VALUE-ADDED TAX CASES CTA: It rejected the CIRs arguments and granted the petition.
CTA: It rejected the CIRs arguments and granted the petition. The CTA ruled that the sale of a vessel was an
Concept
1. CIR vs. Magsaysay Lines, G.R. No. 146984, dated July 28, 2006
FACTS: Pursuant to a government program of privatization, the National Development Company (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. 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.
Private respondent Magsaysay Lines, Inc. 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). The bid was approved by the Committee on Privatization, and a Notice of Award was issued to
Magsaysay Lines.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. 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). 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.
BIR: The BIR held 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].The motion for the reconsideration of the ruling
was denied. 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.
Private respondents: They filed an Appeal and Petition for Refund with the CTA. They prayed for the reversal
of VAT Rulings, as well as the refund of the VAT payment made amounting to P15,120,000.00.
CIR: 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, which provided that [VAT] is
imposed on any sale or transactions deemed sale of taxable goods. The CIR argued that the sale of the vessels
were among those transactions deemed sale. 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.
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.
CA: The Court of Appeals rendered a Decision reversing the CTA. 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. However, the Court of Appeals reversed itself upon
reconsidering the case. 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.
Ruling: 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.
Principle: VAT is ultimately a tax on consumption, even though it is assessed on many levels of transactions
on the basis of a fixed percentage. 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 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). 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. Yet VAT is not a
singular-minded tax on every transactional level. Its assessment bears direct relevance to the taxpayer’s role
or link in the production chain.
Hence, as affirmed by Section 99 of the Tax Code and its subsequent incarnations, 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.
RATIONALE: 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 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. This
finding is confirmed by the Revised Charter of the NDC which bears no indication that the NDC was created
for the primary purpose of selling real property. The conclusion that the sale was not in the course of trade or
business, which the CIR does not dispute before this Court, 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 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.
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. 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. The petition is
DENIED.
Elements of VAT-taxable Transactions
G.R. No. 149073 February 16, 2005
2. COMMISSIONER OF INTERNAL REVENUE vs. CEBU TOYO CORPORATION
FACTS: Respondent Cebu Toyo Corporation is a domestic corporation engaged in the manufacture of lenses
and various optical components used in television sets, cameras, compact discs and other similar devices. Its
principal office is located at the Mactan Export Processing Zone (MEPZ) in Lapu-Lapu City, Cebu. It is a
subsidiary of Toyo Lens Corporation, a non-resident corporation organized under the laws of Japan.
Respondent is a zone export enterprise registered with the Philippine Economic Zone Authority (PEZA). It is
also registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer. As an export enterprise,
respondent sells 80% of its products to its mother corporation, the Japan-based Toyo Lens Corporation,
pursuant to an Agreement of Offsetting. The rest are sold to various enterprises doing business in the MEPZ.
Inasmuch as both sales are considered export sales subject to Value-Added Tax (VAT) at 0% rate under
Section 106(A)(2)(a) of the National Internal Revenue Code, as amended, respondent filed its quarterly VAT
returns from April 1, 1996 to December 31, 1997 showing a total input VAT of ₱4,462,412.63. Respondent
filed an application for tax credit/refund of VAT paid for the period April 1, 1996 to December 31, 1997
amounting to ₱4,439,827.21 representing excess VAT input payments. Respondent, however, did not bother
to wait for the Resolution of its claim by the CIR. Instead, it filed a Petition for Review with the CTA to toll the
running of the two-year prescriptive period pursuant to Section 230 of the Tax Code.
Respondents: As a VAT-registered exporter of goods, it is subject to VAT at the rate of 0% on its export sales
that do not result in any output tax. Hence, the unutilized VAT input taxes on its purchases of goods and
services related to such zero-rated activities are available as tax credits or refunds.
Petitioners: Respondent was not entitled to a refund or tax credit since: (1) it failed to show that the tax was
erroneously or illegally collected; (2) the taxes paid and collected are presumed to have been made in
accordance with law; and (3) claims for refund are strictly construed against the claimant as these partake of
the nature of tax exemption.
CTA: The tax court decreed that the petition should nonetheless be denied because of the respondent’s
failure to present documentary evidence to show that there were foreign currency exchange proceeds from
its export sales. The CTA also observed that respondent failed to submit the approval by Bangko Sentral ng
Pilipinas (BSP) of its Agreement of Offsetting with Toyo Lens Corporation and the certification of constructive
inward remittance.
Motion for Reconsideration of Respondent: The tax court partly granted the motion for reconsideration in
a Resolution. It ordered petitioner to REFUND or, in the alternative, to ISSUE a TAX CREDIT CERTIFICATE in
favor of Petitioner in the amount of ₱2,158,714.46 representing unutilized input tax payments. In granting
partial reconsideration, the tax court found that there was no need for BSP approval of the Agreement of
Offsetting since the same may be categorized as an inter-company open account offset arrangement.
However, the CTA stressed that respondent must still prove that there was an actual offsetting of accounts to
prove that constructive foreign currency exchange proceeds were inwardly remitted as required under
Section 106(A)(2)(a).
Motion for Reconsideration of Petitioner: It argued that respondent was not entitled to a refund because as a
PEZA-registered enterprise, it was not subject to VAT pursuant to Section 24 of Republic Act No. 7916. Thus,
since respondent was not subject to VAT, the Commissioner contended that the capital goods it purchased
must be deemed not used in VAT taxable business and therefore it was not entitled to refund of input taxes
on such capital goods. The CTA denied the petitioner’s motion for reconsideration. It held that the grounds
relied upon were only raised for the first time and that Section 24 of Rep. Act No. 7916 was not applicable
since respondent has availed of the income tax holiday incentive under the E.O. No. 226 or the Omnibus
Investment Code of 1987. The tax court pointed out that E.O. No. 226 granted PEZA-registered enterprises an
exemption from payment of income taxes for 4 or 6 years depending on whether the registration was as a
pioneer or as a non-pioneer enterprise, but subject to other national taxes including VAT.
CA: The petitioner then filed a Petition for Review with the Court of Appeals (CA), praying for the reversal of
the CTA Resolutions. The appellate court decided in respondent’s favor. It agreed with the ruling of the tax
court that respondent had two options under Section 23 of Rep. Act No. 7916, namely: (1) to avail of an
income tax holiday under E.O. No. 226 and be subject to VAT at the rate of 0%; or (2) to avail of the 5%
preferential tax under P.D. No. 66 and enjoy VAT exemption. Since respondent availed of the incentives
under E.O. No. 226, then the 0% VAT rate would be applicable to it and any unutilized input VAT should be
refunded to respondent upon proper application with and substantiation by the BIR. Hence, the instant
petition for review.
Ruling: The Supreme Court finds the petition bereft of merit. Respondent is not exempt from VAT and it
correctly registered itself as a VAT taxpayer. In fine, it is engaged in taxable rather than exempt transactions.
Principle: Taxable transactions are those transactions which are subject to value-added tax either at the rate
of ten percent (10%) or zero percent (0%). In taxable transactions, the seller shall be entitled to tax credit for
the value-added tax paid on purchases and leases of goods, properties or services. An exemption means that
the sale of goods, properties or services and the use or lease of properties is not subject to VAT (output tax)
and the seller is not allowed any tax credit on VAT (input tax) previously paid. The person making the exempt
sale of goods, properties or services shall not bill any output tax to his customers because the said
transaction is not subject to VAT.
Rationale: In principle, the purpose of applying a zero percent (0%) rate on a taxable transaction is to exempt
the transaction completely from VAT previously collected on inputs. It is thus the only true way to ensure
that goods are provided free of VAT. While the zero rating and the exemption are computationally the same,
they actually differ in several aspects, to wit:
(a) A zero-rated sale is a taxable transaction but does not result in an output tax while an exempted
transaction is not subject to the output tax;
(b) The input VAT on the purchases of a VAT-registered person with zero-rated sales may be
allowed as tax credits or refunded while the seller in an exempt transaction is not entitled to any
input tax on his purchases despite the issuance of a VAT invoice or receipt.
(c) Persons engaged in transactions which are zero-rated, being subject to VAT, are required to
register while registration is optional for VAT-exempt persons.
In this case, it is undisputed that respondent is engaged in the export business and is registered as a VAT
taxpayer per Certificate of Registration of the BIR. Respondent is subject to VAT at 0% rate and is entitled to a
refund or credit of the unutilized input taxes. The petition is denied.
Tax Credit Method
Zero-Rated and Effectively Zero-Rated Transactions
G.R. No. 153866 February 11, 2005
3. COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES)
FACTS: Respondent is a resident foreign corporation duly registered with the Securities and Exchange
Commission to do business in the Philippines, with principal office address at the new Cebu Township One,
Special Economic Zone, Barangay Cantao-an, Naga, Cebu. It is registered with the Philippine Export Zone
Authority (PEZA) and has been issued PEZA Certificate to engage in the manufacture of recording
components primarily used in computers for export. It is a VAT-registered entity. VAT returns have been filed
by respondent. An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with
supporting documents was filed. No final action has been received by respondent from petitioner on
respondent’s claim for VAT refund.
The administrative claim for refund by the respondent was not acted upon by the petitioner prompting the
respondent to elevate the case to the CTA by way of Petition for Review in order to toll the running of the
two-year prescriptive period.
Petitioner: Respondent’s alleged claim for tax refund/credit is subject to administrative routinary
investigation/examination by [petitioner’s] Bureau. Since ‘taxes are presumed to have been collected in
accordance with laws and regulations,’ the [respondent] has the burden of proof that the taxes sought to be
refunded were erroneously or illegally collected. Granting, without admitting, that respondent is a PEZA
registered Ecozone Enterprise, then its business is not subject to VAT. As [respondent’s] business is not
subject to VAT, the capital goods and services it alleged to have purchased are considered not used in VAT
taxable business. As such, [respondent] is not entitled to refund of input taxes on such capital goods.
CA: The CA affirmed the Decision of the CTA granting the claim for refund or issuance of a tax credit
certificate (TCC) in favor of respondent in the reduced amount of P12,122,922.66. This sum represented the
unutilized but substantiated input VAT paid on capital goods purchased. The appellate court reasoned that
respondent had availed itself only of the fiscal incentives under Executive Order No. Respondent was,
therefore, considered exempt only from the payment of income tax when it opted for the income tax holiday
in lieu of the 5 percent preferential tax on gross income earned. As a VAT-registered entity, though, it was
still subject to the payment of other national internal revenue taxes, like the VAT. Hence this Petition.
Ruling: The Petition is unmeritorious.
Tax Credit Method: The law that originally imposed the VAT in the country, as well as the subsequent
amendments of that law, has been drawn from the tax credit method. Under the present method that relies
on invoices, an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid
on its purchases, inputs and imports.
If at the end of a taxable quarter the output taxes charged by a seller are equal to the input taxes passed on
by the suppliers, no payment is required. It is when the output taxes exceed the input taxes that the excess
has to be paid. If, however, the input taxes exceed the output taxes, the excess shall be carried over to the
succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively zero-rated
transactions or from the acquisition of capital goods, any excess over the output taxes shall instead be
refunded to the taxpayer or credited against other internal revenue taxes.
Zero-Rated and Effectively Zero-Rated Transactions: Although both are taxable and similar in effect, zero-rated
transactions differ from effectively zero-rated transactions as to their source.
Zero-rated transactions generally refer to the export sale of goods and supply of services. The tax rate is set
at zero. When applied to the tax base, such rate obviously results in no tax chargeable against the purchaser.
The seller of such transactions charges no output tax, but can claim a refund of or a tax credit certificate for
the VAT previously charged by suppliers.
Effectively zero-rated transactions, however, refer to the sale of goods or supply of services to persons or
entities whose exemption under special laws or international agreements to which the Philippines is a
signatory effectively subjects such transactions to a zero rate. The seller who charges zero output tax on such
transactions can also claim a refund of or a tax credit certificate.
Principle: Applying the destination principle to the exportation of goods, automatic zero rating is primarily
intended to be enjoyed by the seller who is directly and legally liable for the VAT, making such seller
internationally competitive by allowing the refund or credit of input taxes that are attributable to export
sales. Effective zero rating, on the contrary, is intended to benefit the purchaser who, not being directly and
legally liable for the payment of the VAT, will ultimately bear the burden of the tax shifted by the suppliers. In
both instances of zero rating, there is total relief for the purchaser from the burden of the tax. But in an
exemption there is only partial relief, because the purchaser is not allowed any tax refund of or credit for
input taxes paid.
Exempt Transaction and Exempt Party: The object of exemption from the VAT may either be the transaction
itself or any of the parties to the transaction.
An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically
listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status -- VAT-
exempt or not -- of the party to the transaction. Indeed, such transaction is not subject to the VAT, but the
seller is not allowed any tax refund of or credit for any input taxes paid.
An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a
special law or an international agreement to which the Philippines is a signatory, and by virtue of which its
taxable transactions become exempt from the VAT. Such party is also not subject to the VAT, but may be
allowed a tax refund of or credit for input taxes paid, depending on its registration as a VAT or non-VAT
taxpayer.
Rationale: Special laws may certainly exempt transactions from the VAT. However, the Tax Code provides that
those falling under PD 66 are not. PD 66 is the precursor of RA 7916 the special law under which respondent
was registered. The purchase transactions it entered into are, therefore, not VAT-exempt. These are subject
to the VAT. Hence, respondent is required to register. Its sales transactions, however, will either be zero-
rated or taxed at the standard rate of 10 percent, depending again on the application of the destination
principle. If respondent enters into such sales transactions with a purchaser -- usually in a foreign country --
for use or consumption outside the Philippines, these shall be subject to 0 percent. If entered into with a
purchaser for use or consumption in the Philippines, then these shall be subject to 10 percent, unless the
purchaser is exempt from the indirect burden of the VAT, in which case it shall also be zero-rated. Since the
purchases of respondent are not exempt from the VAT, the rate to be applied is zero. Its exemption under
both PD 66 and RA 7916 effectively subjects such transactions to a zero rate, because the ecozone within
which it is registered is managed and operated by the PEZA as a separate customs territory. This means that
in such zone is created the legal fiction of foreign territory. Under the cross-border principle, no VAT shall be
imposed to form part of the cost of goods destined for consumption outside of the territorial border of the
taxing authority.
Registration: Petitioner merely asserts that by virtue of the PEZA registration alone of respondent, the latter
is not subject to the VAT. Consequently, the capital goods and services respondent has purchased are not
considered used in the VAT business, and no VAT refund or credit is due. This is a non sequitur. By the VAT’s
very nature as a tax on consumption, the capital goods and services respondent has purchased are subject to
the VAT, although at zero rate. Registration does not determine taxability under the VAT law. The BIR
regulations additionally requiring an approved prior application for effective zero rating cannot prevail over
the clear VAT nature of respondent’s transactions. The scope of such regulations is not "within the statutory
authority granted by the legislature. A mere administrative issuance, like a BIR regulation, cannot amend the
law. Being VAT-registered and having satisfactorily complied with all the requisites for claiming a tax refund
of or credit for the input VAT paid on capital goods purchased, respondent is entitled to VAT refund.
Invoice Requirements
G.R. No. 185969 November 19, 2014
4. AT&T COMMUNICATIONS SERVICES PHILIPPINES, INC., vs. COMMISSIONER OF INTERNAL
REVENUE, Respondent.
FACTS: Petitioner AT&T Communications Services Philippines, Inc. (petitioner), being a domestic corporation
principally engaged in the business of rendering information, promotional, supportive and liaison service,
entered into a Service Agreement with AT&T Communications Services International, Inc. (AT&T-CSI), a non-
resident foreign corporation, on 1 January 1999, whereby compensation for such services is paid in US
Dollars. Petitioner has an Assignment Agreement with AT&T Solutions, Inc. (AT&T-SI) where the latter
assigned to petitioner the performance of services AT&T-SI was supposed to provide Mastercard
International, Inc. (a non-resident foreign corporation) under a Virtual Private Network Service Agreement.
Likewise, the compensation for such services is paid in US Dollars to be inwardly remitted to the Philippines
by AT&T-SI, which acts as the collecting agent of petitioner. A second Assignment Agreement was executed
and entered into by petitioner with AT&T-SI for the purpose of performing the latter’s obligation to Lexmark
International, Inc. (also a non-resident foreign corporation) by providing services to its affiliates in the
Philippines, namely: Lexmark Research and Development Corporation and Lexmark International
(Philippines), Inc. (both Philippine Economic Zone Authority [PEZA]-registered enterprises). Payment of
petitioner’s aforesaid services is as well paid in US Dollars through telegraphic transfer. Consequently,
petitioner filed its Quarterly VAT Returns with the Bureau of Internal Revenue (BIR) for the taxable year
period. Petitioner filed with the BIR an application for refund and/or tax credit of its unutilized VAT input
taxes for the aforesaid taxable period amounting to ₱3,003,265.14. However, there being no action on said
administrative claim, petitioner filed a Petition for Review before the CTA in order to suspend the running of
the prescriptive period.
CTA Division: It dismissed petitioner’s claim for the refund or issuance of a TCC. It ruled that in order to be
entitled to its refund claim, petitioner must show proof of compliance with the substantiation requirements
as mandated by law and regulations. Therefore, considering that the subject revenues pertain to gross
receipts from services rendered by petitioner, valid official receipts and not mere sales invoices should have
been presented and submitted in evidence in support thereof. Without proper VAT official receipts, the
foreign currency payment received by petitioner from services rendered for the four (4) quarters of taxable
year 2003 cannot qualify for zero-rating for VAT purposes. The CTA in Division denied petitioner’s Motion for
Reconsideration.
CTA En Banc: It affirmed both the Decision and Resolution rendered by the CTA in Division. It categorically
pronounced that official receipt cannot be interchanged with sales invoice. It further emphasized that proof
of inward remittances like bank credit advices cannot be used in lieu of VAT official receipts to demonstrate
petitioner’s zero-rated transactions. Under Section 113 of the NIRC of 1997, as amended, irrespective of the
nature of transaction, be it taxable, exempt or zero-rated sale, the law mandates that the taxpayer "for every
sale, issue an invoice or receipt." Thus, the enumerated zero-rated transactions under Sections 106and 108
are those which are duly covered by VAT invoices (in the case of sales of goods), and VAT official receipts (in
the case of sales of services).
Petitioners: (1) the NIRC of 1997, as amended, does not limit the proof of input or output VAT to a single
document. There is no distinction of the evidentiary value of the supporting documents. Hence, it is clear that
invoices or receipts may be used interchangeably to substantiate VAT; (2) the use of the VAT official receipt
as proof of payment of the sale of service loses its significance due to the requirement that petitioner must
prove the validity of its inward remittances; (3) petitioner presented substantial evidence that unequivocally
proved its zero-rated transactions for the taxable year 2003; and (4) in civil cases, such as claims for refund or
issuance of a TCC, a mere preponderance of evidence will suffice to justify the grant of the claim.
Ruling: The Petition is denied. Section 113 of the NIRC of 1997, as amended is the focal provision. Although it
appears under such provision that there is no clear distinction on the evidentiary value of an invoice or
official receipt, it is worthy to note that the said provision is a general provision which covers all sales of a
VAT registered person, whether sale of goods or services. It does not necessarily follow that the legislature
intended to use the same interchangeably. The Court therefore cannot conclude that the general provision of
Section 113 of the NIRC of 1997, as amended, intended that the invoice and official receipt can be used for
either sale of goods or services, because there are specific provisions of the Tax Code which clearly delineates
the difference between the two transactions.
In this instance, Section 108 of the NIRC of 1997, as amended, provides:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties.-
(C) Determination of the Tax -The tax shall be computed by multiplying the total amount indicated in the
official receipt by one eleventh (1/11).
Comparatively, Section 106 of the same Code covers sale of goods, thus:
SEC. 106. Value-added Tax on Sale of Goods or Properties,-
(D) Determination of the Tax. – The tax shall be computed by multiplying the total amount indicated in the
invoiceby one-eleventh (1/11).
Apparently, the construction of the statute shows that the legislature intended to distinguish the use of an
invoice from an official receipt.
It is more logical therefore to conclude that subsections of a statute under the same heading should be
construed as having relevance to its heading. The legislature separately categorized VAT on sale of goods
from VAT on sale of services, not only by its treatment with regard to tax but also with respect to
substantiation requirements. The VAT invoice is the seller's best proof of the sale of the goods or services to
the buyer while the VAT receipt is the buyer's best evidence of the payment of goods or services received
from the seller. T
Zero-rated sales of goods and properties and Effectively zero-rated sales of goods
Invoice Requirements
G.R. No. 181136 June 13, 2012
5. WESTERN MINDANAO POWER CORPORATION, Petitioner, vs. COMMISSIONER OF INTERNAL
REVENUE, Respondent.
FACTS: Petitioner WMPC is a domestic corporation engaged in the production and sale of electricity. It is
registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer. Petitioner alleges that it sells
electricity solely to the National Power Corporation (NPC), which is in turn exempt from the payment of all
forms of taxes, duties, fees and imposts pursuant to Section 13 of Republic Act (R.A.) No. 6395. In view
thereof and pursuant to Section 108(B) (3) of the National Internal Revenue Code (NIRC), petitioner’s power
generation services to NPC is zero-rated. WMPC filed with the Commissioner of Internal Revenue (CIR)
applications for a tax credit certificate of its input VAT covering the taxable 3rd and 4th quarters of 1999
(amounting to ₱ 3,675,026.67) and all the taxable quarters of 2000 (amounting to ₱ 5,649,256.81). WMPC
also filed with the Court of Tax Appeals (CTA) in Division a Petition for Review, seeking refund/tax credit
certificates for the total amount of ₱ 9,324,283.30.
CIR: The CIR filed its Comment on the CTA Petition, arguing that WMPC was not entitled to the latter’s claim
for a tax refund in view of its failure to comply with the invoicing requirements under Section 113 of the NIRC
in relation to Section 4.108-1 of RR 7-95, which provides:
SECTION 4.108-1. Invoicing Requirements — All VAT-registered persons shall, for every sale or lease of goods
or properties or services, issue duly registered receipts or sales or commercial invoices which must show:
1. the name, TIN and address of seller;
2. date of transaction;
3. quantity, unit cost and description of merchandise or nature of service;
 4. the name, TIN, business style, if any, and address of the VAT-registered purchaser, customer or
client;
5. the word "zero rated" imprinted on the invoice covering zero-rated sales; and
6. the invoice value or consideration.
the sale. In a claim for tax refund or tax credit, the applicant must prove not only entitlement to the grant of
the claim under substantive law. It must also show satisfaction of all the documentary and evidentiary
requirements for an administrative claim for a refund or tax credit. Hence, the mere fact that petitioner’s
application for zero-rating has been approved by the CIR does not, by itself, justify the grant of a refund or
tax credit. The taxpayer claiming the refund must further comply with the invoicing and accounting
requirements mandated by the NIRC, as well as by revenue regulations implementing them.

In the case of sale of real property subject to VAT and where the zonal or market value is higher than the
actual consideration, the VAT shall be separately indicated in the invoice or receipt.
Only VAT-registered persons are required to print their TIN followed by the word "VAT" in their invoice or
receipts and this shall be considered as a "VAT Invoice." All purchases covered by invoices other than "VAT"
Invoice" shall not give rise to any input tax.
If the taxable person is also engaged in exempt operations, he should issue separate invoices or receipts for
the taxable and exempt operations. A "VAT Invoice" shall be issued only for sales of goods, properties or
services subject to VAT imposed in Sections 100 and 102 of the Code.
Under the NIRC, a creditable input tax should be evidenced by a VAT invoice or official receipt, which may
only be considered as such when it complies with the requirements of RR 7-95, particularly Section 4.108-1.
This section requires, among others, that "(i)f the sale is subject to zero percent (0%) value-added tax, the
term ‘zero-rated sale’ shall be written or printed prominently on the invoice or receipt." We are not
persuaded by petitioner’s argument that RR 7-95 constitutes undue expansion of the scope of the legislation
it seeks to implement on the ground that the statutory requirement for imprinting the phrase "zero-rated" on
VAT official receipts appears only in Republic Act No. 9337. This law took effect on 1 July 2005, or long after
petitioner had filed its claim for a refund. In fact, this Court has consistently held as fatal the failure to print
the word "zero-rated" on the VAT invoices or official receipts in claims for a refund or credit of input VAT on
zero-rated sales, even if the claims were made prior to the effectively of R.A. 9337. Clearly then, the present
Petition must be denied.

Petitioner: WMPC countered that the invoicing and accounting requirements laid down in RR 7-95 were
merely "compliance requirements," which were not indispensable to establish the claim for refund of excess
and unutilized input VAT. Also, Section 113 of the NIRC prevailing at the time the sales transactions were
made did not expressly state that failure to comply with all the invoicing requirements would result in the
disallowance of a tax credit refund. The express requirement – that "the term ‘zero-rated sale’ shall be
written or printed prominently" on the VAT invoice or official receipt for sales subject to zero percent (0%)
VAT – appeared in Section 113 of the NIRC only after it was amended by Section 11 of R.A. 9337. This
amendment cannot be applied retroactively, considering that it took effect only on 1 July 2005, or long after
petitioner filed its claim for a tax refund, and considering further that the RR 7-95 is punitive in nature.
CTA Second Division: It dismissed the Petition. It held that while petitioner submitted in evidence its Quarterly
VAT Returns for the periods applied for, "the same do not reflect any zero-rated or effectively zero-rated
sales allegedly incurred during said periods. The spaces provided for such amounts were left blank, which
only shows that there existed no zero-rated or effectively zero-rated sales for the 3rd and 4th quarters of
1999 and the four quarters of 2000." Moreover, it found that petitioner’s VAT Invoices and Official Receipts
did not contain on their face the phrase "zero-rated," contrary to Section 4.108-1 of RR 7-95.
VAT on Importation of goods
G.R. No. 172378 January 17, 2011
6. SILICON PHILIPPINES, INC., (Formerly INTEL PHILIPPINES MANUFACTURING, INC.), vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
FACTS: Petitioner Silicon Philippines, Inc., a corporation duly organized and existing under and by virtue of the
laws of the Republic of the Philippines, is engaged in the business of designing, developing, manufacturing
and exporting advance and large-scale integrated circuit components or "IC’s."3 Petitioner is registered with
the Bureau of Internal Revenue (BIR) as a Value Added Tax (VAT) taxpayer 4 and with the Board of
Investments (BOI) as a preferred pioneer enterprise.5
On May 21, 1999, petitioner filed with the respondent Commissioner of Internal Revenue (CIR), through the
One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance (DOF), an
application for credit/refund of unutilized input VAT for the period October 1, 1998 to December 31, 1998 in
the amount of ₱31,902,507.50, broken down as follows:

CTA En Banc Decision: WMPC appealed to the CTA En Banc, which issued a Decision dismissing the appeal and
Amount
affirming the CTA ruling. The CTA En Banc held that the receipts and evidence presented by petitioner failed
to fully substantiate the existence of the latter’s effectively zero-rated sales to NPC. Hence, the present Tax Paid on Imported/Locally Purchased ₱ 15,170,082.00
Petition. Capital Equipment
Total VAT paid on Purchases per Invoices 16,732,425.50
Received During the Period for which
Ruling: We deny the Petition. In the present case, petitioner’s claim for a refund or tax credit of input VAT is
this Application is Filed
anchored on Section 112(A) of the NIRC. A taxpayer engaged in zero-rated or effectively zero-rated sale may
apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid, attributable to Amount of Tax Credit/Refund Applied For ₱ 31,902,507.506
Proceedings before the CTA Division
On December 27, 2000, due to the inaction of the respondent, petitioner filed a Petition for Review with the
CTA Division, docketed as CTA Case No. 6212. Petitioner alleged that for the 4th quarter of 1998, it generated
and recorded zero-rated export sales in the amount of ₱3,027,880,818.42, paid to petitioner in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas;7 and that for the said period, petitioner paid input VAT in the total amount of
₱31,902,507.50,8 which have not been applied to any output VAT.9
To this, respondent filed an Answer10 raising the following special and affirmative defenses, to wit:
8. The petition states no cause of action as it does not allege the dates when the taxes sought to be
refunded/credited were actually paid;
9. It is incumbent upon herein petitioner to show that it complied with the provisions of Section
229 of the Tax Code as amended;
10. Claims for refund are construed strictly against the claimant, the same being in the nature of
exemption from taxes (Commissioner of Internal Revenue vs. Ledesma, 31 SCRA 95; Manila Electric
Co. vs. Commissioner of Internal Revenue, 67 SCRA 35);
11. One who claims to be exempt from payment of a particular tax must do so under clear and
unmistakable terms found in the statute (Asiatic Petroleum vs. Llanes, 49 Phil. 466; Union Garment
Co. vs. Court of Tax Appeals, 4 SCRA 304);
12. In an action for refund, the burden is upon the taxpayer to prove that he is entitled thereto, and
failure to sustain the same is fatal to the action for refund. Furthermore, as pointed out in the case
of William Li Yao vs. Collector (L-11875, December 28, 1963), amounts sought to be recovered or
credited should be shown to be taxes which are erroneously or illegally collected; that is to say,
their payment was an independent single act of voluntary payment of a tax believed to be due and
collectible and accepted by the government, which had therefor become part of the State moneys
subject to expenditure and perhaps already spent or appropriated; and
13. Taxes paid and collected are presumed to have been made in accordance with the law and
regulations, hence not refundable.11
On November 18, 2003, the CTA Division rendered a Decision12 partially granting petitioner’s claim for refund
of unutilized input VAT on capital goods. Out of the amount of ₱15,170,082.00, only ₱9,898,867.00 was
allowed to be refunded because training materials, office supplies, posters, banners, T-shirts, books, and
other similar items purchased by petitioner were not considered capital goods under Section 4.106-1(b) of
Revenue Regulations (RR) No. 7-95 (Consolidated Value-Added Tax Regulations).13 With regard to petitioner’s
claim for credit/refund of input VAT attributable to its zero-rated export sales, the CTA Division denied the
same because petitioner failed to present an Authority to Print (ATP) from the BIR;14 neither did it print on its
export sales invoices the ATP and the word "zero-rated."15 Thus, the CTA Division disposed of the case in this
wise:
WHEREFORE, in view of the foregoing the instant petition for review is hereby PARTIALLY GRANTED.
Respondent is ORDERED to ISSUE A TAX CREDIT CERTIFICATE in favor of petitioner in the reduced amount of
P9,898,867.00 representing input VAT on importation of capital goods. However, the claim for refund of
input VAT attributable to petitioner's alleged zero-rated sales in the amount of P16,732,425.50 is hereby
DENIED for lack of merit.
SO ORDERED.16
Not satisfied with the Decision, petitioner moved for reconsideration.17 It claimed that it is not required to
secure an ATP since it has a "Permit to Adopt Computerized Accounting Documents such as Sales Invoice and
Official Receipts" from the BIR.18 Petitioner further argued that because all its finished products are exported
to its mother company, Intel Corporation, a non-resident corporation and a non-VAT registered entity, the
printing of the word "zero-rated" on its export sales invoices is not necessary.19
On its part, respondent filed a Motion for Partial Reconsideration20 contending that petitioner is not entitled
to a credit/refund of unutilized input VAT on capital goods because it failed to show that the goods
imported/purchased are indeed capital goods as defined in Section 4.106-1 of RR No. 7-95.21
The CTA Division denied both motions in a Resolution22 dated August 10, 2004. It noted that:
[P]etitioner’s request for Permit to Adopt Computerized Accounting Documents such as Sales Invoice and
Official Receipt was approved on August 31, 2001 while the period involved in this case was October 31, 1998
to December 31, 1998 x x x. While it appears that petitioner was previously issued a permit by the BIR Makati
Branch, such permit was only limited to the use of computerized books of account x x x. It was only on August
31, 2001 that petitioner was permitted to generate computerized sales invoices and official receipts
[provided that the BIR Permit Number is printed] in the header of the document x x x.
xxxx
Thus, petitioner’s contention that it is not required to show its BIR permit number on the sales invoices runs
counter to the requirements under the said "Permit." This court also wonders why petitioner was issuing
computer generated sales invoices during the period involved (October 1998 to December 1998) when it did
not have an authority or permit. Therefore, we are convinced that such documents lack probative value and
should be treated as inadmissible, incompetent and immaterial to prove petitioner’s export sales transaction.
xxxx
ACCORDINGLY, the Motion for Reconsideration and the Supplemental Motion for Reconsideration filed by
petitioner as well as the Motion for Partial Reconsideration of respondent are hereby DENIED for lack of
merit. The pronouncement in the assailed decision is REITERATED.
SO ORDERED 23 In this case, not only should petitioner establish that it is entitled to the claim but it must most importantly
show proof of compliance with the substantiation requirements as mandated by law or regulations.
Ruling of the CTA En Banc
The rest of the assigned errors pertain to the alleged errors of the First Division: in finding that the petitioner
Undaunted, petitioner elevated the case to the CTA En Banc via a Petition for Review,24 docketed as EB Case failed to comply with the substantiation requirements provided by law in proving its claim for refund; in
No. 23. reducing the amount of petitioner’s tax credit for input vat on importation of capital goods; and in denying
petitioner’s claim for refund of input vat attributable to petitioner’s zero-rated sales.
On September 30, 2005, the CTA En Banc issued the assailed Decision25 denying the petition for lack of merit.
Pertinent portions of the Decision read: It is petitioner’s contention that it has clearly established its right to the tax credit or refund by way of
substantial evidence in the form of material and documentary evidence and it would be improper to set aside
with haste the claimed input VAT on capital goods expended for training materials, office supplies, posters,
This Court notes that petitioner raised the same issues which have already been thoroughly discussed in the
banners, t-shirts, books and the like because Revenue Regulations No. 7-95 defines capital goods as to
assailed Decision, as well as, in the Resolution denying petitioner's Motion for Partial Reconsideration.
include even those goods which are indirectly used in the production or sale of taxable goods or services.

With regard to the first assigned error, this Court reiterates that, the requirement of [printing] the BIR permit
Capital goods or properties, as defined under Section 4.106-1(b) of Revenue Regulations No. 7-95, refer "to
to print on the face of the sales invoices and official receipts is a control mechanism adopted by the Bureau
goods or properties with estimated useful life greater than one year and which are treated as depreciable
of Internal Revenue to safeguard the interest of the government.
assets under Section 29 (f), used directly or indirectly in the production or sale of taxable goods or services."

This requirement is clearly mandated under Section 238 of the 1997 National Internal Revenue Code, which
Considering that the items (training materials, office supplies, posters, banners, t-shirts, books and the like)
provides that:
purchased by petitioner as reflected in the summary were not duly proven to have been used, directly or
indirectly[,] in the production or sale of taxable goods or services, the same cannot be considered as capital
SEC. 238. Printing of Receipts or Sales or Commercial Invoice. – All persons who are engaged in business shall goods as defined above[. Consequently,] the same may not x x x then [be] claimed as such.
secure from the Bureau of Internal Revenue an authority to print receipts or sales or commercial invoices
before a printer can print the same.
WHEREFORE, in view of the foregoing, this instant Petition for Review is hereby DENIED DUE COURSE and
hereby DISMISSED for lack of merit. This Court's Decision of November 18, 2003 and Resolution of August 10,
The above mentioned provision seeks to eliminate the use of unregistered and double or multiple sets of 2004 are hereby AFFIRMED in all respects.
receipts by striking at the very root of the problem — the printer (H. S. de Leon, The National Internal
Revenue Code Annotated, 7th Ed., p. 901). And what better way to prove that the required permit to print
SO ORDERED.26
was secured from the Bureau of Internal Revenue than to show or print the same on the face of the invoices.
There can be no other valid proof of compliance with the above provision than to show the Authority to Print
Permit number [printed] on the sales invoices and official receipts. Petitioner sought reconsideration of the assailed Decision but the CTA En Banc denied the Motion27 in a
Resolution28 dated April 20, 2006.
With regard to petitioner’s failure to print the word "zero-rated" on the face of its export sales invoices, it
must be emphasized that Section 4.108-1 of Revenue Regulations No. 7-95 specifically requires that all value- Issues
added tax registered persons shall, for every sale or lease of goods or properties or services, issue duly
registered invoices which must show the word "zero-rated" [printed] on the invoices covering zero-rated Hence, the instant Petition raising the following issues for resolution:
sales.
(1) whether the CTA En Banc erred in denying petitioner’s claim for credit/ refund of input VAT
It is not enough that petitioner prove[s] that it is entitled to its claim for refund by way of substantial attributable to its zero-rated sales in the amount of ₱16,732,425.00 due to its failure:
evidence. Well settled in our jurisprudence [is] that tax refunds are in the nature of tax exemptions and as
such, they are regarded as in derogation of sovereign authority (Commissioner of Internal Revenue vs. (a) to show that it secured an ATP from the BIR and to indicate the same in its export
Ledesma, 31 SCRA 95). Thus, tax refunds are construed in strictissimi juris against the person or entity sales invoices; and
claiming the same (Commissioner of Internal Revenue vs. Procter & Gamble Philippines Manufacturing
Corporation, 204 SCRA 377; Commissioner of Internal Revenue vs. Tokyo Shipping Co., Ltd., 244 SCRA 332).
 (b) to print the word "zero-rated" in its export sales invoices.29 In a claim for credit/refund of input VAT attributable to zero-rated sales, Section 112 (A)43 of the NIRC lays
down four requisites, to wit:
(2) whether the CTA En Banc erred in ruling that only the amount of ₱9,898,867.00 can be
classified as input VAT paid on capital goods.30 1) the taxpayer must be VAT-registered;

Petitioner’s Arguments 2) the taxpayer must be engaged in sales which are zero-rated or effectively zero-rated;

Petitioner posits that the denial by the CTA En Banc of its claim for refund of input VAT attributable to its 3) the claim must be filed within two years after the close of the taxable quarter when such sales
zero-rated sales has no legal basis because the printing of the ATP and the word "zero-rated" on the export were made; and
sales invoices are not required under Sections 113 and 237 of the National Internal Revenue Code
(NIRC).31 And since there is no law requiring the ATP and the word "zero-rated" to be indicated on the sales 4) the creditable input tax due or paid must be attributable to such sales, except the transitional
invoices,32 the absence of such information in the sales invoices should not invalidate the petition33 nor result input tax, to the extent that such input tax has not been applied against the output tax.
in the outright denial of a claim for tax credit/refund.34 To support its position, petitioner cites Intel
Technology Philippines, Inc. v. Commissioner of Internal Revenue, 35 where Intel’s failure to print the ATP on
To prove that it is engaged in zero-rated sales, petitioner presented export sales invoices, certifications of
the sales invoices or receipts did not result in the outright denial of its claim for tax credit/refund. 36 Although
inward remittance, export declarations, and airway bills of lading for the fourth quarter of 1998. The CTA
the cited case only dealt with the printing of the ATP, petitioner submits that the reasoning in that case
Division, however, found the export sales invoices of no probative value in establishing petitioner’s zero-
should also apply to the printing of the word "zero-rated."37 Hence, failure to print of the word "zero-rated"
rated sales for the purpose of claiming credit/refund of input VAT because petitioner failed to show that it
on the sales invoices should not result in the denial of a claim.
has an ATP from the BIR and to indicate the ATP and the word "zero-rated" in its export sales invoices.44 The
CTA Division cited as basis Sections 113,4523746 and 23847 of the NIRC, in relation to Section 4.108-1 of RR No.
As to the claim for refund of input VAT on capital goods, petitioner insists that it has sufficiently proven 7-95.48
through testimonial and documentary evidence that all the goods purchased were used in the production
and manufacture of its finished products which were sold and exported.38
We partly agree with the CTA.

Respondent’s Arguments
Printing the ATP on the invoices or receipts is not required

To refute petitioner’s arguments, respondent asserts that the printing of the ATP on the export sales invoices,
It has been settled in Intel Technology Philippines, Inc. v. Commissioner of Internal Revenue49 that the ATP
which serves as a control mechanism for the BIR, is mandated by Section 238 of the NIRC;39 while the printing
need not be reflected or indicated in the invoices or receipts because there is no law or regulation requiring
of the word "zero-rated" on the export sales invoices, which seeks to prevent purchasers of zero-rated sales
it.50 Thus, in the absence of such law or regulation, failure to print the ATP on the invoices or receipts should
or services from claiming non-existent input VAT credit/refund,40 is required under RR No. 7-95, promulgated
not result in the outright denial of a claim or the invalidation of the invoices or receipts for purposes of
pursuant to Section 244 of the NIRC.41 With regard to the unutilized input VAT on capital goods, respondent
claiming a refund.51
counters that petitioner failed to show that the goods it purchased/imported are capital goods as defined in
Section 4.106-1 of RR No. 7-95. 42
ATP must be secured from the BIR
Our Ruling
But while there is no law requiring the ATP to be printed on the invoices or receipts, Section 238 of the NIRC
expressly requires persons engaged in business to secure an ATP from the BIR prior to printing invoices or
The petition is bereft of merit.
receipts. Failure to do so makes the person liable under Section 26452 of the NIRC.

Before us are two types of input VAT credits. One is a credit/refund of input VAT attributable to zero-rated
This brings us to the question of whether a claimant for unutilized input VAT on zero-rated sales is required
sales under Section 112 (A) of the NIRC, and the other is a credit/refund of input VAT on capital goods
to present proof that it has secured an ATP from the BIR prior to the printing of its invoices or receipts.
pursuant to Section 112 (B) of the same Code.

We rule in the affirmative.

Credit/refund of input VAT on zero-rated sales
Under Section 112 (A) of the NIRC, a claimant must be engaged in sales which are zero-rated or effectively 3. the input taxes must not have been applied against any output tax liability; and
zero-rated. To prove this, duly registered invoices or receipts evidencing zero-rated sales must be presented.
However, since the ATP is not indicated in the invoices or receipts, the only way to verify whether the 4. the administrative claim for refund must have been filed within two (2) years after the close of
invoices or receipts are duly registered is by requiring the claimant to present its ATP from the BIR. Without the taxable quarter when the importation or purchase was made.
this proof, the invoices or receipts would have no probative value for the purpose of refund. In the case
of Intel, we emphasized that:
Corollarily, Section 4.106-1 (b) of RR No. 7-95 defines capital goods as follows:

It bears reiterating that while the pertinent provisions of the Tax Code and the rules and regulations
"Capital goods or properties" refer to goods or properties with estimated useful life greater that one year and
implementing them require entities engaged in business to secure a BIR authority to print invoices or receipts
which are treated as depreciable assets under Section 29 (f),57 used directly or indirectly in the production or
and to issue duly registered invoices or receipts, it is not specifically required that the BIR authority to print
sale of taxable goods or services.
be reflected or indicated therein. Indeed, what is important with respect to the BIR authority to print is that it
has been secured or obtained by the taxpayer, and that invoices or receipts are duly registered.53 (Emphasis
supplied) Based on the foregoing definition, we find no reason to deviate from the findings of the CTA that training
materials, office supplies, posters, banners, T-shirts, books, and the other similar items reflected in
petitioner’s Summary of Importation of Goods are not capital goods. A reduction in the refundable input VAT
Failure to print the word "zero-rated" on the sales invoices is fatal to a claim for refund of input VAT1awphi1
on capital goods from ₱15,170,082.00 to ₱9,898,867.00 is therefore in order.

Similarly, failure to print the word "zero-rated" on the sales invoices or receipts is fatal to a claim for
WHEREFORE, the Petition is hereby DENIED. The assailed Decision dated September 30, 2005 and the
credit/refund of input VAT on zero-rated sales.
Resolution dated April 20, 2006 of the Court of Tax Appeals En Banc are hereby AFFIRMED.

In Panasonic Communications Imaging Corporation of the Philippines (formerly Matsushita Business Machine
SO ORDERED.
Corporation of the Philippines) v. Commissioner of Internal Revenue,54 we upheld the denial of Panasonic’s
claim for tax credit/refund due to the absence of the word "zero-rated" in its invoices. We explained that
compliance with Section 4.108-1 of RR 7-95, requiring the printing of the word "zero rated" on the invoice i. Transfer by tax exempt persons
covering zero-rated sales, is essential as this regulation proceeds from the rule-making authority of the
Secretary of Finance under Section 24455 of the NIRC. G.R. No. 151135 July 2, 2004

All told, the non-presentation of the ATP and the failure to indicate the word "zero-rated" in the invoices or CONTEX CORPORATION, petitioner,
receipts are fatal to a claim for credit/refund of input VAT on zero-rated sales. The failure to indicate the ATP vs.
in the sales invoices or receipts, on the other hand, is not. In this case, petitioner failed to present its ATP and HON. COMMISSIONER OF INTERNAL REVENUE, respondent.
to print the word "zero-rated" on its export sales invoices. Thus, we find no error on the part of the CTA in
denying outright petitioner’s claim for credit/refund of input VAT attributable to its zero-rated sales.

Credit/refund of input VAT on capital goods

DECISION
Capital goods are defined under Section 4.106-1(b) of RR No. 7-95

To claim a refund of input VAT on capital goods, Section 112 (B)56 of the NIRC requires that:

1. the claimant must be a VAT registered person; QUISUMBING, J.:

2. the input taxes claimed must have been paid on capital goods; For review is the Decision1 dated September 3, 2001, of the Court of Appeals, in CA-G.R. SP No. 62823, which
reversed and set aside the decision2 dated October 13, 2000, of the Court of Tax Appeals (CTA). The CTA had
ordered the Commissioner of Internal Revenue (CIR) to refund the sum of P683,061.90 to petitioner as
erroneously paid input value-added tax (VAT) or in the alternative, to issue a tax credit certificate for said
amount. Petitioner also assails the appellate court’s Resolution,3 dated December 19, 2001, denying the
motion for reconsideration.
Petitioner is a domestic corporation engaged in the business of manufacturing hospital textiles and garments
and other hospital supplies for export. Petitioner’s place of business is at the Subic Bay Freeport Zone (SBFZ).
It is duly registered with the Subic Bay Metropolitan Authority (SBMA) as a Subic Bay Freeport Enterprise,
pursuant to the provisions of Republic Act No. 7227.4 As an SBMA-registered firm, petitioner is exempt from
all local and national internal revenue taxes except for the preferential tax provided for in Section 12 (c)5 of
Rep. Act No. 7227. Petitioner also registered with the Bureau of Internal Revenue (BIR) as a non-VAT taxpayer
under Certificate of Registration RDO Control No. 95-180-000133.
From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and materials necessary
in the conduct of its manufacturing business. The suppliers of these goods shifted unto petitioner the 10%
VAT on the purchased items, which led the petitioner to pay input taxes in the amounts of P539,411.88
and P504,057.49 for 1997 and 1998, respectively.6
Acting on the belief that it was exempt from all national and local taxes, including VAT, pursuant to Rep. Act
No. 7227, petitioner filed two applications for tax refund or tax credit of the VAT it paid. Mr. Edilberto Carlos,
revenue district officer of BIR RDO No. 19, denied the first application letter, dated December 29, 1998.
Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax refund/credit, this time
directly with Atty. Alberto Pagabao, the regional director of BIR Revenue Region No. 4. The second letter
sought a refund or issuance of a tax credit certificate in the amount of P1,108,307.72, representing
erroneously paid input VAT for the period January 1, 1997 to November 30, 1998.
When no response was forthcoming from the BIR Regional Director, petitioner then elevated the matter to
the Court of Tax Appeals, in a petition for review docketed as CTA Case No. 5895. Petitioner stressed that
Section 112(A)7 if read in relation to Section 106(A)(2)(a)8 of the National Internal Revenue Code, as amended
and Section 12(b)9 and (c) of Rep. Act No. 7227 would show that it was not liable in any way for any value-
added tax.
In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply the rule that claims for
refund are strictly construed against the taxpayer. Since petitioner failed to establish both its right to a tax
refund or tax credit and its compliance with the rules on tax refund as provided for in Sections 204 10 and
22911 of the Tax Code, its claim should be denied, according to the BIR.
On October 13, 2000, the CTA decided CTA Case No. 5895 as follows:
WHEREFORE, in view of the foregoing, the Petition for Review is hereby PARTIALLY GRANTED.
Respondent is hereby ORDERED to REFUND or in the alternative to ISSUE A TAX CREDIT
CERTIFICATE in favor of Petitioner the sum of P683,061.90, representing erroneously paid input
VAT.
SO ORDERED.12
In granting a partial refund, the CTA ruled that petitioner misread Sections 106(A)(2)(a) and 112(A) of the Tax
Code. The tax court stressed that these provisions apply only to those entities registered as VAT taxpayers
whose sales are zero-rated. Petitioner does not fall under this category, since it is a non-VAT taxpayer as
evidenced by the Certificate of Registration RDO Control No. 95-180-000133 issued by RDO Rosemarie
Ragasa of BIR RDO No. 18 of the Subic Bay Freeport Zone and thus it is exempt from VAT, pursuant to Rep.
Act No. 7227, said the CTA.
Nonetheless, the CTA held that the petitioner is exempt from the imposition of input VAT on its purchases of
supplies and materials. It pointed out that under Section 12(c) of Rep. Act No. 7227 and the Implementing
Rules and Regulations of the Bases Conversion and Development Act of 1992, all that petitioner is required to
pay as a SBFZ-registered enterprise is a 5% preferential tax.
The CTA also disallowed all refunds of input VAT paid by the petitioner prior to June 29, 1997 for being
barred by the two-year prescriptive period under Section 229 of the Tax Code. The tax court also limited the
refund only to the input VAT paid by the petitioner on the supplies and materials directly used by the
petitioner in the manufacture of its goods. It struck down all claims for input VAT paid on maintenance, office
supplies, freight charges, and all materials and supplies shipped or delivered to the petitioner’s Makati and
Pasay City offices.
Respondent CIR then filed a petition, docketed as CA-G.R. SP No. 62823, for review of the CTA decision by the
Court of Appeals. Respondent maintained that the exemption of Contex Corp. under Rep. Act No. 7227 was
limited only to direct taxes and not to indirect taxes such as the input component of the VAT. The
Commissioner pointed out that from its very nature, the value-added tax is a burden passed on by a VAT
registered person to the end users; hence, the direct liability for the tax lies with the suppliers and not
Contex.
Finding merit in the CIR’s arguments, the appellate court decided CA-G.R. SP No. 62823 in his favor, thus:
WHEREFORE, premises considered, the appealed decision is hereby REVERSED AND SET ASIDE.
Contex’s claim for refund of erroneously paid taxes is DENIED accordingly.
SO ORDERED.13
In reversing the CTA, the Court of Appeals held that the exemption from duties and taxes on the importation
of raw materials, capital, and equipment of SBFZ-registered enterprises under Rep. Act No. 7227 and its
implementing rules covers only "the VAT imposable under Section 107 of the [Tax Code], which is a direct
liability of the importer, and in no way includes the value-added tax of the seller-exporter the burden of
which was passed on to the importer as an additional costs of the goods."14 This was because the exemption
granted by Rep. Act No. 7227 relates to the act of importation and Section 10715 of the Tax Code specifically
imposes the VAT on importations. The appellate court applied the principle that tax exemptions are strictly
construed against the taxpayer. The Court of Appeals pointed out that under the implementing rules of Rep.
Act No. 7227, the exemption of SBFZ-registered enterprises from internal revenue taxes is qualified as
pertaining only to those for which they may be directly liable. It then stated that apparently, the legislative
intent behind Rep. Act No. 7227 was to grant exemptions only to direct taxes, which SBFZ-registered
enterprise may be liable for and only in connection with their importation of raw materials, capital, and
equipment as well as the sale of their goods and services.
Petitioner timely moved for reconsideration of the Court of Appeals decision, but the motion was denied.
Hence, the instant petition raising as issues for our resolution the following:
A. WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL AND NATIONAL INTERNAL REVENUE
TAXES PROVIDED IN REPUBLIC ACT NO. 7227 COVERS THE VALUE ADDED TAX PAID BY PETITIONER,
A SUBIC BAY FREEPORT ENTERPRISE ON ITS PURCHASES OF SUPPLIES AND MATERIALS.
B. WHETHER OR NOT THE COURT OF TAX APPEALS CORRECTLY HELD THAT PETITIONER IS ENTITLED
TO A TAX CREDIT OR REFUND OF THE VAT PAID ON ITS PURCHASES OF SUPPLIES AND RAW
MATERIALS FOR THE YEARS 1997 AND 1998.16
Simply stated, we shall resolve now the issues concerning: (1) the correctness of the finding of the Court of
Appeals that the VAT exemption embodied in Rep. Act No. 7227 does not apply to petitioner as a purchaser;
and (2) the entitlement of the petitioner to a tax refund on its purchases of supplies and raw materials for
1997 and 1998.
On the first issue, petitioner argues that the appellate court’s restrictive interpretation of petitioner’s VAT
exemption as limited to those covered by Section 107 of the Tax Code is erroneous and devoid of legal basis.
It contends that the provisions of Rep. Act No. 7227 clearly and unambiguously mandate that no local and
national taxes shall be imposed upon SBFZ-registered firms and hence, said law should govern the case.
Petitioner calls our attention to regulations issued by both the SBMA and BIR clearly and categorically
providing that the tax exemption provided for by Rep. Act No. 7227 includes exemption from the imposition
of VAT on purchases of supplies and materials.
The respondent takes the diametrically opposite view that while Rep. Act No. 7227 does grant tax
exemptions, such grant is not all-encompassing but is limited only to those taxes for which a SBFZ-registered
business may be directly liable. Hence, SBFZ locators are not relieved from the indirect taxes that may be
shifted to them by a VAT-registered seller.
At this juncture, it must be stressed that the VAT is an indirect tax. As such, the amount of tax paid on the
goods, properties or services bought, transferred, or leased may be shifted or passed on by the seller,
transferor, or lessor to the buyer, transferee or lessee.17 Unlike a direct tax, such as the income tax, which
primarily taxes an individual’s ability to pay based on his income or net wealth, an indirect tax, such as the
VAT, is a tax on consumption of goods, services, or certain transactions involving the same. The VAT, thus,
forms a substantial portion of consumer expenditures.
Further, in indirect taxation, there is a need to distinguish between the liability for the tax and the burden of
the tax. As earlier pointed out, the amount of tax paid may be shifted or passed on by the seller to the buyer.
What is transferred in such instances is not the liability for the tax, but the tax burden. In adding or including
the VAT due to the selling price, the seller remains the person primarily and legally liable for the payment of
the tax. What is shifted only to the intermediate buyer and ultimately to the final purchaser is the burden of
the tax.18 Stated differently, a seller who is directly and legally liable for payment of an indirect tax, such as
the VAT on goods or services is not necessarily the person who ultimately bears the burden of the same tax.
It is the final purchaser or consumer of such goods or services who, although not directly and legally liable for
the payment thereof, ultimately bears the burden of the tax.19
Exemptions from VAT are granted by express provision of the Tax Code or special laws. Under VAT, the
transaction can have preferential treatment in the following ways:
(a) VAT Exemption. An exemption means that the sale of goods or properties and/or services and
the use or lease of properties is not subject to VAT (output tax) and the seller is not allowed any tax
credit on VAT (input tax) previously paid.20 This is a case wherein the VAT is removed at the exempt
stage (i.e., at the point of the sale, barter or exchange of the goods or properties).
The person making the exempt sale of goods, properties or services shall not bill any output tax to
his customers because the said transaction is not subject to VAT. On the other hand, a VAT-
registered purchaser of VAT-exempt goods/properties or services which are exempt from VAT is
not entitled to any input tax on such purchase despite the issuance of a VAT invoice or receipt.21
(b) Zero-rated Sales. These are sales by VAT-registered persons which are subject to 0% rate,
meaning the tax burden is not passed on to the purchaser. A zero-rated sale by a VAT-registered
person, which is a taxable transaction for VAT purposes, shall not result in any output tax. However,
the input tax on his purchases of goods, properties or services related to such zero-rated sale shall
be available as tax credit or refund in accordance with these regulations.22
Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm. In contrast, exemption only
removes the VAT at the exempt stage, and it will actually increase, rather than reduce the total taxes paid by
the exempt firm’s business or non-retail customers. It is for this reason that a sharp distinction must be made
between zero-rating and exemption in designating a value-added tax.23
Apropos, the petitioner’s claim to VAT exemption in the instant case for its purchases of supplies and raw
materials is founded mainly on Section 12 (b) and (c) of Rep. Act No. 7227, which basically exempts them
from all national and local internal revenue taxes, including VAT and Section 4 (A)(a) of BIR Revenue
Regulations No. 1-95.24
On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is not controverted by the
respondent. In fact, petitioner is registered as a NON-VAT taxpayer per Certificate of Registration25 issued by
the BIR. As such, it is exempt from VAT on all its sales and importations of goods and services.
Petitioner’s claim, however, for exemption from VAT for its purchases of supplies and raw materials is
incongruous with its claim that it is VAT-Exempt, for only VAT-Registered entities can claim Input VAT
Credit/Refund.
The point of contention here is whether or not the petitioner may claim a refund on the Input VAT
erroneously passed on to it by its suppliers.
While it is true that the petitioner should not have been liable for the VAT inadvertently passed on to it by its
supplier since such is a zero-rated sale on the part of the supplier, the petitioner is not the proper party to
claim such VAT refund.
Section 4.100-2 of BIR’s Revenue Regulations 7-95, as amended, or the "Consolidated Value-Added Tax
Regulations" provide:
Sec. 4.100-2. Zero-rated Sales. A zero-rated sale by a VAT-registered person, which is a taxable
transaction for VAT purposes, shall not result in any output tax. However, the input tax on his
purchases of goods, properties or services related to such zero-rated sale shall be available as tax
credit or refund in accordance with these regulations.
The following sales by VAT-registered persons shall be subject to 0%:
(a) Export Sales
"Export Sales" shall mean
...
(5) Those considered export sales under Articles 23 and 77 of Executive Order No. 226,
otherwise known as the Omnibus Investments Code of 1987, and other special laws, e.g.
Republic Act No. 7227, otherwise known as the Bases Conversion and Development Act
of 1992.
...
(c) Sales to persons or entities whose exemption under special laws, e.g. R.A. No. 7227 duly
registered and accredited enterprises with Subic Bay Metropolitan Authority (SBMA) and Clark
Development Authority (CDA), R. A. No. 7916, Philippine Economic Zone Authority (PEZA), or
international agreements, e.g. Asian Development Bank (ADB), International Rice Research Institute
(IRRI), etc. to which the Philippines is a signatory effectively subject such sales to zero-rate."
Since the transaction is deemed a zero-rated sale, petitioner’s supplier may claim an Input VAT credit with no
corresponding Output VAT liability. Congruently, no Output VAT may be passed on to the petitioner.
On the second issue, it may not be amiss to re-emphasize that the petitioner is registered as a NON-VAT
taxpayer and thus, is exempt from VAT. As an exempt VAT taxpayer, it is not allowed any tax credit on VAT
(input tax) previously paid. In fine, even if we are to assume that exemption from the burden of VAT on
petitioner’s purchases did exist, petitioner is still not entitled to any tax credit or refund on the input tax
previously paid as petitioner is an exempt VAT taxpayer.
Rather, it is the petitioner’s suppliers who are the proper parties to claim the tax credit and accordingly
refund the petitioner of the VAT erroneously passed on to the latter.
Accordingly, we find that the Court of Appeals did not commit any reversible error of law in holding that
petitioner’s VAT exemption under Rep. Act No. 7227 is limited to the VAT on which it is directly liable as a
seller and hence, it cannot claim any refund or exemption for any input VAT it paid, if any, on its purchases of
raw materials and supplies.
WHEREFORE, the petition is DENIED for lack of merit. The Decision dated September 3, 2001, of the Court of
Appeals in CA-G.R. SP No. 62823, as well as its Resolution of December 19, 2001 are AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
ii. Technical Importation
G.R. No. 210588
SECRETARY OF FINANCE CESAR B. PURISIMA AND COMMISSIONER OF INTERNAL REVENUE KIM S. JACINTO-
HENARES, Petitioners
vs.
REPRESENTATIVE CARMELO F. LAZATIN AND ECOZONE PLASTIC ENTERPRISES CORPORATION, Respondents
DECISION
BRION, J.:
This is a direct recourse to this Court from the Regional Trial Court (RTC), Branch 58, Angeles City, through a
petition for review on certiorari1 under Rule 45 of the Rules of Court on a pure question of law. The petition
seeks the reversal of the November 8, 2013 decision2 of the RTC in SCA Case No. 12-410. In the assailed
decision, the RTC declared Revenue Regulation (RR) No. 2-2012 unconstitutional and without force and
effect.
The Facts
In response to reports of smuggling of petroleum and petroleum products and to ensure the correct taxes
are paid and collected, petitioner Secretary of Finance Cesar V. Purisima - pursuant to his authority to
interpret tax laws3 and upon the recommendation of petitioner Commissioner of Internal Revenue (CIR) Kim
S. Jacinto-Henares signed RR 2-2012 on February 17, 2012.
The RR requires the payment of value-added tax (VAT) and excise tax on the importation of all petroleum and
petroleum products coming directly from abroad and brought into the Philippines, including Freeport and
economic zones (FEZs).4 It then allows the credit or refund of any VAT or excise tax paid if the taxpayer
proves that the petroleum previously brought in has been sold to a duly registered FEZ locator and used
pursuant to the registered activity of such locator.5
In other words, an FEZ locator must first pay the required taxes upon entry into the FEZ of a petroleum
product, and must thereafter prove the use of the petroleum product for the locator's registered activity in
order to secure a credit for the taxes paid.
On March 7, 2012, Carmelo F. Lazatin, in his capacity as Pampanga First District Representative, filed a
petition for prohibition and injunction6 against the petitioners to annul and set aside RR 2-2012.
Lazatin posits that Republic Act No. (RA) 9400 7 treats the Clark Special Economic Zone and Clark Freeport
Zone (together hereinafter referred to as Clark FEZ) as a separate customs territory and allows tax and duty-
free importations of raw materials, capital and equipment into the zone. Thus, the imposition of VAT and
excise tax, even on the importation of petroleum products into FEZs (like Clark FEZ), directly contravenes the
law.
The respondent Ecozone Plastic Enterprises Corporation (EPEC) sought to intervene in the proceedings as a
co-petitioner and accordingly entered its appearance and moved for leave of court to file its petition-in-
intervention.8
EPEC claims that, as a Clark FEZ locator, it stands to suffer when RR 2-2012 is implemented. EPEC insists that
RR 2-2012's mechanism of requiring even locators to pay the tax first and to subsequently claim a credit or to
refund the taxes paid effectively removes the locators' tax-exempt status.
The RTC initially issued a temporary restraining order to stay the implementation of RR 2-2012. It eventually
issued a writ of preliminary injunction in its order dated April 4, 2012.
The petitioners questioned the issuance of the writ. On May 17, 2012, they filed a petition
for certiorari9 before the Court of Appeals (CA) assailing the RTC's order. The CA granted the petition10 and
denied the respondents' subsequent motion for reconsideration.11
The respondents stood their ground by filing a petition for review on certiorari before this Court (G.R. No.
208387) to reinstate the RTC's injunction against the implementation of RR 2-2012, and by moving for the
issuance of a temporary restraining order and/or writ of preliminary injunction. We denied the motion but
nevertheless required the petitioners to comment on the petition.
The proceedings before the RTC in the meanwhile continued. On April 18, 2012, petitioner Lazatin amended
his original petition, converting it to a petition for declaratory relief.12 The RTC admitted the amended
petition and allowed EPEC to intervene.
In its decision dated November 8, 2013, the RTC ruled in favor of Lazatin and EPEC.
First, on the procedural aspect, the RTC held that the original petition's amendment is allowed by the rules
and that amendments are largely preferred; it allowed the amendment in the exercise of its sound judicial
discretion to avoid multiplicity of suits and to give the parties an opportunity to thresh out the issues and
finally reach a conclusion.13
Second, the R TC held that Lazatin and EPEC had legal standing to question the validity of RR 2-2012. Lazatin's
allegation that RR 2-2012 effectively amends and modifies RA 9400 gave him standing as a legislator: the
amendment of a tax law is a power that belongs exclusively to Congress. Lazatin's allegation, according to the
RTC, sufficiently shows how his rights, privileges, and prerogatives as a member of Congress were impaired
by the issuance of RR 2-2012.
The RTC also ruled that the case warrants a relaxation on the rules on legal standing because the issues
touched upon are of transcendental importance. The trial court considered the encompassing effect that RR
2- 2012 may have in the numerous freeport and economic zones in the Philippines, as well as its potential
impact on hundreds of investors operating within the zones.
The RTC then held that even if Lazatin does not have legal standing, EPEC' s intervention cured this defect:
EPEC, as a locator within the Clark FEZ, would be adversely affected by the implementation of RR 2-2012.
Finally, the RTC declared RR 2-2012 unconstitutional. RR 2-2012 violates RA 9400 because it imposes taxes
that, by law, are not due in the first place.14 Since RA 9400 clearly grants tax and duty-free incentives to Clark
FEZ locators, a revocation of these incentives by an RR directly contravenes the express intent of the
Legislature.15 In effect, the petitioners encroached upon the prerogative to enact, amend, or repeal laws,
which the Constitution exclusively granted to Congress.
The Petition
The petitioners anchor their present petition on two arguments: 1) respondents have no legal standing, and
2) RR 2-2012 is valid and constitutional.
The petitioners submit that the Lazatin and EPEC do not have legal standing to assail the validity of RR 2-
2012.
First, the petitioners claim that Lazatin does not have the requisite legal standing as he failed to exactly show
how the implementation of RR 2-2012 would impair the exercise his official functions. Respondent Lazatin
merely generally alleged that his constitutional prerogatives to pass or amend laws were gravely impaired or
were about to be impaired by the issuance of RR 2-2012. He did not specify the power that he, as a legislator,
would be encroached upon.
While the Clark FEZ is within the district that respondent Lazatin represents, the petitioners emphasize that
Lazatin failed to show that he is authorized to file a case on behalf of the locators in the FEZ, the local
government unit, or his constituents in general.16 To the petitioners, if RR 2- 2012 ever caused injury to the
locators or to any of Lazatin's constituents, only these injured parties possess the personality to question the
petitioners' actions; respondent Lazatin cannot claim this right on their behalf.17
The petitioners claim, too, that the RTC should not have brushed aside the rules on standing on account of
transcendental importance. To them, this case does not involve public funds, only a speculative loss of profits
upon the implementation of RR 2-2012; nor is Lazatin a party with more direct and specific interest to raise
the issues in his petition.18 Citing Senate v. Ermita,19 the petitioners argue that the rules on standing cannot
be relaxed.
Second, petitioners also argue that EPEC does not have legal standing to intervene. That EPEC will ultimately
bear the VAT and excise tax as an end-user, is misguided.20 The burden of payment of VAT and excise tax may
be shifted to the buyer21 and this burden, from the point of view of the transferee, is no longer a tax but
merely a component of the cost of goods purchased. The statutory liability for the tax remains with the seller.
Thus, EPEC cannot say that when the burden is passed on to it, RR 2-2012 effectively imposes tax on it as a
Clark FEZ locator.
The petitioners point out that RR 2-2012 imposes an "advance tax" only upon importers of petroleum
products. If EPEC is indeed a locator, then it enjoys tax and duty exemptions granted by RA 9400 so long as it
does not bring the petroleum or petroleum products to the Philippine customs territory.22
The petitioners legally argue that RR 2-2012 is valid and constitutional.
First, petitioners submit that RR 2-2012's issuance and implementation are within their powers to
undertake.23 RR 2-2012 is an administrative issuance that enjoys the presumption of validity in the manner
that statutes enjoy this presumption; thus, it cannot be nullified without clear and convincing evidence to the
contrary.24
Second, petitioners contend that while RA 9400 does grant tax and customs duty incentives to Clark FEZ
locators, there are conditions before these benefits may be availed of. The locators cannot invoke outright
exemption from VAT and excise tax on its importations without first satisfying the conditions set by RA 9400,
that is, the importation must not be removed from the FEZ and introduced into the Philippine customs
territory.25
These locators enjoy what petitioners call a qualified tax exemption. They must first pay the corresponding
taxes on its imported petroleum. Then, they must submit the documents required under RR 2-2012. If they
have sufficiently shown that the imported products have not been removed from the FEZ, their earlier
payment shall be subject to a refund.
The petitioners lastly argue that RR 2-2012 does not withdraw the locators' tax exemption
privilege.1âwphi1 The regulation simply requires proof that a locator has complied with the conditions for tax
exemption. If the locator cannot show that the goods were retained and/or consumed within the FEZ, such
failure creates the presumption that the goods have been introduced into the customs territory without the
appropriate permits.26 On the other hand, if they have duly proven the disposition of the goods within the
FEZ, their "advance payment" is subject to a refund. Thus, to the petitioners, to the extent that a refund is
allowable, there is in reality a tax exemption.27
Counter-arguments
Respondents Lazatin and EPEC, maintaining that they have standing to question its validity, insist that RR 2-
2012 is unconstitutional.
Respondents have standing as
lawmaker and FEZ locator.
The respondents argue that a member of Congress has standing to protect the prerogatives, powers, and
privileges vested by the Constitution in his office.28 As a member of Congress, his standing to question
executive issuances that infringe on the right of Congress to enact, amend, or repeal laws has already been
recognized.29 He suffers substantial injury whenever the executive oversteps and intrudes into his power as a
lawmaker.30
On the other hand, the respondents point out that RR 2-2012 explicitly covers FEZs. Thus, being a Clark FEZ
locator, EPEC is among the many businesses that would have been directly affected by its implementation.31
RR 2-2012 illegally imposes taxes
on Clark FEZs.
The respondents underscore that RA 9400 provides FEZ locators certain incentives, such as tax- and duty-free
importations of raw materials and capital equipment. These provisions of the law must be interpreted in a
way that will give full effect to law's policy and objective, which is to maximize the benefits derived from the
FEZs in promoting economic and social development.32
They admit that the law subjects to taxes and duties the goods that were brought into the FEZ and
subsequently introduced to the Philippine customs territory. However, contrary to petitioners' position that
locators' tax and duty exemptions are qualified, their incentives apply automatically.
According to the respondents, petitioners' interpretation of the law contravenes the policy laid down by RA
9400, because it makes the incentives subject to a suspensive condition. They claim that the condition - the
removal of the goods from the FEZ and their subsequent introduction to the customs territory - is resolutory;
locators enjoy the granted incentives upon bringing the goods into the FEZ. It is only when the goods are
shown to have been brought into the customs territory will the proper taxes and duties have to be paid.33 RR
2-2012 reverses this process by requiring the locators to pay "advance" taxes and duties first and to
subsequently prove that they are entitled to a refund, thereafter.34 RR 2-2012 indeed allows a refund, but a
refund of taxes that were not due in the first place.35
The respondents add that even the refund mechanism under RR 2-2012 is problematic. They claim that RR 2-
2012 only allows a refund when the petroleum products brought into the FEZ are subsequently sold to FEZ
locators or to entities that similarly enjoy exemption from direct and indirect taxes. The issuance does not
envision a situation where the petroleum products are directly brought into the FEZ and are consumed by the
same entity/locator.36Further, the refund process takes a considerable length of time to secure, thus
requiring cash outlay on the part of locators;37 even when the claim for refund is granted, the refund will not
be in cash, but in the form of a Tax Credit Certificate (TCC).38
As the challenged regulation directly contravenes incentives legitimately granted by a legislative act, the
respondents argue that in issuing RR 2-2012, the petitioners not only encroached upon congressional
prerogatives and arrogated powers unto themselves; they also effectively violated, brushed aside, and
rendered nugatory the rigorous process required in enacting or amending laws.39
Issues
We shall decide the following issues:
I. Whether respondents Lazatin and EPEC have legal standing to bring the action of declaratory relief; and
II. Whether RR 2-2012 is valid and constitutional.
The Court's Ruling
We do not find the petition meritorious.
I. Respondents have legal
standing to file petition for
declaratory relief.
The party seeking declaratory relief must have a legal interest in the controversy for the action to
prosper.40 This interest must be material not merely incidental. It must be an interest that which will be
affected by the challenged decree, law or regulation. It must be a present substantial interest, as opposed to
a mere expectancy or a future, contingent, subordinate, or consequential interest.41
Moreover, in case the petition for declaratory relief specifically involves a question of constitutionality, the
courts will not assume jurisdiction over the case unless the person challenging the validity of the act
possesses the requisite legal standing to pose the challenge.42
Locus standi is a personal and substantial interest in a case such that the party has sustained or will sustain
direct injury as a result of the challenged governmental act. The question is whether the challenging party
alleges such personal stake in the outcome of the controversy so as to assure the existence of concrete
adverseness that would sharpen the presentation of issues and illuminate the court in ruling on the
constitutional question posed.43
We rule that the respondents satisfy these standards.
Lazatin has legal standing as
a legislator.
Lazatin filed the petition for declaratory relief before the RTC in his capacity as a member of Congress.44 He
alleged that RR 2-2012 was issued directly contravening RA 9400, a legislative enactment. Thus, the
regulation encroached upon the Congress' exclusive power to enact, amend, or repeal laws.45 According to
Lazatin, a member of Congress has standing to challenge the validity of an executive issuance if it tends to
impair his prerogatives as a legislator.46
We agree with Lazatin.
In Biraogo v. The Philippine Truth Commission,47 we ruled that legislators have the legal standing to ensure
that the prerogatives, powers, and privileges vested by the Constitution in their office remain inviolate. To
this end, members of Congress are allowed to question the validity of any official action that infringes on
their prerogatives as legislators.48
Thus, members of Congress possess the legal standing to question acts that amount to a usurpation of the
legislative power of Congress.49 Legislative power is exclusively vested in the Legislature. When the
implementing rules and regulations issued by the Executive contradict or add to what Congress has provided
by legislation, the issuance of these rules amounts to an undue exercise of legislative power and an
encroachment of Congress' prerogatives.
To the same extent that the Legislature cannot surrender or abdicate its legislative power without violating
the Constitution,50 so also is a constitutional violation committed when rules and regulations implementing
legislative enactments are contrary to existing statutes. No law can be amended by a mere administrative
rule issued for its implementation; administrative or executive acts are invalid if they contravene the laws or
to the Constitution.51
Thus, the allegation that RR 2-2012 - an executive issuance purporting to implement the provisions of the Tax
Code - directly contravenes RA 9400 clothes a member of Congress with legal standing to question the
issuance to prevent undue encroachment of legislative power by the executive.
EPEC has legal standing as a
Clark FEZ locator.
EPEC intervened in the proceedings before the RTC based on the allegation that, as a Clark FEZ locator, it will tax laws, importations into and establishments located within the Clark FEZ (FEZ Enterprises )58 enjoy special
be directly affected by the implementation of RR 2-2012.52 incentives, including tax and duty-free importation.59More specifically, Clark FEZ enterprises shall be entitled
to the freeport status of the zone and a 5% preferential income tax rate on its gross income, in lieu of national
We agree with EPEC. and local taxes.60

It is not disputed that RR 2-2012 relates to the imposition of VAT and excise tax and applies to all petroleum RA 9400 and its Implementing Rules grant the following:
and petroleum products that are imported directly from abroad to the Philippines, including FEZs.53
First, the law provides that importations of raw materials and capital equipment into the FEZs shall be tax-
As an enterprise located in the Clark FEZ, its importations of petroleum and petroleum products will be and duty-free. It is the specific transaction (i.e., importation) that is exempt from taxes and duties.
directly affected by RR 2-2012. Thus, its interest in the subject matter - a personal and substantial one - gives
it legal standing to question the issuance's validity. Second, the law also grants FEZ enterprises tax- and duty-free importation and a preferential rate in the
payment of income tax, in lieu of all national and local taxes. These incentives exempt the establishment itself
In sum, the respondents' respective interests in this case are sufficiently substantial to be directly affected by from taxation.
the implementation of RR 2-2012. The RTC therefore did not err when it gave due course to Lazatin's petition
for declaratory relief as well as EPEC's petition-in-intervention. Thus, the Legislature intended FEZs to enjoy tax incentives in general - whether with respect to
the transactions that take place within its special jurisdiction, or the persons/establishments within the
In light of this ruling, we see no need to rule on the claimed transcendental importance of the issues raised. jurisdiction. From this perspective, the tax incentives enjoyed by FEZ enterprises must be understood
to necessarily include the tax exemption of importations of selected articles into the FEZ.
II. RR 2-2012 is invalid and
unconstitutional. We have ruled in the past that FEZ enterprises' tax exemptions must be interpreted within the context and in
a manner that promotes the legislative intent of RA 722761 and, by extension, RA 9400. Thus, we recognized
that FEZ enterprises are exempt from both direct and indirect internal revenue taxes.62 In particular, they are
On the merits of the case, we rule that RR 2-2012 is invalid and unconstitutional because: a) it illegally
considered VAT-exempt entities.63
imposes taxes upon FEZ enterprises, which, by law, enjoy tax-exempt status, and b) it effectively amends the
law (i.e., RA 7227, as amended by RA 9400) and thereby encroaches upon the legislative authority reserved
exclusively by the Constitution for Congress. In line with this comprehensive interpretation, we rule that the tax exemption enjoyed by FEZ enterprises
covers internal revenue taxes imposed on goods brought into the FEZ, including the Clark FEZ, such as VAT and
excise tax.
FEZ enterprises enjoy tax- and
duty-free incentives on its
importations. RR 2-2012 illegally imposes VAT and excise
tax on goods brought into the FEZs.
In 1992, Congress enacted RA 7227 otherwise known as the "Bases Conversion and Development Act of
1992" to enhance the benefits to be derived from the Subic and Clark military reservations.54 RA 7227 Section 3 of RR 2-2012 provides the following:
established the Subic Special economic zone and granted such special territory various tax and duty
incentives. First, whenever petroleum and petroleum products are imported and/or brought directly to the Philippines,
the importer of these goods is required to pay the corresponding VAT and excise tax due on the importation.
To effectively extend the same benefits enjoyed in Subic to the Clark FEZ, the legislature enacted RA 9400 to
amend RA 7227.55 Subsequently, the Department of Finance issued Department Order No. 3-200856 to Second, the importer, as the payor of the taxes, may subsequently seek a refund of the amount previously
implement RA 9400 (Implementing Rules). paid by filing a corresponding claim with the Bureau of Customs (BOC).

Under RA 9400 and its Implementing Rules, Clark FEZ is considered a customs Third, the claim shall only be granted upon showing that the necessary condition has been fulfilled.
territory separate and distinct from the Philippines customs territory. Thus, as opposed to importations into
and establishments in the Philippines customs territory,57 which are fully subject to Philippine customs and
At first glance, this imposition - a mere tax administration measure according to the petitioners - appears to
be consistent with the taxation of similar imported articles under the Tax Code, specifically under its Sections
10764 and 14865 (in relation with Sections 12966 and 13167).
However, RR 2-2012 explicitly covers even petroleum and petroleum products imported and/or brought into
the various FEZs in the Philippines. Hence, when an FEZ enterprise brings petroleum and petroleum products
into the FEZ, under RR 2-2012, it shall be considered an importer liable for the taxes due on these products.
The crux of the controversy can be found in this feature of the challenged regulation.
The petitioners assert that RR 2-2012 simply implements the provisions of the Tax Code on collection of
internal revenue taxes, more specifically VAT and excise tax, on the importation of petroleum and petroleum
products. To them, FEZ enterprises enjoy a qualified tax exemption such that they have to pay the tax due on
the importation first, and thereafter claim a refund, which shall be allowed only upon showing that the goods
were not introduced to the Philippine customs territory.
On the other hand, the respondents contend that RR 2-2012 imposes taxes on FEZ enterprises, which in the
first place are not liable for taxes. They emphasize that the tax incentives under RA 9400
apply automatically upon the importation of the goods. The proper taxes on the importation shall only be
due if the enterprises can later show that the goods were subsequently introduced to the Philippine customs
territory.
Since the tax exemptions enjoyed by FEZ enterprises under the law extend even to VAT and excise tax, as we
discussed above, it follows and we accordingly rule that the taxes imposed by Section 3 of RR 2-2012 directly
contravene these exemptions. First, the regulation erroneously considers petroleum and petroleum products
brought into a FEZ as taxable importations. Second, it unreasonably burdens FEZ enterprises by making them
pay the corresponding taxes - an obligation from which the law specifically exempts them - even if there is a
subsequent opportunity to refund the payments made.
Petroleum and petroleum products brought
into the FEZ and which remain therein are
not taxable importations.
RR 2-2012 clearly imposes VAT and excise tax on the importation of petroleum and petroleum products into
FEZs. Strictly speaking, however, articles brought into these FEZs are not taxable importations under the
law based on the following considerations:
First, importation refers to bringing goods from abroad into the Philippine customs jurisdiction. It begins from
the time the goods enter the Philippine jurisdiction and is deemed terminated when the applicable taxes and
duties have been paid or the goods have left the jurisdiction of the BOC.68
Second, under the Tax Code, imported goods are subject to VAT and excise tax. These taxes shall be paid prior
to the release of the goods from customs custody.69 Also, for VAT purposes,70 an importer refers to any
person who brings goods into the Philippines.
Third, the Philippine VAT system adheres to the cross border doctrine.71 Under this rule, no VAT shall be
imposed to form part of the cost of the goods destined for consumption outside the Philippine customs
territory.72 Thus, we have already ruled before that an FEZ enterprise cannot be directly charged for the VAT
on its sales, nor can VAT be passed on to them indirectly as added cost to their purchases.73
Fourth, laws such as RA 7227, RA 7916, and RA 9400 have established certain special areas as separate
customs territories .74 In this regard, we have already held that such jurisdictions, such as the Clark FEZ, are,
by legal fiction, foreign territories.75
Fifth, the Implementing Rules provides that goods initially introduced into the FEZs and subsequently brought
out therefrom and introduced into the Philippine customs territory shall be considered as importations and
thereby subject to the VAT.76 One such instance is the sale by any FEZ enterprise to a customer located in the
customs territory, which the VAT regulations refer to as a technical importation.77
We find it clear from all these that when goods (e.g., petroleum and petroleum products) are brought into an
FEZ, the goods remain to be in foreign territory and are not therefore goods introduced into Philippine
customs territory subject to Philippine customs and tax laws.78
Stated differently, goods brought into and traded within an FEZ are generally beyond the reach of national
internal revenue taxes and customs duties enforced in the Philippine customs territory. This is consistent with
the incentive granted to FEZs exempting the importation itself from taxes and duties.
Therefore, the act of bringing the goods into an FEZ is not a taxable importation. As long as the goods remain
(e.g., sale and/or consumption of the article within the FEZ) in the FEZ or re-exported to another foreign
jurisdiction, they shall continue to be tax-free.79 However, once the goods are introduced into the Philippine
customs territory, it ceases to enjoy the tax privileges accorded to FEZs. It shall then be considered as
an importation subject to all applicable national internal revenue taxes and customs duties.
The tax exemption granted to FEZ
enterprises is an immunity from tax liability
and from the payment of the tax.
The respondents claim that when RR 2-2012 was issued, petroleum and petroleum products brought into the
FEZ by FEZ enterprises suddenly became subject to VAT and excise tax, in direct contravention of RA 9400
(with respect to Clark FEZ enterprises). Such imposition is not authorized under any law, including the Tax
Code.80
On the other hand, the petitioners argue that RR 2-2012 does not withdraw the tax exemption privileges of
FEZ enterprises.1âwphi1 As their tax exemption is merely qualified, they cannot invoke outright exemption.
Thus, FEZ enterprises are required to pay internal revenue taxes first on their imported petroleum under RR
2-2012. They may then refund their previous payment upon showing that the condition under RA 9400 has
been satisfied - that is, the goods have not been introduced to the Philippines customs territory.81 To the
petitioners, to the extent that a refund is allowable, there is still in reality a tax exemption.82
We disagree with this contention.
First, FEZ enterprises bringing goods into the FEZ should not be considered as importers subject to tax in the
same manner that the very act of bringing goods into these special territories does not make them taxable
importations. We emphasize that the exemption from taxes and duties under RA 9400 are granted not only
to importations into the FEZ, but also specifically to each FEZ enterprise. As discussed, the tax exemption
enjoyed by FEZ enterprises necessarily includes the tax exemption of the importations of selected articles into
the FEZ.
Second, the essence of a tax exemption is the immunity or freedom from a charge or burden to which others
are subjected.83 It is a waiver of the government's right to collect84 the amounts that would have been
collectible under our tax laws. Thus, when the law speaks of a tax exemption, it should be understood as
freedom from the imposition and payment of a particular tax.
Based on this premise, we rule that the refund mechanism provided by RR 2-2012 does not amount to a tax
exemption. Even if the possibility of a subsequent refund exists, the fact remains that FEZ enterprises must
still spend money and other resources to pay for something they should be immune to in the first place. This
completely contradicts the essence of their tax exemption.
In the same vein, we cannot agree with the view that FEZ enterprises have the duty to prove their
entitlement to tax exemption first before fully enjoying the same; we find it illogical to determine whether a
person is exempted from tax without first determining if he is subject to the tax being imposed. We have
reminded the tax authorities to determine first if a person is liable for a particular tax, applying the rule of
strict interpretation of tax laws, before asking him to prove his exemption therefrom.85 Indeed, as entities
exempted on taxes on importations, FEZ enterprises are clearly beyond the coverage of any law imposing
those very charges. There is no justifiable reason to require them to prove that they are exempted from it.
More importantly, we have also recognized that the exemption from local and national taxes granted under
RA 7227, as amended by RA 9400, are ipso facto accorded to FEZs. In case of doubt, conflicts with respect to
such tax exemption privilege shall be resolved in favor of these special territories.86
RR 2-2012 is unconstitutional.
According to the respondents, the power to enact, amend, or repeal laws belong exclusively to Congress. 87
passing RR 2-2012, petitioners illegally amended the law - a power solely vested on the Legislature.
We agree with the respondents.
The power of the petitioners to interpret tax laws is not absolute. The rule is that regulations may not
enlarge, alter, restrict, or otherwise go beyond the provisions of the law they administer; administrators and
implementors cannot engraft additional requirements not contemplated by the legislature.88
It is worthy to note that RR 2-2012 does not even refer to a specific Tax Code provision it wishes to
implement. While it purportedly establishes mere administration measures for the collection of VAT and
excise tax on the importation of petroleum and petroleum products, not once did it mention the pertinent
chapters of the Tax Code on VAT and excise tax.
While we recognize petitioners' essential rationale in issuing RR 2-2012, the procedures proposed by the
issuance cannot be implemented at the expense of entities that have been clearly granted statutory tax
immunity.
REVISED PAGE
Tax exemptions are granted for specific public interests that the Legislature considers sufficient to offset the
monetary loss in the grant of exemptions.89 To limit the tax-free importation privilege of FEZ enterprises by
requiring them to pay subject to a refund clearly runs counter to the Legislature's intent to create a free port
where the "free flow of goods or capital within, into, and out of the zones" is ensured.90
Finally, the State's inherent power to tax is vested exclusively in the Legislature.91 We have since ruled that
the power to tax includes the power to grant tax exemptions.92 Thus, the imposition of taxes, as well as the
grant and withdrawal of tax exemptions, shall only be valid pursuant to a legislative enactment.
As RR 2-2012, an executive issuance, attempts to withdraw the tax incentives clearly accorded by the
legislative to FEZ enterprises, the *petitioners have arrogated upon themselves a power reserved exclusively
to Congress, in violation of the doctrine of separation of powers.
In these lights, we hereby rule and declare that RR 2-2012 is null and void.
WHEREFORE, we hereby DISMISS the petition for lack of merit, and accordingly AFFIRM decision of the
Regional Trial Court dated November 8, 2013 2001 in SCA Case No. 12-410.
SO ORDERED.
a. VAT on sale of service and lease of properties
b. G.R. No. 177387
In
c. COMMISSIONER OF INTERNAL REVENUE, Petitioner
vs.
SECRET ARY OF JUSTICE, and PHILIPPINE AMUSEMENT AND GAMING CORPORATION, Respondents
d. DECISION
e. BERSAMIN, J.:
 f. Petitioner Commissioner of Internal Revenue (CIR) commenced this special civil action for certiorari to o. On December 18, 2002, PAGCOR filed a letter-protest with the BIR against Assessment Notice No. 33-
annul the December 22, 2006 resolution1 and the March 12, 2007 resolution,2 both issued by the 1996/1997 /1998 and Assessment Notice No. 33-99.8
Secretary of Justice in OSJ Case No. 2004-1, alleging that respondent Secretary of Justice acted without p. On March 31, 2003, PAGCOR filed a letter-protest against Assessment Notice No. 33-2000, in which it
or in excess of his jurisdiction, or in grave abuse of discretion amounting to lack or excess of jurisdiction. reiterated the asse1iions made in its December 18, 2002 letter-protest.9
g. The dispositive portion of the assailed December 22, 2006 resolution states: q. In reply to both letters-protest, the BIR requested PAGCOR to submit additional documents to enable
h. WHEREFORE, premises considered, PAGCOR is declared exempt from payment [oil all taxes, the conduct of the reinvestigation.10
save for the franchise tax as provided for under Section 13 of PD 1869, as amended, the r. The CIR did not act on PAGCOR’s letter-protest against Assessment Notice No. 33-1996/1997 /1998 and
presidential issuance not having been expressly repealed by RA 7716.3 Assessment Notice No. 33-99 within the 180-day period from the latter's submission of additional
i. while the March 12, 2007 resolution denied the CIR’s motion for reconsideration of the December 22, documents.11Hence, PAGCOR filed an appeal with the Secretary of Justice on January 5, 2004 relative to
2006 resolution. Assessment Notice No. 33-1996/1997 /1998 and Assessment Notice No. 33-99.12
j. Antecedents s. Meanwhile, in response to PAGCOR’s letter-protest dated March 31, 2003, BIR Regional Director
k. Respondent Philippine Amusement and Gaming Corporation (PAGCOR) has operated under a legislative Teodorica Arcega issued a letter dated December 15, 2003 reiterating the assessment for deficiency VAT
franchise granted by Presidential Decree No. 1869 (P.O. No. 1869), its Charter,4 whose Section 13(2) for taxable year 2000,13stating thusly:
provides that: t. In a memorandum to the Regional Director dated December 15, 2003 the Chief Legal Division,
l. (2) Income and other Taxes - (a) Franchise Holder: this Region, confirmed the taxability of PAGCOR under Section 108(A) of the 1997 Tax Code, as
m. No tax of any kind or form, income or otherwise, as well as fees, charges or levies of whatever amended, effective Jan. 1, 1996 (VAT Review Committee Ruling No. 041-2001 ).
nature, whether National or Local, shall he assessed and collected under this Franchise from the u. In view of the confirmation of the Legal Division we hereby reiterate the assessments
Corporation; nor shall any form of tax or charge attach in any way to the earnings of the forwarded to your office under Final Assessment No. 33-2000 dated March 18, 2003
Corporation, except a Franchise Tax of five percent (S(X1) of the gross revenue or earnings amounting to ₱2,097,426,943.00.
derived by the Corporation from its operation under this Franchise. Such tax shall be due and v. However, the BIR only recomputed the deficiency final withholding tax on fringe benefits and expanded
payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, withholding tax, and reduced the assessments to ₱l2,212, 199.85 and ₱6,959,525. l0, respectively.14
fees or assessments of any kind, nature or description, levied, established or collected by any w. PAGCOR elevated its protest against Assessment Notice No. 33-2000 to the CIR, but the 180-day period
municipal, provincial or national government authority. (bold emphasis supplied) prescribed by law also lapsed without any action on the part of the CIR.15 Consequently, on August 4,
n. Notwithstanding the aforesaid 5% franchise tax imposed, the Bureau of Internal Revenue (BIR) issued 2004, PAGCOR brought another appeal to the Secretary of Justice covering Assessment Notice No. 33-
several assessments against PAGCOR for alleged deficiency value-added tax (VAT), final withholding tax 2000.16
on fringe benefits, and expanded withholding tax, as follows: x. The Secretary of Justice consolidated PAGCOR's two appeals.
y. After the parties traded pleadings, the Secretary of Justice summoned them to a preliminary conference
to discuss, inter alia, any possible settlement or compromise.17 When no amicable settlement was
TOTAL AMOUNT reached, the consolidated appeals were considered submitted for resolution.18
DUE z. On December 22, 2006, Secretary of Justice Raul M. Gonzales rendered the first assailed resolution
PERIOD
ASSESSMENT DATE ISSUED (inclusive of interest, declaring PAGCOR exempt from the payment of all taxes except the 5% franchise tax provided in its
COVERED
surcharge and Charter.19
compromise penalty) aa. On March 12, 2007, Secretary Gonzales issued the second assailed resolution denying the CIR's motion
No. 33-1996/1997/1998 (for for reconsideration.20
November 14, 2002 1996/1997/1998 ₱4,078,476,977.26 bb. Hence, this special civil action for certiorari.
deficiency VAT)5
cc. Issues
No. 33-99 (for deficiency dd. The grounds for the petition for certiorari are as follows:
VAT, final withholding tax on ee. I
November 25, 2002 1999 ₱6,678,346,966.49
fringe benefits, and ff. RESPONDENT SECRETARY OF JUSTICE ACTED WITHOUT OR IN EXCESS OF HIS JURISDICTION
expanded withholding tax)6 AND GRAVELY ABUSED HIS DISCRETION IN ASSUMING JURISDICTION OVER THE PETITION ON
DISPUTED TAX ASSESSMENTS FILED BY RESPONDENT PAGCOR.
No. 33-2000 (for deficiency gg. II
VAT and final withholding March 18, 2003 2000 ₱2,953,321,685.92 hh. RESPONDENT SECRETARY OF JUSTICE ACTED WITHOUT OR IN EXCESS OF HIS JURISDICTION
tax on fringe benefits)7 AND GRAVELY ABUSED HIS DISCRETION IN HOLDING THAT R.A. NO. 7716 (VAT LAW) DID NOT
TOTAL ₱13,710,145,629.67
 REPEAL P.D. NO. 1869 (CHARTER OF PAGCOR); HENCE, PAGCOR HAS NOT BECOME LIABLE FOR
THE PAYMENT OF THE 10% VAT IN LIEU OF THE 5% FRANCHISE TAX.
ii. III
jj. RESPONDENT SECRETARY OF JUSTICE ACTED WITHOUT OR IN EXCESS OF HIS JURISDICTION
AND GRAVELY ABUSED HIS DISCRETION IN ABSOLVING PAGCOR OF ITS DUTY AND
RESPONSIBILITY AS WITHHOLDING AGENT TO WITHHOLD AND REMIT FRINGE BENEFITS TAX,
FINAL WITHHOLDING TAX AND EXPANDED WITHHOLDING TAX.21
kk. Otherwise put, the issues to be resolved are: (1) whether or not the Secretary of Justice has jurisdiction
to review the disputed assessments; (2) whether or not PAGCOR is liable for the payment of VAT; and
(3) whether or not P AGCOR is liable for the payment of withholding taxes.
ll. Ruling
mm. The petition for certiorari is partly granted.
nn. 1.
oo. The Secretary of Justice has no jurisdiction to
review the disputed assessments
pp. The petitioner contends that it is the Court of Tax Appeals (CTA), not the Secretary of Justice, that has
the exclusive appellate jurisdiction in this case, pursuant to Section 7(1) of Republic Act No. 1125 (R.A.
No. 1125), which grants the CTA the exclusive appellate jurisdiction to review, among others, the
decisions of the Commissioner of Internal Revenue "in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters
arising under the National Internal Revenue Code (NIRC) or other law or part of law administered by the
Bureau of Internal Revenue."
qq. PAGCOR counters, however, that it is the Secretary of Justice who should adjudicate the dispute by
virtue of Chapter 14 of the Revised Administrative Code of 1987, which provides:
rr. CHAPTER 14. CONTROVERSIES AMONG GOVERNMENT OFFICES AND CORPORATIONS.
ss. SEC. 66. How settled. - All disputes/claims and controversies, solely between or among the
departments, bureaus, offices, agencies and instrumentalities of the National Government,
including government-owned and controlled corporations, such as those arising from the
interpretation and application of statues, contracts or agreements shall be administratively
settled or adjudicated in the manner provided for in this Chapter. This Chapter shall, however,
not apply to disputes involving the Congress, the Supreme Court, the Constitutional
Commission and local governments.
tt. SEC. 67. Disputes Involving Questions of Law. - All cases involving only questions of law shall be
submitted to and settled or adjudicated by the Secretary of Justice as Attorney-General of the
National Government and as ex-officio legal adviser of all government-owned or controlled
corporations. His ruling or decision thereon shall be conclusive and binding on all the parties
concerned.
uu. SEC. 68. Disputes Involving Questions of Fact and Law. – Cases involving mixed questions of
law and of fact or only factual issues shall be submitted to and settled or adjudicated by:
vv. (1) The Solicitor General, if the dispute, claim or controversy involves only departments,
bureaus, offices and other agencies of the National Government as well as government-owned
or controlled corporations or entities of whom he is the principal law officer or general
counsel; and
ww. (2) The Secretary of Justice, in all other cases not falling under paragraph (1).
xx. Although acknowledging the validity of the petitioner's contention, the Secretary of Justice still resolved
the disputed assessments on the basis that the prevailing doctrine at the time of the filing of the
petitions in the Department of Justice (DOJ) on January 5, 2004 was that enunciated in Development
Bank of the Philippines v. Court of Appeals,22 whereby the Court ruled that:
yy. x x x (T)here is an "irreconcilable repugnancy x x between Section 7(2) of R.A. NO. 1125 and
P.D. No. 242," and hence, that the latter enactment (P.O. No. 242), being the latest expression
of the legislative will, should prevail over the earlier.
zz. Later on, the Court reversed itself in Philippine National Oil Company v. Court of Appeals,23 and held as
follows:
aaa. Following the rule on statutory construction involving a general and a special law previously
discussed, then P.O. No. 242 should not affect R.A. No. 1125. R.A. No. 1125, specifically
Section 7 thereof on the jurisdiction of the CTA, constitutes an exception to P.O. No. 242.
Disputes, claims and controversies, falling under Section 7 of R.A. No. 1125, even though
solely among government offices, agencies, and instrumentalities, including government-
owned and controlled corporations, remain in the exclusive appellate jurisdiction of the CTA.
Such a construction resolves the alleged inconsistency or conflict between the two statutes, x
x x.
bbb. Despite the shift in the construction of P.D. No. 242 in relation to R.A. No. 1125, the Secretary of Justice
still resolved PAGCOR's petitions on the merits, stating that:
ccc. While this ruling (DBP) has been superseded by the ruling in Philippine National Oil Company
vs. CA, in view of the prospective application of the PNOC ruling, we (the DOJ) are of the view
that this Office can continue to assume jurisdiction over this case which was filed and has
been pending with this Office since January 5, 2004 and rule on the merits of the case.24
ddd. We disagree with the action of the Secretary of Justice.
eee. PAGCOR filed its appeals in the DOI on January 5, 2004 and August 4, 2004.25 Philippine National Oil
Company v. Court of Appeals was promulgated on April 26, 2006. The Secretary of Justice resolved the
petitions on December 22, 2006. Under the circumstances, the Secretary of Justice had ample
opportunity to abide by the prevailing rule and should have referred the case to the CTA because judicial
decisions applying or interpreting the law formed part of the legal system of the country,26 and are for
that reason to be held in obedience by all, including the Secretary of Justice and his Department. Upon
becoming aware of the new proper construction of P.D. No. 242 in relation to R.A. No. 1125 pronounced
in Philippine National Oil Company v. Court of Appeals, therefore, the Secretary of Justice should have
desisted from dealing with the petitions, and referred them to the CTA, instead of insisting on exercising
jurisdiction thereon. Therein lay the grave abuse of discretion amounting to lack or excess of jurisdiction
on the part of the Secretary of Justice, for he thereby acted arbitrarily and capriciously in ignoring the
pronouncement in Philippine National Oil Company v. Court of Appeals. Indeed, the doctrine of stare
decisis required him to adhere to the ruling of the Court, which by tradition and conformably with our
system of judicial administration speaks the last word on what the law is, and stands as the final arbiter
of any justiciable controversy. In other words, there is only one Supreme Court from whose decisions all
other courts and everyone else should take their bearings.27
fff. Nonetheless, the Secretary of Justice should not be taken to task for initially entertaining the petitions
considering that the prevailing interpretation of the law on jurisdiction at the time of their filing was that
he had jurisdiction. Neither should PAGCOR to blame in bringing its appeal to the DOJ on January 5,
2004 and August 4, 2004 because the prevailing rule then was the interpretation in Development Bank
of the Philippines v. Court of Appeals. The emergence of the later ruling was beyond PAGCOR's control.
 Accordingly, the lapse of the period within which to appeal the disputed assessments to the CTA could
not be taken against P AGCOR. While a judicial interpretation becomes a part of the law as of the date
that the law was originally passed, the reversal of the interpretation cannot be given retroactive effect
to the prejudice of parties who may have relied on the first interpretation.28
ggg. The Court now undertakes to settle the controversy because of the urgent need to promptly decide it.
We cannot lose sight of the fact that PAGCOR is among the most prolific income-generating institutions
that contribute immensely to the country's developing economy. Any controversy involving PAGCOR
should be resolved expeditiously considering the underlying public interest in the matter at hand. To
dismiss the petitions in order to have PAGCOR bring a similar petition in the CTA would not serve the
interest of justice.29 On previous occasions, the Court has overruled the defense of jurisdiction in the
interest of public welfare and for the advancement of public policy whenever, as in this case, an
extraordinary situation existed.30
hhh. 2.
iii. PAGCOR is exempt from payment of VAT
jjj. The CIR insists that under VAT Ruling No. 04-96 (dated May 14, 1996), VAT Ruling No. 030-99 (dated
March 18, 1999), and VAT Ruling No. 067-01 (dated October 8, 2001), R.A. No. 771631 has expressly
repealed, amended, or withdrawn the 5% franchise tax provision in PAGCOR's Charter; hence, PAGCOR
was liable for the 10% VAT.32
kkk. The relevant provisions of R.A. No. 7716 on which the insistence has been anchored are the following:
lll. SEC. 3. Section 102 of the National Internal Revenue Code, as amended, is hereby further
amended to read as follows:
mmm. "SEC. l 02. 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 10% of gross receipts derived from the sale or exchange of
services, including the use or lease of properties.
nnn. "The phrase 'sale or exchange of services' means the performance of all kinds of
service in the Philippines for others for a fee, remuneration or consideration,
including x x x service of franchise grantees of telephone and telegraph, radio and
television broadcasting and all other franchise grantees except those under Section
117 of this Code; x x x"
ooo. SEC. 12. Section 117 of the National Internal revenue Code, as amended, is hereby further
amended further to read as follows:
ppp. "SEC.117. Tax on Franchises. - Any provision of general or special law to the contrary
notwithstanding, there shall be levied, assessed and collected in respect to all
franchises on electric, gas and water utilities a tax of two percent (2%) on the gross
receipts derived from the business covered by the law granting the franchise. x x x"
qqq. SEC. 20. Repealing Clauses. - The provisions of any special law relative to the rate of franchise
taxes are hereby expressly repealed.x x x
rrr. The CIR argues that PAGCOR' s gambling operations are embraced under the phrase sale or exchange of
services, including the use or lease of properties; that such operations are not among those expressly
exempted from the 10% VAT under Section 3 of R.A. No. 7716; and that the legislative purpose to
withdraw PAGCOR's 5% franchise tax was manifested by the language used in Section 20 of R.A.
No.7716.
sss. The CIR' s arguments lack merit.
ttt. Firstly, a basic rule in statutory construction is that a special law cannot be repealed or modified by a
subsequently enacted general law in the absence of any express provision in the latter law to that effect.
A special law must be interpreted to constitute an exception to the general law in the absence of special
circumstances warranting a contrary conclusion.33 R.A. No. 7716, a general law, did not provide for the
express repeal of PAGCOR's Charter, which is a special law; hence, the general repealing clause under
Section 20 of R.A. No. 7716 must pertain only to franchises of electric, gas, and water utilities, while the
term other franchises in Section 102 of the NIRC should refer only to transport, communications and
utilities, exclusive of PAGCOR's casino operations.
uuu. Secondly, R.A. No. 7716 indicates that Congress has not intended to repeal PAGCOR's privilege to enjoy
the 5% franchise tax in lieu of all other taxes. A contrary construction would be unwarranted and myopic
nitpicking. In this regard, we should follow the following apt reminder uttered in Fort Bonifacio
Development Corporation v. Commissioner of Internal Revenue:34
vvv. A law must not be read in truncated parts: its provisions must be read in relation to the whole
law. It is the cardinal rule in statutory construction that a statute’s clauses and phrases must
not be taken as detached and isolated expressions but the whole and every part thereof must
be considered in fixing the meaning of any of its parts in order to produce a harmonious
whole. Every part of the statute must be interpreted with reference to the context, i.e., that
every part of the statute must be considered together with other parts of the statute and kept
subservient to the general intent of the whole enactment.
www. In constructing a statute courts have to take the thought conveyed by the statute as a
whole: construe the constituent parts together; ascertain the legislative intent from the whole
act; consider each and every provision thereof in the light of the general purpose of the
statute; and endeavor to make every part effective, harmonious and sensible.
xxx. Although Section 3 of R.A. No. 7716 imposes 10% VAT on the sale or exchange of services, including the
use or lease of properties, the provision also considers transactions that are subject to 0% VAT. 35 On the
other hand, Section 4 of R.A. No. 7716 enumerates the transactions exempt from VAT, viz.:
yyy. SEC. 4. Section 103 of the National Internal Revenue Code, as amended, is hereby further
amended to read as follows:
zzz. "SEC.103. Exempt transactions. - The following shall he exempt from the value-added
tax:
aaaa. xxxx
bbbb. "(q) Transactions which are exempt under special laws, except those granted
under Presidential Decree Nos. 66, 529, 972, 1491, and 1590, and nonelectric
cooperatives under republic Act No. 6938, or international agreements to which the
Philippines is a signatory;
cccc. x x x x" (bold emphasis supplied.)
dddd. Anent the effect of R.A. No. 7716 on franchises, the Court has observed in Tolentino v. The
Secretary of Finance36that:
eeee. Among the provisions of the NIRC amended is §103, which originally read:
ffff. §103. Exempt transactions.-The following shall be exempt from the value-added tax:
gggg. ....
hhhh. (q) Transactions which are exempt under special laws or international
agreements to which the Philippines is a signatory.
iiii. Among the transactions exempted from the VAT were those of PAL because it was exempted
under its franchise (P.D. No. 1590) from the payment of all "other taxes ... now or in the near
 future," in consideration of the payment by it either of the corporate income tax or a franchise
tax of 2%.
jjjj. As a result of its amendment by Republic Act No. 7716, §103 of the NIRC now provides:
kkkk. §103. Exempt transactions.-The following shall be exempt from the value-
added tax:
llll. ……..
mmmm. (q) Transactions which are exempt under special laws, except those granted
under Presidential Decree Nos. 66, 529, 972, 1491, 1590 .....
nnnn. The effect of the amendment is to remove the exemption granted to PAL, as far as the
VAT is concerned.
oooo. xxxx
pppp. x x x Republic Act No. 7716 expressly amends PAL's franchise (P.D. No. 1590) by
specifically excepting from the grant of exemptions from the VAT PAL's exemption under P.D.
No. 1590. This is within the power of Congress to do under Art. XII, § 11 of the Constitution,
which provides that the grant of a franchise for the operation of a public utility is subject to
amendment, alteration or repeal by Congress when the common good so requires.37
qqqq. Unlike the case of PAL, however, R.A. No. 7716 does not specifically exclude PAGCOR's exemption
under P.D. No. 1869 from the grant of exemptions from VAT; hence, the petitioner's contention that
R.A. No. 7716 expressly amended PAGCOR's franchise has no leg to stand on.
rrrr. Moreover, PAGCOR's exemption from VAT, whether under R.A. No. 7716 or its amendments, has been
settled in Philippine Amusement and Gaming Corporation (PAGCOR) v. The Bureau of Internal
Revenue,38 whereby the Court, citing Commissioner of Internal Revenue v. Acesite (Philippines) Hotel
Corporation,39 has declared:
ssss. Petitioner is exempt from the payment of VAT, because PAGCORs charter, P.D. No. 1869, is a
special law that grants petitioner exemption from taxes.
tttt. Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A. No. 9337,
which retained Section 108 (B) (3) of R.A. No. 8424, thus:
uuuu. [R.A. No. 9337], SEC. 6. Section 108 of the same Code (R.A. No. 8424), as
amended, is hereby further amended to read as follows:
vvvv. SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties.
wwww. (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-
added tax equivalent to ten percent (10%) of gross receipts derived from the sale or
exchange of services, including the use or lease of properties: x x x
xxxx. x x x x
yyyy. (B) Transactions Subject to Zero Percent (0%) Rate. The following services
performed in the Philippines by VAT-registered persons shall be subject to zero
percent (0%) rate;
zzzz. x x x x
aaaaa. (3) Services rendered to persons or entities whose exemption under special
laws or international agreements to which the Philippines is a signatory
effectively subjects the supply of such services to zero percent (0%) rate;
bbbbb. x x x x
ccccc. As pointed out by petitioner, although R.A. No. 9337 introduced amendments
to Section 108 of R.A. No. 8424 by imposing VAT on other services not previously
covered, it did not amend the portion of Section 108 (B) (3) that subjects to zero
percent rate services performed by VAT-registered persons to persons or entities
whose exemption under special laws or international agreements to which the
Philippines is a signatory effectively subjects the supply of such services to 0% rate.
ddddd. Petitioner's exemption from VAT under Section 108 (B) (3) of R.A. No. 8424 has been
thoroughly and extensively discussed in Commissioner of Internal Revenue v. Acesite
(Philippines) Hotel Corporation. x x x The Court ruled that PAGCOR and Acesite were both
exempt from paying VAT, thus:
eeeee. x x x x
fffff. PAGCOR is exempt from payment of indirect taxes
ggggg. It is undisputed that P.D. 1869, the charter creating P AGCOR, grants the latter
an exemption from the payment of taxes. Section 13 of P.O. 1869 pertinently
provides:
hhhhh. Sec. 13. Exemptions.
iiiii. x x x x
jjjjj. (2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or
form, income or otherwise, as well as fees, charges or levies of whatever
nature, whether National or Local, shall be assessed and collected under
this Franchise from the Corporation; nor shall any form of tax or charge
attach in any way to the earnings of the Corporation, except a Franchise
Tax of five (5%) percent of the gross revenue or earnings derived by the
Corporation from its operation under this Franchise. Such tax shall be due
and payable quarterly to the National Government and shall be in lieu of
all kinds of taxes, levies, fees or assessments of any kind, nature or
description, levied, established or collected by any municipal, provincial,
or national government authority.
kkkkk. (b) Others: The exemptions herein granted for earnings derived from
the operations conducted under the franchise specifically from the
payment of any tax, income or otherwise, as well as any form of charges,
fees or levies, shall inure to the benefit of and extend to corporation(s),
association(s), agency(ies), or individual(s) with whom the Corporation or
operator has any contractual relationship in connection with the
operations of the casino(s) authorized to be conducted under this
Franchise and to those receiving compensation or other remuneration
from the Corporation or operator as a result of essential facilities
furnished and/or technical services rendered to the Corporation or
operator.
lllll. Petitioner contends that the above tax exemption refers only to PAGCOR's direct tax
liability and not to indirect taxes, like the VAT.
mmmmm. We disagree.
nnnnn. A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption
to taxes with no distinction on whether the taxes arc direct or indirect. We arc one
with the CA ruling that PAGCOR is also exempt from indirect taxes, like VAT, as
follows:
ooooo. Under the above provision [Section 13 (2) (b) of P.O. 1869], the term
"Corporation" or operator refers to PAGCOR. Although the law does not
 specifically mention PAGCOR's exemption from indirect taxes, PAGCOR is
undoubtedly exempt from such taxes because the law exempts from taxes
persons or entities contracting with PAGCOR in casino
operations. Although, differently worded, the provision clearly exempts
PAGCOR from indirect taxes. In fact, it goes one step further by granting tax
exempt status to persons dealing with PAGCOR in casino operations. The
unmistakable conclusion is that PAGCOR is not liable for the ₱30,
152,892.02 VAT and neither is Acesitc as the latter is effectively subject to
zero percent rate under Sec. 108 B (3 ), R.A. 8424. (Emphasis supplied.)
ppppp. Indeed, by extending the exemption to entitles or individuals dealing with
PAGCOR, the legislature clearly granted exemption also from indirect taxes. It must
be noted that the indirect tax of VAT, as in the instant case, can be shifted or passed
to the buyer, transferee, or lessee of the goods, properties, or services subject to
VAT. Thus, by extending the tax exemption to entities or individuals dealing with P
AGCOR in casino operations, it is exempting P AGCOR from being liable to indirect
taxes.
qqqqq. The manner of charging VAT docs not make PAGCOR liable to said tax.
rrrrr.It is true that VAT can either be incorporated in the value of the goods, properties,
or services sold or leased, in which case it is computed as 1/11 of such value, or
charged as an additional 10% to the value. Verily, the seller or lessor has the option
to follow either way in charging its clients and customer. In the instant case, Acesite
followed the latter method, that is, charging an additional 10% of the gross sales and
rentals. Be that as it may, the use of either method, and in particular, the first
method, does not denigrate the fact that PAGCOR is exempt from an indirect tax,
like VAT.
sssss. VAT exemption extends to Aeesite
ttttt. Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by Acesite,
the latter is not liable for the payment of it as it is exempt in this particular
transaction by operation of law to pay the indirect tax. Such exemption falls within
the fo1mer Section 102 (b) (3) of the 1977 Tax Code, as amended (now Sec. 108 [b]
[3] of R.A. 8424), which provides:
uuuuu. Section 102. Value-added tax on sale of services.- (a) Rate and base of
tax - There shall be levied, assessed and collected, a value-added tax
equivalent to 10% of gross receipts derived by any person engaged in the
sale of services x x x; Provided, that the following services performed in
the Philippines by VAT registered persons shall be subject to 0%.
vvvvv. xxxx
wwwww. (3) Services rendered to persons or entities whose exemption under
special laws or international agreements to which the Philippines is a
signatory effectively subjects the supply of such services to zero (0%) rate
(emphasis supplied).
xxxxx. The rationale for the exemption from indirect taxes provided for in P.O. 1869
and the extension of such exemption to entities or individuals dealing with PAGCOR
in casino operations are best elucidated from the 1987 case of Commissioner of
Internal Revenue v. John Gotamco & Sons, Inc., where the absolute tax exemption of
the World Health Organization (WHO) upon an international agreement was upheld.
We held in said case that the exemption of contractee WHO should be implemented
to mean that the entity or person exempt is the contractor itself who constructed
the building owned by contractee WHO, and such does not violate the rule that tax
exemptions are personal because the manifest intention of the agreement is to
exempt the contractor so that no contractor's tax may be shifted to the contractee
WHO. Thus, the proviso in P.D. 1869, extending the exemption to entities or
individuals dealing with PAGCOR in casino operations, is clearly to proscribe any
indirect tax, like VAT, that may be shifted to PAGCOR.
yyyyy. Although the basis of the exemption of PAGCOR and Acesite from VAT in the case of The
Commissioner of Internal Revenue v. Acesite (Philippines)Hotel Corporation was Section 102 (b)
of the 1977 Tax Code, as amended, which section was retained as Section 108 (B) (3) in R.A.
No. 8424, it is still applicable to this case, since the provision relied upon has been retained in
R.A. No. 9337.40
zzzzz. Clearly, the assessments for deficiency VAT issued against PAGCOR should be cancelled for lack of
legal basis.
aaaaaa. The Court also deems it warranted to cancel the assessments for deficiency withholding VAT
pertaining to the payments made by PAGCOR to its catering service contractor.
bbbbbb. In two separate letters dated December 12, 200341 and December 15, 2003,42 the BIR conceded
that the unmonetized meal allowances of PAGCOR's employees were not subject to fringe benefits tax
(FBT). However, the BIR held PAGCOR liable for expanded withholding VAT for the payments made to its
catering service contractor who provided the meals for its employees. Accordingly, the BIR assessed
PAGCOR with deficiency withholding VAT for taxable year 1999 in the amount of ₱4,077 ,667.40,
inclusive of interest and compromise penalty; and for taxable year 2000 in the amount of ₱l2,212,
199.85, exclusive of interest and penalties.
cccccc. The payments made by PAGCOR to its catering service contractor are subject to zero-rated (0%)
VAT in accordance with Section 13(2) of P.D. No. 1869 in relation to Section 3 of R.A. No. 7716, viz.:
dddddd. SEC. 13. Exemptions.-
eeeeee. (1) x x x
ffffff. (2) (a) x x x
gggggg. (b) Others: The exemption herein granted for earnings derived from the operations
conducted under the franchise, specifically from the payment of any tax, income or otherwise,
as well as any form of charges, fees, or levies, shall inure to the benefit and extend to
corporation(s), association(s), agency(ies), or individual(s) with whom the Corporation or
operator has any contractual relationship in connection with the operations of casino(s)
authorized to be conducted under this Franchise and to those receiving compensation or
other remuneration from the Corporation or operator as a result of essential facilities
furnished and/or technical services rendered to the Corporation or operator.
hhhhhh. x x x x
iiiiii. SEC. 3. Section 102 of the National Internal Revenue Code, as amended, is hereby further
amended to read as follows:
jjjjjj. "SEC.102. Value-added tax on sale of service and use or lease of properties. - x x x
kkkkkk. "(b) Transaction subject to zero-rate. - The following services performed in the Philippines
by Vat-registered persons shall be subject to 0%:
llllll. "x x xx
 mmmmmm. "(3) Services rendered to persons or entities whose exemptions under special FBT is imposed on PAGCOR's employees who receive the fringe benefit. PAGCOR's liability as a
laws or international agreements to which the Philippines is a signatory effectively subjects withholding agent is not covered by the tax exemptions under its Charter.
the supply of such services to zero rate. yyyyyy. The car plan extended by PAGCOR to its qualified officers is evidently considered a fringe
nnnnnn. As such, the catering service contractor, who is presumably a VAT-registered person, shall impose a benefit46 as defined under Section 33 of the NIRC. To avoid the imposition of the FBT on the benefit
zero rate (0%) output tax on its sale or lease of goods, services or properties to PAGCOR. Consequently, received by the employee, and, consequently, to avoid the withholding of the payment thereof by the
no withholding tax is due on such transaction. employer, PAGCOR must sufficiently establish that the fringe benefit is required by the nature of, or is
oooooo. 3. necessary to the trade, business or profession of the employer, or when the fringe benefit is for the
pppppp. PAGCOR is liable for the payment of withholding taxes convenience or advantage of the employer.
qqqqqq. Through the letters dated December 12, 200343 and December 15, 2003,44 the BIRrecomputed the zzzzzz. PAGCOR asserted that the car plan was granted "not only because it was necessary to the nature of
assessments for deficiency final withholding taxes on fringe benefits under Assessment No. 33-99 and the trade of PAGCOR but it was also granted for its convenience."47 The records are lacking in proof as to
Assessment No. 33-2000, respectively, as follows: whether such benefit granted to PAGCOR's officers were, in fact, necessary for PAGCOR's business or for
its convenience and advantage. Accordingly, PAGCOR should have withheld the FBT from the officers
who have availed themselves of the benefits of the car plan and remitted the same to the BIR.
Period aaaaaaa. As for the payment of the membership dues and fees, the Court finds that this is not considered a
Recomputed Amount
Covered fringe benefit that is subject to FBT and which holds PAGCOR liable for final withholding tax. According
Assessment No. 33-99 to PAGCOR, the membership dues and fees are:
bbbbbbb. 57. x x x expenses borne by [respondent] to cover various memberships in social, athletic
₱13,337,414.58, inclusive of penalty clubs and similar organizations. x x x
Final Withholding Tax on Fringe Benefits 1999
and interest ccccccc. 58. Respondent's nature of business is casino operations and it derives business from its
customers who play at the casinos. In furtherance of its business, PAGCOR usually attends its
Assessment No. 33-2000 VIP customers, amenities such as playing rights to golf clubs. The membership of PAGCOR to
₱12,212,199.85, exclusive of penalty these golf clubs and other organizations are intended to benefit respondent's customers and
Final Withholding Tax on Fringe Benefits 2000 not its employees. Aside from this, the membership is under the name of PAGCOR, and as
and interest
such, cannot be considered as fringe benefits because it is the customers and not the
employees of PAGCOR who benefit from such memberships.48
rrrrrr. The amount of the assessment for deficiency expanded withholding tax under Assessment No. 33- ddddddd. Considering that the payments of membership dues and fees are not borne by PAGCOR for its
99 remained at ₱3,790,916,809.16. employees, they cannot be considered as fringe benefits which are subject to FBT under Section 33 of
ssssss. We now resolve the validity of the foregoing assessments.1âwphi1 the NIRC. Hence, PAGCOR is not liable to withhold FBT from its employees.
tttttt. a. Final Withholding Tax on eeeeeee. b. Expanded Withholding Tax
Fringe Benefits fffffff. The BIR assessed PAGCOR with deficiency expanded withholding tax for the year 1999 under
uuuuuu. The recomputed assessment for deficiency final withholding taxes related to the car plan granted Assessment No. 33-99 amounting to ₱3,790,916,809.16, inclusive of surcharge and interest, which was
to PAGCOR's employees and for its payment of membership dues and fees. computed as follows:49
vvvvvv. Under Section 33 of the NIRC, FBT is imposed as:
wwwwww. A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three
percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1, Taxable Basis per Investigation ₱ 2,441,948,878.00
2000 and thereafter, is hereby imposed on the grossed-up monetary value of fringe benefit
furnished or granted to the employee (except rank and file employees as defined herein) by
the employer, whether an individual or a corporation (unless the fringe benefit is required by Expanded Withholding Tax due per investigation 45,762,839.60
the nature of, or necessary to the trade, business or profession of the employer, or when the
Less: Tax paid 43,490,484.05
fringe benefit is for the convenience or advantage of the employer). The tax herein imposed is
payable by the employer which tax shall be paid in the same manner as provided for under
Section 57 (A) of this Code. Deficiency Expanded Withholding Tax Due ₱ 2,398,458,393. 95
xxxxxx. FBT is treated as a final income tax on the employee that shall be withheld and paid by the
employer on a calendar quarterly basis.45 As such, PAGCOR is a mere withholding agent inasmuch as the Add: 25% surcharge
 promo items shall be subject only to 20% final tax (attached as Annexes "19" to "51" and made
20% interest per annum from ___ 12-20-02 1,392,433,415.21
Compromise Penalty integral parts hereof);
ooooooo. c) Reimbursements amounting to ₱18,246,090.35 which were paid directly by
agents/employees as over the counter purchases subsequently liquidated/reimbursed by
TOTAL AMOUNT DUE & COLLECTIBLE ₱ 3, 790,891,809.16 PAGCOR pursuant to BIR rulings 129-92 and 345-88;
================== ppppppp. d) Taxes amounting to ₱6,679,807.53, the amount of which should not be subjected to
expanded withholding tax for obvious reasons;
qqqqqqq. e) Security Deposit amounting to ₱3,450,000.00 which was written off after the Regional
ggggggg. Later, BIR issued a letter dated December 12, 2003 showing therein a recomputation of the Trial Court, Branch 226 of Quezon City through Presiding Judge, Leah S. Domingo-Regala,
assessment, to wit:50 rendered a decision based on a compromise agreement in Civil Case No. 097-31299 entitled
'Felina Rodriguez-Luna, et al vs. Philippine Amusement and Gaming Corporation" (attached as
Annex "52" and made an integral part hereof);51
Taxable Basis per Investigation ₱ 2,441,948,878.00 rrrrrrr. PAGCOR' s submission is partly meritorious. The Court finds that PAGCOR is not liable for deficiency
================ expanded withholding tax on its payment for: (1) audit services rendered by the Commission on Audit
(COA), amounting to ₱4,243,977.96,52 and (2) prizes and other promo items amounting to
EWT due per investigation 45,762,839.60
₱16,185,936.61.53
Less: Tax paid 43,490,484.05 sssssss. PAGCOR's payment to the COA for its audit services is exempted from withholding tax pursuant to
Sec. 2.57.5 (A) of Revenue Regulation (RR) 2-98, which states:
ttttttt. SEC. 2.57.5. Exemption from Withholding Tax –The withholding of creditable withholding
Def. EWT ₱ 2,272,355.55 tax prescribed in these Regulations shall not apply to income payments made to the following:
uuuuuuu. (A) National government and its instrumentalities, including provincial, city or municipal
Add: Interest 1-26-00 to 12-26-03 ₱l,780,311.85 governments;
vvvvvvv. On the other hand, the prizes and other promo items amounting to ₱16,185,936.61 were already
Compromise 25,000.00 1,805,311.85 subjected to the 20% final withholding tax54 pursuant to Section 24(B)(l) of the NIRC.55 To impose
another tax on these items would amount to obnoxious or prohibited double taxation because the
taxpayer would be taxed twice by the same jurisdiction for the same purpose.56
Def. EWT ₱ 4,077,667.40 wwwwwww. Hence, except for the foregoing, the Court upholds the validity of the assessment against
PAGCOR for deficiency expanded withholding tax.
hhhhhhh. PAGCOR submits that the BIR erroneously assessed it for thedeficiency expanded withholding xxxxxxx. We explain.
taxes, explaining thusly: yyyyyyy. Other than the ₱4,243,977.96 payments made to COA, the remainder of the ₱71,61 l,563.60
iiiiiii. 44. The computation made by the revenue officers for the year 1999 for expanded compensation income that PAGCOR paid for the services of its contractual, casual, clerical and
withholding taxes against respondent arc also not correct because it included payments messengerial employees are clearly subject to expanded withholding tax by virtue of Section 79 (A) of
amounting to ₱682,120,262 which should not be subjected to withholding tax; the NIRC which reads:
jjjjjjj. 45. Of the said amount, ₱194,999,366 cover importations or various items for the sole and zzzzzzz. Sec. 79 Income Tax Collected at Source.-
exclusive use of the casinos x x x: aaaaaaaa. (A) Requirement of Withholding. - Every employer making payment of wages
kkkkkkk. x x x x shall deduct and withhold upon such wages a tax determined in accordance with the rules and
lllllll. 46. The breakdown of respondent's payments which were assessed expanded withholding tax regulations to be prescribed by the Secretary of Finance, upon recommendation of the
by the BIR but which should not have been made subject thereto arc as follows: Commissioner: Provided, however, That no withholding of a tax shall be required where the
mmmmmmm. a) Taxable Compensation Income amounting to ₱7l,6ll,563.60, representing total compensation income of an individual does not exceed the statutory minimum wage, or
salaries of contractuals and casuals, clerical and messengerial and other services, cost of COA Five thousand pesos (₱5,000) per month, whichever is higher.
services and unclaimed salaries and other benefits recognized as income but subsequently bbbbbbbb. In addition, Section 2.57.3(C) of RR 2-98 states that:
claimed (attached as Annexes "10" to "18" and made integral parts hereof); cccccccc. SEC. 2.57.3 Persons Required to Deduct and Withhold. - The following persons are hereby
nnnnnnn. b) Prizes and other promo items amounting to ₱16,185,936.61 which were already constituted as withholding agents for purposes of the creditable tax required to be withheld
subjected to 20% final withholding tax. Pursuant to Revenue Regulations 2-98, prizes and on income payments enumerated in Section 2.57.2:
dddddddd. xxxx
eeeeeeee. (c) All government offices including government-owned or controlled rrrrrrrr. (3) CANCEL Assessment No. 33-2000 dated March 18, 2003, insofar as it assessed PHILIPPINE
corporations, as well as provincial, city and municipal governments. AMUSEMENT AND GAMING CORPORATION for deficiency –
ffffffff. As for the rest of the assessment for deficiency expanded withholding tax arising from PAGCOR's ssssssss. (a) value-added tax;
(1) reimbursement for over-the-counter purchases by its agents amounting to ₱18,246,090.34; (2) tax tttttttt. (b)expanded withholding value-added tax on payments made by PHILIPPINE AMUSEMENT AND
payments of ₱6,679,807.53; (3) security deposit totalling ₱3,450,000.00; and (4) importations w01ih GAMING CORPORATION to its catering service contractor; and
₱194,999,366.00, the Court observes that PAGCOR did not present sufficient and convincing proof to uuuuuuuu. (c) final withholding tax on fringe benefits relating to the membership fees and dues paid
establish its non-liability. by PHILIPPINE AMUSEMENT AND GAMING CORPORATION for the benefit of its clients and customers;
gggggggg.With regard to the reimbursement for over-the-counter purchases by its agents, PAGCOR merely vvvvvvvv. Respondent PHILIPPINE AMUSEMENT AND GAMING CORPORATION is DIRECTED TO PAY to the
relied on BIR Ruling Nos. 129-92 and 345-88 to support its claim that it should not be liable to withhold Bureau of Internal Revenue:
taxes on these payments without submitting any proof to show that there were really actual payments wwwwwwww. (l) its deficiency final withholding tax on fringe benefits arising from the car plan it
made.57 There is also nothing in the records to show that the amount of ₱6,679,807.53 really granted to its qualified officers and employees under Assessment No. 33-99 and Assessment No. 33-
represented PAGCOR's tax payments,58 or that the amount of ₱194,999,366.00 were, in fact, paid for 2000; and
PAGCOR's importations of various items in furtherance of its business. xxxxxxxx. (2) its deficiency expanded withholding tax under Assessment No. 33-99, except on compensation
hhhhhhhh. Even the ₱3,450,000.00 security deposit that it claims to have been written-off based on income paid to the Commission on Audit for its audit services and on prizes and other promo items.
the compromise agreement in Civil Case No. 097-31299 was not sufficiently proved to be tax exempt. yyyyyyyy. Upon receipt of respondent PHILIPPINE AMUSEMENT AND GAMING COH.PORA TIO N's payment for
The only document presented by PAGCOR to support its contention was a copy of the trial court's the foregoing tax deficiencies, the Bureau of Internal Revenue is DIRECTED TO WITHHOLD 5% thereof
decision in the civil case. However, nowhere in the decision mentioned the security deposit. and TO REMIT the same to the Office of the Solicitor General pursuant to Section 11(1) 60 of Republic
iiiiiiii. It is settled that all presumptions are in favor of the correctness of tax assessments.1âwphi1 The Act No. 9417 (An Act to Strengthen the Office of the Solicitor General, by Expanding and Streamlining its
good faith of the tax assessors and the validity of their actions are thus presumed. They will be Bureaucracy, Upgrading Employee Skills and Augmenting Benefits, and Appropriating Funds Therefor and
presumed to have taken into consideration all the facts to which their attention was called.59 Hence, it is for Other Purposes).
incumbent upon the taxpayer to credibly show that the assessment was erroneous in order to relieve zzzzzzzz. No pronouncement on costs of suit.
himself from the liability it imposes. PAGCOR failed in this regard. Hence, except for the assessment for aaaaaaaaa. SO ORDERED.
deficiency expanded withholding taxes pertaining to the payments made to the COA for its audit
services and for the prizes and other promo items, the Court upholds the BIR's assessment for deficiency
expanded withholding taxes. i. Zero-rated sale of service
jjjjjjjj. WHEREFORE, the Court PARTIALLY GRANTS the petition for certiorari; ANNULS and SETS ASIDE the ii. February 8, 2017
Resolutions dated December 22, 2006 and March 12, 2007 of the Secretary of Justice in OSJ Case No. iii. G.R. No. 201326
2004-1FOR LACK OF JURISDICTION; DECLARES that Republic Act No. 7716 did not repeal Section 13(2) of iv. SITEL PHILIPPINES CORPORATION (FORMERLY CLIENTLOGIC PHILS., INC.), Petitioner
Presidential Decree 1869, and, ACCORDINGLY, the PHILIPPINE AMUSEMENT AND GAMING CORPORATION vs.
is EXEMPT from value-added tax. COMMISSIONER OF INTERNAL REVENUE, Respondent
kkkkkkkk. The Court FURTHER RESOLVES to: v. DECISION
llllllll. (1) CANCEL Assessment No. 33-1996/1997 /1998 dated November 14, 2002, which vi. CAGUIOA, J.:
assessed PHILIPPINE AMUSEMENT AND GAMING CORPORATION for deficiency value-added tax; vii. This Petition for Review on Certiorari1 under Rule 45 of the Rules of Court filed by petitioner
mmmmmmmm. (2) CANCEL Assessment No. 33-99 dated November 25, 2002, insofar as it Sitel Philippines Corporation (Sitel) against the Commissioner of Internal Revenue (CIR) seeks
assessed PHILIPPINE AMUSEMENT AND GAMING CORPORATION for deficiency - to reverse and set aside the Decision dated November 11, 2011[[2]] and Resolution dated
nnnnnnnn. (a) value-added tax; March 28, 2012[[3]] of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 644, which
oooooooo. (b) expanded withholding value-added tax on payments made by PHILIPPINE denied Sitel' s claim for refund of unutilized input value-added tax (VAT) for the first to fourth
AMUSEMENT AND GAMING CORPORATION to its catering service contractor; quarters of taxable year 2004 for being prematurely filed.
pppppppp. (c) final withholding tax on fringe benefits relating to the membership fees and dues paid viii. Facts
by PHILIPPINE AMUSEMENT AND GAMING CORPORATION for the benefit of its clients and customers; ix. Sitel, a corporation organized and existing under the laws of the Philippines, is engaged in the
and business of providing call center services from the Philippines to domestic and offshore
qqqqqqqq. (d) expanded withholding tax on compensation income paid by PHILIPPINE AMUSEMENT businesses. It is registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer, as well
AND GAMING CORPORATION to the Commission on Audit for its audit services, and expanded as with the Board of Investments on pioneer status as a new information technology service
withholding tax on the prizes and other promo items, which were already subjected to the 20% final firm 'in the field of call center.[[4]]
withholding tax;
 x. For the period from January 1, 2004 to December 31, 2004, Sitel filed with the BIR its xvi. In view of the foregoing, the instant Petition for Review is hereby PARTIALLY
Quarterly VAT Returns as follows: GRANTED. Petitioner is entitled to the instant claim in the reduced amount of
₱11,155,276.59 computed as follows:
Period Covered Date Filed
Amount of Input VAT Claim ₱ 23,093,899.59
1st Quarter 2004 26 April 2004

2nd Quarter 2004 26 July 2004 Less: Input VAT Claim on Zero-Rated Sales 7,170,276.02

3rd Quarter 2004 25 October 2004 Input VAT Claim on Capital Goods Purchases ₱ 15,923,623.57

4th Quarter 2004 25 January 20055 Not Properly Substantiated Input VAT Claim on Capital Goods
Less:
Purchases

xi. Sitel's Amended Quarterly VAT Returns for the first to fourth quarters of 2004 declared as Per ICPA Report (₱15,923,623.57 less ₱13,824,129.14) 2,099,494.43
follows:
Per this Court's further verification 2,668,852.55

Taxable Sales Zero-Rated Total Sales Input Tax for the Input Tax from Input Tax Input Tax Refundable
Input Input VAT on Capital Goods Purchases
Tax Allocated ₱ 11,155,276.59
(A) Sales (C=A+B) [Quarter] Capital Goods from Regular Allocated to Zero-Rated
(B) (D) (E) Transactions to Taxable Sales
(F+D-E) Sales xvii.
[H=(B/C) Accordingly, respondent is ORDERED to REFUND OR ISSUE A TAX CREDIT
x (F)]
[G=(A/C) x CERTIFICATE in the reduced amount of ₱11,155,276.59 representing unutilized input
(F)] VAT arising from petitioner's domestic purchases of goods and services which are
attributable to zero-rated transactions and purchases/importations of capital goods
509,799.74 180,450,030.29 180,957,830.03 3,842,714.21 2,422,090.40 1,400,623.81 3,930.40 1,396,693.41 for the taxable year 2004.
xviii. SO ORDERED.9
0 142,664,271.00 142,664,271.00 3,554,922.94 2,846,225.66 708,696.58 - 708,696.58
xix. The CTA Division denied Sitel's ₱7,170,276.02 claim for unutilized input VAT attributable to its
zero-rated sales for the four quarters of 2004. Relying upon the rulings of this Court
517,736.36 205,021,590.46 205,539,326.82 9,568,047.25 7,629, 734.40 1,938,312.85 4,882.45 1,933,430.40 in Commissioner of Internal Revenue v.Burmeister and Wain Scandinavian Contractor
Mindanao, Inc.10 (Burmeister), the CTA Division found that Sitel failed to prove that the
0 334,384,766.48 334,384,766.48 6,137,028.74 3,005,573.11 3,313,455.63 - 3,313,455.63
recipients of its services are doing business outside the Philippines, as required under Section
1,025,536.10 862,520,658.23 863,546,194.33 23,102,712.44 15,923,623.57 7,179,088.87 8,812.85 7,170,276.02 108(B)(2)
6 of the National Internal Revenue Code of 1997 (NIRC), as amended.11
xx. The CTA Division also disallowed the amount of ₱2,668,852.55 representing input VAT paid on
capital goods purchased for taxable year 2004 for failure to comply with the invoicing
xii. On March 28, 2006, Sitel filed separate formal claims for refund or issuance of tax credit with requirements under Sections 113, 237, and 238 of the NIRC of 1997, as amended, and Section
the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of 4.108-1 of Revenue Regulations No. 7-95 (RR 7-95).12
Finance for its unutilized input VAT arising from domestic purchases of goods and services xxi. Aggrieved, Sitel filed a motion for partial reconsideration13 and Supplement (To Motion for
attributed to zero-rated transactions and purchases/importations of capital goods for the 1st, Reconsideration [of Decision dated October 21, 2009]),14 on November 11, 2009 and March
2nd, 3rd and 4th quarters of 2004 in the aggregate amount of ₱23,093,899.59.7 26, 2010, respectively.
xiii. On March 30, 2006, Sitel filed a judicial claim for refund or tax credit via a petition for review xxii. Prior thereto, or on January 8, 2010, Sitel filed a Motion for Partial Execution of Judgment15
before the CTA, docketed as CTA Case No. 7423. seeking the execution pending appeal of the portion of the Decision dated October 21, 2009
xiv. Ruling of the CTA Division granting refund in the amount of ₱11,155,276.59, which portion was not made part of its
xv. On October 21, 2009, the CTA Division rendered a Decision8 partially granting Sitel' s claim for motion for partial reconsideration.
VAT refund or tax credit, the dispositive portion of which reads as follows: xxiii. On May 31, 2010, the CTA Division denied Sitel's Motion for Reconsideration and Supplement
(To Motion for Reconsideration [of Decision dated October 21, 2009]) for lack of merit.16
xxiv. Undaunted, Sitel filed a Petition for Review17 with the CTA En Banc claiming that it is entitled xxxvii.
to the amount denied by the CTA Division. xxxviii.
xxv. Ruling of the CTA En Banc
xxvi. In the assailed Decision, the CTA En Banc reversed and set aside the ruling of the CTA Division. xxxix.
Citing the case of Commissioner of Internal Revenue v. Aichi Forging Company of Asia,
Inc.18 (Aichi), the CTA En Banc ruled that the 120-day period for the CIR to act on the
administrative claim for refund or tax credit, under Section 112(D) of the NIRC of 1997, as
amended, is mandatory and jurisdictional. Considering that Sitel filed its judicial claim for VAT
refund or credit without waiting for the lapse of the 120-day period for the CIR to act on its
administrative claim, the CTA did not acquire jurisdiction as there was no decision or inaction xl.
to speak of.19 Thus, the CTA En Banc denied Sitel' s entire refund claim on the ground of
prematurity. The dispositive portion of the CTA En Banc's Decision reads as follows:
xxvii. WHEREFORE, on the basis of the foregoing considerations, the Petition for
Review En Banc is DISMISSED. Accordingly, the Decision of the CTA First Division xli.
dated October 21, 2009 and the Resolution issued by the Special First Division dated xlii.
May 31, 2010, are hereby reversed and set aside. Petitioner's refund claim of xliii.
₱19,702,880.80 is DENIED on the ground that the judicial claim for the first to fourth
quarters of taxable year 2004 was prematurely filed.
xxviii. SO ORDERED.20
xxix. Aggrieved, Sitel moved for reconsideration,21 but the same was denied by the Court En xliv.
Banc for lack of merit.22 xlv.
xxx. Hence, the instant petition raising the following issues: xlvi.
xxxi. x x x WHETHER OR NOT THE AICHI RULING PROMULGATED ON OCTOBER 6, 2010 xlvii.
MAY BE APPLIED RETROACTIVELY TO THE INST ANT CLAIM FOR REFUND OF INPUT
VAT INCURRED IN 2004.
xxxii. x x x WHETHER OR NOT THE CTA EN BANC CAN VALIDLY WITHDRAW AND REVOKE
THE PORTION OF THE REFUND CLAIM ALREADY GRANTED TO PETITIONER IN THE
AMOUNT OF ₱11,155,276.59 AFTER TRIAL ON THE MERITS, NOTWITHSTANDING xlviii.
THAT SUCH PORTION OF THE DECISION HAD NOT BEEN APPEALED.
xxxiii. x x x WHETHER OR NOT PETITIONER IS ENTITLED TO A REFUND OR TAX CREDIT OF
ITS UNUTILIZED INPUT VAT ARISING FROM PURCHASES OF GOODS AND SERVICES
ATTRIBUTABLE TO ZERO-RATED SALES AND PURCHASES/IMPORTATIONS OF CAPITAL
GOODS FOR THE 1sT, 2ND, 3RD, [AND] 4TH QUARTERS OF TAXABLE YEAR 2004 IN
THE AGGREGATE AMOUNT OF ₱20,994,405.16.23 xlix.
xxxiv. In the Resolution24 dated July 4, 2012, the CIR was required to comment on the instant
petition. In compliance thereto, the CIR filed its Comment25 on November 14, 2012.
xxxv. On January 16, 2013, the Court issued a Resolution26 denying Sitel's petition for failure to
sufficiently show that the CTA En Banc committed reversible error in denying its refund claim l.
on the ground of prematurity based on prevailing jurisprudence.
xxxvi. Soon thereafter, however, or on February 12, 2013, the Court En Banc decided the
consolidated cases of Commissioner of Internal Revenue v. San Roque Power Corporation,
Taganito Mining Corporation v. Commissioner of Internal Revenue, and Phi/ex Mining
Corporation v. Commissioner of Internal Revenue27 (San Roque). In that case, the Court
recognized BIR Ruling No. DA-489-03 as an exception to the mandatory and jurisdictional li.
nature of the 120-day waiting period.
Invoking San Roque, Sitel filed a Motion for Reconsideration.28
In the Resolution29 dated June 17, 2013, the Court granted Sitel's motion and reinstated the
instant petition.
In the instant petition, Sitel claims that its judicial claim for refund was timely filed following
the Court's pronouncements in San Roque; thus, it was erroneous for the CTA En Banc to
reverse the ruling of the CTA Division and to dismiss its petition on the ground of prematurity.
Sitel further argues that the previously granted amount for refund of ₱11,155,276.59 should
be reinstated and declared final and executory, the same not being the subject of Sitel's partial
appeal before the CTA En Banc,nor of any appeal from the CIR.
Finally, Sitel contends that insofar as the denied portion of the claim is concerned, which the
CTA En Banc failed to pass upon with the dismissal of its appeal, speedy justice demands that
the Court resolved the same on the merits and Sitel be declared entitled to an additional
refund in the amount of ₱9,839, 128.57.
The Court's Ruling
The Court finds the petition partly meritorious.
Sitel's Judicial Claim/or VAT Refund
was deemed timely filed pursuant to
the Court's pronouncement in San
Roque.
Section 112(C) of the NIRC, as amended, provides:
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 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.
(Emphasis supplied)
Based on the plain language of the foregoing provision, the CIR is given 120 days within which
to grant or deny a claim for refund. Upon receipt of CIR' s decision or ruling denying the said
claim, or upon the expiration of the 120-day period without action from the CIR, the taxpayer
has thirty (30) days within which to file a petition for review with the CTA.
In Aichi, the Court ruled that the 120-day period granted to the CIR was mandatory and
jurisdictional, the non-observance of which was fatal to the filing of a judicia1 claim with the
CTA. The Court further explained that the two (2)-year prescriptive period under Section
112(A) of the NIRC pertained only to the filing of the administrative claim with the BIR; while
the judicial claim may be filed with the CTA within thirty (30) days from the receipt of the
decision of the CIR or the expiration of the 120-day period of the CIR to act on the claim. Thus:
Section 112 (D) of the NIRC clearly provides that the CIR has "120 days, from the
date of the submission of the complete documents in support of the application [for
 tax refund/credit]," within which to grant or deny the claim. In case of full or partial
denial by the CIR, the taxpayer's recourse is to file an appeal before the CTA within
30 days from receipt of the decision of the CIR. However, if after the 120-day period
the CIR fails to act on the application for tax refund/credit, the remedy of the
taxpayer is to appeal the inaction of the CIR to CTA within 30 days.
lii. In this case, the administrative and the judicial claims were simultaneously filed on
September 30, 2004. Obviously, respondent did not wait for the decision of the CIR
or the lapse of the 120-day period. For this reason, we find the filing of the judicial
claim with the CTA premature.
liii. Respondent's assertion that the non-observance of the 120-day period is not fatal to
the filing of a judicial claim as long as both the administrative and the judicial claims
are filed within the two-year prescriptive period has no legal basis.
liv. 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 CT A. 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.
lv. 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.
lvi. xxxx
lvii. In fine, the premature filing of respondent's claim for refund/credit of input VAT
before the CTA warrants a dismissal inasmuch as no jurisdiction was acquired by the
CTA.30
lviii. However, in San Roque, the Court clarified that the 120-day period does not apply to claims
for refund that were prematurely filed during the period from the issuance of BIR Ruling No.
DA-489-03, on December 10, 2003, until October 6, 2010, when Aichi was promulgated. The
Court explained that BIR Ruling No. DA-489-03, which expressly allowed the filing of judicial
claims with the CTA even before the lapse of the 120-day period, provided for a valid claim of
equitable estoppel because the CIR had misled taxpayers into prematurely filing their judicial
claims before the CTA:
lix. There is no dispute that the 120-day period is mandatory and jurisdictional, and that
the CTA does not acquire jurisdiction over a judicial claim that is filed before the
expiration of the 120-day period. There are, however, two exceptions to this rule.
The first exception is if the Commissioner, through a specific ruling, misleads a
particular taxpayer to prematurely file a judicial claim with the CTA. Such specific
ruling is applicable only to such particular taxpayer. The second exception is where
the Commissioner, through a general interpretative rule issued under Section 4 of the
Tax Code, misleads all taxpayers into filing prematurely judicial claims with the CTA. In
these cases, the Commissioner cannot be allowed to later on question the CTA's
assumption of jurisdiction over such claim since equitable estoppel has set in as
expressly authorized under Section 246 of the Tax Code.
lx. xxxx
lxi. 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.
lxii. 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.31 (Emphasis supplied).
lxiii. In Visayas Geothermal Power Company v. Commissioner of Internal Revenue, 32 the Court came
up with an outline summarizing the pronouncements in San Roque, to wit:
lxiv. For clarity and guidance, the Court deems it proper to outline the rules laid down
in San Roque with regard to claims for refund or tax credit of unutilized creditable
input VAT. They are as follows:
lxv. 1. When to file an administrative claim with the CIR:
lxvi. a. General rule - Section 112(A) and Mirant
lxvii. Within 2 years from the close of the taxable quarter when the sales were
made.
lxviii. b. Exception – Atlas
lxix. Within 2 years from the date of payment of the output VAT, if the
administrative claim was filed from June 8, 2007 (promulgation of Atlas) to
September 12, 2008 (promulgation of Mirant).
lxx. 2. When to file a judicial claim with the CT A:
lxxi. a. General rule - Section 112(D); not Section 229
lxxii. i. Within 30 days from the full or partial denial of the administrative claim
by the CIR; or
lxxiii. ii. Within 30 days from the expiration of the 120-day period provided to the
CIR to decide on the claim. This is mandatory and jurisdictional beginning
January 1, 1998 (effectivity of 1997 NIRC).
lxxiv. b. Exception-BIR Ruling No. DA-489-03
lxxv. The judicial claim need not await the expiration of the 120-day period, if
such was filed from December 10, 2003 (issuance of BIR Ruling No. DA-489-
03) to October 6, 2010 (promulgation of Aichi).33 (Emphasis and
underscoring supplied).
lxxvi. In this case, records show that Sitel filed its administrative and judicial claim for refund on
March 28, 2006 and March 30, 2006, respectively, or after the issuance of BIR Ruling No. DA-
489-03, but before the date when Aichi was promulgated. Thus, even though Sitel filed its
judicial claim prematurely, i.e., without waiting for the expiration of the 120-day mandatory
period, the CTA may still take cognizance of the case because the claim was filed within the
excepted period stated in San Roque. In other words, Sitel' s judicial claim was deemed timely
filed and should have not been dismissed by the CTA En Banc.Consequently, the October 21,
2009 Decision34 of the CTA Division partially granting Sitel' s judicial claim for refund in the
reduced amount of ₱11,155,276.59, which is not subject of the instant appeal, should be
reinstated. In this regard, since the CIR did not appeal said decision to the CTA En Banc, the
same is now considered final and beyond this Court's review.
lxxvii. Sitel now questions the following portions of its refund claim which the CTA Division denied:
(1) ₱7,l 70,276.02, representing unutilized input VAT on purchases of goods and services
attributable to zero-rated sales, which was denied because Sitel failed to prove that the call
services it rendered for the year 2004 were made to non-resident foreign clients doing
business outside the Philippines; and (2) ₱2,668,852.55 representing input VAT on purchases
of capital goods, because these are supported by invoices and official receipts with pre-
printed TIN-V instead of TIN-VAT, as required under Section 4.108-1 of RR 7-95.
lxxviii. Sitel claims that testimonial and documentary evidence sufficiently established that its clients
were non-resident foreign corporations not doing business in Philippines. It also asserts that
the input VAT on its purchases of capital goods were duly substantiated because the
supporting official receipts substantially complied with the invoicing requirements provided by
the rules.
lxxix. In other words, Sitel wants the Court to review factual findings of the CTA Division, reexamine
the evidence and determine on the basis thereof whether it should be refunded the additional
amount of ₱9,839,128.57. This, however, cannot be done in the instant case for settled is the
rule that this Court is not a trier of facts and does not normally embark in the evaluation of
evidence adduced during trial.35 It is not this Court's function to analyze or weigh all over again
the evidence already considered in the proceedings below, the Court's jurisdiction being
limited to reviewing only errors of law that may have been committed by the lower court.36
lxxx. Furthermore, the Court accords findings and conclusions of the CTA with the highest
respect.37 As a specialized court dedicated exclusively to the resolution of tax problems, the
CTA has accordingly developed an expertise on the subject of taxation.38 Thus, its decisions are
presumed valid in every aspect and will not be overturned on appeal, unless the Court finds
that the questioned decision is not supported by substantial evidence or there has been an
abuse or improvident exercise of authority on the part of the tax court.39
lxxxi. Upon careful review of the instant case, and directly addressing the issues raised by Sitel, the
Court finds no cogent reason to reverse or modify the findings of the CTA Division.
lxxxii. The Court expounds.
lxxxiii. Sitel failed to prove that the
recipients of its call services are
foreign corporations doing business
outside the Philippines.
lxxxiv. Sitel's claim for refund is anchored on Section 112(A)40 of the NIRC, which allows the refund or
credit of input VAT attributable to zero-rated or effectively zero-rated sales. In relation
thereto, Sitel points to Section 108(B)(2) of the NIRC [formerly Section 102(b)(2) of the NIRC of
1977, as amended] as legal basis for treating its sale of services as zero-rated or effectively
zero-rated. Section 108(B)(2) reads:
lxxxv. SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. -
lxxxvi. xxxx
lxxxvii. (B) Transactions Subject to Zero Percent (0%) Rate. - The following services
performed in the Philippines by VAT-registered persons shall be subject to zero
percent (0%) rate:
lxxxviii. xxxx
lxxxix. (2) Services other than those mentioned in the preceding paragraph rendered to a
person engaged in business conducted outside the Philippines or to a nonresident
person not engaged in business who is outside the Philippines when the services are
performed, the consideration for which is paid for in acceptable foreign currency
and accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP); (Emphasis supplied)
xc. In Burmeister, the Court clarified that an essential condition to qualify for zero-rating under
the aforequoted provision is that the service-recipient must be doing business outside the
Philippines, to wit:
xci. The Tax Code not only requires that the services be other than "processing,
manufacturing or repacking of goods" and that payment for such services be in
acceptable foreign currency accounted for in accordance with BSP rules. Another
essential condition for qualification to zero-rating under Section 102(b)(2) is that
the recipient of such services is doing business outside the Philippines. x x x
xcii. This can only be the logical interpretation of Section 102(b)(2). If the provider and
recipient of the "other services" are both doing business in the Philippines, the
payment of foreign currency is irrelevant. Otherwise, those subject to the regular
VAT under Section 102(a) can avoid paying the VAT by simply stipulating payment in
foreign currency inwardly remitted by the recipient of services. To interpret Section
102(b)(2) to apply to a payer-recipient of services doing business in the Philippines is
to make the payment of the regular VAT under Section 102(a) dependent on the
generosity of the taxpayer. The provider of services can choose to pay the regular
VAT or avoid it by stipulating payment in foreign currency inwardly remitted by the
payer-recipient. Such interpretation removes Section 102(a) as a tax measure in the
Tax Code, an interpretation this Court cannot sanction. A tax is a mandatory
exaction, not a voluntary contribution.
xciii. xxxx
xciv. Thus, when Section 102(b)(2) speaks of "[s]ervices other than those mentioned in the
preceding subparagraph," the legislative intent is that only the services are different
between subparagraphs 1 and 2. The requirements for zero-rating, including the
essential condition that the recipient of services is doing business outside the
Philippines, remain the same under both subparagraphs.
xcv. Significantly, the amended Section 108(b) [previously Section 102 (b)] of the present
Tax Code clarifies this legislative intent. Expressly included among the transactions
subject to 0% VAT are "[s]ervices other than those mentioned in the [first]
paragraph [of Section 108(b)] rendered to a person engaged in business conducted
outside the Philippines or to a nonresident person not engaged in business who is
outside the Philippines when the services are performed, the consideration for
which is paid for in acceptable foreign currency and accounted for in accordance
with the rules and regulations of the BSP."41
xcvi. Following Burmeister, the Court, in Accenture, Inc. v. Commissioner of Internal
Revenue,42 (Accenture), emphasized that a taxpayer claiming for a VAT refund or credit under
Section 108(B) has the burden to prove not only that the recipient of the service is a foreign
corporation, but also that said corporation is doing business outside the Philippines. For failure
to discharge this burden, the Court denied Accenture's claim for refund.
xcvii. We rule that the recipient of the service must be doing business outside the
Philippines for the transaction to qualify for zero-rating under Section 108(B) of the
Tax Code.
xcviii. xxxx
xcix. The evidence presented by Accenture may have established that its clients are
foreign. This fact does not automatically mean, however, that these clients were
doing business outside the Philippines. After all, the Tax Code itself has provisions
for a foreign corporation engaged in business within the Philippines and vice versa,
to wit:
c. SEC. 22. Definitions. - When used in this Title:
ci. xxxx
cii. (H) The term "resident foreign corporation" applies to a foreign
corporation engaged in trade or business within the Philippines.
ciii. (I) The term 'nonresident foreign corporation' applies to a foreign
corporation not engaged in trade or business within the Philippines.
(Emphasis in the original)
civ. Consequently, to come within the purview of Section 108(B)(2), it is not enough that
the recipient of the service be proven to be a foreign corporation; rather, it must be
specifically proven to be a nonresident foreign corporation.
cv. There is no specific criterion as to what constitutes "doing" or "engaging in" or
"transacting" business. We ruled thus in Commissioner of Internal Revenue v. British
Overseas Airways Corporation:
cvi. x x x. There is no specific criterion as to what constitutes "doing" or
"engaging in" or "transacting" business. Each case must be judged in the
light of its peculiar environmental circumstances. The term implies a
continuity of commercial dealings and arrangements, and contemplates,
to that extent, the performance of acts or works or the exercise of some
of the functions normally incident to, and in progressive prosecution of
commercial gain or for the purpose and object of the business
organization. "In order that a foreign corporation may be regarded as doing
business within a State, there must be continuity of conduct and intention
to establish a continuous business, such as the appointment of a local
agent, and not one of a temporary character."
cvii. A taxpayer claiming a tax credit or refund has the burden of proof to establish the
factual basis of that claim. Tax refunds, like tax exemptions, are construed strictly
against the taxpayer.
cviii. Accenture failed to discharge this burden. It alleged and presented evidence to
prove only that its clients were foreign entities. However, as found by both the CTA
Division and the CTA En Banc, no evidence was presented by Accenture to prove the
fact that the foreign clients to whom petitioner rendered its services were clients
doing business outside the Philippines.
cix. As ruled by the CTA En Banc, the Official Receipts, Intercompany Payment Requests,
Billing Statements, Memo Invoices-Receivable, Memo Invoices-Payable, and Bank
Statements presented by Accenture merely substantiated the existence of sales,
receipt of foreign currency payments, and inward remittance of the proceeds of
such sales duly accounted for in accordance with BSP rules, all of these were devoid
of any evidence that the clients were doing business outside of the
Philippines.43 (Emphasis supplied; citations omitted)
cx. In the same vein, Sitel fell short of proving that the recipients of its call services were foreign
corporations doing business outside the Philippines. As correctly pointed out by the CTA
Division, while Sitel' s documentary evidence, which includes Certifications issued by the
Securities and Exchange Commission and Agreements between Sitel and its foreign clients,
may have established that Sitel rendered services to foreign corporations in 2004 and received
payments therefor through inward remittances, said documents failed to specifically prove
that such foreign clients were doing business outside the Philippines or have a continuity of
commercial dealings outside the Philippines.
cxi. Thus, the Court finds no reason to reverse the ruling of the CTA Division denying the refund of
₱7,170,276.02, allegedly representing Sitel's input VAT attributable to zero-rated sales.
cxii. Sitel failed to strictly comply with
invoicing requirements for VAT
refund.
cxiii. The CTA Division also did not err when it denied the amount of ₱2,668,852.55, allegedly
representing input taxes claimed on Sitel's domestic purchases of goods and services which
are supported by invoices/receipts with pre-printed TIN-V. In Western Mindanao Power Corp.
v. Commissioner of Internal Revenue,44 the Court ruled that in a claim for tax refund or tax
credit, the applicant must prove not only entitlement to the grant of the claim under
substantive law, he must also show satisfaction of all the documentary and evidentiary
requirements for an administrative claim for a refund or tax credit and compliance with the
invoicing and accounting requirements mandated by the NIRC, as well as by revenue
regulations implementing them. The NIRC requires that the creditable input VAT should be
evidenced by a VAT invoice or official receipt,45 which may only be considered as such when
the TIN-VAT is printed thereon, as required by Section 4.108-1 of RR 7-95.
cxiv. The Court's pronouncement in Kepco Philippines Corp. v. Commissioner of Internal Revenue46 is
instructive:
cxv. Furthermore, Kepco insists that Section 4.108-1 of Revenue Regulation 07-95 does
not require the word "TIN-VAT" to be imprinted on a VAT-registered person's
 supporting invoices and official receipts and so there is no reason for the denial of
its ₱4,720,725.63 claim of input tax.
cxvi. In this regard, Internal Revenue Regulation 7-95 (Consolidated Value-Added Tax
Regulations) is clear.1âwphi1 Section 4.108-1 thereof reads:
cxvii. Only VAT registered persons are required to print their TIN followed by
the word "VAT" in their invoice or receipts and this shall be considered as
a "VAT" Invoice. All purchases covered by invoices other than 'VAT Invoice'
shall not give rise to any input tax.
cxviii. Contrary to Kepco's allegation, the regulation specifically requires the VAT registered
person to imprint TIN-VAT on its invoices or receipts. Thus, the Court agrees with
the CTA when it wrote: "[T]o be considered a 'VAT invoice,' the TIN-VAT must be
printed, and not merely stamped. Consequently, purchases supported by invoices or
official receipts, wherein the TIN-VAT is not printed thereon, shall not give rise to
any input VAT. Likewise, input VAT on purchases supported by invoices or official
receipts which are NON-VAT are disallowed because these invoices or official
receipts are not considered as 'VAT Invoices."'47
cxix. In the same vein, considering that the subject invoice/official receipts are not imprinted with
the taxpayer's TIN followed by the word VAT, these would not be considered as VAT
invoices/official receipts and would not give rise to any creditable input VAT in favor of Sitel.
cxx. At this juncture, it bears to emphasize that "[t]ax refunds or tax credits - just like tax
exemptions - are strictly construed against taxpayers, the latter having the burden to prove
strict compliance with the conditions for the grant of the tax refund or credit."48
cxxi. WHEREFORE, premises considered, the instant petition for review is GRANTED IN PART. The
Decision dated November 11, 2011 and Resolution dated March 28, 2012 of the CTA En
Banc in CTA EB No. 644 are hereby REVERSED and SET ASIDE.Accordingly, the October 21,
2009 Decision of the CTA First Division in CTA Case No. 7423 is hereby REINSTATED.
Respondent is hereby ORDERED TO REFUND or, in the alternative, TO ISSUE A TAX CREDIT
CERTIFICATE, in favor of the petitioner in the amount of ₱11,155,276.59, representing unutilized input
VAT arising from purchases/importations of capital goods for taxable year 2004.
SO ORDERED.
i. Change of Status as VAT-registered person
G.R. No. 175410 November 12, 2014
SMI-ED PHILIPPINES TECHNOLOGY, INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
LEONEN, J.:
In an action for the refund of taxes allegedly erroneously paid, the Court of Tax Appeals may determine
whether there are taxes that should have been paid in lieu of the taxes paid. Determining the proper
category of tax that should have been paid is not an assessment. It is incidental to determining whether there
should be a refund.
A Philippine Economic Zone Authority (PEZA)-registered corporation that has never commenced operations
may not avail the tax incentives and preferential rates given to PEZA-registered enterprises. Such corporation
is subject to ordinary tax rates under the National Internal Revenue Code of 1997.
This is a petition for review1 on certiorari of the November 3, 2006 Court of Tax Appeals En Banc decision.2 It
affirmed the Court of Tax Appeals Second Division’s decision3 and resolution4 denying petitioner SMI-Ed
Philippines Technology, Inc.’s (SMI-Ed Philippines) claim for tax refund.5
SMI-Ed Philippines is a PEZA-registered corporation authorized "to engage in the business of manufacturing
ultra high-density microprocessor unit package."6
After its registration on June 29, 1998, SMI-Ed Philippines constructed buildings and purchased machineries
and equipment.7 As of December 31, 1999, the total cost of the properties amounted to ₱3,150,925,917.00.8
SMI-Ed Philippines "failed to commence operations."9 Its factory was temporarily closed, effective October
15, 1999. On August 1, 2000, it sold its buildings and some of its installed machineries and equipment to
Ibiden Philippines, Inc., another PEZA-registered enterprise, for ¥2,100,000,000.00 (₱893,550,000.00). SMI-
Ed Philippines was dissolved on November 30, 2000.10
In its quarterly income tax return for year 2000, SMI-Ed Philippines subjected the entire gross sales of
itsproperties to 5% final tax on PEZA registered corporations. SMI-Ed Philippines paid taxes amounting to
₱44,677,500.00.11
On February 2, 2001, after requesting the cancellation of its PEZA registration and amending its articles of
incorporation to shorten its corporate term, SMI-Ed Philippines filed an administrative claim for the refund of
₱44,677,500.00 with the Bureauof Internal Revenue (BIR). SMIEd Philippines alleged that the amountwas
erroneously paid. It also indicated the refundable amount in its final income tax return filed on March 1,
2001. It also alleged that it incurred a net loss of ₱2,233,464,538.00.12
The BIR did not act on SMI-Ed Philippines’ claim, which prompted the latter to file a petition for reviewbefore
the Court of Tax Appeals on September 9, 2002.13
The Court of Tax Appeals Second Division denied SMI-Ed Philippines’ claim for refund in the decision dated
December 29, 2004.14
The Court of Tax Appeals Second Division found that SMI-Ed Philippines’ administrative claim for refund and
the petition for review with the Court of Tax Appeals were filed within the two-year prescriptive
period.15 However, fiscal incentives given to PEZA-registered enterprises may be availed only by PEZA-
registered enterprises that had already commenced operations.16 Since SMI-Ed Philippines had not
commenced operations, it was not entitled to the incentives of either the income tax holiday or the 5%
preferential tax rate.17 Payment of the 5% preferential tax amounting to ₱44,677,500.00 was erroneous.18
After finding that SMI-Ed Philippines sold properties that were capital assets under Section 39(A)(1) of the
National Internal Revenue Code of 1997, the Court of Tax Appeals Second Division subjected the sale of
SMIEd Philippines’ assets to 6% capital gains tax under Section 27(D)(5) of the same Code and Section 2 of
Revenue Regulations No. 8-98.19 It was found liable for capital gains tax amounting to
₱53,613,000.00.20 Therefore, SMIEd Philippines must still pay the balance of ₱8,935,500.00 as deficiency
tax,21 "which respondent should perhaps look into."22 The dispositive portion of the Court of Tax Appeals
Second Division’s decision reads:
WHEREFORE, premises considered, the instant petition is hereby DENIED.
SO ORDERED.23
The Court of Tax Appeals denied SMI-Ed Philippines’ motion for reconsideration in its June 15, 2005
resolution.24
On July 17, 2005, SMI-Ed Philippines filed a petition for review before the Court of Tax Appeals En Banc.25 It
argued that the Court of Tax Appeals Second Division erroneously assessed the 6% capital gains tax on the
sale of SMI-Ed Philippines’ equipment, machineries, and buildings.26 It also argued that the Court of Tax
Appeals Second Division cannot make an assessment at the first instance.27 Even if the Court of Tax Appeals
Second Division has such power, the period to make an assessment had already prescribed.28
In the decision promulgated on November 3, 2006, the Court of Tax Appeals En Banc dismissed SMI-Ed
Philippines’ petition and affirmed the Court of Tax Appeals Second Division’s decision and resolution.29 The
dispositive portion of the Court of Tax Appeals En Banc’s decision reads:
WHEREFORE, finding no reversible error to reverse the assailed Decision promulgated on December 29, 2004
and the Resolution dated June 15, 2005, the instant petition for review is hereby DISMISSED. Accordingly, the
assailed Decision and Resolution are hereby AFFIRMED. SO ORDERED.30
SMI-Ed Philippines filed a petition for review before this court on December 27, 2006,31 praying for the grant
of its claim for refund and the reversal of the Court of Tax Appeals En Banc’s decision.32
SMI-Ed Philippines assigned the following errors:
A. The honorable CTA En Banc grievously erred and acted beyond its jurisdiction when it assessed
for deficiency tax in the first instance.
B. Even assuming that the honorable CTA En Banc has the right to make an assessment against the
petitioner-appellant, it grievously erred in finding that the machineries and equipment sold by the
petitioner-appellant is subject to the six percent (6%) capital gains tax under Section 27(D)(5) of the
Tax Code.33
Petitioner argued that the Court of Tax Appeals has no jurisdiction to make an assessment since its
jurisdiction, with respect to the decisions of respondent, is merely appellate.34 Moreover, the power to make
assessment had already prescribed under Section 203 of the National Internal Revenue Code of 1997 since
the return for the erroneous payment was filed on September 13, 2000. This is more than three (3) years
from the last day prescribed by law for the filing of the return.35
Petitioner also argued that the Court of Tax Appeals En Banc erroneously subjected petitioner’s machineries
to 6% capital gains tax.36 Section 27(D)(5) of the National Internal Revenue Code of 1997 is clear that the 6%
capital gains tax on domestic corporations applies only on the sale of lands and buildings and not
tomachineries and equipment.37 Since ¥1,700,000,000.00 of the ¥2,100,000,000.00 constituted the
consideration for the sale of petitioner’s machineries, only ¥400,000,000.00 or ₱170,200,000.00 should be
subjected to the 6% capital gains tax.38 Petitioner should be liable only for ₱10,212,000.00.39 It should be
entitled to a refund of ₱34,464,500.00 after deducting ₱10,212,000.00 from the erroneously paid final tax of
₱44,677,500.00.40
In its comment, respondent argued that the Court of Tax Appeals’ determination of petitioner’s liability for
capital gains tax was not an assessment. Such determination was necessary to settle the question regarding
the tax consequence of the sale of the properties.41 This is clearly within the Court of Tax Appeals’ jurisdiction
under Section 7 of Republic Act No. 9282.42 Respondent also argued that "petitioner failed to justify its claim
for refund."43
The petition is meritorious.
I
Jurisdiction of the Court of Tax Appeals
The term "assessment" refers to the determination of amounts due from a person obligated to make
payments. In the context of national internal revenue collection, it refers the determination of the taxes due
from a taxpayer under the National Internal Revenue Code of 1997.
The power and duty to assess national internal revenue taxes are lodged with the BIR.44 Section 2 of the
National Internal Revenue Code of 1997 provides:
SEC. 2. Powers and Duties of the Bureau of Internal Revenue. - The Bureau of Internal Revenue shall be under
the supervision and control of the Department of Finance and its powers and duties shall comprehend the
assessment and collection ofall national internal revenue taxes, fees, and charges, and the enforcement of all
forfeitures, penalties, and fines connected therewith, including the execution of judgments in all cases
decided in its favor by the Court of Tax Appeals and the ordinary courts. The Bureau shall give effect to and
administer the supervisory and police powers conferred to it by this Code or other laws. (Emphasis supplied)
The BIR is not mandated to make an assessment relative to every return filed with it. Tax returns filed with
the BIR enjoy the presumption that these are in accordance with the law.45 Tax returns are also presumed
correct since these are filed under the penalty of perjury.46Generally, however, the BIR assesses taxes when it
appears, after a return had been filed, that the taxes paid were incorrect,47 false,48 or fraudulent.49 The BIR
also assesses taxes when taxes are due but no return is filed.50 Thus:
SEC. 6. Power of the Commissioner to Make assessments and Prescribe additional Requirements for Tax
Administration and Enforcement.–
(A) Examination of Returns and Determination of Tax Due. - After a return has been filed as required under
the provisions of this Code, the Commissioner or his duly authorized representative may authorize the
examination of any taxpayer and the assessment of the correct amount of tax: Provided, however; That
failure to file a return shall not prevent the Commissioner from authorizing the examination of any
taxpayer.The tax or any deficiency tax so assessed shall be paid upon notice and demand from the
Commissioner or from his duly authorized representative.
....
SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes.
(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may
be assessed, or a preceeding in court for the collection of such tax may be filed without assessment, at any
time within ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a fraud
assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in
the civil or criminal action for the collection thereof. (Emphasis supplied)
The Court of Tax Appeals has no powerto make an assessment at the first instance. On matters such as tax
collection, tax refund, and others related to the national internal revenue taxes, the Court of Tax Appeals’
jurisdiction is appellate in nature.
Section 7(a)(1) and Section 7(a)(2) of Republic Act No. 1125,51 as amended by Republic Act No.
9282,52 provide that the Court of Tax Appeals reviews decisions and inactions of the Commissioner of Internal
Revenue in disputed assessments and claims for tax refunds. Thus: SEC. 7. Jurisdiction.- The CTA shall
exercise:
a. Exclusive appellate jurisdiction toreview by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue or other laws administered by the Bureau of
Internal Revenue;
2. Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relations thereto, or other
matters arising under the National Internal Revenue Code or other laws administered by the
Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific period
of action, in which case the inaction shall be deemed a denial[.] (Emphasis supplied) Based on these
provisions, the following must be present for the Court of Tax Appeals to have jurisdiction over a
case involving the BIR’s decisions or inactions:
a) A case involving any of the following:
i. Disputed assessments;
ii. Refunds of internal revenue taxes, fees, or other charges, penalties in
relation thereto; and
iii. Other matters arising under the National Internal Revenue Code of 1997.
b) Commissioner of Internal Revenue’s decision or inaction in a case submitted to him or
her
Thus, the BIR first has to make an assessment of the taxpayer’s liabilities. When the BIR makes the
assessment, the taxpayer is allowed to dispute that assessment before the BIR. If the BIR issues a decision
that is unfavorable to the taxpayer or if the BIR fails to act on a dispute brought by the taxpayer, the BIR’s
decision or inaction may be brought on appeal to the Court of Tax Appeals. The Court of Tax Appeals then
acquires jurisdiction over the case.
When the BIR’s unfavorable decision is brought on appeal to the Court of Tax Appeals, the Court of Tax
Appeals reviews the correctness of the BIR’s assessment and decision. In reviewing the BIR’s assessment and
decision, the Court of Tax Appeals had to make its own determination of the taxpayer’s tax liabilities. The
Court of Tax Appeals may not make such determination before the BIR makes its assessment and before a
dispute involving such assessment is brought to the Court of Tax Appeals on appeal.
The Court of Tax Appeals’ jurisdiction is not limited to cases when the BIR makes an assessment or a decision
unfavorable to the taxpayer. Because Republic Act No. 112553 also vests the Court of Tax Appeals with
jurisdiction over the BIR’s inaction on a taxpayer’s refund claim, there may be instances when the Court of
Tax Appeals has to take cognizance of cases that have nothing to do with the BIR’s assessments or decisions.
When the BIR fails to act on a claim for refund of voluntarily but mistakenly paid taxes, for example, there is
no decision or assessment involved.
Taxes are generally self-assessed. They are initially computed and voluntarily paid by the taxpayer. The
government does not have to demand it. If the tax payments are correct, the BIR need not make an
assessment.
The self-assessing and voluntarily paying taxpayer, however, may later find that he or she has erroneously
paid taxes. Erroneously paid taxes may come in the form of amounts thatshould not have been paid. Thus, a
taxpayer may find that he or she has paid more than the amount that should have been paid under the law.
Erroneously paid taxes may also come in the form of tax payments for the wrong category of tax. Thus, a
taxpayer may find that he or she has paid a certain kindof tax that he or she is not subject to.
In these instances, the taxpayer may ask for a refund. If the BIR fails to act on the request for refund, the
taxpayer may bring the matter to the Court of Tax Appeals.
From the taxpayer’s self-assessment and tax payment up to his or her request for refund and the BIR’s
inaction,the BIR’s participation is limited to the receipt of the taxpayer’s payment. The BIR does not make an
assessment; the BIR issues no decision; and there is no dispute yet involved. Since there is no BIR assessment
yet, the Court of Tax Appeals may not determine the amount of taxes due from the taxpayer. There is also no
decision yet to review. However, there was inaction on the part of the BIR. That inaction is within the Court of
Tax Appeals’ jurisdiction.
In other words, the Court of Tax Appeals may acquire jurisdiction over cases even if they do not involve BIR
assessments or decisions.
In this case, the Court of Tax Appeals’ jurisdiction was acquired because petitioner brought the case on
appeal before the Court of Tax Appeals after the BIR had failed to act on petitioner’s claim for refund of
erroneously paid taxes. The Court of Tax Appeals did not acquire jurisdiction as a result of a disputed
assessment of a BIR decision.
Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to 6% capital gains tax or
other taxes at the first instance. The Court of Tax Appeals has no power to make an assessment.
As earlier established, the Court of Tax Appeals has no assessment powers. In stating that petitioner’s
transactions are subject to capital gains tax, however, the Court of Tax Appeals was not making an
assessment. It was merely determining the proper category of tax that petitioner should have paid, in view of
its claim that it erroneously imposed upon itself and paid the 5% final tax imposed upon PEZA-registered
enterprises.
The determination of the proper category of tax that petitioner should have paid is an incidental matter
necessary for the resolution of the principal issue, which is whether petitioner was entitled to a refund.54
The issue of petitioner’s claim for tax refund is intertwined with the issue of the proper taxes that are due
from petitioner. A claim for tax refund carries the assumption that the tax returns filed were correct. 55 If the
tax return filed was not proper, the correctness of the amount paid and, therefore, the claim for refund
become questionable. In that case, the court must determine if a taxpayer claiming refund of erroneously
paid taxes is more properly liable for taxes other than that paid.
In South African Airways v. Commissioner of Internal Revenue,56 South African Airways claimed for refund of
its erroneously paid 2½% taxes on its gross Philippine billings. This court did not immediately grant South
African’s claim for refund. This is because although this court found that South African Airways was not
subject to the 2½% tax on its gross Philippine billings, this court also found that it was subject to 32% tax on
its taxable income.57
In this case, petitioner’s claim that it erroneously paid the 5% final tax is an admission that the quarterly tax
return it filed in 2000 was improper. Hence, to determine if petitioner was entitled to the refund being
claimed, the Court of Tax Appeals has the duty to determine if petitioner was indeed not liable for the 5%
final tax and, instead, liable for taxes other than the 5% final tax. As in South African Airways, petitioner’s
request for refund can neither be granted nor denied outright without such determination.58
If the taxpayer is found liable for taxes other than the erroneously paid 5% final tax, the amount of the
taxpayer’s liability should be computed and deducted from the refundable amount.
Any liability in excess of the refundable amount, however, may not be collected in a case involving solely the
issue of the taxpayer’s entitlement to refund. The question of tax deficiencyis distinct and unrelated to the
question of petitioner’s entitlement to refund. Tax deficiencies should be subject to assessment procedures
and the rules of prescription. The court cannot be expected to perform the BIR’s duties whenever it fails to
do so either through neglect or oversight. Neither can court processes be used as a tool to circumvent laws
protecting the rights of taxpayers.
II
Petitioner’s entitlement to benefits given to PEZA-registered enterprises
Petitioner is not entitled to benefits given to PEZA-registered enterprises, including the 5% preferential tax
rate under Republic Act No. 7916 or the Special Economic Zone Act of 1995. This is because it never began its
operation.
Essentially, the purpose of Republic Act No. 7916 is to promote development and encourage investments and
business activities that will generate employment.59 Giving fiscal incentives to businesses is one of the means
devised to achieve this purpose. It comes with the expectation that persons who will avail these incentives
will contribute to the purpose’s achievement. Hence, to avail the fiscal incentives under Republic Act No.
7916, the law did not say that mere PEZA registration is sufficient.
Republic Act No. 7916 or The Special Economic Zone Act of 1995 provides:
SEC. 23. Fiscal Incentives.— Business establishments operating within the ECOZONES shall be entitled to the
fiscal incentives as provided for under Presidential Decree No. 66, the law creating the Export Processing
Zone Authority, or those provided under Book VI of Executive Order No. 226, otherwise known as the
Omnibus Investment Code of 1987.
Furthermore, tax credits for exporters using local materials as inputs shall enjoy the same benefits provided
for in the Export Development Act of 1994.
SEC. 24. Exemption from Taxes Under the National Internal Revenue Code. — Any provision of existing laws,
rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed on
business establishments operating within the ECOZONE. In lieu of paying taxes, five percent (5%) of the gross
income earned by all businesses and enterprises within the ECOZONE shall be remitted tothe national
government. This five percent (5%) shall be shared and distributed as follows:
a. Three percent (3%) to the national government;
b. One percent (1%) to the localgovernment units affected by the declaration of the ECOZONE
inproportion to their population, land area, and equal sharing factors; and
c. One percent (1%) for the establishment of a development fund to be utilized for the
development of municipalities outside and contiguous to each ECOZONE: Provided, however, That
the respective share of the affected local government units shall be determined on the basis of the
following formula:
1. Population - fifty percent (50%);
2. Land area - twenty-five percent (25%); and
3. Equal sharing - twenty-five percent (25%). (Emphasis supplied)
Based on these provisions, the fiscal incentives and the 5% preferential tax rate are available only to
businesses operating within the Ecozone.60 A business is considered in operation when it starts entering into
commercial transactions that are not merely incidental to but are related to the purposes of the business. It
is similar to the definition of "doing business," as applied in actions involvingthe right of foreign corporations
to maintain court actions. In Mentholatum Co. Inc., et al. v. Mangaliman, et al.,61 this court said that the
terms "doing" or "engaging in" or "transacting" business":
. . . impl[y] a continuity of commercial dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions normally incident to, and in
progressive prosecution of, the purpose and object of its organization.62 Petitioner never started its
operations since its registration on June 29, 199863 because of the Asian financial crisis.64 Petitioner admitted
this.65 Therefore, it cannot avail the incentives provided under Republic Act No. 7916. It is not entitled to the
preferential tax rate of 5% on gross income in lieu of all taxes. Because petitioner is not entitled to a
preferential rate, it is subject to ordinary tax rates under the National Internal Revenue Code of 1997.
WHEREFORE, the Court of Tax Appeals' November 3, 2006 decision is SET ASIDE. The Bureau of Internal
Revenue is ordered to refund petitioner SMI-Ed Philippines Technology, Inc. the amount of 5% final tax paid
to the BIR, less the 6% capital gains tax on the sale of petitioner SMI-Ed Philippines Technology, Inc. 's land
and building. In view of the lapse of the prescriptive period for assessment, any capital gains tax accrued from
the sale of its land and building that is in excess of the 5% final tax paid to the Bureau of Internal Revenue
may no longer be recovered from petitioner SMI-Ed Philippines Technology, Inc.
j. Exemption from VAT
June 19, 2017
G.R. No. 202922
COMMISSIONER OF INTERNAL REVENUE, Petitioner
vs.
SEMIRARA MINING CORPORATION, Respondent
DECISION
CAGUIOA, J.:
Before the Court is a petition for review on certiorari1 under Rule 45 of the Rules of Court filed by petitioner
Commissioner of Internal Revenue (CIR), assailing the Decision dated April 23, 20122 and Resolution dated
July 26, 20123 of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 793, which granted the claim of
respondent Semirara Mining Corporation (SMC) for refund or issuance of tax credit of final value-added tax
(VAT) it erroneously paid in connection with its sales of coal for the period covering July 1, 2006 to December
31, 2006.
Facts
SMC is a duly registered and existing domestic corporation, registered with the Bureau of Internal Revenue
(BIR) as a non-VAT enterprise engaged in coal mining business.4 It conducts business by virtue of Presidential
Decree (PD) No. 972,5 otherwise known as the "Coal Development Act of 1976."6
On June 8, 1983, Semirara Coal Corporation (SCC) executed a Coal Operating Contract7 (COC) with the
Ministry of Energy (now Department of Energy) through the Bureau of Energy Development. The term of the
COC is until the year 2012.8 In 2002, SCC changed its corporate name to SMC, the herein petitioner.9
As a coal mine operator, SMC sells its coal production, under the COC, to various customers, among which is
the National Power Corporation (NPC), a government-owned and controlled corporation, in accordance with
the duly executed Coal Supply Agreement dated May 19, 1995.10
SMC has been selling coal to NPC for years without paying VAT pursuant to the exemption granted under
Section 16 of PD No. 972. 11 However, after Republic Act (RA) No. 9337,12 which amended certain provisions
of the National Internal Revenue Code (NIRC) of 1997, as amended, took effect on July 1, 2005,13 NPC started
to withhold a tax of five percent (5%) representing the final withholding VAT on SMC's coal billings pursuant
to Section 114(C)14 of the same law, on the belief that the sale of coal by SMC was no longer exempt from
VAT.15
In view thereof, SMC requested for a BIR pronouncement sustaining its position that its sale of coal to NPC
was still exempt from VAT notwithstanding RA No. 9337, which the BIR granted through BIR Ruling No. 006-
2007.16
Consequently, on May 21, 2007, January 21, 2008, and January 29, 2008, SMC filed with the BIR Large
Taxpayers Division, Revenue District Office No. 121-Quexon City, letters with supporting documents
requesting for a refund or issuance of a tax credit certificate (TCC) in the total amount of ₱77,253,245.39,
representing the final withholding VAT withheld by NPC on its coal billing for the period of July 1, 2006 to
December 31, 2006.17
Due to the CIR's inaction, SMC filed on August 8 and November 10, 2008 its petitions for review with the CT A
Division, docketed as CTA Case No. 7822 and 7849.18 In a Resolution dated January 27, 2009, the CTA Division
consolidated CTA Case Nos. 7822 and 7849. 19
Ruling of the CTA Division
On March 28, 2011, the CTA Division rendered its Decision20 granting SMC's refund claim for erroneously paid
final VAT withheld by NPC.21 The CTA Division found that SMC is exempt from VAT pursuant to Section 109(K)
of the National Internal Revenue Code (NIRC) of 1997, as amended by RA No. 9337, in relation to Section 16
of PD No. 972.22 The CT A Division also found that SMC timely filed its administrative and judicial claims 23 and
submitted relevant documents in support thereof.24 Thus, the dispositive portion of the CTA Division's
Decision reads as follows:
WHEREFORE, premises considered, the instant Petitions for Review are hereby GRANTED. Accordingly,
respondent is hereby DIRECTED TO REFUND OR ISSUE A TAX CREDIT CERTIFICATE in favor of petitioner in the
amount of ₱77,253,245.39, representing the erroneously paid final VAT withheld by the National Power
Corporation and remitted to the Bureau of Internal Revenue in connection with its sales of coal for the period
covering July 1, 2006 to December 31, 2006.
SO ORDERED.25
The CIR moved for reconsideration but this was denied by the CTA Division in a Resolution26 dated June 3,
2011.
Undaunted, the CIR filed a Petition for Review27 with the CT A En Banc, docketed as CTA EB No. 793.
Ruling of the CTA En Banc
In the assailed Decision,28 the CTA En Banc dismissed the CIR's petition for lack of merit.29 The CTA En
Banc noted that the CIR's arguments were a mere rehash of its previous arguments already raised before,
discussed and resolved by the CTA Division; thus, it found no reason to disturb the CTA Division's finding that
SMC is entitled to the claimed VAT refund. 30
On July 26, 2012, the CTA En Banc issued the assailed Resolution31 denying the CIR' s motion for
reconsideration32 for lack of merit.
Hence, the instant petition raising the following issues:
[WHETHER THE CTA] ERRED IN HOLDING THAT [SMC] IS ENTITLED TO A TAX CREDIT/REFUND DESPITE THE
LATTER'S FAIL URE TO SUBMIT REQUISITE DOCUMENTS TO THE BIR.
[WHETHER THE CTA] ERRED IN HOLDING THAT THE TRANSACTION OF SALE OR IMPORTATION OF COAL IS
EXEMPT FROM V AT.33
The CIR argues that the provision which grants tax exemption to SMC under Section 109(e) of the NIRC of
1997, as amended, was withdrawn by the legislature when RA No. 9337 was passed deleting the "sale or
importation of coal and natural gas, in whatever form or state"34 from the list of transactions exempt from
VAT.35
The CIR further claims that the CTA erroneously approved SMC's claim for tax refund/credit because the
latter failed to submit complete documents in support of its administrative claim for refund. According to the
CIR, SMC's administrative claim for tax refund is proforma because SMC failed to submit the list of documents
(required to support an application for a tax refund) enumerated under Revenue Memorandum Order (RMO)
No. 53-98; consequently, the instant judicial appeal is without foundation and should suffer the same fate. 36
For its part, SMC insists that its sales of coal to NPC is exempt from VAT under RA No. 9337 in relation to PD
No. 972. According to SMC, RA No. 9337 did not withdraw the tax exemption granted by PD No. 972 and
incorporated into SMC's coal operating contract, considering that Section 109(K) of the NIRC of 1997, as
amended by RA No. 9337, expressly recognizes that transactions which are exempt under special laws are
also exempt from VAT. SMC further claims that RA No. 9337 could not have impliedly repealed PD No. 972
because no irreconcilable inconsistency and repugnancy exists between the two laws and that the general
repealing clause in RA No. 9337 does not prevail over specific provisions of PD No. 972. Finally, SMC asserts
that both its administrative and judicial claims for refund were supported by documentary evidence; that the
CT A, after evaluating all evidence it had submitted, concluded that SMC had sufficiently substantiated its
claim for VAT refund.37
The Court's Ruling
The Petition lacks merit.
Tax exemptions under PD No. 972.
Contrary to the CIR's contention, SMC's claim for VAT exemption is anchored not on the paragraph deleted
by RA No. 9337 from the list of VAT exempt transactions under Section 109 of the NIRC of 1997, as amended,
but on the tax incentives granted to operators of COCs executed pursuant to PD No. 972.
The COC implements the declared state policy in PD No. 972 to "accelerate the exploration, development,
exploitation, production and utilization of the country's coal resources" 38 through the "participation of the
private sector with sufficient capital, technical and managerial resources,"39 who shall undertake to perform
all coal operations and provide all necessary services, technology and financing in connection therewith. 40 In
furtherance of this policy, Section 16 of PD No. 972 provides various incentives to COC operators, including
tax exemptions, to wit:
SEC. 16. Incentives to Operators.-The provisions of any law to the contrary notwithstanding, a contract
executed under this Decree may provide that the operator shall have the following incentives:
a) Exemption from all taxes except income tax;
b) Exemption from payment of tariff duties and compensating tax on importation of machinery and
equipment and spare parts and materials required for the coal operations subject to the following
conditions:41
As VAT is one of the national internal revenue taxes, it falls within the tax exemptions provided under PD No.
972.
Section 16 of PD No. 972 was, in turn, incorporated in the tenns and conditions of SMC's COC, to wit:
SECTION V - RIGHTS AND OBLIGATIONS OF THE PARTIES
xxxx
5.2 The OPERATOR shall have the following rights:
a) Exemption from all taxes (national and local) except income tax;42
The Court agrees with the CT A that the tax exemption provided under Section 16 of PD No. 972 was not
revoked, withdrawn or repealed expressly or impliedly- by Congress with the enactment of RA No. 9337.
It is a fundamental rule in statutory construction that a special law cannot be repealed or modified by a
subsequently enacted general law in the absence of any express provision in the latter law to that effect. 43 A
special law must be interpreted to constitute an exception to the general law in the absence of special
circumstances warranting a contrary conclusion.44 The repealing clause of RA No. 9337, a general law, did not
provide for the express repeal of PD No. 972, a special law. Section 24 of RA No. 933 7 pertinently reads:
SEC. 24. Repealing Clause.-The following laws or provisions of laws are hereby repealed and the persons
and/or transactions affected herein are made subject to the value-added tax subject to the provisions of Title
IV of the National Internal Revenue Code of 1997, as amended:
(A) Section 13 of R.A. No. 6395 on the exemption from valueadded tax of the National Power Corporation
(NPC);
(B) Section 6, fifth paragraph of R.A. No. 9136 on the zero VAT rate imposed on the sales of generated power
by generation companies; and
(C) All other laws, acts, decrees, executive orders, issuances and rules and regulations or parts thereof which
are contrary to and inconsistent with any provisions of this Act are hereby repealed, amended or modified
accordingly.
Had Congress intended to withdraw or revoke the tax exemptions under PD No. 972, it would have explicitly
mentioned Section 16 of PD No. 972, in the same way that it specifically mentioned Section 13 of RA No.
6395 and Section 6, paragraph 5 of RA No. 9136, as among the laws repealed by RA No. 9337.
The CTA also correctly ruled that RA No. 9337 could not have impliedly repealed PD No. 972. In Mecano v.
Commission on Audit,45 the Court extensively discussed how repeals by implication operate, to wit:
There are two categories of repeal by implication. The first is where provisions in the two acts on the same
subject matter are in an irreconcilable conflict. The later act to the extent of the conflict constitutes an
implied repeal of the earlier one. The second is if the later act covers the whole subject of the earlier one and
is clearly intended as a substitute, it will operate to repeal the earlier law.
Implied repeal by irreconcilable inconsistency takes place when the two statutes cover the same subject
matter; they are so clearly inconsistent and incompatible with each other that they cannot be reconciled or
harmonized; and both cannot be given effect, that is, that one law cannot [be] enforced without nullifying
the other. 46
Comparing the two laws, it is apparent that neither kind of implied repeal exists in this case. RA No. 9337
does not cover the whole subject matter of PD No. 972 and could not have been intended to substitute the
same. There is also no irreconcilable inconsistency or repugnancy between the two laws. While under RA No.
9337, the "sale or importation of coal and natural gas, in whatever form or state" was deleted from the list of
VAT exempt transactions, Section 7 of the same law reads:
SEC. 7. Section 109 of the same Code, as amended, is hereby further amended to read as follows:
"SEC. 109. Exempt Transactions.-(l) Subject to the provisions of Subsection (2) hereof, the following
transactions shall be exempt from the value-added tax:
xxxx REVENUE MEMORANDUM ORDER NO. 53-98

"(K) Transactions which are exempt under international agreements to which the Philippines is a signatory or
under special laws, except those under Presidential Decree No. 529;47
Verily, as things stand, SMC is exempt from the payment of VAT on the sale of coal produced under its COC,
because Section 16(a) of PD No. 972, a special law, grants SMC exemption from all national taxes except
income tax. Accordingly, SMC is entitled to claim for a refund of the 5% final VAT erroneously withheld on
SMC's coal billings and remitted by NPC to the BIR.
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

Notably, the BIR validated SMC's VAT exemption under PD No. 972 through BIR Ruling No. 006-2007,48 which It has been observed that for the same kind of tax audit case, Revenue Officers differ in their request for
provides: 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
Be that as it may, since the tax exemption on the sale of coal products is premised on PD 972 which is a Bureau comes up with a prescribed list of requirements from taxpayers, per kind of tax, as well as of the
special law, and which Section 109(k) of the Tax Code, as amended so specifically provides to be the basis of internally prepared reporting requirements, all of which comprise a complete tax docket.
the VAT exemption, the same shall apply to coal produced by SMC pursuant to the COC. In short, the
imposition of VAT on the transaction which burden may be passed on the seller of the product/services to its II. OBJECTIVE
buyer is not the same with exempting the transaction itself from VAT, as contemplated under PD 972.
This order is issued to:
In view of the foregoing, this office hereby rules that since the main object of the COC for which the tax
exemption was granted is the active exploration, development and production of coal resources, SMC's sales
a. Identify the documents to be required from a taxpayer during audit, according to particular kind of tax; and
of coal produced by virtue of a COC with EDB remain exempt from VAT pursuant to Section 109(k) of the Tax
Code, as amended by R.A. 9337, in relation to PD 972, as amended.49
b. Identify the different audit reporting requirements to be prepared, submitted and attached to a tax audit
docket.
Submission of supporting documents
prescribed under RMO No. 53-98.
III. LIST OF REQUIREMENTS PER TAX TYPE
The CIR insists that SMC's claim for VAT refund should be denied for failure to submit, at the administrative
level, the required supporting documents prescribed under RMO No. 53-98. Income Tax/Withholding Tax

The issue of whether non-submission of the documents enumerated under RMO No. 53-98 at the - Annex A (3 pages)
administrative level is fatal to the taxpayer's judicial claim for VAT refund is not novel. In Pilipinas Total Gas,
Inc. v. Commissioner of Internal Revenue,50 the Court, sitting En bane, ruled: Value-Added Tax

Anent RMO No. 53-98, the CTA Division found that the said order provided a checklist of documents for the - Annex B (2 pages)
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. - Annex B-1 (5 pages)

This should also be corrected. xxxx

To quote RMO No. 53-98: 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.1awp++i1 Nothing stated in the issuance would show that it was Jurisprudence has consistently shown that this Court accords the findings of fact by the CT A with the highest
intended to be a benchmark in determining whether the documents submitted by a taxpayer respect. x x x this Court recognizes that the Court of Tax Appeals, which by the very nature of its function is
are actually complete to support a claim for tax credit or refund of excess unutilized excess VAT. As dedicated exclusively to the consideration of tax problems, has necessarily developed an expertise on the
expounded in Commissioner of Internal Revenue v. Team Sual Corporation (formerly Mirant Sual Corporation): subject, and its conclusions will not be overturned unless there has been an abuse or improvident exercise of
authority. Such findings can only be disturbed on appeal if they are not supported by substantial evidence or
The CIR's reliance on RMO 53-98 is misplaced. There is nothing in Section 112 of the NIRC, RR 3-88 or RMO there is a showing of gross error or abuse on the part of the Tax Court. In the absence of any clear and
53-98 itself that requires submission of the complete documents enumerated in RMO 53-98 for a grant of a convincing proof to the contrary, this Court must presume that the CTA rendered a decision which is valid in
refund or credit of input VAT.1âwphi1 The subject of RMO 53-98 states that it is a "Checklist of Documents to every respect. 55
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 There is no reason for this Court to depart from this well-entrenched principle, since the CT A did not abuse
assuming that RMO 53-98 applies, it specifically states that some documents are required to be submitted by its authority or committed gross error in granting SMC's refund claim.
the taxpayer "if applicable."
WHEREFORE, premises considered, the instant petition for review is hereby DENIED. The Decision dated April
Moreover, if TSC indeed failed to submit the complete documents in support of its application, the CIR could 23, 2012 and the Resolution dated July 26, 2012 of the CTA En Banc in CT A EB No. 793 are hereby AFFIRMED.
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 SO ORDERED.
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
i. Destination Principle
in support of its application for refund or credit of its input tax at the same time.
ii. G.R. No. 152609 June 29, 2005
iii. COMMISSIONER OF INTERNAL REVENUE, Petitioner,
xxxx vs.
AMERICAN EXPRESS INTERNATIONAL, INC. (PHILIPPINE BRANCH), Respondent.
As explained earlier and underlined in Team Sual above, taxpayers cannot simply be faulted for failing to iv. DECISION
submit the complete documents enumerated in RMO No. 53-98, absent notice from a revenue officer or v. PANGANIBAN, J.:
employee that other documents are required. Granting that the BIR found that the documents submitted by vi. As a general rule, the value-added tax (VAT) system uses the destination principle. However,
Total Gas were inadequate, it should have notified the latter of the inadequacy by sending it a request to our VAT law itself provides for a clear exception, under which the supply of service shall be
produce the necessary documents in order to make a just and expeditious resolution of the claim. zero-rated when the following requirements are met: (1) the service is performed in the
Philippines; (2) the service falls under any of the categories provided in Section 102(b) of the
Indeed, a taxpayer's failure with the requirements listed under RMO No. 53-98 is not fatal to its claim for tax Tax Code; and (3) it is paid for in acceptable foreign currency that is accounted for in
credit or refund of excess unutilized excess VAT. This holds especially true when the application for tax credit or accordance with the regulations of the Bangko Sentral ng Pilipinas. Since respondent’s services
refund of excess unutilized excess VAT has arrived at the judicial level. After all, in the judicial level or when the meet these requirements, they are zero-rated. Petitioner’s Revenue Regulations that alter or
case is elevated to the Court, the Rules of Court governs. Simply put, the question of whether the evidence revoke the above requirements are ultra vires and invalid.
submitted by a party is sufficient to warrant the granting of its prayer lies within the sound discretion and vii. The Case
judgment of the Court.51 viii. Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the February
28, 2002 Decision2of the Court of Appeals (CA) in CA-GR SP No. 62727. The assailed Decision
disposed as follows:
The CTA found that SMC submitted various documents in support of its claim for VAT refund and a scrutiny
ix. "WHEREFORE, premises considered, the petition is hereby DISMISSED for lack of merit. The
thereof proved that NPC indeed erroneously withheld and remitted to the BIR a final withholding VAT, in the
assailed decision of the Court of Tax Appeals (CTA) is AFFIRMED in toto."3
amount of ₱77,253,245.39, on its gross payments for coal purchases from SMC for the third and fourth
x. The Facts
quarters of 2006. 52Settled is the rule that the Court will not lightly set aside the factual conclusions reached
xi. Quoting the CTA, the CA narrated the undisputed facts as follows:
by the CTA which, by the very nature of its function of being dedicated exclusively to the resolution of tax
xii. "[Respondent] is a Philippine branch of American Express International, Inc., a corporation duly
problems, has accordingly developed an expertise on the subject, unless there has been an abuse or
organized and existing under and by virtue of the laws of the State of Delaware, U.S.A., with
improvident exercise of authority.53 In Barcelon, Roxas Securities, Inc. v. Commissioner of Internal
office in the Philippines at the Ground Floor, ACE Building, corner Rada and de la Rosa Streets,
Revenue, 54 this Court ruled that:
 Legaspi Village, Makati City. It is a servicing unit of American Express International, Inc. - xviii. ‘(B) Excess Output or Input Tax. - If at the end of any taxable quarter the output tax exceeds the
Hongkong Branch (Amex-HK) and is engaged primarily to facilitate the collections of Amex-HK input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the
receivables from card members situated in the Philippines and payment to service output tax, the excess shall be carried over to the succeeding quarter or quarters. Any input tax
establishments in the Philippines. attributable to the purchase of capital goods or to zero-rated sales by a VAT-registered person
xiii. "Amex Philippines registered itself with the Bureau of Internal Revenue (BIR), Revenue District may at his option be refunded or credited against other internal revenue taxes, subject to the
Office No. 47 (East Makati) as a value-added tax (VAT) taxpayer effective March 1988 and was provisions of Section 112.’
issued VAT Registration Certificate No. 088445 bearing VAT Registration No. 32A-3-004868. For xix. "There being no immediate action on the part of the [petitioner], [respondent’s] petition was
the period January 1, 1997 to December 31, 1997, [respondent] filed with the BIR its quarterly filed on April 15, 1999.
VAT returns as follows: xx. "In support of its Petition for Review, the following arguments were raised by [respondent]:
xxi. A. Export sales by a VAT-registered person, the consideration for which is paid for in acceptable
foreign currency inwardly remitted to the Philippines and accounted for in accordance with
Exhibit Period Covered Date Filed existing regulations of the Bangko Sentral ng Pilipinas, are subject to [VAT] at zero percent
D 1997 1st Qtr. April 18, 1997 (0%). According to [respondent], being a VAT-registered entity, it is subject to the VAT imposed
under Title IV of the Tax Code, to wit:
F 2nd Qtr. July 21, 1997 xxii. ‘Section 102.(sic) Value-added tax on sale of services.- (a) Rate and base of tax. - There shall be
levied, assessed and collected, a value-added tax equivalent to 10% percent of gross receipts
G 3rd Qtr. October 2, 1997 derived by any person engaged in the sale of services. The phrase "sale of services" means the
H 4th Qtr. January 20, 1998 performance of all kinds of services for others for a fee, remuneration or consideration,
including those performed or rendered by construction and service contractors: stock, real
estate, commercial, customs and immigration brokers; lessors of personal property; lessors or
xiv. "On March 23, 1999, however, [respondent] amended the aforesaid returns and declared the distributors of cinematographic films; persons engaged in milling, processing, manufacturing or
following: repacking goods for others; and similar services regardless of whether o[r] not the
performance thereof calls for the exercise or use of the physical or mental
faculties: Provided That the following services performed in the Philippines by VAT-registered
Exh 1997 Taxable Sales Output Zero-rated Domestic Input
persons shall be subject to 0%:
VAT Sales Purchases VAT
xxiii. (1) x x x
I 1st qtr ₱59,597.20 ₱5,959.72 ₱17,513,801.11 ₱6,778,182.30 ₱677,818.23xxiv. (2) Services other than those mentioned in the preceding subparagraph, the consideration is
paid for in acceptable foreign currency which is remitted inwardly to the Philippines and
J 2nd qtr 67,517.20 6,751.72 17,937,361.51 9,333,242.90 933,324.29 accounted for in accordance with the rules and regulations of the BSP. x x x.’
xxv. In addition, [respondent] relied on VAT Ruling No. 080-89, dated April 3, 1989, the pertinent
K 3rd qtr 51,936.60 5,193.66 19,627,245.36 8,438,357.00 843,835.70 portion of which reads as follows:
L 4th qtr 67,994.30 6,799.43 25,231,225.22 13,080,822.10 xxvi.
1,308,082.21 ‘In Reply, please be informed that, as a VAT registered entity whose service is paid for in
acceptable foreign currency which is remitted inwardly to the Philippines and accounted for in
accordance with the rules and regulations of the Central [B]ank of the Philippines, your service
Total ₱247,045.30 ₱24,704.53 ₱80,309,633.20 ₱37,630,604.30 ₱3,763,060.43 income is automatically zero rated effective January 1, 1998. [Section 102(a)(2) of the Tax Code
as amended].4 For this, there is no need to file an application for zero-rate.’
xxvii. B. Input taxes on domestic purchases of taxable goods and services related to zero-rated
revenues are available as tax refund in accordance with Section 106 (now Section 112) of the
xv. "On April 13, 1999, [respondent] filed with the BIR a letter-request for the refund of its 1997 [Tax Code] and Section 8(a) of [Revenue] Regulations [(RR)] No. 5-87, to state:
excess input taxes in the amount of ₱3,751,067.04, which amount was arrived at after xxviii. ‘Section 106. Refunds or tax credits of input tax. -
deducting from its total input VAT paid of ₱3,763,060.43 its applied output VAT liabilities only xxix. (A) Zero-rated or effectively Zero-rated Sales. - Any VAT-registered person, except those
for the third and fourth quarters of 1997 amounting to ₱5,193.66 and ₱6,799.43, respectively. covered by paragraph (a) above, whose sales are zero-rated or are effectively zero-rated, may,
[Respondent] cites as basis therefor, Section 110 (B) of the 1997 Tax Code, to state: within two (2) years after the close of the taxable quarter when such sales were made, apply
xvi. ‘Section 110. Tax Credits. - for the issuance of tax credit certificate or refund of the input taxes due or attributable to such
xvii. xxxxxxxxx
 sales, to the extent that such input tax has not been applied against output tax. x x x. [Section xl.
106(a) of the Tax Code]’5
xxx. ‘Section 8. Zero-rating. - (a) In general. - A zero-rated sale is a taxable transaction for value-
added tax purposes. A sale by a VAT-registered person of goods and/or services taxed at zero
rate shall not result in any output tax. The input tax on his purchases of goods or services xli.
related to such zero-rated sale shall be available as tax credit or refundable in accordance with xlii.
Section 16 of these Regulations. x x x.’ [Section 8(a), [RR] 5-87].’6
xxxi. "[Petitioner], in his Answer filed on May 6, 1999, claimed by way of Special and Affirmative
Defenses that:
xxxii. 7. The claim for refund is subject to investigation by the Bureau of Internal Revenue;
xxxiii. 8. Taxes paid and collected are presumed to have been made in accordance with laws and
regulations, hence, not refundable. Claims for tax refund are construed strictly against the
claimant as they partake of the nature of tax exemption from tax and it is incumbent upon the
[respondent] to prove that it is entitled thereto under the law and he who claims exemption xliii.
must be able to justify his claim by the clearest grant of organic or statu[t]e law. An exemption
from the common burden [cannot] be permitted to exist upon vague implications;
xxxiv. 9. Moreover, [respondent] must prove that it has complied with the governing rules with
reference to tax recovery or refund, which are found in Sections 204(c) and 229 of the Tax
Code, as amended, which are quoted as follows: xliv.
xxxv. ‘Section 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. xlv.
- The Commissioner may - x x x. xlvi.
xxxvi. (C) Credit or refund taxes erroneously or illegally received or penalties imposed without xlvii.
authority, refund the value of internal revenue stamps when they are returned in good
condition by the purchaser, and, in his discretion, redeem or change unused stamps that have
been rendered unfit for use and refund their value upon proof of destruction. No credit or xlviii.
refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the xlix.
Commissioner a claim for credit or refund within two (2) years after payment of the tax or l.
penalty: Provided, however, That a return filed with an overpayment shall be considered a li.
written claim for credit or refund.’ lii.
xxxvii. ‘Section 229. Recovery of tax erroneously or illegally collected.- No suit or proceeding shall be liii.
maintained in any court for the recovery of any national internal revenue tax hereafter alleged
to have been erroneously or illegally assessed or collected, or of any penalty claimed to have
been collected without authority, or of any sum alleged to have been excessively or in any liv.
manner wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not such tax,
penalty or sum has been paid under protest or duress.
xxxviii. In any case, no such suit or proceeding shall be begun (sic) after the expiration of two (2) years
from the date of payment of the tax or penalty regardless of any supervening cause that may
arise after payment: Provided, however, That the Commissioner may, even without written
claim therefor, refund or credit any tax, where on the face of the return upon which payment lv.
was made, such payment appears clearly to have been erroneously paid.’ lvi.
xxxix. "From the foregoing, the [CTA], through the Presiding Judge Ernesto D. Acosta rendered a lvii.
decision7 in favor of the herein respondent holding that its services are subject to zero-rate
pursuant to Section 108(b) of the Tax Reform Act of 1997 and Section 4.102-2 (b)(2) of
Revenue Regulations 5-96, the decretal portion of which reads as follows: lviii.
‘WHEREFORE, in view of all the foregoing, this Court finds the [petition] meritorious and in
accordance with law. Accordingly, [petitioner] is hereby ORDERED to REFUND to [respondent]
the amount of ₱3,352,406.59 representing the latter’s excess input VAT paid for the year
1997.’"8
Ruling of the Court of Appeals
In affirming the CTA, the CA held that respondent’s services fell under the first type
enumerated in Section 4.102-2(b)(2) of RR 7-95, as amended by RR 5-96. More particularly, its
"services were not of the same class or of the same nature as project studies, information, or
engineering and architectural designs" for non-resident foreign clients; rather, they were
"services other than the processing, manufacturing or repacking of goods for persons doing
business outside the Philippines." The consideration in both types of service, however, was
paid for in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas.
Furthermore, the CA reasoned that reliance on VAT Ruling No. 040-98 was unwarranted. By
requiring that respondent’s services be consumed abroad in order to be zero-rated, petitioner
went beyond the sphere of interpretation and into that of legislation. Even granting that it is
valid, the ruling cannot be given retroactive effect, for it will be harsh and oppressive to
respondent, which has already relied upon VAT Ruling No. 080-89 for zero rating.
Hence, this Petition.9
The Issue
Petitioner raises this sole issue for our consideration:
"Whether or not the Court of Appeals committed reversible error in holding that respondent is
entitled to the refund of the amount of ₱3,352,406.59 allegedly representing excess input VAT
for the year 1997."10
The Court’s Ruling
The Petition is unmeritorious.
Sole Issue:
Entitlement to Tax Refund
Section 102 of the Tax Code11 provides:
"Sec. 102. Value-added tax on sale of services and use or lease of properties. -- (a) Rate and
base of tax. -- There shall be levied, assessed and collected, a value-added tax equivalent to ten
percent (10%) of gross receipts derived from the sale or exchange of services x x x.
"The phrase 'sale or exchange of services' means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or
rendered by x x x persons engaged in milling, processing, manufacturing or repacking goods for
others; x x x services of banks, non-bank financial intermediaries and finance companies; x x x
and similar services regardless of whether or not the performance thereof calls for the exercise
or use of the physical or mental faculties. The phrase 'sale or exchange of services' shall
likewise include:
xxxxxxxxx
‘(3) The supply of x x x commercial knowledge or information;
‘(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means
of enabling the application or enjoyment of x x x any such knowledge or information as is
mentioned in subparagraph (3);
xxxxxxxxx
lix. ‘(6) The supply of technical advice, assistance or services rendered in connection with technical
management or administration of any x x x commercial undertaking, venture, project or
scheme;
lx. xxxxxxxxx
lxi. "The term 'gross receipts’ means the total amount of money or its equivalent representing the
contract price, compensation, service fee, rental or royalty, including the amount charged for
materials supplied with the services and deposits and advanced payments actually or
constructively received during the taxable quarter for the services performed or to be
performed for another person, excluding value-added tax.
lxii. "(b) Transactions subject to zero percent (0%) rate. -- The following services performed in the
Philippines by VAT-registered persons shall be subject to zero percent (0%) rate[:]
lxiii. ‘(1) Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP);
lxiv. ‘(2) Services other than those mentioned in the preceding subparagraph, the consideration for
which is paid for in acceptable foreign currency and accounted for in accordance with the rules
and regulations of the [BSP];’"
lxv. xxxxxxxxx
lxvi. Zero Rating of "Other" Services
lxvii. The law is very clear. Under the last paragraph quoted above, services performed by VAT-
registered persons in the Philippines (other than the processing, manufacturing or repacking of
goods for persons doing business outside the Philippines), when paid in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the BSP, are zero-
rated.
lxviii. Respondent is a VAT-registered person that facilitates the collection and payment of
receivables belonging to its non-resident foreign client, for which it gets paid in acceptable
foreign currency inwardly remitted and accounted for in conformity with BSP rules and
regulations. Certainly, the service it renders in the Philippines is not in the same category as
"processing, manufacturing or repacking of goods" and should, therefore, be zero-rated. In
reply to a query of respondent, the BIR opined in VAT Ruling No. 080-89 that the income
respondent earned from its parent company’s regional operating centers (ROCs) was
automatically zero-rated effective January 1, 1988.12
lxix. Service has been defined as "the art of doing something useful for a person or company for a
fee"13 or "useful labor or work rendered or to be rendered by one person to another." 14 For
facilitating in the Philippines the collection and payment of receivables belonging to its Hong
Kong-based foreign client, and getting paid for it in duly accounted acceptable foreign
currency, respondent renders service falling under the category of zero rating. Pursuant to the
Tax Code, a VAT of zero percent should, therefore, be levied upon the supply of that service.15
lxx. The Credit Card System and Its Components
lxxi. For sure, the ancillary business of facilitating the said collection is different from
the main business of issuing credit cards.16 Under the credit card system, the credit card
company extends credit accommodations to its card holders for the purchase of goods and
services from its member establishments, to be reimbursed by them later on upon proper
billing. Given the complexities of present-day business transactions, the components of this
system can certainly function as separate billable services.
lxxii. Under RA 8484,17 the credit card that is issued by banks18 in general, or by non-banks in
particular, refers to "any card x x x or other credit device existing for the purpose of obtaining x
x x goods x x x or services x x x on credit;"19and is being used "usually on a revolving
basis."20 This means that the consumer-credit arrangement that exists between the issuer and
the holder of the credit card enables the latter to procure goods or services "on a continuing
basis as long as the outstanding balance does not exceed a specified limit."21 The card holder is,
therefore, given "the power to obtain present control of goods or service on a promise to pay
for them in the future."22
lxxiii. Business establishments may extend credit sales through the use of the credit card facilities of
a non-bank credit card company to avoid the risk of uncollectible accounts from their
customers. Under this system, the establishments do not deposit in their bank accounts the
credit card drafts23 that arise from the credit sales. Instead, they merely record their
receivables from the credit card company and periodically send the drafts evidencing those
receivables to the latter.
lxxiv. The credit card company, in turn, sends checks as payment to these business establishments,
but it does not redeem the drafts at full price. The agreement between them usually provides
for discounts to be taken by the company upon its redemption of the drafts.24 At the end of
each month, it then bills its credit card holders for their respective drafts redeemed during the
previous month. If the holders fail to pay the amounts owed, the company sustains the loss.25
lxxv. In the present case, respondent’s role in the consumer credit26 process described above
primarily consists of gathering the bills and credit card drafts of different service
establishments located in the Philippines and forwarding them to the ROCs outside the
country. Servicing the bill is not the same as billing. For the former type of service alone,
respondent already gets paid.
lxxvi. The parent company -- to which the ROCs and respondent belong -- takes charge not only of
redeeming the drafts from the ROCs and sending the checks to the service establishments, but
also of billing the credit card holders for their respective drafts that it has redeemed. While it
usually imposes finance charges27 upon the holders, none may be exacted by respondent upon
either the ROCs or the card holders.
lxxvii. Branch and Home Office
lxxviii. By designation alone, respondent and the ROCs are operated as branches. This means that
each of them is a unit, "an offshoot, lateral extension, or division" 28 located at some distance
from the home office29 of the parent company; carrying separate inventories; incurring their
own expenses; and generating their respective incomes. Each may conduct sales operations in
any locality as an extension of the principal office.30
lxxix. The extent of accounting activity at any of these branches depends upon company policy,31 but
the financial reports of the entire business enterprise -- the credit card company to which they
all belong -- must always show its financial position, results of operation, and changes in its
financial position as a single unit.32 Reciprocal accounts are reconciled or eliminated, because
they lose all significance when the branches and home office are viewed as a single entity.33 In
like manner, intra-company profits or losses must be offset against each other for accounting
purposes.
lxxx. Contrary to petitioner’s assertion,34 respondent can sell its services to another branch of the
same parent company.35 In fact, the business concept of a transfer price allows goods and
services to be sold between and among intra-company units at cost or above cost.36 A branch
may be operated as a revenue center, cost center, profit center or investment center,
depending upon the policies and accounting system of its parent company.37Furthermore, the
latter may choose not to make any sale itself, but merely to function as a control center, where
most or all of its expenses are allocated to any of its branches.38
lxxxi. Gratia argumenti that the sending of drafts and bills by service establishments to respondent is
equivalent to the act of sending them directly to its parent company abroad, and that the
parent company’s subsequent redemption of these drafts and billings of credit card holders is
also attributable to respondent, then with greater reason should the service rendered by
respondent be zero-rated under our VAT system. The service partakes of the nature of export
sales as applied to goods,39 especially when rendered in the Philippines by a VAT-registered
person40 that gets paid in acceptable foreign currency accounted for in accordance with BSP
rules and regulations.
lxxxii. VAT Requirements for the Supply of Service
lxxxiii. The VAT is a tax on consumption41 "expressed as a percentage of the value added to goods or
services"42purchased by the producer or taxpayer.43 As an indirect tax44 on services,45 its main
object is the transaction46itself or, more concretely, the performance of all kinds of
services47 conducted in the course of trade or business in the Philippines.48 These services must
be regularly conducted in this country; undertaken in "pursuit of a commercial or an economic
activity;"49 for a valuable consideration; and not exempt under the Tax Code, other special
laws, or any international agreement.50
lxxxiv. Without doubt, the transactions respondent entered into with its Hong Kong-based client meet
all these requirements.
lxxxv. First, respondent regularly renders in the Philippines the service of facilitating the collection
and payment of receivables belonging to a foreign company that is a clearly separate and
distinct entity.
lxxxvi. Second, such service is commercial in nature; carried on over a sustained period of time; on a
significant scale; with a reasonable degree of frequency; and not at random, fortuitous or
attenuated.
lxxxvii. Third, for this service, respondent definitely receives consideration in foreign currency that is
accounted for in conformity with law.
lxxxviii. Finally, respondent is not an entity exempt under any of our laws or international agreements.
lxxxix. Services Subject to Zero VAT
xc. As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional
reach of the tax.51Goods and services are taxed only in the country where they are consumed.
Thus, exports are zero-rated, while imports are taxed.
xci. Confusion in zero rating arises because petitioner equates the performance of a particular type
of service with the consumption of its output abroad. In the present case, the facilitation of the
collection of receivables is different from the utilization or consumption of the outcome of such
service. While the facilitation is done in the Philippines, the consumption is not. Respondent
renders assistance to its foreign clients -- the ROCs outside the country -- by receiving the bills
of service establishments located here in the country and forwarding them to the ROCs abroad.
The consumption contemplated by law, contrary to petitioner’s administrative
interpretation,52 does not imply that the service be done abroad in order to be zero-rated.
xcii. Consumption is "the use of a thing in a way that thereby exhausts it." 53 Applied to services, the
term means the performance or "successful completion of a contractual duty, usually resulting
in the performer’s release from any past or future liability x x x."54 The services rendered by
respondent are performed or successfully completed upon its sending to its foreign client the
drafts and bills it has gathered from service establishments here. Its services, having been
performed in the Philippines, are therefore also consumed in the Philippines.
xciii. Unlike goods, services cannot be physically used in or bound for a specific place when their
destination is determined. Instead, there can only be a "predetermined end of a
course"55 when determining the service "location or position x x x for legal
purposes."56 Respondent’s facilitation service has no physical existence, yet takes place upon
rendition, and therefore upon consumption, in the Philippines. Under the destination principle,
as petitioner asserts, such service is subject to VAT at the rate of 10 percent.
xciv. Respondent’s Services Exempt from the Destination Principle
xcv. However, the law clearly provides for an exception to the destination principle; that is, for a
zero percent VAT rate for services that are performed in the Philippines, "paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the
[BSP]."57 Thus, for the supply of service to be zero-rated as an exception, the law merely
requires that first, the service be performed in the Philippines; second, the service fall under
any of the categories in Section 102(b) of the Tax Code; and, third, it be paid in acceptable
foreign currency accounted for in accordance with BSP rules and regulations.
xcvi. Indeed, these three requirements for exemption from the destination principle are met by
respondent. Its facilitation service is performed in the Philippines. It falls under the second
category found in Section 102(b) of the Tax Code, because it is a service other than
"processing, manufacturing or repacking of goods" as mentioned in the provision. Undisputed
is the fact that such service meets the statutory condition that it be paid in acceptable foreign
currency duly accounted for in accordance with BSP rules. Thus, it should be zero-rated.
xcvii. Performance of Service versus Product Arising from Performance
xcviii. Again, contrary to petitioner’s stand, for the cost of respondent’s service to be zero-rated, it
need not be tacked in as part of the cost of goods exported.58 The law neither imposes such
requirement nor associates services with exported goods. It simply states that
the services performed by VAT-registered persons in the Philippines -- services other than the
processing, manufacturing or repacking of goods for persons doing business outside this
country -- if paid in acceptable foreign currency and accounted for in accordance with the rules
and regulations of the BSP, are zero-rated. The service rendered by respondent is clearly
different from the product that arises from the rendition of such service. The activity that
creates the income must not be confused with the main business in the course of which that
income is realized.59
xcix. Tax Situs of a Zero-Rated Service
c. The law neither makes a qualification nor adds a condition in determining the tax situs of a
zero-rated service. Under this criterion, the place where the service is rendered determines the
jurisdiction60 to impose the VAT.61 Performed in the Philippines, such service is necessarily
subject to its jurisdiction,62 for the State necessarily has to have "a substantial connection" 63 to
 it, in order to enforce a zero rate.64 The place of payment is immaterial;65 much less is the place
where the output of the service will be further or ultimately used.
ci. Statutory Construction or Interpretation Unnecessary
cii. As mentioned at the outset, Section 102(b)(2) of the Tax Code is very clear. Therefore, no
statutory construction or interpretation is needed. Neither can conditions or limitations be
introduced where none is provided for. Rewriting the law is a forbidden ground that only
Congress may tread upon.
ciii. The Court may not construe a statute that is free from doubt.66 "[W]here the law speaks in
clear and categorical language, there is no room for interpretation. There is only room for
application."67 The Court has no choice but to "see to it that its mandate is obeyed."68
civ. No Qualifications Under RR 5-87
cv. In implementing the VAT provisions of the Tax Code, RR 5-87 provides for the zero rating of
services other than the processing, manufacturing or repacking of goods -- in general and
without qualifications -- when paid for by the person to whom such services are rendered in
acceptable foreign currency inwardly remitted and duly accounted for in accordance with the
BSP (then Central Bank) regulations. Section 8 of RR 5-87 states:
cvi. "SECTION 8. Zero-rating. -- (a) In general. -- A zero-rated sale is a taxable transaction for value-
added tax purposes. A sale by a VAT-registered person of goods and/or services taxed at zero
rate shall not result in any output tax. The input tax on his purchases of goods or services
related to such zero-rated sale shall be available as tax credit or refundable in accordance with
Section 16 of these Regulations.
cvii. xxxxxxxxx
cviii. " (c) Zero-rated sales of services. -- The following services rendered by VAT-registered persons
are zero-rated:
cix. ‘(1) Services in connection with the processing, manufacturing or repacking of goods for
persons doing business outside the Philippines, where such goods are actually shipped out of
the Philippines to said persons or their assignees and the services are paid for in acceptable
foreign currency inwardly remitted and duly accounted for under the regulations of the Central
Bank of the Philippines.
cx. xxxxxxxxx
cxi. ‘(3) Services performed in the Philippines other than those mentioned in subparagraph (1)
above which are paid for by the person or entity to whom the service is rendered in acceptable
foreign currency inwardly remitted and duly accounted for in accordance with Central Bank
regulations. Where the contract involves payment in both foreign and local currency, only the
service corresponding to that paid in foreign currency shall enjoy zero-rating. The portion paid
for in local currency shall be subject to VAT at the rate of 10%.’"
cxii. RR 7-95 Broad Enough
cxiii. RR 7-95, otherwise known as the "Consolidated VAT Regulations,"69 reiterates the above-
quoted provision and further presents as examples only the services performed in the
Philippines by VAT-registered hotels and other service establishments. Again, the condition
remains that these services must be paid in acceptable foreign currency inwardly remitted and
accounted for in accordance with the rules and regulations of the BSP. The term "other service
establishments" is obviously broad enough to cover respondent’s facilitation service. Section
4.102-2 of RR 7-95 provides thus:
cxiv. "SECTION 4.102-2. Zero-Rating. -- (a) In general. -- A zero-rated sale by a VAT registered person,
which is a taxable transaction for VAT purposes, shall not result in any output tax. However, the
input tax on his purchases of goods, properties or services related to such zero-rated sale shall
be available as tax credit or refund in accordance with these regulations.
cxv. "(b) Transaction subject to zero-rate. -- The following services performed in the Philippines by
VAT-registered persons shall be subject to 0%:
cxvi. ‘(1) Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of
the BSP;
cxvii. ‘(2) Services other than those mentioned in the preceding subparagraph, e.g. those rendered
by hotels and other service establishments, the consideration for which is paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of
the BSP;’"
cxviii. xxxxxxxxx
cxix. Meaning of "as well as" in RR 5-96
cxx. Section 4.102-2(b)(2) of RR 7-95 was subsequently amended by RR 5-96 to read as follows:
cxxi. "Section 4.102-2(b)(2) -- ‘Services other than processing, manufacturing or repacking for other
persons doing business outside the Philippines for goods which are subsequently exported, as
well as services by a resident to a non-resident foreign client such as project studies,
information services, engineering and architectural designs and other similar services, the
consideration for which is paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP.’"
cxxii. Aside from the already scopious coverage of services in Section 4.102-2(b)(2) of RR 7-95, the
amendment introduced by RR 5-96 further enumerates specific services entitled to zero rating.
Although superfluous, these sample services are meant to be merely illustrative. In this
provision, the use of the term "as well as" is not restrictive. As a prepositional phrase with an
adverbial relation to some other word, it simply means "in addition to, besides, also or too." 70
cxxiii. Neither the law nor any of the implementing revenue regulations aforequoted categorically
defines or limits the services that may be sold or exchanged for a fee, remuneration or
consideration. Rather, both merely enumerate the items of service that fall under the term
"sale or exchange of services."71
cxxiv. Ejusdem Generis
Inapplicable
cxxv. The canon of statutory construction known as ejusdem generis or "of the same kind or specie"
does not apply to Section 4.102-2(b)(2) of RR 7-95 as amended by RR 5-96.
cxxvi. First, although the regulatory provision contains an enumeration of particular or specific words,
followed by the general phrase "and other similar services," such words do not constitute a
readily discernible class and are patently not of the same kind.72 Project studies involve
investments or marketing; information services focus on data technology; engineering and
architectural designs require creativity. Aside from calling for the exercise or use of mental
faculties or perhaps producing written technical outputs, no common denominator to the
exclusion of all others characterizes these three services. Nothing sets them apart from other
and similar general services that may involve advertising, computers, consultancy, health care,
management, messengerial work -- to name only a few.
cxxvii. Second, there is the regulatory intent to give the general phrase "and other similar services" a
broader meaning.73 Clearly, the preceding phrase "as well as" is not meant to limit the effect of
"and other similar services."
cxxviii. Third, and most important, the statutory provision upon which this regulation is based is by
itself not restrictive. The scope of the word "services" in Section 102(b)(2) of the Tax Code is
broad; it is not susceptible of narrow interpretation.741avvphi1.zw+
cxxix. VAT Ruling Nos. 040-98 and 080-89
cxxx. VAT Ruling No. 040-98 relied upon by petitioner is a less general interpretation at the
administrative level,75rendered by the BIR commissioner upon request of a taxpayer to clarify
certain provisions of the VAT law. As correctly held by the CA, when this ruling states that the
service must be "destined for consumption outside of the Philippines"76 in order to qualify for
zero rating, it contravenes both the law and the regulations issued pursuant to it.77 This portion
of VAT Ruling No. 040-98 is clearly ultra vires and invalid.78
cxxxi. Although "[i]t is widely accepted that the interpretation placed upon a statute by the executive
officers, whose duty is to enforce it, is entitled to great respect by the courts,"79 this
interpretation is not conclusive and will have to be "ignored if judicially found to be
erroneous"80 and "clearly absurd x x x or improper."81 An administrative issuance that overrides
the law it merely seeks to interpret, instead of remaining consistent and in harmony with it, will
not be countenanced by this Court.82
cxxxii. In the present case, respondent has relied upon VAT Ruling No. 080-89, which clearly
recognizes its zero rating. Changing this status will certainly deprive respondent of a refund of
the substantial amount of excess input taxes to which it is entitled.
cxxxiii. Again, assuming arguendo that VAT Ruling No. 040-98 revoked VAT Ruling No. 080-89, such
revocation could not be given retroactive effect if the application of the latter ruling would only
be prejudicial to respondent.83 Section 246 of the Tax Code categorically declares that "[a]ny
revocation x x x of x x x any of the rulings x x x promulgated by the Commissioner shall not be
given retroactive application if the revocation x x x will be prejudicial to the taxpayers."84
cxxxiv. It is also basic in law that "no x x x rule x x x shall be given retrospective effect 85 unless explicitly
stated."86 No indication of such retroactive application to respondent does the Court find in
VAT Ruling No. 040-98. Neither do the exceptions enumerated in Section 24687 of the Tax Code
apply.
cxxxv. Though vested with the power to interpret the provisions of the Tax Code88 and not bound by
predecessors’ acts or rulings, the BIR commissioner may render a different construction to a
statute89 only if the new interpretation is in congruence with the law. Otherwise, no amount of
interpretation can ever revoke, repeal or modify what the law says.
cxxxvi. "Consumed Abroad" Not Required by Legislature
cxxxvii. Interpellations on the subject in the halls of the Senate also reveal a clear intent on the part of
the legislators not to impose the condition of being "consumed abroad" in order
for services performed in the Philippines by a VAT-registered person to be zero-rated. We
quote the relevant portions of the proceedings:
cxxxviii. "Senator Maceda: Going back to Section 102 just for the moment. Will the Gentleman kindly
explain to me - I am referring to the lower part of the first paragraph with the ‘Provided’.
Section 102. ‘Provided that the following services performed in the Philippines by VAT
registered persons shall be subject to zero percent.’ There are three here. What is the
difference between the three here which is subject to zero percent and Section 103 which is
exempt transactions, to being with?
cxxxix. "Senator Herrera: Mr. President, in the case of processing and manufacturing or repacking
goods for persons doing business outside the Philippines which are subsequently exported, and
where the services are paid for in acceptable foreign currencies inwardly remitted, this is
considered as subject to 0%. But if these conditions are not complied with, they are subject to
the VAT.
cxl. "In the case of No. 2, again, as the Gentleman pointed out, these three are zero-rated and the
other one that he indicated are exempted from the very beginning. These three enumerations
under Section 102 are zero-rated provided that these conditions indicated in these three
paragraphs are also complied with. If they are not complied with, then they are not entitled to
the zero ratings. Just like in the export of minerals, if these are not exported, then they cannot
qualify under this provision of zero rating.
cxli. "Senator Maceda: Mr. President, just one small item so we can leave this. Under the proviso, it
is required that the following services be performed in the Philippines.
cxlii. "Under No. 2, services other than those mentioned above includes, let us say, manufacturing
computers and computer chips or repacking goods for persons doing business outside the
Philippines. Meaning to say, we ship the goods to them in Chicago or Washington and they
send the payment inwardly to the Philippines in foreign currency, and that is, of course, zero-
rated.lawphil.net
cxliii. "Now, when we say ‘services other than those mentioned in the preceding subsection[,’] may I
have some examples of these?
cxliv. "Senator Herrera: Which portion is the Gentleman referring to?
cxlv. "Senator Maceda: I am referring to the second paragraph, in the same Section 102. The first
paragraph is when one manufactures or packages something here and he sends it abroad and
they pay him, that is covered. That is clear to me. The second paragraph says ‘Services other
than those mentioned in the preceding subparagraph, the consideration of which is paid for in
acceptable foreign currency…’
cxlvi. "One example I could immediately think of -- I do not know why this comes to my mind tonight
-- is for tourism or escort services. For example, the services of the tour operator or tour escort
-- just a good name for all kinds of activities -- is made here at the Midtown Ramada Hotel or at
the Philippine Plaza, but the payment is made from outside and remitted into the country.
cxlvii. "Senator Herrera: What is important here is that these services are paid in acceptable foreign
currency remitted inwardly to the Philippines.
cxlviii. "Senator Maceda: Yes, Mr. President. Like those Japanese tours which include $50 for the
services of a woman or a tourist guide, it is zero-rated when it is remitted here.
cxlix. "Senator Herrera: I guess it can be interpreted that way, although this tourist guide should also
be considered as among the professionals. If they earn more than ₱200,000, they should be
covered.
cl. xxxxxxxxx
cli. Senator Maceda: So, the services by Filipino citizens outside the Philippines are subject to VAT,
and I am talking of all services. Do big contractual engineers in Saudi Arabia pay VAT?
clii. "Senator Herrera: This provision applies to a VAT-registered person. When he performs services
in the Philippines, that is zero-rated.
cliii. "Senator Maceda: That is right."90
 cliv. Legislative Approval By Reenactment
clv. Finally, upon the enactment of RA 8424, which substantially carries over the particular
provisions on zero rating of services under Section 102(b) of the Tax Code, the principle of
legislative approval of administrative interpretation by reenactment clearly obtains. This
principle means that "the reenactment of a statute substantially unchanged is persuasive
indication of the adoption by Congress of a prior executive construction."91
clvi. The legislature is presumed to have reenacted the law with full knowledge of the contents of
the revenue regulations then in force regarding the VAT, and to have approved or confirmed
them because they would carry out the legislative purpose. The particular provisions of the
regulations we have mentioned earlier are, therefore, re-enforced. "When a statute is
susceptible of the meaning placed upon it by a ruling of the government agency charged with
its enforcement and the [l]egislature thereafter [reenacts] the provisions [without] substantial
change, such action is to some extent confirmatory that the ruling carries out the legislative
purpose."92
clvii. In sum, having resolved that transactions of respondent are zero-rated, the Court upholds the
former’s entitlement to the refund as determined by the appellate court. Moreover, there is no
conflict between the decisions of the CTA and CA. This Court respects the findings and
conclusions of a specialized court like the CTA "which, by the nature of its functions, is
dedicated exclusively to the study and consideration of tax cases and has necessarily developed
an expertise on the subject."93
clviii. Furthermore, under a zero-rating scheme, the sale or exchange of a particular service is
completely freed from the VAT, because the seller is entitled to recover, by way of a refund or
as an input tax credit, the tax that is included in the cost of purchases attributable to the sale or
exchange.94 "[T]he tax paid or withheld is not deducted from the tax base." 95 Having been
applied for within the reglementary period,96 respondent’s refund is in order.
clix. WHEREFORE, the Petition is hereby DENIED, and the assailed Decision AFFIRMED. No
pronouncement as to costs.
ii. VAT exempt Transactions
G.R. No. 157594 March 9, 2010
TOSHIBA INFORMATION EQUIPMENT (PHILS.), INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
In this Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, petitioner Toshiba Information
Equipment (Philippines), Inc. (Toshiba) seeks the reversal and setting aside of (1) the Decision 2 dated August
29, 2002 of the Court of Appeals in CA-G.R. SP No. 63047, which found that Toshiba was not entitled to the
credit/refund of its unutilized input Value-Added Tax (VAT) payments attributable to its export sales, because
it was a tax-exempt entity and its export sales were VAT-exempt transactions; and (2) the Resolution3 dated
February 19, 2003 of the appellate court in the same case, which denied the Motion for Reconsideration of
Toshiba. The herein assailed judgment of the Court of Appeals reversed and set aside the Decision4 dated
October 16, 2000 of the Court of Tax Appeals (CTA) in CTA Case No. 5762 granting the claim for credit/refund
of Toshiba in the amount of ₱1,385,282.08.
Toshiba is a domestic corporation principally engaged in the business of manufacturing and exporting of
electric machinery, equipment systems, accessories, parts, components, materials and goods of all kinds,
including those relating to office automation and information technology and all types of computer hardware
and software, such as but not limited to HDD-CD-ROM and personal computer printed circuit board.5 It is
registered with the Philippine Economic Zone Authority (PEZA) as an Economic Zone (ECOZONE) export
enterprise in the Laguna Technopark, Inc., as evidenced by Certificate of Registration No. 95-99 dated
September 27, 1995.6 It is also registered with Regional District Office No. 57 of the Bureau of Internal
Revenue (BIR) in San Pedro, Laguna, as a VAT-taxpayer with Taxpayer Identification No. (TIN) 004-739-137.7
In its VAT returns for the first and second quarters of 1997,8 filed on April 14, 1997 and July 21, 1997,
respectively, Toshiba declared input VAT payments on its domestic purchases of taxable goods and services
in the aggregate sum of ₱3,875,139.65,9 with no zero-rated sales. Toshiba subsequently submitted to the BIR
on July 23, 1997 its amended VAT returns for the first and second quarters of 1997,10 reporting the same
amount of input VAT payments but, this time, with zero-rated sales totaling ₱7,494,677,000.00.11
On March 30, 1999, Toshiba filed with the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center
of the Department of Finance (DOF One-Stop Shop) two separate applications for tax credit/refund12 of its
unutilized input VAT payments for the first half of 1997 in the total amount of ₱3,685,446.73.13
The next day, on March 31, 1999, Toshiba likewise filed with the CTA a Petition for Review14 to toll the
running of the two-year prescriptive period under Section 230 of the Tax Code of 1977,15 as amended.16 In
said Petition, docketed as CTA Case No. 5762, Toshiba prayed that –
[A]fter due hearing, judgment be rendered ordering [herein respondent Commissioner of Internal Revenue
(CIR)] to refund or issue to [Toshiba] a tax refund/tax credit certificate in the amount of P3,875,139.65
representing unutilized input taxes paid on its purchase of taxable goods and services for the period January
1 to June 30, 1997.17
The Commissioner of Internal Revenue (CIR) opposed the claim for tax refund/credit of Toshiba, setting up
the following special and affirmative defenses in his Answer18 –
5. [Toshiba’s] alleged claim for refund/tax credit is subject to administrative routinary
investigation/examination by [CIR’s] Bureau;
6. [Toshiba] failed miserably to show that the total amount of ₱3,875,139.65 claimed as VAT input
taxes, were erroneously or illegally collected, or that the same are properly documented;
 7. Taxes paid and collected are presumed to have been made in accordance with law; hence, not Whether or not input taxes incurred by [Toshiba] for the first two quarters of 1997 are properly substantiated
refundable; by official receipts and invoices.23

8. In an action for tax refund, the burden is on the taxpayer to establish its right to refund, and During the trial before the CTA, Toshiba presented documentary evidence in support of its claim for tax
failure to sustain the burden is fatal to the claim for refund; credit/refund, while the CIR did not present any evidence at all.

9. It is incumbent upon [Toshiba] to show that it has complied with the provisions of Section 204 in
relation to Section 229 of the Tax Code;
10. Well-established is the rule that claims for refund/tax credit are construed in strictissimi
juris against the taxpayer as it partakes the nature of exemption from tax.19
Upon being advised by the CTA,20 Toshiba and the CIR filed a Joint Stipulation of Facts and Issues,21 wherein
the opposing parties "agreed and admitted" that –
1. [Toshiba] is a duly registered value-added tax entity in accordance with Section 107 of the Tax
Code, as amended.
2. [Toshiba] is subject to zero percent (0%) value-added tax on its export sales in accordance with
then Section 100(a)(2)(A) of the Tax Code, as amended.
With both parties waiving the right to submit their respective memoranda, the CTA rendered its Decision in
CTA Case No. 5762 on October 16, 2000 favoring Toshiba. According to the CTA, the CIR himself admitted
that the export sales of Toshiba were subject to zero percent (0%) VAT based on Section 100(a)(2)(A)(i) of the
Tax Code of 1977, as amended. Toshiba could then claim tax credit or refund of input VAT paid on its
purchases of goods, properties, or services, directly attributable to such zero-rated sales, in accordance with
Section 4.102-2 of Revenue Regulations No. 7-95. The CTA, though, reduced the amount to be credited or
refunded to Toshiba to ₱1,385,292.02.
The dispositive portion of the October 16, 2000 Decision of the CTA fully reads –
WHEREFORE, [Toshiba’s] claim for refund of unutilized input VAT payments is hereby GRANTED but in a
reduced amount of ₱1,385,282.08 computed as follows:
1st Quarter 2nd Quarter Total

3. [Toshiba] filed its quarterly VAT returns for the first two quarters of 1997 within the legally Amount of claimed input taxes filed with
prescribed period. the DOF One Stop Shop Center P3,268,682.34 P416,764.39 P3,685,446.73

Less: 1) Input taxes not properly

xxxx supported by VAT invoices and official
receipts
7. [Toshiba] is subject to zero percent (0%) value-added tax on its export sales. a. Per SGV’s verification
(Exh. I) ₱ 242,491.45 ₱154,391.13 ₱ 396,882.58
8. [Toshiba] has duly filed the instant Petition for Review within the two-year prescriptive period
b. Per this court’s further verification
prescribed by then Section 230 of the Tax Code.22
(Annex A) ₱1,852,437.65 ₱ 35,108.00 ₱1,887,545.65
₱189,499.13 ₱2,300,164.65
In the same pleading, Toshiba and the CIR jointly submitted the following issues for determination by the CTA
–
Amount Refundable ₱1,158,016.82 ₱227,265.26 ₱1,385,282.08

Whether or not [Toshiba] has incurred input taxes in the amount of ₱3,875,139.65 for the period January 1
to June 30, 1997 which are directly attributable to its export sales[.] Respondent Commissioner of Internal Revenue is ORDERED to REFUND to [Toshiba] or in the alternative,
ISSUE a TAX CREDIT CERTIFICATE in the amount of ₱1,385,282.08 representing unutilized input taxes paid by
Whether or not the input taxes incurred by [Toshiba] for the period January 1 to June 30, 1997 have not been [Toshiba] on its purchases of taxable goods and services for the period January 1 to June 30, 1997.24
carried over to the succeeding quarters[.]
Both Toshiba and the CIR sought reconsideration of the foregoing CTA Decision.
Whether or not input taxes incurred by [Toshiba] for the first two quarters of 1997 have not been offset
against any output tax[.]
Toshiba asserted in its Motion for Reconsideration25 that it had presented proper substantiation for the
₱1,887,545.65 input VAT disallowed by the CTA.
The CIR, on the other hand, argued in his Motion for Reconsideration26 that Toshiba was not entitled to the
credit/refund of its input VAT payments because as a PEZA-registered ECOZONE export enterprise, Toshiba
was not subject to VAT. The CIR invoked the following statutory and regulatory provisions –
Section 24 of Republic Act No. 791627
SECTION 24. Exemption from Taxes Under the National Internal Revenue Code. – Any provision of existing
laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed on
business establishments operating within the ECOZONE. In lieu of paying taxes, five percent (5%) of the gross
income earned by all businesses and enterprises within the ECOZONE shall be remitted to the national
government. x x x.
Section 103(q) of the Tax Code of 1977, as amended
Sec. 103. Exempt transactions. – The following shall be exempt from the value-added tax:
xxxx
(q) Transactions which are exempt under special laws, except those granted under Presidential Decree Nos.
66, 529, 972, 1491, and 1950, and non-electric cooperatives under Republic Act No. 6938, or international
agreements to which the Philippines is a signatory.
Section 4.103-1 of Revenue Regulations No. 7-95
SEC. 4.103-1. Exemptions. – (A) In general. – An exemption means that the sale of goods or properties and/or
services and the use or lease of properties is not subject to VAT (output tax) and the seller is not allowed any
tax credit on VAT (input tax) previously paid.
The person making the exempt sale of goods, properties or services shall not bill any output tax to his
customers because the said transaction is not subject to VAT. On the other hand, a VAT-registered purchaser
of VAT-exempt goods, properties or services which are exempt from VAT is not entitled to any input tax on
such purchase despite the issuance of a VAT invoice or receipt.
The CIR contended that under Section 24 of Republic Act No. 7916, a special law, all businesses and
establishments within the ECOZONE were to remit to the government five percent (5%) of their gross income
earned within the zone, in lieu of all taxes, including VAT. This placed Toshiba within the ambit of Section
103(q) of the Tax Code of 1977, as amended, which exempted from VAT the transactions that were
exempted under special laws. Following Section 4.103-1(A) of Revenue Regulations No. 7-95, the VAT-
exemption of Toshiba meant that its sale of goods was not subject to output VAT and Toshiba as seller was
not allowed any tax credit on the input VAT it had previously paid.
On January 17, 2001, the CTA issued a Resolution28 denying both Motions for Reconsideration of Toshiba and
the CIR.
The CTA took note that the pieces of evidence referred to by Toshiba in its Motion for Reconsideration were
insufficient substantiation, being mere schedules of input VAT payments it had purportedly paid for the first
and second quarters of 1997. While the CTA gives credence to the report of its commissioned certified public
accountant (CPA), it does not render its decision based on the findings of the said CPA alone. The CTA has its
own CPA and the tax court itself conducts an investigation/examination of the documents presented. The
CTA stood by its earlier disallowance of the amount of ₱1,887,545.65 as tax credit/refund because it was not
supported by VAT invoices and/or official receipts.1avvphi1
The CTA refused to consider the argument that Toshiba was not entitled to a tax credit/refund under Section
24 of Republic Act No. 7916 because it was only raised by the CIR for the first time in his Motion for
Reconsideration. Also, contrary to the assertions of the CIR, the CTA held that Section 23, and not Section 24,
of Republic Act No. 7916, applied to Toshiba. According to Section 23 of Republic Act No. 7916 –
SECTION 23. Fiscal Incentives. – Business establishments operating within the ECOZONES shall be entitled to
the fiscal incentives as provided for under Presidential Decree No. 66, the law creating the Export Processing
Zone Authority, or those provided under Book VI of Executive Order No. 226, otherwise known as the
Omnibus Investment Code of 1987.
Furthermore, tax credits for exporters using local materials as inputs shall enjoy the benefits provided for in
the Export Development Act of 1994.
Among the fiscal incentives granted to PEZA-registered enterprises by the Omnibus Investments Code of
1987 was the income tax holiday, to wit –
Art. 39. Incentives to Registered Enterprises. – All registered enterprises shall be granted the following
incentives to the extent engaged in a preferred area of investment:
(a) Income Tax Holiday. —
(1) For six (6) years from commercial operation for pioneer firms and four (4) years for
non-pioneer firms, new registered firms shall be fully exempt from income taxes levied by
the national government. Subject to such guidelines as may be prescribed by the Board,
the income tax exemption will be extended for another year in each of the following
cases:
(i) The project meets the prescribed ratio of capital equipment to number of
workers set by the Board;
 (ii) Utilization of indigenous raw materials at rates set by the Board;
(iii) The net foreign exchange savings or earnings amount to at least
US$500,000.00 annually during the first three (3) years of operation.
The preceding paragraph notwithstanding, no registered pioneer firm may avail of this
incentive for a period exceeding eight (8) years.
(2) For a period of three (3) years from commercial operation, registered expanding firms
shall be entitled to an exemption from income taxes levied by the National Government
proportionate to their expansion under such terms and conditions as the Board may
determine: Provided, however, That during the period within which this incentive is
availed of by the expanding firm it shall not be entitled to additional deduction for
incremental labor expense.
(3) The provision of Article 7(14) notwithstanding, registered firms shall not be entitled to
any extension of this incentive.
The CTA pointed out that Toshiba availed itself of the income tax holiday under the Omnibus Investments
Code of 1987, so Toshiba was exempt only from income tax but not from other taxes such as VAT. As a result,
Toshiba was liable for output VAT on its export sales, but at zero percent (0%) rate, and entitled to the
credit/refund of the input VAT paid on its purchases of goods and services relative to such zero-rated export
sales.
Unsatisfied, the CIR filed a Petition for Review29 with the Court of Appeals, docketed as CA-G.R. SP No. 63047.
In its Decision dated August 29, 2002, the Court of Appeals granted the appeal of the CIR, and reversed and
set aside the Decision dated October 16, 2000 and the Resolution dated January 17, 2001 of the CTA. The
appellate court ruled that Toshiba was not entitled to the refund of its alleged unused input VAT payments
because it was a tax-exempt entity under Section 24 of Republic Act No. 7916. As a PEZA-registered
corporation, Toshiba was liable for remitting to the national government the five percent (5%) preferential
rate on its gross income earned within the ECOZONE, in lieu of all other national and local taxes, including
VAT.
The Court of Appeals further adjudged that the export sales of Toshiba were VAT-exempt, not zero-rated,
transactions. The appellate court found that the Answer filed by the CIR in CTA Case No. 5762 did not contain
any admission that the export sales of Toshiba were zero-rated transactions under Section 100(a)(2)(A) of the
Tax Code of 1977, as amended. At the least, what was admitted by the CIR in said Answer was that the Tax
Code provisions cited in the Petition for Review of Toshiba in CTA Case No. 5762 were correct. As to the Joint
Stipulation of Facts and Issues filed by the parties in CTA Case No. 5762, which stated that Toshiba was
subject to zero percent (0%) VAT on its export sales, the appellate court declared that the CIR signed the said
pleading through palpable mistake. This palpable mistake in the stipulation of facts should not be taken
against the CIR, for to do otherwise would result in suppressing the truth through falsehood. In addition, the
State could not be put in estoppel by the mistakes or errors of its officials or agents.
Given that Toshiba was a tax-exempt entity under Republic Act No. 7916, a special law, the Court of Appeals
concluded that the export sales of Toshiba were VAT-exempt transactions under Section 109(q) of the Tax
Code of 1997, formerly Section 103(q) of the Tax Code of 1977. Therefore, Toshiba could not claim refund of
its input VAT payments on its domestic purchases of goods and services.
The Court of Appeals decreed at the end of its August 29, 2002 Decision –
WHEREFORE, premises considered, the appealed decision of the Court of Tax Appeals in CTA Case No. 5762,
is hereby REVERSED and SET ASIDE, and a new one is hereby rendered finding [Toshiba], being a tax exempt
entity under R.A. No. 7916, not entitled to refund the VAT payments made in its domestic purchases of goods
and services.30
Toshiba filed a Motion for Reconsideration31 of the aforementioned Decision, anchored on the following
arguments: (a) the CIR never raised as an issue before the CTA that Toshiba was tax-exempt under Section 24
of Republic Act No. 7916; (b) Section 24 of Republic Act No. 7916, subjecting the gross income earned by a
PEZA-registered enterprise within the ECOZONE to a preferential rate of five percent (5%), in lieu of all taxes,
did not apply to Toshiba, which availed itself of the income tax holiday under Section 23 of the same statute;
(c) the conclusion of the CTA that the export sales of Toshiba were zero-rated was supported by substantial
evidence, other than the admission of the CIR in the Joint Stipulation of Facts and Issues; and (d) the
judgment of the CTA granting the refund of the input VAT payments was supported by substantial evidence
and should not have been set aside by the Court of Appeals.
In a Resolution dated February 19, 2003, the Court of Appeals denied the Motion for Reconsideration of
Toshiba since the arguments presented therein were mere reiterations of those already passed upon and
found to be without merit by the appellate court in its earlier Decision. The Court of Appeals, however,
mentioned that it was incorrect for Toshiba to say that the issue of the applicability of Section 24 of Republic
Act No. 7916 was only raised for the first time on appeal before the appellate court. The said issue was
adequately raised by the CIR in his Motion for Reconsideration before the CTA, and was even ruled upon by
the tax court.
Hence, Toshiba filed the instant Petition for Review with the following assignment of errors –
5.1 THE HONORABLE COURT OF APPEALS ERRED WHEN IT RULED THAT [TOSHIBA], BEING A PEZA-
REGISTERED ENTERPRISE, IS EXEMPT FROM VAT UNDER SECTION 24 OF R.A. 7916, AND FURTHER
HOLDING THAT [TOSHIBA’S] EXPORT SALES ARE EXEMPT TRANSACTIONS UNDER SECTION 109 OF
THE TAX CODE.
5.2 THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED TO DISMISS OUTRIGHT AND
GAVE DUE COURSE TO [CIR’S] PETITION NOTWITHSTANDING [CIR’S] FAILURE TO ADEQUATELY
 RAISE IN ISSUE DURING THE TRIAL IN THE COURT OF TAX APPEALS THE APPLICABILITY OF SECTION
24 OF R.A. 7916 TO [TOSHIBA’S] CLAIM FOR REFUND.
5.3 THE HONORABLE COURT OF APPEALS ERRED WHEN [IT] RULED THAT THE COURT OF TAX
APPEALS’ FINDINGS, WITH REGARD [TOSHIBA’S] EXPORT SALES BEING ZERO RATED SALES FOR VAT
PURPOSES, WERE BASED MERELY ON THE ADMISSIONS MADE BY [CIR’S] COUNSEL AND NOT
SUPPORTED BY SUBSTANTIAL EVIDENCE.
5.4 THE HONORABLE COURT OF APPEALS ERRED WHEN IT REVERSED THE DECISION OF THE COURT
OF TAX APPEALS GRANTING [TOSHIBA’S] CLAIM FOR REFUND[;]32
and the following prayer –
WHEREFORE, premises considered, Petitioner TOSHIBA INFORMATION EQUIPMENT (PHILS.), INC. most
respectfully prays that the decision and resolution of the Honorable Court of Appeals, reversing the decision
of the CTA in CTA Case No. 5762, be set aside and further prays that a new one be rendered AFFIRMING AND
UPHOLDING the Decision of the CTA promulgated on October 16, 2000 in CTA Case No. 5762.
Other reliefs, which the Honorable Court may deem just and equitable under the circumstances, are likewise
prayed for.33
The Petition is impressed with merit.
The CIR did not timely raise before the CTA the issues on the VAT-exemptions of Toshiba and its export sales.
Upon the failure of the CIR to timely plead and prove before the CTA the defenses or objections that Toshiba
was VAT-exempt under Section 24 of Republic Act No. 7916, and that its export sales were VAT-exempt
transactions under Section 103(q) of the Tax Code of 1977, as amended, the CIR is deemed to have waived
the same.
During the pendency of CTA Case No. 5762, the proceedings before the CTA were governed by the Rules of
the Court of Tax Appeals,34 while the Rules of Court were applied suppletorily.35
Rule 9, Section 1 of the Rules of Court provides:
SECTION 1. Defenses and objections not pleaded. – Defenses and objections not pleaded either in a motion
to dismiss or in the answer are deemed waived. However, when it appears from the pleadings or the
evidence on record that the court has no jurisdiction over the subject matter, that there is another action
pending between the same parties for the same cause, or that the action is barred by a prior judgment or by
statute of limitations, the court shall dismiss the claim.
The CIR did not argue straight away in his Answer in CTA Case No. 5762 that Toshiba had no right to the
credit/refund of its input VAT payments because the latter was VAT-exempt and its export sales were VAT-
exempt transactions. The Pre-Trial Brief36 of the CIR was equally bereft of such allegations or arguments. The
CIR passed up the opportunity to prove the supposed VAT-exemptions of Toshiba and its export sales when
the CIR chose not to present any evidence at all during the trial before the CTA.37 He missed another
opportunity to present the said issues before the CTA when he waived the submission of a
Memorandum.38 The CIR had waited until the CTA already rendered its Decision dated October 16, 2000 in
CTA Case No. 5762, which granted the claim for credit/refund of Toshiba, before asserting in his Motion for
Reconsideration that Toshiba was VAT-exempt and its export sales were VAT-exempt transactions.
The CIR did not offer any explanation as to why he did not argue the VAT-exemptions of Toshiba and its
export sales before and during the trial held by the CTA, only doing so in his Motion for Reconsideration of
the adverse CTA judgment. Surely, said defenses or objections were already available to the CIR when the CIR
filed his Answer to the Petition for Review of Toshiba in CTA Case No. 5762.
It is axiomatic in pleadings and practice that no new issue in a case can be raised in a pleading which by due
diligence could have been raised in previous pleadings.39 The Court cannot simply grant the plea of the CIR
that the procedural rules be relaxed based on the general averment of the interest of substantive justice. It
should not be forgotten that the first and fundamental concern of the rules of procedure is to secure a just
determination of every action.40 Procedural rules are designed to facilitate the adjudication of cases. Courts
and litigants alike are enjoined to abide strictly by the rules. While in certain instances, the Court allows a
relaxation in the application of the rules, it never intends to forge a weapon for erring litigants to violate the
rules with impunity. The liberal interpretation and application of rules apply only in proper cases of
demonstrable merit and under justifiable causes and circumstances. While it is true that litigation is not a
game of technicalities, it is equally true that every case must be prosecuted in accordance with the
prescribed procedure to ensure an orderly and speedy administration of justice. Party litigants and their
counsel are well advised to abide by, rather than flaunt, procedural rules for these rules illumine the path of
the law and rationalize the pursuit of justice.41
The CIR judicially admitted that Toshiba was VAT-registered and its export sales were subject to VAT at zero
percent (0%) rate.
More importantly, the arguments of the CIR that Toshiba was VAT-exempt and the latter’s export sales were
VAT-exempt transactions are inconsistent with the explicit admissions of the CIR in the Joint Stipulation of
Facts and Issues (Joint Stipulation) that Toshiba was a registered VAT entity and that it was subject to zero
percent (0%) VAT on its export sales.
The Joint Stipulation was executed and submitted by Toshiba and the CIR upon being advised to do so by the
CTA at the end of the pre-trial conference held on June 23, 1999.42 The approval of the Joint Stipulation by
the CTA, in its Resolution43 dated July 12, 1999, marked the culmination of the pre-trial process in CTA Case
No. 5762.
Pre-trial is an answer to the clarion call for the speedy disposition of cases. Although it was discretionary
under the 1940 Rules of Court, it was made mandatory under the 1964 Rules and the subsequent
amendments in 1997. It has been hailed as "the most important procedural innovation in Anglo-Saxon justice
in the nineteenth century."44
The nature and purpose of a pre-trial have been laid down in Rule 18, Section 2 of the Rules of Court:
SECTION 2. Nature and purpose. – The pre-trial is mandatory. The court shall consider:
(a) The possibility of an amicable settlement or of a submission to alternative modes of dispute
resolution;
(b) The simplification of the issues;
(c) The necessity or desirability of amendments to the pleadings;
(d) The possibility of obtaining stipulations or admissions of facts and of documents to avoid
unnecessary proof;
(e) The limitation of the number of witnesses;
(f) The advisability of a preliminary reference of issues to a commissioner;
(g) The propriety of rendering judgment on the pleadings, or summary judgment, or of dismissing
the action should a valid ground therefor be found to exist;
(h) The advisability or necessity of suspending the proceedings; and
(i) Such other matters as may aid in the prompt disposition of the action. (Emphasis ours.)
The admission having been made in a stipulation of facts at pre-trial by the parties, it must be treated as a
judicial admission.45 Under Section 4, Rule 129 of the Rules of Court, a judicial admission requires no proof.
The admission may be contradicted only by a showing that it was made through palpable mistake or that no
such admission was made. The Court cannot lightly set aside a judicial admission especially when the
opposing party relied upon the same and accordingly dispensed with further proof of the fact already
admitted. An admission made by a party in the course of the proceedings does not require proof.46
In the instant case, among the facts expressly admitted by the CIR and Toshiba in their CTA-approved Joint
Stipulation are that Toshiba "is a duly registered value-added tax entity in accordance with Section 107 of the
Tax Code, as amended[,]"47 that "is subject to zero percent (0%) value-added tax on its export sales in
accordance with then Section 100(a)(2)(A) of the Tax Code, as amended."48 The CIR was bound by these
admissions, which he could not eventually contradict in his Motion for Reconsideration of the CTA Decision
dated October 16, 2000, by arguing that Toshiba was actually a VAT-exempt entity and its export sales were
VAT-exempt transactions. Obviously, Toshiba could not have been subject to VAT and exempt from VAT at
the same time. Similarly, the export sales of Toshiba could not have been subject to zero percent (0%) VAT
and exempt from VAT as well.
The CIR cannot escape the binding effect of his judicial admissions.
The Court disagrees with the Court of Appeals when it ruled in its Decision dated August 29, 2002 that the
CIR could not be bound by his admissions in the Joint Stipulation because (1) the said admissions were "made
through palpable mistake"49 which, if countenanced, "would result in falsehood, unfairness and
injustice";50 and (2) the State could not be put in estoppel by the mistakes of its officials or agents. This ruling
of the Court of Appeals is rooted in its conclusion that a "palpable mistake" had been committed by the CIR in
the signing of the Joint Stipulation. However, this Court finds no evidence of the commission of a mistake,
much more, of a palpable one.
The CIR does not deny that his counsel, Atty. Joselito F. Biazon, Revenue Attorney II of the BIR, signed the
Joint Stipulation, together with the counsel of Toshiba, Atty. Patricia B. Bisda. Considering the presumption of
regularity in the performance of official duty,51 Atty. Biazon is presumed to have read, studied, and
understood the contents of the Joint Stipulation before he signed the same. It rests on the CIR to present
evidence to the contrary.
Yet, the Court observes that the CIR himself never alleged in his Motion for Reconsideration of the CTA
Decision dated October 16, 2000, nor in his Petition for Review before the Court of Appeals, that Atty. Biazon
committed a mistake in signing the Joint Stipulation. Since the CIR did not make such an allegation, neither
did he present any proof in support thereof. The CIR began to aver the existence of a palpable mistake only
after the Court of Appeals made such a declaration in its Decision dated August 29, 2002.
Despite the absence of allegation and evidence by the CIR, the Court of Appeals, on its own, concluded that
the admissions of the CIR in the Joint Stipulation were due to a palpable mistake based on the following
deduction –
Scrutinizing the Answer filed by [the CIR], we rule that the Joint Stipulation of Facts and Issues signed by [the
CIR] was made through palpable mistake. Quoting paragraph 4 of its Answer, [the CIR] states:
"4. He ADMITS the allegations contained in paragraph 5 of the petition only insofar as the cited provisions of
Tax Code is concerned, but SPECIFICALLY DENIES the rest of the allegations therein for being mere opinions,
arguments or gratuitous assertions on the part of [Toshiba] and/or because they are mere erroneous
conclusions or interpretations of the quoted law involved, the truth of the matter being those stated
hereunder
x x x x"
And paragraph 5 of the petition for review filed by [Toshiba] before the CTA states:
"5. Petitioner is subject to zero percent (0%) value-added tax on its export sales in accordance with then attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied
Section 100(a)(2)(A) of the Tax Code x x x. against output tax: Provided, however, That in the case of zero-rated sales under Section 100(a)(2)(A)(i),(ii)
and (b) and Section 102(b)(1) and (2), the acceptable foreign currency exchange proceeds thereof has been
x x x x" duly accounted for in accordance with the regulations of the Bangko Sentral ng Pilipinas (BSP): Provided,
further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or
exempt sale of goods or properties of services, and the amount of creditable input tax due or paid cannot be
As we see it, nothing in said Answer did [the CIR] admit that the export sales of [Toshiba] were indeed zero-
directly and entirely attributed to any one of the transactions, it shall be allocated proportionately on the
rated transactions. At the least, what was admitted only by [the CIR] concerning paragraph 4 of his Answer, is
basis of the volume sales.
the fact that the provisions of the Tax Code, as cited by [Toshiba] in its petition for review filed before the
CTA were correct.52
SEC. 100. Value-added tax on sale of goods or properties. – (a) Rate and base of tax. – x x x
The Court of Appeals provided no explanation as to why the admissions of the CIR in his Answer in CTA Case
No. 5762 deserved more weight and credence than those he made in the Joint Stipulation. The appellate xxxx
court failed to appreciate that the CIR, through counsel, Atty. Biazon, also signed the Joint Stipulation; and
that absent evidence to the contrary, Atty. Biazon is presumed to have signed the Joint Stipulation willingly (2) The following sales by VAT-registered persons shall be subject to 0%:
and knowingly, in the regular performance of his official duties. Additionally, the Joint Stipulation53 of Toshiba
and the CIR was a more recent pleading than the Answer54 of the CIR. It was submitted by the parties after (A) Export sales. – The term "export sales" means:
the pre-trial conference held by the CTA, and subsequently approved by the tax court. If there was any
discrepancy between the admissions of the CIR in his Answer and in the Joint Stipulation, the more logical
(i) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of
and reasonable explanation would be that the CIR changed his mind or conceded some points to Toshiba
any shipping arrangement that may be agreed upon which may influence or determine the transfer
during the pre-trial conference which immediately preceded the execution of the Joint Stipulation. To
of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent
automatically construe that the discrepancy was the result of a palpable mistake is a wide leap which this
in goods or services, and accounted for in accordance with the rules and regulations of the Bangko
Court is not prepared to take without substantial basis.
Sentral ng Pilipnas (BSP).

The judicial admissions of the CIR in the Joint Stipulation are not intrinsically false, wrong, or illegal, and are
Despite the difference in the legal bases for the claims for credit/refund in the Toshiba case and the case at
consistent with the ruling on the VAT treatment of PEZA-registered enterprises in the previous Toshiba case.
bar, the CIR raised the very same defense or objection in both – that Toshiba and its transactions were VAT-
exempt. Hence, the ruling of the Court in the former case is relevant to the present case.
There is no basis for believing that to bind the CIR to his judicial admissions in the Joint Stipulation – that
Toshiba was a VAT-registered entity and its export sales were zero-rated VAT transactions – would result in
At the outset, the Court establishes that there is a basic distinction in the VAT-exemption of a person and the
"falsehood, unfairness and injustice." The judicial admissions of the CIR are not intrinsically false, wrong, or
VAT-exemption of a transaction –
illegal. On the contrary, they are consistent with the ruling of this Court in a previous case involving the same
parties, Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.) Inc.55 (Toshiba case),
explaining the VAT treatment of PEZA-registered enterprises. It would seem that petitioner CIR failed to differentiate between VAT-exempt transactions from VAT-exempt
entities. In the case of Commissioner of Internal Revenue v. Seagate Technology (Philippines), this Court
already made such distinction –
In the Toshiba case, Toshiba sought the refund of its unutilized input VAT on its purchase of capital goods and
services for the first and second quarters of 1996, based on Section 106(b) of the Tax Code of 1977, as
amended.56In the Petition at bar, Toshiba is claiming refund of its unutilized input VAT on its local purchase of An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically
goods and services which are attributable to its export sales for the first and second quarters of 1997, listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status – VAT-
pursuant to Section 106(a), in relation to Section 100(a)(1)(A)(i) of the Tax Code of 1977, as amended, which exempt or not – of the party to the transaction…
read –
An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a
SEC. 106. Refunds or tax credits of creditable input tax. – (a) Any VAT-registered person, whose sales are special law or an international agreement to which the Philippines is a signatory, and by virtue of which its
zero-rated or effectively zero-rated, may, within two (2) years after the close of the taxable quarter when the taxable transactions become exempt from VAT x x x.57
sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid
In effect, the CIR is opposing the claim for credit/refund of input VAT of Toshiba on two grounds: (1) that
Toshiba was a VAT-exempt entity; and (2) that its export sales were VAT-exempt transactions.
It is now a settled rule that based on the Cross Border Doctrine, PEZA-registered enterprises, such as Toshiba,
are VAT-exempt and no VAT can be passed on to them. The Court explained in the Toshiba case that –
PEZA-registered enterprise, which would necessarily be located within ECOZONES, are VAT-exempt entities,
not because of Section 24 of Rep. Act No. 7916, as amended, which imposes the five percent (5%)
preferential tax rate on gross income of PEZA-registered enterprises, in lieu of all taxes; but, rather, because
of Section 8 of the same statute which establishes the fiction that ECOZONES are foreign territory.
xxxx
The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT shall be
imposed to form part of the cost of goods destined for consumption outside of the territorial border of the
taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be
free of VAT; while, those destined for use or consumption within the Philippines shall be imposed with ten
percent (10%) VAT.
Applying said doctrine to the sale of goods, properties, and services to and from the ECOZONES, the BIR
issued Revenue Memorandum Circular (RMC) No. 74-99, on 15 October 1999. Of particular interest to the
present Petition is Section 3 thereof, which reads –
SECTION 3. Tax Treatment of Sales Made by a VAT Registered Supplier from the Customs Territory, to a PEZA
Registered Enterprise. –
(1) If the Buyer is a PEZA registered enterprise which is subject to the 5% special tax regime, in lieu
of all taxes, except real property tax, pursuant to R.A. No. 7916, as amended:
(a) Sale of goods (i.e., merchandise). – This shall be treated as indirect export hence,
considered subject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and
Sec. 23 of R.A. No. 7916, in relation to ART. 77(2) of the Omnibus Investments Code.
(b) Sale of service. – This shall be treated subject to zero percent (0%) VAT under the
"cross border doctrine" of the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov.
5, 1998.
(2) If Buyer is a PEZA registered enterprise which is not embraced by the 5% special tax regime,
hence, subject to taxes under the NIRC, e.g., Service Establishments which are subject to taxes
under the NIRC rather than the 5% special tax regime:
(a) Sale of goods (i.e., merchandise). – This shall be treated as indirect export hence,
considered subject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and
Sec. 23 of R.A. No. 7916 in relation to ART. 77(2) of the Omnibus Investments Code.
(b) Sale of Service. – This shall be treated subject to zero percent (0%) VAT under the
"cross border doctrine" of the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov.
5, 1998.
(3) In the final analysis, any sale of goods, property or services made by a VAT registered supplier
from the Customs Territory to any registered enterprise operating in the ecozone, regardless of the
class or type of the latter’s PEZA registration, is actually qualified and thus legally entitled to the
zero percent (0%) VAT. Accordingly, all sales of goods or property to such enterprise made by a VAT
registered supplier from the Customs Territory shall be treated subject to 0% VAT, pursuant to Sec.
106(A)(2)(a)(5), NIRC, in relation to ART. 77(2) of the Omnibus Investments Code, while all sales of
services to the said enterprises, made by VAT registered suppliers from the Customs Territory, shall
be treated effectively subject to the 0% VAT, pursuant to Section 108(B)(3), NIRC, in relation to the
provisions of R.A. No. 7916 and the "Cross Border Doctrine" of the VAT system.
This Circular shall serve as a sufficient basis to entitle such supplier of goods, property or services to the
benefit of the zero percent (0%) VAT for sales made to the aforementioned ECOZONE enterprises and shall
serve as sufficient compliance to the requirement for prior approval of zero-rating imposed by Revenue
Regulations No. 7-95 effective as of the date of the issuance of this Circular.
Indubitably, no output VAT may be passed on to an ECOZONE enterprise since it is a VAT-exempt entity. x x
x.58
The Court, nevertheless, noted in the Toshiba case that the rule which considers any sale by a supplier from
the Customs Territory to a PEZA-registered enterprise as export sale, which should not be burdened by
output VAT, was only clearly established on October 15, 1999, upon the issuance by the BIR of RMC No. 74-
99. Prior to October 15, 1999, whether a PEZA-registered enterprise was exempt or subject to VAT depended
on the type of fiscal incentives availed of by the said enterprise.59 The old rule, then followed by the BIR, and
recognized and affirmed by the CTA, the Court of Appeals, and this Court, was described as follows –
According to the old rule, Section 23 of Rep. Act No. 7916, as amended, gives the PEZA-registered enterprise
the option to choose between two sets of fiscal incentives: (a) The five percent (5%) preferential tax rate on
its gross income under Rep. Act No. 7916, as amended; and (b) the income tax holiday provided under
Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987, as amended.
The five percent (5%) preferential tax rate on gross income under Rep. Act No. 7916, as amended, is in lieu of
all taxes. Except for real property taxes, no other national or local tax may be imposed on a PEZA-registered
enterprise availing of this particular fiscal incentive, not even an indirect tax like VAT.
Alternatively, Book VI of Exec. Order No. 226, as amended, grants income tax holiday to registered pioneer
and non-pioneer enterprises for six-year and four-year periods, respectively. Those availing of this incentive
are exempt only from income tax, but shall be subject to all other taxes, including the ten percent (10%) VAT.
This old rule clearly did not take into consideration the Cross Border Doctrine essential to the VAT system or
the fiction of the ECOZONE as a foreign territory. It relied totally on the choice of fiscal incentives of the
PEZA-registered enterprise. Again, for emphasis, the old VAT rule for PEZA-registered enterprises was based
on their choice of fiscal incentives: (1) If the PEZA-registered enterprise chose the five percent (5%)
preferential tax on its gross income, in lieu of all taxes, as provided by Rep. Act No. 7916, as amended, then it
would be VAT-exempt; (2) If the PEZA-registered enterprise availed of the income tax holiday under Exec.
Order No. 226, as amended, it shall be subject to VAT at ten percent (10%). Such distinction was abolished by
RMC No. 74-99, which categorically declared that all sales of goods, properties, and services made by a VAT-
registered supplier from the Customs Territory to an ECOZONE enterprise shall be subject to VAT, at zero
percent (0%) rate, regardless of the latter’s type or class of PEZA registration; and, thus, affirming the nature
of a PEZA-registered or an ECOZONE enterprise as a VAT-exempt entity.60
To recall, Toshiba is herein claiming the refund of unutilized input VAT payments on its local purchases of
goods and services attributable to its export sales for the first and second quarters of 1997. Such export sales
took place before October 15, 1999, when the old rule on the VAT treatment of PEZA-registered enterprises
still applied. Under this old rule, it was not only possible, but even acceptable, for Toshiba, availing itself of
the income tax holiday option under Section 23 of Republic Act No. 7916, in relation to Section 39 of the
Omnibus Investments Code of 1987, to be subject to VAT, both indirectly (as purchaser to whom the seller
shifts the VAT burden) and directly (as seller whose sales were subject to VAT, either at ten percent [10%] or
zero percent [0%]).
A VAT-registered seller of goods and/or services who made zero-rated sales can claim tax credit or refund of
the input VAT paid on its purchases of goods, properties, or services relative to such zero-rated sales, in
accordance with Section 4.102-2 of Revenue Regulations No. 7-95, which provides –
Sec. 4.102-2. Zero-rating. – (a) In general. - A zero-rated sale by a VAT-registered person, which is a taxable
transaction for VAT purposes, shall not result in any output tax. However, the input tax on his purchases of
goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in
accordance with these regulations.
The BIR, as late as July 15, 2003, when it issued RMC No. 42-2003, accepted applications for credit/refund of
input VAT on purchases prior to RMC No. 74-99, filed by PEZA-registered enterprises which availed
themselves of the income tax holiday. The BIR answered Question Q-5(1) of RMC No. 42-2003 in this wise –
Q-5: Under Revenue Memorandum Circular (RMC) No. 74-99, purchases by PEZA-registered firms
automatically qualify as zero-rated without seeking prior approval from the BIR effective October 1999.
1) Will the OSS-DOF Center still accept applications from PEZA-registered claimants who were
allegedly billed VAT by their suppliers before and during the effectivity of the RMC by issuing VAT
invoices/receipts?
xxxx
A-5(1): If the PEZA-registered enterprise is paying the 5% preferential tax in lieu of all
other taxes, the said PEZA-registered taxpayer cannot claim TCC or refund for the VAT
paid on purchases. However, if the taxpayer is availing of the income tax holiday, it can
claim VAT credit provided:
a. The taxpayer-claimant is VAT-registered;
b. Purchases are evidenced by VAT invoices or receipts, whichever is applicable,
with shifted VAT to the purchaser prior to the implementation of RMC No. 74-
99; and
c. The supplier issues a sworn statement under penalties of perjury that it
shifted the VAT and declared the sales to the PEZA-registered purchaser as
taxable sales in its VAT returns.
For invoices/receipts issued upon the effectivity of RMC No. 74-99, the claims for input VAT by PEZA-
registered companies, regardless of the type or class of PEZA-registration, should be denied. (Emphases
ours.)
Consequently, the CIR cannot herein insist that all PEZA-registered enterprises are VAT-exempt in every
instance. RMC No. 42-2003 contains an express acknowledgement by the BIR that prior to RMC No. 74-99,
there were PEZA-registered enterprises liable for VAT and entitled to credit/refund of input VAT paid under
certain conditions.
This Court already rejected in the Toshiba case the argument that sale transactions of a PEZA-registered
enterprise were VAT-exempt under Section 103(q) of the Tax Code of 1977, as amended, ratiocinating that –
Section 103(q) of the Tax Code of 1977, as amended, relied upon by petitioner CIR, relates to VAT-exempt
transactions. These are transactions exempted from VAT by special laws or international agreements to
which the Philippines is a signatory. Since such transactions are not subject to VAT, the sellers cannot pass on
any output VAT to the purchasers of goods, properties, or services, and they may not claim tax credit/refund
of the input VAT they had paid thereon.
Section 103(q) of the Tax Code of 1977, as amended, cannot apply to transactions of respondent Toshiba
because although the said section recognizes that transactions covered by special laws may be exempt from
VAT, the very same section provides that those falling under Presidential Decree No. 66 are not. Presidential
Decree No. 66, creating the Export Processing Zone Authority (EPZA), is the precursor of Rep. Act No. 7916,
as amended, under which the EPZA evolved into the PEZA. Consequently, the exception of Presidential
Decree No. 66 from Section 103(q) of the Tax Code of 1977, as amended, extends likewise to Rep. Act No.
7916, as amended.61 (Emphasis ours.)
In light of the judicial admissions of Toshiba, the CTA correctly confined itself to the other factual issues
submitted for resolution by the parties.
In accord with the admitted facts – that Toshiba was a VAT-registered entity and that its export sales were
zero-rated transactions – the stated issues in the Joint Stipulation were limited to other factual matters,
particularly, on the compliance by Toshiba with the rest of the requirements for credit/refund of input VAT
on zero-rated transactions. Thus, during trial, Toshiba concentrated on presenting evidence to establish that
it incurred ₱3,875,139.65 of input VAT for the first and second quarters of 1997 which were directly
attributable to its export sales; that said amount of input VAT were not carried over to the succeeding
quarters; that said amount of input VAT has not been applied or offset against any output VAT liability; and
that said amount of input VAT was properly substantiated by official receipts and invoices.
After what truly appears to be an exhaustive review of the evidence presented by Toshiba, the CTA made the
following findings –
(1) The amended quarterly VAT returns of Toshiba for 1997 showed that it made no other sales,
except zero-rated export sales, for the entire year, in the sum of ₱2,083,305,000.00 for the first
quarter and ₱5,411,372,000.00 for the second quarter. That being the case, all input VAT allegedly
incurred by Toshiba for the first two quarters of 1997, in the amount of ₱3,875,139.65, was directly
attributable to its zero-rated sales for the same period.
(2) Toshiba did carry-over the ₱3,875,139.65 input VAT it reportedly incurred during the first two
quarters of 1997 to succeeding quarters, until the first quarter of 1999. Despite the carry-over of
the subject input VAT of ₱3,875,139.65, the claim of Toshiba was not affected because it later on
deducted the said amount as "VAT Refund/TCC Claimed" from its total available input VAT of
₱6,841,468.17 for the first quarter of 1999.
(3) Still, the CTA could not allow the credit/refund of the total input VAT of ₱3,875,139.65 being
claimed by Toshiba because not all of said amount was actually incurred by the company and duly
substantiated by invoices and official receipts. From the ₱3,875,139.65 claim, the CTA deducted
the amounts of (a) ₱189,692.92, which was in excess of the ₱3,685,446.23 input VAT Toshiba
originally claimed in its application for credit/refund filed with the DOF One-Stop Shop; (b)
₱396,882.58, which SGV & Co., the commissioned CPA, disallowed for being improperly
substantiated, i.e., supported only by provisional acknowledgement receipts, or by documents
other than official receipts, or not supported by TIN or TIN VAT or by any document at all; (c)
₱1,887,545.65, which the CTA itself verified as not being substantiated in accordance with Section
4.104-562 of Revenue Regulations No. 7-95, in relation to Sections 10863 and 23864 of the Tax Code
of 1977, as amended; and (d) ₱15,736.42, which Toshiba already applied to its output VAT liability
for the fourth quarter of 1998.
(4) Ultimately, Toshiba was entitled to the credit/refund of unutilized input VAT payments
attributable to its zero-rated sales in the amounts of ₱1,158,016.82 and ₱227,265.26, for the first
and second quarters of 1997, respectively, or in the total amount of ₱1,385,282.08.
Since the aforementioned findings of fact of the CTA are borne by substantial evidence on record, unrefuted
by the CIR, and untouched by the Court of Appeals, they are given utmost respect by this Court.
The Court will not lightly set aside the conclusions reached by the CTA which, by the very nature of its
functions, is dedicated exclusively to the resolution of tax problems and has accordingly developed an
expertise on the subject unless there has been an abuse or improvident exercise of authority.65 In Barcelon,
Roxas Securities, Inc. (now known as UBP Securities, Inc.) v. Commissioner of Internal Revenue,66 this Court
more explicitly pronounced –
Jurisprudence has consistently shown that this Court accords the findings of fact by the CTA with the highest
respect. In Sea-Land Service Inc. v. Court of Appeals [G.R. No. 122605, 30 April 2001, 357 SCRA 441, 445-446],
this Court recognizes that the Court of Tax Appeals, which by the very nature of its function is dedicated
exclusively to the consideration of tax problems, has necessarily developed an expertise on the subject, and
its conclusions will not be overturned unless there has been an abuse or improvident exercise of authority.
Such findings can only be disturbed on appeal if they are not supported by substantial evidence or there is a
showing of gross error or abuse on the part of the Tax Court. In the absence of any clear and convincing proof
to the contrary, this Court must presume that the CTA rendered a decision which is valid in every respect.
WHEREFORE, the assailed Decision dated August 29, 2002 and the Resolution dated February 19, 2003 of the
Court of Appeals in CA-G.R. SP No. 63047 are REVERSED and SET ASIDE, and the Decision dated October 16,
2000 of the Court of Tax Appeals in CTA Case No. 5762 is REINSTATED. Respondent Commissioner of Internal
Revenue is ORDERED to REFUND or, in the alternative, to ISSUE a TAX CREDIT CERTIFICATE in favor of
petitioner Toshiba Information Equipment (Phils.), Inc. in the amount of ₱1,385,282.08, representing the
latter’s unutilized input VAT payments for the first and second quarters of 1997. No pronouncement as to
costs.
SO ORDERED.
k. Input Tax and Output Tax
SECOND DIVISION
[G.R. NO. 145559 : July 14, 2006]
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. BENGUET CORPORATION, Respondent.
DECISION
GARCIA, J.:
P13,467,663.41 01 Nov88 to 31Jan89

In this Petition for Review under Rule 45 of the Rules of Court, petitioner Commissioner of Internal Revenue P7,030,261.29 01 Feb89 to 30Apr89
seeks the reversal and setting aside of the following Resolutions of the Court of Appeals (CA) in CA-G.R. SP
No. 38413, to wit: P18,263,960.28 01May89 to 31Jul89

1. Resolution dated May 10, 20001 insofar as it ordered petitioner to issue a tax credit to respondent Benguet
Corporation in the amount of P49,749,223.31 representing input VAT/tax attributable to its sales of gold to
the Central Bank (now Bangko Sentral ng Pilipinas or BSP) covering the period from January 1, 1988 to July
31, 1989; andcralawlibrary
2. Resolution dated October 16, 20002 denying petitioner's motion for reconsideration.
The facts, as narrated by the CA in its basic Resolution of May 10, 2000, are:
[Respondent] is a domestic corporation engaged in mining business, specifically the exploration,
development and operation of mining properties for purposes of commercial production and the marketing
of mine products. It is a VAT-registered enterprise, with VAT Registration No. 31-0-000027 issued on January
1, 1988. Sometime in January 1988, [respondent] filed an application for zero-rating of its sales of mine
products, which application was duly approved by the [petitioner] Commissioner of Internal Revenue.
On August 28, 1988, then Deputy Commissioner of Internal Revenue Eufracio D. Santos issued VAT Ruling No.
378-88 which declared that the sale of gold to the Central Bank is considered an export sale and therefore
subject to VAT at 0% rate. On December 14, 1988, then Deputy Commissioner Santos also issued Revenue
Memorandum Circular (RMC) No. 59-88, again declaring that the sale of gold by a VAT-registered taxpayer to
the Central Bank is subject to the zero-rate VAT. No less than five Rulings were subsequently issued by
[petitioner] from 1988 to 1990 reiterating and confirming its position that the sale of gold by a VAT-
registered taxpayer to the Central Bank is subject to the zero-rate VAT.
As a corollary, and in reliance, of the foregoing issuances, [respondent], during the six (6) taxable quarters in
question covering the period January 1, 1988 to July 31, 1989, sold gold to the Central Bank and treated
these sales as zero-rated - that is, subject to the 0% VAT. During the same period, [respondent] thus incurred
input taxes attributable to said sales to the Central Bank. Consequently, [respondent] filed with the
Commissioner of Internal Revenue applications for the issuance of Tax Credit Certificates for input VAT
Credits attributable to its export sales - that is, inclusive of direct export sales and sale of gold to the Central
Bank corresponding to the same taxable periods, to wit:
AMOUNT OF TAX CREDIT TAXABLE PERIOD
APPLIED FOR
P34,449,817.71 01Jan88 to 30 Apr88
P30,382,666.86 01May88 to 31Jul88
(CTA Decision dated March 23, 1995; Pages 83-86, rollo)
Meanwhile, on January 23, 1992, then Commissioner Jose U. Ong issued VAT Ruling No. 008-92 declaring and
holding that the sales of gold to the Central Bank are considered domestic sales subject to 10% VAT instead
of 0% VAT as previously held in BIR Issuances from 1998 to 1990. Subsequently, VAT Ruling No. 59-92, dated
April 28, 1992, x x x were issued by [petitioner] reiterating the treatment of sales of gold to the Central Bank
as domestic sales, and expressly countenancing the Retroactive application of VAT Ruling No. 008-92 to all
such sales made starting January 1, 1988, ratiocinating, inter alia, that the mining companies will not be
unduly prejudiced by a retroactive application of VAT Ruling 008-92 because their claim for refund of input
taxes are not lost because the same are allowable on its output taxes on the sales of gold to Central Bank; on
its output taxes on other sales; and as deduction to income tax under Section 29 of the Tax Code.
On the basis of the aforequoted BIR Issuances, [petitioner] thus treated [respondent's] sales of gold to the
Central Bank as domestic sales subject to 10% VAT but allowed [respondent] a total tax credit of
only P81,991,810.91 which corresponded to VAT input taxes attributable to its direct export sales (CTA
Decision dated March 23, 1995; Page 87). Notwithstanding this finding of the [petitioner], [respondent] was
not refunded the said amounts of tax credit claimed. Thus, to suspend the running of the two-year
prescriptive period (Sec. 106, NIRC) for claiming refunds or tax credits, [respondent] instituted x x x
consolidated Petitions for Review with the Court of Tax Appeals, praying for the issuance of "Tax Credit
Certificates" for the following input VAT credits attributable to export sales transacted during the taxable
quarters or periods in question, to wit:
CTA Case Amount of Tax Credit Taxable Period
Applied for
Number
4429 P64,832,374.67 01JAN 88 to 31JUL88
4495 P43,614,437.88 01AUG 88to 31JAN89
4575 P23,294,221.77 01FEB 89 to 31JUL89
P131,741,034.22 = TOTAL
Significantly, the total amount of P131,741,034.22, as hereinabove computed, corresponds to the total input
VAT credits attributable to export sales made by [respondent] during the taxable periods set forth and
therefore, represents a combination of input tax attributable to both (1) direct export sales and (2) sales of
gold to the Central Bank. (Words in brackets added).3
In a decision dated March 23, 1995,4 the Court of Tax Appeals (CTA) dismissed respondent's aforementioned
consolidated Petitions for Review and denied the whole amount of its claim for tax credit
of P131,741,034.22. The tax court held that the alleged prejudice to respondent as a result of the retroactive
application of VAT Ruling No. 008-92 issued on January 23, 1992 to the latter's gold sales to the Central Bank
(CB) from January 1, 1988 to July 31, 1989 is merely speculative and not actual and imminent so as to
proscribe said Ruling's retroactivity. The CTA further held that respondent would not be unduly prejudiced
considering that VAT Ruling No. 59-92 which mandates the retroactivity of VAT Ruling No. 008-92 likewise
provides for alternative remedies for the recovery of the input VAT.
Its motion for reconsideration having been denied by the tax court, respondent appealed to the CA whereat
its recourse was docketed as CA-G.R. SP No. 38413.
At first, the CA, in a decision dated May 30, 1996,5 affirmed in toto that of the tax court.
However, upon respondent's motion for reconsideration, the CA, in the herein assailed basic Resolution dated
May 10, 2000, reversed itself by setting aside its earlier decision of May 30, 1996 and ordering herein
petitioner to issue in respondent's favor a tax credit in the amount of P131,741,034.22, to wit:
IN THE LIGHT OF ALL THE FOREGOING, [respondent's] Motion for Reconsideration, x x x as supplemented, is
GRANTED. The Decision of this Court, dated May 30, 1996, affirming the Decision of the Court of Tax Appeals
x x x is SET ASIDE. The [petitioner Commissioner of Internal Revenue] is hereby ordered to issue [respondent]
a TAX CREDIT in the amount of P131,741,034.22.
SO ORDERED.
In its reversal action, the CA ruled that the tax credit in the total amount of P131,741,034.22 consists of
(1) P81,991,810.91, representing input VAT credits attributable to direct export sales subject to 0% VAT, and
(2) P49,749,223.31, representing input VAT attributable to sales of gold to the CB which were subject to 0%
when said sales were made in 1988 and 1989. In effect, the CA rejected the retroactive application of VAT
Ruling No. 008-92 to the subject gold sales of respondent because of the resulting prejudice to the latter
despite the existence of alternative modes for the recovery of the input VAT.
This time, it was petitioner who moved for a reconsideration but his motion was denied by the CA in its
subsequent Resolution of October 16, 2000.
Hence, petitioner's present recourse assailing only that portion of the CA Resolution of May 10, 2000
allowing respondent the amount of P49,749,223.31 as tax credit corresponding to the input VAT attributable
to its sales of gold to the CB for the period January 1, 1988 to July 31, 1989. It is petitioner's sole contention
that the CA erred in rejecting the retroactive application of VAT Ruling No. 008-92, dated January 23, 1992,
subjecting sales of gold to the CB to 10% VAT to respondent's sales of gold during the period from January 1,
1988 to July 31, 1989. Petitioner posits that, contrary to the ruling of the appellate court, the retroactive
application of VAT Ruling No. 008-92 to respondent would not prejudice the latter.
Initially, the Court, in its Resolution of January 24, 2001, 6 denied the Petition for lack of verification and
certification against forum shopping. However, upon petitioner's manifestation and motion for
reconsideration, the Court reinstated the Petition in its subsequent Resolution of March 5, 2001.7
The petition must have to fall.
We start with the well-entrenched rule that rulings and circulars, rules and regulations, promulgated by the
Commissioner of Internal Revenue, would have no retroactive application if to so apply them would be
prejudicial to the taxpayers.8
And this is as it should be, for the Tax Code, specifically Section 246 thereof, is explicit that:
x x x Any revocation, modification, or reversal of any rules and regulations promulgated in accordance with
the preceding section or any of the rulings or circulars promulgated by the Commissioner of Internal Revenue
shall not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the
taxpayers except in the following cases: a) where the taxpayer deliberately misstates or omits material facts
from his return or in any document required of him by the Bureau of Internal Revenue; b) where the facts
subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which
the ruling is based; or c) where the taxpayer acted in bad faith.
There is no question, therefore, as to the prohibition against the retroactive application of the revocation,
modification or reversal, as the case maybe, of previously established Bureau on Internal Revenue (BIR)
Rulings when the taxpayer's interest would be prejudiced thereby. But even if prejudicial to a taxpayer,
retroactive application is still allowed where: (a) a taxpayer deliberately misstates or omits material facts
from his return or any document required by the BIR; (b) where subsequent facts gathered by the BIR are
materially different from which the ruling is based; and (c) where the taxpayer acted in bad faith.
As admittedly, respondent's case does not fall under any of the above exceptions, what is crucial to
determine then is whether the retroactive application of VAT Ruling No. 008-92 would be prejudicial to
respondent Benguet Corporation.
The Court resolves the question in the affirmative.
Input VAT or input tax represents the actual payments, costs and expenses incurred by a VAT-registered
taxpayer in connection with his purchase of goods and services. Thus, "input tax" means the value-added tax
paid by a VAT-registered person/entity in the course of his/its trade or business on the importation of goods
or local purchases of goods or services from a VAT-registered person.9
On the other hand, when that person or entity sells his/its products or services, the VAT-registered taxpayer
generally becomes liable for 10% of the selling price as output VAT or output tax.10 Hence, "output tax" is the
value-added tax on the sale of taxable goods or services by any person registered or required to register
under Section 107 of the (old) Tax Code.11
The VAT system of taxation allows a VAT-registered taxpayer to recover its input VAT either by (1) passing on transactions which are subject to the 10% VAT or (2) if there are no other sales transactions subject to 10%
the 10% output VAT on the gross selling price or gross receipts, as the case may be, to its buyers, or (2) if the VAT, treat the input VAT as cost and deduct the same from income for income tax purposes.
input tax is attributable to the purchase of capital goods or to zero-rated sales, by filing a claim for a refund
or tax credit with the BIR.12 We are not persuaded.

Simply stated, a taxpayer subject to 10% output VAT on its sales of goods and services may recover its input The first remedy cannot be applied in this case. As correctly found by the CA, respondent has clearly shown
VAT costs by passing on said costs as output VAT to its buyers of goods and services but it cannot claim the that it has no "other transactions" subject to 10% VAT, and petitioner has failed to prove the existence of
same as a refund or tax credit, while a taxpayer subject to 0% on its sales of goods and services may only such "other transactions" against which to set off respondent's input VAT.14
recover its input VAT costs by filing a refund or tax credit with the BIR.
Anent the second remedy, prejudice will still, indubitably, result because treating the input VAT as an income
Here, the claimed tax credit of input tax amounting to P49,749,223.31 represents the costs or expenses tax deductible expense will yield only a partial and not full financial benefit of having the input VAT refunded
incurred by respondent in connection with its gold production. Relying on BIR Rulings, specifically VAT Ruling or used as a tax credit. We quote with approval the CA's observations in this respect, thus:
No. 378-88, dated August 28, 1988, and VAT Ruling No. 59-88, dated December 14, 1988, both of which
declared that sales of gold to the CB are considered export sales subject to 0%, respondent sold gold to the
x x x even assuming that input VAT is still available for deduction, [respondent] still suffers prejudice. As a
CB from January 1, 1988 to July 31, 1989 without passing on to the latter its input VAT costs, obviously
zero-rated taxpayer (pursuant to the 1988 to 1990 BIR issuances), [respondent] could have claimed a cash
intending to obtain a refund or credit thereof from the BIR at the end of the taxable period. However, by the
refund or tax credit of the input VAT in the amount of P49,749,223.31. If it had been allowed a cash refund or
time respondent applied for refund/credit of its input VAT costs, VAT Ruling No. 008-92 dated January 23,
tax credit, it could have used the full amount thereof to pay its other tax obligations (or, in the case of a cash
1992, treating sales of gold to the CB as domestic sales subject to 10% VAT, and VAT Ruling No. 059-92 dated
refund, to fund its operations). With VAT Ruling No. 059-92, [respondent] is precluded from claiming the cash
April 28, 1992, retroactively applying said VAT Ruling No. 008-92 to such sales made from January 1, 1988
refund or tax credit and is limited to the so-called remedy of deducting the input VAT from gross income. But
onwards, were issued. As a result, respondent's application for refund/credit was denied and, as likewise
a cash refund or tax credit is not the same as a tax deduction. A tax deduction has less benefits than a tax
found by the CA, it was even subsequently assessed deficiency output VAT on October 19, 1992 in the total
credit. Consider the following differences;
amounts of P252,283,241.95 for the year 1988, and P244,318,148.56 for the year 1989.13

2.42.1 A tax credit may be used to pay any national internal revenue tax liability. Section 104(b) of the Tax
Clearly, from the foregoing, the prejudice to respondent by the retroactive application of VAT Ruling No. 008-
Code states;
92 to its sales of gold to the CB from January 1, 1988 to July 31, 1989 is patently evident.

"(b) Excess output or input tax. - xxx Any input tax attributable to xxx zero-rated sales by a VAT-registered
Verily, by reason of the denial of its claim for refund/credit, respondent has been precluded from recovering
person may at his option be refunded or credited against other internal revenue taxes, subject to the
its input VAT costs attributable to its sales of gold to the CB during the period mentioned, for the following
provisions of Section 106."
reasons:

On the other hand, a tax deduction may be used only against gross income for purposes of income tax. A tax
First, because respondent could not pass on to the CB the 10% output VAT which would be retroactively
deduction is not allowed against other internal revenue taxes such as excise taxes, documentary stamp taxes,
imposed on said transactions, not having passed the same at the time the sales were made on the
and output VAT.
assumption that said sales are subject to 0%, and, hence, maybe refunded or credited later. And second,
because respondent could not claim the input VAT costs as a refund/credit as it has been prevented such
option, the sales in question having been retroactively subjected to 10% VAT, ergo limiting recovery of said 2.42.2 In terms of income tax, a tax deduction is only an expense item in computing income tax liabilities
costs to the application of the same against the output tax which will result therefrom. (Sections 27 to 29, Tax Code) while a tax credit is a direct credit against final income tax due (Section 106[b],
Tax Code). This is illustrated in the example below:
Indeed, respondent stands to suffer substantial economic prejudice by the retroactive application of the VAT
Ruling in question. Assume that in 1988, respondent had a gross income of P1,000,000,000 and deductible expenses in general
(such as salaries, utilities, transportation, fuel and costs of sale) of P500,000,000. Assume also that
[respondent] had input VAT of P131,741,034.22, the amount being claimed in the instant case.
But petitioner maintains otherwise, arguing that respondent will not be unduly prejudiced since there are still
[Respondent's] income tax liability, depending on whether it utilized the input tax as tax credit or tax
other available remedies for it to recover its input VAT costs. Said remedies, so petitioner points out, are for
deduction, would be as follows:
respondent to either (1) use said input taxes in paying its output taxes in connection with its other sales
A. Tax credit xxx xxx xxx

Gross Income (Section 28, Tax Code)
Deductions (Section 29, Tax Code)
Taxable Income (Section 27, Tax Code)
Tax rate (Section 24[a], Tax Code)
Tax Payable
Tax Credit
Tax due
b. Tax deduction
Gross income (Section 28, Tax Code)
Deductions
General (Section 29, Tax Code)
Input VAT (VAT Ruling No. 059-92)
Taxable income (Section 27, Tax Code)
Tax rate (Section 24[a], Tax Code)
Tax payable
Tax Credit
Tax due
P1,000,000,000.00 x x x the deduction of an expense under Section 29 of the Tax Code is not tantamount to a recovery of the
( 500,000,000.00) expense. The deduction of a bad debt, for instance, does not result in the recovery of the debt. On the other
hand, a tax credit, because it can be fully utilized to reduce tax liability, is as good as cash and is thus
P 500,000.000.00 effectively a full recovery of the input VAT cost.15(Emphasis in the original; Words in brackets supplied).
x 35%
We may add that the prejudice which befell respondent is all the more highlighted by the fact that it has
P 175,000,000.00 been issued assessments for deficiency output VAT on the basis of the same sales of gold to the CB.
(131,741,034.22)
On a final note, the Court is fully cognizant of the well-entrenched principle that the Government is not
P 43,258,965.78 estopped from collecting taxes because of mistakes or errors on the part of its agents.16 But, like other
principles of law, this also admits of exceptions in the interest of justice and fair play, as where injustice will
result to the taxpayer.17
P1,000,000,000.00
As this Court has said in ABS-CBN Broadcasting Corporation v. Court of Tax Appeals and the Commissioner of
Internal Revenue:18
P500,000,000.00
P131,741,034.22 P 631,741,034.22) The insertion of Sec. 338-A [now Sec. 246] into the National Internal Revenue Code x x x is indicative of
legislative intention to support the principle of good faith. In fact, in the United States x x x it has been held
P 368,258,966.78 that the Commissioner or Collector is precluded from adopting a position inconsistent with one previously
taken where injustice would result therefrom, or where there has been a misrepresentation to the taxpayer.
x 35%
[Word in brackets supplied].
P 128,890,638.02
Here, when respondent sold gold to the CB, it relied on the formal assurances of the BIR, i.e., VAT Ruling No.
-
378-88 dated August 28, 1988 and VAT Ruling RMC No. 59-88 dated December 14, 1988, that such sales are
______________ zero-rated. To retroact a later ruling - VAT Ruling No. 008-92 - revoking the grant of zero-rating status to the
sales of gold to the CB and applying a new and contrary position that such sales are now subject to 10%, is
P 128,890,638.02 clearly inconsistent with justice and the elementary requirements of fair play.

Thus, if the input VAT of P131,741,034.22 were to be credited against the income tax due, the income tax
payable is only P43,258,965.78. On the other hand, if the input VAT were to be deducted from gross income
before arriving at the net income, the income tax payable is P128,890,638.02. This is almost three (3) times
the income tax payable if the input VAT were to be deducted from the income tax payable.
As can be seen from above, there is a substantial difference between a tax credit and a tax deduction. A tax
credit reduces tax liability while a tax deduction only reduces taxable income (emphasis supplied).
Accordingly, we find that the CA did not commit a reversible error in holding that VAT Ruling No. 008-92
cannot be retroactively applied to respondent's sales of gold to the CB during the period January 1, 1988 to
July 31, 1989, hence, it is entitled to tax credit in the amount of P49,749,223.31 attributable to such sales.
IN VIEW WHEREOF, the instant petition is DENIED and the assailed CA Resolutions are AFFIRMED.
No costs.

A tax credit of input VAT fully utilizes the entire amount of P131,741,034.22, since tax liability is reduced by SO ORDERED.
the said amount. A tax deduction is not fully utilized because the savings is only 35% or P46,109,361.98. In
the above case, therefore, the use of input VAT as a tax deduction results in a loss of 65% of the input VAT,
or P85,631,672.24, which [respondent] could have otherwise fully utilized as a tax credit.
i. Source of Input Tax
 1. Purchase or Importation of Goods
2. Purchase of real properties
3. Purchase of services
4. Transactions deemed sale
5. Presumptive input
6. Transitional input
G.R. No.173425 January 22, 2013
FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and REVENUE DISTRICT OFFICER, REVENUE DISTRICT NO. 44, T AGUIG
and PATEROS, BUREAU OF INTERNAL REVENUE, Respondents.
RESOLUTION
DEL CASTILLO, J.:
This resolves respondents' Motion for Reconsideration.1 Respondents raise the following arguments: "1) Prior
payment of tax is inherent in the nature and payment of the 8% transitional input tax; 2 2) Revenue
Regulations No. 7-95 providing for 8% transitional input tax based on the value of the improvements on the
real properties is a valid legislative rule;3 3) For failure to clearly prove its entitlement to the transitional input
tax credit, petitioner's claim for tax refund must fail in light of the basic doctrine that tax refund partakes of
the nature of a tax exemption which should be construed strictissimi juris against the taxpayer." 4
We deny with finality the Motion for Reconsideration filed by respondents; the basic issues presented have
already been passed upon and no substantial argument has been adduced to warrant the reconsideration
sought.
In his Dissent, Justice Carpio cites four grounds as follows: "first, petitioner is not entitled to any refund of
input [Value-added tax] VAT, since the sale by the national government of the Global City land to petitioner
was not subject to any input VAT; second, the Tax Code does not allow any cash refund of input VAT, only a
tax credit; third, even for zero-rated or effectively zero-rated VAT-registered taxpayers, the Tax Code does
not allow any cash refund or credit of transitional input tax; and fourth, the cash refund, not being supported
by any prior actual tax payment, is unconstitutional since public funds will be used to pay for the refund
which is for the exclusive benefit of petitioner, a private entity."5
At the outset, it must be pointed out that all these arguments have already been extensively discussed and
argued, not only during the deliberations but likewise in the exchange of comments/opinions.
Nevertheless, we will discuss them again for emphasis. First argument: "Petitioner is not entitled to any
refund of input VAT since the sale by the national government of the Global City land to petitioner was not
subject to any input VAT."6
Otherwise stated, it is argued that prior payment of taxes is a prerequisite before a taxpayer could avail of
the transitional input tax credit.
This argument has long been settled. To reiterate, prior payment of taxes is not necessary before a taxpayer
could avail of the 8% transitional input tax credit. This position is solidly supported by law and jurisprudence,
viz:
First. Section 105 of the old National Internal Revenue Code (NIRC) clearly provides that for a
taxpayer to avail of the 8% transitional input tax credit, all that is required from the taxpayer is to
file a beginning inventory with the Bureau of Internal Revenue (BIR). It was never mentioned in
Section 105 that prior payment of taxes is a requirement. For clarity and reference, Section 105 is
reproduced below:
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 onsuch
goods, materials and supplies, whichever is higher, which shall be creditable against the output tax.
(Emphasis supplied.)
Second. Since the law (Section 105 of the NIRC) does not provide for prior payment of taxes, to
require it now would be tantamount to judicial legislation which, to state the obvious, is not
allowed.
Third. A transitional input tax credit is not a tax refund per se but a tax credit. Logically, prior
payment of taxes is not required before a taxpayer could avail of transitional input tax credit. As we
have declared in our September 4, 2012 Decision,7 "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. Tax credit, on the other hand, is an amount subtracted directly from one’s total tax
liability. It is any amount given to a taxpayer as a subsidy, a refund, or an incentive to encourage
investment."8
Fourth. The issue of whether prior payment of taxes is necessary to avail of transitional input tax
credit is no longer novel. It has long been settled by jurisprudence. In fact, in the earlier case of Fort
Bonifacio Development Corporation v. Commissioner of Internal Revenue,9 this Court had already
ruled that—
x x x. 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.10
Fifth. Moreover, in Commissioner of Internal Revenue v. Central Luzon Drug Corp.,11 this Court had
already declared that prior payment of taxes is not required in order to avail of a tax
credit.12 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.13
Second and third arguments: "The Tax Code does not allow any cash refund of input VAT, only a tax credit;"
and "even for zero-rated or effectively zero-rated VAT-registered taxpayers, the Tax Code does not allow any
cash refund or credit of transitional input tax."14
Citing Sections 110 and 112 of the Tax Code, it is argued that the Tax Code does not allow a cash refund, only
a tax credit.
This is inaccurate.
First. Section 112 of the Tax Code speaks of zero-rated or effectively zero-rated sales. Notably, the
transaction involved in this case is not zero-rated or effectively zero-rated sales.
Second. A careful reading of Section 112 of the Tax Code would show that it allows either a cash refund or a
tax credit for input VAT on zero-rated or effectively zero-rated sales. For reference, Section 112 is herein
quoted, viz:
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: x x x. (Emphasis supplied.)
Third. Contrary to the Dissent, Section 112 of the Tax Code does not prohibit cash refund or tax credit of
transitional input tax in the case of zero-rated or effectively zero-rated VAT registered taxpayers, who do not
have any output VAT. The phrase "except transitional input tax" in Section 112 of the Tax Code was inserted
to distinguish creditable input tax from transitional input tax credit. Transitional input tax credits are input
taxes on a taxpayer’s beginning inventory of goods, materials, and supplies equivalent to 8% (then 2%) or the
actual VAT paid on such goods, materials and supplies, whichever is higher. It may only be availed of once by
first-time VAT taxpayers. Creditable input taxes, on the other hand, are input taxes of VAT taxpayers in the
course of their trade or business, which should be applied within two years after the close of the taxable
quarter when the sales were made.
Fourth. As regards Section 110, while the law only provides for a tax credit, a taxpayer who erroneously or
excessively pays his output tax is still entitled to recover the payments he made either as a tax credit or a tax
refund. In this case, since petitioner still has available transitional input tax credit, it filed a claim for refund to
recover the output VAT it erroneously or excessively paid for the 1st quarter of 1997. Thus, there is no reason
for denying its claim for tax refund/credit.
Fifth. Significantly, the dispositive portion of our September 4, 2012 Decision 15 directed the respondent
Commissioner of Internal Revenue (CIR) to either refund the amount paid as output VAT for the 1st quarter
of 1997 or to issue a tax credit certificate. We did not outrightly direct the cash refund of the amount
claimed, thus:
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.16
Sixth. Notably, in the earlier case of Fort Bonifacio, we likewise directed the respondent to either refund or
issue a tax credit certificate. It bears emphasis that this Decision already became final and executory and
entry of judgment was made in due course. The dispositive portion of our Decision in said case reads:
WHEREFORE, the petitions are GRANTED. The assailed decisions of the Court of Tax Appeals and the Court of
Appeals are REVERSED and SET ASIDE. Respondents are hereby (1) restrained from collecting from petitioner
the amount of ₱28,413,783.00 representing the transitional input tax credit due it for the fourth quarter of
1996; and (2) directed to refund to petitioner the amount of ₱347,741,695.74 paid as output VAT for the
third quarter of 1997 in light of the persisting transitional input tax credit available to petitioner for the said
quarter, or to issue a tax credit corresponding to such amount. No pronouncement as to costs.17
Clearly, the CIR has the option to return the amount claimed either in the form of tax credit or refund.
Fourth argument. "The cash refund, not being supported by any prior actual tax payment, is unconstitutional
since public funds will be used to pay for the refund which is for the exclusive benefit of petitioner, a private
entity."18
Otherwise stated, it is argued that the refund or issuance of tax credit certificate violates the mandate in
Section 4(2) of the Government Auditing Code of the Philippines that "Government funds or property shall be
spent or used solely for public purposes." Again, this is inaccurate. On the contrary, the grant of a refund or
issuance of tax credit certificate in this case would not contravene the above provision. The refund or tax
credit would not be unconstitutional because it is precisely pursuant to Section 105 of the old NIRC which
allows refund/tax credit.
Final Note
As earlier mentioned, the issues in this case are not novel. These same issues had been squarely ruled upon
by this Court in the earlier Fort Bonifacio case. This earlier Fort Bonifacio case already attained finality and
entry of judgment was already made in due course. To reverse our Decision in this case would logically affect
our Decision in the earlier Fort Bonifacio case. Once again, this Court will become an easy target for charges
of "flip-flopping."
ACCORDINGLY, the Motion for Reconsideration is DENIED with FINALITY, the basic issues presented having
been passed upon and no substantial argument having been adduced to warrant the reconsideration sought.
No further pleadings or motions shall be entertained in this case. Let entry of final judgment be made in due
course.
SO ORDERED.
ii. Who can avail of input tax credit
G.R. No. 190021 October 22, 2014
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR MINDANAO, INC., Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari1 are the Decision2 dated August 13, 2009 and the
Resolution3 dated October 22, 2009 of the Court of Tax Appeals (CTA) En Banc in C.T.A. EB No. 487 which
affirmed the Decision4dated September 17, 2008 and the Resolution5 dated April 13, 2009 of the CTA First
Division in C.T.A. Case No. 6220 granting respondent Burmeister and Wain Scandinavian Contractor
Mindanao, Inc. (respondent) a refund of its unutilized input taxes attributable to zero-rated sales of services
for the fourth quarter of taxable year 1998.
The Facts
Respondent is a corporation duly organized and existing under the laws of the Philippines, and primarily
engaged in the business of constructing, erecting, assembling, commissioning, operating, maintaining,
rehabilitating, and managing industrial and power-generating plants and related facilities for the conversion
intoelectricity of coal distillate, and other fuels, provided by and under contract with the Philippine
Government, or any government-owned and controlled corporations, or other entities engaged in the
development, supply, or distribution of electricity.6 It is registered as a value-added tax (VAT) taxpayer.7
Respondent subcontracted from a consortium8 of non-resident foreign corporations the actual operation and
maintenance of two 100-megawatt power barges owned by the National Power Corporation, which services
are subject to zero percent (0%) VAT, pursuant to Bureau of Internal Revenue (BIR) Ruling No. 023-95 issued
on February 14, 1995, that was reconfirmed on January 7, 1999 in its VAT Review Committee Ruling No. 003-
99.9
On January 21, 1999, respondent filed its Quarterly VAT Return for the fourth quarter of taxable year1998
indicating zero-rated sales of ₱68,761,361.50 and input VAT of ₱1,834,388.55 paid on its domestic purchases
of goods and services for the same period.10
On July 21, 1999, respondent filed an Application for Tax Credit/Refund of VAT Paid for the period July to
December 1998 in the amount of 4,154,969.51, which was not acted upon by herein petitioner, the
Commissioner of Internal Revenue (CIR).11
On January 9, 2001, respondent filed a petition for review before the CTA, praying for the refund or the
issuance of a tax credit certificate in the amount of ₱1,834,388.55 representing its alleged unutilized input
VAT payment for the fourth quarter of 1998. The petition was denied on January 29, 2003 due to
insufficiency of evidence. However, on appeal before the Court of Appeals (CA), docketed as CA-G.R. SP No.
79272, the case was remanded to the CTA on April 19, 2005 for the reception of respondent’s evidence
consisting of VAT invoices and receipts which had not been submitted earlier, but were already attached to
its motion for reconsideration of the denial of the CTA petition.12
The CTA First Division Ruling
On September 17, 2008, after due trial, the CTA First Division rendered a Decision13 in C.T.A. Case No. 6220
ordering the CIR to refund or issue a tax credit certificate infavor of respondent in the reduced amount of
₱1,556,913.68 representing the latter’s valid claim. It was determined that the administrative claim filed on
July21, 1999 and the petition for review filed on January 9, 2001 fell within the two-year prescriptive period
reckoned from January 21,1999, the date when respondent filed its Quarterly VAT Return for the fourth
quarter of taxable year 1998.14
The CIR moved for the reconsideration of the aforesaid CTA First Division Decision, but was denied in a
Resolution15 dated April 13, 2009.
Undaunted, the CIR elevated the case to the CTA En Banc on petition for review, docketed as C.T.A. EB No.
487, lamenting the alleged failure on the part of respondent to comply with the periods mandated under
Section 112 of Republic Act No. (RA) 8424,16 otherwise known as the Tax Reform Act of 1997. From the time
the administrative claim for refund was filed on July 21, 1999, the CIR had 120 days, or until November 18,
1999, to act on the application, failing in which, respondent may elevate the case before the CTA within 30
days from November 18, 1999, or until December 18, 1999. However, respondent filed its judicial claim only
on January 9, 2001.
The CTA En BancRuling
In a Decision17 dated August 13, 2009, the CTA En Banc dismissed the petition holding that the CIR could not
raise for the first time on appeal the issue of prescription in the filing of respondent’s judicial claim for
refund, viz.:
It is worthy to note that the present case was remanded from the CA to the CTA ordering the latter to admit
and consider the VAT receipts and invoices attached to respondent’s Motion for Reconsideration to
determine respondent’s claim for refund. During the proceedings before the CA until this case was remanded
to the CTA, [CIR] never questioned the period within which the respondent’s judicial claim for refund was
filed. When the CTA First Division partially granted respondent’s judicial claim for refund, [the CIR]
immediately filed his Motion for Reconsideration to which he neither mentioned nor raised the issue of
prescription. More than eight years have lapsed before the [CIR] brought the issue of prescription and was
questioned only now at the CTAen banclevel after an unfavorable judgment was issued against him.18
The CIR filed a motion for reconsideration but was likewise denied in a Resolution19 dated October 22, 2009
for lack of merit, hence, the present petition.
The Issue Before the Court
The lone issue for the Court’s resolution is whether or not the CTA En Banc correctly dismissed the petition
for review on the ground that the issue of prescription was belatedly raised.
The Court’s Ruling
The petition is meritorious.
Section 112 of RA 8424,20 which was in force at the time of the filing of respondent’s claim for credit or
refund of its creditable input tax, pertinently reads as follows:
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 x x x.
xxxx
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. – In proper cases, the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one
hundred twenty (120) daysfrom 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.21 (Emphases supplied)
It should be recalled that the CTA First Division declared in its September 17, 2008 Decision that the
administrative claim filed on July 21, 1999 and the petition for review filed on January 9, 2001 fell within the
twoyear prescriptive period reckoned from January 21, 1999, the date when respondent filed its Quarterly
VAT Returnfor the fourth quarter of taxable year 1998.22
The CIR argues, on the other hand, that the two-year period for filing both the administrative and judicial
claims should be reckoned from the close of the fourth taxable quarter when the relevant sales were made,
which fell on December 31, 1998. As such, respondent only had until December 31, 2000 to file both its
administrative and judicial claims.23 While it filed its administrative claim on July 21, 1999 within the two-year
prescriptive period, the same is not true with the petition for review that was filed with the CTA only on
January 9, 2001.24 To support its contention, the CIR cited the case of CIR v. Mirant Pagbilao Corp.25 (Mirant).
To resolve the matter, the Court deems it fit to briefly discuss the doctrinal metamorphosis of the two-year
prescriptive period provided under Section 112 (A) as above-cited.
In the case of Atlas Consolidated Mining and Dev’t. Corp. v. CIR26 (Atlas), which was promulgated on June 8,
2007, the two-year prescriptive period stated in Section 112 (A)27 was counted from the date of payment of
the output VAT.28 At that time, the output VAT must be paid at the time of filing of the quarterly tax returns,
which meant within 20 days following the end of each quarter.29 However, on September 12, 2008, the Atlas
doctrine was abandoned in the case of Mirant which adopted the verba legis rule and counted the two-year
prescriptive period from the "close of the taxable quarter when the sales were made" as expressly stated in
the law,30 regardless when the input VAT was paid.31 In the recent case of CIR v. San Roque Power
Corporation32 (San Roque), promulgated on February 12, 2013, the Court clarified that (a) the Atlasdoctrine
was effective only from its promulgation on June 8, 2007 until its abandonment on September 12, 2008 in
Mirant, and (b) prior to the Atlas doctrine, Section 112 (A) should be applied following the verba legisrule
adopted in Mirant.33
Thus, applying Section 112 (A) strictly as worded, it may then be concluded that the administrative claim filed
by respondent on July 21, 1999 was filed within the two-year prescriptive period reckoned from the close of
the fourth taxable quarter falling on December 31, 1998, the last day of filing being December 31, 2000.
In fact, whether the two-year prescriptive period is counted from the date of payment (January 21, 1999) of
the output VAT following Atlas, or from the close of the taxable quarter when the sales weremade
(December 31, 1998) pursuant to Mirant, the conclusion that the administrative claim was timely filed would
equally stand.
The CIR insists, however, that both the administrative and judicial claims should fall within the two-year
prescriptive period. This argument is untenable.
It should be pointed out that on October 6, 2010, the Court held in the case of CIR v. Aichi Forging Company
of Asia, Inc.34 (Aichi) that 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.35 The Court gave three (3) compelling reasons for this ruling in San Roque, namely:
First, Section 112(A) clearly, plainly, and unequivocally provides that the taxpayer "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 the creditable input tax due or paid to such sales." In short, the law states that the
taxpayer may apply with the Commissioner for a refund or credit "within two (2) years," which means at
anytime within two years. Thus, the application for refund or credit may be filed by the taxpayer with the
Commissioner on the last day of the two-year prescriptive period and it will still strictly comply with the law.
The twoyear prescriptive period is a grace period in favor of the taxpayer and he can avail of the full period
before his right to apply for a tax refund or credit is barred by prescription.
Second, Section 112(C) provides that the Commissioner shall decide the application for refund orcredit
"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)." The reference in Section 112(C) of the submission of
documents "in support of the application filed in accordance with Subsection A" means that the application in
Section 112(A) is the administrative claim that the Commissioner must decide within the 120-day period. In
short, the twoyear prescriptive period in Section 112(A) refers to the period within which the taxpayer can
file an administrative claim for tax refund or credit. Stated otherwise, the two-year prescriptive period does
not refer to the filing of the judicial claim with the CTA but to the filing of the administrative claim with the
Commissioner. x x x.
Third, if the 30-day period, or any part of it, is required to fall within the two-year prescriptive period
(equivalent to 730 days), then the taxpayer must file his administrative claim for refund or credit within the
first 610 days of the two-year prescriptive period. Otherwise, the filing of the administrative claim beyond the
first 610 days will result in the appeal to the CTA being filed beyond the two-year prescriptive period. Thus, if
the taxpayer files his administrative claim on the 611th day, the Commissioner, with his 120-day period, will
have until the 731st day to decide the claim. If the Commissioner decides only on the 731st day, or does not
decide at all, the taxpayer can no longer file his judicial claim with the CTA because the two-year prescriptive
period (equivalent to 730 days) has lapsed. The 30-day period granted by law to the taxpayer to file an appeal
before the CTA becomes utterly useless, even if the taxpayer complied with the law by filing his
administrative claim within the two-year prescriptive period.36 (Emphases in the original)
In fine, the taxpayer can file its administrative claim for refund or credit at any time within the two-year
prescriptive period. If it files its claim on the last day of said period, it is still filed on time. 37 The CIR will have
120 days from such filing to decide the claim. If the CIR decides the claim on the 120th day, or does not
decide it on that day, the taxpayer still has 30 days to file its judicial claim with the CTA; 38 otherwise, the
judicial claim would be, properly speaking, dismissed for being filed out of time and not, as the CTA En
Bancputs it, prescribed.
It bears emphasis that Section 112 (D)39 (now renumbered as Section 112[C]) of RA 8424, which is explicit on
the mandatory and jurisdictional natureof the 120+30-day period, was already effective on January 1,
1998.40 Hence, it is of no consequence that the Aichiand San Roque rulings were not yet in existence when
respondent’s administrative claim was filed in 1999, so as to rid itself of the said section’s mandatory and
jurisdictional application.
That being said, and notwithstanding the fact that respondent’s administrative claim had been timely filed,
the Court is nonetheless constrained to deny the averred tax refund or credit, as its judicial claim therefor
was filed beyond the 120+30-day period, and, hence – as earlier stated – deemed to be filed out of time.
As the records would show, the CIR had 120 days from the filing of the administrative claim on July 21, 1999,
or until November 18, 1999, to decide on respondent’s application. Since the CIR did not act at all,
respondent had until December 18, 1999, the last day of the 30-day period, to file its judicial claim. However,
respondent filed its petition for review with the CTA only on January 9, 2001 and, thus, was one (1) year and
22 days late. As a consequence of the late filing of said petition, the CTA did not properly acquire jurisdiction
over the claim.41
In this relation, it is significant to point out that the CTA, being a court of special jurisdiction, can take
cognizance only of matters that are clearly within its jurisdiction. Section 7 of RA 1125, 42 as amended by RA
9282,43 specifically provides:
SEC. 7. Jurisdiction. — The CTA shall exercise:
(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:
(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue Code or other laws administered by the
Bureau of Internal Revenue;
(2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue Code or other laws administered by the
Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific period
of action, in which case the inaction shall be deemed a denial;
x x x x (Emphasis supplied)
The inaction of the CIR on the claim during the 120-day period is, by express provision of law, "deemed a
denial" of such claim, and the failure of the taxpayer to file its judicial claim within 30 days from the
expiration of the 120-day period shall render the "deemed a denial" decision of the CIR final and
inappealable. The right to appeal to the CTA from a decision or "deemed a denial" decision of the
Commissioner is merely a statutory privilege, not a constitutional right. The exercise of such statutory
privilege requires strict compliance with the conditions attached by the statute for its exercise.44 Thus,
respondent's failure to comply with the statutory conditions is fatal to its claim. This is so, notwithstanding
the fact that the CIR, for his part, failed to raise the issue of non-compliance with the mandatory periods at
the earliest opportunity.
In the case of Nippon Express (Philippines) Corporation v. CJR,45 the Court ruled that, because the 120+ 30-
day period is jurisdictional, the issue of whether the taxpayer complied with the said time frame may be
broached at any stage, even on appeal. Well-settled is the rule that the question of jurisdiction over the
subject matter can be raised at any time during the proceedings. Jurisdiction cannot be waived because it is
conferred by law and is not dependent on the consent or objection or the acts or omissions of the parties or
any one of them.46 Therefore, respondent's contention on this score is of no moment.1âwphi1
Indeed, it has been pronounced time and again that taxes are the lifeblood of the government and,
consequently, tax laws must be faithfully and strictly implemented as they are not intended to he liberally
construed.47 Hence, with this in mind and in light of the foregoing considerations, the Court so holds that the
CTA En Banc committed reversible error when it granted respondent's claim for refund or tax credit despite
its noncompliance with the mandatory periods under Section 112 (D) (now renumbered as Section 112[C]) of
RA 8424. Accordingly, the claim for refund/tax credit must be denied.
WHEREFORE, the petition is GRANTED. The Decision dated August 13, 2009 and the Resolution dated
October 22, 2009 of the Court of Tax Appeals (CTA) En Banc in C.T.A. EB No. 487 are hereby REVERSED and
SET ASIDE. Respondent Burmeister and Wain Scandinavian Contractor Mindanao, Inc.'s judicial claim for
refund or tax credit through its petition for review before the CTA is DENIED.
SO ORDERED.
iii. Determination of output tax
l. Invoicing requirements
G.R. No. 179632 October 19, 2011
SOUTHERN PHILIPPINES POWER CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
ABAD, J.:
The case is about the sufficiency of sales invoices and receipts, which do not have the words "zero-rated"
imprinted on them, to evidence zero-rated transactions, a requirement in taxpayer’s claim for tax credit or
refund.
The Facts and the Case
Petitioner Southern Philippines Power Corporation (SPP), a power company that generates and sells
electricity to the National Power Corporation (NPC), applied with the Bureau of Internal Revenue (BIR) for
zero-rating of its transactions under Section 108(B)(3) of the National Internal Revenue Code (NIRC). The BIR
approved the application for taxable years 1999 and 2000.
On June 20, 2000 SPP filed a claim with respondent Commissioner of Internal Revenue (CIR) for a
₱5,083,371.57 tax credit or refund for 1999. On July 13, 2001 SPP filed a second claim of ₱6,221,078.44 in tax
credit or refund for 2000. The amounts represented unutilized input VAT attributable to SPP’s zero-rated sale
of electricity to NPC.
On September 29, 2001, before the lapse of the two-year prescriptive period for such actions, SPP filed with
the Court of Tax Appeals (CTA) Second Division a petition for review covering its claims for refund or tax
credit. The petition claimed only the aggregate amount of ₱8,636,126.75 which covered the last two quarters
of 1999 and the four quarters in 2000.
In his Comment on the petition, the CIR maintained that SPP is not entitled to tax credit or refund since (a)
the BIR was still examining SPP’s claims for the same; (b) SPP failed to substantiate its payment of input VAT;
(c) its right to claim refund already prescribed, and (d) SPP has not shown compliance with Section 204(c) in
relation to Section 229 of the NIRC as amended and Revenue Regulation (RR) 5-87 as amended by RR 3-88.
In a Decision dated April 26, 2006, the Second Division1 denied SPP’s claims, holding that its zero-rated
official receipts did not correspond to the quarterly VAT returns, bearing a difference of ₱800,107,956.61.
Those receipts only support the amount of ₱118,945,643.88. Further, these receipts do not bear the words
"zero-rated" in violation of RR 7-95. The Second Division denied SPP’s motion for reconsideration on August
15, 2006.
On appeal, the CTA En Banc affirmed the Second Division’s decision dated July 31, 2007. 2 The CTA En Banc
rejected SPP’s contention that its sales invoices reflected the words "zero-rated," pointing out that it is on the
official receipts that the law requires the printing of such words. Moreover, SPP did not report in the
corresponding quarterly VAT return the sales subject of its zero-rated receipts. The CTA En Banc denied SPP’s
motion for reconsideration on September 19, 2007.
The Issues Presented
The case presents the following issues:
1. Whether or not the CTA En Banc correctly rejected the invoices that SPP presented and, thus,
ruled that it failed to prove the zero-rated or effectively zero-rated sales that it made;
2. Whether or not the CTA En Banc correctly ruled that the words "BIR-VAT Zero Rate Application
Number 419.2000" imprinted on SPP’s invoices did not comply with RR 7-95;
 3. Whether or not the CTA En Banc correctly held that SPP should have declared its zero-rated sales
in its VAT returns for the subject period of the claim; and
4. Whether or not the CTA En Banc correctly ruled that SPP was not entitled to a tax refund or
credit.
The Court’s Rulings
One and Two. The Court reiterated in San Roque Power Corporation v. Commissioner of Internal
Revenue3 the following criteria governing claims for refund or tax credit under Section 112(A) of the NIRC:
(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.
While acknowledging that SPP’s sale of electricity to NPC is a zero-rated transaction,4 the CTA En Banc ruled
that SPP failed to establish that it made zero-rated sales. True, SPP submitted official receipts and sales
invoices stamped with the words "BIR VAT Zero-Rate Application Number 419.2000" but the CTA En Banc
held that these were not sufficient to prove the fact of sale.
But NIRC Section 110 (A.1) provides that the input tax subject of tax refund is to be evidenced by a VAT
invoice "or" official receipt issued in accordance with Section 113. Section 113 has been amended by
Republic Act (R.A.) 9337 but it is the unamended version that covers the period when the transactions in this
case took place. It reads:
Section 113. Invoicing and Accounting Requirements for VAT-Registered Persons. –
A. Invoicing Requirements. – A VAT-registered person shall, for every sale, issue an invoice or receipt. In
addition to the information required under Section 237, the following information shall be indicated in the
invoice or receipt:
(1) A statement that the seller is a VAT-registered person, followed by his taxpayer’s identification
number (TIN); and
(2) The total amount which the purchaser pays or is obligated to pay to the seller with the
indication that such amount includes the value-added tax. (Emphasis supplied)
The above does not distinguish between an invoice and a receipt when used as evidence of a zero-rated
transaction. Consequently, the CTA should have accepted either or both of these documents as evidence of
SPP’s zero-rated transactions.
Section 237 of the NIRC also makes no distinction between receipts and invoices as evidence of a commercial
transaction:
SEC. 237. Issuance of Receipts or Sales or Commercial Invoices.– All persons subject to an internal revenue
tax shall, for each sale or transfer of merchandise or for services rendered valued at Twenty-five pesos
(₱25.00) or more, issue duly registered receipts or sales or commercial invoices, prepared at least in
duplicate, showing the date of transaction, quantity, unit cost and description of merchandise or nature of
service: Provided, however, That in the case of sales, receipts or transfers in the amount of One hundred
pesos (₱100.00) or more, or regardless of the amount, where the sale or transfer is made by a person liable
to value-added tax to another person also liable to value-added tax; or where the receipt is issued to cover
payment made as rentals, commissions, compensations or fees, receipts or invoices shall be issued which
shall show the name, business style, if any, and address of the purchaser, customer or client: Provided,
further, That where the purchaser is a VAT-registered person, in addition to the information herein required,
the invoice or receipt shall further show the Taxpayer Identification Number (TIN) of the purchaser.
The original of each receipt or invoice shall be issued to the purchaser, customer or client at the time the
transaction is effected, who, if engaged in business or in the exercise of profession, shall keep and preserve
the same in his place of business for a period of three (3) years from the close of the taxable year in which
such invoice or receipt was issued, while the duplicate shall be kept and preserved by the issuer, also in his
place of business, for a like period.
The Commissioner may, in meritorious cases, exempt any person subject to internal revenue tax from
compliance with the provisions of this Section. (Emphasis supplied)
The Court held in Seaoil Petroleum Corporation v. Autocorp Group5 that business forms like sales invoices are
recognized in the commercial world as valid between the parties and serve as memorials of their business
transactions. And such documents have probative value.
Three. The CTA also did not accept SPP’s official receipts due to the absence of the words "zero-rated" on it.
The omission, said that court, made the receipts non-compliant with RR 7-95, specifically Section 4.108.1. But
Section 4.108.1 requires the printing of the words "zero-rated" only on invoices, not on official receipts:
Section 4.108-1. Invoicing Requirements. — All VAT-registered persons shall, for every sale or lease of goods
or properties or services, issue duly registered receipts or sales or commercial invoices which must show:
1. The name, TIN and address of seller;
2. Date of transaction;
3. Quantity, unit cost and description of merchandise or nature of service;
4. The name, TIN, business style, if any, and address of the VAT-registered purchaser, customer or
client;
5. The word "zero-rated" imprinted on the invoice covering zero-rated sales; and
6. The invoice value or consideration.
x x x x (Emphasis supplied)
Actually, it is R.A. 9337 that in 2005 required the printing of the words "zero-rated" on receipts. But, since the
receipts and invoices in this case cover sales made from 1999 to 2000, what applies is Section 4.108.1 above
which refers only to invoices.
A claim for tax credit or refund, arising out of zero-rated transactions, is essentially based on excess payment.
In zero-rating a transaction, the purpose is not to benefit the person legally liable to pay the tax, like SPP, but
to relieve exempt entities like NPC which supplies electricity to factories, offices, and homes, from having to
shoulder the tax burden that ultimately would be passed to the public.
The principle of solutio indebiti should govern this case since the BIR received something that it was not
entitled to. Thus, it has to return the same. The government should not use technicalities to hold on to
money that does not belong to it.6 Only a preponderance of evidence is needed to grant a claim for tax
refund based on excess payment.7
Notably, SPP does no other business except sell the power it produces to NPC, a fact that the CIR did not
contest in the parties’ joint stipulation of facts.8 Consequently, the likelihood that SPP would claim input taxes
paid on purchases attributed to sales that are not zero-rated is close to nil.
Four. The Court finds that SPP failed to indicate its zero-rated sales in its VAT returns. But this is not sufficient
reason to deny it its claim for tax credit or refund when there are other documents from which the CTA can
determine the veracity of SPP’s claim.1avvphi1
Of course, such failure if partaking of a criminal act under Section 255 of the NIRC could warrant the criminal
prosecution of the responsible person or persons. But the omission does not furnish ground for the outright
denial of the claim for tax credit or refund if such claim is in fact justified.
Five. The CTA denied SPP’s claim outright for failure to establish the existence of zero-rated sales,
disregarding SPP’s sales invoices and receipts which evidence them. That court did not delve into the
question of SPP’s compliance with the other requisites provided under Section 112 of the NIRC.
Consequently, even as the Court holds that SPP’s sales invoices and receipts would be sufficient to prove its
zero-rated transactions, the case has to be remanded to the CTA for determination of whether or not SPP has
complied with the other requisites mentioned. Such matter involves questions of fact and entails the need to
examine the records. The Court is not a trier of facts and the competence needed for examining the relevant
accounting books or records is undoubtedly with the CTA.
WHEREFORE, the Court GRANTS the petition, SETS ASIDE the Court of Tax Appeals En Banc decision dated
July 31, 2007 and resolution dated September 19, 2007, and REMANDS the case to the Court of Tax Appeals
Second Division for further hearing as stated above.
SO ORDERED.
m. Filing of return and payment
February 22, 2017
G.R. No. 221590
COMMISSIONER OF INTERNAL REVENUE, Petitioner
vs.
ASALUS CORPORATION, Respondent
DECISION
MENDOZA, J.:
This petition for review on certiorari seeks to reverse and set aside the July 30, 2015 Decision1 and the
November 6, 2015 Resolution2 of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 1191, which affirmed
the April 2, 2014 Decision3 of the CTA Third Division (CTA Division).
The Antecedents
On December 16, 2010, respondent Asalus Corporation (Asalus) received a Notice of Informal Conference
from Revenue District Office (RDO) No. 47 of the Bureau of Internal Revenue (BIR). It was in connection with
the investigation conducted by Revenue Officer Fidel M. Bañares II (Bañares) on the Value-Added
Tax (VAT) transactions of Asalus for the taxable year 2007.4 Asalus filed its Letter-Reply,5 dated December 29,
2010, questioning the basis of Bañares' computation for its VAT liability.
On January 10, 2011, petitioner Commissioner of Internal Revenue (CIR) issued the Preliminary Assessment
Notice (PAN) finding Asalus liable for deficiency VAT for 2007 in the aggregate amount of ₱413, 378, 058.11,
inclusive of surcharge and interest. Asalus filed its protest against the PAN but it was denied by the CIR. 6
On August 26, 2011, Asalus received the Formal Assessment Notice (FAN) stating that it was liable for
deficiency VAT for 2007 in the total amount of ₱95,681,988.64, inclusive of surcharge and interest.
Consequently, it filed its protest against the FAN, dated September 6, 2011. Thereafter, Asal us filed a
supplemental protest stating that the deficiency VAT assessment had prescribed pursuant to Section 203 of
the National Internal Revenue Code (NIRC).7
On October 16, 2012, Asal us received the Final Decision on Disputed Assessment8 (FDDA) showing VAT
deficiency for 2007 in the aggregate amount of ₱106,761,025.17, inclusive of surcharge and interest and
₱25,000.00 as compromise penalty. As a result, it filed a petition for review before the CTA Division.
The CTA Division Ruling
In its April 2, 2014 Decision, the CT A Division ruled that the VAT assessment issued on August 26, 2011 had
prescribed and consequently deemed invalid. It opined that the ten (10)-year prescriptive period under
Section 222 of the NIRC was inapplicable as neither the FAN nor the FDDA indicated that Asalus had filed a
false VAT return warranting the application of the ten (10)-year prescriptive period. It explained that it was
only in the PAN where an allegation of false or fraudulent return was made. The CTA stressed that after
Asalus had protested the PAN, the CIR never mentioned in both the FAN and the FDDA that the prescriptive
period would be ten (10) years. It further pointed out that the CIR failed to present evidence regarding its
allegation of fraud or falsity in the returns.
The CTA wrote that "the three instances where the three-year prescriptive period will not apply must always
be alleged and established by clear and convincing evidence and should not be anchored on mere
conjectures and speculations,9 before the ten (10) year prescriptive period could be considered. Thus, it
disposed:
WHEREFORE, the instant Petition for Review is hereby GRANTED. Accordingly, the deficiency VAT assessment
for taxable year 2007 and the compromise penalty are hereby CANCELLED and WITHDRAWN, on ground of
prescription.
SO ORDERED.10
The CIR moved for reconsideration but its motion was denied.
The CTA En Banc Ruling
In its July 30, 2015 Decision, the CTA En Banc sustained the assailed decision of the CT A Division and
dismissed the petition for review filed by the CIR. It explained that there was nothing in the FAN and the
FDDA that would indicate, the non-application of the three (3) year prescriptive period under Section 203 of
the NIRC. It found that the CIR did not present any evidence during the trial to substantiate its claim of falsity
in the returns and again missed its chance to do so when it failed to file its memorandum before the CTA
Division.
The CTA En Banc further explained that the PAN alone could not be used as a basis because it was not the
assessment contemplated by law. Consequently, the allegation of falsity in Asalus' tax returns could not be
considered as it was not reiterated in the FAN. The dispositive portion thus reads:
WHEREFORE, premises considered, the present Petition for Review is hereby DENIED, and accordingly,
DISMISSED for lack of merit.
SO ORDERED.11
The CIR sought the reconsideration of the decision of the CTA En Banc, but the latter upheld its decision in its
November 6, 2015 resolution.
Hence, this petition.
ISSUES
I
WHETHER PETITIONER HAD SUFFICIENTLY APPRISED RESPONDENT THAT THE FAN AND FDDA ISSUED AGAINST
THE LATTER FALLS UNDER SECTION 222(A) OF THE 1997 NIRC, AS AMENDED;
II
WHETHER RESPONDENT'S FAILURE TO REPORT IN ITS VAT RETURNS ALL THE FEES IT COLLECTED FROM ITS
MEMBERS APPLYING FOR HEALTHCARE SERVICES CONSTITUTES "FALSE" RETURN UNDER SECTION 222(A) OF
THE 1997 NIRC, AS AMENDED; AND
II
WHETHER PETITIONER'S RIGHT TO ASSESS RESPONDENT FOR ITS DEFICIENCY VAT FOR TAXABLE YEAR 2007
HAD ALREADY PRESCRIBED.12
The CIR, through the Office of the Solicitor General (OSG), argues that the VAT assessment had yet to
prescribe as the applicable prescriptive period is the ten (10)-year prescriptive period under Section 222 of
the NIRC, and not the three (3) year prescriptive period under Section 203 thereof. It claims that Asalus was
informed in the PAN of the ten (10)-year prescriptive period and that the FAN made specific reference to the
PAN. In turn, the FDDA made reference to the FAN. Asalus, on the other hand, only raised prescription in its
supplemental protest to the FAN. The CIR insists that Asalus was made fully aware that the prescriptive
period under Section 222 would apply.
Moreover, the CIR asserts that there was substantial understatement in Asalus' income, which exceeded 30%
of what was declared in its VAT returns as appearing in its quarterly VAT returns; and the underdeclaration
was supported by the judicial admission of its lone witness that not all the membership fees collected from
members applying for healthcare services were reported in its VAT returns. Thus, the CIR concludes that
there was prima facie evidence of a false return.
The Position of Asalus
In its Comment/Opposition,13 dated April 22, 2016, Asalus countered that the present petition involved a
question of fact, which was beyond the ambit of a petition for review under Rule 45. Moreover, it asserted
that the findings of fact of the CT A Division, which were affirmed by the CTA En Banc, were conclusive and
binding upon the Court. It posited that the CIR could not raise for the first time on appeal a new argument
that "the FDDA and the FAN need not explicitly state the applicability of the ten-year prescriptive period and
the bases thereof as long as the totality of the circumstances show that the taxpayer was 'sufficiently
informed' of the facts in support of the assessment. Based on the totality of the circumstances, it was
informed of the facts in support of the assessment." 14
Asalus reiterated that the CIR, either in the FAN or the FDDA, failed to show that it had filed false returns
warranting the application of the extraordinary prescriptive period under Section 222 of the NIRC. It insisted
that it was not informed of the facts and law on which the assessment was based because the FAN did not
state that it filed false or fraudulent returns. For this reason, Asalus averred that the assessment had
prescribed because it was made beyond the three (3)-year period as provided in Section 203 of the NIRC.
The Reply of the CIR
In its Reply, 15 dated August 15, 2016, the CIR argued that the findings of the CT A might be set aside on
appeal if they were not supported with substantial evidence or if there was a showing of gross error or abuse.
It repeated that there was presumption of falsity in light of the 30% underdeclaration of sales. The CIR
emphasized that even Asalus' own witness testified that not all the membership fees collected were reported
in its VAT returns. It insisted that Asalus was sufficiently informed of its assessment based on the prescriptive
period under Section 222 of the NIRC as early as when the PAN was issued.
On another note, the CIR manifested that Asalus' counsels made use of insulting words in its Comment,
which could have been dispensed with. Particularly, it highlighted the use of the following phrases as
insulting: "even to the uninitiated," "petitioner's habit of disregarding firmly established rules of procedure,"
"twist establish facts to suit her ends," "just to indulge petitioner," and "she then tried to calculate, on her
own but without factual basis." It asserted that "[w]hile a lawyer has a complete discretion on what legal
strategy to employ in a case, the overzealousness in protecting his client's interest does not warrant the use
of insulting and profane language in his pleadings xxx." 16
The Court's Ruling
There is merit in the petition.
It is true that the findings of fact of the CT A are, as a rule, respected by the Court, but they can be set aside
in exceptional cases. In Barcelon, Roxas Securities, Inc. (now known as UBP Securities, Inc.) v. Commissioner of
Internal Revenue, this Court in Toshiba Information Equipment (Phils.), Inc. v. Commissioner of Internal
Revenue, 17explicitly pronounced-
Jurisprudence has consistently shown that this Court accords the findings of fact by the CTA with the highest
respect. In Sea-Land Service, Inc. v. Court of Appeals [G.R. No. 122605, 30 April 2001, 357 SCRA 441, 445-
446], this Court recognizes that the Court of Tax Appeals, which by the very nature of its function is dedicated
exclusively to the consideration of tax problems, has necessarily developed an expertise on the subject, and
its conclusions will not be overturned unless there has been an abuse or improvident exercise of authority.
Such findings can only be disturbed on appeal if they are not supported by substantial evidence or there is a
showing of gross error or abuse on the part of the Tax Court. In the absence of any clear and convincing proof
to the contrary, this Court must presume that the CTA rendered a decision which is valid in every
respect.18 [Emphasis supplied]
After a review of the records and applicable laws and jurisprudence, the Court finds that the CTA erred in
concluding that the assessment against Asalus had prescribed.
Generally, internal revenue taxes shall be assessed within three (3) years after the ,last day prescribed by law
for the filing of the return, or where the return is filed beyond the period, from the day the return was
actually filed. 19Section 222 of the NIRC, however, provides for exceptions to the general rule. It states that in
the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the assessment
may be made within ten (10) years from the discovery of the falsity, fraud or omission.
In the oft-cited Aznar v. CTA,20the Court compared a false return to a fraudulent return in relation to the
applicable prescriptive periods for assessments, to wit:
Petitioner argues that Sec. 332 of the NIRC does not apply because the taxpayer did not file false and
fraudulent returns with intent to' evade tax, while respondent Commissioner of Internal Revenue insists
contrariwise, with respondent Court of Tax Appeals concluding that the very "substantial under declarations
of income for six consecutive years eloquently demonstrate the falsity or fraudulence of the income tax
returns with an intent to evade the payment of tax."
xxxx
xxx We believe that the proper and reasonable interpretation of said provision should be that in the three
different cases of (1) false return, (2) fraudulent return with intent to evade tax, (3) failure to file a return, the
tax may be assessed, or a proceeding in court for the collection of such tax may be begun without
assessmeμt, at any time within ten years after the discovery of the (1) falsity, (2) fraud, (3) omission. Our
stand that the law should be interpreted to mean a separation of the three different situations of false return,
fraudulent return with intent to evade tax, and failure to file a return is strengthened immeasurably by the last
portion of the provision which seggregates the situations into three different classes, namely "falsity", "fraud"
and "omission." That there is a difference between "false return" and "fraudulent return" cannot be denied.
While the first merely implies deviation from the truth, whether intentional or not, the second implies
intentional or deceitful entry with intent to evade the taxes due.
The ordinary period of prescription of 5 years within which to assess tax liabilities under Sec. 331 of the NIRC
should be applicable to normal circumstances, but whenever the government is placed, at a disadvantage so
as to prevent its lawful agents from proper assessment of tax liabilities due to false returns, fraudulent return
intended to evade payment of tax or failure to file returns, the period of ten years provided for in Sec. 332 (a)
NIRC, from the time of the discovery of the falsity, fraud or omission even seems to be inadequate and
should be the one enforced.
There being undoubtedly false tax returns in this case, We affirm the conclusion of the respondent Court of
Tax Appeals that Sec. 332 (a) of the NIRC should apply and that the period of ten years within which to assess
petitioner's tax liability had not expired at the time said assessment was made. (Emphasis supplied)
Thus, a mere showing that the returns filed by the taxpayer were false, notwithstanding the absence of intent
to defraud, is sufficient to warrant the application of the ten (10) year prescriptive period under Section 222
of the NIRC.
Presumption of Falsity of Returns
In the present case, the CTA opined that the CIR failed to substantiate with clear and convincing evidence its
claim that Asalus filed a false return. As it noted that the CIR never presented any evidence to prove the
falsity in the returns that Asalus filed, the CTA ruled that the assessment was subject to the three (3) year
ordinary prescriptive period.
The Court is of a different view.
Under Section 248(B) of the NIRC,21 there is a prima facie evidence of a false return if there is a substantial
underdeclaration of taxable sales, receipt or income. The failure to report sales, receipts or income in an
amount exceeding 30% what is declared in the returns constitute substantial underdeclaration. A prima
facie evidence is one which that will establish a fact or sustain a judgment unless contradictory evidence is
produced. 22
In other words, when there is a showing that a taxpayer has substantially underdeclared its sales, receipt or
income, there is a presumption that it has filed a false return. As such, the CIR need not immediately present
evidence to support the falsity of the return, unless the taxpayer fails to overcome the presumption against
it.
Applied in this case, the audit investigation revealed that there were undeclared VA Table sales more than
30% of that declared in Asalus' VAT returns. Moreover, Asalus' lone witness testified that not all membership
fees, particularly those pertaining to medical practitioners and hospitals, were reported in Asalus' VAT
returns. The testimony of its witness, in trying to justify why not all of its sales were included in the gross
receipts reflected in the VAT returns, supported the presumption that the return filed was indeed false
precisely because not all the sales of Asalus were included in the VAT returns.
Hence, the CIR need not present further evidence as the presumption of falsity of the returns was not
overcome. Asalus was bound to refute the presumption of the falsity of the return and to prove that it had
filed accurate returns. Its failure to overcome the same warranted the application of the ten (10)-year
prescriptive period for assessment under Section 222 of the NIRC. To require the CIR to present additional
evidence in spite of the presumption provided in Section 248(B) of the NIRC would render the said provision
inutile.
Substantial Compliance of Notice Requirement
The CTA also posited that the ordinary prescriptive period of three (3) years applied in this case because
there was no mention in the FAN or the FDDA that what would apply was the extraordinary prescriptive
period and that the CIR did not present any evidence to support its claim of false returns.
Again, the Court disagrees.
It is true that neither the FAN nor the FDDA explicitly stated that the applicable prescriptive period was the
ten (10)-year period set in Section 222 of the NIRC. They, however, made reference to the PAN, which
categorically stated that "[t]he running of the three-year statute of limitation I as provided un4er Section 203
of the 1997 National Internal Revenue Code (NIRC) is not i applicable xxx but rather to the ten (10) year
prescriptive period pursua11t to Section 222(A) of the tax code xxx." 23 In Samar-I Electric Cooperative v.
COMELEC,24the Court ruled that it sufficed that the taxpayer was substantially informed of the legal and
factual bases of the assessment enabling him to file an effective protest, to wit:
Although, the FAN and demand letter issued to petitioner were not accompanied by a written explanation of
the legal and factual bases of the deficiency taxes assessed against the petitioner, the records showed that
respondent in its letter dated April 10, 2003 responded to petitioner's October 14, 2002 letter-protest,
explaining at length the factual and legal bases of the deficiency tax assessments and denying the protest.
Considerirg the foregoing exchange of correspondence and Document between the parties, we find that the
requirement of Section 228 was substantially complied with. Respondent had fully informed I petitioner in
writing of the factual and legal bases of the deficiency taxes assessment, which enabled the latter to file an
"effective" protest, much unlike the taxpayer's situation in Enron. Petitioner's right to due process was thus
not violated. [Emphasis supplied]
Thus, substantial compliance with the requirement as laid down under Section 228 of the NIRC suffices, for
what is important is that the taxpayer has been sufficiently informed of the factual and legal bases of the
assessment so that it may file an effective protest against the assessment. In the case at bench, Asalus was
sufficiently informed that with respect to its tax liability, the extraordinary period laid down in Section 222 of
the NIRC would apply. This was categorically stated in the PAN and all subsequent communications from the
CIR made reference to the PAN. Asalus was eventually able to file a protest addressing the issue on
prescription, although it was done only in its supplemental protest to the FAN.
Considering the existing circumstances, the assessment was timely made because the applicable prescriptive
period was the ten (10)-year prescriptive period under Section 222 of the NIRC. To reiterate, there was
a prima facie showing that the returns filed by Asalus were false, which it failed to controvert. Also, it was
adequately informed that it was being assessed within the extraordinary prescriptive period.
expected to observe such conduct of nobility and uprightness which should remain with them, whether in their
public or private lives, and may be disciplined in the event their conduct falls short of the standards imposed
upon them. Thus, in this case, it is inconsequential that the statements were merely relayed to Orlando's
brother in private. As a member of the bar, Orlando should have been more circumspect in his words, being
fully aware that they pertain to another lawyer to whom fairness as well as candor is owed. It was highly
improper for Orlando to interfere and insult Maximino to his client.
Indulging in offensive personalities in the course of judicial proceedings, as in this case, constitutes
unprofessional conduct which subjects a lawyer to disciplinary action. While a lawyer is entitled to. present his
case with vigor and courage, such enthusiasm does not justify the use of offensive and abusive language. The
Court has consistently reminded the members of the bar to abstain from all offensive personality and to
advance no fact prejudicial to the honor and reputation of a party. xxx26[Emphases supplied]
While the Court recognizes and appreciates the passion of Asalus' counsels in promoting and protecting its
interest, they must still be reminded that they should be more circumspect in their choice of words to argue
their client's position. As much as possible, words which undermine the integrity, competence and ability of
the opposing party, or are otherwise offensive, must be avoided especially if the message may be delivered in
a respectful, yet equally emphatic manner. A counsel's mettle will not be viewed any less should he choose to
pursue his cause without denigrating the other party.
WHEREFORE, petition is GRANTED. The July 30, 2015 Decision and the November 6, 2015 Resolution of the
Court of Tax Appeals En Banc are REVERSED and SET ASIDE. The case is ordered REMANDED to the Court of
Tax Appeals for the determination of the Value Added Tax liabilities of the Asalus Corporation.

A Reminder SO ORDERED.

A lawyer is indeed expected to champion the cause of his client with utmost zeal and competence. Such
exuberance, however, must be tempered to meet the standards of civility and decorum. Rule 8.01 of the
Code of Professional Responsibility mandates that "[a] lawyer shall not, in his professional dealings, use
language which is abusive, offensive or otherwise improper." In Noble v. Atty. Ailes, 25 the Court cautioned
lawyers to be careful in their: choice of words as not to unduly malign the other party, to wit:

Though a lawyer's language may be forceful and emphatic, it should always be dignified and respectful,
befitting the dignity of the legal profession.1âwphi1 The use of intemperate language and unkind ascriptions
has no place in the dignity of the judicial forum. In Buatis Jr. v. People, the Court treated a lawyer's use of the
words "lousy," "inutile," "carabao English," "stupidity," and "satan" in a letter addressed to another colleague
as defamatory and injurious which effectively maligned his integrity. Similarly, the hurling of insulting
language to describe the opposing counsel is considered conduct unbecoming of the legal profession.

xxx

On this score, it must be emphasized that membership in the bar is a privilege burdened with conditions such
that a lawyer's words and actions directly affect the public's opinion of the legal profession. Lawyers are