIR's Final Decision on Disputed Assessment dated
May 15, 2009, denying MEDICARD's protest, to wit:
IN VIEW HEREOF, we deny your letter protest and hereby reiterate in toto assessment of
deficiency [VAT] in total sum of ₱196,614,476.99. It is requested that you pay said deficiency
taxes immediately. Should payment be made later, adjustment has to be made to impose interest
until date of payment. This is olir final decision. If you disagree, you may take an appeal to the
[CTA] within the period provided by law, otherwise, said assessment shall become final,
executory and demandable. 16

On July 20, 2009, MEDICARD proceeded to file a petition for review before the CT A, reiterating
its position before the tax authorities. 17

On June 5, 2014, the CTA Division rendered a Decision18 affirming with modifications the CIR's
deficiency VAT assessment covering taxable year 2006, viz.:

WHEREFORE, premises considered, the deficiency VAT assessment issued by [CIR] against
[MEDICARD] covering taxable year 2006 ·is hereby AFFIRMED WITH MODIFICATIONS.
Accordingly, [MEDICARD] is ordered to pay [CIR] the amount of P223,l 73,208.35, inclusive of
the twenty-five percent (25%) surcharge imposed under -Section 248(A)(3) of the NIRC of 1997,
as amended, computed as follows:

Basic Deficiency VAT ₱l78,538,566.68

Add: 25% Surcharge 44,634,641.67
Total ₱223.173.208.35
In addition, [MEDICARD] is ordered to pay:

a. Deficiency interest at the rate of twenty percent (20%) per annum on the basis deficiency VAT
of Pl 78,538,566.68 computed from January 25, 2007 until full payment thereof pursuant to
Section 249(B) of the NIRC of 1997, as amended; and

b. Delinquency interest at the rate of twenty percent (20%) per annum on the total amount of
₱223,173,208.35 representing basic deficiency VAT of ₱l78,538,566.68 and· 25% surcharge of
₱44,634,64 l .67 and on the 20% deficiency interest which have accrued as afore-stated in (a),
computed from June 19, 2009 until full payment thereof pursuant to Section 249(C) of the NIRC
of 1997.

SO ORDERED.19

The CTA Division held that: (1) the determination of deficiency VAT is not limited to the issuance
of Letter of Authority (LOA) alone as the CIR is granted vast powers to perform examination and
assessment functions; (2) in lieu of an LOA, an LN was issued to MEDICARD informing it· of
the discrepancies between its ITRs and VAT Returns and this procedure is authorized under
Revenue Memorandum Order (RMO) No. 30-2003 and 42-2003; (3) MEDICARD is estopped
from questioning the validity of the assessment on the ground of lack of LOA since the assessment
issued against MEDICARD contained the requisite legal and factual bases that put MEDICARD
on notice of the deficiencies and it in fact availed of the remedies provided by law without
questioning the nullity of the assessment; (4) the amounts that MEDICARD earmarked , and
eventually paid to doctors, hospitals and clinics cannot be excluded from · the computation of its
gross receipts under the provisions of RR No. 4-2007 because the act of earmarking or allocation
is by itself an act of ownership and management over the funds by MEDICARD which is beyond
the contemplation of RR No. 4-2007; (5) MEDICARD's earnings from its clinics and laboratory
facilities cannot be excluded from its gross receipts because the operation of these clinics and
laboratory is merely an incident to MEDICARD's main line of business as HMO and there is no
evidence that MEDICARD segregated the amounts pertaining to this at the time it received the
premium from its members; and (6) MEDICARD was not able to substantiate the amount
pertaining to its January 2006 income and therefore has no basis to impose a 10% VAT rate.20

Undaunted, MEDICARD filed a Motion for Reconsideration but it was denied. Hence,
MEDICARD elevated the matter to the CTA en banc.

In a Decision21 dated September 2, 2015, the CTA en banc partially granted the petition only
insofar as the 10% VAT rate for January 2006 is concerned but sustained the findings of the CTA
Division in all other matters, thus:

WHEREFORE, in view thereof, the instant Petition for Review is hereby PARTIALLY
GRANTED. Accordingly, the Decision date June 5, 2014 is hereby MODIFIED, as follows:

"WHEREFORE, premises considered, the deficiency VAT assessment issued by [CIR] against

[MEDICARD] covering taxable year 2006 is hereby AFFIRMED WITH MODIFICATIONS.

Accordingly, [MEDICARD] is ordered to pay [CIR] the amount of ₱220,234,609.48, inclusive of
the 25% surcharge imposed under Section 248(A)(3) of the NIRC of 1997, as amended, computed
as follows:

Basic Deficiency VAT ₱76,187,687.58

Add: 25% Surcharge 44,046,921.90
Total ₱220,234.609.48
In addition, [MEDICARD] is ordered to pay:

(a) Deficiency interest at the rate of 20% per annum on the basic deficiency VAT of ₱l
76,187,687.58 computed from January 25, 2007 until full payment thereof pursuant to Section
249(B) of the NIRC of 1997, as amended; and

(b) Delinquency interest at the rate of 20% per annum on the total amount of ₱220,234,609.48
(representing basic deficiency VAT of ₱l76,187,687.58 and 25% surcharge of ₱44,046,921.90) and
on the deficiency interest which have accrued as afore-stated in (a), computed from June 19, 2009
until full payment thereof pursuant to Section 249(C) of the NIRC of 1997, as amended."

SO ORDERED.22
Disagreeing with the CTA en bane's decision, MEDICARD filed a motion for reconsideration but
it was denied.23 Hence, MEDICARD now seeks recourse to this Court via a petition for review on
certiorari.

The Issues

l. WHETHER THE ABSENCE OF THE LOA IS FATAL; and

2. WHETHER THE AMOUNTS THAT MEDICARD EARMARKED AND EVENTUALLY

PAID TO THE MEDICAL SERVICE PROVIDERS SHOULD STILL FORM PART OF ITS
GROSS RECEIPTS FOR VAT PURPOSES.24

Ruling of the Court

The petition is meritorious.

The absence of an LOA violated

MEDICARD's right to due process

An 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. 25 An
LOA is premised on the fact that the examination of a taxpayer who has already filed his tax
returns is a power that statutorily belongs only to the CIR himself or his duly authorized
representatives. Section 6 of the NIRC clearly provides as follows:

SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements
for Tax Administration and Enforcement. –

(A) Examination of Return 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 examinationof 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 x (Emphasis and underlining ours)

Based on the afore-quoted provision, it is clear that unless authorized by the CIR himself or by his
duly authorized representative, through an LOA, an examination of the taxpayer cannot ordinarily
be undertaken. The circumstances contemplated under Section 6 where the taxpayer may be
assessed through best-evidence obtainable, inventory-taking, or surveillance among others has
nothing to do with the LOA. These are simply methods of examining the taxpayer in order to
arrive at .the correct amount of taxes. Hence, unless undertaken by the CIR himself or his duly
authorized representatives, other tax agents may not validly conduct any of these kinds of
examinations without prior authority.

With the advances in information and communication technology, the Bureau of Internal Revenue
(BIR) promulgated RMO No. 30-2003 to lay down the policies and guidelines once its then
incipient centralized Data Warehouse (DW) becomes fully operational in conjunction with its
Reconciliation of Listing for Enforcement System (RELIEF System).26 This system can detect
tax leaks by matching the data available under the BIR's Integrated Tax System (ITS) with data
gathered from third-party sources. Through the consolidation and cross-referencing of third-party
information, discrepancy reports on sales and purchases can be generated to uncover under
declared income and over claimed purchases of Goods and services.

Under this RMO, several offices of the BIR are tasked with specific functions relative to the
RELIEF System, particularly with regard to LNs. Thus, the Systems Operations Division (SOD)
under the Information Systems Group (ISG) is responsible for: (1) coming up with the List of
Taxpayers with discrepancies within the threshold amount set by management for the issuance of
LN and for the system-generated LNs; and (2) sending the same to the taxpayer and to the Audit
Information, Tax Exemption and Incentives Division (AITEID). After receiving the LNs, the
AITEID under the Assessment

Service (AS), in coordination with the concerned offices under the ISG, shall be responsible for
transmitting the LNs to the investigating offices [Revenue District Office (RDO)/Large Taxpayers
District Office (LTDO)/Large Taxpayers Audit and Investigation Division (LTAID)]. At the level
of these investigating offices, the appropriate action on the LN s issued to taxpayers with RELIEF
data discrepancy would be determined.

RMO No. 30-2003 was supplemented by RMO No. 42-2003, which laid down the "no-contact-
audit approach" in the CIR's exercise of its ·power to authorize any examination of taxpayer arid
the assessment of the correct amount of tax. The no-contact-audit approach includes the process of
computerized matching of sales and purchases data contained in the Schedules of Sales and
Domestic Purchases and Schedule of Importation submitted by VAT taxpayers under the RELIEF
System pursuant to RR No. 7-95, as amended by RR Nos. 13-97, 7-99 and 8-2002. This may also
include the matching of data from other information or returns filed by the taxpayers with the BIR
such as Alphalist of Payees subject to Final or Creditable Withholding Taxes.

Under this policy, even without conducting a detailed examination of taxpayer's books and
records, if the computerized/manual matching of sales and purchases/expenses appears to reveal
discrepancies, the same shall be communicated to the concerned taxpayer through the issuance of
LN. The LN shall serve as a discrepancy notice to taxpayer similar to a Notice for Informal
Conference to the concerned taxpayer. Thus, under the RELIEF System, a revenue officer may
begin an examination of the taxpayer even prior to the issuance of an LN or even in the absence of
an LOA with the aid of a computerized/manual matching of taxpayers': documents/records.
Accordingly, under the RELIEF System, the presumption that the tax returns are in accordance
with law and are presumed correct since these are filed under the penalty of perjury27 are easily
rebutted and the taxpayer becomes instantly burdened to explain a purported discrepancy.

Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are silent on the statutory requirement
of an LOA before any investigation or examination of the taxpayer may be conducted. As
provided in the RMO No. 42-2003, the LN is merely similar to a Notice for Informal Conference.
However, for a Notice of Informal Conference, which generally precedes the issuance of an
assessment notice to be valid, the same presupposes that the revenue officer who issued the same
is properly authorized in the first place.

With this apparent lacuna in the RMOs, in November 2005, RMO No. 30-2003, as supplemented
by RMO No. 42-2003, was amended by RMO No. 32-2005 to fine tune existing procedures in
handing assessments against taxpayers'· issued LNs by reconciling various revenue issuances
which conflict with the NIRC. Among the objectives in the issuance of RMO No. 32-2005 is to
prescribe procedure in the resolution of LN discrepancies, conversion of LNs to LOAs and
assessment and collection of deficiency taxes.

IV. POLICIES AND GUIDELINES

xxxx

8. In the event a taxpayer who has been issued an LN refutes the discrepancy shown in the LN, the
concerned taxpayer will be given an opportunity to reconcile its records with those of the BIR
within

One Hundred and Twenty (120) days from the date of the issuance of the LN. However, the
subject taxpayer shall no longer be entitled to the abatement of interest and penalties after the
lapse of the sixty (60)-day period from the LN issuance.

9. In case the above discrepancies remained unresolved at the end of the One Hundred and Twenty
(120)-day period, the revenue officer (RO) assigned to handle the LN shall recommend the
issuance of [LOA) to replace the LN. The head of the concerned investigating office shall submit a
summary list of LNs for conversion to LAs (using the herein prescribed format in Annex "E"
hereof) to the OACIR-LTS I ORD for the preparation of the corresponding LAs with the notation
"This LA cancels LN_________ No. "

xxxx

V. PROCEDURES

xxxx

B. At the Regional Office/Large Taxpayers Service

xxxx
7. Evaluate the Summary List of LNs for Conversion to LAs submitted by the RDO x x x prior to
approval.

8. Upon approval of the above list, prepare/accomplish and sign the corresponding LAs.

xxxx

Decision 11 G.R. No. 222743

xxxx

10. Transmit the approved/signed LAs, together with the duly accomplished/approved Summary
List of LNs for conversion to LAs, to the concerned investigating offices for the encoding of the
required information x x x and for service to the concerned taxpayers.

xxxx

C. At the RDO x x x

xxxx

11. If the LN discrepancies remained unresolved within One Hundred and Twenty (120) days from
issuance thereof, prepare a summary list of said LN s for conversion to LAs x x x.

xxxx

16. Effect the service of the above LAs to the concerned taxpayers.28

In this case, there is no dispute that no LOA was issued prior to the issuance of a PAN and FAN
against MED ICARD. Therefore no LOA was also served on MEDICARD. The LN that was
issued earlier was also not converted into an LOA contrary to the above quoted provision.
Surprisingly, the CIR did not even dispute the applicability of the above provision of RMO 32-
2005 in the present case which is clear and unequivocal on the necessity of an LOA for the·
assessment proceeding to be valid. Hence, the CTA's disregard of MEDICARD's right to due
process warrant the reversal of the assailed decision and resolution.

In the case of Commissioner of Internal Revenue v. Sony Philippines, Inc. ,29 the Court said that:

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.30
(Emphasis and underlining ours)
The Court cannot convert the LN into the LOA required under the law even if the same was issued
by the CIR himself. Under RR No. 12-2002, LN is issued to a person found to have underreported
sales/receipts per data generated under the RELIEF system. Upon receipt of the LN, a taxpayer
may avail of the BIR's Voluntary Assessment and Abatement Program. If a taxpayer fails or
refuses to avail of the said program, the BIR may avail of administrative and criminal .remedies,
particularly closure, criminal action, or audit and investigation. Since the law specifically requires
an LOA and RMO No. 32-2005 requires the conversion of the previously issued LN to an LOA,
the absence thereof cannot be simply swept under the rug, as the CIR would have it. In fact
Revenue Memorandum Circular No. 40-2003 considers an LN as a notice of audit or investigation
only for the purpose of disqualifying the taxpayer from amending his returns.

The following differences between an LOA and LN are crucial. First, an LOA addressed to a
revenue officer is specifically required under the NIRC before an examination of a taxpayer may
be had while an LN is not found in the NIRC and is only for the purpose of notifying the taxpayer
that a discrepancy is found based on the BIR's RELIEF System. Second, an LOA is valid only for
30 days from date of issue while an LN has no such limitation. Third, an LOA gives the revenue
officer only a period of 10days from receipt of LOA to conduct his examination of the taxpayer
whereas an LN does not contain such a limitation.31 Simply put, LN is entirely different and
serves a different purpose than an LOA. Due process demands, as recognized under RMO No. 32-
2005, that after an LN has serve its purpose, the revenue officer should have properly secured an
LOA before proceeding with the further examination and assessment of the petitioner.
Unfortunarely, this was not done in this case.

Contrary to the ruling of the CTA en banc, an LOA cannot be dispensed with just because none of
the financial books or records being physically kept by MEDICARD was examined. To begin
with, Section 6 of the NIRC requires an authority from the CIR or from his duly authorized
representatives before an examination "of a taxpayer" may be made. The requirement of
authorization is therefore not dependent on whether the taxpayer may be required to physically
open his books and financial records but only on whether a taxpayer is being subject to
examination.

The BIR's RELIEF System has admittedly made the BIR's assessment and collection efforts much
easier and faster. The ease by which the BIR's revenue generating objectives is achieved is no
excuse however for its non-compliance with the statutory requirement under Section 6 and with its
own administrative issuance. In fact, apart from being a statutory requirement, an LOA is equally
needed even under the BIR's RELIEF System because the rationale of requirement is the same
whether or not the CIR conducts a physical examination of the taxpayer's records: to prevent
undue harassment of a taxpayer and level the playing field between the government' s vast
resources for tax assessment, collection and enforcement, on one hand, and the solitary taxpayer's
dual need to prosecute its business while at the same time responding to the BIR exercise of its
statutory powers. The balance between these is achieved by ensuring that any examination of the
taxpayer by the BIR' s revenue officers is properly authorized in the first place by those to whom
the discretion to exercise the power of examination is given by the statute.
That the BIR officials herein were not shown to have acted unreasonably is beside the point
because the issue of their lack of authority was only brought up during the trial of the case. What
is crucial is whether the proceedings that led to the issuance of VAT deficiency assessment against
MEDICARD had the prior approval and authorization from the CIR or her duly authorized
representatives. Not having authority to examine MEDICARD in the first place, the assessment
issued by the CIR is inescapably void.

At any rate, even if it is assumed that the absence of an LOA is not fatal, the Court still partially
finds merit in MEDICARD's substantive arguments.

The amounts earmarked and

eventually paid by MEDICARD to
the medical service providers do not
form part of gross receipts.for VAT
purposes

MEDICARD argues that the CTA en banc seriously erred in affirming the ruling of the CT A
Division that the gross receipts of an HMO for VAT purposes shall be the total amount of money
or its equivalent actually received from members undiminished by any amount paid or payable to
the owners/operators of hospitals, clinics and medical and dental practitioners. MEDICARD
explains that its business as an HMO involves two different although interrelated contracts. One is
between a corporate client and MEDICARD, with the corporate client's employees being
considered as MEDICARD members; and the other is between the health care
institutions/healthcare professionals and MED ICARD.

Under the first, MEDICARD undertakes to make arrangements with healthcare

institutions/healthcare professionals for the coverage of MEDICARD members under specific
health related services for a specified period of time in exchange for payment of a more or less
fixed membership fee. Under its contract with its corporate clients, MEDICARD expressly
provides that 20% of the membership fees per individual, regardless of the amount involved,
already includes the VAT of 10%/20% excluding the remaining 80o/o because MED ICARD
would earmark this latter portion for medical utilization of its members. Lastly, MEDICARD also
assails CIR's inclusion in its gross receipts of its earnings from medical services which it actually
and directly rendered to its members.

Since an HMO like MEDICARD is primarily engaged m arranging for coverage or designated
managed care services that are needed by plan holders/members for fixed prepaid membership
fees and for a specified period of time, then MEDICARD is principally engaged in the sale of
services. Its VAT base and corresponding liability is, thus, determined under Section 108(A)32 of
the Tax Code, as amended by Republic Act No. 9337.

Prior to RR No. 16-2005, an HMO, like a pre-need company, is treated for VAT purposes as a
dealer in securities whose gross receipts is the amount actually received as contract price without
allowing any deduction from the gross receipts.33 This restrictive tenor changed under RR No.
16-2005. Under this RR, an HMO's gross receipts and gross receipts in general were defined, thus:

Section 4.108-3. xxx

xxxx

HMO's gross receipts shall be the total amount of money or its equivalent representing the service
fee actually or constructively received during the taxable period for the services performed or to
be performed for another person, excluding the value-added tax. The compensation for their
services representing their service fee, is presumed to be the total amount received as enrollment
fee from their members plus other charges received.

Section 4.108-4. x x x. "Gross receipts" refers to 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 applied as payments for services
rendered, and advance payments actually or constructively received during the taxable period for
the services performed or to be performed for another person, excluding the VAT. 34

In 2007, the BIR issued RR No. 4-2007 amending portions of RR No. 16-2005, including the
definition of gross receipts in general.35

According to the CTA en banc, the entire amount of membership fees should form part of
MEDICARD's gross receipts because the exclusions to the gross receipts under RR No. 4-2007
does not apply to MEDICARD. What applies to MEDICARD is the definition of gross receipts of
an HMO under RR No. 16-2005 and not the modified definition of gross receipts in general under
the RR No. 4-2007.

The CTA en banc overlooked that the definition of gross receipts under. RR No. 16-2005 merely
presumed that the amount received by an HMO as membership fee is the HMO's compensation for
their services. As a mere presumption, an HMO is, thus, allowed to establish that a portion of the
amount it received as membership fee does NOT actually compensate it but some other person,
which in this case are the medical service providers themselves. It is a well-settled principle of
legal hermeneutics that words of a statute will be interpreted in their natural, plain and ordinary
acceptation and signification, unless it is evident that the legislature intended a technical or special
legal meaning to those words. The Court cannot read the word "presumed" in any other way.

It is notable in this regard that the term gross receipts as elsewhere mentioned as the tax base
under the NIRC does not contain any specific definition.36 Therefore, absent a statutory
definition, this Court has construed the term gross receipts in its plain and ordinary meaning, that
is, gross receipts is understood as comprising the entire receipts without any deduction.37
Congress, under Section 108, could have simply left the term gross receipts similarly undefined
and its interpretation subjected to ordinary acceptation,. Instead of doing so, Congress limited the
scope of the term gross receipts for VAT purposes only to the amount that the taxpayer received
for the services it performed or to the amount it received as advance payment for the services it
will render in the future for another person.

In the proceedings ·below, the nature of MEDICARD's business and the extent of the services it
rendered are not seriously disputed. As an HMO, MEDICARD primarily acts as an intermediary
between the purchaser of healthcare services (its members) and the healthcare providers (the
doctors, hospitals and clinics) for a fee. By enrolling membership with MED ICARD, its members
will be able to avail of the pre-arranged medical services from its accredited healthcare providers
without the necessary protocol of posting cash bonds or deposits prior to being attended to or
admitted to hospitals or clinics, especially during emergencies, at any given time. Apart from this,
MEDICARD may also directly provide medical, hospital and laboratory services, which depends
upon its member's choice.

Thus, in the course of its business as such, MED ICARD members can either avail of medical
services from MEDICARD's accredited healthcare providers or directly from MEDICARD. In the
former, MEDICARD members obviously knew that beyond the agreement to pre-arrange the
healthcare needs of its ·members, MEDICARD would not actually be providing the actual
healthcare service. Thus, based on industry practice, MEDICARD informs its would-be member
beforehand that 80% of the amount would be earmarked for medical utilization and only the
remaining 20% comprises its service fee. In the latter case, MEDICARD's sale of its services is
exempt from VAT under Section 109(G).

The CTA's ruling and CIR's Comment have not pointed to any portion of Section 108 of the NIRC
that would extend the definition of gross receipts even to amounts that do not only pertain to the
services to be performed: by another person, other than the taxpayer, but even to amounts that
were indisputably utilized not by MED ICARD itself but by the medical service providers.

It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a
statute shall be considered surplusage or superfluous, meaningless, void and insignificant. To this
end, a construction which renders every word operative is preferred over that which makes some
words idle and nugatory. This principle is expressed in the maxim Ut magisvaleat quam pereat,
that is, we choose the interpretation which gives effect to the whole of the statute – it’s every
word.

In Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue,38the Court

adopted the principal object and purpose object in determining whether the MEDICARD therein is
engaged in the business of insurance and therefore liable for documentary stamp tax. The Court
held therein that an HMO engaged in preventive, diagnostic and curative medical services is not
engaged in the business of an insurance, thus:

To summarize, the distinctive features of the cooperative are the rendering of service, its
extension, the bringing of physician and patient together, the preventive features, the
regularization of service as well as payment, the substantial reduction in cost by quantity
purchasing in short, getting the medical job done and paid for; not, except incidentally to these
features, the indemnification for cost after .the services is rendered. Except the last, these are not
distinctive or generally characteristic of the insurance arrangement. There is, therefore, a
substantial difference between contracting in this way for the rendering of service, even on the
contingency that it be needed, and contracting merely to stand its cost when or after it is
rendered.39 (Emphasis ours)

In sum, the Court said that the main difference between an HMO arid an insurance company is
that HMOs undertake to provide or arrange for the provision of medical services through
participating physicians while insurance companies simply undertake to indemnify the insured for
medical expenses incurred up to a pre-agreed limit. In the present case, the VAT is a tax on the
value added by the performance of the service by the taxpayer. It is, thus, this service and the
value charged thereof by the taxpayer that is taxable under the NIRC.

To be sure, there are pros and cons in subjecting the entire amount of membership fees to VAT.40
But the Court's task however is not to weigh these policy considerations but to determine if these
considerations in favor of taxation can even be implied from the statute where the CIR purports to
derive her authority. This Court rules that they cannot because the language of the NIRC is pretty
straightforward and clear. As this Court previously ruled:

What is controlling in this case is the well-settled doctrine of strict interpretation in the imposition
of taxes, not the similar doctrine as applied to tax exemptions. The rule in the interpretation of tax
laws is that a statute will not be construed as imposing a tax unless it does so clearly, expressly,
and unambiguously. A tax cannot be imposed without clear and express words for that purpose.
Accordingly, the general rule of requiring adherence to the letter in construing statutes applies
with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by
implication. In answering the question of who is subject to tax statutes, it is basic that in case of
doubt, such statutes are to be construed most strongly against the government and in favor of the
subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond
what statutes expressly and clearly import. As burdens, taxes should not be unduly exacted nor
assumed beyond the plain meaning of the tax laws. 41 (Citation omitted and emphasis and
underlining ours)

For this Court to subject the entire amount of MEDICARD's gross receipts without exclusion, the
authority should have been reasonably founded from the language of the statute. That language is
wanting in this case. In the scheme of judicial tax administration, the need for certainty and
predictability in the implementation of tax laws is crucial. Our tax authorities fill in the details that
Congress may not have the opportunity or competence to provide. The regulations these
authorities issue are relied upon by taxpayers, who are certain that these will be followed by the
courts. Courts, however, will not uphold these authorities' interpretations when dearly absurd,
erroneous or improper.42 The CIR's interpretation of gross receipts in the present case is patently
erroneous for lack of both textual and non-textual support.

As to the CIR's argument that the act of earmarking or allocation is by itself an act of ownership
and management over the funds, the Court does not agree.1âwphi1 On the contrary, it is
MEDICARD's act of earmarking or allocating 80% of the amount it received as membership fee at
the time of payment that weakens the ownership imputed to it. By earmarking or allocating 80%
of the amount, MEDICARD unequivocally recognizes that its possession of the funds is not in the
concept of owner but as a mere administrator of the same. For this reason, at most, MEDICARD's
right in relation to these amounts is a mere inchoate owner which would ripen into actual
ownership if, and only if, there is underutilization of the membership fees at the end of the fiscal
year. Prior to that, MEDI CARD is bound to pay from the amounts it had allocated as an
administrator once its members avail of the medical services of MEDICARD's healthcare
providers.

Before the Court, the parties were one in submitting the legal issue of whether the amounts
MEDICARD earmarked, corresponding to 80% of its enrollment fees, and paid to the medical
service providers should form part of its gross receipt for VAT purposes, after having paid the VAT
on the amount comprising the 20%. It is significant to note in this regard that MEDICARD
established that upon receipt of payment of membership fee it actually issued two official receipts,
one pertaining to the VAT able portion, representing compensation for its services, and the other
represents the non-vatable portion pertaining to the amount earmarked for medical utilization.:
Therefore, the absence of an actual and physical segregation of the amounts pertaining to two
different kinds · of fees cannot arbitrarily disqualify MEDICARD from rebutting the presumption
under the law and from proving that indeed services were rendered by its healthcare providers for
which it paid the amount it sought to be excluded from its gross receipts.

With the foregoing discussions on the nullity of the assessment on due process grounds and
violation of the NIRC, on one hand, and the utter lack of legal basis of the CIR's position on the
computation of MEDICARD's gross receipts, the Court finds it unnecessary, nay useless, to
discuss the rest of the parties' arguments and counter-arguments.

In fine, the foregoing discussion suffices for the reversal of the assailed decision and resolution of
the CTA en banc grounded as it is on due process violation. The Court likewise rules that for
purposes of determining the VAT liability of an HMO, the amounts earmarked and actually spent
for medical utilization of its members should not be included in the computation of its gross
receipts.

WHEREFORE, in consideration of the foregoing disquisitions, the petition is hereby GRANTED.

The Decision dated September 2, 2015 and Resolution dated January 29, 2016 issued by the Court
of Tax Appeals en bane in CTA EB No. 1224 are REVERSED and SET ASIDE. The definition of
gross receipts under Revenue Regulations Nos. 16-2005 and 4-2007, in relation to Section 108(A)
of the National Internal Revenue Code, as amended by Republic Act No. 9337, for purposes of
determining its Value-Added Tax liability, is hereby declared to EXCLUDE the eighty percent
(80%) of the amount of the contract price earmarked as fiduciary funds for the medical utilization
of its members. Further, the Value-Added Tax deficiency assessment issued against Medicard
Philippines, Inc. is hereby declared unauthorized for having been issued without a Letter of
Authority by the Commissioner of Internal Revenue or his duly authorized representatives.

SO ORDERED.
BIENVENID L. REYES,
Associate Justice

WE CONCUR:

PRESBITERO J. VELASCO, JR
Associate Justice
Chairperson

LUCAS P. BERSAMIN
Associate Justice ALFREDO BENJAMIN S. CAGUIOA
Associate Justice
NOEL G. TIJAM
Associate Justice

ATT E S TAT I O N

I attest that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court’s Division.

PRESBITERO J. VELASCO, JR
Associate Justice
Chairperson,

C E RT I F I CATI O N

Pursuant to the 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.

MARIA LOURDES P.A. SERENO

Chief Justice

Footnotes

* Additional Member per Raffle dated April 3, 2017 vice Associate Justice Francis H. Jardeleza.

1 Rollo, pp. 187-231.

2 Penned by Associate Justice Juanito C. Castaneda; id. at 13-45.

3 Id. at 46-59; Presiding Justice Roman G. Del Rosario with Concurring and Dissenting Opinion,
joined by Associate Justice Erlinda P. Uy.

4 Penned by Associate Justice Ma. Belen M. Ringpis-Liban, with Associate Justices Lovell R.
Bautista and Esperanza R. Pabon-Victorino concurring; id. at 124-174.

5 Id.atl75-178.

6 SEC. 249. Interest. -

xxxx

(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.

7 Rollo, p. 190.

8 Id.atl5.

9 Id. at 15-16.

10

Receivable from members, beginning [₱]45,265,483 .00

Add/Deduct Adjustments
1. Membership fees for the year [₱]l,956,016,629.00
2. Administrative service fees 3,388,889.00
3. Professional fees 11,522,346.00
4. Processing fees 11,008,809.00
5. Rental income 119,942.00
6. Unearned fees, ending405,616,650.00 2,387,673,265.00
2,432,938,748.00
Less: Receivable from members, ending 85,189,221.00
Unearned fees, beginning 412,184,856.00 497,374,077.00
Gross receipts subject to VAT 1,935,564,671.00
VAT Rate 12%
Output tax due 207,381,929.04
Less: Input tax 25, 794,078.24
VAT payable 181,587 ,850.80
Less: VAT payments 15,816,053.22
VAT payable 165,771,797.58
Add: Increment
Surcharge
Interest (1-26-07 to 12-31-07 or 339 days) 30,792,679.11
Compromise penalty 50,000.00 30,842,679.11
Total Deficiency VAT Payable [₱]196,614,4 76.69
11 Rollo, p. 16.

12 550 Phil. 304 (2007).

13 Rollo, pp. 16-17.

14 Id. at 18-20.

15 Id. at 20.

16 Id.

17 Id.

18 Id. at 124-174.

19 Id. at 173.

20 Id. at 153-170.

21 Id. at 13-45.

22 Id. at 43-44.

23 Id. at 46-59.

24 Id. at 197-198.

25 Commissioner of Internal Revenue v. Sony Philippines, Inc., 649 Phil. 519, 529-530 (2010).

26 The following are the objectives of RMO No. 30-2003: 1. Establish adequate controls to ensure
security/integrity and confidentiality of RELIEF data maintained in the DW, consistent with
relevant statutes and policies concerning Unlawful Disclosure; 2. Delineate the duties and
responsibilities of offices responsible fm: oversight of the RELIEF system including all activities
associated with requests for access and farming out of RELIEF data to the regional and district
offices; 3. Prescribe procedures in the resolution of matched error or discrepancies, examination of
taxpayer's records, assessment and collection of deficiency taxes; and 4. Prescribe standard report
format to be used by all concerned offices in the implementation of this Order.
<https://www.bir.gov.ph/images/bir files/old files/pdf/l 966rmo03 30.pdf> visited last March 7,
2017.

27 SMl-Ed Philippines Technology, Inc. v. Commissioner of Internal Revenue, G.R. No. 175410,
November 12, 2014, 739 SCRA 691, 701.

28 <https://www.bir.gov.ph/irnages/bir filed/old files/pdf/27350RM0%2032-2005.pdt> visited last

March 7, 2017.

29 649 Phil. 519 (2010).

30 Id. at 530.

31 BIR's General Audit Procedures and Documentation

32 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 (12%) of gross receipts derived from the sale or exchange of services,
including the use or lease of properties: Provided, That the President, upon the recommendation of
the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to
twelve percent (12%), after any of the following conditions has been satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%); or

(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one
half percent (1 1/2%).

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 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. The phrase 'sale or exchange of services' shall likewise include:

(l) 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;

(2) The lease or the use of, or the right to use of any industrial, commercial or, scientific
equipment;

(3) The supply of scientific, technical, industrial or 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 any such property, or right as is mentioned in
subparagraph (2) or any such knowledge or information as is mentioned in subparagraph (3);

(5) The supply of services by a nonresident person or his employee in connection with the use of
property or rights belonging to, or the installation or operation of any brand, machinery or other
apparatus purchased from such nonresident person;

(6) The supply of technical advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial undertaking, venture,
project or scheme;

(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.

Lease of properties shall be subject to the tax herein imposed irrespective of the place where the
contract of lease or licensing agreement was executed if the property is leased or used in the
Philippines.

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
materi.als 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. (Emphasis ours)

33 RR No. 14-2005, Section 4.108-3 (i).

34 <https://www.bir.gov.ph/images/bir files/old files/pdf/26116rr16-2005.pdt> visited last March
7, 2017

35 Gross receipts'· refers to 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 applied as payments for services rendered and advance
payments actually or constructively received during the taxable period for the services performed
or to be performed for another person, excluding the VAT, except those amounts earmarked for
payment to unrelated third (3rd) party or received as reimbursement for advance payment on
behalf of another which do not redound to the benefit of the payor.

A payment is a payment to a third (3rd) party if the same is made to settle an obligation of another
person, e.g., customer or client, to the said third party, which obligation is evidenced by the sales
invoice/official receipt issued by said third party to the obligor/debtor (e.g., customer or client of
the payor of the obligation).

An advance payment is an advance payment on behalf of another if the same is paid to a third
(3rd) party for a present or future obligation of said another party which obligation is evidenced by
a sales invoice/official receipt issued by the obligee/creditor to the obligor/debtor (i.e., the
aforementioned 'another party') for the sale of goods or services by the former to the latter.

For this purpose unrelated party' shall not include taxpayer's employees, partners, affiliates
(parent, subsidiary and other related companies), relatives by consanguinity or affinity within the
fourth (4th) civil degree, and trust fund where the taxpayer is the trustor, trustee or beneficiary,
even if covered by an agreement to the contrary. (Underlining in the original)

36 Compare with Section 125 of the NIRC, where the gross receipts for purposes of amusement
tax broadly included "all receipts of the proprietor, lessee or operator of the amusement place."
See Sections 116, 117, 119 and 121 of the NIRC, as amended by R.A. No. 9337.

37 Commissioner of Internal Revenue v. Bank of Commerce, 498 Phil. 673, 685 (2005).

38 616 Phil. 387 (2009).

39 Id. at 404-405, citing Jordan v. Group Health Association, 107 F.2d 239, 247-248 (D.C. App.

40 For instance, arguably, excluding from an HMO's gross receipts the amount that they
indisputably utilized for the"benefit of their members could mean lessening the state's burden of
having to spend for the amount of these services were it not for the favorable effect of the
exclusion on the overall healthcare scheme. Similarly, the indirect benefits of an HMO's
diagnostic and preventive medical health service (as distinguished from its curative medical health
service generally associated with the reimbursement scheme of health insurance) to the state's
legitimate interest of maintaining a healthy population may also arguably explain the exclusion of
the medically utilized amount from an HMO's gross receipts.
41 Commissioner of Internal Revenue v. Fortune Tobacco Corporation, 581 Phil. 146, 168 (2008).

42 Commissioner of Internal Revenue v. Central Luzon Drug Corporation, 496 Phil. 307, 332
(2005)

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-66416 March 21, 1990

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
TOURS SPECIALISTS, INC., and THE COURT OF TAX APPEALS, respondents.

Gadioma Law Offices for private respondent.

GUTIERREZ, JR., J.:

This is a petition to review on certiorari the decision of the Court of Tax Appeals which ruled that
the money entrusted to private respondent Tours Specialists, Inc., earmarked and paid for hotel
room charges of tourists, travelers and/or foreign travel agencies does not form part of its gross
receipts subject to the 3% independent contractor's tax under the National Internal Revenue Code
of 1977.

We adopt the findings of facts of the Court of Tax Appeals as follows:

For the years 1974 to 1976, petitioner (Tours Specialists, Inc.) had derived income from its
activities as a travel agency by servicing the needs of foreign tourists and travelers and Filipino
"Balikbayans" during their stay in this country. Some of the services extended to the tourists
consist of booking said tourists and travelers in local hotels for their lodging and board needs;
transporting these foreign tourists from the airport to their respective hotels, and from the latter to
the airport upon their departure from the Philippines, transporting them from their hotels to
various embarkation points for local tours, visits and excursions; securing permits for them to visit
places of interest; and arranging their cultural entertainment, shopping and recreational activities.

In order to ably supply these services to the foreign tourists, petitioner and its correspondent
counterpart tourist agencies abroad have agreed to offer a package fee for the tourists. Although
the fee to be paid by said tourists is quoted by the petitioner, the payments of the hotel room
accommodations, food and other personal expenses of said tourists, as a rule, are paid directly
either by tourists themselves, or by their foreign travel agencies to the local hotels (pp. 77, t.s.n.,
February 2, 1981; Exhs. O & O-1, p. 29, CTA rec.; pp. 2425, t.s.n., ibid) and restaurants or shops,
as the case may be.

It is also the case that some tour agencies abroad request the local tour agencies, such as the
petitioner in the case, that the hotel room charges, in some specific cases, be paid through them.
(Exh. Q, Q-1, p. 29 CTA rec., p. 25, T.s.n., ibid, pp. 5-6, 17-18, t.s.n., Aug. 20, 1981.; See also
Exh. "U", pp. 22-23, t.s.n., Oct. 9, 1981, pp. 3-4, 11., t.s.n., Aug. 10, 1982). By this arrangement,
the foreign tour agency entrusts to the petitioner Tours Specialists, Inc., the fund for hotel room
accommodation, which in turn is paid by petitioner tour agency to the local hotel when billed. The
procedure observed is that the billing hotel sends the bill to the petitioner. The local hotel
identifies the individual tourist, or the particular groups of tourists by code name or group
designation and also the duration of their stay for purposes of payment. Upon receipt of the bill,
the petitioner then pays the local hotel with the funds entrusted to it by the foreign tour
correspondent agency.

Despite this arrangement, respondent Commissioner of Internal Revenue assessed petitioner for
deficiency 3% contractor's tax as independent contractor by including the entrusted hotel room
charges in its gross receipts from services for the years 1974 to 1976. Consequently, on December
6, 1979, petitioner received from respondent the 3% deficiency independent contractor's tax
assessment in the amount of P122,946.93 for the years 1974 to 1976, inclusive, computed as
follows:

1974 deficiency percentage tax

per investigation P 3,995.63

15% surcharge for late payment 998.91

—————

P 4,994.54

14% interest computed by quarters

up to 12-28-793,953.18 P 8,847.72

1975 deficiency percentage tax

per investigation P 8,427.39

25% surcharge for late payment 2,106.85

—————
P 10,534.24

14% interest computed by quarters

up to 12-28-796,808.47 P 17,342.71

1976 deficiency percentage

per investigation P 54,276.42

25% surcharge for late payment 13,569.11

—————

P 67,845.53

14% interest computed by quarters

up to 12-28-7928,910.97 P 96,756.50

————— —————

Total amount due P 122,946.93

=========

In addition to the deficiency contractor's tax of P122,946.93, petitioner was assessed to pay a
compromise penalty of P500.00.

Subsequently on December 11, 1979, petitioner formally protested the assessment made by
respondent on the ground that the money received and entrusted to it by the tourists, earmarked to
pay hotel room charges, were not considered and have never been considered by it as part of its
taxable gross receipts for purposes of computing and paying its constractor's tax.

During one of the hearings in this case, a witness, Serafina Sazon, Certified Public Accountant and
in charge of the Accounting Department of petitioner, had testified, her credibility not having been
destroyed on cross examination, categorically stated that the amounts entrusted to it by the foreign
tourist agencies intended for payment of hotel room charges, were paid entirely to the hotel
concerned, without any portion thereof being diverted to its own funds. (t.s.n., Feb. 2, 1981, pp. 7,
25; t.s.n., Aug. 20, 1981, pp. 5-9, 17-18). The testimony of Serafina Sazon was corroborated by
Gerardo Isada, General Manager of petitioner, declaring to the effect that payments of hotel
accommodation are made through petitioner without any increase in the room charged (t.s.n., Oct.
9, 1981, pp. 21-25) and that the reason why tourists pay their room charge, or through their
foreign tourists agencies, is the fact that the room charge is exempt from hotel room tax under P.D.
31. (t.s.n., Ibid., pp. 25-29.) Witness Isada stated, on cross-examination, that if their payment is
made, thru petitioner's tour agency, the hotel cost or charges "is only an act of accomodation on
our (its) part" or that the "agent abroad instead of sending several telexes and saving on bank
charges they take the option to send money to us to be held in trust to be endorsed to the hotel."
(pp. 3-4, t.s.n. Aug. 10, 1982.)

Nevertheless, on June 2, 1980, respondent, without deciding the petitioner's written protest, caused
the issuance of a warrant of distraint and levy. (p. 51, BIR Rec.) And later, respondent had
petitioner's bank deposits garnished. (pp. 49-50, BIR Rec.)

Taking this action of respondent as the adverse and final decision on the disputed assessment,
petitioner appealed to this Court. (Rollo, pp. 40-45)

The petitioner raises the lone issue in this petition as follows:

WHETHER AMOUNTS RECEIVED BY A LOCAL TOURIST AND TRAVEL AGENCY

INCLUDED IN A PACKAGE FEE FROM TOURISTS OR FOREIGN TOUR AGENCIES,
INTENDED OR EARMARKED FOR HOTEL ACCOMMODATIONS FORM PART OF GROSS
RECEIPTS SUBJECT TO 3% CONTRACTOR'S TAX. (Rollo, p. 23)

The petitioner premises the issue raised on the following assumptions:

Firstly, the ruling overlooks the fact that the amounts received, intended for hotel room
accommodations, were received as part of the package fee and, therefore, form part of "gross
receipts" as defined by law.

Secondly, there is no showing and is not established by the evidence. that the amounts received
and "earmarked" are actually what had been paid out as hotel room charges. The mere possibility
that the amounts actually paid could be less than the amounts received is sufficient to destroy the
validity of the ruling. (Rollo, pp. 26-27)

In effect, the petitioner's lone issue is based on alleged error in the findings of facts of the
respondent court.

The well-settled doctrine is that the findings of facts of the Court of Tax Appeals are binding on
this Court and absent strong reasons for this Court to delve into facts, only questions of law are
open for determination. (Nilsen v. Commissioner of Customs, 89 SCRA 43 [1979]; Balbas v.
Domingo, 21 SCRA 444 [1967]; Raymundo v. De Joya, 101 SCRA 495 [1980]). In the recent case
of Sy Po v. Court of Appeals, (164 SCRA 524 [1988]), we ruled that the factual findings of the
Court of Tax Appeals are binding upon this court and can only be disturbed on appeal if not
supported by substantial evidence.

In the instant case, we find no reason to disregard and deviate from the findings of facts of the
Court of Tax Appeals.
As quoted earlier, the Court of Tax Appeals sufficiently explained the services of a local travel
agency, like the herein private respondent, rendered to foreign customers. The respondent
differentiated between the package fee — offered by both the local travel agency and its
correspondent counterpart tourist agencies abroad and the requests made by some tour agencies
abroad to local tour agencies wherein the hotel room charges in some specific cases, would be
paid to the local hotels through them. In the latter case, the correspondent court found as a fact
". . . that the foreign tour agency entrusts to the petitioner Tours Specialists, Inc. the fund for hotel
room accommodation, which in turn is paid by petitioner tour agency to the local hotel when
billed." (Rollo, p. 42) The following procedure is followed: The billing hotel sends the bill to the
respondent; the local hotel then identifies the individual tourist, or the particular group of tourist
by code name or group designation plus the duration of their stay for purposes of payment; upon
receipt of the bill the private respondent pays the local hotel with the funds entrusted to it by the
foreign tour correspondent agency.

Moreover, evidence presented by the private respondent shows that the amounts entrusted to it by
the foreign tourist agencies to pay the room charges of foreign tourists in local hotels were not
diverted to its funds; this arrangement was only an act of accommodation on the part of the private
respondent. This evidence was not refuted.

In essence, the petitioner's assertion that the hotel room charges entrusted to the private respondent
were part of the package fee paid by foreign tourists to the respondent is not correct. The evidence
is clear to the effect that the amounts entrusted to the private respondent were exclusively for
payment of hotel room charges of foreign tourists entrusted to it by foreign travel agencies.

As regards the petitioner's second assumption, the respondent court stated:

. . . [C]ontrary to the contention of respondent, the records show, firstly, in the Examiners'
Worksheet (Exh. T, p. 22, BIR Rec.), that from July to December 1976 alone, the following sums
made up the hotel room accommodations:

July 1976P 102,702.97

Aug. 1976 121,167.19

Sept. 1976 53,209.61

—————

P 282,079.77

=========

Oct. 1976P 71,134.80

Nov. 1976 409,019.17

Dec. 1976 142,761.55

—————

622,915.51

—————

Grand Total P 904,995.29

=========

It is not true therefore, as stated by respondent, that there is no evidence proving the amounts
earmarked for hotel room charges. Since the BIR examiners could not have manufactured the
above figures representing "advances for hotel room accommodations," these payments must have
certainly been taken from the records of petitioner, such as the invoices, hotel bills, official
receipts and other pertinent documents. (Rollo, pp. 48-49)

The factual findings of the respondent court are supported by substantial evidence, hence binding
upon this Court.

With these clarifications, the issue to be threshed out is as stated by the respondent court, to wit:

. . . [W]hether or not the hotel room charges held in trust for foreign tourists and travelers and/or
correspondent foreign travel agencies and paid to local host hotels form part of the taxable gross
receipts for purposes of the 3% contractor's tax. (Rollo, p. 45)

The petitioner opines that the gross receipts which are subject to the 3% contractor's tax pursuant
to Section 191 (Section 205 of the National Internal Revenue Code of 1977) of the Tax Code
include the entire gross receipts of a taxpayer undiminished by any amount. According to the
petitioner, this interpretation is in consonance with B.I.R. Ruling No. 68-027, dated 23 October,
1968 (implementing Section 191 of the Tax Code) which states that the 3% contractor's tax
prescribed by Section 191 of the Tax Code is imposed of the gross receipts of the contractor, "no
deduction whatever being allowed by said law." The petitioner contends that the only exception to
this rule is when there is a law or regulation which would exempt such gross receipts from being
subjected to the 3% contractor's tax citing the case of Commissioner of Internal Revenue v. Manila
Jockey Club, Inc. (108 Phil. 821 [1960]). Thus, the petitioner argues that since there is no law or
regulation that money entrusted, earmarked and paid for hotel room charges should not form part
of the gross receipts, then the said hotel room charges are included in the private respondent's
gross receipts for purposes of the 3% contractor's tax.
In the case of Commissioner of Internal Revenue v. Manila Jockey Club, Inc. (supra), the
Commissioner appealed two decisions of the Court of Tax Appeals disapproving his levy of
amusement taxes upon the Manila Jockey Club, a duly constituted corporation authorized to hold
horse races in Manila. The facts of the case show that the monies sought to be taxed never really
belonged to the club. The decision shows that during the period November 1946 to 1950, the
Manila Jockey Club paid amusement tax on its commission but without including the 5-1/2%
which pursuant to Executive Order 320 and Republic Act 309 went to the Board of Races, the
owner of horses and jockeys. Section 260 of the Internal Revenue Code provides that the
amusement tax was payable by the operator on its "gross receipts". The Manila Jockey Club,
however, did not consider as part of its "gross receipts" subject to amusement tax the amounts
which it had to deliver to the Board on Races, the horse owners and the jockeys. This view was
fully sustained by three opinions of the Secretary of Justice, to wit:

There is no question that the Manila Jockey, Inc., owns only 7-1/2% of the total bets registered by
the Totalizer. This portion represents its share or commission in the total amount of money it
handles and goes to the funds thereof as its own property which it may legally disburse for its own
purposes. The 5% does not belong to the club. It is merely held in trust for distribution as prizes to
the owners of winning horses. It is destined for no other object than the payment of prizes and the
club cannot otherwise appropriate this portion without incurring liability to the owners of winning
horses. It cannot be considered as an item of expense because the sum used for the payment of
prizes is not taken from the funds of the club but from a certain portion of the total bets especially
earmarked for that purpose.

In view of all the foregoing, I am of the opinion that in the submission of the returns for the
amusement tax of 10% (now it is 20% of the "gross receipts", provided for in Section 260 of the
National Internal Revenue Code), the 5% of the total bets that is set aside for prizes to owners of
winning horses should not be included by the Manila Jockey Club, Inc.

The Collector of the Internal Revenue, however had a different opinion on the matter and
demanded payment of amusement taxes. The Court of Tax Appeals reversed the Collector.

We affirmed the decision of the Court of Tax Appeals and stated:

The Secretary's opinion was correct. The Government could not have meant to tax as gross receipt
of the Manila Jockey Club the 1/2% which it directs same Club to turn over to the Board on
Races. The latter being a Government institution, there would be double taxation, which should be
avoided unless the statute admits of no other interpretation. In the same manner, the Government
could not have intended to consider as gross receipt the portion of the funds which it directed the
Club to give, or knew the Club would give, to winning horses and jockeys — admittedly 5%. It is
true that the law says that out of the total wager funds 12-1/2% shall be set aside as the
"commission" of the race track owner, but the law itself takes official notice, and actually
approves or directs payment of the portion that goes to owners of horses as prizes and bonuses of
jockeys, which portion is admittedly 5% out of that 12-1/2% commission. As it did not at that time
contemplate the application of "gross receipts" revenue principle, the law in making a distribution
of the total wager funds, took no trouble of separating one item from the other; and for
convenience, grouped three items under one common denomination.

Needless to say, gross receipts of the proprietor of the amusement place should not include any
money which although delivered to the amusement place has been especially earmarked by law or
regulation for some person other than the proprietor. (The situation thus differs from one in which
the owner of the amusement place, by a private contract, with its employees or partners, agrees to
reserve for them a portion of the proceeds of the establishment. (See Wong & Lee v. Coll. 104
Phil. 469; 55 Off. Gaz. [51] 10539; Sy Chuico v. Coll., 107 Phil., 428; 59 Off. Gaz., [6] 896).

In the second case, the facts of the case are:

The Manila Jockey Club holds once a year a so called "special Novato race", wherein only
"novato" horses, (i.e. horses which are running for the first time in an official [of the club] race),
may take part. Owners of these horses must pay to the Club an inscription fee of P1.00, and a
declaration fee of P1.00 per horse. In addition, each of them must contribute to a common fund
(P10.00 per horse). The Club contributes an equal amount P10.00 per horse) to such common
fund, the total amount of which is added to the 5% participation of horse owners already described
herein-above in the first case.

Since the institution of this yearly special novato race in 1950, the Manila Jockey Club never paid
amusement tax on the moneys thus contributed by horse owners (P10.00 each) because it
entertained the belief that in accordance with the three opinions of the Secretary of Justice herein-
above described, such contributions never formed part of its gross receipts. On the inscription fee
of the P1.00 per horse, it paid the tax. It did not on the declaration fee of P1.00 because it was
imposed by the Municipal Ordinance of Manila and was turned over to the City officers.

The Collector of Internal Revenue required the Manila Jockey Club to pay amusement tax on such
contributed fund P10.00 per horse in the special novato race, holding they were part of its gross
receipts. The Manila Jockey Club protested and resorted to the Court of Tax Appeals, where it
obtained favorable judgment on the same grounds sustained by said Court in connection with the
5% of the total wager funds in the herein-mentioned first case; they were not receipts of the Club.

We resolved the issue in the following manner:

We think the reasons for upholding the Tax Court's decision in the first case apply to this one. The
ten-peso contribution never belonged to the Club. It was held by it as a trust fund. And then, after
all, when it received the ten-peso contribution, it at the same time contributed ten pesos out of its
own pocket, and thereafter distributed both amounts as prizes to horse owners. It would seem
unreasonable to regard the ten-peso contribution of the horse owners as taxable receipt of the
Club, since the latter, at the same moment it received the contribution necessarily lost ten pesos
too.

As demonstrated in the above-mentioned case, gross receipts subject to tax under the Tax Code do
not include monies or receipts entrusted to the taxpayer which do not belong to them and do not
redound to the taxpayer's benefit; and it is not necessary that there must be a law or regulation
which would exempt such monies and receipts within the meaning of gross receipts under the Tax
Code.

Parenthetically, the room charges entrusted by the foreign travel agencies to the private respondent
do not form part of its gross receipts within the definition of the Tax Code. The said receipts never
belonged to the private respondent. The private respondent never benefited from their payment to
the local hotels. As stated earlier, this arrangement was only to accommodate the foreign travel
agencies.

Another objection raised by the petitioner is to the respondent court's application of Presidential
Decree 31 which exempts foreign tourists from payment of hotel room tax. Section 1 thereof
provides:

Sec. 1. — Foreign tourists and travelers shall be exempt from payment of any and all hotel room
tax for the entire period of their stay in the country.

The petitioner now alleges that P.D. 31 has no relevance to the case. He contends that the tax
under Section 191 of the Tax Code is in the nature of an excise tax; that it is a tax on the exercise
of the privilege to engage in business as a contractor and that it is imposed on, and collectible
from the person exercising the privilege. He sums his arguments by stating that "while the burden
may be shifted to the person for whom the services are rendered by the contractor, the latter is not
relieved from payment of the tax." (Rollo, p. 28)

The same arguments were submitted by the Commissioner of Internal Revenue in the case of
Commissioner of Internal Revenue v. John Gotamco & Son., Inc. (148 SCRA 36 [1987]), to
justify his imposition of the 3% contractor's tax under Section 191 of the National Internal
Revenue Code on the gross receipts John Gotamco & Sons, Inc., realized from the construction of
the World Health Organization (WHO) office building in Manila. We rejected the petitioner's
arguments and ruled:

We agree with the Court of Tax Appeals in rejecting this contention of the petitioner. Said the
respondent court:

"In context, direct taxes are those that are demanded from the very person who, it is intended or
desired, should pay them; while indirect taxes are those that are demanded in the first instance
from one person in the expectation and intention that he can shift the burden to someone else.
(Pollock v. Farmers, L & T Co., 1957 US 429, 15 S. Ct. 673, 39 Law. ed. 759). The contractor's
tax is of course payable by the contractor but in the last analysis it is the owner of the building that
shoulders the burden of the tax because the same is shifted by the contractor to the owner as a
matter of self-preservation. Thus, it is an indirect tax. And it is an indirect tax on the WHO
because, although it is payable by the petitioner, the latter can shift its burden on the WHO. In the
last analysis it is the WHO that will pay the tax indirectly through the contractor and it certainly
cannot be said that 'this tax has no bearing upon the World Health Organization.'"

Petitioner claims that under the authority of the Philippine Acetylene Company versus
Commissioner of Internal Revenue, et al., (127 Phil. 461) the 3% contractor's tax falls directly on
Gotamco and cannot be shifted to the WHO. The Court of Tax Appeals, however, held that the
said case is not controlling in this case, since the Host Agreement specifically exempts the WHO
from "indirect taxes." We agree. The Philippine Acetylene case involved a tax on sales of goods
which under the law had to be paid by the manufacturer or producer; the fact that the manufacturer
or producer might have added the amount of the tax to the price of the goods did not make the
sales tax "a tax on the purchaser." The Court held that the sales tax must be paid by the
manufacturer or producer even if the sale is made to tax-exempt entities like the National Power
Corporation, an agency of the Philippine Government, and to the Voice of America, an agency of
the United States Government.

The Host Agreement, in specifically exempting the WHO from "indirect taxes," contemplates
taxes which, although not imposed upon or paid by the Organization directly, form part of the
price paid or to be paid by it.

Accordingly, the significance of P.D. 31 is clearly established in determining whether or not hotel
room charges of foreign tourists in local hotels are subject to the 3% contractor's tax. As the
respondent court aptly stated:

. . . If the hotel room charges entrusted to petitioner will be subjected to 3% contractor's tax as
what respondent would want to do in this case, that would in effect do indirectly what P.D. 31
would not like hotel room charges of foreign tourists to be subjected to hotel room tax. Although,
respondent may claim that the 3% contractor's tax is imposed upon a different incidence i.e. the
gross receipts of petitioner tourist agency which he asserts includes the hotel room charges
entrusted to it, the effect would be to impose a tax, and though different, it nonetheless imposes a
tax actually on room charges. One way or the other, it would not have the effect of promoting
tourism in the Philippines as that would increase the costs or expenses by the addition of a hotel
room tax in the overall expenses of said tourists. (Rollo, pp. 51-52)

WHEREFORE, the instant petition is DENIED. The decision of the Court of Tax Appeals is
AFFIRMED. No pronouncement as to costs.

SO ORDERED.

Fernan, C.J., Narvasa, Melencio-Herrera, Cruz, Paras, Feliciano, Gancayco, Padilla, Bidin,
Sarmiento, Cortes, Griño-Aquino, Medialdea and Regalado, JJ., concur

FIRST DIVISION
KEPCO PHILIPPINES CORPORATION,

Petitioner,

- versus

COMMISSIONER OF

INTERNAL REVENUE,

Respondent.

G.R. No. 179356

Present:

PUNO, C.J., Chairperson,

CARPIO MORALES,

LEONARDO-DE CASTRO,

BERSAMIN, and
VILLARAMA, JR., JJ.

Promulgated:

December 14, 2009

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

DECISION

CARPIO MORALES, J.:

Korea Electric Power Corporation (KEPCO) Philippines Corporation (petitioner) is an

independent power producer engaged in selling electricity to the National Power Corporation
(NPC).

After its incorporation and registration with the Securities and Exchange Commission on June 15,
1995, petitioner forged a Rehabilitation Operation Maintenance and Management Agreement with
NPC for the rehabilitation and operation of Malaya Power Plant Complex in Pililia, Rizal.[1]

On September 30, 1998, petitioner filed with the Commissioner of Internal Revenue (respondent)
administrative claims for tax refund in the amounts of P4,895,858.01 representing unutilized input
Value Added Tax (VAT) payments on domestic purchases of goods and services for the 3rd quarter
of 1996 and P4,084,867.25 representing creditable VAT withheld from payments received from
NPC for the months of April and June 1996.

Petitioner also filed a judicial claim before the Court of Tax Appeals (CTA), docketed as CTA
Case No. 5765, also based on the above-stated amounts.

Petitioner filed before respondent on December 28, 1998 still another claim for refund
representing unutilized input VAT payments attributable to its zero-rated sale transactions with
NPC, including input VAT payments on domestic goods and services in the amount of
P13,191,278.00 for the 4th quarter of 1996. Petitioner also filed the same claim before the CTA on
December 29, 1998, docketed as CTA Case No. 5704.

The two petitions before the CTA for a refund in the total amount of P22,172,003.26 were
consolidated.

In his report, the court-commissioned auditor, Ruben R. Rubio, concluded that the claimed amount
of P20,550,953.93 was properly substantiated for VAT purposes and subject of a valid refund.

By Decision of March 18, 2003, the CTA granted petitioner partial refund with respect to
unutilized input VAT payment on domestic goods and services qualifying as capital goods
purchased for the 3rd and 4th quarters of 1996 in the amount of P8,325,350.35. All other claims
were disallowed.

Petitioner filed an urgent motion for reconsideration, claiming an additional amount of

P5,012,875.67.

By Resolution of July 8, 2003,[2] the CTA denied petitioners motion, it holding that part of the
additional amount prayed for ─ P1,557,676.13 ─ involved purchases for the year 1997, and with
respect to the remaining amount of P3,455,199.54, it was not recorded under depreciable asset
accounts, hence, it cannot be considered as capital goods.
Petitioner appealed under Rule 43 of the Rules of Court before the Court of Appeals,[3] praying
only for the refund of P3,455,199.54, claiming that the purchases represented thereby were used in
the rehabilitation of the Malaya Power Plant Complex which should be considered as capital
expense to fall within the purview of capital goods.

The appellate court, by Decision of December 11, 2006, affirmed that of the CTA. In arriving at its
decision, the appellate court considered, among other things, the account vouchers submitted by
petitioner which listed the purchases under inventory accounts as follows:

1) Inventory supplies/materials

2) Inventory supplies/lubricants

3) Inventory supplies/spare parts

4) Inventory supplies/supplies

5) Cost/O&M Supplies

6) Cost/O&M Uniforms and Working Clothes

7) Cost/O&M/Supplies

8) Cost/O&M/Repairs and Maintenance

9) Office Supplies

10) Repair and Maintenance/Mechanics

11) Repair and Maintenance/Common/General

12) Repair and Maintenance/Chemicals

Reconsideration of the appellate courts decision having been denied by Resolution of August 17,
2007, the present petition for review on certiorari was filed.

In the main, petitioner faults the appellate court for not considering the purchases amounting to
P3,455,199.54 as falling under the definition of capital goods.

The petition is bereft of merit.

Section 4.106-1 (b) of Revenue Regulations No. 7-95 defines capital goods and its scope in this
wise:

xxxx

(b) Capital Goods. Only a VAT-registered person may apply for issuance of a tax credit certificate
or refund of input taxes paid on capital goods imported or locally purchased. The refund shall be
allowed to the extent that such input taxes have not been applied against output taxes. The
application should be made within two (2) years after the close of the taxable quarter when the
importation or purchase was made.

Refund of input taxes on capital goods shall be allowed only to the extent that such capital goods
are used in VAT taxable business. If it is also used in exempt operations, the input tax refundable
shall only be the ratable portion corresponding to taxable operations.

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) ,[4] used directly or
indirectly in the production or sale of taxable goods or services. (underscoring supplied)

For petitioners purchases of domestic goods and services to be considered as capital goods or
properties, three requisites must concur. First, useful life of goods or properties must exceed one
year; second, said goods or properties are treated as depreciable assets under Section 34 (f) and;
third, goods or properties must be used directly or indirectly in the production or sale of taxable
goods and services.

From petitioners evidence, the account vouchers specifically indicate that the disallowed
purchases were recorded under inventory accounts, instead of depreciable accounts. That
petitioner failed to indicate under its fixed assets or depreciable assets account, goods and services
allegedly purchased pursuant to the rehabilitation and maintenance of Malaya Power Plant
Complex, militates against its claim for refund. As correctly found by the CTA, the goods or
properties must be recorded and treated as depreciable assets under Section 34 (F) of the NIRC.

Petitioner further contends that since the disallowed items are treated as capital goods in the
general ledger and accounting records, as testified on by its senior accountant, Karen Bulos,
before the CTA, this should have been given more significance than the account vouchers which
listed the items under inventory accounts.

A general ledger is a record of a business entitys accounts which make up its financial statements.
Information contained in a general ledger is gathered from source documents such as account
vouchers, purchase orders and sales invoices. In case of variance between the source document
and the general ledger, the former is preferred.

The account vouchers presented by petitioner confirm that the purchases cannot qualify as capital
goods for they are held as inventory items and not charged to any depreciable asset account.
Petitioner has proffered no explanation why the disallowed items were not listed under depreciable
asset accounts.

It is settled that tax refunds are in the nature of tax exemptions. Laws granting exemptions are
construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority.[5]
Where the taxpayer claims a refund, the CTA as a court of record is required to conduct a formal
trial (trial de novo) to prove every minute aspect of the claim.[6]
By the very nature of its functions, the CTA is dedicated exclusively to the resolution of tax
problems and has consequently developed an expertise on the subject. Absent a showing of abuse
or reckless exercise of authority,[7] the Court appreciates no ground to disturb the appellate courts
Decision affirming that of the CTA.

IN FINE, petitioner having failed to establish that the disallowed items should be classified as
capital goods, the assailed Decision of the Court of Appeals must be upheld.

WHEREFORE, the petition is DENIED.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 191498 January 15, 2014

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
MINDANAO II GEOTHERMAL PARTNERSHIP, Respondent.

DECISION

SERENO, CJ:

This Rule 45 Petition1 requires this Court to address the question of timeliness with respect to
petitioner's administrative and judicial claims for refund and credit of accumulated unutilized
input Value Added Tax (VAT) under Section 112(A) and Section 112(D) of the 1997 Tax Code.
Petitioner Mindanao II Geothermal Partnership (Mindanao II) assails the Decision2 and
Resolution3 of the Court of Tax Appeals En Banc (CTA En Banc) in CTA En Banc Case No. 448,
affirming the Decision in CTA Case No. 7507 of the CTA Second Division.4 The latter ordered the
refund or issuance of a tax credit certificate in the amount of ₱6,791,845.24 representing
unutilized input VAT incurred for the second, third, and fourth quarters of taxable year 2004 in
favor of herein respondent, Mindanao II.
FACTS

Mindanao II is a partnership registered with the Securities and Exchange Commission.5 It is

engaged in the business of power generation and sale of electricity to the National Power
Corporation (NAPOCOR)6 and is accredited by the Department of Energy.7

Mindanao II filed its Quarterly VAT Returns for the second, third and fourth quarters of taxable
year 2004 on the following dates:8

Date filedQuarter Taxable Year

Original Amended
26 July 2004 12 July 2005 2nd 2004
22 October 2004 12 July 2005 3rd 2004
25 January 2005 12 July 2005 4th 2004
On 6 October 2005, Mindanao II filed with the Bureau of Internal Revenue (BIR) an application
for the refund or credit of accumulated unutilized creditable input taxes.9 In support of the
administrative claim for refund or credit, Mindanao II alleged, among others, that it is registered
with the BIR as a value-added taxpayer10 and all its sales are zero-rated under the EPIRA law.11
It further stated that for the second, third, and fourth quarters of taxable year 2004, it paid input
VAT in the aggregate amount of ₱7,167,005.84, which were directly attributable to the zero-rated
sales. The input taxes had not been applied against output tax.

Pursuant to Section 112(D) of the 1997 Tax Code, the Commissioner of Internal Revenue (CIR)
had a period of 120 days, or until 3 February 2006, to act on the claim. The administrative claim,
however, remained unresolved on 3 February 2006.

Under the same provision, Mindanao II could treat the inaction of the CIR as a denial of its claim,
in which case, the former would have 30 days to file an appeal to the CTA, that is, on 5 March
2006. Mindanao II, however, did not file an appeal within the 30-day period.

Apparently, Mindanao II believed that a judicial claim must be filed within the two-year
prescriptive period provided under Section 112(A) and that such time frame was to be reckoned
from the filing of its Quarterly VAT Returns for the second, third, and fourth quarters of taxable
year 2004, that is, from 26 July 2004, 22 October 2004, and 25 January 2005, respectively. Thus,
on 21 July 2006, Mindanao II, claiming inaction on the part of the CIR and that the two-year
prescriptive period was about to expire, filed a Petition for Review with the CTA docketed as CTA
Case No. 6133.12

On 8 June 2007, while the application for refund or credit of unutilized input VAT of Mindanao II
was pending before the CTA Second Division, this Court promulgated Atlas Consolidated Mining
and Development Corporation v. CIR13 (Atlas). Atlas held that the two-year prescriptive period
for the filing of a claim for an input VAT refund or credit is to be reckoned from the date of filing
of the corresponding quarterly VAT return and payment of the tax.
On 12 August 2008, the CTA Second Division rendered a Decision14 ordering the CIR to grant a
refund or a tax credit certificate, but only in the reduced amount of ₱6,791,845.24, representing
unutilized input VAT incurred for the second, third and fourth quarters of taxable year 2004.15

In support of its ruling, the CTA Second Division held that Mindanao II complied with the twin
requisites for VAT zero-rating under the EPIRA law: first, it is a generation company, and second,
it derived sales from power generation. It also ruled that Mindanao II satisfied the requirements
for the grant of a refund/credit under Section 112 of the Tax Code: (1) there must be zero-rated or
effectively zero-rated sales; (2) input taxes must have been incurred or paid; (3) the creditable
input tax due or paid must be attributable to zero-rated sales or effectively zero-rated sales; (4) the
input VAT payments must not have been applied against any output liability; and (5) the claim
must be filed within the two-year prescriptive period.16

As to the second requisite, however, the input tax claim to the extent of ₱375,160.60
corresponding to purchases of services from Mitsubishi Corporation was disallowed, since it was
not substantiated by official receipts.17

As regards to the fifth requirement in section 112 of the Tax Code, the tax court, citing Atlas,
counted from 26 July 2004, 22 October 2004, and 25 January 2005 – the dates when Mindanao II
filed its Quarterly VAT Returns for the second, third, and fourth quarters of taxable year 2004,
respectively – and determined that both the administrative claim filed on 6 October 2005 and the
judicial claim filed on 21 July 2006 fell within the two-year prescriptive period.18

On 1 September 2008, the CIR filed a Motion for Partial Reconsideration,19 pointing out that
prescription had already set in, since the appeal to the CTA was filed only on 21 July 2006, which
was way beyond the last day to appeal – 5 March 2006.20 As legal basis for this argument, the
CIR relied on Section 112(D) of the 1997 Tax Code.21

Meanwhile, on 12 September 2008, this Court promulgated CIR v. Mirant Pagbilao Corporation
(Mirant).22 Mirant fixed the reckoning date of the two-year prescriptive period for the application
for refund or credit of unutilized input VAT at the close of the taxable quarter when the relevant
sales were made , as stated in Section 112(A).23

On 3 December 2008, the CTA Second Division denied the CIR’s Motion for Partial
Reconsideration.24 The tax court stood by its reliance on Atlas25 and on its finding that both the
administrative and judicial claims of Mindanao II were timely filed.26

On 7 January 2009, the CIR elevated the matter to the CTA En Banc via a Petition for Review.27
Apart from the contention that the judicial claim of Mindanao II was filed beyond the 30-day
period fixed by Section 112(D) of the 1997 Tax Code,28 the CIR argued that Mindanao II
erroneously fixed 26 July 2004, the date when the return for the second quarter was filed, as the
date from which to reckon the two-year prescriptive period for filing an application for refund or
credit of unutilized input VAT under Section 112(A). As the two-year prescriptive period ended on
30 June 2006, the Petition for Review of Mindanao II was filed out of time on 21 July 2006.29
The CIR invoked the recently promulgated Mirant to support this theory.

On 11 November 2009, the CTA En Banc rendered its Decision denying the CIR’s Petition for
Review.30 On the question whether the application for refund was timely filed, it held that the
CTA Second Division correctly applied the Atlas ruling.31 It reasoned that Atlas remained to be
the controlling doctrine. Mirant was a new doctrine and, as such, the latter should not apply
retroactively to Mindanao II who had relied on the old doctrine of Atlas and had acted on the faith
thereof.32

As to the issue of compliance with the 30-day period for appeal to the CTA, the CTA En Banc held
that this was a requirement only when the CIR actually denies the taxpayer’s claim. But in cases
of CIR inaction, the 30-day period is not a mandatory requirement; the judicial claim is seasonably
filed as long as it is filed after the lapse of the 120-day waiting period but within two years from
the date of filing of the return.33

The CIR filed a Motion for Partial Reconsideration34 of the Decision, but it was denied for lack of
merit.35

Dissatisfied, the CIR filed this Rule 45 Petition, raising the following arguments in support of its
appeal:

I.

THE CTA 2ND DIVISION LACKED JURISDICTION TO TAKE COGNIZANCE OF THE

CASE.

II.

THE COURT A QUO’S RELIANCE ON THE RULING IN ATLAS IS MISPLACED.36

ISSUES

The resolution of this case hinges on the question of compliance with the following time
requirements for the grant of a claim for refund or credit of unutilized input VAT: (1) the two-year
prescriptive period for filing an application for refund or credit of unutilized input VAT; and (2)
the 120+30 day period for filing an appeal with the CTA.

THE COURT’S RULING

We deny Mindanao II’s claim for refund or credit of unutilized input VAT on the ground that its
judicial claims were filed out of time, even as we hold that its application for refund was filed on
time.
I.

MINDANAO II’S APPLICATION FOR

REFUND WAS FILED ON TIME

We find no error in the conclusion of the tax courts that the application for refund or credit of
unutilized input VAT was timely filed. The problem lies with their bases for the conclusion as to:
(1) what should be filed within the prescriptive period; and (2) the date from which to reckon the
prescriptive period.

We thus take a different route to reach the same conclusion, initially focusing our discussion on
what should be filed within the two-year prescriptive period.

A. The Judicial Claim Need Not Be Filed Within the Two-Year Prescriptive Period

Section 112(A) 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
zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter
when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable
input tax due or paid attributable to such sales, except transitional input tax, to the extent that such
input tax has not been applied against output tax: Provided, however, That in the case of zero-rated
sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108(B)(1) and (2), the acceptable
foreign currency exchange proceeds thereof had been duly accounted for in accordance with the
rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the
taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale
of goods or properties or services, and the amount of creditable input tax due or paid cannot be
directly and entirely attributed to any one of the transactions, it shall be allocated proportionately
on the basis of the volume of sales.

Both the CTA Second Division and CTA En Banc decisions held that the phrase "apply for the
issuance of a tax credit certificate or refund" in Section 112(A) is construed to refer to both the
administrative claim filed with the CIR and the judicial claim filed with the CTA. This view,
however, has no legal basis.

In Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. (Aichi), we

dispelled the misconception that both the administrative and judicial claims must be filed within
the two-year prescriptive period:37

There is nothing in Section 112 of the NIRC to support respondent’s view. Subsection (A) of the
said provision states that "any VAT-registered person, whose sales are zero-rated or effectively
zero-rated 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. (Emphasis supplied)

The message of Aichi is clear: it is only the administrative claim that must be filed within the two-
year prescriptive period; the judicial claim need not fall within the two-year prescriptive period.

Having disposed of this question, we proceed to the date for reckoning the prescriptive period
under Section 112(A).

B. Reckoning Date is the Close of the Taxable Quarter When the Relevant Sales Were Made.

The other flaw in the reasoning of the tax courts is their reliance on the Atlas ruling, which fixed
the reckoning point to the date of filing the return and payment of the tax.

The CIR’s Stand

The CIR’s stand is that Atlas is not applicable to the case at hand as it involves Section 230 of the
1977 Tax Code, which contemplates recovery of tax payments erroneously or illegally collected.
On the other hand, this case deals with claims for tax refund or credit of unutilized input VAT for
the second, third, and fourth quarters of 2004, which are covered by Section 112 of the 1977 Tax
Code.38

The CIR further contends that Mindanao II cannot claim good faith reliance on the Atlas doctrine
since the case was decided only on 8 June 2007, two years after Mindanao II filed its claim for
refund or credit with the CIR and one year after it filed a Petition for Review with the CTA on 21
July 2006.39

In lieu of Atlas, the CIR proposes that it is the Court's ruling in Mirant that should apply to this
case despite the fact that the latter was promulgated on 12 September 2008, after Mindanao II had
filed its administrative claim in 2005.40 It argues that Mirant can be applied retroactively to this
case, since the decision merely interprets Section 112, a provision that was already effective when
Mindanao II filed its claims for tax refund or credit.

The Taxpayer’s Defense

On the other hand, Mindanao II counters that Atlas, decided by the Third Division of this Court,
could not have been superseded by Mirant, a Second Division Decision of this Court. A doctrine
laid down by the Supreme Court in a Division may be modified or reversed only through a
decision of the Court sitting en banc.41

Mindanao II further contends that when it filed its Petition for Review, the prevailing rule in the
CTA reckons the two-year prescriptive period from the date of the filing of the VAT return.42
Finally, after building its case on Atlas, Mindanao II assails the CIR’s reliance on the Mirant
doctrine stating that it cannot be applied retroactively to this case, lest it violate the rock-solid rule
that a judicial ruling cannot be given retroactive effect if it will impair vested rights.43

Section 112(A) is the Applicable Rule

The issue posed is not novel. In the recent case of Commissioner of Internal Revenue v. San
Roque Power Corporation44 (San Roque), this Court resolved the threshold question of when to
reckon the two-year prescriptive period for filing an administrative claim for refund or credit of
unutilized input VAT under the 1997 Tax Code in view of our pronouncements in Atlas and
Mirant. In that case, we delineated the scope and effectivity of the Atlas and Mirant doctrines as
follows:

The Atlas doctrine, which held that claims for refund or credit of input VAT must comply with the
two-year prescriptive period under Section 229, should be effective only from its promulgation on
8 June 2007 until its abandonment on 12 September 2008 in Mirant. The Atlas doctrine was
limited to the reckoning of the two-year prescriptive period from the date of payment of the output
VAT. Prior to the Atlas doctrine, the two-year prescriptive period for claiming refund or credit of
input VAT should be governed by Section 112(A) following the verba legis rule. The Mirant
ruling, which abandoned the Atlas doctrine, adopted the verba legis rule, thus applying Section
112(A) in computing the two-year prescriptive period in claiming refund or credit of input VAT.
(Emphases supplied)

Furthermore, San Roque distinguished between Section 112 and Section 229 of the 1997 Tax
Code:

The input VAT is not "excessively" collected as understood under Section 229 because at the time
the input VAT is collected the amount paid is correct and proper. The input VAT is a tax liability
of, and legally paid by, a VAT-registered seller of goods, properties or services used as input by
another VAT-registered person in the sale of his own goods, properties, or services. This tax
liability is true even if the seller passes on the input VAT to the buyer as part of the purchase price.
The second VAT-registered person, who is not legally liable for the input VAT, is the one who
applies the input VAT as credit for his own output VAT. If the input VAT is in fact "excessively"
collected as understood under Section 229, then it is the first VAT-registered person — the
taxpayer who is legally liable and who is deemed to have legally paid for the input VAT — who
can ask for a tax refund or credit under Section 229 as an ordinary refund or credit outside of the
VAT System. In such event, the second VAT-registered taxpayer will have no input VAT to offset
against his own output VAT.

In a claim for refund or credit of "excess" input VAT under Section 110(B) and Section 112(A),
the input VAT is not "excessively" collected as understood under Section 229. At the time of
payment of the input VAT the amount paid is the correct and proper amount. Under the VAT
System, there is no claim or issue that the input VAT is "excessively" collected, that is, that the
input VAT paid is more than what is legally due. The person legally liable for the input VAT
cannot claim that he overpaid the input VAT by the mere existence of an "excess" input VAT. The
term "excess" input VAT simply means that the input VAT available as credit exceeds the output
VAT, not that the input VAT is excessively collected because it is more than what is legally due.
Thus, the taxpayer who legally paid the input VAT cannot claim for refund or credit of the input
VAT as "excessively" collected under Section 229.

Under Section 229, the prescriptive period for filing a judicial claim for refund is two years from
the date of payment of the tax "erroneously, . . . illegally, . . . excessively or in any manner
wrongfully collected." The prescriptive period is reckoned from the date the person liable for the
tax pays the tax. Thus, if the input VAT is in fact "excessively" collected, that is, the person liable
for the tax actually pays more than what is legally due, the taxpayer must file a judicial claim for
refund within two years from his date of payment. Only the person legally liable to pay the tax can
file the judicial claim for refund. The person to whom the tax is passed on as part of the purchase
price has no personality to file the judicial claim under Section 229.

Under Section 110(B) and Section 112(A), the prescriptive period for filing a judicial claim for
"excess" input VAT is two years from the close of the taxable quarter when the sale was made by
the person legally liable to pay the output VAT. This prescriptive period has no relation to the date
of payment of the "excess" input VAT. The "excess" input VAT may have been paid for more than
two years but this does not bar the filing of a judicial claim for "excess" VAT under Section
112(A), which has a different reckoning period from Section 229. Moreover, the person claiming
the refund or credit of the input VAT is not the person who legally paid the input VAT. Such person
seeking the VAT refund or credit does not claim that the input VAT was "excessively" collected
from him, or that he paid an input VAT that is more than what is legally due. He is not the taxpayer
who legally paid the input VAT.

As its name implies, the Value-Added Tax system is a tax on the value added by the taxpayer in
the chain of transactions. For simplicity and efficiency in tax collection, the VAT is imposed not
just on the value added by the taxpayer, but on the entire selling price of his goods, properties or
services. However, the taxpayer is allowed a refund or credit on the VAT previously paid by those
who sold him the inputs for his goods, properties, or services. The net effect is that the taxpayer
pays the VAT only on the value that he adds to the goods, properties, or services that he actually
sells.
Under Section 110(B), a taxpayer can apply his input VAT only against his output VAT. The only
exception is when the taxpayer is expressly "zero-rated or effectively zero-rated" under the law,
like companies generating power through renewable sources of energy. Thus, a non zero-rated
VAT-registered taxpayer who has no output VAT because he has no sales cannot claim a tax refund
or credit of his unused input VAT under the VAT System. Even if the taxpayer has sales but his
input VAT exceeds his output VAT, he cannot seek a tax refund or credit of his "excess" input VAT
under the VAT System. He can only carry-over and apply his "excess" input VAT against his future
output VAT. If such "excess" input VAT is an "excessively" collected tax, the taxpayer should be
able to seek a refund or credit for such "excess" input VAT whether or not he has output VAT. The
VAT System does not allow such refund or credit. Such "excess" input VAT is not an "excessively"
collected tax under Section 229. The "excess" input VAT is a correctly and properly collected tax.
However, such "excess" input VAT can be applied against the output VAT because the VAT is a tax
imposed only on the value added by the taxpayer. If the input VAT is in fact "excessively"
collected under Section 229, then it is the person legally liable to pay the input VAT, not the person
to whom the tax was passed on as part of the purchase price and claiming credit for the input VAT
under the VAT System, who can file the judicial claim under Section 229.

Any suggestion that the "excess" input VAT under the VAT System is an "excessively" collected
tax under Section 229 may lead taxpayers to file a claim for refund or credit for such "excess"
input VAT under Section 229 as an ordinary tax refund or credit outside of the VAT System. Under
Section 229, mere payment of a tax beyond what is legally due can be claimed as a refund or
credit. There is no requirement under Section 229 for an output VAT or subsequent sale of goods,
properties, or services using materials subject to input VAT.

From the plain text of Section 229, it is clear that what can be refunded or credited is a tax that is
"erroneously . . . illegally, . . . excessively or in any manner wrongfully collected." In short, there
must be a wrongful payment because what is paid, or part of it, is not legally due. As the Court
held in Mirant, Section 229 should "apply only to instances of erroneous payment or illegal
collection of internal revenue taxes." Erroneous or wrongful payment includes excessive payment
because they all refer to payment of taxes not legally due. Under the VAT System, there is no
claim or issue that the "excess" input VAT is "excessively or in any manner wrongfully collected."
In fact, if the "excess" input VAT is an "excessively" collected tax under Section 229, then the
taxpayer claiming to apply such "excessively" collected input VAT to offset his output VAT may
have no legal basis to make such offsetting. The person legally liable to pay the input VAT can
claim a refund or credit for such "excessively" collected tax, and thus there will no longer be any
"excess" input VAT. This will upend the present VAT System as we know it.45

Two things are clear from the above quoted San Roque disquisitions. First, when it comes to
recovery of unutilized input VAT, Section 112, and not Section 229 of the 1997 Tax Code, is the
governing law. Second, prior to 8 June 2007, the applicable rule is neither Atlas nor Mirant, but
Section 112(A).

We present the rules laid down by San Roque in determining the proper reckoning date of the two-
year prescriptive period through the following timeline:

Thus, the task at hand is to determine the applicable period for this case.

In this case, Mindanao II filed its administrative claims for refund or credit for the second, third
and fourth quarters of 2004 on 6 October 2005. The case thus falls within the first period as
indicated in the above timeline. In other words, it is covered by the rule prior to the advent of
either Atlas or Mirant.

Accordingly, the proper reckoning date in this case, as provided by Section 112(A) of the 1997
Tax Code, is the close of the taxable quarter when the relevant sales were made.

C. The Administrative Claims Were Timely Filed

We sum up our conclusions so far: (1) it is only the administrative claim that must be filed within
the two-year prescriptive period; and (2) the two-year prescriptive period begins to run from the
close of the taxable quarter when the relevant sales were made.

Bearing these in mind, we now proceed to determine whether Mindanao II's administrative claims
for the second, third, and fourth quarters of 2004 were timely filed.

Second Quarter

Since the zero-rated sales were made in the second quarter of 2004, the date of reckoning the two-
year prescriptive period is the close of the second quarter, which is on 30 June 2004. Applying
Section 112(A), Mindanao II had two years from 30 June 2004, or until 30 June 2006 to file an
administrative claim with the CIR. Mindanao II filed its administrative claim on 6 October 2005,
which is within the two-year prescriptive period. The administrative claim for the second quarter
of 2004 was thus timely filed. For clarity, we present the rules laid down by San Roque in
determining the proper reckoning date of the two-year prescriptive period through the following
timeline:

Third Quarter

As regards the claim for the third quarter of 2004, the two-year prescriptive period started to run
on 30 September 2004, the close of the taxable quarter. It ended on 30 September 2006, pursuant
to Section 112(A) of the 1997 Tax Code. Mindanao II filed its administrative claim on 6 October
2005. Thus, since the administrative claim was filed well within the two-year prescriptive period,
the administrative claim for the third quarter of 2004 was timely filed. (See timeline below)

Fourth Quarter

Here, the two-year prescriptive period is counted starting from the close of the fourth quarter
which is on 31 December 2004. The last day of the prescriptive period for filing an application for
tax refund/credit with the CIR was on 31 December 2006. Mindanao II filed its administrative
claim with the CIR on 6 October 2005. Hence, the claims were filed on time, pursuant to Section
112(A) of the 1997 Tax Code. (See timeline below)

II.

MINDANAO II’S JUDICIAL CLAIMS WERE FILED OUT OF TIME

Notwithstanding the timely filing of the administrative claims, we find that the CTA En Banc
erred in holding that Mindanao II’s judicial claims were timely filed.

A. 30-Day Period Also Applies to Appeals from Inaction

Section 112(D) of the 1997 Tax Code states the time requirements for filing a judicial claim for
refund or tax credit of input VAT:

(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 Subsection (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. (Emphases supplied)

Section 112(D) speaks of two periods: the period of 120 days, which serves as a waiting period to
give time for the CIR to act on the administrative claim for refund or credit, and the period of 30
days, which refers to the period for interposing an appeal with the CTA. It is with the 30-day
period that there is an issue in this case.

The CTA En Banc’s holding is that, since the word "or" – a disjunctive term that signifies
dissociation and independence of one thing from another – is used in Section 112(D), the taxpayer
is given two options: 1) file an appeal within 30 days from the CIR’s denial of the administrative
claim; or 2) file an appeal with the CTA after expiration of the 120-day period, in which case the
30-day appeal period does not apply. The judicial claim is seasonably filed so long as it is filed
after the lapse of the 120-day waiting period but before the lapse of the two-year prescriptive
period under Section 112(A).46

We do not agree.

The 30-day period applies not only to instances of actual denial by the CIR of the claim for refund
or tax credit, but to cases of inaction by the CIR as well. This is the correct interpretation of the
law, as held in San Roque:47

Section 112(C)48 also expressly grants the taxpayer a 30-day period to appeal to the CTA the
decision or inaction of the Commissioner, thus:

x x x the taxpayer affected may, within thirty (30) days from the receipt of the decision denying
the claim or after the expiration of the one hundred twenty day-period, appeal the decision or the
unacted claim with the Court of Tax Appeals.

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

The San Roque pronouncement is clear. The taxpayer can file the appeal in one of two ways: (1)
file the judicial claim within thirty days after the Commissioner denies the claim within the 120-
day period, or (2) file the judicial claim within thirty days from the expiration of the 120-day
period if the Commissioner does not act within the 120-day period.

B. The Judicial Claim Was Belatedly Filed

In this case, the facts are not up for debate. Mindanao II filed its administrative claim for refund or
credit for the second, third, and fourth quarters of 2004 on 6 October 2005. The CIR, therefore,
had a period of 120 days, or until 3 February 2006, to act on the claim. The CIR, however, failed
to do so. Mindanao II then could treat the inaction as a denial and appeal it to the CTA within 30
days from 3 February 2006, or until 5 March 2006.

Mindanao II, however, filed a Petition for Review only on 21 July 2006, 138 days after the lapse
of the 30-day period on 5 March 2006. The judicial claim was therefore filed late. (See timeline
below.)

C. The 30-Day Period to Appeal is Mandatory and Jurisdictional

However, what is up for debate is the nature of the 30-day time requirement. The CIR posits that it
is mandatory. Mindanao II contends that the requirement of judicial recourse within 30 days is
only directory and permissive, as indicated by the use of the word "may" in Section 112(D).49

The answer is found in San Roque. There, we declared that the 30-day period to appeal is both
mandatory and jurisdictional:

Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to the CTA the
decision or inaction of the Commissioner, thus:
x x x the taxpayer affected may, within thirty (30) days from the receipt of the decision denying
the claim or after the expiration of the one hundred twenty day-period, appeal the decision or the
unacted claim with the Court of Tax Appeals. (Emphasis supplied)

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

xxxx

Section 112(A) and (C) must be interpreted according to its clear, plain, and unequivocal
language. The taxpayer can file his administrative claim for refund or credit at anytime within the
two-year prescriptive period. If he files his claim on the last day of the two-year prescriptive
period, his claim is still filed on time. The Commissioner will have 120 days from such filing to
decide the claim. If the Commissioner decides the claim on the 120th day, or does not decide it on
that day, the taxpayer still has 30 days to file his judicial claim with the CTA. This is not only the
plain meaning but also the only logical interpretation of Section 112(A) and (C).

xxxx

When Section 112(C) states that "the taxpayer affected may, within thirty (30) days from receipt of
the decision denying the claim or after the expiration of the one hundred twenty-day period,
appeal the decision or the unacted claim with the Court of Tax Appeals," the law does not make
the 120+30 day periods optional just because the law uses the word " may." The word "may"
simply means that the taxpayer may or may not appeal the decision of the Commissioner within
30 days from receipt of the decision, or within 30 days from the expiration of the 120-day period.
x x x.50

D. Exception to the mandatory and jurisdictional nature of the 120+30 day period not applicable

Nevertheless, San Roque provides an exception to the mandatory and jurisdictional nature of the
120+30 day period ─ BIR Ruling No. DA-489-03 dated 10 December 2003. The BIR ruling
declares that the "taxpayer-claimant need not wait for the lapse of the 120-day period before it
could seek judicial relief with the CTA by way of Petition for Review."

Although Mindanao II has not invoked the BIR ruling, we deem it prudent as well as necessary to
dwell on this issue to determine whether this case falls under the exception.

For this question, we come back to San Roque, which provides that BIR Ruling No. DA-489-03 is
a general interpretative rule; thus, taxpayers can rely on it from the time of its issuance on 10
December 2003 until its reversal by this Court in Aichi on 6 October 2010, when the 120+30 day
periods were held to be mandatory and jurisdictional. The Court reasoned as follows:

Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner,

particularly on a difficult question of law. The abandonment of the Atlas doctrine by Mirant and
Aichi is proof that the reckoning of the prescriptive periods for input VAT tax refund or credit is a
difficult question of law. The abandonment of the Atlas doctrine did not result in Atlas, or other
taxpayers similarly situated, being made to return the tax refund or credit they received or could
have received under Atlas prior to its abandonment. This Court is applying Mirant and Aichi
prospectively. Absent fraud, bad faith or misrepresentation, the reversal by this Court of a general
interpretative rule issued by the Commissioner, like the reversal of a specific BIR ruling under
Section 246, should also apply prospectively. x x x.

xxxx

Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule
applicable to all taxpayers or a specific ruling applicable only to a particular taxpayer.

BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a query
made, not by a particular taxpayer, but by a government agency tasked with processing tax refunds
and credits, that is, the One Stop Shop Inter-Agency Tax Credit and Drawback Center of the
Department of Finance . This government agency is also the addressee, or the entity responded to,
in BIR Ruling No. DA-489-03. Thus, while this government agency mentions in its query to the
Commissioner the administrative claim of Lazi Bay Resources Development, Inc., the agency was
in fact asking the Commissioner what to do in cases like the tax claim of Lazi Bay Resources
Development, Inc., where the taxpayer did not wait for the lapse of the 120-day period.

Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can rely on
BIR Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to its reversal
by this Court in Aichi on 6 October 2010, where this Court held that the 120+30 day periods are
mandatory and jurisdictional.51

Thus, in San Roque, the Court applied this exception to Taganito Mining Corporation (Taganito),
one of the taxpayers in San Roque. Taganito filed its judicial claim on 14 February 2007, after the
BIR ruling took effect on 10 December 2003 and before the promulgation of Mirant. The Court
stated:

Taganito, however, filed its judicial claim with the CTA on 14 February 2007, after the issuance of
BIR Ruling No. DA-489-03 on 10 December 2003. Truly, Taganito can claim that in filing its
judicial claim prematurely without waiting for the 120-day period to expire, it was misled by BIR
Ruling No. DA-489-03. Thus, Taganito can claim the benefit of BIR Ruling No. DA-489-03,
which shields the filing of its judicial claim from the vice of prematurity.52

San Roque was also careful to point out that the BIR ruling does not retroactively apply to
premature judicial claims filed before the issuance of the BIR ruling:

However, BIR Ruling No. DA-489-03 cannot be given retroactive effect for four reasons: first, it
is admittedly an erroneous interpretation of the law; second, prior to its issuance, the BIR held that
the 120-day period was mandatory and jurisdictional, which is the correct interpretation of the
law; third, prior to its issuance, no taxpayer can claim that it was misled by the BIR into filing a
judicial claim prematurely; and fourth, a claim for tax refund or credit, like a claim for tax
exemption, is strictly construed against the taxpayer.53

Thus, San Roque held that taxpayer San Roque Power Corporation, could not seek refuge in the
BIR ruling as it jumped the gun when it filed its judicial claim on 10 April 2003, prior to the
issuance of the BIR ruling on 10 December 2003.1âwphi1 The Court stated:

San Roque, therefore, cannot benefit from BIR Ruling No. DA-489-03 because it filed its judicial
claim prematurely on 10 April 2003, before the issuance of BIR Ruling No. DA-489-03 on 10
December 2003. To repeat, San Roque cannot claim that it was misled by the BIR into filing its
judicial claim prematurely because BIR Ruling No. DA-489-03 was issued only after San Roque
filed its judicial claim. At the time San Roque filed its judicial claim, the law as applied and
administered by the BIR was that the Commissioner had 120 days to act on administrative claims.
This was in fact the position of the BIR prior to the issuance of BIR Ruling No. DA-489-03.
Indeed, San Roque never claimed the benefit of BIR Ruling No. DA-489-03 or RMC 49-03,
whether in this Court, the CTA, or before the Commissioner.54

San Roque likewise ruled out the application of the BIR ruling to cases of late filing. The Court
held that the BIR ruling, as an exception to the mandatory and jurisdictional nature of the 120+30
day periods, is limited to premature filing and does not extend to late filing of a judicial claim.
Thus, the Court found that since Philex Mining Corporation, the other party in the consolidated
case San Roque, filed its claim 426 days after the lapse of the 30-day period, it could not avail
itself of the benefit of the BIR ruling:

Philex’s situation is not a case of premature filing of its judicial claim but of late filing, indeed

Very late filing. BIR Ruling No. DA-489-03 allowed premature filing of a judicial claim, which
means non-exhaustion of the 120-day period for the Commissioner to act on an administrative
claim. Philex cannot claim the benefit of BIR Ruling No. DA-489-03 because Philex did not file
its judicial claim prematurely but filed it long after the lapse of the 30-day period following the
expiration of the 120-day period. In fact, Philex filed its judicial claim 426 days after the lapse of
the 30-day period.55

We sum up the rules established by San Roque on the mandatory and jurisdictional nature of the
30-day period to appeal through the following timeline:

Bearing in mind the foregoing rules for the timely filing of a judicial claim for refund or credit of
unutilized input VAT, we rule on the present case of Mindanao II as follows:
We find that Mindanao II’s situation is similar to that of Philex in San Roque.

As mentioned above, Mindanao II filed its judicial claim with the CTA on 21 July 2006. This was
after the issuance of BIR Ruling No. DA-489-03 on 10 December 2003, but before its reversal on
5 October 2010. However, while the BIR ruling was in effect when Mindanao II filed its judicial
claim, the rule cannot be properly invoked. The BIR ruling, as discussed earlier, contemplates
premature filing. The situation of Mindanao II is one of late filing. To repeat, its judicial claim was
filed on 21 July 2006 – long after 5 March 2006, the last day of the 30-day period for appeal. In
fact, it filed its judicial claim 138 days after the lapse of the 30-day period. (See timeline below)

E. Undersigned dissented in San Roque to the retroactive application of the mandatory and
jurisdictional nature of the 120+30 day period.

It is worthy to note that in San Roque, this ponente registered her dissent to the retroactive
application of the mandatory and jurisdictional nature of the 120+30 day period provided under
Section 112(D) of the Tax Code which, in her view, is unfair to taxpayers. It has been the view of
this ponente that the mandatory nature of 120+30 day period must be completely applied
prospectively or, at the earliest, only upon the finality of Aichi in order to create stability and
consistency in our tax laws. Nevertheless, this ponente is mindful of the fact that judicial
precedents cannot be ignored. Hence, the majority view expressed in San Roque must be applied.

SUMMARY OF RULES ON PRESCRIPTIVE PERIODS FOR CLAIMING REFUND OR

CREDIT OF INPUT VAT

The lessons of this case may be summed up as follows:

A. Two-Year Prescriptive Period

1. It is only the administrative claim that must be filed within the two-year prescriptive period.
(Aichi) 2. The proper reckoning date for the two-year prescriptive period is the close of the taxable
quarter when the relevant sales were made. (San Roque)

3. The only other rule is the Atlas ruling, which applied only from 8 June 2007 to 12 September
2008. Atlas states that the two-year prescriptive period for filing a claim for tax refund or credit of
unutilized input VAT payments should be counted from the date of filing of the VAT return and
payment of the tax. (San Roque)

B. 120+30 Day Period

1. The taxpayer can file an appeal in one of two ways: (1) file the judicial claim within thirty days
after the Commissioner denies the claim within the 120-day period, or (2) file the judicial claim
within thirty days from the expiration of the 120-day period if the Commissioner does not act
within the 120-day period.
2. The 30-day period always applies, whether there is a denial or inaction on the part of the CIR.

3. As a general rule, the 3 0-day period to appeal is both mandatory and jurisdictional. (Aichi and
San Roque)

4. As an exception to the general rule, premature filing is allowed only if filed between 10
December 2003 and 5 October 2010, when BIR Ruling No. DA-489-03 was still in force. (San
Roque)

5. Late filing is absolutely prohibited, even during the time when BIR Ruling No. DA-489-03 was
in force. (San Roque)

SUMMARY AND CONCLUSION

In sum, our finding is that the three administrative claims for the refund or credit of unutilized
input VAT were all timely filed, while the corresponding judicial claims were belatedly filed.

The foregoing considered, the CT A lost jurisdiction over Mindanao Il’s claims for refund or
credit.1âwphi1 The CTA EB erred in granting these claims.

WHEREFORE, we GRANT the Petition. The assailed Court of Tax Appeals En Banc Decision
dated 11 November 2009 and Resolution dated 3 March 2010 of the in CTA EB Case No. 448
(CTA Case No. 7507) are hereby REVERSED and SET ASIDE. A new ruling is entered
DENYING respondent s claim for a tax refund or credit of ₱6,791,845.24.

SO ORDERED.

MARIA LOURDES P. A. SERENO

Chief Justice, Chairperson

WE CONCUR:

TERESITA J. LEONARDO-DE CASTRO

Associate Justice

LUCAS P. BERSAMIN
Associate Justice MARTIN S. VILLARAMA, JR.
Associate Justice
BIENVENIDO L. REYES
Associate Justice

C E RT I F I CATI O N
Pursuant to Section 13, Article VIII of the Constitution, 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.

MARIA LOURDES P. A. SERENO

Chief Justice

Footnotes

1 Rollo, pp. 8-42.

2 Id. at 49-68. CTA En Banc Decision dated 11 November 2009, penned by Associate Justice
Caesar A Casanova, concurred in by Presiding Justice Ernesto D Acosta, and Associate Justices
Lovell R Bautista, Juanito C Castaneda, Jr., Olga Palanca-Enriquez, and Erlinda P Uy.

3 Id at 70. CT A Resolution dated 3 March 2010.

4 Id. at 81-95; dated 12 August 2008, penned by Associate Justice Juanito C. Castañeda, Jr.,
concurred in by Associate Justice Erlinda D. Uy and Olga Palanca-Endquez.

5 Id. at 81.

6 Id.

7 Id. at 82.

8 Id. at 85.

9 Id.

10 Id. at 81.

11 On 26 June 2001, Republic Act No. 9136 - or the Electric Power Industry Reform Act of 2000
(EPIRA) - came into law, making the sale of power by a generation company a zero-rated
transaction under the Value-Added Tax (VAT) system. Section 6 of EPIRA provides:

Generation Sector. — Generation of electric power, a business affected with public interest shall
be competitive and open.

Upon the effectivity of this Act, any new generation company shall, before it operates, secure from
the Energy Regulatory Commission (ERC) a certificate of compliance pursuant to the standards
set forth in this Act, as well as health, safety and environmental clearances from the appropriate
government agencies under existing laws.
Any law to the contrary notwithstanding, power generation shall not be considered a public utility
operation. For this purpose, any person or entity engaged or which shall engage in power
generation and supply of electricity shall not be required to secure a national franchise.

Upon the implementation of retail competition and open access, the prices charged by a generation
company for the supply of electricity shall not be subject to regulation by the ERC except as
otherwise provided in this Act.

Pursuant to the objective of lowering electricity rates to end-users, sales of generated power by
generation companies shall be value added tax zero-rated.

The ERC shall, in determining the existence of market power abuse or anti-competitive behavior,
require from generation companies the submission of their financial statements. (Emphasis
supplied)

12 Rollo, p. 85. Also, CTA records, pp. 1-8. Petition for Review, pp. 1-8.

13 GR Nos. 141104 and 148763, 8 June 2007, 524 SCRA 154.

14 Rollo, pp. 81-95.

15 Id. at 94.

16 Id. at 88-93.

17 Id. at 90-92.

18 Id. at 93.

19 Id. at 96-103.

20 Id. at 97-98.

21 Id.

22 586 Phil. 712 (2008).

23 Rollo, p. 116-118.

24 Id. at 105-107; dated 3 December 2008.

25 Id. at 106.
26 Id.

27 Id. at 108-125.

28 Id. at 118-122.

29 Id. at 117.

30 Id. at 49-68.

31 Id. at 58. Decision, p. 10.

32 Id. at 55-58. Decision, pp. 7-10.

33 Id. at 59-60. Decision, pp. 11-12.

34 Id. at 148-154; dated 8 December 2009.

35 Id. at 70-74, dated 3 March 2010.

36 Id. at 19.

37 G.R. No. 184823, 6 October 2010, 632 SCRA 422, 443-444.

38 Rollo, pp. 33-35.

39 Id. at 35.

40 Id. at 36.

41 Article VIII, Sec. 4(3) of the 1987 Constitution states: "Cases or matters heard by a division
shall be decided or resolved with the concurrence of a majority of the Members who actually took
part in the deliberations on the issues in the case and voted thereon, and in no case without the
concurrence of at least three of such Members. When the required number is not obtained, the case
shall be decided en banc: Provided, that no doctrine or principle of law laid down by the court in a
decision rendered en banc or in division may be modified or reversed except by the court sitting
en banc."

42 See Rollo, p. 83.

43 Id. at pp. 36-37.

44 G.R. No. 187485, 12 February 2013, 690 SCRA 336, 397.

45 Id. at 392-397.

46 Rollo, pp. 59-60. Decision, pp. 11-12.

47 Supra note 44, at 387-388.

48 The section is numbered 112(D) under RA 8424. However, RA 9337 renumbered the section to
112(C). In San Roque, the Court refers to Section 112(D) under RA 8424 as Section 112(C) as it is
currently numbered. Elsewhere in this Decision, we refer to the provision as Section 112(D) to
make it consistent with references to it made by the Court in other cases.

49 Id. at pp. 179-181.

50 Rollo, pp. 179-181.

51 Supra note 44, at 403-404.

52 Id. at 405.

53 Id.

54 Id.

55 Id. at 405-406.

THIRD DIVISION

SAN ROQUE POWER CORPORATION,

��������������� Petitioner,
- versus -

COMMISSIONER OF INTERNAL REVENUE,

�������������
Respondent.����������������������

G.R. No. 180345

Present:

CORONA, J.,

����� Chairperson,

CHICO-NAZARIO,� �����

VELASCO, JR.,

NACHURA, and

PERALTA, JJ.

Promulgated:
November 25, 2009

x- - - - - - - - - - - - - - - - - - - - - - - -� - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CHICO-NAZARIO, J.:

����������� In this Petition for Review on Certiorari, under Rule 45 of the

Revised Rules of Court, petitioner San Roque Power Corporation assails the Decision[1] of the
Court of Tax Appeals (CTA) En Banc dated 20 September 2007 in CTA EB No. 248, affirming the
Decision[2] dated 23 March 2006 of the CTA Second Division in CTA Case No. 6916, which
dismissed the claim of petitioner for the refund and/or issuance of a tax credit certificate in the
amount of Two Hundred Forty-Nine Million Three Hundred Ninety-Seven Thousand Six Hundred
Twenty Pesos and 18/100 (P249,397,620.18) allegedly representing unutilized input Value Added
Tax (VAT) for the period covering January to December 2002.�

Respondent, as the Commissioner of the Bureau of Internal Revenue (BIR), is responsible for the
assessment and collection of all national internal revenue taxes, fees, and charges, including the
Value Added Tax (VAT), imposed by Section 108[3] of the National Internal Revenue Code
(NIRC) of 1997.� Moreover, it is empowered to grant refunds or issue tax credit certificates in
accordance with Section 112 of the NIRC of 1997 for unutilized input VAT paid on zero-rated or
effectively zero-rated sales and purchases of capital goods, to wit:

SEC. 112.� Refunds or Tax Credits of Input Tax. -

(A)� Zero-rated or Effectively Zero-rated Sales�Any VAT-registered person, whose sales are
zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter
when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable
input tax due or paid attributable to such sales, except transitional input tax, to the extent that such
input tax has not been applied against output tax: Provided, however, That in the case of zero-rated
sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable
foreign currency exchange proceeds thereof had been duly accounted for in accordance with the
rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the
taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale
of goods or properties or services, and the amount of creditable input tax due or paid cannot be
directly and entirely attributed to any one of the transactions, it shall be allocated proportionately
on the basis of the volume of sales.

�(B) Capital Goods�A VAT-registered person may apply for the issuance of a tax credit
certificate or refund of input taxes paid on capital goods imported or locally purchased, to the
extent the such input taxes have not been applied against output taxes. � The application may be
made only within two (2) years after the close of the taxable quarter when the importation or
purchase was made.

On the other hand, petitioner is a domestic corporation organized under the corporate laws of the
Republic of the Philippines.� On 14 October 1997, it was incorporated for the sole purpose of
building and operating the San Roque Multipurpose Project in San Manuel, Pangasinan, which is
an indivisible project consisting of the power station, the dam, spillway, and other related
facilities.[4]� It is registered with the Board of Investments (BOI) on a preferred pioneer status to
engage in the design, construction, erection, assembly, as well as own, commission, and operate
electric power-generating plants and related activities, for which it was issued the Certificate of
Registration No. 97-356 dated 11 February 1998.[5] As a seller of services, petitioner is registered
with the BIR as a VAT taxpayer under Certificate of Registration No. OCN-98-006-007394.[6]

On 11 October 1997, petitioner entered into a Power Purchase Agreement (PPA) with the National
Power Corporation (NPC) to develop the hydro potential of the Lower Agno River, and to be able
to generate additional power and energy for the Luzon Power Grid, by developing and operating
the San Roque Multipurpose Project.� The PPA provides that petitioner shall be responsible for
the design, construction, installation, completion and testing and commissioning of the Power
Station and it shall operate and maintain the same, subject to the instructions of the NPC.�
During the cooperation period of 25 years commencing from the completion date of the Power
Station, the NPC shall purchase all the electricity generated by the Power Plant.[7]

Because of the exclusive nature of the PPA between petitioner and the NPC, petitioner applied for
and was granted five Certificates of Zero Rate by the BIR, through the Chief Regulatory
Operations Monitoring Division, now the Audit Information, Tax Exemption & Incentive
Division.� Based on these certificates, the zero-rated status of petitioner commenced on 27
September 1998 and continued throughout the year 2002.[8]

For the period January to December 2002, petitioner filed with the respondent its Monthly VAT
Declarations and Quarterly VAT Returns.� Its Quarterly VAT Returns showed excess input VAT
payments on account of its importation and domestic purchases of goods and services, as
follows[9]:

Period Covered

Date Filed

Particulars

Amount

1st Quarter

(January 1, 2002 to

March 31, 2002)

April 20, 2002

Tax Due for the Quarter (Box 13C)

P���������� 26,247.27

Input Tax carried over from previous qtr (22B)

296,124,429.21

Input VAT on Domestic Purchases for the Qtr

(22D)

95,003,348.91

Input VAT on Importation of Goods for the Qtr

(22F)

20,758,668.00

Total Available Input tax (23)

411,886,446.12

VAT Refund/TCC Claimed (24A)

173,909,435.66

Net Creditable Input Tax (25)

237,977,010.46

VAT payable (Excess Input Tax) (26)

(237,950,763.19)

Tax Payable (overpayment) (28)

(237,950,763.19)

2nd Quarter
(April 1, 2002 to

June 30, 2002)

July 24, 2002

Tax Due for the Quarter (Box 13C)

P�� blank

Input Tax carried over from previous qtr (22B)

237,950,763.19

Input VAT on Domestic Purchases for the Qtr

(22D)

65,206,499.83

Input VAT on Importation of Goods for the Qtr

(22F)

18,485,758.00

Total Available Input tax (23)

321,643,021.02

VAT Refund/TCC Claimed (24A)

237,950,763.19

Net Creditable Input Tax (25)

83,692,257.83
VAT payable (Excess Input Tax) (26)

(83,692,257.83)

Tax Payable (overpayment) (28)

(83,692,257.83)

3rd Quarter

(July 1, 2002 to

September 30, 2002)

October 25, 2002

Tax Due for the Quarter (Box 13C)

P�� blank

Input Tax carried over from previous qtr (22B)

199,428,027.47

Input VAT on Domestic Purchases for the Qtr

(22D)

28,924,020.79

Input VAT on Importation of Goods for the Qtr

(22F)
1,465,875.00

Total Available Input tax (23)

229,817,923.26

VAT Refund/TCC Claimed (24A)

Blank

Net Creditable Input Tax (25)

229,817,923.26

VAT payable (Excess Input Tax) (26)

(229,817,923.26)

Tax Payable (overpayment) (28)

(229,817,923.26)

4th Quarter

(October 1, 2002 to

December 31, 2002)

January 23, 2003

Tax Due for the Quarter (Box 13C)

P�� 34,996.36

Input Tax carried over from previous qtr (22B)

114,082,153.62
Input VAT on Domestic Purchases for the Qtr

(22D)

18,166,330.54

Input VAT on Importation of Goods for the Qtr

(22F)

2,308,837.00

Total Available Input tax (23)

134,557,321.16

VAT Refund/TCC Claimed (24A)

83,692,257.83

Net Creditable Input Tax (25)

50,865,063.33

VAT payable (Excess Input Tax) (26)

(50,830,066.97)

Tax Payable (overpayment) (28)

(50,830,066.97)

On 19 June 2002, 25 October 2002, 27 February 2003, and 29 May 2003, petitioner filed with the
BIR four separate administrative claims for refund of Unutilized Input VAT paid for the period
January to March 2002, April to June 2002, July to September 2002, and October to December
2002, respectively. In these letters addressed to the BIR, Carlos Echevarria (Echevarria), the Vice
President and Director of Finance of petitioner, explained that petitioner �s sale of power to NPC
are subject to VAT at zero percent rate, in accordance with Section 108(B)(3) of the NIRC.[10]�
Petitioner sought to recover the total amount of P250,258,094.25, representing its unutilized
excess VAT on its importation of capital and other taxable goods and services for the year 2002,
broken down as follows[11]:

Qtr

Involved

Output Tax

Input Tax

Domestic Purchases

Importations

Excess Input Tax

(A)

(B)

(C)

(D) = (B) + (C) �(A)

1st

P 26,247.27
P95,003,348.91

P20,758,668.00

P115,735,769.84

2nd

65,206,499.83

18,485,758.00

83,692,257.83

3rd

28,924,020.79

1,465,875.00

30,389,895.79

4th

34,996.36

18,166,330.54

2,308,837.00

20,440,171.18

P61,243.63

P207,300,200.07

P43,019,138.00
P250,258,094.44

Petitioner amended its Quarterly VAT Returns, particularly the items on (1) Input VAT on
Domestic Purchases during the first quarter of 2002; (2) Input VAT on Domestic Purchases for the
fourth quarter of 2002; and (3) Input VAT on Importation of Goods for the fourth quarter of
2002.� The amendments read as follows[12]:

Period Covered

Date Filed

Particulars

Amount

1st Quarter

(January 1, 2002 to

March 31, 2002)

April 24, 2003

Tax Due for the Quarter (Box 13C)

P����������� 26,247.27

Input Tax carried over from previous qtr (22B)

297,719,296.25

Input VAT on Domestic Purchases for the Qtr

(22D)

95,126,981.69

(22F)

20,758,668.00

Total Available Input tax (23)

413,604,945.94

VAT Refund/TCC Claimed (24A)

175,544,002.27

Net Creditable Input Tax (25)

175,544,002.27

VAT payable (Excess Input Tax) (26)

(238,060,943.67)

Tax Payable (overpayment) (28)

(238,034,696.40)

2nd Quarter

(April 1, 2002 to

June 30, 2002)

April 24, 2003

Tax Due for the Quarter (Box 13C)

P�� blank

Input Tax carried over from previous qtr (22B)

238,034,696.40

Input VAT on Domestic Purchases for the Qtr

(22D)

65,206,499.83

Input VAT on Importation of Goods for the Qtr

(22F)

18,485,758.00

Total Available Input tax (23)

321,643,021.02

VAT Refund/TCC Claimed (24A)

237,950,763.19

Net Creditable Input Tax (25)

83,692,257.83

VAT payable (Excess Input Tax) (26)

(83,692,257.83)

Tax Payable (overpayment) (28)

(83,692,257.83)
3rd Quarter

(July 1, 2002 to

September 30, 2002)

October 25, 2002

Tax Due for the Quarter (Box 13C)

P�� blank

Input Tax carried over from previous qtr (22B)

83,692,257.83

Input VAT on Domestic Purchases for the Qtr

(22D)

28,924,020.79

Input VAT on Importation of Goods for the Qtr

(22F)

1,465,875.00

Total Available Input tax (23)

114,082,153.62

VAT Refund/TCC Claimed (24A)

Blank

Net Creditable Input Tax (25)

114,082,153.62

VAT payable (Excess Input Tax) (26)

(114,082,153.62)

Tax Payable (overpayment) (28)

(114,082,153.62)

4th Quarter

(October 1, 2002 to

December 31, 2002)

January 23, 2003

Tax Due for the Quarter (Box 13C)

P�� 34,996.36

Input Tax carried over from previous qtr (22B)

114,082,153.62

Input VAT on Domestic Purchases for the Qtr

(22D)

17,918,056.50
Input VAT on Importation of Goods for the Qtr

(22F)

1,573,004.00

Total Available Input tax (23)

133,573,214.12

VAT Refund/TCC Claimed (24A)

83,692,257.83

Net Creditable Input Tax (25)

49,880,956.29

VAT payable (Excess Input Tax) (26)

(49,845,959.93)

Tax Payable (overpayment) (28)

(49,845,959.93)

On 30 May 2003 and 31 July 2003, petitioner filed two letters with the BIR to amend its claims
for tax refund or credit for the first and fourth quarter of 2002, respectively. � Petitioner sought to
recover a total amount of P249,397,620.18 representing its unutilized excess VAT on its
importation and domestic purchases of goods and services for the year 2002, broken down as
follows[13]:

Qtr

Involved
Date Filed

Output Tax

Input Tax

Domestic Purchases

Importations

Excess Input Tax

(A)

(B)

(C)

(D) = (B) + (C) �(A)

1st

30-May-03

P 26,247.27

P95,126,981.69
P20,758,668.00

P115,859,402.42

2nd

25-Oct-02

65,206,499.83

18,185,758.00

83,692,257.83

3rd

27-Feb-03

28,924,920.79

1,465,875,00

30,389,895.79

4th

31-Jul-03

34,996.36

17,918,056.50

1,573,004.00

19,456,064.14
P61,243.63

P207,175,558.81

P42,283,305.00

P249,397,620.18

Respondent failed to act on the request for tax refund or credit of petitioner, which prompted the
latter to file on 5 April 2004, with the CTA in Division, a Petition for Review, docketed as CTA
Case No. 6916 before it could be barred by the two-year prescriptive period within which to file
its claim.� Petitioner sought the refund of the amount of P249,397,620.18 representing its
unutilized excess VAT on its importation and local purchases of various goods and services for the
year 2002.[14]�

During the proceedings before the CTA Second Division, petitioner presented the following
documents, among other pieces of evidence: (1) Petitioner �s Amended Quarterly VAT return for
the 4th Quarter of 2002 marked as Exhibit �A,� showing the amount of P42,500,000.00 paid by
NTC to petitioner for all the electricity produced during test runs; (2) the special audit report,
prepared by the CPA firm of Punongbayan and Araullo through a partner, Angel A. Aguilar
(Aguilar), and the attached schedules, marked as Exhibits �J-2 � to �J-21 �; (3) Sales Invoices
and Official Receipts and related documents issued to petitioner for the year 2002, marked as
Exhibits �J-4-A1� to �J-4-L265�; (4) Audited Financial Statements of Petitioner for the year
2002, with comparative figures for 2001, marked as Exhibit �K�; and (5) the Affidavit of
Echevarria dated 9 February 2005, marked as Exhibit �L�.[15]

During the hearings, the parties jointly stipulated on the issues involved:

1.�������� Whether or not petitioner�s sales are subject to value-added taxes at

effectively zero percent (0%) rate;
2.�������� Whether or not petitioner incurred input taxes which are attributable to its
effectively zero-rated transactions;

3.�������� Whether or not petitioner�s importation and purchases of capital goods

and related services are within the scope and meaning of �capital goods � under Revenue
Regulations No. 7-95;

4.�������� Whether or not petitioner�s input taxes are sufficiently substantiated with
VAT invoices or official receipts;

5.�������� Whether or not the VAT input taxes being claimed for refund/tax credit by
petitioner (had) been credited or utilized against any output taxes or (had) been carried forward to
the succeeding quarter or quarters; and

6.�������� Whether or not petitioner is entitled to a refund of VAT input taxes it paid
from January 1, 2002 to December 31, 2002 in the total amount of Two Hundred Forty Nine
Million Three Hundred Ninety Seven Thousand Six Hundred Twenty and 18/100 Pesos
(P249,397,620.18).

��������� Simply put, the issue is:� whether or not petitioner is entitled to refund or
tax credit in the amount of P249,397,620.18 representing its unutilized input VAT paid on
importation and purchases of capital and other taxable goods and services from January 1 to
December 31, 2002.

After a hearing on the merits, the CTA Second Division rendered a Decision[16] dated 23 March
2006 denying petitioner�s claim for tax refund or credit. The CTA noted that petitioner based its
claim on creditable input VAT paid, which is attributable to (1) zero-rated or effectively zero-rated
sale, as provided under Section 112(A) of the NIRC, and (2) purchases of capital goods, in
accordance with Section 112(B) of the NIRC.�� The court ruled that in order for petitioner to
be entitled to the refund or issuance of a tax credit certificate on the basis of Section 112(A) of the
NIRC, it must establish that it had incurred zero-rated sales or effectively zero-rated sales for the
taxable year 2002.�� Since records show that petitioner did not make any zero-rated or
effectively-zero rated sales for the taxable year 2002, the CTA reasoned that petitioner �s claim
must be denied.� Parenthetically, the court declared that the claim for tax refund or credit based
on Section 112(B) of the NIRC requires petitioner to prove that it paid input VAT on capital goods
purchased, based on the definition of capital goods provided under Section 4.112-1(b) of Revenue
Regulations No. 7-95�i.e., goods or properties which have an estimated useful life of greater than
one year, are treated as depreciable assets under Section 34(F) of the NIRC, and are used directly
or indirectly in the production or sale of taxable goods and services. � The CTA found that the
evidence offered by petitioner�the suppliers� invoices and official receipts and Import Entries
and Internal Revenue Declarations and the audit report of the Court-commissioned Independent
Certified Public Accountant (CPA) are insufficient to prove that the importations and domestic
purchases were classified as capital goods and properties entered as part of the �Property, Plant
and Equipment� account of the petitioner. �The dispositive part of the said Decision reads:

WHEREFORE, the instant Petition for Review is DENIED for lack of merit.[17]

Not satisfied with the foregoing Decision dated 23 March 2006, petitioner filed a Motion for
Reconsideration which was denied by the CTA Second Division in a Resolution dated 4 January
2007.[18]

Petitioner filed an appeal with the CTA En Banc, docketed as CTA EB No. 248. �The CTA En
Banc promulgated its Decision[19] on 20 September 2007 denying petitioner �s appeal. � The
CTA En Banc reiterated the ruling of the Division that petitioner �s claim based on Section
112(A) of the NIRC should be denied since it did not present any records of any zero-rated or
effectively zero-rated transactions.� It clarified that since petitioner failed to prove that any sale
of its electricity had transpired, petitioner may base its claim only on Section 112(B) of the NIRC,
the provision governing the purchase of capital goods. � The court noted that the report of the
Court-commissioned auditing firm, Punongbayan & Araullo, dealt specifically with the unutilized
input taxes paid or incurred by petitioner on its local and foreign purchases of goods and services
attributable to its zero-rated sales, and not to purchases of capital goods. �It decided that
petitioner failed to prove that the purchases evidenced by the invoices and receipts, which
petitioner presented, were classified as capital goods which formed part of its �Property, Plant
and Equipment,� especially since petitioner failed to present its books of account. � The
dispositive part of the said Decision reads:
WHEREFORE, premises considered, the instant petition is hereby DISMISSED. � Accordingly,
the assailed Decision and Resolution are hereby AFFIRMED.[20]

The CTA En Banc denied petitioner�s Motion for Reconsideration in a Resolution dated 22
October 2007.[21]

Hence, the present Petition for Review where the petitioner raises the following errors allegedly
committed by the CTA En banc:

THE COURT OF TAX APPEALS EN BANC COMMITTED SERIOUS ERROR AND ACTED
WITH GRAVE ABUSE OF DISCRETION TANTAMOUNT TO LACK OR EXCESS OF
JURISDICTION IN FAILING OR REFUSING TO APPRECIATE THE OVERWHELMING
AND UNCONTROVERTED EVIDENCE SUBMITTED BY THE PETITIONER, THUS
DEPRIVING PETITIONER OF ITS PROPERTY WITHOUT DUE PROCESS; AND

II

THE COURT OF TAX APPEALS COMMITTED SERIOUS ERROR AND ACTED WITH
GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION IN RULING THAT THE ABSENCE OF ZERO-RATED SALES BY
PETITIONER DURING THE YEAR COVERED BY THE CLAIM FOR REFUND DOES NOT
ENTITLE PETITIONER TO A REFUND OF ITS EXCESS VAT INPUT TAXES
ATTRIBUTABLE TO ZERO-RATED SALES, CONTRARY TO PROVISIONS OF LAW.[22]
The present Petition is meritorious.

The main issue in this case is whether or not petitioner may claim a tax refund or credit in the
amount of P249,397,620.18 for creditable input tax attributable to zero-rated or effectively zero-
rated sales pursuant to Section 112(A) of the NIRC or for input taxes paid on capital goods as
provided under Section 112(B) of the NIRC.

To resolve the issue, this Court must re-examine the facts and the evidence offered by the parties.
It is an accepted doctrine that this Court is not a trier of facts. � It is not its function to review,
examine and evaluate or weigh the probative value of the evidence presented. � However, this
rule does not apply where the judgment is premised on a misapprehension of facts, or when the
appellate court failed to notice certain relevant facts which if considered would justify a different
conclusion.[23]

After reviewing the records, this Court finds that petitioner�s claim for refund or credit is
justified under Section 112(A) of the NIRC which states that:

SEC. 112.� Refunds or Tax Credits of Input Tax.�

(A)� Zero-rated or Effectively Zero-rated Sales�Any VAT-registered person, whose sales are
zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter
when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable
input tax due or paid attributable to such sales, except transitional input tax, to the extent that such
input tax has not been applied against output tax: Provided, however, That in the case of zero-rated
sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108(B)(1) and (2), the acceptable
foreign currency exchange proceeds thereof had been duly accounted for in accordance with the
rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the
taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale
of goods or properties or services, and the amount of creditable input tax due or paid cannot be
directly and entirely attributed to any one of the transactions, it shall be allocated proportionately
on the basis of the volume of sales.
To claim refund or tax credit under Section 112(A), petitioner must comply with the following
criteria: (1) the taxpayer is VAT registered; (2) the taxpayer is engaged in zero-rated or effectively
zero-rated sales; (3) the input taxes are due or paid; (4) the input taxes are not transitional input
taxes; (5) the input taxes have not been applied against output taxes during and in the succeeding
quarters; (6) the input taxes claimed are attributable to zero-rated or effectively zero-rated sales;
(7) for zero-rated sales under Section 106(A)(2)(1) and (2); 106(B); and 108(B)(1) and (2), the
acceptable foreign currency exchange proceeds have been duly accounted for in accordance with
BSP rules and regulations; (8) where there are both zero-rated or effectively zero-rated sales and
taxable or exempt sales, and the input taxes cannot be directly and entirely attributable to any of
these sales, the input taxes shall be proportionately allocated on the basis of sales volume; and (9)
the claim is filed within two years after the close of the taxable quarter when such sales were
made.[24]

Based on the evidence presented, petitioner complied with the abovementioned requirements.�
Firstly, petitioner had adequately proved that it is a VAT registered taxpayer when it presented
Certificate of Registration No. OCN-98-006-007394, which it attached to its Petition for Review
dated 29 March 2004 filed before the CTA in Division. � Secondly, it is unquestioned that
petitioner is engaged in providing electricity for NPC, an activity which is subject to zero rate,
under Section 108(B)(3) of the NIRC.� Thirdly, petitioner offered as evidence suppliers � VAT
invoices or official receipts, as well as Import Entries and Internal Revenue Declarations (Exhibits
�J-4-A1� to �J-4-L265�), which were examined in the audit conducted by Aguilar, the
Court-commissioned Independent CPA.� Significantly, Aguilar noted in his audit report (Exhibit
�J-2�) that of the P249,397,620.18 claimed by petitioner, he identified items with incomplete
documentation and errors in computation with a total amount of P3,266,009.78. � Based on these
findings, the remaining input VAT of P246,131,610.40 was properly documented and recorded in
the books.� The said report reads:

In performing the procedures referred under the Procedures Performed section of this report, no
matters came to our attention that cause us to believe that the amount of input VAT applied for as
tax credit certificate/refund of P249,397,620.18 for the period January 1, 2002 to December 31,
2002 should be adjusted except for input VAT claimed with incomplete documentation, those with
various and other exceptions on the supporting documents and those with errors in computation
totaling P3,266,009.78, as discussed in the Findings and Results of the Agreed-Upon Audit
Procedures Performed sections of this report.� We have also ascertained that the input VAT
claimed are properly recorded in the books and, except as specifically identified in the Findings
and Results of the Agreed-Upon Audit Procedures Performed sections of this report, are properly
supported by original and appropriate suppliers� VAT invoices and/or official receipts.[25]

Fourthly, the input taxes claimed, which consisted of local purchases and importations made in
2002, are not transitional input taxes, which Section 111 of the NIRC defines as input taxes
allowed on the beginning inventory of goods, materials and supplies.[26] � Fifthly, the audit
report of Aguilar affirms that the input VAT being claimed for tax refund or credit is net of the
input VAT that was already offset against output VAT amounting to P26,247.27 for the first quarter
of 2002 and P34,996.36 for the fourth quarter of 2002,[27] as reflected in the Quarterly VAT
Returns.[28] ���

The main dispute in this case is whether or not petitioner �s claim complied with the sixth
requirement�the existence of zero-rated or effectively zero-rated sales, to which creditable input
taxes may be attributed. The CTA in Division and en banc denied petitioner �s claim solely on
this ground.� The tax courts based this conclusion on the audited report, marked as Exhibit �J-
2,� stating that petitioner made no sale of electricity to NPC in 2002.[29] � Moreover, the
affidavit of Echevarria (Exhibit �L�), petitioner�s Vice President and Director for Finance,
contained an admission that no commercial sale of electricity had been made in favor of NPC in
2002 since the project was still under construction at that time.[30]

However, upon closer examination of the records, it appears that on 2002, petitioner carried out a
�sale� of electricity to NPC.� The fourth quarter return for the year 2002, which petitioner
filed, reported a zero-rated sale in the amount of P42,500,000.00.[31]� In the Affidavit of
Echevarria dated 9 February 2005 (Exhibit �L�), which was uncontroverted by respondent, the
affiant stated that although no commercial sale was made in 2002, petitioner produced and
transferred electricity to NPC during the testing period in exchange for the amount of
P42,500,000.00, to wit:[32]

A:� San Roque Power Corporation has had no sale yet during 2002. � The P42,500,000.00
which was paid to us by Napocor was something similar to a more cost recovery scheme. � The
pre-agreed amount would be about equal to our costs for producing the electricity during the
testing period and we just reflected this in our 4th quarter return as a zero-rated sale. � x x x.
The Court is not unmindful of the fact that the transaction described hereinabove was not a
commercial sale.� In granting the tax benefit to VAT-registered zero-rated or effectively zero-
rated taxpayers, Section 112(A) of the NIRC does not limit the definition of �sale � to
commercial transactions in the normal course of business.� Conspicuously, Section 106(B) of the
NIRC, which deals with the imposition of the VAT, does not limit the term �sale � to
commercial sales, rather it extends the term to transactions that are �deemed � sale, which are
thus enumerated:

����������� SEC 106. Value-Added Tax on Sale of Goods or Properties.

xxxx

(B)������ Transactions Deemed Sale.�The following transactions shall be deemed sale:

����������� (1)� Transfer, use or consumption not in the course of business of

goods or properties originally intended for sale or for use in the course of business;

����������� (2)� Distribution or transfer to:

����� (a) Shareholders or investors as share in the profits of the VAT-registered persons; or

����� (b) Creditors in payment of debt;

����������� (3)� Consignment of goods if actual sale is not made within sixty
(60) days following the date such goods were consigned; and
����������� (4) �Retirement from or cessation of business, with respect to
inventories of taxable goods existing as of such retirement or cessation. (Our emphasis.)

After carefully examining this provision, this Court finds it an equitable construction of the law
that when the term �sale� is made to include certain transactions for the purpose of imposing a
tax, these same transactions should be included in the term �sale � when considering the
availability of an exemption or tax benefit from the same revenue measures. � It is undisputed
that during the fourth quarter of 2002, petitioner transferred to NPC all the electricity that was
produced during the trial period.� The fact that it was not transferred through a commercial sale
or in the normal course of business does not deflect from the fact that such transaction is deemed
as a sale under the law.

The seventh requirement regarding foreign currency exchange proceeds is inapplicable where
petitioner�s zero-rated sale of electricity to NPC did not involve foreign exchange and consisted
only of a single transaction wherein NPC paid petitioner P42,500,000.00 in exchange for the
electricity transferred to it by petitioner.� Similarly, the eighth requirement is inapplicable to this
case, where the only sale transaction consisted of an effectively zero-rated sale and there are no
exempt or taxable sales that transpired, which will require the proportionate allocation of the
creditable input tax paid.

The last requirement determines that the claim should be filed within two years after the close of
the taxable quarter when such sales were made.� The sale of electricity to NPC was reported at
the fourth quarter of 2002, which closed on 31 December 2002. � Petitioner had until 30
December 2004 to file its claim for refund or credit. � For the period January to March 2002,
petitioner filed an amended request for refund or tax credit on 30 May 2003; for the period July
2002 to September 2002, on 27 February 2003; and for the period October 2002 to December
2002, on 31 July 2003.[33]� In these three quarters, petitioners seasonably filed its requests for
refund and tax credit.� However, for the period April 2002 to May 2002, the claim was filed
prematurely on 25 October 2002, before the last quarter had closed on 31 December 2002.[34]�

Despite this lapse in procedure, this Court notes that petitioner was able to positively show that it
was able to accumulate excess input taxes on various importations and local purchases in the
amount of P246,131,610.40, which were attributable to a transfer of electricity in favor of NPC.�
The fact that it had filed its claim for refund or credit during the quarter when the transfer of
electricity had taken place, instead of at the close of the said quarter does not make petitioner any
less entitled to its claim.� Given the special circumstances of this case, wherein petitioner was
incorporated for the sole purpose of constructing or operating a power plant that will transfer all
the electricity it generates to NPC, there is no danger that petitioner would try to fraudulently
claim input tax paid on purchases that will be attributed to sale transactions that are not zero-
rated.� Substantial justice, equity and fair play are on the side of the petitioner. � Technicalities
and legalisms, however, exalted, should not be misused by the government to keep money not
belonging to it, thereby enriching itself at the expense of its law abiding citizens.

����������� Substantial justice, equity and fair play are on the side of
petitioner.� Technicalities and legalisms, however exalted, should not be misused by the
government to keep money not belonging to it, thereby enriching itself at the expense of its law-
abiding citizens. �Under the principle of solutio indebiti provided in Art. 2154, Civil Code, the
BIR received something �when there [was] no right to demand it, � and thus, it has the
obligation to return it.� Heavily militating against respondent Commissioner is the ancient
principle that no one, not even the State, shall enrich oneself at the expense of another. � Indeed,
simple justice requires the speedy refund of the wrongly held taxes.[35]

It bears emphasis that effective zero-rating is not intended as a benefit to the person legally liable
to pay the tax, such as petitioner, but to relieve certain exempt entities, such as the NPC, from the
burden of indirect tax so as to encourage the development of particular industries. � Before, as
well as after, the adoption of the VAT, certain special laws were enacted for the benefit of various
entities and international agreements were entered into by the Philippines with foreign
governments and institutions exempting sale of goods or supply of services from indirect taxes at
the level of their suppliers.� Effective zero-rating was intended to relieve the exempt entity from
being burdened with the indirect tax which is or which will be shifted to it had there been no
exemption.� In this case, petitioner is being exempted from paying VAT on its purchases to
relieve NPC of the burden of additional costs that petitioner may shift to NPC by adding to the
cost of the electricity sold to the latter.[36]

Section 13 of Republic Act No. 6395, otherwise known as the NPC Charter, further clarifies that it
is the lawmakers� intention that NPC be made completely exempt from all taxes, both direct and
indirect:
����������� Sec. 13.� Non-profit Character of the Corporation; Exemption from
all Taxes, Duties, Fees, Imposts and Other Charges by Government and Governmental
Instrumentalities. - The corporation shall be non-profit and shall devote all its returns from its
capital investment, as well as excess revenues from its operation, for expansion. � To enable the
corporation to pay its indebtedness and obligations and in furtherance and effective
implementation of the policy enunciated in Section 1 of this Act, the corporation is hereby
declared exempt:

����������� (a)������� From the payment of all taxes, duties, fees,

imposts, charges, costs and service fees in any court or administrative proceedings in which it may
be a party, restrictions and duties to the Republic of the Philippines, its provinces, cities,
municipalities, and other government agencies and instrumentalities;

����������� (b)������� From all income taxes, franchise taxes, and

realty taxes to be paid to the National Government, its provinces, cities, municipalities and other
government agencies and instrumentalities;

����������� (c)������� From all import duties, compensating taxes and

advanced sales tax and wharfage fees on import of foreign goods, required for its operations and
projects; and

����������� (d)������ From all taxes, duties, fees, imposts, and all other
charges imposed by the Republic of the Philippines, its provinces, cities, municipalities and other
government agencies and instrumentalities, on all petroleum products used by the corporation in
the generation, transmission, utilization, and sale of electric power.

To limit the exemption granted to the NPC to direct taxes, notwithstanding the general and broad
language of the statute will be to thwart the legislative intention in giving exemption from all
forms of taxes and impositions, without distinguishing between those that are direct and those that
are not.[37]
Congress granted NPC a comprehensive tax exemption because of the significant public interest
involved.� This is enunciated in Section 1 of Republic Act No. 6395:

����������� Section 1.� Declaration of Policy.� Congress hereby declares that

(1) the comprehensive development, utilization and conservation of Philippine water resources for
all beneficial uses, including power generation, and (2) the total electrification of the Philippines
through the development of power from all sources to meet the needs of industrial development
and dispersal and the needs of rural electrification are primary objectives of the nation which shall
be pursued coordinately and supported by all instrumentalities and agencies of government,
including its financial institutions.

The ability of the NPC to provide sufficient and affordable electricity throughout the country
greatly affects our industrial and rural development.� Erroneously and unjustly depriving
industries that generate electrical power of tax benefits that the law clearly grants will have an
immediate effect on consumers of electricity and long term effects on our economy.

��������� In the same breath, we cannot lose sight of the fact that it is the declared
policy of the State, expressed in Section 2 of Republic Act No. 9136, otherwise known as the
EPIRA Law, �to ensure and accelerate the total electrification of the country; � �to enhance the
inflow of private capital and broaden the ownership base of the power generation, transmission
and distribution sectors;� and �to promote the utilization of indigenous and new and renewable
energy resources in power generation in order to reduce dependence on imported energy.��
Further, Section 6 provides that �pursuant to the objective of lowering electricity rates to end-
users, sales of generated power by generation companies shall be value-added tax zero-rated.

��������� Section 75 of said law succinctly declares that �this Act shall, unless the
context indicates otherwise, be construed in favor of the establishment, promotion, preservation of
competition and power empowerment so that the widest participation of the people, whether
directly or indirectly is ensured.�
��������� The objectives as set forth in the EPIRA Law can only be achieved if
government were to allow petitioner and others similarly situated to obtain the input tax credits
available under the law.� Denying petitioner such credits would go against the declared policies
of the EPIRA Law.

��������� The legislative grant of tax relief (whether in the EPIRA Law or the Tax
Code) constitutes a sovereign commitment of Government to taxpayers that the latter can avail
themselves of certain tax reliefs and incentives in the course of their business activities here.�
Such a commitment is particularly vital to foreign investors who have been enticed to invest
heavily in our country�s infrastructure, and who have done so on the firm assurance that certain
tax reliefs and incentives can be availed of in order to enable them to achieve their projected
returns on these very long-term and heavily funded investments. � While the government �s
ability to keep its commitment is put in doubt, credit rating turns to worse; the costs of borrowing
becomes higher and the harder it will be to attract foreign investors. � The country �s earnest
efforts to move forward will all be put to naught.�

Having decided that petitioner is entitled to claim refund or tax credit under Section 112(A) of the
NIRC or on the basis of effectively zero-rated sales in the amount of P246,131,610.40, there is no
more need to establish its right to make the same claim under Section 112(B) of the NIRC or on
the basis of purchase of capital goods.

Finally, respondent contends that according to well-established doctrine, a tax refund, which is in
the nature of a tax exemption, should be construed strictissimi juris against the taxpayer.[38]��
However, when the claim for refund has clear legal basis and is sufficiently supported by
evidence, as in the present case, then the Court shall not hesitate to grant the same.[39]�

WHEREFORE, the instant Petition for Review is GRANTED.� The Decision of the Court of Tax
Appeals En Banc dated 20 September 2007 in CTA EB Case No. 248, affirming the Decision
dated 23 March 2006 of the CTA Second Division in CTA Case No. 6916, is REVERSED.
�Respondent Commissioner of Internal Revenue is ordered to refund, or in the alternative, to
issue a tax credit certificate to petitioner San Roque Power Corporation in the amount of Two
Hundred Forty-Six Million One Hundred Thirty-One Thousand Six Hundred Ten Pesos and
40/100 (P246,131,610.40), representing unutilized input VAT for the period 1 January 2002 to 31
December 2002. ��No costs.
��������� SO ORDERED

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,[1] reversing that of the Court of Tax Appeals,[2] which affirmed with modification the
decision of the Commissioner of Internal Revenue ruling that Commonwealth Management and
Services Corporation, is liable for value added tax for services to clients during taxable year 1988.

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

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

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[4] a petition for
review contesting the Commissioner's assessment. COMASERCO asserted that the services it
rendered to Philamlife and its affiliates, relating to collections, consultative and other technical
assistance, including functioning as an internal auditor, were on a "no-profit, reimbursement-of-
cost-only" basis. It averred that it was not engaged 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.

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

"WHEREFORE, the decision of the Commissioner of Internal Revenue assessing petitioner

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

"The compromise penalty of P16,000.00 imposed by the respondent in her assessment letter shall
not be included in the payment as there was no compromise agreement entered into between
petitioner and respondent with respect to the value-added tax deficiency."[5]

On July 26, 1995, respondent filed with the Court of Appeals, 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,[7] 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.

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[10] defines the phrase "sale of
services" as the "performance of all kinds of services for others for a fee, remuneration or
consideration." It includes "the supply of technical advice, assistance or services rendered in
connection with technical management or administration of any scientific, industrial or
commercial undertaking or project."[11]

On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling No. 010-98[12]
emphasizing that a domestic corporation that provided technical, research, management and
technical assistance to its affiliated companies and received payments on a reimbursement-of-cost
basis, without any intention of realizing profit, was subject to VAT on services rendered. In fact,
even if such corporation was organized without any intention of realizing profit, any income or
profit generated by the entity in the conduct of its activities was subject to income tax. lex

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.[13] In the case of VAT, Section 109, Republic
Act 8424 clearly enumerates the transactions exempted from VAT. The services rendered by
COMASERCO do not fall within the exemptions.

Both the Commissioner of Internal Revenue and the Court of Tax Appeals correctly ruled that the
services rendered by COMASERCO to Philamlife and its affiliates are subject to VAT. As pointed
out by the Commissioner, the performance of all kinds of services for others for a fee,
remuneration or consideration is considered as sale of services subject to VAT. As the government
agency charged with the enforcement of the law, the opinion of the Commissioner of Internal
Revenue, in the absence of any showing that it is plainly wrong, is entitled to great weight.[14]
Also, it has been the long standing policy and practice of this Court to respect the conclusions of
quasi-judicial agencies, such as the Court of Tax Appeals which, by the nature of its functions, is
dedicated exclusively to the study and consideration of tax cases and has necessarily developed an
expertise on the subject, unless there has been an abuse or improvident exercise of its authority.
[15]

There is no merit to respondent's contention that the Court of Appeals' decision in CA-G. R. No.
34042, declaring the COMASERCO as not engaged in business and not liable for the payment of
fixed and percentage taxes, binds petitioner. The issue in CA-G. R. No. 34042 is different from the
present case, which involves COMASERCO's liability for VAT. As heretofore stated, every person
who sells, barters, or exchanges goods and services, in the course of trade or business, as defined
by law, is subject to VAT. 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

G.R. No. 207112, December 08, 2015 - PILIPINAS TOTAL GAS, INC., Petitioner, v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
 G.R. No. 207112, December 08, 2015 - PILIPINAS TOTAL GAS, INC., Petitioner, v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
PHILIPPINE SUPREME COURT DECISIONS

EN BANC

G.R. No. 207112, December 08, 2015

PILIPINAS TOTAL GAS, INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE,

Respondent.

DECISION

MENDOZA, J.:

Before the Court is a petition for review on certiorari1 under Rule 45 of the Rules of Court
assailing the October 11, 2012 Decision2 and the May 8, 2013 Resolution3 of the Court of Tax
Appeals (CTA) En Banc, in CTA EB Case No. 776, which affirmed the January 13, 2011
Decision4 of the CTA Third Division (CTA Division) in CTA Case No. 7863.

The Facts

Petitioner Pilipinas Total Gas, Inc. (Total Gas) is engaged in the business of selling, transporting
and distributing industrial gas. It is also engaged in the sale of gas equipment and other related
businesses. For this purpose, Total Gas registered itself with the Bureau of Internal Revenue (BIR)
as a Value Added Tax (VAT) taxpayer.

On April 20, 2007 and July 20, 2007, Total Gas filed its Original Quarterly VAT Returns for the
First and Second quarters of 2007, respectively with the BIR.

On May 20, 2008, it filed its Amended Quarterly VAT Returns for the first two quarters of 2007
reflecting its sales subject to VAT, zero-rated sales, and domestic purchases of non-capital goods
and services.

For the First and Second quarters of 2007, Total Gas claimed it incurred unutilized input VAT
credits from its domestic purchases of noncapital goods and services in the total amount of
P8,124,400.35. Of this total accumulated input VAT, Total Gas claimed that it had P7,898,433.98
excess unutilized input VAT.

On May 15, 2008, Total Gas filed an administrative claim for refund of unutilized input VAT for
the first two quarters of taxable year 2007, inclusive of supporting documents.

On August 28, 2008, Total Gas submitted additional supporting documents to the BIR.
On January 23, 2009, Total Gas elevated the matter to the CTA in view of the inaction of the
Commissioner of Internal Revenue (CIR).

During the hearing, Total Gas presented, as witnesses, Rosalia T. Yu and Richard Go, who
identified documentary evidence marked as Exhibits "A" to "ZZ-1," all of which were admitted.
Respondent CIR, on the other hand, did not adduce any evidence and had the case submitted for
decision.

Ruling of the CTA Division

In its January 13, 2011 Decision,5 the CTA Division dismissed the petition for being prematurely
filed. It explained that Total Gas failed to complete the necessary documents to substantiate a
claim for refund of unutilized input VAT on purchases of goods and services enumerated under
Revenue Memorandum Order (RMO) No. 53-98. Of note were the lack of Summary List of Local
Purchases and the certifications from the Office of the Board of Investment (BOD), the Bureau of
Customs (BOC), and the Philippine Economic Zone Authority (PEZA) that the taxpayer had not
filed any similar claim for refund covering the same period.6

Believing that Total Gas failed to complete the necessary documents to substantiate its claim for
refund, the CTA Division was of the view that the 120-day period allowed to the CIR to decide its
claim under Section 112 (C) of the National Internal Revenue Code of 1997 (NIRC), had not even
started to run. With this, the CTA Division opined that the petition for review was prematurely
filed because Total Gas failed to exhauist the appropriate administrative remedies. The CTA
Division stressed that tax refunds partake of the nature of an exemption, putting into operation the
rule of strict interpretation, with the taxpayer being charged with the burden of proving that he had
satisfied all the statutory and administrative requirements.7

Total Gas sought for reconsideration8 from the CTA Division, but its motion was denied for lack
of merit in a Resolution, dated April 19, 2011.9 In the same resolution, it reiterated that "that the
complete supporting documents should be submitted to the BIR before the 120-day period for the
Commissioner to decide the claim for refund shall commence to run. It is only upon the lapse of
the 120-day period that the taxpayer can appeal the inaction [to the CTA.]"10 It noted that RMO
No. 53-98, which provides a checklist of documents for the BIR to consider in granting claims for
refund, also serves as a guideline for the courts to determine if the taxpayer had submitted
complete supporting documents.11 It also stated that Total Gas could not invoke Revenue
Memorandum Circular (RMC) No. 29-09 because it was issued after the administrative claim was
filed and could not be applied retroactively.12 Thus, the CTA Division disposed:
WHEREFORE, premises considered, the present Petition for Review is hereby DENIED DUE
COURSE, and, accordingly DISMISSED for having been prematurely filed.

SO ORDERED.13ChanRoblesVirtualawlibrary
Ruling of the CTA En Banc
In its assailed decision, the CTA En Banc likewise denied the petition for review of Total Gas for
lack of merit. It condensed its arguments into two core issues, to wit: (1) whether Total Gas
seasonably filed its judicial claim for refund; and (2) whether it was unable to substantiate its
administrative claim for refund by failing to submit the required documents that would allow
respondent to act on it.14

As to the first issue, the CTA En Banc ruled that the CTA Division had no jurisdiction over the
case because Total Gas failed to seasonably file its petition. Counting from the date it filed its
administrative claim on May 15, 2008, the CTA En Banc explained that the CIR had 120 days to
act on the claim (until September 12, 2008), and Total Gas had 30 days from then, or until October
12, 2008, to question the inaction before the CTA. Considering that Total Gas only filed its
petition on January 23, 2009, the CTA En Banc concluded that the petition for review was
belatedly filed. For the tax court, the 120-day period could not commence on the day Total Gas
filed its last supporting document on August 28, 2008, because to allow such would give the
taxpayer unlimited discretion to indefinitely extend the 120-day period by simply filing the
required documents piecemeal.15

As to the second issue, the CTA En Banc affirmed the CTA Division that Total Gas failed to
submit the complete supporting documents to warrant the grant of its application for refund.
Quoting the pertinent portion of the decision of its division, the CTA En Banc likewise concurred
in its finding that the judicial claim of Total Gas was prematurely filed because the 120-day period
for the CIR to decide the claim had yet to commence to run due to the lack of essential
documents.16

Total Gas filed a motion for reconsideration,17 but it was denied in the assailed resolution of the
CTA En Banc.18

Hence, the present petition.

ISSUES

(a) whether the judicial claim for refund was belatedly filed on 23 January 2009, or way beyond
the 30-day period to appeal as provided in Section 112(c) of the Tax Code, as amended; and

(b) whether the submission of incomplete documents at the adminstrative level (BIR) renders the
judicial claim premature and dismissible for lack of jurisdiction.19ChanRoblesVirtualawlibrary
In its petition, Total Gas argues that its judicial claim was filed within the prescriptive period for
claiming excess unutilized input VAT refund as provided under Section 112 of the NIRC and
expounded in the Court's ruling in CIR v. Aichi Forging Company of Asia20 (Aichi) and in
compliance with Section 112 of the NIRC. In addition to citing Section 112 (C) of the Tax Code,
Total Gas points out that in one of its previous claims for refund of excess unutilized input VAT,
the CTA En Banc in CTA En Banc Case No. 674,21 faulted the BIR in not considering that the
reckoning period for the 120-period should be counted from the date of submission of complete
documents.22 It then adds that the previous ruling of the CTA En Banc was in accordance with
law because Section 112 (C) of the Tax Code is clear in providing that the 120-day period should
be counted from the date of its submission of the complete documents or from August 28, 2008
and not from the date it filed its administrative claim on May 15, 2008.23 Total Gas argues that,
since its claim was filed within the period of exception provided in CIR v. San Roque Power
Corporation24 (San Roque), it did not have to strictly comply with 120+30 day period before it
could seek judicial relief.25cralawred

Moreover, Total Gas questions the logic of the CTA En Banc which stated that the petition was
filed both belatedly and prematurely. Total Gas points out that on the one hand, the CTA En Banc
ruled that it filed the judicial claim belatedly as it was way beyond the 120+30 day period. Yet, it
also affirmed the findings of its division that its petition for review was prematurely filed since the
120-day period did not even commence to run for lack of complete supporting documents.26

For Total Gas, the CTA En Banc violated the doctrine of stare decisis because the tax tribunal had,
on numerous occassions, held that the submission of incomplete supporting documents should not
make the judicial appeal premature and dismissible for lack of jurisdiction. In these decisions, the
CTA En Banc had previously held that non-compliance with RMO No. 53-98 should not be fatal
since the requirements listed therein refer to requirements for refund or tax credit in the
administrative level for purposes of establishing the authenticity of a taxpayer's claim; and that in
the judicial level, it is the Rules of Court that govern and, thus, whether or not the evidence
submitted by the party to the court is sufficient lies within the sound discretion of the court. Total
Gas emphasizes that RMO No. 53-98 does not state that non-submission of supporting documents
will nullify the judicial claim. It posits that once a judicial claim is filed, what should be examined
are the evidence formally offered in the judicial proceedings.27

Even assuming that the supporting documents submitted to the BIR were incomplete, Total Gas
argues that there was no legal basis to hold that the CIR could not decide or act on the claim for
refund without the complete supporting documents. It argues that under RMC No. 29-09, the BIR
is tasked with the duty to notify the taxpayer of the incompleteness of its supporting documents
and, if the taxpayer fails to complete the supporting supporting documents despite such notice, the
same shall be denied. The same regulation provides that for purposes of computing the 120-day
period, it should be considered tolled when the taxpayer is notified. Total Gas, however, insists
that it was never notified and, therefore, was justified in seeking judicial relief.28

Although Total Gas admits that RMC No. 29-09 was not yet issued at the time it filed its
administrative claim, the BIR still erred for not notifying them of their lack of supporting
documents. According to Total Gas, the power to notify a taxpayer of lacking documents and to
deny its claim if the latter would not comply is inherent in the CIR's power to decide refund cases
pursuant to Section 4 of the NIRC. It adds "[s]ound policy also dictates that it should be the
taxpayer who should determine whether he has already submitted all documents pertinent to his
claim. To rule otherwise would result into a never-ending conflict/issue as to the completeness of
documents which, in turn, would delay the taxpayer's claim, and would put to naught the
protection afforded by Section 112 (C) of the Tax Code."29

In her Comment,30 the CIR echoed the ruling of the CTA En Banc, that Total Gas filed its petition
out of time. She countered that the 120-day period could not be counted from the time Total Gas
submitted its additional documents on August 28, 2008 because such an interpretation of Section
112(D) would indefinitely extend the prescriptive period as provided in favor of the taxpayer.

In its Reply,31 Total Gas insisted that Section 112(C) stated that the 120-day period should be
reckoned from the date of submission of complete documents, and not from the date of the filing
of the administrative claim.

Ruling of the Court

The petition has merit.

Judicial claim timely filed

Section 112 (C) of the NIRC provides:chanRoblesvirtualLawlibrary

SEC. 112. Refunds or Tax Credits of Input Tax. -

xxxx

(C) 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.

xxxx

[Emphasis and Underscoring Supplied]

From the above, it is apparent that the CIR has 120 days from the date of submission of complete
documents to decide a claim for tax credit or refund of creditable input taxes. The taxpayer may,
within 30 days from receipt of the denial of the claim or after the expiration of the 120-day period,
which is considered a "denial due to inaction," appeal the decision or unacted claim to the CTA.

To be clear, Section 112(C) categorically provides that the 120-day period is counted "from the
date of submission of complete documents in support of the application." Contrary to this
mandate, the CTA En Banc counted the running of the period from the date the application for
refund was filed or May 15, 2008, and, thus, ruled that the judicial claim was belatedly filed.

This should be corrected.

Indeed, the 120-day period granted to the CIR to decide the administrative claim under the Section
112 is primarily intended to benefit the taxpayer, to ensure that his claim is decided judiciously
and expeditiously. After all, the sooner the taxpayer successfully processes his refund, the sooner
can such resources be further reinvested to the business translating to greater efficiencies and
productivities that would ultimately uplift the general welfare. To allow the CIR to determine the
completeness of the documents submitted and, thus, dictate the running of the 120-day period,
would undermine these objectives, as it would provide the CIR the unbridled power to indefinitely
delay the administrative claim, which would ultimately prevent the filing of a judicial claim with
the CTA.

A hypothetical situation illustrates the hazards of granting the CIR the authority to decide when
complete documents have been submitted - A taxpayer files its administrative claim for VAT
refund/credit with supporting documents. After 121 days, the CIR informs the taxpayer that it
must submit additional documents. Considering that the CIR had determined that complete
documents have not yet been submitted, the 120-day period to decide the administrative claim has
not yet begun to run. In the meantime, more than 120 days have already passed since the
application with the supporting documents was filed to the detriment of the taxpayer, who has no
opportunity to file a judicial claim until the lapse of the 120+30 day period in Section 112(C).
With no limitation to the period for the CIR to determine when complete documents have been
submitted, the taxpayer may be left in a limbo and at the mercy of the CIR, with no adequate
remedy available to hasten the processing of its administrative claim.

Thus, the question must be asked: In an administrative claim for tax credit or refund of creditable
input VAT, from what point does the law allow the CIR to determine when it should decide an
application for refund? Or stated differently: Under present law, when should the submission of
documents be deemed "completed" for purposes of determining the running of the 120-day
period?

Ideally, upon filing his administrative claim, a taxpayer should complete the necessary documents
to support his claim for tax credit or refund or for excess utilized VAT. After all, should the
taxpayer decide to submit additional documents and effectively extend the 120-period, it grants
the CIR more time to decide the claim. Moreover, it would be prejudicial to the interest of a
taxpayer to prolong the period of processing of his application before he may reap the benefits of
his claim. Therefore, ideally, the CIR has a period of 120 days from the date an administrative
claim is filed within which to decide if a claim for tax credit or refund of excess unutilized VAT
has merit.

Thus, when the VAT was first introduced through Executive Order No. 273,32 the pertinent rule
was that:
(e) Period within which refund of input taxes may be made by the Commissioner. The
Commissioner shall refund input taxes within 60 days from the date the application for refund was
filed with him or his duly authorized representative. No refund or input taxes shall be allowed
unless the VAT-registered person files an application for refund within the period prescribed in
paragraphs (a), (b) and (c), as the case maybe.

[Emphasis supplied]
Here, the CIR was not only given 60 days within which to decide an administrative claim for
refund of input taxes, but the beginning of the period was reckoned "from the date the application
for refund was filed."

When Republic Act (R.A.) No. 771633 was, however, enacted on May 5, 1994, the law was
amended to read:
(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 for creditable input taxes within sixty
(60) days from the date of submission of complete documents in support of the application filed in
accordance with sub-paragraphs (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 sixty-day period, appeal the
decision or the unacted claim with the Court of Tax Appeals.

[Emphasis supplied]
Again, while the CIR was given only 60 days within which to act upon an administrative claim for
refund or tax credit, the period came to be reckoned "from the date of submission of complete
documents in support of the application." With this amendment, the date when a taxpayer made its
submission of complete documents became relevant. In order to ensure that such date was at least
determinable, RMO No. 4-94 provides:
REVENUE MEMORANDUM ORDER NO. 40-94

SUBJECT : Prescribing the Modified Procedures on the Processing of Claims for Value-Added
Tax Credit/Refund

III. Procedures
REGIONAL OFFICE
A. Revenue District Office
In General:chanRoblesvirtualLawlibrary

1. Ascertain the completeness of the supporting documents prior to the receipt of the application
for VAT credit/refund from the taxpayer.

2. Receive application for VAT Credit/Refund (BIR Form No. 2552) in three (3) copies in the
following manner:
a. stamp the word "RECEIVED" on the appropriate space provided in all copies of application;

b. indicate the claim number;

c. indicate the date of receipt; and

d. initial by receiving officer.
The application shall be received only if the required attachments prescribed in RAMO 1-91 have
been fully complied with x x x.
Then, when the NIRC34 was enacted on January 1, 1998, the rule was once more amended to
read:
(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 compete 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]
This time, the period granted to the CIR to act upon an admmistrative claim for refund was
extended to 120 days. The reckoning point however, remained "from the date of submission of
complete documents."

Aware that not all taxpayers were able to file the complete documents to allow the CIR to properly
evaluate an administrative claim for tax credit or refund of creditable input taxes, the CIR issued
RMC No. 49-2003, which provided:
Q-18: For pending claims with incomplete documents, what is the period within which to submit
the supporting documents required by the investigating/processing office? When should the
investigating/processing office officially receive claims for tax credit/refund and what is the
period required to process such claims?

A-18: For pending claims which have not been acted upon by the investigating/processing office
due to incomplete documentation, the taxpayer-claimants are given thirty (30) days within which
to submit the documentary requirements unless given further extension by the head of the
processing unit, but such extension should not exceed thirty (30) days.

For claims to be filed by claimants with the respective investigating/processing office of the
administrative agency, the same shall be officially received only upon submission of complete
documents.

For current and future claims for tax credit/refund, the same shall be processed within one hundred
twenty (120) days from receipt of the complete documents. If, in the course of the investigation
and processing of the claim, additional documents are required for the proper determination of the
legitimate amount of claim, the taxpayer-claimants shall submit such documents within thirty (30)
days from request of the investigating/processing office, which shall be construed as within the
one hundred twenty (120) day period.

[Emphases Supplied]
Consequently, upon filing of his application for tax credit or refund for excess creditable input
taxes, the taxpayer-claimant is given thirty (30) days within which to complete the required
documents, unless given further extension by the head of the processing unit. If, in the course of
the investigation and processing of the claim, additional documents are required for the proper
determination of the legitimate amount of claim, the taxpayer-claimants shall submit such
documents within thirty (30) days from request of the investigating/processing office. Notice, by
way of a request from the tax collection authority to produce the complete documents in these
cases, became essential. It is only upon the submission of these documents that the 120-day period
would begin to run.

Then, when R.A. No. 933735 was passed on July 1, 2005, the same provision under the NIRC was
retained. With the amendment to Section 112, particularly the deletion of what was once Section
112(B) of the NIRC, Section 112 (D) was amended and renamed 112(C). Thus:
(C) 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 Subsection (A) 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.
With the amendments only with respect to its place under Section 112, the Court finds that RMC
No. 49-2003 should still be observed. Thus, taking the foregoing changes to the law altogether, it
becomes apparent that, for purposes of determining when the supporting documents have been
completed — it is the taxpayer who ultimately determines when complete documents have been
submitted for the purpose of commencing and continuing the running of the 120-day period. After
all, he may have already completed the necessary documents the moment he filed his
administrative claim, in which case, the 120-day period is reckoned from the date of filing.

The taxpayer may have also filed the complete documents on the 30th day from filing of his
application, pursuant to RMC No. 49-2003. He may very well have filed his supporting
documents on the first day he was notified by the BIR of the lack of the necessary documents. In
such cases, the 120-day period is computed from the date the taxpayer is able to submit the
complete documents in support of his application.

Then, except in those instances where the BIR would require additional documents in order to
fully appreciate a claim for tax credit or refund, in terms what additional document must be
presented in support of a claim for tax credit or refund - it is the taxpayer who has that right and
the burden of providing any and all documents that would support his claim for tax credit or
refund. After all, in a claim for tax credit or refund, it is the taxpayer who has the burden to prove
his cause of action. As such, he enjoys relative freedom to submit such evidence to prove his
claim.

The foregoing conclusion is but a logical consequence of the due process guarantee under the
Constitution. Corollary to the guarantee that one be afforded the opportunity to be heard, it goes
without saying that the applicant should be allowed reasonable freedom as to when and how to
present his claim within the allowable period.

Thereafter, whether these documents are actually complete as required by law - is for the CIR and
the courts to determine. Besides, as between a taxpayer-applicant, who seeks the refund of his
creditable input tax and the CIR, it cannot be denied that the former has greater interest in
ensuring that the complete set of documentary evidence is provided for proper evaluation of the
State.

Lest it be misunderstood, the benefit given to the taxpayer to determine when it should complete
its submission of documents is not unbridled. Under RMC No. 49-2003, if in the course of the
investigation and processing of the claim, additional documents are required for the proper
determination of the legitimacy of the claim, the taxpayer-claimants shall submit such documents
within thirty (30) days from request of the investigating/processing office. Again, notice, by way
of a request from the tax collection authority to produce the complete documents in these cases, is
essential.

Moreover, under Section 112(A) of the NIRC,36 as amended by RA 9337, a taxpayer has two (2)
years, after the close of the taxable quarter when the sales were made, to apply for the issuance of
a tax credit certificate or refund of creditable input tax due or paid attributable to such sales. Thus,
before the adminstrative claim is barred by prescription, the taxpayer must be able to submit his
complete documents in support of the application filed. This is because, it is upon the complete
submission of his documents in support of his application that it can be said that the application
was, "officially received" as provided under RMC No. 49-2003.

To summarize, for the just disposition of the subject controversy, the rule is that from the date an
administrative claim for excess unutilized VAT is filed, a taxpayer has thirty (30) days within
which to submit the documentary requirements sufficient to support his claim, unless given further
extension by the CIR. Then, upon filing by the taxpayer of his complete documents to support his
application, or expiration of the period given, the CIR has 120 days within which to decide the
claim for tax credit or refund. Should the taxpayer, on the date of his filing, manifest that he no
longer wishes to submit any other addition documents to complete his administrative claim, the
120 day period allowed to the CIR begins to run from the date of filing.

In all cases, whatever documents a taxpayer intends to file to support his claim must be completed
within the two-year period under Section 112(A) of the NIRC. The 30-day period from denial of
the claim or from the expiration of the 120-day period within which to appeal the denial or
inaction of the CIR to the CTA must also be respected.
It bears mentioning at this point that the foregoing summation of the rules should only be made
applicable to those claims for tax credit or refund filed prior to June 11, 2014, such as the claim at
bench. As it now stands, RMC 54-2014 dated June 11, 2014 mandates that:
The application for VAT refund/tax credit must be accompanied by complete supporting
documents as enumerated in Annex "A" hereof. In addition, the taxpayer shall attach a statement
under oath attesting to the completeness of the submitted documents (Annex B). The affidavit
shall further state that the said documents are the only documents which the taxpayer will present
to support the claim. If the taxpayer is a juridical person, there should be a sworn statement that
the officer signing the affidavit (i.e., at the very least, the Chief Financial Officer) has been
authorized by the Board of Directors of the company.

Upon submission of the administrative claim and its supporting documents, the claim shall be
processed and no other documents shall be accepted/required from the taxpayer in the course of its
evaluation. A decision shall be rendered by the Commissioner based only on the documents
submitted by the taxpayer. The application for tax refund/tax credit shall be denied where the
taxpayer/claimant failed to submit the complete supporting documents. For this purpose, the
concerned processing/investigating office shall prepare and issue the corresponding Denial Letter
to the taxpayer/claimant.
Thus, under the current rule, the reckoning of the 120-day period has been withdrawn from the
taxpayer by RMC 54-2014, since it requires him at the time he files his claim to complete his
supporting documents and attest that he will no longer submit any other document to prove his
claim. Further, the taxpayer is barred from submitting additional documents after he has filed his
administrative claim.

On this score, the Court finds that the foregoing issuance cannot be applied rectroactively to the
case at bar since it imposes new obligations upon taxpayers in order to perfect their administrative
claim, that is, [1] compliance with the mandate to submit the "supporting documents" enumerated
under RMC 54-2014 under its "Annex A"; and [2] the filing of "a statement under oath attesting to
the completeness of the submitted documents," referred to in RMC 54-2014 as "Annex B." This
should not prejudice taxpayers who have every right to pursue their claims in the manner provided
by existing regulations at the time it was filed.

As provided under Section 246 of the Tax Code:

SEC. 246. Non-Retroactivity of Rulings. - Any revocation, modification or reversal of any of the
rules and regulations promulgated in accordance with the preceding Sections 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:chanRoblesvirtualLawlibrary

(a) Where the taxpayer deliberately misstates or omits material facts from his return or any
document required of him by the Bureau of Internal Revenue;

(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are materially
different from the facts on which the ruling is based; or

(c) Where the taxpayer acted in bad faith.

[Emphasis and Italics Supplied]

Applying the foregoing precepts to the case at bench, it is observed that the CIR made no effort to
question the inadequacy of the documents submitted by Total Gas. It neither gave notice to Total
Gas that its documents were inadequate, nor ruled to deny its claim for failure to adequately
substantiate its claim. Thus, for purposes of counting the 120-day period, it should be reckoned
from August 28, 2008, the date when Total Gas made its "submission of complete documents to
support its application" for refund of excess unutilized input VAT. Consequently, counting from
this later date, the BIR had 120 days to decide the claim or until December 26, 2008. With
absolutely no action or notice on the part of the BIR for 120 days, Total Gas had 30 days or until
January 25, 2009 to file its judicial claim.

Total Gas, thus, timely filed its judicial claim on January 23, 2009.

Anent RMO No. 53-98, the CTA Division found that the said order provided a checklist of
documents for the BIR to consider in granting claims for refund, and served as a guide for the
courts in determining whether the taxpayer had submitted complete supporting documents.

This should also be corrected.

To quote RMO No. 53-98:

REVENUE MEMORANDUM ORDER NO. 53-98

SUBJECT: Checklist of Documents to be Submitted by a Taxpayer upon Audit of his Tax

Liabilities as well as of the Mandatory Reporting Requirements to be Prepared by a Revenue
Officer, all of which Comprise a Complete Tax Docket.

TO: All Internal Revenue Officers, Employees and Others Concerned

I. BACKGROUND

It has been observed that for the same kind of tax audit case, Revenue Officers differ in their
request for requirements from taxpayers as well as in the attachments to the dockets resulting to
tremendous complaints from taxpayers and confusion among tax auditors and reviewers.

For equity and uniformity, this Bureau comes up with a prescribed list of requirements from
taxpayers, per kind of tax, as well as of the internally prepared reporting requirements, all of
which comprise a complete tax docket.

II. OBJECTIVE
This order is issued to:chanRoblesvirtualLawlibrary

a. Identify the documents to be required from a taxpayer during audit, according to particular kind
of tax; and

b. Identify the different audit reporting requirements to be prepared, submitted and attached to a
tax audit docket.

III. LIST OF REQUIREMENTS PER TAX TYPE

Income Tax/ Withholding Tax

- Annex A (3 pages)

Value Added Tax

- Annex B (2 pages)
- Annex B-1 (5 pages)

xxxx
As can be gleaned from the above, RMO No. 53-98 is addressed to internal revenue officers and
employees, for purposes of equity and uniformity, to guide them as to what documents they may
require taxpayers to present upon audit of their tax liabilities. Nothing stated in the issuance would
show that it was intended to be a benchmark in determining whether the documents submitted by a
taxpayer are actually complete to support a claim for tax credit or refund of excess unutilized
excess VAT. As expounded in Commissioner of Internal Revenue v. Team Sual Corporation
(formerely Mir ant Sual Corporation):37
The CIR's reliance on RMO 53-98 is misplaced. There is nothing in Section 112 of the NIRC. RR
3-88 or RMO K3-Q8 itself that requires submission of the complete documents enumerated in
RMO 53-98 for a grant of a refund or credit of input VAT. The subject of RMO 53-98 states that it
is a "Checklist of Documents to be Submitted by a Taxpayer upon Audit of his Tax Liabilities x x
x." In this case, TSC was applying for a grant of refund or credit of its input tax. There was no
allegation of an audit being conducted by the CIR. Even assuming that RMO 53-98 applies, it
specifically states that some documents are required to be submitted by the taxpayer "if
applicable."

Moreover, if TSC indeed failed to submit the complete documents in support of its application, the
CIR could have informed TSC of its failure, consistent with Revenue Memorandum Circular No.
(RMC) 42-03. However, the CIR did not inform TSC of the document it failed to submit, even up
to the present petition. The CIR likewise raised the issue of TSC's alleged failure to submit the
complete documents only in its motion for reconsideration of the CTA Special First Division's 4
March 2010 Decision. Accordingly, we affirm the CTA EB's finding that TSC filed its
administrative claim on 21 December 2005, and submitted the complete documents in support of
its application for refund or credit of its input tax at the same time.

[Emphasis included. Underlining Ours.]

As explained earlier and underlined in Team Sual above, taxpayers cannot simply be faulted for
failing to submit the complete documents enumerated in RMO No. 53-98, absent notice from a
revenue officer or employee that other documents are required. Granting that the BIR found that
the documents submitted by Total Gas were inadequate, it should have notified the latter of the
inadequacy by sending it a request to produce the necessary documents in order to make a just and
expeditious resolution of the claim.

Indeed, a taxpayer's failure with the requirements listed under RMO No. 53-98 is not fatal to its
claim for tax credit or refund of excess unutilized excess VAT. This holds especially true when the
application for tax credit or refund of excess unutilized excess VAT has arrived at the judicial
level. After all, in the judicial level or when the case is elevated to the Court, the Rules of Court
governs. Simply put, the question of whether the evidence submitted by a party is sufficient to
warrant the granting of its prayer lies within the sound discretion and judgment of the Court.

At this point, it is worth emphasizing that the reckoning of the 120-day period from August 28,
2008 cannot be doubted. First, a review of the records of the case undubitably show that Total Gas
filed its supporting documents on August 28, 2008, together with a transmittal letter bearing the
same date. These documents were then stamped and signed as received by the appropriate officer
of the BIR. Second, contrary to RMO No. 40-94, which mandates officials of the BIR to indicate
the date of receipt of documents received by their office in every claim for refund or credit of VAT,
the receiving officer failed to indicate the precise date and time when he received these
documents. Clearly, the error is attributable to the BIR officials and should not prejudice Total
Gas.

Third, it is observed that whether before the CTA or this Court, the BIR had never questioned the
date it received the supporting documents filed by Total Gas, or the propriety of the filing thereof.
In contrast to the contiuous efforts of Total Gas to complete the necessary documents needed to
support its application, all that was insisted by the CIR was that the reckoning period should be
counted from the date Total Gas filed its application for refund of excess unutilized input VAT.
There being no question as to whether these documents were actually received on August 28,
2008, this Court shall not, by way of conjecture, cast doubt on the truthfullness on such
submission. Finally, in consonance with the presumption that a person acts in accordance with the
ordinary course of business, it is presumed that such documents were received on the date stated
therein.

Verily, should there be any doubt on whether Total Gas filed its supporting documents on August
28, 2008, it is incumbent upon the CIR to allege and prove such assertion. As the saying goes,
contra preferentum.

If only to settle any doubt, this Court is by no means setting a precedent by leaving it to the mercy
of the taxpayer to determine when the 120- day reckoning period should begin to run by providing
absolute discretion as to when he must comply with the mandate submitting complete documents
in support of his claim. In addition to the limitations thoroughly discussed above, the peculiar
circumstance applicable herein, as to relieve Total Gas from the application of the rule, is the
obvious failure of the BIR to comply with the specific directive, under RMO 40-94, to stamp the
date it received the supporting documents which Total Gas had submitted to the BIR for its
consideration in the processing of its claim. The utter failure of the tax administrative agency to
comply with this simple mandate to stamp the date it receive the documents submitted by Total
Gas - should not in any manner prejudice the taxpayer by casting doubt as to when it was able to
submit its complete documents for purposes of determing the 120-day period.

While it is still true a taxpayer must prove not only his entitlement to a refund but also his
compliance with the procedural due process38 - it also true that when the law or rule mandates
that a party or authority must comply with a specific obligation to perform an act for the benefit of
another, the non-compliance therof by the former should not operate to prejudice the latter, lest it
render the nugatory the objective of the rule. Such is the situation in case at bar.

Judicial claim not prematurely filed

The CTA En Banc curiously ruled in the assailed decision that the judicial claim of Total Gas was
not only belatedly filed, but prematurely filed as well, for failure of Total Gas to prove that it had
submitted the complete supporting documents to warrant the grant of the tax refund and to reckon
the commencement of the 120-day period. It asserted that Total Gas had failed to submit all the
required documents to the CIR and, thus, the 120-day period for the CIR to decide the claim had
not yet begun to run, resulting in the premature filing of the judicial claim. It wrote that the
taxpayer must first submit the complete supporting documents before the 120-day period could
commence, and that the CIR could not decide the claim for refund without the complete
supporting documents.

The Court disagrees.

The alleged failure of Total Gas to submit the complete documents at the administrative level did
not render its petition for review with the CTA dismissible for lack of jurisdiction. First, the 120-
day period had commenced to run and the 120+30 day period was, in fact, complied with. As
already discussed, it is the taxpayer who determines when complete documents have been
submitted for the purpose of the running of the 120-day period. It must again be pointed out that
this in no way precludes the CIR from requiring additional documents necessary to decide the
claim, or even denying the claim if the taxpayer fails to submit the additional documents
requested.

Second, the CIR sent no written notice informing Total Gas that the documents were incomplete
or required it to submit additional documents. As stated above, such notice by way of a written
request is required by the CIR to be sent to Total Gas. Neither was there any decision made
denying the administrative claim of Total Gas on the ground that it had failed to submit all the
required documents. It was precisely the inaction of the BIR which prompted Total Gas to file the
judicial claim. Thus, by failing to inform Total Gas of the need to submit any additional document,
the BIR cannot now argue that the judicial claim should be dismissed because it failed to submit
complete documents.
Finally, it should be mentioned that the appeal made by Total Gas to the CTA cannot be said to be
premature on the ground that it did not observe the otherwise mandatory and juridictional 120+30
day period. When Total Gas filed its appeal with the CTA on January 23, 2009, it simply relied on
BIR Ruling No. DA-489-03, which, at that time, was not yet struck down by the Court's ruling in
Aichi. As explained in San Roque, this Court recognized a period in time wherein the 120-day
period need not be strictly observed. Thus:
To repeat, a claim for tax refund or credit, like a claim for tax exemption, is construed strictly
against the taxpayer. One of the conditions for a judicial claim of refund or credit under the VAT
System is compliance with the 120+30 day mandatory and jurisdictional periods. Thus, strict
compliance with the 120+30 day periods is necessary for such a claim to prosper, whether before,
during, or after the effectivity of the Atlas doctrine, except for the period from the issuance of BIR
Ruling No. DA-489-03 on 10 December 2003 to 6 October 2010 when the Aichi doctrine was
adopted, which again reinstated the 120+30 day periods as mandatory and jurisdictional.

xxxx

Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can rely on
BIR Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to its reversal
by this Court in Aichi on 6 October 2010, where this Court held that the 120+30 day periods are
mandatory and jurisdictional.
At this stage, a review of the nature of a judicial claim before the CTA is in order. In Atlas
Consolidated Mining and Development Corporation v. CIR, it was ruled -
x x x First, a judicial claim for refund or tax credit in the CTA is by no means an original action
but rather an appeal by way of petition for review of a previous, unsuccessful administrative
claim. Therefore, as in every appeal or petition for review, a petitioner has to convince the
appellate court that the quasi-judicial agency a quo did not have any reason to deny its claims. In
this case, it was necessary for petitioner to show the CTA not only that it was entitled under
substantive law to the grant of its claims but also that it satisfied all the documentary and
evidentiary requirements for an administrative claim for refund or tax credit. Second, cases filed in
the CTA are litigated de novo. Thus, a petitioner should prove every minute aspect of its case by
presenting, formally offering and submitting its evidence to the CTA. Since it is crucial for a
petitioner in a judicial claim for refund or tax credit to show that its administrative claim should
have been granted in the first place, part of the evidence to be submitted to the CTA must
necessarily include whatever is required for the successful prosecution of an administrative
claim.39

[Underscoring Supplied]
A distinction must, thus, be made between administrative cases appealed due to inaction and those
dismissed at the administrative level due to the failure of the taxpayer to submit supporting
documents. If an administrative claim was dismissed by the CIR due to the taxpayer's failure to
submit complete documents despite notice/request, then the judicial claim before the CTA would
be dismissible, not for lack of jurisdiction, but for the taxpayer's failure to substantiate the claim at
the administrative level. When a judicial claim for refund or tax credit in the CTA is an appeal of
an unsuccessful administrative claim, the taxpayer has to convince the CTA that the CIR had no
reason to deny its claim. It, thus, becomes imperative for the taxpayer to show the CTA that not
only is he entitled under substantive law to his claim for refund or tax credit, but also that he
satisfied all the documentary and evidentiary requirements for an administrative claim. It is, thus,
crucial for a taxpayer in a judicial claim for refund or tax credit to show that its administrative
claim should have been granted in the first place. Consequently, a taxpayer cannot cure its failure
to submit a document requested by the BIR at the administrative level by filing the said document
before the CTA.

In the present case, however, Total Gas filed its judicial claim due to the inaction of the BIR.
Considering that the administrative claim was never acted upon; there was no decision for the
CTA to review on appeal per se. Consequently, the CTA may give credence to all evidence
presented by Total Gas, including those that may not have been submitted to the CIR as the case is
being essentially decided in the first instance. The Total Gas must prove every minute aspect of its
case by presenting and formally offering its evidence to the CTA, which must necessarily include
whatever is required for the successful prosecution of an administrative claim.40

The Court cannot, however, make a ruling on the issue of whether Total Gas is entitled to a refund
or tax credit certificate in the amount of P7,898,433.98. Considering that the judicial claim was
denied due course and dismissed by the CTA Division on the ground of premature and/or belated
filing, no ruling on the issue of Total Gas entitlement to the refund was made. The Court is not a
trier of facts, especially when such facts have not been ruled upon by the lower courts. The case
shall, thus, be remanded to the CTA Division for trial de novo.

WHEREFORE, the petition is PARTIALLY GRANTED. The October 11, 2012 Decision and the
May 8, 2013 Resolution of the Court of Tax Appeals En Banc, in CTA EB No. 776 are
REVERSED and SET ASIDE.

The case is REMANDED to the CTA Third Division for trial de novo.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 173594 February 6, 2008

SILKAIR (SINGAPORE) PTE, LTD., petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION

CARPIO MORALES, J.:

Petitioner, Silkair (Singapore) Pte. Ltd. (Silkair), a corporation organized under the laws of
Singapore which has a Philippine representative office, is an online international air carrier
operating the Singapore-Cebu-Davao-Singapore, Singapore-Davao-Cebu-Singapore, and
Singapore-Cebu-Singapore routes.

On December 19, 2001, Silkair filed with the Bureau of Internal Revenue (BIR) a written
application for the refund of P4,567,450.79 excise taxes it claimed to have paid on its purchases of
jet fuel from Petron Corporation from January to June 2000.1

As the BIR had not yet acted on the application as of December 26, 2001, Silkair filed a Petition
for Review2 before the CTA following Commissioner of Internal Revenue v. Victorias Milling
Co., Inc., et al.3

Opposing the petition, respondent Commissioner on Internal Revenue (CIR) alleged in his Answer
that, among other things,

Petitioner failed to prove that the sale of the petroleum products was directly made from a
domestic oil company to the international carrier. The excise tax on petroleum products is the
direct liability of the manufacturer/producer, and when added to the cost of the goods sold to the
buyer, it is no longer a tax but part of the price which the buyer has to pay to obtain the article.4
(Emphasis and underscoring supplied)

By Decision of May 27, 2005, the Second Division of the CTA denied Silkair’s petition on the
ground that as the excise tax was imposed on Petron Corporation as the manufacturer of petroleum
products, any claim for refund should be filed by the latter; and where the burden of tax is shifted
to the purchaser, the amount passed on to it is no longer a tax but becomes an added cost of the
goods purchased. Thus the CTA discoursed:

The liability for excise tax on petroleum products that are being removed from its refinery is
imposed on the manufacturer/producer (Section 130 of the NIRC of 1997). x x x

xxxx

While it is true that in the case of excise tax imposed on petroleum products, the seller thereof
may shift the tax burden to the buyer, the latter is the proper party to claim for the refund in the
case of exemption from excise tax. Since the excise tax was imposed upon Petron Corporation as
the manufacturer of petroleum products, pursuant to Section 130(A)(2), and that the corresponding
excise taxes were indeed, paid by it, . . . any claim for refund of the subject excise taxes should be
filed by Petron Corporation as the taxpayer contemplated under the law. Petitioner cannot be
considered as the taxpayer because it merely shouldered the burden of the excise tax and not the
excise tax itself.

Therefore, the right to claim for the refund of excise taxes paid on petroleum products lies with
Petron Corporation who paid and remitted the excise tax to the BIR. Respondent, on the other
hand, may only claim from Petron Corporation the reimbursement of the tax burden shifted to the
former by the latter. The excise tax partaking the nature of an indirect tax, is clearly the liability of
the manufacturer or seller who has the option whether or not to shift the burden of the tax to the
purchaser. Where the burden of the tax is shifted to the [purchaser], the amount passed on to it is
no longer a tax but becomes an added cost on the goods purchased which constitutes a part of the
purchase price. The incidence of taxation or the person statutorily liable to pay the tax falls on
Petron Corporation though the impact of taxation or the burden of taxation falls on another person,
which in this case is petitioner Silkair.5 (Italics in the original; emphasis and underscoring
supplied)

Silkair filed a Motion for Reconsideration6 during the pendency of which or on September 12,
2005 the Bengzon Law Firm entered its appearance as counsel,7 without Silkair’s then-counsel of
record (Jimenez Gonzales Liwanag Bello Valdez Caluya & Fernandez or "JGLaw") having
withdrawn as such.

By Resolution8 of September 22, 2005, the CTA Second Division denied Silkair’s motion for
reconsideration. A copy of the Resolution was furnished Silkair’s counsel JGLaw which received
it on October 3, 2005.9

On October 13, 2005, JGLaw, with the conformity of Silkair, filed its Notice of Withdrawal of
Appearance.10 On even date, Silkair, through the Bengzon Law Firm, filed a
Manifestation/Motion11 stating:

Petitioner was formerly represented xxx by JIMENEZ GONZALES LIWANAG BELLO

VALDEZ CALUYA & FERNANDEZ (JGLaw).

1. On 24 August 2005, petitioner served notice to JGLaw of its decision to cease all legal
representation handled by the latter on behalf of the petitioner. Petitioner also requested JGLaw to
make arrangements for the transfer of all files relating to its legal representation on behalf of
petitioner to the undersigned counsel. x x x

2. The undersigned counsel was engaged to act as counsel for the petitioner in the above-entitled
case; and thus, filed its entry of appearance on 12 September 2005. x x x

3. The undersigned counsel, through petitioner, has received information that the Honorable Court
promulgated a Resolution on petitioner’s Motion for Reconsideration. To date, the undersigned
counsel has yet to receive an official copy of the above-mentioned Resolution. In light of the
foregoing, undersigned counsel hereby respectfully requests for an official copy of the Honorable
Court’s Resolution on petitioner’s Motion for Reconsideration x x x.12 (Underscoring supplied)
On October 14, 2005, the Bengzon Law Firm received its requested copy of the September 22,
200513 CTA Second Division Resolution. Thirty-seven days later or on October 28, 2005, Silkair,
through said counsel, filed a Motion for Extension of Time to File Petition for Review14 before
the CTA En Banc which gave it until November 14, 2005 to file a petition for review.

On November 11, 2005, Silkair filed another Motion for Extension of Time.15 On even date, the
Bengzon Law Firm informed the CTA of its withdrawal of appearance as counsel for Silkair with
the information, that Silkair would continue to be represented by Atty. Teodoro A. Pastrana, who
used to be with the firm but who had become a partner of the Pastrana and Fallar Law Offices.16

The CTA En Banc granted Silkair’s second Motion for Extension of Time, giving Silkair until
November 24, 2005 to file its petition for review. On November 17, 2005, Silkair filed its Petition
for Review17 before the CTA En Banc.

By Resolution of May 19,2006, the CTA En Banc dismissed18 Silkair’s petition for review for
having been filed out of time in this wise:

A petitioner is given a period of fifteen (15) days from notice of award, judgment, final order or
resolution, or denial of motion for new trial or reconsideration to appeal to the proper forum, in
this case, the CTA En Banc. This is clear from both Section 11 and Section 9 of Republic Act No.
9282 x x x.

xxxx

The petitioner, through its counsel of record Jimenez, Gonzalez, L[iwanag], Bello, Valdez, Caluya
& Fernandez Law Offices, received the Resolution dated September 22, 2005 on October 3, 2005.
At that time, the petitioner had two counsels of record, namely, Jimenez, Gonzales, L[iwanag],
Bello, Valdez, Caluya & Fernandez Law Offices and The Bengzon Law Firm which filed its Entry
of Appearance on September 12, 2005. However, as of said date, Atty. Mary Jane B. Austria-
Delgado of Jimenez, Gonzales, L[iwanag], Bello, Valdez, Caluya & Fernandez Law Offices was
still the counsel of record considering that the Notice of Withdrawal of Appearance signed by Atty.
Mary Jane B. Austria-Delgado was filed only on October 13, 2005 or ten (10) days after receipt of
the September 22, 2005 Resolution of the Court’s Second Division. This notwithstanding, Section
2 of Rule 13 of the Rules of Court provides that if any party has appeared by counsel, service upon
him shall be made upon his counsel or one of them, unless service upon the party himself is
ordered by the Court. Where a party is represented by more than one counsel of record, "notice to
any one of the several counsel on record is equivalent to notice to all the counsel (Damasco vs.
Arrieta, et. al., 7 SCRA 224)." Considering that petitioner, through its counsel of record, had
received the September 22, 2005 Resolution as early as October 3, 2005, it had only until October
18, 2005 within which to file its Petition for Review. Petitioner only managed to file the Petition
for Review with the Court En Banc on November 17, 2005 or [after] thirty (30) days had lapsed
from the final date of October 18, 2005 to appeal.
The argument that it requested Motions for Extension of Time on October 28, 2005 or ten (10)
days from the appeal period and the second Motion for Extension of Time to file its Petition for
Review on November 11, 2005 and its allowance by the CTA En Banc notwithstanding, the
questioned Decision is no longer appealable for failure to timely file the necessary Petition for
Review.19 (Emphasis in the original)

In a Separate Concurring Opinion,20 CTA Associate Justice Juanito C. Castañeda, Jr. posited that
Silkair is not the proper party to claim the tax refund.

Silkair filed a Motion for Reconsideration21 which the CTA En Banc denied.22 Hence, the
present Petition for Review23 which raises the following issues:

I. WHETHER OR NOT THE PETITION FOR REVIEW FILED WITH THE HONORABLE
COURT OF TAX APPEALS EN BANC WAS TIMELY FILED.

II. APPEAL BEING AN ESSENTIAL PART OF OUR JUDICIAL SYSTEM, WHETHER OR

NOT PETITIONER SHOULD BE DEPRIVED OF ITS RIGHT TO APPEAL ON THE BASIS
OF TECHNICALITY.

III. ASSUMING THE HONORABLE SUPREME COURT WOULD HOLD THAT THE FILING
OF THE PETITITON FOR REVIEW WITH THE HONORABLE COURT OF TAX APPEALS
EN BANC WAS TIMELY, WHETHER OR NOT THE PETITIONER IS THE PROPER PARTY
TO CLAIM FOR REFUND OR TAX CREDIT.24 (Underscoring supplied)

Silkair posits that "the instant case does not involve a situation where the petitioner was
represented by two (2) counsels on record, such that notice to the former counsel would be held
binding on the petitioner, as in the case of Damasco v. Arrieta, etc., et al.25 x x x heavily relied
upon by the respondent";26 and that "the case of Dolores De Mesa Abad v. Court of Appeals27
has more appropriate application to the present case."28

In Dolores De Mesa Abad, the trial court issued an order of November 19, 1974 granting the
therein private respondents’ Motion for Annulment of documents and titles. The order was
received by the therein petitioner’s counsel of record, Atty. Escolastico R. Viola, on November 22,
1974 prior to which or on July 17, 1974, Atty. Vicente Millora of the Millora, Tobias and Calimlim
Law Office had filed an "Appearance and Manifestation." Atty. Millora received a copy of the trial
court’s order on December 9, 1974. On January 4, 1975, the therein petitioners, through Atty.
Ernesto D. Tobias also of the Millora, Tobias and Calimlim Law Office, filed their Notice of
Appeal and Cash Appeal Bond as well as a Motion for Extension of the period to file a Record on
Appeal. They filed the Record on Appeal on January 24, 1975. The trial court dismissed the appeal
for having been filed out of time, which was upheld by the Court of Appeals on the ground that the
period within which to appeal should be counted from November 22, 1974, the date Atty. Viola
received a copy of the November 19, 1974 order. The appellate court held that Atty. Viola was still
the counsel of record, he not having yet withdrawn his appearance as counsel for the therein
petitioners. On petition for certiorari,29 this Court held
x x x [R]espondent Court reckoned the period of appeal from the time petitioners’ original
counsel, Atty. Escolastico R. Viola, received the Order granting the Motion for Annulment of
documents and titles on November 22, 1974. But as petitioners stress, Atty. Vicente Millora of the
Millora, Tobias and Calimlim Law Office had filed an "Appearance and Manifestation" on July
16, 1974. Where there may have been no specific withdrawal by Atty. Escolastico R. Viola, for
which he should be admonished, by the appearance of a new counsel, it can be said that Atty.
Viola had ceased as counsel for petitioners. In fact, Orders subsequent to the aforesaid date were
already sent by the trial Court to the Millora, Tobias and Calimlim Law Office and not to Atty.
Viola.

Under the circumstances, December 9, 1974 is the controlling date of receipt by petitioners’
counsel and from which the period of appeal from the Order of November 19, 1974 should be
reckoned. That being the case, petitioner’s x x x appeal filed on January 4, 1975 was timely
filed.30 (Underscoring supplied)

The facts of Dolores De Mesa Abad are not on all fours with those of the present case. In any
event, more recent jurisprudence holds that in case of failure to comply with the procedure
established by Section 26, Rule 13831 of the Rules of Court re the withdrawal of a lawyer as a
counsel in a case, the attorney of record is regarded as the counsel who should be served with
copies of the judgments, orders and pleadings.32 Thus, where no notice of withdrawal or
substitution of counsel has been shown, notice to counsel of record is, for all purposes, notice to
the client.33 The court cannot be expected to itself ascertain whether the counsel of record has
been changed.34

In the case at bar, JGLaw filed its Notice of Withdrawal of Appearance on October 13, 200535
after the Bengzon Law Firm had entered its appearance. While Silkair claims it dismissed JGLaw
as its counsel as early as August 24, 2005, the same was communicated to the CTA only on
October 13, 2005.36 Thus, JGLaw was still Silkair’s counsel of record as of October 3, 2005 when
a copy of the September 22, 2005 resolution of the CTA Second Division was served on it. The
service upon JGLaw on October 3, 2005 of the September 22, 2005 resolution of CTA Second
Division was, therefore, for all legal intents and purposes, service to Silkair, and the CTA correctly
reckoned the period of appeal from such date.

TECHNICALITY ASIDE, on the merits, the petition just the same fails.

Silkair bases its claim for refund or tax credit on Section 135 (b) of the NIRC of 1997 which reads

Sec. 135. Petroleum Products sold to International Carriers and Exempt Entities of Agencies. –
Petroleum products sold to the following are exempt from excise tax:

xxxx

(b) Exempt entities or agencies covered by tax treaties, conventions, and other international
agreements for their use and consumption: Provided, however, That the country of said foreign
international carrier or exempt entities or agencies exempts from similar taxes petroleum products
sold to Philippine carriers, entities or agencies; x x x

x x x x,

and Article 4(2) of the Air Transport Agreement between the Government of the Republic of the
Philippines and the Government of the Republic of Singapore (Air Transport Agreement between
RP and Singapore) which reads

Fuel, lubricants, spare parts, regular equipment and aircraft stores introduced into, or taken on
board aircraft in the territory of one Contracting party by, or on behalf of, a designated airline of
the other Contracting Party and intended solely for use in the operation of the agreed services
shall, with the exception of charges corresponding to the service performed, be exempt from the
same customs duties, inspection fees and other duties or taxes imposed in the territories of the first
Contracting Party , even when these supplies are to be used on the parts of the journey performed
over the territory of the Contracting Party in which they are introduced into or taken on board. The
materials referred to above may be required to be kept under customs supervision and control.

The proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer, the
person on whom the tax is imposed by law and who paid the same even if he shifts the burden
thereof to another.37 Section 130 (A) (2) of the NIRC provides that "[u]nless otherwise
specifically allowed, the return shall be filed and the excise tax paid by the manufacturer or
producer before removal of domestic products from place of production." Thus, Petron
Corporation, not Silkair, is the statutory taxpayer which is entitled to claim a refund based on
Section 135 of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and
Singapore.

Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billed
to Silkair for jet fuel is not a tax but part of the price which Silkair had to pay as a purchaser.38

Silkair nevertheless argues that it is exempt from indirect taxes because the Air Transport
Agreement between RP and Singapore grants exemption "from the same customs duties,
inspection fees and other duties or taxes imposed in the territory of the first Contracting Party."39
It invokes Maceda v. Macaraig, Jr.40 which upheld the claim for tax credit or refund by the
National Power Corporation (NPC) on the ground that the NPC is exempt even from the payment
of indirect taxes.

Silkairs’s argument does not persuade. In Commissioner of Internal Revenue v. Philippine Long
Distance Telephone Company,41 this Court clarified the ruling in Maceda v. Macaraig, Jr., viz:

It may be so that in Maceda vs. Macaraig, Jr., the Court held that an exemption from "all taxes"
granted to the National Power Corporation (NPC) under its charter includes both direct and
indirect taxes. But far from providing PLDT comfort, Maceda in fact supports the case of herein
petitioner, the correct lesson of Maceda being that an exemption from "all taxes" excludes indirect
taxes, unless the exempting statute, like NPC’s charter, is so couched as to include indirect tax
from the exemption. Wrote the Court:

x x x However, the amendment under Republic Act No. 6395 enumerated the details covered by
the exemption. Subsequently, P.D. 380, made even more specific the details of the exemption of
NPC to cover, among others, both direct and indirect taxes on all petroleum products used in its
operation. Presidential Decree No. 938 [NPC’s amended charter] amended the tax exemption by
simplifying the same law in general terms. It succinctly exempts NPC from "all forms of taxes,
duties[,] fees…"

The use of the phrase "all forms" of taxes demonstrates the intention of the law to give NPC all the
tax exemptions it has been enjoying before…

xxxx

It is evident from the provisions of P.D. No. 938 that its purpose is to maintain the tax exemption
of NPC from all forms of taxes including indirect taxes as provided under R.A. No. 6395 and P.D.
380 if it is to attain its goals. (Italics in the original; emphasis supplied)42

The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2) of the Air
Transport Agreement between RP and Singapore cannot, without a clear showing of legislative
intent, be construed as including indirect taxes. Statutes granting tax exemptions must be
construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority, 43
and if an exemption is found to exist, it must not be enlarged by construction.44

WHEREFORE, the petition is DENIED.

Costs against petitioner.

SO ORDERED.

THIRD DIVISION

COMMISSIONER OF INTERNAL G.R. No. 159647

REVENUE,

Petitioner, Present:

Panganiban, J.,

Chairman,

Sandoval-Gutierrez,

- versus - Corona,

Carpio Morales, and

Garcia, JJ

CENTRAL LUZON DRUG Promulgated:

CORPORATION,

Respondent. April 15, 2005

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

DECISION

PANGANIBAN, J.:

T
he 20 percent discount required by the law to be given to senior citizens is a tax credit, not merely
a tax deduction from the gross income or gross sale of the establishment concerned. A tax credit is
used by a private establishment only after the tax has been computed; a tax deduction, before the
tax is computed. RA 7432 unconditionally grants a tax credit to all covered entities. Thus, the
provisions of the revenue regulation that withdraw or modify such grant are void. Basic is the rule
that administrative regulations cannot amend or revoke the law.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to set aside the
August 29, 2002 Decision[2] and the August 11, 2003 Resolution[3] of the Court of Appeals (CA)
in CA-GR SP No. 67439. The assailed Decision reads as follows:

WHEREFORE, premises considered, the Resolution appealed from is AFFIRMED in toto. No

costs.[4]

The assailed Resolution denied petitioners Motion for Reconsideration.

The Facts

The CA narrated the antecedent facts as follows:

Respondent is a domestic corporation primarily engaged in retailing of medicines and other

pharmaceutical products. In 1996, it operated six (6) drugstores under the business name and style
Mercury Drug.

From January to December 1996, respondent granted twenty (20%) percent sales discount to
qualified senior citizens on their purchases of medicines pursuant to Republic Act No. [R.A.] 7432
and its Implementing Rules and Regulations. For the said period, the amount allegedly
representing the 20% sales discount granted by respondent to qualified senior citizens totaled
P904,769.00.

On April 15, 1997, respondent filed its Annual Income Tax Return for taxable year 1996 declaring
therein that it incurred net losses from its operations.

On January 16, 1998, respondent filed with petitioner a claim for tax refund/credit in the amount
of P904,769.00 allegedly arising from the 20% sales discount granted by respondent to qualified
senior citizens in compliance with [R.A.] 7432. Unable to obtain affirmative response from
petitioner, respondent elevated its claim to the Court of Tax Appeals [(CTA or Tax Court)] via a
Petition for Review.

On February 12, 2001, the Tax Court rendered a Decision[5] dismissing respondents Petition for
lack of merit. In said decision, the [CTA] justified its ruling with the following ratiocination:

x x x, if no tax has been paid to the government, erroneously or illegally, or if no amount is due
and collectible from the taxpayer, tax refund or tax credit is unavailing. Moreover, whether the
recovery of the tax is made by means of a claim for refund or tax credit, before recovery is
allowed[,] it must be first established that there was an actual collection and receipt by the
government of the tax sought to be recovered. x x x.

xxxxxxxxx

Prescinding from the above, it could logically be deduced that tax credit is premised on the
existence of tax liability on the part of taxpayer. In other words, if there is no tax liability, tax
credit is not available.

Respondent lodged a Motion for Reconsideration. The [CTA], in its assailed resolution,[6] granted
respondents motion for reconsideration and ordered herein petitioner to issue a Tax Credit
Certificate in favor of respondent citing the decision of the then Special Fourth Division of [the
CA] in CA G.R. SP No. 60057 entitled Central [Luzon] Drug Corporation vs. Commissioner of
Internal Revenue promulgated on May 31, 2001, to wit:

However, Sec. 229 clearly does not apply in the instant case because the tax sought to be refunded
or credited by petitioner was not erroneously paid or illegally collected. We take exception to the
CTAs sweeping but unfounded statement that both tax refund and tax credit are modes of
recovering taxes which are either erroneously or illegally paid to the government. Tax refunds or
credits do not exclusively pertain to illegally collected or erroneously paid taxes as they may be
other circumstances where a refund is warranted. The tax refund provided under Section 229 deals
exclusively with illegally collected or erroneously paid taxes but there are other possible
situations, such as the refund of excess estimated corporate quarterly income tax paid, or that of
excess input tax paid by a VAT-registered person, or that of excise tax paid on goods locally
produced or manufactured but actually exported. The standards and mechanics for the grant of a
refund or credit under these situations are different from that under Sec. 229. Sec. 4[.a)] of R.A.
7432, is yet another instance of a tax credit and it does not in any way refer to illegally collected
or erroneously paid taxes, x x x.[7]

Ruling of the Court of Appeals

The CA affirmed in toto the Resolution of the Court of Tax Appeals (CTA) ordering petitioner to
issue a tax credit certificate in favor of respondent in the reduced amount of P903,038.39. It
reasoned that Republic Act No. (RA) 7432 required neither a tax liability nor a payment of taxes
by private establishments prior to the availment of a tax credit. Moreover, such credit is not
tantamount to an unintended benefit from the law, but rather a just compensation for the taking of
private property for public use.

Hence this Petition.[8]

The Issues

Petitioner raises the following issues for our consideration:

Whether the Court of Appeals erred in holding that respondent may claim the 20% sales discount
as a tax credit instead of as a deduction from gross income or gross sales.

Whether the Court of Appeals erred in holding that respondent is entitled to a refund.[9]

These two issues may be summed up in only one: whether respondent, despite incurring a net loss,
may still claim the 20 percent sales discount as a tax credit.

The Courts Ruling

The Petition is not meritorious.

Sole Issue:
Claim of 20 Percent Sales Discount

as Tax Credit Despite Net Loss

Section 4a) of RA 7432[10] grants to senior citizens the privilege of obtaining a 20 percent
discount on their purchase of medicine from any private establishment in the country.[11] The
latter may then claim the cost of the discount as a tax credit.[12] But can such credit be claimed,
even though an establishment operates at a loss?

We answer in the affirmative.

Tax Credit versus

Tax Deduction

Although the term is not specifically defined in our Tax Code,[13] tax credit generally refers to an
amount that is subtracted directly from ones total tax liability.[14] It is an allowance against the
tax itself[15] or a deduction from what is owed[16] by a taxpayer to the government. Examples of
tax credits are withheld taxes, payments of estimated tax, and investment tax credits.[17]

Tax credit should be understood in relation to other tax concepts. One of these is tax deduction --
defined as a subtraction from income for tax purposes,[18] or an amount that is allowed by law to
reduce income prior to [the] application of the tax rate to compute the amount of tax which is due.
[19] An example of a tax deduction is any of the allowable deductions enumerated in Section
34[20] of the Tax Code.

A tax credit differs from a tax deduction. On the one hand, a tax credit reduces the tax due,
including -- whenever applicable -- the income tax that is determined after applying the
corresponding tax rates to taxable income.[21] A tax deduction, on the other, reduces the income
that is subject to tax[22] in order to arrive at taxable income.[23] To think of the former as the
latter is to avoid, if not entirely confuse, the issue. A tax credit is used only after the tax has been
computed; a tax deduction, before.

Tax Liability Required

for Tax Credit

Since a tax credit is used to reduce directly the tax that is due, there ought to be a tax liability
before the tax credit can be applied. Without that liability, any tax credit application will be
useless. There will be no reason for deducting the latter when there is, to begin with, no existing
obligation to the government. However, as will be presented shortly, the existence of a tax credit
or its grant by law is not the same as the availment or use of such credit. While the grant is
mandatory, the availment or use is not.

If a net loss is reported by, and no other taxes are currently due from, a business establishment,
there will obviously be no tax liability against which any tax credit can be applied.[24] For the
establishment to choose the immediate availment of a tax credit will be premature and
impracticable. Nevertheless, the irrefutable fact remains that, under RA 7432, Congress has
granted without conditions a tax credit benefit to all covered establishments.

Although this tax credit benefit is available, it need not be used by losing ventures, since there is
no tax liability that calls for its application. Neither can it be reduced to nil by the quick yet callow
stroke of an administrative pen, simply because no reduction of taxes can instantly be effected. By
its nature, the tax credit may still be deducted from a future, not a present, tax liability, without
which it does not have any use. In the meantime, it need not move. But it breathes.

Prior Tax Payments Not

Required for Tax Credit

While a tax liability is essential to the availment or use of any tax credit, prior tax payments are
not. On the contrary, for the existence or grant solely of such credit, neither a tax liability nor a
prior tax payment is needed. The Tax Code is in fact replete with provisions granting or allowing
tax credits, even though no taxes have been previously paid.

For example, in computing the estate tax due, Section 86(E) allows a tax credit -- subject to
certain limitations -- for estate taxes paid to a foreign country. Also found in Section 101(C) is a
similar provision for donors taxes -- again when paid to a foreign country -- in computing for the
donors tax due. The tax credits in both instances allude to the prior payment of taxes, even if not
made to our government.

Under Section 110, a VAT (Value-Added Tax)- registered person engaging in transactions --
whether or not subject to the VAT -- is also allowed a tax credit that includes a ratable portion of
any input tax not directly attributable to either activity. This input tax may either be the VAT on the
purchase or importation of goods or services that is merely due from -- not necessarily paid by --
such VAT-registered person in the course of trade or business; or the transitional input tax
determined in accordance with Section 111(A). The latter type may in fact be an amount
equivalent to only eight percent of the value of a VAT-registered persons beginning inventory of
goods, materials and supplies, when such amount -- as computed -- is higher than the actual VAT
paid on the said items.[25] Clearly from this provision, the tax credit refers to an input tax that is
either due only or given a value by mere comparison with the VAT actually paid -- then later
prorated. No tax is actually paid prior to the availment of such credit.

In Section 111(B), a one and a half percent input tax credit that is merely presumptive is allowed.
For the purchase of primary agricultural products used as inputs -- either in the processing of
sardines, mackerel and milk, or in the manufacture of refined sugar and cooking oil -- and for the
contract price of public work contracts entered into with the government, again, no prior tax
payments are needed for the use of the tax credit.

More important, a VAT-registered person whose sales are zero-rated or effectively zero-rated may,
under Section 112(A), apply for the issuance of a tax credit certificate for the amount of creditable
input taxes merely due -- again not necessarily paid to -- the government and attributable to such
sales, to the extent that the input taxes have not been applied against output taxes.[26] Where a
taxpayer
is engaged in zero-rated or effectively zero-rated sales and also in taxable or exempt sales, the
amount of creditable input taxes due that are not directly and entirely attributable to any one of
these transactions shall be proportionately allocated on the basis of the volume of sales. Indeed, in
availing of such tax credit for VAT purposes, this provision -- as well as the one earlier mentioned
-- shows that the prior payment of taxes is not a requisite.

It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustration of a tax credit
allowed, even though no prior tax payments are not required. Specifically, in this provision, the
imposition of a final withholding tax rate on cash and/or property dividends received by a
nonresident foreign corporation from a domestic corporation is subjected to the condition that a
foreign tax credit will be given by the domiciliary country in an amount equivalent to taxes that
are merely deemed paid.[27] Although true, this provision actually refers to the tax credit as a
condition only for the imposition of a lower tax rate, not as a deduction from the corresponding
tax liability. Besides, it is not our government but the domiciliary country that credits against the
income tax payable to the latter by the foreign corporation, the tax to be foregone or spared.[28]

In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically allows as credits,

against the income tax imposable under Title II, the amount of income taxes merely incurred -- not
necessarily paid -- by a domestic corporation during a taxable year in any foreign country.
Moreover, Section 34(C)(5) provides that for such taxes incurred but not paid, a tax credit may be
allowed, subject to the condition precedent that the taxpayer shall simply give a bond with sureties
satisfactory to and approved by petitioner, in such sum as may be required; and further
conditioned upon payment by the taxpayer of any tax found due, upon petitioners redetermination
of it.

In addition to the above-cited provisions in the Tax Code, there are also tax treaties and special
laws that grant or allow tax credits, even though no prior tax payments have been made.

Under the treaties in which the tax credit method is used as a relief to avoid double taxation,
income that is taxed in the state of source is also taxable in the state of residence, but the tax paid
in the former is merely allowed as a credit against the tax levied in the latter.[29] Apparently,
payment is made to the state of source, not the state of residence. No tax, therefore, has been
previously paid to the latter.

Under special laws that particularly affect businesses, there can also be tax credit incentives. To
illustrate, the incentives provided for in Article 48 of Presidential Decree No. (PD) 1789, as
amended by Batas Pambansa Blg. (BP) 391, include tax credits equivalent to either five percent of
the net value earned, or five or ten percent of the net local content of exports.[30] In order to avail
of such credits under the said law and still achieve its objectives, no prior tax payments are
necessary.

From all the foregoing instances, it is evident that prior tax payments are not indispensable to the
availment of a tax credit. Thus, the CA correctly held that the availment under RA 7432 did not
require prior tax payments by private establishments concerned.[31] However, we do not agree
with its finding[32] that the carry-over of tax credits under the said special law to succeeding
taxable periods, and even their application against internal revenue taxes, did not necessitate the
existence of a tax liability.

The examples above show that a tax liability is certainly important in the availment or use, not the
existence or grant, of a tax credit. Regarding this matter, a private establishment reporting a net
loss in its financial statements is no different from another that presents a net income. Both are
entitled to the tax credit provided for under RA 7432, since the law itself accords that
unconditional benefit. However, for the losing establishment to immediately apply such credit,
where no tax is due, will be an improvident usance.

Sections 2.i and 4 of Revenue

Regulations No. 2-94 Erroneous

RA 7432 specifically allows private establishments to claim as tax credit the amount of discounts
they grant.[33] In turn, the Implementing Rules and Regulations, issued pursuant thereto, provide
the procedures for its availment.[34] To deny such credit, despite the plain mandate of the law and
the regulations carrying out that mandate, is indefensible.

First, the definition given by petitioner is erroneous. It refers to tax credit as the amount
representing the 20 percent discount that shall be deducted by the said establishments from their
gross income for income tax purposes and from their gross sales for value-added tax or other
percentage tax purposes.[35] In ordinary business language, the tax credit represents the amount
of such discount. However, the manner by which the discount shall be credited against taxes has
not been clarified by the revenue regulations.

By ordinary acceptation, a discount is an abatement or reduction made from the gross amount or
value of anything.[36] To be more precise, it is in business parlance a deduction or lowering of an
amount of money;[37] or a reduction from the full amount or value of something, especially a
price.[38] In business there are many kinds of discount, the most common of which is that
affecting the income statement[39] or financial report upon which the income tax is based.
Business Discounts

Deducted from Gross Sales

A cash discount, for example, is one granted by business establishments to credit customers for
their prompt payment.[40] It is a reduction in price offered to the purchaser if payment is made
within a shorter period of time than the maximum time specified.[41] Also referred to as a sales
discount on the part of the seller and a purchase discount on the part of the buyer, it may be
expressed in such
terms as 5/10, n/30.[42]

A quantity discount, however, is a reduction in price allowed for purchases made in large
quantities, justified by savings in packaging, shipping, and handling.[43] It is also called a volume
or bulk discount.[44]

A percentage reduction from the list price x x x allowed by manufacturers to wholesalers and by
wholesalers to retailers[45] is known as a trade discount. No entry for it need be made in the
manual or computerized books of accounts, since the purchase or sale is already valued at the net
price actually charged the buyer.[46] The purpose for the discount is to encourage trading or
increase sales, and the prices at which the purchased goods may be resold are also suggested.[47]
Even a chain discount -- a series of discounts from one list price -- is recorded at net.[48]

Finally, akin to a trade discount is a functional discount. It is a suppliers price discount given to a
purchaser based on the [latters] role in the [formers] distribution system.[49] This role usually
involves warehousing or advertising.

Based on this discussion, we find that the nature of a sales discount is peculiar. Applying generally
accepted accounting principles (GAAP) in the country, this type of discount is reflected in the
income statement[50] as a line item deducted -- along with returns, allowances, rebates and other
similar expenses -- from gross sales to arrive at net sales.[51] This type of presentation is resorted
to, because the accounts receivable and sales figures that arise from sales discounts, -- as well as
from quantity, volume or bulk discounts -- are recorded in the manual and computerized books of
accounts and reflected in the financial statements at the gross amounts of the invoices.[52] This
manner of recording credit sales -- known as the gross method -- is most widely used, because it is
simple, more convenient to apply than the net method, and produces no material errors over time.
[53]

However, under the net method used in recording trade, chain or functional discounts, only the net
amounts of the invoices -- after the discounts have been deducted -- are recorded in the books of
accounts[54] and reflected in the financial statements. A separate line item cannot be shown,[55]
because the transactions themselves involving both accounts receivable and sales have already
been entered into, net of the said discounts.

The term sales discounts is not expressly defined in the Tax Code, but one provision adverts to
amounts whose sum -- along with sales returns, allowances and cost of goods sold[56] -- is
deducted from gross sales to come up with the gross income, profit or margin[57] derived from
business.[58] In another provision therein, sales discounts that are granted and indicated in the
invoices at the time of sale -- and that do not depend upon the happening of any future event --
may be excluded from the gross sales within the same quarter they were given.[59] While
determinative only of the VAT, the latter provision also appears as a suitable reference point for
income tax purposes already embraced in the former. After all, these two provisions affirm that
sales discounts are amounts that are always deductible from gross sales.

Reason for the Senior Citizen Discount:

The Law, Not Prompt Payment

A distinguishing feature of the implementing rules of RA 7432 is the private establishments

outright deduction of the discount from the invoice price of the medicine sold to the senior citizen.
[60] It is, therefore, expected that for each retail sale made under this law, the discount period lasts
no more than a day, because such discount is given -- and the net amount thereof collected --
immediately upon perfection of the sale.[61] Although prompt payment is made for an arms-
length transaction by the senior citizen, the real and compelling reason for the private
establishment giving the discount is that the law itself makes it mandatory.

What RA 7432 grants the senior citizen is a mere discount privilege, not a sales discount or any of
the above discounts in particular. Prompt payment is not the reason for (although a necessary
consequence of) such grant. To be sure, the privilege enjoyed by the senior citizen must be
equivalent to the tax credit benefit enjoyed by the private establishment granting the discount. Yet,
under the revenue regulations promulgated by our tax authorities, this benefit has been
erroneously likened and confined to a sales discount.

To a senior citizen, the monetary effect of the privilege may be the same as that resulting from a
sales discount. However, to a private establishment, the effect is different from a simple reduction
in price that results from such discount. In other words, the tax credit benefit is not the same as a
sales discount. To repeat from our earlier discourse, this benefit cannot and should not be treated
as a tax deduction.

To stress, the effect of a sales discount on the income statement and income tax return of an
establishment covered by RA 7432 is different from that resulting from the availment or use of its
tax credit benefit. While the former is a deduction before, the latter is a deduction after, the income
tax is computed. As mentioned earlier, a discount is not necessarily a sales discount, and a tax
credit for a simple discount privilege should not be automatically treated like a sales discount. Ubi
lex non distinguit, nec nos distinguere debemus. Where the law does not distinguish, we ought not
to distinguish.

Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent
discount deductible from gross income for income tax purposes, or from gross sales for VAT or
other percentage tax purposes. In effect, the tax credit benefit under RA 7432 is related to a sales
discount. This contrived definition is improper, considering that the latter has to be deducted from
gross sales in order to compute the gross income in the income statement and cannot be deducted
again, even for purposes of computing the income tax.

When the law says that the cost of the discount may be claimed as a tax credit, it means that the
amount -- when claimed -- shall be treated as a reduction from any tax liability, plain and simple.
The option to avail of the tax credit benefit depends upon the existence of a tax liability, but to
limit the benefit to a sales discount -- which is not even identical to the discount privilege that is
granted by law -- does not define it at all and serves no useful purpose. The definition must,
therefore, be stricken down.

Laws Not Amended

by Regulations

Second, the law cannot be amended by a mere regulation. In fact, a regulation that operates to
create a rule out of harmony with
the statute is a mere nullity;[62] it cannot prevail.

It is a cardinal rule that courts will and should respect the contemporaneous construction placed
upon a statute by the executive officers whose duty it is to enforce it x x x.[63] In the scheme of
judicial tax administration, the need for certainty and predictability in the implementation of tax
laws is crucial.[64] Our tax authorities fill in the details that Congress may not have the
opportunity or competence to provide.[65] The regulations these authorities issue are relied upon
by taxpayers, who are certain that these will be followed by the courts.[66] Courts, however, will
not uphold these authorities interpretations when clearly absurd, erroneous or improper.

In the present case, the tax authorities have given the term tax credit in Sections 2.i and 4 of RR 2-
94 a meaning utterly in contrast to what RA 7432 provides. Their interpretation has muddled up
the intent of Congress in granting a mere discount privilege, not a sales discount. The
administrative agency issuing these regulations may not enlarge, alter or restrict the provisions of
the law it administers; it cannot engraft additional requirements not contemplated by the
legislature.[67]

In case of conflict, the law must prevail.[68] A regulation adopted pursuant to law is law.[69]
Conversely, a regulation or any portion thereof not adopted pursuant to law is no law and has
neither the force nor the effect of law.[70]

Availment of Tax

Credit Voluntary

Third, the word may in the text of the statute[71] implies that the
availability of the tax credit benefit is neither unrestricted nor mandatory.[72] There is no absolute
right conferred upon respondent, or any similar taxpayer, to avail itself of the tax credit remedy
whenever it chooses; neither does it impose a duty on the part of the government to sit back and
allow an important facet of tax collection to be at the sole control and discretion of the taxpayer.
[73] For the tax authorities to compel respondent to deduct the 20 percent discount from either its
gross income or its gross sales[74] is, therefore, not only to make an imposition without basis in
law, but also to blatantly contravene the law itself.

What Section 4.a of RA 7432 means is that the tax credit benefit is merely permissive, not
imperative. Respondent is given two options -- either to claim or not to claim the cost of the
discounts as a tax credit. In fact, it may even ignore the credit and simply consider the gesture as
an act of beneficence, an expression of its social conscience.

Granting that there is a tax liability and respondent claims such cost as a tax credit, then the tax
credit can easily be applied. If there is none, the credit cannot be used and will just have to be
carried over and revalidated[75] accordingly. If, however, the business continues to operate at a
loss and no other taxes are due, thus compelling it to close shop, the credit can never be applied
and will be lost altogether.

In other words, it is the existence or the lack of a tax liability that determines whether the cost of
the discounts can be used as a tax credit. RA 7432 does not give respondent the unfettered right to
avail itself of the credit whenever it pleases. Neither does it allow our tax administrators to expand
or contract the legislative mandate. The plain meaning rule or verba legis in statutory construction
is thus applicable x x x. Where the words of a statute are clear, plain and free from ambiguity, it
must be given its literal meaning and applied without attempted interpretation.[76]

Tax Credit Benefit

Deemed Just Compensation

Fourth, Sections 2.i and 4 of RR 2-94 deny the exercise by the State of its power of eminent
domain. Be it stressed that the privilege enjoyed by senior citizens does not come directly from the
State, but rather from the private establishments concerned. Accordingly, the tax credit benefit
granted to these establishments can be deemed as their just compensation for private property
taken by the State for public use.[77]
The concept of public use is no longer confined to the traditional notion of use by the public, but
held synonymous with public interest, public benefit, public welfare, and public convenience.[78]
The discount privilege to which our senior citizens are entitled is actually a benefit enjoyed by the
general public to which these citizens belong. The discounts given would have entered the coffers
and formed part of the gross sales of the private establishments concerned, were it not for RA
7432. The permanent reduction in their total revenues is a forced subsidy corresponding to the
taking of private property for public use or benefit.

As a result of the 20 percent discount imposed by RA 7432, respondent becomes entitled to a just
compensation. This term refers not only to the issuance of a tax credit certificate indicating the
correct amount of the discounts given, but also to the promptness in its release. Equivalent to the
payment of property taken by the State, such issuance -- when not done within a reasonable time
from the grant of the discounts -- cannot be considered as just compensation. In effect, respondent
is made to suffer the consequences of being immediately deprived of its revenues while awaiting
actual receipt, through the certificate, of the equivalent amount it needs to cope with the reduction
in its revenues.[79]

Besides, the taxation power can also be used as an implement for the exercise of the power of
eminent domain.[80] Tax measures are but enforced contributions exacted on pain of penal
sanctions[81] and clearly imposed for a public purpose.[82] In recent years, the power to tax has
indeed become a most effective tool to realize social justice, public welfare, and the equitable
distribution of wealth.[83]

While it is a declared commitment under Section 1 of RA 7432, social justice cannot be invoked to
trample on the rights of property owners who under our Constitution and laws are also entitled to
protection. The social justice consecrated in our [C]onstitution [is] not intended to take away
rights from a person and give them to another who is not entitled thereto.[84] For this reason, a
just compensation for income that is taken away from respondent becomes necessary. It is in the
tax credit that our legislators find support to realize social justice, and no administrative body can
alter that fact.

To put it differently, a private establishment that merely breaks even[85] -- without the discounts
yet -- will surely start to incur losses because of such discounts. The same effect is expected if its
mark-up is less than 20 percent, and if all its sales come from retail purchases by senior citizens.
Aside from the observation we have already raised earlier, it will also be grossly unfair to an
establishment if the discounts will be treated merely as deductions from either its gross income or
its gross sales. Operating at a loss through no fault of its own, it will realize that the tax credit
limitation under RR 2-94 is inutile, if not improper. Worse, profit-generating businesses will be
put in a better position if they avail themselves of tax credits denied those that are losing, because
no taxes are due from the latter.

Grant of Tax Credit

Intended by the Legislature

Fifth, RA 7432 itself seeks to adopt measures whereby senior citizens are assisted by the
community as a whole and to establish a program beneficial to them.[86] These objectives are
consonant with the constitutional policy of making health x x x services available to all the people
at affordable cost[87] and of giving priority for the needs of the x x x elderly.[88] Sections 2.i and
4 of RR 2-94, however, contradict these constitutional policies and statutory objectives.

Furthermore, Congress has allowed all private establishments a simple tax credit, not a deduction.
In fact, no cash outlay is required from the government for the availment or use of such credit. The
deliberations on February 5, 1992 of the Bicameral Conference Committee Meeting on Social
Justice, which finalized RA 7432, disclose the true intent of our legislators to treat the sales
discounts as a tax credit, rather than as a deduction from gross income. We quote from those
deliberations as follows:

"THE CHAIRMAN (Rep. Unico). By the way, before that ano, about deductions from taxable
income. I think we incorporated there a provision na - on the responsibility of the private hospitals
and drugstores, hindi ba?

SEN. ANGARA. Oo.

THE CHAIRMAN. (Rep. Unico), So, I think we have to put in also a provision here about the
deductions from taxable income of that private hospitals, di ba ganon 'yan?
MS. ADVENTO. Kaya lang po sir, and mga discounts po nila affecting government and public
institutions, so, puwede na po nating hindi isama yung mga less deductions ng taxable income.

THE CHAIRMAN. (Rep. Unico). Puwede na. Yung about the private hospitals. Yung isiningit
natin?

MS. ADVENTO. Singit na po ba yung 15% on credit. (inaudible/did not use the microphone).

SEN. ANGARA. Hindi pa, hindi pa.

THE CHAIRMAN. (Rep. Unico) Ah, 'di pa ba naisama natin?

SEN. ANGARA. Oo. You want to insert that?

THE CHAIRMAN (Rep. Unico). Yung ang proposal ni Senator Shahani, e.

SEN. ANGARA. In the case of private hospitals they got the grant of 15% discount, provided that,
the private hospitals can claim the expense as a tax credit.

REP. AQUINO. Yah could be allowed as deductions in the perpetrations of (inaudible) income.

SEN. ANGARA. I-tax credit na lang natin para walang cash-out ano?
REP. AQUINO. Oo, tax credit. Tama, Okay. Hospitals ba o lahat ng establishments na covered.

THE CHAIRMAN. (Rep. Unico). Sa kuwan lang yon, as private hospitals lang.

REP. AQUINO. Ano ba yung establishments na covered?

SEN. ANGARA. Restaurant lodging houses, recreation centers.

REP. AQUINO. All establishments covered siguro?

SEN. ANGARA. From all establishments. Alisin na natin 'Yung kuwan kung ganon. Can we go
back to Section 4 ha?

REP. AQUINO. Oho.

SEN. ANGARA. Letter A. To capture that thought, we'll say the grant of 20% discount from all
establishments et cetera, et cetera, provided that said establishments - provided that private
establishments may claim the cost as a tax credit. Ganon ba 'yon?

REP. AQUINO. Yah.

SEN. ANGARA. Dahil kung government, they don't need to claim it.
THE CHAIRMAN. (Rep. Unico). Tax credit.

SEN. ANGARA. As a tax credit [rather] than a kuwan - deduction, Okay.

REP. AQUINO Okay.

SEN. ANGARA. Sige Okay. Di subject to style na lang sa Letter A".[89]

Special Law

Over General Law

Sixth and last, RA 7432 is a special law that should prevail over the Tax Code -- a general law. x x
x [T]he rule is that on a specific matter the special law shall prevail over the general law, which
shall
be resorted to only to supply deficiencies in the former.[90] In addition, [w]here there are two
statutes, the earlier special and the later general -- the terms of the general broad enough to include
the matter provided for in the special -- the fact that one is special and the other is general creates
a presumption that the special is to be considered as remaining an exception to the general,[91]
one as a general law of the land, the other as the law of a particular case.[92] It is a canon of
statutory construction that a later statute, general in its terms and not expressly repealing a prior
special statute, will ordinarily not affect the special provisions of such earlier statute.[93]

RA 7432 is an earlier law not expressly repealed by, and therefore remains an exception to, the
Tax Code -- a later law. When the former states that a tax credit may be claimed, then the
requirement of prior tax payments under certain provisions of the latter, as discussed above,
cannot be made to apply. Neither can the instances of or references to a tax deduction under the
Tax Code[94] be made to restrict RA 7432. No provision of any revenue regulation can supplant
or modify the acts of Congress.
WHEREFORE, the Petition is hereby DENIED. The assailed Decision and Resolution of the
Court of Appeals AFFIRMED. No pronouncement as to costs.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 195909 September 26, 2012

COMMISSIONER OF INTERNAL REVENUE, PETITIONER,

vs.
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.

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

G.R. No. 195960

ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,

vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

DECISION

CARPIO, J.:

The Case

These are consolidated 1 petitions for review on certiorari under Rule 45 of the Rules of Court
assailing the Decision of 19 November 2010 of the Court of Tax Appeals (CTA) En Banc and its
Resolution 2 of 1 March 2011 in CTA Case No. 6746. This Court resolves this case on a pure
question of law, which involves the interpretation of Section 27(B) vis-à-vis Section 30(E) and (G)
of the National Internal Revenue Code of the Philippines (NIRC), on the income tax treatment of
proprietary non-profit hospitals.

The Facts
St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and non-profit
corporation. Under its articles of incorporation, among its corporate purposes are:

(a) To establish, equip, operate and maintain a non-stock, non-profit Christian, benevolent,
charitable and scientific hospital which shall give curative, rehabilitative and spiritual care to the
sick, diseased and disabled persons; provided that purely medical and surgical services shall be
performed by duly licensed physicians and surgeons who may be freely and individually
contracted by patients;

(b) To provide a career of health science education and provide medical services to the community
through organized clinics in such specialties as the facilities and resources of the corporation make
possible;

(c) To carry on educational activities related to the maintenance and promotion of health as well as
provide facilities for scientific and medical researches which, in the opinion of the Board of
Trustees, may be justified by the facilities, personnel, funds, or other requirements that are
available;

(d) To cooperate with organized medical societies, agencies of both government and private
sector; establish rules and regulations consistent with the highest professional ethics;

xxxx3

On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes
amounting to ₱76,063,116.06 for 1998, comprised of deficiency income tax, value-added tax,
withholding tax on compensation and expanded withholding tax. The BIR reduced the amount to
₱63,935,351.57 during trial in the First Division of the CTA. 4

On 14 January 2003, St. Luke's filed an administrative protest with the BIR against the deficiency
tax assessments. The BIR did not act on the protest within the 180-day period under Section 228
of the NIRC. Thus, St. Luke's appealed to the CTA.

The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10%
preferential tax rate on the income of proprietary non-profit hospitals, should be applicable to St.
Luke's. According to the BIR, Section 27(B), introduced in 1997, "is a new provision intended to
amend the exemption on non-profit hospitals that were previously categorized as non-stock, non-
profit corporations under Section 26 of the 1997 Tax Code x x x." 5 It is a specific provision
which prevails over the general exemption on income tax granted under Section 30(E) and (G) for
non-stock, non-profit charitable institutions and civic organizations promoting social welfare. 6

The BIR claimed that St. Luke's was actually operating for profit in 1998 because only 13% of its
revenues came from charitable purposes. Moreover, the hospital's board of trustees, officers and
employees directly benefit from its profits and assets. St. Luke's had total revenues of
₱1,730,367,965 or approximately ₱1.73 billion from patient services in 1998. 7

St. Luke's contended that the BIR should not consider its total revenues, because its free services
to patients was ₱218,187,498 or 65.20% of its 1998 operating income (i.e., total revenues less
operating expenses) of ₱334,642,615. 8 St. Luke's also claimed that its income does not inure to
the benefit of any individual.

St. Luke's maintained that it is a non-stock and non-profit institution for charitable and social
welfare purposes under Section 30(E) and (G) of the NIRC. It argued that the making of profit per
se does not destroy its income tax exemption.

The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments before the
CTA that Section 27(B) applies to St. Luke's. The petition raises the sole issue of whether the
enactment of Section 27(B) takes proprietary non-profit hospitals out of the income tax exemption
under Section 30 of the NIRC and instead, imposes a preferential rate of 10% on their taxable
income. The BIR prays that St. Luke's be ordered to pay ₱57,659,981.19 as deficiency income and
expanded withholding tax for 1998 with surcharges and interest for late payment.

The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment and
withholding of a part of its income, 9 as well as the payment of surcharge and delinquency
interest. There is no ground for this Court to undertake such a factual review. Under the
Constitution 10 and the Rules of Court, 11 this Court's review power is generally limited to "cases
in which only an error or question of law is involved." 12 This Court cannot depart from this
limitation if a party fails to invoke a recognized exception.

The Ruling of the Court of Tax Appeals

The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First Division
Decision dated 23 February 2009 which held:

WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY
GRANTED. Accordingly, the 1998 deficiency VAT assessment issued by respondent against
petitioner in the amount of ₱110,000.00 is hereby CANCELLED and WITHDRAWN. However,
petitioner is hereby ORDERED to PAY deficiency income tax and deficiency expanded
withholding tax for the taxable year 1998 in the respective amounts of ₱5,496,963.54 and
₱778,406.84 or in the sum of ₱6,275,370.38, x x x.

xxxx

In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency interest on
the total amount of ₱6,275,370.38 counted from October 15, 2003 until full payment thereof,
pursuant to Section 249(C)(3) of the NIRC of 1997.

SO ORDERED. 13
The deficiency income tax of ₱5,496,963.54, ordered by the CTA En Banc to be paid, arose from
the failure of St. Luke's to prove that part of its income in 1998 (declared as "Other Income-Net")
14 came from charitable activities. The CTA cancelled the remainder of the ₱63,113,952.79
deficiency assessed by the BIR based on the 10% tax rate under Section 27(B) of the NIRC, which
the CTA En Banc held was not applicable to St. Luke's. 15

The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution covered by
Section 30(E) and (G) of the NIRC. This ruling would exempt all income derived by St. Luke's
from services to its patients, whether paying or non-paying. The CTA reiterated its earlier decision
in St. Luke's Medical Center, Inc. v. Commissioner of Internal Revenue, 16 which examined the
primary purposes of St. Luke's under its articles of incorporation and various documents 17
identifying St. Luke's as a charitable institution.

The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City, 18 which states that
"a charitable institution does not lose its charitable character and its consequent exemption from
taxation merely because recipients of its benefits who are able to pay are required to do so, where
funds derived in this manner are devoted to the charitable purposes of the institution x x x." 19
The generation of income from paying patients does not per se destroy the charitable nature of St.
Luke's.

Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal Revenue, 20 which
ruled that the old NIRC (Commonwealth Act No. 466, as amended) 21 "positively exempts from
taxation those corporations or associations which, otherwise, would be subject thereto, because of
the existence of x x x net income." 22 The NIRC of 1997 substantially reproduces the provision on
charitable institutions of the old NIRC. Thus, in rejecting the argument that tax exemption is lost
whenever there is net income, the Court in Jesus Sacred Heart College declared: "[E]very
responsible organization must be run to at least insure its existence, by operating within the limits
of its own resources, especially its regular income. In other words, it should always strive,
whenever possible, to have a surplus." 23

The CTA held that Section 27(B) of the present NIRC does not apply to St. Luke's. 24 The CTA
explained that to apply the 10% preferential rate, Section 27(B) requires a hospital to be "non-
profit." On the other hand, Congress specifically used the word "non-stock" to qualify a charitable
"corporation or association" in Section 30(E) of the NIRC. According to the CTA, this is unique in
the present tax code, indicating an intent to exempt this type of charitable organization from
income tax. Section 27(B) does not require that the hospital be "non-stock." The CTA stated, "it is
clear that non-stock, non-profit hospitals operated exclusively for charitable purpose are exempt
from income tax on income received by them as such, applying the provision of Section 30(E) of
the NIRC of 1997, as amended." 25

The Issue

The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under Section
27(B) of the NIRC, which imposes a preferential tax rate of 10% on the income of proprietary
non-profit hospitals.

The Ruling of the Court

St. Luke's Petition in G.R. No. 195960

As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No. 195960 because
the petition raises factual issues. Under Section 1, Rule 45 of the Rules of Court, "[t]he petition
shall raise only questions of law which must be distinctly set forth." St. Luke's cites Martinez v.
Court of Appeals 26 which permits factual review "when the Court of Appeals [in this case, the
CTA] manifestly overlooked certain relevant facts not disputed by the parties and which, if
properly considered, would justify a different conclusion." 27

This Court does not see how the CTA overlooked relevant facts. St. Luke's itself stated that the
CTA "disregarded the testimony of [its] witness, Romeo B. Mary, being allegedly self-serving, to
show the nature of the 'Other Income-Net' x x x." 28 This is not a case of overlooking or failing to
consider relevant evidence. The CTA obviously considered the evidence and concluded that it is
self-serving. The CTA declared that it has "gone through the records of this case and found no
other evidence aside from the self-serving affidavit executed by [the] witnesses [of St. Luke's] x x
x." 29

The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the 25%
surcharge under Section 248(A)(3) of the NIRC. There is "[f]ailure to pay the deficiency tax
within the time prescribed for its payment in the notice of assessment[.]" 30 St. Luke's is also
liable to pay 20% delinquency interest under Section 249(C)(3) of the NIRC. 31 As explained by
the CTA En Banc, the amount of ₱6,275,370.38 in the dispositive portion of the CTA First
Division Decision includes only deficiency interest under Section 249(A) and (B) of the NIRC and
not delinquency interest. 32

The Main Issue

The issue raised by the BIR is a purely legal one. It involves the effect of the introduction of
Section 27(B) in the NIRC of 1997 vis-à-vis Section 30(E) and (G) on the income tax exemption
of charitable and social welfare institutions. The 10% income tax rate under Section 27(B)
specifically pertains to proprietary educational institutions and proprietary non-profit hospitals.
The BIR argues that Congress intended to remove the exemption that non-profit hospitals
previously enjoyed under Section 27(E) of the NIRC of 1977, which is now substantially
reproduced in Section 30(E) of the NIRC of 1997. 33 Section 27(B) of the present NIRC provides:

SEC. 27. Rates of Income Tax on Domestic Corporations. -

xxxx
(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and
hospitals which are non-profit shall pay a tax of ten percent (10%) on their taxable income except
those covered by Subsection (D) hereof: Provided, That if the gross income from unrelated trade,
business or other activity exceeds fifty percent (50%) of the total gross income derived by such
educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof
shall be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated
trade, business or other activity' means any trade, business or other activity, the conduct of which
is not substantially related to the exercise or performance by such educational institution or
hospital of its primary purpose or function. A 'proprietary educational institution' is any private
school maintained and administered by private individuals or groups with an issued permit to
operate from the Department of Education, Culture and Sports (DECS), or the Commission on
Higher Education (CHED), or the Technical Education and Skills Development Authority
(TESDA), as the case may be, in accordance with existing laws and regulations. (Emphasis
supplied)

St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that it is a
charitable institution and an organization promoting social welfare. The arguments of St. Luke's
focus on the wording of Section 30(E) exempting from income tax non-stock, non-profit
charitable institutions. 34 St. Luke's asserts that the legislative intent of introducing Section 27(B)
was only to remove the exemption for "proprietary non-profit" hospitals. 35 The relevant
provisions of Section 30 state:

SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed
under this Title in respect to income received by them as such:

xxxx

(E) Nonstock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of
its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or
any specific person;

xxxx

(G) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;

xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any
of their activities conducted for profit regardless of the disposition made of such income, shall be
subject to tax imposed under this Code. (Emphasis supplied)
The Court partly grants the petition of the BIR but on a different ground. We hold that Section
27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals
under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other
hand, can be construed together without the removal of such tax exemption. The effect of the
introduction of Section 27(B) is to subject the taxable income of two specific institutions, namely,
proprietary non-profit educational institutions 36 and proprietary non-profit hospitals, among the
institutions covered by Section 30, to the 10% preferential rate under Section 27(B) instead of the
ordinary 30% corporate rate under the last paragraph of Section 30 in relation to Section 27(A)(1).

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary
non-profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications
for hospitals are that they must be proprietary and non-profit. "Proprietary" means private,
following the definition of a "proprietary educational institution" as "any private school
maintained and administered by private individuals or groups" with a government permit. "Non-
profit" means no net income or asset accrues to or benefits any member or specific person, with all
the net income or asset devoted to the institution's purposes and all its activities conducted not for
profit.

"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v. Club
Filipino Inc. de Cebu, 37 this Court considered as non-profit a sports club organized for recreation
and entertainment of its stockholders and members. The club was primarily funded by
membership fees and dues. If it had profits, they were used for overhead expenses and improving
its golf course. 38 The club was non-profit because of its purpose and there was no evidence that it
was engaged in a profit-making enterprise. 39

The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The
Court defined "charity" in Lung Center of the Philippines v. Quezon City 40 as "a gift, to be
applied consistently with existing laws, for the benefit of an indefinite number of persons, either
by bringing their minds and hearts under the influence of education or religion, by assisting them
to establish themselves in life or [by] otherwise lessening the burden of government." 41 A non-
profit club for the benefit of its members fails this test. An organization may be considered as non-
profit if it does not distribute any part of its income to stockholders or members. However, despite
its being a tax exempt institution, any income such institution earns from activities conducted for
profit is taxable, as expressly provided in the last paragraph of Section 30.

To be a charitable institution, however, an organization must meet the substantive test of charity in
Lung Center. The issue in Lung Center concerns exemption from real property tax and not income
tax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to
an indefinite number of persons which lessens the burden of government. In other words,
charitable institutions provide for free goods and services to the public which would otherwise fall
on the shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes
which should have been spent to address public needs, because certain private entities already
assume a part of the burden. This is the rationale for the tax exemption of charitable institutions.
The loss of taxes by the government is compensated by its relief from doing public works which
would have been funded by appropriations from the Treasury. 42

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements
for a tax exemption are specified by the law granting it. The power of Congress to tax implies the
power to exempt from tax. Congress can create tax exemptions, subject to the constitutional
provision that "[n]o law granting any tax exemption shall be passed without the concurrence of a
majority of all the Members of Congress." 43 The requirements for a tax exemption are strictly
construed against the taxpayer 44 because an exemption restricts the collection of taxes necessary
for the existence of the government.

The Court in Lung Center declared that the Lung Center of the Philippines is a charitable
institution for the purpose of exemption from real property taxes. This ruling uses the same
premise as Hospital de San Juan 45 and Jesus Sacred Heart College 46 which says that receiving
income from paying patients does not destroy the charitable nature of a hospital.

As a general principle, a charitable institution does not lose its character as such and its exemption
from taxes simply because it derives income from paying patients, whether out-patient, or
confined in the hospital, or receives subsidies from the government, so long as the money received
is devoted or used altogether to the charitable object which it is intended to achieve; and no money
inures to the private benefit of the persons managing or operating the institution. 47

For real property taxes, the incidental generation of income is permissible because the test of
exemption is the use of the property. The Constitution provides that "[c]haritable institutions,
churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all
lands, buildings, and improvements, actually, directly, and exclusively used for religious,
charitable, or educational purposes shall be exempt from taxation." 48 The test of exemption is not
strictly a requirement on the intrinsic nature or character of the institution. The test requires that
the institution use the property in a certain way, i.e. for a charitable purpose. Thus, the Court held
that the Lung Center of the Philippines did not lose its charitable character when it used a portion
of its lot for commercial purposes. The effect of failing to meet the use requirement is simply to
remove from the tax exemption that portion of the property not devoted to charity.

The Constitution exempts charitable institutions only from real property taxes. In the NIRC,
Congress decided to extend the exemption to income taxes. However, the way Congress crafted
Section 30(E) of the NIRC is materially different from Section 28(3), Article VI of the
Constitution. Section 30(E) of the NIRC defines the corporation or association that is exempt from
income tax. On the other hand, Section 28(3), Article VI of the Constitution does not define a
charitable institution, but requires that the institution "actually, directly and exclusively" use the
property for a charitable purpose.

Section 30(E) of the NIRC provides that a charitable institution must be:

(1) A non-stock corporation or association;

(2) Organized exclusively for charitable purposes;

(3) Operated exclusively for charitable purposes; and

(4) No part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.

Thus, both the organization and operations of the charitable institution must be devoted
"exclusively" for charitable purposes. The organization of the institution refers to its corporate
form, as shown by its articles of incorporation, by-laws and other constitutive documents. Section
30(E) of the NIRC specifically requires that the corporation or association be non-stock, which is
defined by the Corporation Code as "one where no part of its income is distributable as dividends
to its members, trustees, or officers" 49 and that any profit "obtain[ed] as an incident to its
operations shall, whenever necessary or proper, be used for the furtherance of the purpose or
purposes for which the corporation was organized." 50 However, under Lung Center, any profit by
a charitable institution must not only be plowed back "whenever necessary or proper," but must be
"devoted or used altogether to the charitable object which it is intended to achieve." 51

The operations of the charitable institution generally refer to its regular activities. Section 30(E) of
the NIRC requires that these operations be exclusive to charity. There is also a specific
requirement that "no part of [the] net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person." The use of lands, buildings and improvements
of the institution is but a part of its operations.

There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution.
However, this does not automatically exempt St. Luke's from paying taxes. This only refers to the
organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable institution is not
ipso facto tax exempt. To be exempt from real property taxes, Section 28(3), Article VI of the
Constitution requires that a charitable institution use the property "actually, directly and
exclusively" for charitable purposes. To be exempt from income taxes, Section 30(E) of the NIRC
requires that a charitable institution must be "organized and operated exclusively" for charitable
purposes. Likewise, to be exempt from income taxes, Section 30(G) of the NIRC requires that the
institution be "operated exclusively" for social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and
operated exclusively" by providing that:

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any
of their activities conducted for profit regardless of the disposition made of such income, shall be
subject to tax imposed under this Code. (Emphasis supplied)

In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution
conducts "any" activity for profit, such activity is not tax exempt even as its not-for-profit
activities remain tax exempt. This paragraph qualifies the requirements in Section 30(E) that the
"[n]on-stock corporation or association [must be] organized and operated exclusively for x x x
charitable x x x purposes x x x." It likewise qualifies the requirement in Section 30(G) that the
civic organization must be "operated exclusively" for the promotion of social welfare.

Thus, even if the charitable institution must be "organized and operated exclusively" for charitable
purposes, it is nevertheless allowed to engage in "activities conducted for profit" without losing its
tax exempt status for its not-for-profit activities. The only consequence is that the "income of
whatever kind and character" of a charitable institution "from any of its activities conducted for
profit, regardless of the disposition made of such income, shall be subject to tax." Prior to the
introduction of Section 27(B), the tax rate on such income from for-profit activities was the
ordinary corporate rate under Section 27(A). With the introduction of Section 27(B), the tax rate is
now 10%.

In 1998, St. Luke's had total revenues of ₱1,730,367,965 from services to paying patients. It
cannot be disputed that a hospital which receives approximately ₱1.73 billion from paying patients
is not an institution "operated exclusively" for charitable purposes. Clearly, revenues from paying
patients are income received from "activities conducted for profit." 52 Indeed, St. Luke's admits
that it derived profits from its paying patients. St. Luke's declared ₱1,730,367,965 as "Revenues
from Services to Patients" in contrast to its "Free Services" expenditure of ₱218,187,498. In its
Comment in G.R. No. 195909, St. Luke's showed the following "calculation" to support its claim
that 65.20% of its "income after expenses was allocated to free or charitable services" in 1998. 53

REVENUES FROM SERVICES TO PATIENTS ₱1,730,367,965.00

OPERATING EXPENSES

Professional care of patients ₱1,016,608,394.00

Administrative 287,319,334.00
Household and Property 91,797,622.00

₱1,395,725,350.00

INCOME FROM OPERATIONS ₱334,642,615.00 100%

Free Services -218,187,498.00 -65.20%
INCOME FROM OPERATIONS, Net of FREE SERVICES ₱116,455,117.00 34.80%

OTHER INCOME 17,482,304.00

EXCESS OF REVENUES OVER EXPENSES ₱133,937,421.00

In Lung Center, this Court declared:

"[e]xclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from
participation or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a
privilege exclusively." x x x The words "dominant use" or "principal use" cannot be substituted for
the words "used exclusively" without doing violence to the Constitution and the law. Solely is
synonymous with exclusively. 54

The Court cannot expand the meaning of the words "operated exclusively" without violating the
NIRC. Services to paying patients are activities conducted for profit. They cannot be considered
any other way. There is a "purpose to make profit over and above the cost" of services. 55 The
₱1.73 billion total revenues from paying patients is not even incidental to St. Luke's charity
expenditure of ₱218,187,498 for non-paying patients.

St. Luke's claims that its charity expenditure of ₱218,187,498 is 65.20% of its operating income in
1998. However, if a part of the remaining 34.80% of the operating income is reinvested in
property, equipment or facilities used for services to paying and non-paying patients, then it
cannot be said that the income is "devoted or used altogether to the charitable object which it is
intended to achieve." 56 The income is plowed back to the corporation not entirely for charitable
purposes, but for profit as well. In any case, the last paragraph of Section 30 of the NIRC
expressly qualifies that income from activities for profit is taxable "regardless of the disposition
made of such income."

Jesus Sacred Heart College declared that there is no official legislative record explaining the
phrase "any activity conducted for profit." However, it quoted a deposition of Senator Mariano
Jesus Cuenco, who was a member of the Committee of Conference for the Senate, which
introduced the phrase "or from any activity conducted for profit."

P. Cuando ha hablado de la Universidad de Santo Tomás que tiene un hospital, no cree Vd. que es
una actividad esencial dicho hospital para el funcionamiento del colegio de medicina de dicha
universidad?

xxxx

R. Si el hospital se limita a recibir enformos pobres, mi contestación seria afirmativa; pero

considerando que el hospital tiene cuartos de pago, y a los mismos generalmente van enfermos de
buena posición social económica, lo que se paga por estos enfermos debe estar sujeto a 'income
tax', y es una de las razones que hemos tenido para insertar las palabras o frase 'or from any
activity conducted for profit.' 57
The question was whether having a hospital is essential to an educational institution like the
College of Medicine of the University of Santo Tomas. Senator Cuenco answered that if the
hospital has paid rooms generally occupied by people of good economic standing, then it should
be subject to income tax. He said that this was one of the reasons Congress inserted the phrase "or
any activity conducted for profit."

The question in Jesus Sacred Heart College involves an educational institution. 58 However, it is
applicable to charitable institutions because Senator Cuenco's response shows an intent to focus on
the activities of charitable institutions. Activities for profit should not escape the reach of taxation.
Being a non-stock and non-profit corporation does not, by this reason alone, completely exempt an
institution from tax. An institution cannot use its corporate form to prevent its profitable activities
from being taxed.

The Court finds that St. Luke's is a corporation that is not "operated exclusively" for charitable or
social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is
based not only on a strict interpretation of a provision granting tax exemption, but also on the clear
and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an
institution be "operated exclusively" for charitable or social welfare purposes to be completely
exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption
if it earns income from its for-profit activities. Such income from for-profit activities, under the
last paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate
rate but now at the preferential 10% rate pursuant to Section 27(B).

A tax exemption is effectively a social subsidy granted by the State because an exempt institution
is spared from sharing in the expenses of government and yet benefits from them. Tax exemptions
for charitable institutions should therefore be limited to institutions beneficial to the public and
those which improve social welfare. A profit-making entity should not be allowed to exploit this
subsidy to the detriment of the government and other taxpayers.1âwphi1

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be
completely tax exempt from all its income. However, it remains a proprietary non-profit hospital
under Section 27(B) of the NIRC as long as it does not distribute any of its profits to its members
and such profits are reinvested pursuant to its corporate purposes. St. Luke's, as a proprietary non-
profit hospital, is entitled to the preferential tax rate of 10% on its net income from its for-profit
activities.

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC.
However, St. Luke's has good reasons to rely on the letter dated 6 June 1990 by the BIR, which
opined that St. Luke's is "a corporation for purely charitable and social welfare purposes"59 and
thus exempt from income tax. 60 In Michael J. Lhuillier, Inc. v. Commissioner of Internal
Revenue, 61 the Court said that "good faith and honest belief that one is not subject to tax on the
basis of previous interpretation of government agencies tasked to implement the tax law, are
sufficient justification to delete the imposition of surcharges and interest." 62
WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is
PARTLY GRANTED. The Decision of the Court of Tax Appeals En Banc dated 19 November
2010 and its Resolution dated 1 March 2011 in CTA Case No. 6746 are MODIFIED. St. Luke's
Medical Center, Inc. is ORDERED TO PAY the deficiency income tax in 1998 based on the 10%
preferential income tax rate under Section 27(B) of the National Internal Revenue Code. However,
it is not liable for surcharges and interest on such deficiency income tax under Sections 248 and
249 of the National Internal Revenue Code. All other parts of the Decision and Resolution of the
Court of Tax Appeals are AFFIRMED.

The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating
Section 1, Rule 45 of the Rules of Court.

SO ORDERED.

Leonardo-De Castro*, Brion, Perez, and Perlas-Bernabe, JJ., concur

THIRD DIVISION

COMMISSIONER OF G.R. No. 146984

INTERNAL REVENUE

Petitioner,

Present:

QUISUMBING,

- versus - Chairperson,

CARPIO,

CARPIO MORALES,

TINGA, and

MAGSAYSAY LINES, INC., VELASCO, JR., JJ.

BALIWAG NAVIGATION, INC.,

FIM LIMITED OF THE MARDEN

GROUP (HK) and NATIONAL

DEVELOPMENT COMPANY,

Respondents. Promulgated:

July 28, 2006

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

DECISION

TINGA, J.:

The issue in this present petition is whether the sale by the National Development Company
(NDC) of five (5) of its vessels to the private respondents is subject to value-added tax (VAT)
under the National Internal Revenue Code of 1986 (Tax Code) then prevailing at the time of the
sale. The Court of Tax Appeals (CTA) and the Court of Appeals commonly ruled that the sale is
not subject to VAT. We affirm, though on a more unequivocal rationale than that utilized by the
rulings under review. The fact that the sale was not in the course of the trade or business of NDC
is sufficient in itself to declare the sale as outside the coverage of VAT.

The facts are culled primarily from the ruling of the CTA.
Pursuant to a government program of privatization, NDC decided to sell to private enterprise all of
its shares in its wholly-owned subsidiary the National Marine Corporation (NMC). The NDC
decided to sell in one lot its NMC shares and five (5) of its ships, which are 3,700 DWT Tween-
Decker, Kloeckner type vessels.[1] The vessels were constructed for the NDC between 1981 and
1984, then initially leased to Luzon Stevedoring Company, also its wholly-owned subsidiary.
Subsequently, the vessels were transferred and leased, on a bareboat basis, to the NMC.[2]

The NMC shares and the vessels were offered for public bidding. Among the stipulated terms and
conditions for the public auction was that the winning bidder was to pay a value added tax of 10%
on the value of the vessels.[3] On 3 June 1988, private respondent Magsaysay Lines, Inc.
(Magsaysay Lines) offered to buy the shares and the vessels for P168,000,000.00. The bid was
made by Magsaysay Lines, purportedly for a new company still to be formed composed of itself,
Baliwag Navigation, Inc., and FIM Limited of the Marden Group based in Hongkong
(collectively, private respondents).[4] The bid was approved by the Committee on Privatization,
and a Notice of Award dated 1 July 1988 was issued to Magsaysay Lines.

On 28 September 1988, the implementing Contract of Sale was executed between NDC, on one
hand, and Magsaysay Lines, Baliwag Navigation, and FIM Limited, on the other. Paragraph 11.02
of the contract stipulated that [v]alue-added tax, if any, shall be for the account of the
PURCHASER.[5] Per arrangement, an irrevocable confirmed Letter of Credit previously filed as
bidders bond was accepted by NDC as security for the payment of VAT, if any. By this time, a
formal request for a ruling on whether or not the sale of the vessels was subject to VAT had
already been filed with the Bureau of Internal Revenue (BIR) by the law firm of Sycip Salazar
Hernandez & Gatmaitan, presumably in behalf of private respondents. Thus, the parties agreed
that should no favorable ruling be received from the BIR, NDC was authorized to draw on the
Letter of Credit upon written demand the amount needed for the payment of the VAT on the
stipulated due date, 20 December 1988.[6]

In January of 1989, private respondents through counsel received VAT Ruling No. 568-88 dated
14 December 1988 from the BIR, holding that the sale of the vessels was subject to the 10% VAT.
The ruling cited the fact that NDC was a VAT-registered enterprise, and thus its transactions
incident to its normal VAT registered activity of leasing out personal property including sale of its
own assets that are movable, tangible objects which are appropriable or transferable are subject to
the 10% [VAT].[7]

Private respondents moved for the reconsideration of VAT Ruling No. 568-88, as well as VAT
Ruling No. 395-88 (dated 18 August 1988), which made a similar ruling on the sale of the same
vessels in response to an inquiry from the Chairman of the Senate Blue Ribbon Committee. Their
motion was denied when the BIR issued VAT Ruling Nos. 007-89 dated 24 February 1989,
reiterating the earlier VAT rulings. At this point, NDC drew on the Letter of Credit to pay for the
VAT, and the amount of P15,120,000.00 in taxes was paid on 16 March 1989.

On 10 April 1989, private respondents filed an Appeal and Petition for Refund with the CTA,
followed by a Supplemental Petition for Review on 14 July 1989. They prayed for the reversal of
VAT Rulings No. 395-88, 568-88 and 007-89, as well as the refund of the VAT payment made
amounting to P15,120,000.00.[8] The Commissioner of Internal Revenue (CIR) opposed the
petition, first arguing that private respondents were not the real parties in interest as they were not
the transferors or sellers as contemplated in Sections 99 and 100 of the then Tax Code. The CIR
also squarely defended the VAT rulings holding the sale of the vessels liable for VAT, especially
citing Section 3 of Revenue Regulation No. 5-87 (R.R. No. 5-87), which provided that [VAT] is
imposed on any sale or transactions deemed sale of taxable goods (including capital goods,
irrespective of the date of acquisition). The CIR argued that the sale of the vessels were among
those transactions deemed sale, as enumerated in Section 4 of R.R. No. 5-87. It seems that the CIR
particularly emphasized Section 4(E)(i) of the Regulation, which classified change of ownership
of business as a circumstance that gave rise to a transaction deemed sale.

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

The CIR appealed the CTA Decision to the Court of Appeals,[10] which on 11 March 1997,
rendered a Decision reversing the CTA.[11] While the appellate court agreed that the sale was an
isolated transaction, not made in the course of NDCs regular trade or business, it nonetheless
found that the transaction fell within the classification of those deemed sale under R.R. No. 5-87,
since the sale of the vessels together with the NMC shares brought about a change of ownership in
NMC. The Court of Appeals also applied the principle governing tax exemptions that such should
be strictly construed against the taxpayer, and liberally in favor of the government.[12]

However, the Court of Appeals reversed itself upon reconsidering the case, through a Resolution
dated 5 February 2001.[13] This time, the appellate court ruled that the change of ownership of
business as contemplated in R.R. No. 5-87 must be a consequence of the retirement from or
cessation of business by the owner of the goods, as provided for in Section 100 of the Tax Code.
The Court of Appeals also agreed with the CTA that the classification of transactions deemed sale
was a classification statute, and not an exemption statute, thus warranting the resolution of any
doubt in favor of the taxpayer.[14]

To the mind of the Court, the arguments raised in the present petition have already been
adequately discussed and refuted in the rulings assailed before us. Evidently, the petition should be
denied. Yet the Court finds that Section 99 of the Tax Code is sufficient reason for upholding the
refund of VAT payments, and the subsequent disquisitions by the lower courts on the applicability
of Section 100 of the Tax Code and Section 4 of R.R. No. 5-87 are ultimately irrelevant.

A brief reiteration of the basic principles governing VAT is in order. VAT is ultimately a tax on
consumption, even though it is assessed on many levels of transactions on the basis of a fixed
percentage.[15] It is the end user of consumer goods or services which ultimately shoulders the
tax, as the liability therefrom is passed on to the end users by the providers of these goods or
services[16] who in turn may credit their own VAT liability (or input VAT) from the VAT
payments they receive from the final consumer (or output VAT).[17] The final purchase by the end
consumer represents the final link in a production chain that itself involves several transactions
and several acts of consumption. The VAT system assures fiscal adequacy through the collection
of taxes on every level of consumption,[18] yet assuages the manufacturers or providers of goods
and services by enabling them to pass on their respective VAT liabilities to the next link of the
chain until finally the end consumer shoulders the entire tax liability.

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

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

In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955 (97 Phil. 992),
the term carrying on business does not mean the performance of a single disconnected act, but
means conducting, prosecuting and continuing business by performing progressively all the acts
normally incident thereof; while doing business conveys the idea of business being done, not from
time to time, but all the time. [J. Aranas, UPDATED NATIONAL INTERNAL REVENUE CODE
(WITH ANNOTATIONS), p. 608-9 (1988)]. Course of business is what is usually done in the
management of trade or business. [Idmi v. Weeks & Russel, 99 So. 761, 764, 135 Miss. 65, cited
in Words & Phrases, Vol. 10, (1984)].

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

This finding is confirmed by the Revised Charter[22] of the NDC which bears no indication that
the NDC was created for the primary purpose of selling real property.[23]
The conclusion that the sale was not in the course of trade or business, which the CIR does not
dispute before this Court,[24] should have definitively settled the matter. Any sale, barter or
exchange of goods or services not in the course of trade or business is not subject to VAT.

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

It would have been a different matter if Section 100 purported to define the phrase in the course of
trade or business as expressed in Section 99. If that were so, reference to Section 100 would have
been necessary as a means of ascertaining whether the sale of the vessels was in the course of
trade or business, and thus subject to

VAT. But that is not the case. What Section 100 and Section 4(E)(i) of R.R. No. 5-87 elaborate on
is not the meaning of in the course of trade or business, but instead the identification of the
transactions which may be deemed as sale. It would become necessary to ascertain whether under
those two provisions the transaction may be deemed a sale, only if it is settled that the transaction
occurred in the course of trade or business in the first place. If the transaction transpired outside
the course of trade or business, it would be irrelevant for the purpose of determining VAT liability
whether the transaction may be deemed sale, since it anyway is not subject to VAT.

Accordingly, the Court rules that given the undisputed finding that the transaction in question was
not made in the course of trade or business of the seller, NDC that is, the sale is not subject to VAT
pursuant to Section 99 of the Tax Code, no matter how the said sale may hew to those transactions
deemed sale as defined under Section 100.

In any event, even if Section 100 or Section 4 of R.R. No. 5-87 were to find application in this
case, the Court finds the discussions offered on this point by the CTA and the Court of Appeals (in
its subsequent Resolution) essentially correct. Section 4 (E)(i) of R.R. No. 5-87 does classify as
among the transactions deemed sale those involving change of ownership of business. However,
Section 4(E) of R.R. No. 5-87, reflecting Section 100 of the Tax Code, clarifies that such change
of ownership is only an attending circumstance to retirement from or cessation of business[, ] with
respect to all goods on hand [as] of the date of such retirement or cessation.[25] Indeed, Section
4(E) of R.R. No. 5-87 expressly characterizes the change of ownership of business as only a
circumstance that attends those transactions deemed sale, which are otherwise stated in the same
section.[26]

WHEREFORE, the petition is DENIED. No costs.

SO ORDERED.