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[G.R. No. 150154.

August 9, 2005]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. TOSHIBA INFORMATION EQUIPMENT (PHILS.),
INC., respondent.
D E C I S I O N
CHICO-NAZARIO, J.:

In this Petition for Review under Rule 45 of the Rules of Court, petitioner Commissioner of Internal
Revenue (CIR) prays for the reversal of the decision of the Court of Appeals in CA-G.R. SP No. 59106,[1]
affirming the order of the Court of Tax Appeals (CTA) in CTA Case No. 5593,[2] which ordered said
petitioner CIR to refund or, in the alternative, to issue a tax credit certificate to respondent Toshiba
Information Equipment (Phils.), Inc. (Toshiba), in the amount of P16,188,045.44, representing unutilized
input value-added tax (VAT) payments for the first and second quarters of 1996.

There is hardly any dispute as to the facts giving rise to the present Petition.

Respondent Toshiba was organized and established as a domestic corporation, duly-registered with the
Securities and Exchange Commission on 07 July 1995,[3] with the primary purpose of engaging in the
business of manufacturing and exporting of electrical and mechanical machinery, equipment, systems,
accessories, parts, components, materials and goods of all kinds, including, without limitation, to those
relating to office automation and information technology, and all types of computer hardware and
software, such as HDD, CD-ROM and personal computer printed circuit boards.[4]

On 27 September 1995, respondent Toshiba also registered with the Philippine Economic Zone
Authority (PEZA) as an ECOZONE Export Enterprise, with principal office in Laguna Technopark, Bian,
Laguna.[5] Finally, on 29 December 1995, it registered with the Bureau of Internal Revenue (BIR) as a
VAT taxpayer and a withholding agent.[6]

Respondent Toshiba filed its VAT returns for the first and second quarters of taxable year 1996,
reporting input VAT in the amount of P13,118,542.00[7] and P5,128,761.94,[8] respectively, or a total of
P18,247,303.94. It alleged that the said input VAT was from its purchases of capital goods and services
which remained unutilized since it had not yet engaged in any business activity or transaction for which
it may be liable for any output VAT.[9] Consequently, on 27 March 1998, respondent Toshiba filed with
the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance
(DOF) applications for tax credit/refund of its unutilized input VAT for 01 January to 31 March 1996 in
the amount of P14,176,601.28,[10] and for 01 April to 30 June 1996 in the amount of
P5,161,820.79,[11] for a total of P19,338,422.07. To toll the running of the two-year prescriptive period
for judicially claiming a tax credit/refund, respondent Toshiba, on 31 March 1998, filed with the CTA a
Petition for Review. It would subsequently file an Amended Petition for Review on 10 November 1998
so as to conform to the evidence presented before the CTA during the hearings.

In his Answer to the Amended Petition for Review before the CTA, petitioner CIR raised several Special
and Affirmative Defenses, to wit

5. Assuming without admitting that petitioner filed a claim for refund/tax credit, the same is subject to
investigation by the Bureau of Internal Revenue.

6. Taxes are presumed to have been collected in accordance with law. Hence, petitioner must prove
that the taxes sought to be refunded were erroneously or illegally collected.

7. Petitioner must prove the allegations supporting its entitlement to a refund.

8. Petitioner must show that it has complied with the provisions of Sections 204(c) and 229 of the 1997
Tax Code on the filing of a written claim for refund within two (2) years from the date of payment of the
tax.

9. Claims for refund of taxes are construed strictly against claimants, the same being in the nature of an
exemption from taxation.[12]

After evaluating the evidence submitted by respondent Toshiba,[13] the CTA, in its Decision dated 10
March 2000, ordered petitioner CIR to refund, or in the alternative, to issue a tax credit certificate to
respondent Toshiba in the amount of P16,188,045.44.[14]

In a Resolution, dated 24 May 2000, the CTA denied petitioner CIRs Motion for Reconsideration for lack
of merit.[15]

The Court of Appeals, in its Decision dated 27 September 2001, dismissed petitioner CIRs Petition for
Review and affirmed the CTA Decision dated 10 March 2000.

Comes now petitioner CIR before this Court assailing the above-mentioned Decision of the Court of
Appeals based on the following grounds

1. The Court of Appeals erred in holding that petitioners failure to raise in the Tax Court the arguments
relied upon by him in the petition, is fatal to his cause.

2. The Court of Appeals erred in not holding that respondent being registered with the Philippine
Economic Zone Authority (PEZA) as an Ecozone Export Enterprise, its business is not subject to VAT
pursuant to Section 24 of Republic Act No. 7916 in relation to Section 103 (now 109) of the Tax Code.

3. The Court of Appeals erred in not holding that since respondents business is not subject to VAT, the
capital goods and services it purchased are considered not used in VAT taxable business, and, therefore,
it is not entitled to refund of input taxes on such capital goods pursuant to Section 4.106-1 of Revenue
Regulations No. 7-95 and of input taxes on services pursuant to Section 4.103-1 of said Regulations.

4. The Court of Appeals erred in holding that respondent is entitled to a refund or tax credit of input
taxes it paid on zero-rated transactions.[16]

Ultimately, however, the issue still to be resolved herein shall be whether respondent Toshiba is entitled
to the tax credit/refund of its input VAT on its purchases of capital goods and services, to which this
Court answers in the affirmative.

I

An ECOZONE enterprise is a VAT-exempt entity. Sales of goods, properties, and services by persons
from the Customs Territory to ECOZONE enterprises shall be subject to VAT at zero percent (0%).

Respondent Toshiba bases its claim for tax credit/refund on Section 106(b) of the Tax Code of 1977, as
amended, which reads:

SEC. 106. Refunds or tax credits of creditable input tax.



(b) Capital goods. A VAT-registered person may apply for the issuance of a tax credit certificate or
refund of input taxes paid on capital goods imported or locally purchased, to the extent that such input
taxes have not been applied against output taxes. The application may be made only within two (2)
years after the close of the taxable quarter when the importation or purchase was made.[17]

Petitioner CIR, on the other hand, opposes such claim on account of Section 4.106-1(b) of Revenue
Regulations (RR) No. 7-95, otherwise known as the VAT Regulations, as amended, which provides as
follows

Sec. 4.106-1. Refunds or tax credits of input tax.

. . .

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

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

Capital goods or properties refer to goods or properties with estimated useful life greater than one
year and which are treated as depreciable assets under Section 29(f), used directly or indirectly in the
production or sale of taxable goods or services. (Underscoring ours.)

Petitioner CIR argues that although respondent Toshiba may be a VAT-registered taxpayer, it is not
engaged in a VAT-taxable business. According to petitioner CIR, respondent Toshiba is actually VAT-
exempt, invoking the following provision of the Tax Code of 1977, as amended

SEC. 103. Exempt transactions. The following shall be exempt from value-added tax.



(q) Transactions which are exempt under special laws, except those granted under Presidential Decree
No. 66, 529, 972, 1491, and 1590, and non-electric cooperatives under Republic Act No. 6938, or
international agreements to which the Philippines is a signatory.[18]

Since respondent Toshiba is a PEZA-registered enterprise, it is subject to the five percent (5%)
preferential tax rate imposed under Chapter III, Section 24 of Republic Act No. 7916, otherwise known
as The Special Economic Zone Act of 1995, as amended. According to the said section, *e+xcept for real
property taxes on land owned by developers, no taxes, local and national, shall be imposed on business
establishments operating within the ECOZONE. In lieu thereof, five percent (5%) of the gross income
earned by all business enterprises within the ECOZONE shall be paid The five percent (5%)
preferential tax rate imposed on the gross income of a PEZA-registered enterprise shall be in lieu of all
national taxes, including VAT. Thus, petitioner CIR contends that respondent Toshiba is VAT-exempt by
virtue of a special law, Rep. Act No. 7916, as amended.

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),[19] this Court already made such distinction

An exempt transaction, on the one hand, involves goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax
status VAT-exempt or not of the party to the transaction

An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a
special law or an international agreement to which the Philippines is a signatory, and by virtue of which
its taxable transactions become exempt from VAT

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,[20] 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.

This Court agrees, however, that PEZA-registered enterprises, 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.

It is important to note herein that respondent Toshiba is located within an ECOZONE. An ECOZONE or a
Special Economic Zone has been described as

. . . [S]elected areas with highly developed or which have the potential to be developed into agro-
industrial, industrial, tourist, recreational, commercial, banking, investment and financial centers whose
metes and bounds are fixed or delimited by Presidential Proclamations. An ECOZONE may contain any
or all of the following: industrial estates (IEs), export processing zones (EPZs), free trade zones and
tourist/recreational centers.[21]

The national territory of the Philippines outside of the proclaimed borders of the ECOZONE shall be
referred to as the Customs Territory.[22]

Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall manage and operate the
ECOZONES as a separate customs territory;[23] thus, creating the fiction that the ECOZONE is a foreign
territory.[24] As a result, sales made by a supplier in the Customs Territory to a purchaser in the
ECOZONE shall be treated as an exportation from the Customs Territory. Conversely, sales made by a
supplier from the ECOZONE to a purchaser in the Customs Territory shall be considered as an
importation into the Customs Territory.

Given the preceding discussion, what would be the VAT implication of sales made by a supplier from the
Customs Territory to an ECOZONE enterprise?

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.[25]

Applying said doctrine to the sale of goods, properties, and services to and from the ECOZONES,[26] 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 latters 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.
The VAT treatment of sales to it, however, varies depending on whether the supplier from the Customs
Territory is VAT-registered or not.

Sales of goods, properties and services by a VAT-registered supplier from the Customs Territory to an
ECOZONE enterprise shall be treated as export sales. If such sales are made by a VAT-registered
supplier, they shall be subject to VAT at zero percent (0%). In zero-rated transactions, the VAT-
registered supplier shall not pass on any output VAT to the ECOZONE enterprise, and at the same time,
shall be entitled to claim tax credit/refund of its input VAT attributable to such sales. Zero-rating of
export sales primarily intends to benefit the exporter (i.e., the supplier from the Customs Territory), who
is directly and legally liable for the VAT, making it internationally competitive by allowing it to
credit/refund the input VAT attributable to its export sales.

Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or unregistered supplier would only be
exempt from VAT and the supplier shall not be able to claim credit/refund of its input VAT.

Even conceding, however, that respondent Toshiba, as a PEZA-registered enterprise, is a VAT-exempt
entity that could not have engaged in a VAT-taxable business, this Court still believes, given the
particular circumstances of the present case, that it is entitled to a credit/refund of its input VAT.

II

Prior to RMC No. 74-99, however, PEZA-registered enterprises availing of the income tax holiday under
Executive Order No. 226, as amended, were deemed subject to VAT.

In his Petition, petitioner CIR opposed the grant of tax credit/refund to respondent Toshiba, reasoning
thus

In the first place, respondent could not have paid input taxes on its purchases of goods and services
from VAT-registered suppliers because such purchases being zero-rated, that is, no output tax was paid
by the suppliers, no input tax was shifted or passed on to respondent. The VAT is an indirect tax and the
amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or
services (Section 105, 1997 Tax Code).



Secondly, Section 4.100-2 of Revenue Regulations No. 7-95 provides:

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.

From the foregoing, the VAT-registered person who can avail as tax credit or refund of the input tax on
his purchases of goods, services or properties is the seller whose sale is zero-rated. Applying the
foregoing provision to the case at bench, the VAT-registered supplier, whose sale of goods and services
to respondent is zero-rated, can avail as tax credit or refund the input taxes on its (supplier) own
purchases of goods and services related to its zero-rated sale of goods and services to respondent. On
the other hand, respondent, as the buyer in such zero-rated sale of goods and services, could not have
paid input taxes for which it can claim as tax credit or refund.[27]

Before anything else, this Court wishes to point out that petitioner CIR is working on the erroneous
premise that respondent Toshiba is claiming tax credit or refund of input VAT based on Section 4.100-
2,[28] in relation to Section 4.106-1(a),[29] of RR No. 7-95, as amended, which allows the tax
credit/refund of input VAT on zero-rated sales of goods, properties or services. Instead, respondent
Toshiba is basing its claim for tax credit or refund on Sec. 4.106-1(b) of the same regulations, which
allows a VAT-registered person to apply for tax credit/refund of the input VAT on its capital goods.
While in the former, the seller of the goods, properties or services is the one entitled to the tax
credit/refund; in the latter, it is the purchaser of the capital goods.

Nevertheless, regardless of his mistake as to the basis for respondent Toshibas application for tax
credit/refund, petitioner CIR validly raised the question of whether any output VAT was actually passed
on to respondent Toshiba which it could claim as input VAT subject to credit/refund. If the VAT-
registered supplier from the Customs Territory did not charge any output VAT to respondent Toshiba
believing that it is exempt from VAT or it is subject to zero-rated VAT, then respondent Toshiba did not
pay any input VAT on its purchase of capital goods and it could not claim any tax credit/refund thereof.

The rule that any sale by a VAT-registered supplier from the Customs Territory to a PEZA-registered
enterprise shall be considered an export sale and subject to zero percent (0%) VAT was clearly
established only on 15 October 1999, upon the issuance of RMC No. 74-99. Prior to the said date,
however, whether or not a PEZA-registered enterprise was VAT-exempt depended on the type of fiscal
incentives availed of by the said enterprise. This old rule on VAT-exemption or liability of PEZA-
registered enterprises, followed by the BIR, also recognized and affirmed by the CTA, the Court of
Appeals, and even this Court,[30] cannot be lightly disregarded considering the great number of PEZA-
registered enterprises which did rely on it to determine its tax liabilities, as well as, its privileges.

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.[31]

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.[32] 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 latters type or
class of PEZA registration; and, thus, affirming the nature of a PEZA-registered or an ECOZONE
enterprise as a VAT-exempt entity.

The sale of capital goods by suppliers from the Customs Territory to respondent Toshiba in the present
Petition took place during the first and second quarters of 1996, way before the issuance of RMC No. 74-
99, and when the old rule was accepted and implemented by no less than the BIR itself. Since
respondent Toshiba opted to avail itself of the income tax holiday under Exec. Order No. 226, as
amended, then it was deemed subject to the ten percent (10%) VAT. It was very likely therefore that
suppliers from the Customs Territory had passed on output VAT to respondent Toshiba, and the latter,
thus, incurred input VAT. It bears emphasis that the CTA, with the help of SGV & Co., the independent
accountant it commissioned to make a report, already thoroughly reviewed the evidence submitted by
respondent Toshiba consisting of receipts, invoices, and vouchers, from its suppliers from the Customs
Territory. Accordingly, this Court gives due respect to and adopts herein the CTAs findings that the
suppliers of capital goods from the Customs Territory did pass on output VAT to respondent Toshiba and
the amount of input VAT which respondent Toshiba could claim as credit/refund.

Moreover, in another circular, Revenue Memorandum Circular (RMC) No. 42-2003, issued on 15 July
2003, the BIR answered the following question

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?



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.

Under RMC No. 42-2003, the DOF would still accept applications for tax credit/refund filed by PEZA-
registered enterprises, availing of the income tax holiday, for input VAT on their purchases made prior to
RMC No. 74-99. Acceptance of applications essentially implies processing and possible approval thereof
depending on whether the given conditions are met. Respondent Toshibas claim for tax credit/refund
arose from the very same circumstances recognized by Q-5(1) and A-5(1) of RMC No. 42-2003. It
therefore seems irrational and unreasonable for petitioner CIR to oppose respondent Toshibas
application for tax credit/refund of its input VAT, when such claim had already been determined and
approved by the CTA after due hearing, and even affirmed by the Court of Appeals; while it could
accept, process, and even approve applications filed by other similarly-situated PEZA-registered
enterprises at the administrative level.

III

Findings of fact by the CTA are respected and adopted by this Court.

Finally, petitioner CIR, in a last desperate attempt to block respondent Toshibas claim for tax
credit/refund, challenges the allegation of said respondent that it availed of the income tax holiday
under Exec. Order No. 226, as amended, rather than the five percent (5%) preferential tax rate under
Rep. Act No. 7916, as amended. Undoubtedly, this is a factual matter that should have been raised and
threshed out in the lower courts. Giving it credence would belie petitioner CIRs assertion that it is
raising only issues of law in its Petition that may be resolved without need for reception of additional
evidences. Once more, this Court respects and adopts the finding of the CTA, affirmed by the Court of
Appeals, that respondent Toshiba had indeed availed of the income tax holiday under Exec. Order No.
226, as amended.

WHEREFORE, based on the foregoing, this Court AFFIRMS the decision of the Court of Appeals in CA-G.R.
SP. No. 59106, and the order of the CTA in CTA Case No. 5593, ordering said petitioner CIR to refund or,
in the alternative, to issue a tax credit certificate to respondent Toshiba, in the amount of
P16,188,045.44, representing unutilized input VAT for the first and second quarters of 1996.

SO ORDERED.
COMMISSIONER OF G.R. No. 153205
INTERNAL REVENUE,
Petitioner, Present:

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

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D E C I S I O N

CARPIO, J.:


The Case


This petition for review[1] seeks to set aside the 16 April 2002 Decision[2] of the Court of Appeals
in CA-G.R. SP No. 66341 affirming the 8 August 2001 Decision[3] of the Court of Tax Appeals (CTA). The
CTA ordered the Commissioner of Internal Revenue (petitioner) to issue a tax credit certificate for
P6,994,659.67 in favor of Burmeister and Wain Scandinavian Contractor Mindanao, Inc. (respondent).


The Antecedents

The CTA summarized the facts, which the Court of Appeals adopted, as follows:

[Respondent] is a domestic corporation duly organized and existing under and by virtue of the laws
of the Philippines with principal address located at Daruma Building, Jose P. Laurel Avenue, Lanang,
Davao City.

It is represented that a foreign consortium composed of Burmeister and Wain Scandinavian
Contractor A/S (BWSC-Denmark), Mitsui Engineering and Shipbuilding, Ltd., and Mitsui and Co., Ltd.
entered into a contract with the National Power Corporation (NAPOCOR) for the operation and
maintenance of *NAPOCORs+ two power barges. The Consortium appointed BWSC-Denmark as its
coordination manager.

BWSC-Denmark established [respondent] which subcontracted the actual operation and
maintenance of NAPOCORs two power barges as well as the performance of other duties and acts
which necessarily have to be done in the Philippines.

NAPOCOR paid capacity and energy fees to the Consortium in a mixture of currencies (Mark, Yen,
and Peso). The freely convertible non-Peso component is deposited directly to the Consortiums bank
accounts in Denmark and Japan, while the Peso-denominated component is deposited in a separate and
special designated bank account in the Philippines. On the other hand, the Consortium pays
[respondent] in foreign currency inwardly remitted to the Philippines through the banking system.

In order to ascertain the tax implications of the above transactions, [respondent] sought a ruling
from the BIR which responded with BIR Ruling No. 023-95 dated February 14, 1995, declaring therein
that if [respondent] chooses to register as a VAT person and the consideration for its services is paid for
in acceptable foreign currency and accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas, the aforesaid services shall be subject to VAT at zero-rate.

[Respondent] chose to register as a VAT taxpayer. On May 26, 1995, the Certificate of
Registration bearing RDO Control No. 95-113-007556 was issued in favor of [respondent] by the
Revenue District Office No. 113 of Davao City.

For the year 1996, [respondent] seasonably filed its quarterly Value-Added Tax Returns reflecting,
among others, a total zero-rated sales of P147,317,189.62 with VAT input taxes of P3,361,174.14,
detailed as follows:
Qtr. Exh. Date Filed Zero-Rated Sales VAT Input Tax
----------------------------------------------------------------------------------
1st E 04-18-96 P 33,019,651.07 P608,953.48
2nd F 07-16-96 37,108,863.33 756,802.66
3rd G 10-14-96 34,196,372.35 930,279.14
4th H 01-20-97 42,992,302.87 1,065,138.86
Totals P147,317,189.62 P3,361,174.14


On December 29, 1997, [respondent] availed of the Voluntary Assessment Program (VAP) of the
BIR. It allegedly misinterpreted Revenue Regulations No. 5-96 dated February 20, 1996 to be applicable
to its case. Revenue Regulations No. 5-96 provides in part thus:

SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-95 are hereby amended
to read as follows:

Section 4.102-2(b)(2) Services other than processing, manufacturing or repacking for other
persons doing business outside the Philippines for goods which are subsequently exported, as well as
services by a resident to a non-resident foreign client such as project studies, information services,
engineering and architectural designs and other similar services, the consideration for which is paid for
in acceptable foreign currency and accounted for in accordance with the rules and regulations of the
BSP.

x x x x x x x x x x.

In [conformity] with the aforecited Revenue Regulations, [respondent] subjected its sale of
services to the Consortium to the 10% VAT in the total amount of P103,558,338.11 representing April to
December 1996 sales since said Revenue Regulations No. 5-96 became effective only on April 1996. The
sum of P43,893,951.07, representing January to March 1996 sales was subjected to zero rate.
Consequently, [respondent] filed its 1996 amended VAT return consolidating therein the VAT output
and input taxes for the four calendar quarters of 1996. It paid the amount of P6,994,659.67 through
BIRs collecting agent, PCIBank, as its output tax liability for the year 1996, computed as follows:

Amount subject to 10% VAT P103,558,338.11
Multiply by 10%
VAT Output Tax P 10,355,833.81
Less: 1996 Input VAT P 3,361,174.14
VAT Output Tax Payable P 6,994,659.67

On January 7,1999, [respondent] was able to secure VAT Ruling No. 003-99 from the VAT Review
Committee which reconfirmed BIR Ruling No. 023-95 insofar as it held that the services being rendered
by BWSCMI is subject to VAT at zero percent (0%).


On the strength of the aforementioned rulings, [respondent] on April 22,1999, filed a claim for the
issuance of a tax credit certificate with Revenue District No. 113 of the BIR. [Respondent] believed that it
erroneously paid the output VAT for 1996 due to its availment of the Voluntary Assessment Program
(VAP) of the BIR.[4]



On 27 December 1999, respondent filed a petition for review with the CTA in order to toll the
running of the two-year prescriptive period under the Tax Code.



The Ruling of the Court of Tax Appeals


In its 8 August 2001 Decision, the CTA ordered petitioner to issue a tax credit certificate for
P6,994,659.67 in favor of respondent. The CTAs ruling stated:

*Respondents+ sale of services to the Consortium *was+ paid for in acceptable foreign currency
inwardly remitted to the Philippines and accounted for in accordance with the rules and regulations of
Bangko Sentral ng Pilipinas. These were established by various BPI Credit Memos showing remittances
in Danish Kroner (DKK) and US dollars (US$) as payments for the specific invoices billed by [respondent]
to the consortium. These remittances were further certified by the Branch Manager x x x of BPI-Davao
Lanang Branch to represent payments for sub-contract fees that came from Den Danske Aktieselskab
Bank-Denmark for the account of *respondent+. Clearly, *respondents+ sale of services to the
Consortium is subject to VAT at 0% pursuant to Section 108(B)(2) of the Tax Code.

x x x x

The zero-rating of *respondents+ sale of services to the Consortium was even confirmed by the
[petitioner] in BIR Ruling No. 023-95 dated February 15, 1995, and later by VAT Ruling No. 003-99
dated January 7,1999, x x x.

Since it is apparent that the payments for the services rendered by [respondent] were indeed
subject to VAT at zero percent, it follows that it mistakenly availed of the Voluntary Assessment
Program by paying output tax for its sale of services. x x x

x x x Considering the principle of solutio indebiti which requires the return of what has been
delivered by mistake, the [petitioner] is obligated to issue the tax credit certificate prayed for by
[respondent]. x x x[5]


Petitioner filed a petition for review with the Court of Appeals, which dismissed the petition for
lack of merit and affirmed the CTA decision.[6]

Hence, this petition.



The Court of Appeals Ruling


In affirming the CTA, the Court of Appeals rejected petitioners view that since respondents services are
not destined for consumption abroad, they are not of the same nature as project studies, information
services, engineering and architectural designs, and other similar services mentioned in Section 4.102-
2(b)(2) of Revenue Regulations No. 5-96[7] as subject to 0% VAT. Thus, according to petitioner,
respondents services cannot legally qualify for 0% VAT but are subject to the regular 10% VAT.*8+

The Court of Appeals found untenable petitioners contention that under VAT Ruling No. 040-98,
respondents services should be destined for consumption abroad to enjoy zero-rating. Contrary to
petitioners interpretation, there are two kinds of transactions or services subject to zero percent VAT
under VAT Ruling No. 040-98. These are (a) services other than repacking goods for other persons doing
business outside the Philippines which goods are subsequently exported; and (b) services by a resident
to a non-resident foreign client, such as project studies, information services, engineering and
architectural designs and other similar services, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP).[9]

The Court of Appeals stated that only the first classification is required by the provision to be
consumed abroad in order to be taxed at zero rate. In x x x the absence of such express or implied
stipulation in the statute, the second classification need not be consumed abroad.*10+

The Court of Appeals further held that assuming petitioners interpretation of Section 4.102-2(b)(2)
of Revenue Regulations No. 5-96 is correct, such administrative provision is void being an amendment to
the Tax Code. Petitioner went beyond merely providing the implementing details by adding another
requirement to zero-rating. This is indicated by the additional phrase as well as services by a resident
to a non-resident foreign client, such as project studies, information services and engineering and
architectural designs and other similar services. In effect, this phrase adds not just one but two
requisites: (a) services must be rendered by a resident to a non-resident; and (b) these must be in the
nature of project studies, information services, etc.*11+

The Court of Appeals explained that under Section 108(b)(2) of the Tax Code,[12] for services which
were performed in the Philippines to enjoy zero-rating, these must comply only with two requisites, to
wit: (1) payment in acceptable foreign currency and (2) accounted for in accordance with the rules of
the BSP. Section 108(b)(2) of the Tax Code does not provide that services must be destined for
consumption abroad in order to be VAT zero-rated.[13]

The Court of Appeals disagreed with petitioners argument that our VAT law generally follows the
destination principle (i.e., exports exempt, imports taxable).[14] The Court of Appeals stated that if
indeed the destination principle underlies and is the basis of the VAT laws, then petitioners proper
remedy would be to recommend an amendment of Section 108(b)(2) to Congress. Without such
amendment, however, petitioner should apply the terms of the basic law. Petitioner could not resort to
administrative legislation, as what *he+ had done in this case.*15+

The Issue

The lone issue for resolution is whether respondent is entitled to the refund of P6,994,659.67 as
erroneously paid output VAT for the year 1996.[16]


The Ruling of the Court

We deny the petition.

At the outset, the Court declares that the denial of the instant petition is not on the ground that
respondents services are subject to 0% VAT. Rather, it is based on the non-retroactivity of the
prejudicial revocation of BIR Ruling No. 023-95[17] and VAT Ruling No. 003-99,[18] which held that
respondents services are subject to 0% VAT and which respondent invoked in applying for refund of the
output VAT.

Section 102(b) of the Tax Code,[19] the applicable provision in 1996 when respondent rendered the
services and paid the VAT in question, enumerates which services are zero-rated, thus:

(b) Transactions subject to zero-rate. The following services performed in the Philippines by
VAT-registered persons shall be subject to 0%:


(1) Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP);

(2) Services other than those mentioned in the preceding sub-paragraph, the consideration for
which is paid for in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);

(3) Services rendered to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero
rate;

(4) Services rendered to vessels engaged exclusively in international shipping; and

(5) Services performed by subcontractors and/or contractors in processing, converting, or
manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual
production. (Emphasis supplied)





In insisting that its services should be zero-rated, respondent claims that it complied with the
requirements of the Tax Code for zero rating under the second paragraph of Section 102(b).
Respondent asserts that (1) the payment of its service fees was in acceptable foreign currency, (2) there
was inward remittance of the foreign currency into the Philippines, and (3) accounting of such
remittance was in accordance with BSP rules. Moreover, respondent contends that its services which
constitute the actual operation and management of two (2) power barges in Mindanao are not even
remotely similar to project studies, information services and engineering and architectural designs
under Section 4.102-2(b)(2) of Revenue Regulations No. 5-96. As such, respondents services need not
be destined to be consumed abroad in order to be VAT zero-rated.

Respondent is mistaken.

The Tax Code not only requires that the services be other than processing, manufacturing or repacking
of goods and that payment for such services be in acceptable foreign currency accounted for in
accordance with BSP rules. Another essential condition for qualification to zero-rating under Section
102(b)(2) is that the recipient of such services is doing business outside the Philippines. While this
requirement is not expressly stated in the second paragraph of Section 102(b), this is clearly provided in
the first paragraph of Section 102(b) where the listed services must be for other persons doing business
outside the Philippines. The phrase for other persons doing business outside the Philippines not only
refers to the services enumerated in the first paragraph of Section 102(b), but also pertains to the
general term services appearing in the second paragraph of Section 102(b). In short, services other
than processing, manufacturing, or repacking of goods must likewise be performed for persons doing
business outside the Philippines.
This can only be the logical interpretation of Section 102(b)(2). If the provider and recipient of the
other services are both doing business in the Philippines, the payment of foreign currency is irrelevant.
Otherwise, those subject to the regular VAT under Section 102(a) can avoid paying the VAT by simply
stipulating payment in foreign currency inwardly remitted by the recipient of services. To interpret
Section 102(b)(2) to apply to a payer-recipient of services doing business in the Philippines is to make
the payment of the regular VAT under Section 102(a) dependent on the generosity of the taxpayer. The
provider of services can choose to pay the regular VAT or avoid it by stipulating payment in foreign
currency inwardly remitted by the payer-recipient. Such interpretation removes Section 102(a) as a tax
measure in the Tax Code, an interpretation this Court cannot sanction. A tax is a mandatory exaction,
not a voluntary contribution.

When Section 102(b)(2) stipulates payment in acceptable foreign currency under BSP rules, the law
clearly envisions the payer-recipient of services to be doing business outside the Philippines. Only those
not doing business in the Philippines can be required under BSP rules[20] to pay in acceptable foreign
currency for their purchase of goods or services from the Philippines. In a domestic transaction, where
the provider and recipient of services are both doing business in the Philippines, the BSP cannot require
any party to make payment in foreign currency.

Services covered by Section 102(b) (1) and (2) are in the nature of export sales since the payer-recipient
of services is doing business outside the Philippines. Under BSP rules,[21] the proceeds of export sales
must be reported to the Bangko Sentral ng Pilipinas. Thus, there is reason to require the provider of
services under Section 102(b) (1) and (2) to account for the foreign currency proceeds to the BSP. The
same rationale does not apply if the provider and recipient of the services are both doing business in the
Philippines since their transaction is not in the nature of an export sale even if payment is denominated
in foreign currency.

Further, when the provider and recipient of services are both doing business in the Philippines, their
transaction falls squarely under Section 102(a) governing domestic sale or exchange of services. Indeed,
this is a purely local sale or exchange of services subject to the regular VAT, unless of course the
transaction falls under the other provisions of Section 102(b).

Thus, when Section 102(b)(2) speaks of *s+ervices other than those mentioned in the preceding
subparagraph, the legislative intent is that only the services are different between subparagraphs 1 and
2. The requirements for zero-rating, including the essential condition that the recipient of services is
doing business outside the Philippines, remain the same under both subparagraphs.

Significantly, the amended Section 108(b)[22] [previously Section 102(b)] of the present Tax Code
clarifies this legislative intent. Expressly included among the transactions subject to 0% VAT are
*s+ervices other than those mentioned in the *first+ paragraph *of Section 108(b)+ rendered to a person
engaged in business conducted outside the Philippines or to a nonresident person not engaged in
business who is outside the Philippines when the services are performed, the consideration for which is
paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations
of the BSP.


In this case, the payer-recipient of respondents services is the Consortium which is a joint-venture
doing business in the Philippines. While the Consortiums principal members are non-resident foreign
corporations, the Consortium itself is doing business in the Philippines. This is shown clearly in BIR
Ruling No. 023-95 which states that the contract between the Consortium and NAPOCOR is for a 15-year
term, thus:

This refers to your letter dated January 14, 1994 requesting for a clarification of the tax
implications of a contract between a consortium composed of Burmeister & Wain Scandinavian
Contractor A/S (BWSC), Mitsui Engineering & Shipbuilding, Ltd. (MES), and Mitsui & Co., Ltd.
(MITSUI), all referred to hereinafter as the Consortium, and the National Power Corporation
(NAPOCOR) for the operation and maintenance of two 100-Megawatt power barges (Power Barges)
acquired by NAPOCOR for a 15-year term.[23] (Emphasis supplied)

Considering this length of time, the Consortiums operation and maintenance of NAPOCORs power
barges cannot be classified as a single or isolated transaction. The Consortium does not fall under
Section 102(b)(2) which requires that the recipient of the services must be a person doing business
outside the Philippines. Therefore, respondents services to the Consortium, not being supplied to a
person doing business outside the Philippines, cannot legally qualify for 0% VAT.

Respondent, as subcontractor of the Consortium, operates and maintains NAPOCORs power
barges in the Philippines. NAPOCOR pays the Consortium, through its non-resident partners, partly in
foreign currency outwardly remitted. In turn, the Consortium pays respondent also in foreign currency
inwardly remitted and accounted for in accordance with BSP rules. This payment scheme does not
entitle respondent to 0% VAT. As the Court held in Commissioner of Internal Revenue v. American
Express International, Inc. (Philippine Branch),[24] the place of payment is immaterial, much less is the
place where the output of the service is ultimately used. An essential condition for entitlement to 0%
VAT under Section 102(b)(1) and (2) is that the recipient of the services is a person doing business
outside the Philippines. In this case, the recipient of the services is the Consortium, which is doing
business not outside, but within the Philippines because it has a 15-year contract to operate and
maintain NAPOCORs two 100-megawatt power barges in Mindanao.

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

Respondents reliance on the ruling in American Express*26+ is misplaced. That case involved a
recipient of services, specifically American Express International, Inc. (Hongkong Branch), doing business
outside the Philippines. There, the Court stated:

Respondent [American Express International, Inc. (Philippine Branch)] is a VAT-registered person that
facilitates the collection and payment of receivables belonging to its non-resident foreign client
[American Express International, Inc. (Hongkong Branch)], for which it gets paid in acceptable foreign
currency inwardly remitted and accounted for in accordance with BSP rules and regulations. x x x x[27]
(Emphasis supplied)

In contrast, this case involves a recipient of services the Consortium which is doing business in the
Philippines. Hence, American Express services were subject to 0% VAT, while respondents services
should be subject to 10% VAT.

Nevertheless, in seeking a refund of its excess output tax, respondent relied on VAT Ruling No. 003-
99,[28] which reconfirmed BIR Ruling No. 023-95*29+ insofar as it held that the services being
rendered by BWSCMI is subject to VAT at zero percent (0%). Respondents reliance on these BIR rulings
binds petitioner.

Petitioners filing of his Answer before the CTA challenging respondents claim for refund
effectively serves as a revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95. However, such
revocation cannot be given retroactive effect since it will prejudice respondent. Changing respondents
status will deprive respondent of a refund of a substantial amount representing excess output tax.[30]
Section 246 of the Tax Code provides that any revocation of a ruling by the Commissioner of Internal
Revenue shall not be given retroactive application if the revocation will prejudice the taxpayer. Further,
there is no showing of the existence of any of the exceptions enumerated in Section 246 of the Tax Code
for the retroactive application of such revocation.

However, upon the filing of petitioners Answer dated 2 March 2000 before the CTA contesting
respondents claim for refund, respondents services shall be subject to the regular 10% VAT.[31]
Such filing is deemed a revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95.

WHEREFORE, the Court DENIES the petition.


SO ORDERED.



G.R. No. 146984 July 28, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM LIMITED OF THE MARDEN GROUP (HK) and
NATIONAL DEVELOPMENT COMPANY, respondents.

D E C I S I O N

TINGA, J.:

The issue in this present petition is whether the sale by the National Development Company (NDC) of
five (5) of its vessels to the private respondents is subject to value-added tax (VAT) under the National
Internal Revenue Code of 1986 (Tax Code) then prevailing at the time of the sale. The Court of Tax
Appeals (CTA) and the Court of Appeals commonly ruled that the sale is not subject to VAT. We affirm,
though on a more unequivocal rationale than that utilized by the rulings under review. The fact that the
sale was not in the course of the trade or business of NDC is sufficient in itself to declare the sale as
outside the coverage of VAT.

The facts are culled primarily from the ruling of the CTA.

Pursuant to a government program of privatization, NDC decided to sell to private enterprise all of its
shares in its wholly-owned subsidiary the National Marine Corporation (NMC). The NDC decided to sell
in one lot its NMC shares and five (5) of its ships, which are 3,700 DWT Tween-Decker, "Kloeckner" type
vessels.1 The vessels were constructed for the NDC between 1981 and 1984, then initially leased to
Luzon Stevedoring Company, also its wholly-owned subsidiary. Subsequently, the vessels were
transferred and leased, on a bareboat basis, to the NMC.2

The NMC shares and the vessels were offered for public bidding. Among the stipulated terms and
conditions for the public auction was that the winning bidder was to pay "a value added tax of 10% on
the value of the vessels."3 On 3 June 1988, private respondent Magsaysay Lines, Inc. (Magsaysay Lines)
offered to buy the shares and the vessels for P168,000,000.00. The bid was made by Magsaysay Lines,
purportedly for a new company still to be formed composed of itself, Baliwag Navigation, Inc., and FIM
Limited of the Marden Group based in Hongkong (collectively, private respondents).4 The bid was
approved by the Committee on Privatization, and a Notice of Award dated 1 July 1988 was issued to
Magsaysay Lines.

On 28 September 1988, the implementing Contract of Sale was executed between NDC, on one hand,
and Magsaysay Lines, Baliwag Navigation, and FIM Limited, on the other. Paragraph 11.02 of the
contract stipulated that "[v]alue-added tax, if any, shall be for the account of the PURCHASER."5 Per
arrangement, an irrevocable confirmed Letter of Credit previously filed as bidders bond was accepted by
NDC as security for the payment of VAT, if any. By this time, a formal request for a ruling on whether or
not the sale of the vessels was subject to VAT had already been filed with the Bureau of Internal
Revenue (BIR) by the law firm of Sycip Salazar Hernandez & Gatmaitan, presumably in behalf of private
respondents. Thus, the parties agreed that should no favorable ruling be received from the BIR, NDC was
authorized to draw on the Letter of Credit upon written demand the amount needed for the payment of
the VAT on the stipulated due date, 20 December 1988.6

In January of 1989, private respondents through counsel received VAT Ruling No. 568-88 dated 14
December 1988 from the BIR, holding that the sale of the vessels was subject to the 10% VAT. The ruling
cited the fact that NDC was a VAT-registered enterprise, and thus its "transactions incident to its normal
VAT registered activity of leasing out personal property including sale of its own assets that are movable,
tangible objects which are appropriable or transferable are subject to the 10% [VAT]."7

Private respondents moved for the reconsideration of VAT Ruling No. 568-88, as well as VAT Ruling No.
395-88 (dated 18 August 1988), which made a similar ruling on the sale of the same vessels in response
to an inquiry from the Chairman of the Senate Blue Ribbon Committee. Their motion was denied when
the BIR issued VAT Ruling Nos. 007-89 dated 24 February 1989, reiterating the earlier VAT rulings. At this
point, NDC drew on the Letter of Credit to pay for the VAT, and the amount of P15,120,000.00 in taxes
was paid on 16 March 1989.

On 10 April 1989, private respondents filed an Appeal and Petition for Refund with the CTA, followed by
a Supplemental Petition for Review on 14 July 1989. They prayed for the reversal of VAT Rulings No.
395-88, 568-88 and 007-89, as well as the refund of the VAT payment made amounting to
P15,120,000.00.8 The Commissioner of Internal Revenue (CIR) opposed the petition, first arguing that
private respondents were not the real parties in interest as they were not the transferors or sellers as
contemplated in Sections 99 and 100 of the then Tax Code. The CIR also squarely defended the VAT
rulings holding the sale of the vessels liable for VAT, especially citing Section 3 of Revenue Regulation
No. 5-87 (R.R. No. 5-87), which provided that "*VAT+ is imposed on any sale or transactions deemed
sale of taxable goods (including capital goods, irrespective of the date of acquisition)." The CIR argued
that the sale of the vessels were among those transactions "deemed sale," as enumerated in Section 4
of R.R. No. 5-87. It seems that the CIR particularly emphasized Section 4(E)(i) of the Regulation, which
classified "change of ownership of business" as a circumstance that gave rise to a transaction "deemed
sale."

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

The CIR appealed the CTA Decision to the Court of Appeals,10 which on 11 March 1997, rendered a
Decision reversing the CTA.11 While the appellate court agreed that the sale was an isolated
transaction, not made in the course of NDCs regular trade or business, it nonetheless found that the
transaction fell within the classification of those "deemed sale" under R.R. No. 5-87, since the sale of the
vessels together with the NMC shares brought about a change of ownership in NMC. The Court of
Appeals also applied the principle governing tax exemptions that such should be strictly construed
against the taxpayer, and liberally in favor of the government.12

However, the Court of Appeals reversed itself upon reconsidering the case, through a Resolution dated 5
February 2001.13 This time, the appellate court ruled that the "change of ownership of business" as
contemplated in R.R. No. 5-87 must be a consequence of the "retirement from or cessation of business"
by the owner of the goods, as provided for in Section 100 of the Tax Code. The Court of Appeals also
agreed with the CTA that the classification of transactions "deemed sale" was a classification statute,
and not an exemption statute, thus warranting the resolution of any doubt in favor of the taxpayer.14

To the mind of the Court, the arguments raised in the present petition have already been adequately
discussed and refuted in the rulings assailed before us. Evidently, the petition should be denied. Yet the
Court finds that Section 99 of the Tax Code is sufficient reason for upholding the refund of VAT
payments, and the subsequent disquisitions by the lower courts on the applicability of Section 100 of
the Tax Code and Section 4 of R.R. No. 5-87 are ultimately irrelevant.

A brief reiteration of the basic principles governing VAT is in order. VAT is ultimately a tax on
consumption, even though it is assessed on many levels of transactions on the basis of a fixed
percentage.15 It is the end user of consumer goods or services which ultimately shoulders the tax, as
the liability therefrom is passed on to the end users by the providers of these goods or services16 who in
turn may credit their own VAT liability (or input VAT) from the VAT payments they receive from the final
consumer (or output VAT).17 The final purchase by the end consumer represents the final link in a
production chain that itself involves several transactions and several acts of consumption. The VAT
system assures fiscal adequacy through the collection of taxes on every level of consumption,18 yet
assuages the manufacturers or providers of goods and services by enabling them to pass on their
respective VAT liabilities to the next link of the chain until finally the end consumer shoulders the entire
tax liability.

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

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

In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955 (97 Phil. 992), the term
"carrying on business" does not mean the performance of a single disconnected act, but means
conducting, prosecuting and continuing business by performing progressively all the acts normally
incident thereof; while "doing business" conveys the idea of business being done, not from time to time,
but all the time. [J. Aranas, UPDATED NATIONAL INTERNAL REVENUE CODE (WITH ANNOTATIONS), p.
608-9 (1988)]. "Course of business" is what is usually done in the management of trade or business.
[Idmi v. Weeks & Russel, 99 So. 761, 764, 135 Miss. 65, cited in Words & Phrases, Vol. 10, (1984)].

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

This finding is confirmed by the Revised Charter22 of the NDC which bears no indication that the NDC
was created for the primary purpose of selling real property.23

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

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

It would have been a different matter if Section 100 purported to define the phrase "in the course of
trade or business" as expressed in Section 99. If that were so, reference to Section 100 would have been
necessary as a means of ascertaining whether the sale of the vessels was "in the course of trade or
business," and thus subject to

VAT. But that is not the case. What Section 100 and Section 4(E)(i) of R.R. No. 5-87 elaborate on is not
the meaning of "in the course of trade or business," but instead the identification of the transactions
which may be deemed as sale. It would become necessary to ascertain whether under those two
provisions the transaction may be deemed a sale, only if it is settled that the transaction occurred in the
course of trade or business in the first place. If the transaction transpired outside the course of trade or
business, it would be irrelevant for the purpose of determining VAT liability whether the transaction
may be deemed sale, since it anyway is not subject to VAT.

Accordingly, the Court rules that given the undisputed finding that the transaction in question was not
made in the course of trade or business of the seller, NDC that is, the sale is not subject to VAT pursuant
to Section 99 of the Tax Code, no matter how the said sale may hew to those transactions deemed sale
as defined under Section 100.

In any event, even if Section 100 or Section 4 of R.R. No. 5-87 were to find application in this case, the
Court finds the discussions offered on this point by the CTA and the Court of Appeals (in its subsequent
Resolution) essentially correct. Section 4 (E)(i) of R.R. No. 5-87 does classify as among the transactions
deemed sale those involving "change of ownership of business." However, Section 4(E) of R.R. No. 5-87,
reflecting Section 100 of the Tax Code, clarifies that such "change of ownership" is only an attending
circumstance to "retirement from or cessation of business[, ] with respect to all goods on hand [as] of
the date of such retirement or cessation."25 Indeed, Section 4(E) of R.R. No. 5-87 expressly characterizes
the "change of ownership of business" as only a "circumstance" that attends those transactions
"deemed sale," which are otherwise stated in the same section.26

WHEREFORE, the petition is DENIED. No costs.

SO ORDERED.
Tolentino vs. Secretary of Finance, G.R. No. 115455
Tolentino vs. Secretary of Finance
G.R. No. 115455

Facts
The value-added tax (VAT) is levied on the sale, barter or exchange of goods and properties as well as on
the sale or exchange of services. RA 7716 seeks to widen the tax base of the existing VAT system and
enhance its administration by amending the National Internal Revenue Code. There are various suits
challenging the constitutionality of RA 7716 on various grounds.

One contention is that RA 7716 did not originate exclusively in the House of Representatives as required
by Art. VI, Sec. 24 of the Constitution, because it is in fact the result of the consolidation of 2 distinct
bills, H. No. 11197 and S. No. 1630. There is also a contention that S. No. 1630 did not pass 3 readings as
required by the Constitution.

Issue
Whether or not RA 7716 violates Art. VI, Secs. 24 and 26(2) of the Constitution

Held
The argument that RA 7716 did not originate exclusively in the House of Representatives as required by
Art. VI, Sec. 24 of the Constitution will not bear analysis. To begin with, it is not the law but the revenue
bill which is required by the Constitution to originate exclusively in the House of Representatives. To
insist that a revenue statute and not only the bill which initiated the legislative process culminating in
the enactment of the law must substantially be the same as the House bill would be to deny the
Senates power not only to concur with amendments but also to propose amendments. Indeed, what
the Constitution simply means is that the initiative for filing revenue, tariff or tax bills, bills authorizing
an increase of the public debt, private bills and bills of local application must come from the House of
Representatives on the theory that, elected as they are from the districts, the members of the House
can be expected to be more sensitive to the local needs and problems. Nor does the Constitution
prohibit the filing in the Senate of a substitute bill in anticipation of its receipt of the bill from the House,
so long as action by the Senate as a body is withheld pending receipt of the House bill.

The next argument of the petitioners was that S. No. 1630 did not pass 3 readings on separate days as
required by the Constitution because the second and third readings were done on the same day. But
this was because the President had certified S. No. 1630 as urgent. The presidential certification
dispensed with the requirement not only of printing but also that of reading the bill on separate days.
That upon the certification of a bill by the President the requirement of 3 readings on separate days and
of printing and distribution can be dispensed with is supported by the weight of legislative practice.
G.R. No. 166408 October 6, 2008

QUEZON CITY and THE CITY TREASURER OF QUEZON CITY, petitioners,
vs.
ABS-CBN BROADCASTING CORPORATION, respondent.

D E C I S I O N

REYES, R.T., J.:

CLAIMS for tax exemption must be based on language in law too plain to be mistaken. It cannot be made
out of inference or implication.

The principle is relevant in this petition for review on certiorari of the Decision1 of the Court of Appeals
(CA) and that2 of the Regional Trial Court (RTC) ordering the refund and declaring invalid the imposition
and collection of local franchise tax by the City Treasurer of Quezon City on ABS-CBN Broadcasting
Corporation (ABS-CBN).

The Facts

Petitioner City Government of Quezon City is a local government unit duly organized and existing by
virtue of Republic Act (R.A.) No. 537, otherwise known as the Revised Charter of Quezon City. Petitioner
City Treasurer of Quezon City is primarily responsible for the imposition and collection of taxes within
the territorial jurisdiction of Quezon City.

Under Section 31, Article 13 of the Quezon City Revenue Code of 1993,3 a franchise tax was imposed on
businesses operating within its jurisdiction. The provision states:

Section 31. Imposition of Tax. - Any provision of special laws or grant of tax exemption to the contrary
notwithstanding, any person, corporation, partnership or association enjoying a franchise whether
issued by the national government or local government and, doing business in Quezon City, shall pay a
franchise tax at the rate of ten percent (10%) of one percent (1%) for 1993-1994, twenty percent (20%)
of one percent (1%) for 1995, and thirty percent (30%) of one percent (1%) for 1996 and the succeeding
years thereafter, of gross receipts and sales derived from the operation of the business in Quezon City
during the preceding calendar year.

On May 3, 1995, ABS-CBN was granted the franchise to install and operate radio and television
broadcasting stations in the Philippines under R.A. No. 7966.4 Section 8 of R.A. No. 7966 provides the
tax liabilities of ABS-CBN which reads:

Section 8. Tax Provisions. - The grantee, its successors or assigns, shall be liable to pay the same taxes on
their real estate, buildings and personal property, exclusive of this franchise, as other persons or
corporations are now hereafter may be required by law to pay. In addition thereto, the grantee, its
successors or assigns, shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of
the radio/television business transacted under this franchise by the grantee, its successors or assigns,
and the said percentage tax shall be in lieu of all taxes on this franchise or earnings thereof; Provided
that the grantee, its successors or assigns shall continue to be liable for income taxes under Title II of the
National Internal Revenue Code pursuant to Section 2 of Executive No. 72 unless the latter enactment is
amended or repealed, in which case the amendment or repeal shall be applicable thereto. (Emphasis
added)

ABS-CBN had been paying local franchise tax imposed by Quezon City. However, in view of the above
provision in R.A. No. 9766 that it "shall pay a franchise tax x x x in lieu of all taxes," the corporation
developed the opinion that it is not liable to pay the local franchise tax imposed by Quezon City.
Consequently, ABS-CBN paid under protest the local franchise tax imposed by Quezon City on the dates,
in the amounts and under the official receipts as follows:

O.R. No.

Date

Amount Paid

2464274

7/18/1995

P 1,489,977.28

2484651

10/20/1995

1,489,977.28

2536134

1/22/1996

2,880,975.65

8354906

1/23/1997

8,621,470.83

48756

1/23/1997

2,731,135.81

67352

4/3/1997

2,731,135.81

Total

P19,944,672.665

On January 29, 1997, ABS-CBN filed a written claim for refund for local franchise tax paid to Quezon City
for 1996 and for the first quarter of 1997 in the total amount of Fourteen Million Two Hundred Thirty-
Three Thousand Five Hundred Eighty-Two and 29/100 centavos (P14,233,582.29) broken down as
follows:

O.R. No.

Date

Amount Paid

2536134

1-22-96

P 2,880,975.65

8354906

1-23-97

8,621,470.83

0048756

1-23-97

2,731,135.81

Total

P14,233,582.296

In a letter dated March 3, 1997 to the Quezon City Treasurer, ABS-CBN reiterated its claim for refund of
local franchise taxes paid.

On June 25, 1997, for failure to obtain any response from the Quezon City Treasurer, ABS-CBN filed a
complaint before the RTC in Quezon City seeking the declaration of nullity of the imposition of local
franchise tax by the City Government of Quezon City for being unconstitutional. It likewise prayed for
the refund of local franchise tax in the amount of Nineteen Million Nine Hundred Forty-Four Thousand
Six Hundred Seventy-Two and 66/100 centavos (P19,944,672.66) broken down as follows:

O.R. No.

Date

Amount Paid

2464274

7-18-95

P 1,489,977.28

2484651

10-20-95

1,489,977.28

2536134

1-22-96

2,880,975.65

8354906

1-23-97

8,621,470.83

0048756

1-23-97

2,731,135.81

0067352

4-03-97

2,731,135.81

Total

P19,944,672.667

Quezon City argued that the "in lieu of all taxes" provision in R.A. No. 9766 could not have been
intended to prevail over a constitutional mandate which ensures the viability and self-sufficiency of local
government units. Further, that taxes collectible by and payable to the local government were distinct
from taxes collectible by and payable to the national government, considering that the Constitution
specifically declared that the taxes imposed by local government units "shall accrue exclusively to the
local governments." Lastly, the City contended that the exemption claimed by ABS-CBN under R.A. No.
7966 was withdrawn by Congress when the Local Government Code (LGC) was passed.8 Section 193 of
the LGC provides:

Section 193. Withdrawal of Tax Exemption Privileges. - Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical,
including government-owned or -controlled corporations, except local water districts, cooperatives duly
registered under R.A. 6938, non-stock and non-profit hospitals and educational institutions, are hereby
withdrawn upon the effectivity of this Code. (Emphasis added)

On August 13, 1997, ABS-CBN filed a supplemental complaint adding to its claim for refund the local
franchise tax paid for the third quarter of 1997 in the amount of Two Million Seven Hundred Thirty-One
Thousand One Hundred Thirty-Five and 81/100 centavos (P2,731,135.81) and of other amounts of local
franchise tax as may have been and will be paid by ABS-CBN until the resolution of the case.

Quezon City insisted that the claim for refund must fail because of the absence of a prior written claim
for it.

RTC and CA Dispositions

On January 20, 1999, the RTC rendered judgment declaring as invalid the imposition on and collection
from ABS-CBN of local franchise tax paid pursuant to Quezon City Ordinance No. SP-91, S-93, after the
enactment of R.A. No. 7966, and ordered the refund of all payments made. The dispositive portion of
the RTC decision reads:

WHEREFORE, judgment is hereby rendered declaring the imposition on and collection from plaintiff ABS-
CBN BROADCASTING CORPORATION of local franchise taxes pursuant to Quezon City Ordinance No. SP-
91, S-93 after the enactment of Republic Act No. 7966 to be invalid, and, accordingly, the Court hereby
orders the defendants to refund all its payments made after the effectivity of its legislative franchise on
May 3, 1995.

SO ORDERED.9

In its decision, the RTC ruled that the "in lieu of all taxes" provision contained in Section 8 of R.A. No.
7966 absolutely excused ABS-CBN from the payment of local franchise tax imposed under Quezon City
Ordinance No. SP-91, S-93. The intent of the legislature to excuse ABS-CBN from payment of local
franchise tax could be discerned from the usage of the "in lieu of all taxes" provision and from the
absence of any qualification except income taxes. Had Congress intended to exclude taxes imposed from
the exemption, it would have expressly mentioned so in a fashion similar to the proviso on income
taxes.

The RTC also based its ruling on the 1990 case of Province of Misamis Oriental v. Cagayan Electric Power
and Light Company, Inc. (CEPALCO).10 In said case, the exemption of respondent electric company
CEPALCO from payment of provincial franchise tax was upheld on the ground that the franchise of
CEPALCO was a special law, while the Local Tax Code, on which the provincial ordinance imposing the
local franchise tax was based, was a general law. Further, it was held that whenever there is a conflict
between two laws, one special and particular and the other general, the special law must be taken as
intended to constitute an exception to the general act.

The RTC noted that the legislative franchise of ABS-CBN was granted years after the effectivity of the
LGC. Thus, it was unavoidable to conclude that Section 8 of R.A. No. 7966 was an exception since the
legislature ought to be presumed to have enacted it with the knowledge and awareness of the existence
and prior enactment of Section 13711 of the LGC.

In addition, the RTC, again citing the case of Province of Misamis Oriental v. Cagayan Electric Power and
Light Company, Inc. (CEPALCO),12 ruled that the imposition of the local franchise tax was an impairment
of ABS-CBN's contract with the government. The imposition of another franchise on the corporation by
the local authority would constitute an impairment of the former's charter, which is in the nature of a
private contract between it and the government.

As to the amounts to be refunded, the RTC rejected Quezon City's position that a written claim for
refund pursuant to Section 196 of the LGC was a condition sine qua non before filing the case in court.
The RTC ruled that although Fourteen Million Two Hundred Thirty-Three Thousand Five Hundred Eighty-
Two and 29/100 centavos (P14,233,582.29) was the only amount stated in the letter to the Quezon City
Treasurer claiming refund, ABS-CBN should nonetheless be also refunded of all payments made after the
effectivity of R.A. No. 7966. The inaction of the City Treasurer on the claim for refund of ABS-CBN legally
rendered any further claims for refund on the part of plaintiff absurd and futile in relation to the
succeeding payments.

The City of Quezon and its Treasurer filed a motion for reconsideration which was subsequently denied
by the RTC. Thus, appeal was made to the CA. On September 1, 2004, the CA dismissed the petition of
Quezon City and its Treasurer. According to the appellate court, the issues raised were purely legal
questions cognizable only by the Supreme Court. The CA ratiocinated:

For another, the issues which appellants submit for this Court's consideration are more of legal query
necessitating a legal opinion rather than a call for adjudication on the matter in dispute.

x x x x

The first issue has earlier been categorized in Province of Misamis Oriental v. Cagayan Electric and
Power Co., Inc. to be a legal one. There is no more argument to this.

The next issue although it may need the reexamination of the pertinent provisions of the local franchise
and the legislative franchise given to appellee, also needs no evaluation of facts. It suffices that there
may be a conflict which may need to be reconciled, without regard to the factual backdrop of the case.

The last issue deals with a legal question, because whether or not there is a prior written claim for
refund is no longer in dispute. Rather, the question revolves on whether the said requirement may be
dispensed with, which obviously is not a factual issue.13

On September 23, 2004, petitioner moved for reconsideration. The motion was, however, denied by the
CA in its Resolution dated December 16, 2004. Hence, the present recourse.

Issues

Petitioner submits the following issues for resolution:

I.

Whether or not the phrase "in lieu of all taxes" indicated in the franchise of the respondent appellee
(Section 8 of RA 7966) serves to exempt it from the payment of the local franchise tax imposed by the
petitioners-appellants.

II.

Whether or not the petitioners-appellants raised factual and legal issues before the Honorable Court of
Appeals.14

Our Ruling

The second issue, being procedural in nature, shall be dealt with immediately. But there are other
resultant issues linked to the first.

I. The dismissal by the CA of petitioners' appeal is in order because it raised purely legal issues, namely:

1) Whether appellee, whose franchise expressly provides that its payment of franchise tax shall be in
lieu of all taxes in this franchise or earnings thereof, is absolutely excused from paying the franchise tax
imposed by appellants;

2) Whether appellants' imposition of local franchise tax is a violation of appellee's legislative franchise;
and

3) Whether one can do away with the requirement on prior written claim for refund.15

Obviously, these are purely legal questions, cognizable by this Court, to the exclusion of all other courts.
There is a question of law when the doubt or difference arises as to what the law is pertaining to a
certain state of facts.16

Section 2, Rule 50 of the Rules of Court provides that an appeal taken to the CA under Rule 41 raising
only questions of law is erroneous and shall be dismissed, issues of pure law not being within its
jurisdiction.17 Consequently, the dismissal by the CA of petitioners' appeal was in order.

In the recent case of Sevilleno v. Carilo,18 this Court ruled that the dismissal of the appeal of petitioner
was valid, considering the issues raised there were pure questions of law, viz.:

Petitioners interposed an appeal to the Court of Appeals but it was dismissed for being the wrong mode
of appeal. The appellate court held that since the issue being raised is whether the RTC has jurisdiction
over the subject matter of the case, which is a question of law, the appeal should have been elevated to
the Supreme Court under Rule 45 of the 1997 Rules of Civil Procedure, as amended. Section 2, Rule 41 of
the same Rules which governs appeals from judgments and final orders of the RTC to the Court of
Appeals, provides:

SEC. 2. Modes of appeal. -

(a) Ordinary appeal. - The appeal to the Court of Appeals in cases decided by the Regional Trial Court in
the exercise of its original jurisdiction shall be taken by filing a notice of appeal with the court which
rendered the judgment or final order appealed from and serving a copy thereof upon the adverse party.
No record on appeal shall be required except in special proceedings and other cases of multiple or
separate appeals where the law or these Rules so require. In such cases, the record on appeal shall be
filed and served in like manner.

(b) Petition for review. - The appeal to the Court of Appeals in cases decided by the Regional Trial Court
in the exercise of its appellate jurisdiction shall be by petition for review in accordance with Rule 42.

(c) Appeal by certiorari. - In all cases where only questions of law are raised or involved, the appeal shall
be to the Supreme Court by petition for review on certiorari in accordance with Rule 45.

In Macawili Gold Mining and Development Co., Inc. v. Court of Appeals, we summarized the rule on
appeals as follows:

(1) In all cases decided by the RTC in the exercise of its original jurisdiction, appeal may be made to the
Court of Appeals by mere notice of appeal where the appellant raises questions of fact or mixed
questions of fact and law;

(2) In all cases decided by the RTC in the exercise of its original jurisdiction where the appellant raises
only questions of law, the appeal must be taken to the Supreme Court on a petition for review on
certiorari under Rule 45;

(3) All appeals from judgments rendered by the RTC in the exercise of its appellate jurisdiction,
regardless of whether the appellant raises questions of fact, questions of law, or mixed questions of fact
and law, shall be brought to the Court of Appeals by filing a petition for review under Rule 42.

It is not disputed that the issue brought by petitioners to the Court of Appeals involves the jurisdiction of
the RTC over the subject matter of the case. We have a long standing rule that a court's jurisdiction over
the subject matter of an action is conferred only by the Constitution or by statute. Otherwise put,
jurisdiction of a court over the subject matter of the action is a matter of law. Consequently, issues
which deal with the jurisdiction of a court over the subject matter of a case are pure questions of law. As
petitioners' appeal solely involves a question of law, they should have directly taken their appeal to this
Court by filing a petition for review on certiorari under Rule 45, not an ordinary appeal with the Court of
Appeals under Rule 41. Clearly, the appellate court did not err in holding that petitioners pursued the
wrong mode of appeal.

Indeed, the Court of Appeals did not err in dismissing petitioners' appeal. Section 2, Rule 50 of the same
Rules provides that an appeal from the RTC to the Court of Appeals raising only questions of law shall be
dismissed; and that an appeal erroneously taken to the Court of Appeals shall be dismissed outright, x x
x.19 (Emphasis added)

However, to serve the demands of substantial justice and equity, the Court opts to relax procedural
rules and rule upon on the merits of the case. In Ong Lim Sing Jr. v. FEB Leasing and Finance
Corporation,20 this Court stated:

Courts have the prerogative to relax procedural rules of even the most mandatory character, mindful of
the duty to reconcile both the need to speedily put an end to litigation and the parties' right to due
process. In numerous cases, this Court has allowed liberal construction of the rules when to do so would
serve the demands of substantial justice and equity. In Aguam v. Court of Appeals, the Court explained:

"The court has the discretion to dismiss or not to dismiss an appellant's appeal. It is a power conferred
on the court, not a duty. The "discretion must be a sound one, to be exercised in accordance with the
tenets of justice and fair play, having in mind the circumstances obtaining in each case." Technicalities,
however, must be avoided. The law abhors technicalities that impede the cause of justice. The court's
primary duty is to render or dispense justice. "A litigation is not a game of technicalities." "Lawsuits
unlike duels are not to be won by a rapier's thrust. Technicality, when it deserts its proper office as an
aid to justice and becomes its great hindrance and chief enemy, deserves scant consideration from
courts." Litigations must be decided on their merits and not on technicality. Every party litigant must be
afforded the amplest opportunity for the proper and just determination of his cause, free from the
unacceptable plea of technicalities. Thus, dismissal of appeals purely on technical grounds is frowned
upon where the policy of the court is to encourage hearings of appeals on their merits and the rules of
procedure ought not to be applied in a very rigid, technical sense; rules of procedure are used only to
help secure, not override substantial justice. It is a far better and more prudent course of action for the
court to excuse a technical lapse and afford the parties a review of the case on appeal to attain the ends
of justice rather than dispose of the case on technicality and cause a grave injustice to the parties, giving
a false impression of speedy disposal of cases while actually resulting in more delay, if not a miscarriage
of justice.21

II. The "in lieu of all taxes" provision in its franchise does not exempt ABS-CBN from payment of local
franchise tax.

A. The present controversy essentially boils down to a dispute between the inherent taxing power of
Congress and the delegated authority to tax of local governments under the 1987 Constitution and
effected under the LGC of 1991.

The power of the local government of Quezon City to impose franchise tax is based on Section 151 in
relation to Section 137 of the LGC, to wit:

Section 137. Franchise Tax. - Notwithstanding any exemption granted by any law or other special law,
the province may impose a tax on businesses enjoying a franchise, at the rate not exceeding fifty
percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on
the incoming receipt, or realized within its territorial jurisdiction. x x x

x x x x

Section 151. Scope of Taxing Powers. - Except as otherwise provided in this Code, the city may levy the
taxes, fees and charges which the province or municipality may impose: Provided, however, That the
taxes, fees and charges levied and collected by highly urbanized and component cities shall accrue to
them and distributed in accordance with the provisions of this Code.

The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or
municipality by not more than fifty percent (50%) except the rates of professional and amusement
taxes. (Emphasis supplied)

Such taxing power by the local government, however, is limited in the sense that Congress can enact
legislation granting exemptions. This principle was upheld in City Government of Quezon City, et al. v.
Bayan Telecommunications, Inc.22 Said this Court:

This thus raises the question of whether or not the City's Revenue Code pursuant to which the city
treasurer of Quezon City levied real property taxes against Bayantel's real properties located within the
City effectively withdrew the tax exemption enjoyed by Bayantel under its franchise, as amended.

Bayantel answers the poser in the negative arguing that once again it is only "liable to pay the same
taxes, as any other persons or corporations on all its real or personal properties, exclusive of its
franchise."

Bayantel's posture is well-taken. While the system of local government taxation has changed with the
onset of the 1987 Constitution, the power of local government units to tax is still limited. As we
explained in Mactan Cebu International Airport Authority:

"The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be exercised
by local legislative bodies, no longer merely be virtue of a valid delegation as before, but pursuant to
direct authority conferred by Section 5, Article X of the Constitution. Under the latter, the exercise of
the power may be subject to such guidelines and limitations as the Congress may provide which,
however, must be consistent with the basic policy of local autonomy. x x x"

Clearly then, while a new slant on the subject of local taxation now prevails in the sense that the former
doctrine of local government units' delegated power to tax had been effectively modified with Article X,
Section 5 of the 1987 Constitution now in place, the basic doctrine on local taxation remains essentially
the same. For as the Court stressed in Mactan, "the power to tax is [still] primarily vested in the
Congress."

This new perspective is best articulated by Fr. Joaquin G. Bernas, S.J., himself a Commissioner of the
1986 Constitutional Commission which crafted the 1987 Constitution, thus:

"What is the effect of Section 5 on the fiscal position of municipal corporations? Section 5 does not
change the doctrine that municipal corporations do not possess inherent powers of taxation. What it
does is to confer municipal corporations a general power to levy taxes and otherwise create sources of
revenue. They no longer have to wait for a statutory grant of these powers. The power of the legislative
authority relative to the fiscal powers of local governments has been reduced to the authority to impose
limitations on municipal powers. Moreover, these limitations must be "consistent with the basic policy
of local autonomy." The important legal effect of Section 5 is thus to reverse the principle that doubts
are resolved against municipal corporations. Henceforth, in interpreting statutory provisions on
municipal fiscal powers, doubts will be resolved in favor of municipal corporations. It is understood,
however, that taxes imposed by local government must be for a public purpose, uniform within a
locality, must not be confiscatory, and must be within the jurisdiction of the local unit to pass."

In net effect, the controversy presently before the Court involves, at bottom, a clash between the
inherent taxing power of the legislature, which necessarily includes the power to exempt, and the local
government's delegated power to tax under the aegis of the 1987 Constitution.

Now to go back to the Quezon City Revenue Code which imposed real estate taxes on all real properties
within the city's territory and removed exemptions theretofore "previously granted to, or presently
enjoyed by all persons, whether natural or juridical [x x x]" there can really be no dispute that the power
of the Quezon City Government to tax is limited by Section 232 of the LGC which expressly provides that
"a province or city or municipality within the Metropolitan Manila Area may levy an annual ad valorem
tax on real property such as land, building, machinery, and other improvement not hereinafter
specifically exempted." Under this law, the Legislature highlighted its power to thereafter exempt
certain realties from the taxing power of local government units. An interpretation denying Congress
such power to exempt would reduce the phrase "not hereinafter specifically exempted" as a pure
jargon, without meaning whatsoever. Needless to state, such absurd situation is unacceptable.

For sure, in Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of Davao, this Court has
upheld the power of Congress to grant exemptions over the power of local government units to impose
taxes. There, the Court wrote:

"Indeed, the grant of taxing powers to local government units under the Constitution and the LGC does
not affect the power of Congress to grant exemptions to certain persons, pursuant to a declared
national policy. The legal effect of the constitutional grant to local governments simply means that in
interpreting statutory provisions on municipal taxing powers, doubts must be resolved in favor of
municipal corporations."23 (Emphasis supplied)

In the case under review, the Philippine Congress enacted R.A. No. 7966 on March 30, 1995, subsequent
to the effectivity of the LGC on January 1, 1992. Under it, ABS-CBN was granted the franchise to install
and operate radio and television broadcasting stations in the Philippines. Likewise, Section 8 imposed on
ABS-CBN the duty of paying 3% franchise tax. It bears stressing, however, that payment of the
percentage franchise tax shall be "in lieu of all taxes" on the said franchise.24

Congress has the inherent power to tax, which includes the power to grant tax exemptions. On the other
hand, the power of Quezon City to tax is prescribed by Section 151 in relation to Section 137 of the LGC
which expressly provides that notwithstanding any exemption granted by any law or other special law,
the City may impose a franchise tax. It must be noted that Section 137 of the LGC does not prohibit
grant of future exemptions. As earlier discussed, this Court in City Government of Quezon City v. Bayan
Telecommunications, Inc.25 sustained the power of Congress to grant tax exemptions over and above
the power of the local government's delegated power to tax.

B. The more pertinent issue now to consider is whether or not by passing R.A. No. 7966, which contains
the "in lieu of all taxes" provision, Congress intended to exempt ABS-CBN from local franchise tax.

Petitioners argue that the "in lieu of all taxes" provision in ABS-CBN's franchise does not expressly
exempt it from payment of local franchise tax. They contend that a tax exemption cannot be created by
mere implication and that one who claims tax exemptions must be able to justify his claim by clearest
grant of organic law or statute.

Taxes are what civilized people pay for civilized society. They are the lifeblood of the nation. Thus,
statutes granting tax exemptions are construed stricissimi juris against the taxpayer and liberally in favor
of the taxing authority. A claim of tax exemption must be clearly shown and based on language in law
too plain to be mistaken. Otherwise stated, taxation is the rule, exemption is the exception.26 The
burden of proof rests upon the party claiming the exemption to prove that it is in fact covered by the
exemption so claimed.27

The basis for the rule on strict construction to statutory provisions granting tax exemptions or
deductions is to minimize differential treatment and foster impartiality, fairness and equality of
treatment among taxpayers.28 He who claims an exemption from his share of common burden must
justify his claim that the legislature intended to exempt him by unmistakable terms. For exemptions
from taxation are not favored in law, nor are they presumed. They must be expressed in the clearest
and most unambiguous language and not left to mere implications. It has been held that "exemptions
are never presumed, the burden is on the claimant to establish clearly his right to exemption and cannot
be made out of inference or implications but must be laid beyond reasonable doubt. In other words,
since taxation is the rule and exemption the exception, the intention to make an exemption ought to be
expressed in clear and unambiguous terms.29

Section 8 of R.A. No. 7966 imposes on ABS-CBN a franchise tax equivalent to three (3) percent of all
gross receipts of the radio/television business transacted under the franchise and the franchise tax shall
be "in lieu of all taxes" on the franchise or earnings thereof.

The "in lieu of all taxes" provision in the franchise of ABS-CBN does not expressly provide what kind of
taxes ABS-CBN is exempted from. It is not clear whether the exemption would include both local,
whether municipal, city or provincial, and national tax. What is clear is that ABS-CBN shall be liable to
pay three (3) percent franchise tax and income taxes under Title II of the NIRC. But whether the "in lieu
of all taxes provision" would include exemption from local tax is not unequivocal.

As adverted to earlier, the right to exemption from local franchise tax must be clearly established and
cannot be made out of inference or implications but must be laid beyond reasonable doubt. Verily, the
uncertainty in the "in lieu of all taxes" provision should be construed against ABS-CBN. ABS-CBN has the
burden to prove that it is in fact covered by the exemption so claimed. ABS-CBN miserably failed in this
regard.

ABS-CBN cites the cases Carcar Electric & Ice Plant v. Collector of Internal Revenue,30 Manila Railroad v.
Rafferty,31 Philippine Railway Co. v. Collector of Internal Revenue,32 and Visayan Electric Co. v. David33
to support its claim that that the "in lieu of all taxes" clause includes exemption from all taxes.

However, a review of the foregoing case law reveals that the grantees' respective franchises expressly
exempt them from municipal and provincial taxes. Said the Court in Manila Railroad v. Rafferty:34

On the 7th day of July 1906, by an Act of the Philippine Legislature, a special charter was granted to the
Manila Railroad Company. Subsection 12 of Section 1 of said Act (No. 1510) provides that:

"In consideration of the premises and of the granting of this concession or franchise, there shall be paid
by the grantee to the Philippine Government, annually, for the period of thirty (30) years from the date
hereof, an amount equal to one-half (1/2) of one per cent of the gross earnings of the grantee in respect
of the lines covered hereby for the preceding year; after said period of thirty (30) years, and for the fifty
(50) years thereafter, the amount so to be paid annually shall be an amount equal to one and one-half (1
1/2) per cent of such gross earnings for the preceding year; and after such period of eighty (80) years,
the percentage and amount so to be paid annually by the grantee shall be fixed by the Philippine
Government.

Such annual payments, when promptly and fully made by the grantee, shall be in lieu of all taxes of
every name and nature - municipal, provincial or central - upon its capital stock, franchises, right of way,
earnings, and all other property owned or operated by the grantee under this concession or
franchise."35 (Underscoring supplied)

In the case under review, ABS-CBN's franchise did not embody an exemption similar to those in Carcar,
Manila Railroad, Philippine Railway, and Visayan Electric. Too, the franchise failed to specify the taxing
authority from whose jurisdiction the taxing power is withheld, whether municipal, provincial, or
national. In fine, since ABS-CBN failed to justify its claim for exemption from local franchise tax, by a
grant expressed in terms "too plain to be mistaken" its claim for exemption for local franchise tax must
fail.

C. The "in lieu of all taxes" clause in the franchise of ABS-CBN has become functus officio with the
abolition of the franchise tax on broadcasting companies with yearly gross receipts exceeding Ten
Million Pesos.

In its decision dated January 20, 1999, the RTC held that pursuant to the "in lieu of all taxes" provision
contained in Section 8 of R.A. No. 7966, ABS-CBN is exempt from the payment of the local franchise tax.
The RTC further pronounced that ABS-CBN shall instead be liable to pay a franchise tax of 3% of all gross
receipts in lieu of all other taxes.

On this score, the RTC ruling is flawed. In keeping with the laws that have been passed since the grant of
ABS-CBN's franchise, the corporation should now be subject to VAT, instead of the 3% franchise tax.

At the time of the enactment of its franchise on May 3, 1995, ABS-CBN was subject to 3% franchise tax
under Section 117(b) of the 1977 National Internal Revenue Code (NIRC), as amended, viz.:

SECTION 117. Tax on franchises. - Any provision of general or special laws to the contrary
notwithstanding, there shall be levied, assessed and collected in respect to all franchise, upon the gross
receipts from the business covered by the law granting the franchise, a tax in accordance with the
schedule prescribed hereunder:

(a) On electric utilities, city gas, and water supplies Two (2%) percent

(b) On telephone and/or telegraph systems, radio and/or broadcasting stations Three (3%) percent

(c) On other franchises Five (5%) percent. (Emphasis supplied)

On January 1, 1996, R.A. No. 7716, otherwise known as the Expanded Value Added Tax Law,36 took
effect and subjected to VAT those services rendered by radio and/or broadcasting stations. Section 3 of
R.A. No. 7716 provides:

Section 3. Section 102 of the National Internal Revenue Code, as amended is hereby further amended to
read as follows:

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, as value-added tax equivalent to 10% of gross receipts
derived from the sale or exchange of services, including the use or lease of properties.

The phrase "sale or exchange of services" means the performance of all kinds of services in the
Philippines, for others for a fee, remuneration or consideration, including those performed or rendered
by construction and service contractors; x x x services 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 (Emphasis supplied)

Notably, under the same law, "telephone and/or telegraph systems, broadcasting stations and other
franchise grantees" were omitted from the list of entities subject to franchise tax. The impression was
that these entities were subject to 10% VAT but not to franchise tax. Only the franchise tax on "electric,
gas and water utilities" remained. Section 12 of R.A. No. 7716 provides:

Section 12. Section 117 of the National Internal Revenue Code, as amended, is hereby further amended
to read as follows:

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. (Emphasis added)

Subsequently, R.A. No. 824137 took effect on January 1, 199738 containing more amendments to the
NIRC. Radio and/or television companies whose annual gross receipts do not exceed P10,000,000.00
were granted the option to choose between paying 3% national franchise tax or 10% VAT. Section 9 of
R.A. No. 8241 provides:

SECTION 9. Section 12 of Republic Act No. 7716 is hereby amended to read as follows:

"Sec. 12. Section 117 of the National Internal Revenue Code, as amended, is hereby further amended to
read as follows:

"Sec. 117. Tax on franchise. - Any provision of general or special law to the contrary, notwithstanding,
there shall be levied, assessed and collected in respect to all franchises on radio and/or television
broadcasting companies whose annual gross receipts of the preceding year does not exceed Ten million
pesos (P10,000,000.00), subject to Section 107(d) of this Code, a tax of three percent (3%) and 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: Provided, however, That radio and television
broadcasting companies referred to in this section, shall have an option to be registered as a value-
added tax payer and pay the tax due thereon: Provided, further, That once the option is exercised, it
shall not be revoked. (Emphasis supplied)

On the other hand, radio and/or television companies with yearly gross receipts exceeding
P10,000,000.00 were subject to 10% VAT, pursuant to Section 102 of the NIRC.

On January 1, 1998, R.A. No. 842439 was passed confirming the 10% VAT liability of radio and/or
television companies with yearly gross receipts exceeding P10,000,000.00.

R.A. No. 9337 was subsequently enacted and became effective on July 1, 2005. The said law further
amended the NIRC by increasing the rate of VAT to 12%. The effectivity of the imposition of the 12% VAT
was later moved from January 1, 2006 to February 1, 2006.

In consonance with the above survey of pertinent laws on the matter, ABS-CBN is subject to the
payment of VAT. It does not have the option to choose between the payment of franchise tax or VAT
since it is a broadcasting company with yearly gross receipts exceeding Ten Million Pesos
(P10,000,000.00).

VAT is a percentage tax imposed on any person whether or not a franchise grantee, who in the course of
trade or business, sells, barters, exchanges, leases, goods or properties, renders services. It is also levied
on every importation of goods whether or not in the course of trade or business. The tax base of the
VAT is limited only to the value added to such goods, properties, or services by the seller, transferor or
lessor. Further, the VAT is an indirect tax and can be passed on to the buyer.

The franchise tax, on the other hand, is a percentage tax imposed only on franchise holders. It is
imposed under Section 119 of the Tax Code and is a direct liability of the franchise grantee.

The clause "in lieu of all taxes" does not pertain to VAT or any other tax. It cannot apply when what is
paid is a tax other than a franchise tax. Since the franchise tax on the broadcasting companies with
yearly gross receipts exceeding ten million pesos has been abolished, the "in lieu of all taxes" clause has
now become functus officio, rendered inoperative.

In sum, ABS-CBN's claims for exemption must fail on twin grounds. First, the "in lieu of all taxes" clause
in its franchise failed to specify the taxes the company is sought to be exempted from. Neither did it
particularize the jurisdiction from which the taxing power is withheld. Second, the clause has become
functus officio because as the law now stands, ABS-CBN is no longer subject to a franchise tax. It is now
liable for VAT.

WHEREFORE, the petition is GRANTED and the appealed Decision REVERSED AND SET ASIDE. The
petition in the trial court for refund of local franchise tax is DISMISSED.

SO ORDERED.
G.R. No. 168056 September 1, 2005

ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S. ALCANTARA and ED VINCENT S.
ALBANO, Petitioners,
vs.
THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA; HONORABLE SECRETARY OF THE
DEPARTMENT OF FINANCE CESAR PURISIMA; and HONORABLE COMMISSIONER OF INTERNAL REVENUE
GUILLERMO PARAYNO, JR., Respondent.

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

G.R. No. 168207

AQUILINO Q. PIMENTEL, JR., LUISA P. EJERCITO-ESTRADA, JINGGOY E. ESTRADA, PANFILO M. LACSON,
ALFREDO S. LIM, JAMBY A.S. MADRIGAL, AND SERGIO R. OSMEA III, Petitioners,
vs.
EXECUTIVE SECRETARY EDUARDO R. ERMITA, CESAR V. PURISIMA, SECRETARY OF FINANCE, GUILLERMO
L. PARAYNO, JR., COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE, Respondent.

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

G.R. No. 168461

ASSOCIATION OF PILIPINAS SHELL DEALERS, INC. represented by its President, ROSARIO ANTONIO;
PETRON DEALERS ASSOCIATION represented by its President, RUTH E. BARBIBI; ASSOCIATION OF
CALTEX DEALERS OF THE PHILIPPINES represented by its President, MERCEDITAS A. GARCIA; ROSARIO
ANTONIO doing business under the name and style of "ANB NORTH SHELL SERVICE STATION"; LOURDES
MARTINEZ doing business under the name and style of "SHELL GATE N. DOMINGO"; BETHZAIDA TAN
doing business under the name and style of "ADVANCE SHELL STATION"; REYNALDO P. MONTOYA doing
business under the name and style of "NEW LAMUAN SHELL SERVICE STATION"; EFREN SOTTO doing
business under the name and style of "RED FIELD SHELL SERVICE STATION"; DONICA CORPORATION
represented by its President, DESI TOMACRUZ; RUTH E. MARBIBI doing business under the name and
style of "R&R PETRON STATION"; PETER M. UNGSON doing business under the name and style of
"CLASSIC STAR GASOLINE SERVICE STATION"; MARIAN SHEILA A. LEE doing business under the name and
style of "NTE GASOLINE & SERVICE STATION"; JULIAN CESAR P. POSADAS doing business under the name
and style of "STARCARGA ENTERPRISES"; ADORACION MAEBO doing business under the name and
style of "CMA MOTORISTS CENTER"; SUSAN M. ENTRATA doing business under the name and style of
"LEONAS GASOLINE STATION and SERVICE CENTER"; CARMELITA BALDONADO doing business under the
name and style of "FIRST CHOICE SERVICE CENTER"; MERCEDITAS A. GARCIA doing business under the
name and style of "LORPED SERVICE CENTER"; RHEAMAR A. RAMOS doing business under the name and
style of "RJRAM PTT GAS STATION"; MA. ISABEL VIOLAGO doing business under the name and style of
"VIOLAGO-PTT SERVICE CENTER"; MOTORISTS HEART CORPORATION represented by its Vice-President
for Operations, JOSELITO F. FLORDELIZA; MOTORISTS HARVARD CORPORATION represented by its Vice-
President for Operations, JOSELITO F. FLORDELIZA; MOTORISTS HERITAGE CORPORATION represented
by its Vice-President for Operations, JOSELITO F. FLORDELIZA; PHILIPPINE STANDARD OIL CORPORATION
represented by its Vice-President for Operations, JOSELITO F. FLORDELIZA; ROMEO MANUEL doing
business under the name and style of "ROMMAN GASOLINE STATION"; ANTHONY ALBERT CRUZ III doing
business under the name and style of "TRUE SERVICE STATION", Petitioners,
vs.
CESAR V. PURISIMA, in his capacity as Secretary of the Department of Finance and GUILLERMO L.
PARAYNO, JR., in his capacity as Commissioner of Internal Revenue, Respondent.

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

G.R. No. 168463

FRANCIS JOSEPH G. ESCUDERO, VINCENT CRISOLOGO, EMMANUEL JOEL J. VILLANUEVA, RODOLFO G.
PLAZA, DARLENE ANTONINO-CUSTODIO, OSCAR G. MALAPITAN, BENJAMIN C. AGARAO, JR. JUAN
EDGARDO M. ANGARA, JUSTIN MARC SB. CHIPECO, FLORENCIO G. NOEL, MUJIV S. HATAMAN, RENATO
B. MAGTUBO, JOSEPH A. SANTIAGO, TEOFISTO DL. GUINGONA III, RUY ELIAS C. LOPEZ, RODOLFO Q.
AGBAYANI and TEODORO A. CASIO, Petitioners,
vs.
CESAR V. PURISIMA, in his capacity as Secretary of Finance, GUILLERMO L. PARAYNO, JR., in his capacity
as Commissioner of Internal Revenue, and EDUARDO R. ERMITA, in his capacity as Executive Secretary,
Respondent.

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

G.R. No. 168730

BATAAN GOVERNOR ENRIQUE T. GARCIA, JR. Petitioner,
vs.
HON. EDUARDO R. ERMITA, in his capacity as the Executive Secretary; HON. MARGARITO TEVES, in his
capacity as Secretary of Finance; HON. JOSE MARIO BUNAG, in his capacity as the OIC Commissioner of
the Bureau of Internal Revenue; and HON. ALEXANDER AREVALO, in his capacity as the OIC
Commissioner of the Bureau of Customs, Respondent.

D E C I S I O N

AUSTRIA-MARTINEZ, J.:

The expenses of government, having for their object the interest of all, should be borne by everyone,
and the more man enjoys the advantages of society, the more he ought to hold himself honored in
contributing to those expenses.

-Anne Robert Jacques Turgot (1727-1781)

French statesman and economist

Mounting budget deficit, revenue generation, inadequate fiscal allocation for education, increased
emoluments for health workers, and wider coverage for full value-added tax benefits these are the
reasons why Republic Act No. 9337 (R.A. No. 9337)1 was enacted. Reasons, the wisdom of which, the
Court even with its extensive constitutional power of review, cannot probe. The petitioners in these
cases, however, question not only the wisdom of the law, but also perceived constitutional infirmities in
its passage.

Every law enjoys in its favor the presumption of constitutionality. Their arguments notwithstanding,
petitioners failed to justify their call for the invalidity of the law. Hence, R.A. No. 9337 is not
unconstitutional.

LEGISLATIVE HISTORY

R.A. No. 9337 is a consolidation of three legislative bills namely, House Bill Nos. 3555 and 3705, and
Senate Bill No. 1950.

House Bill No. 35552 was introduced on first reading on January 7, 2005. The House Committee on Ways
and Means approved the bill, in substitution of House Bill No. 1468, which Representative (Rep.) Eric D.
Singson introduced on August 8, 2004. The President certified the bill on January 7, 2005 for immediate
enactment. On January 27, 2005, the House of Representatives approved the bill on second and third
reading.

House Bill No. 37053 on the other hand, substituted House Bill No. 3105 introduced by Rep. Salacnib F.
Baterina, and House Bill No. 3381 introduced by Rep. Jacinto V. Paras. Its "mother bill" is House Bill No.
3555. The House Committee on Ways and Means approved the bill on February 2, 2005. The President
also certified it as urgent on February 8, 2005. The House of Representatives approved the bill on
second and third reading on February 28, 2005.

Meanwhile, the Senate Committee on Ways and Means approved Senate Bill No. 19504 on March 7,
2005, "in substitution of Senate Bill Nos. 1337, 1838 and 1873, taking into consideration House Bill Nos.
3555 and 3705." Senator Ralph G. Recto sponsored Senate Bill No. 1337, while Senate Bill Nos. 1838 and
1873 were both sponsored by Sens. Franklin M. Drilon, Juan M. Flavier and Francis N. Pangilinan. The
President certified the bill on March 11, 2005, and was approved by the Senate on second and third
reading on April 13, 2005.

On the same date, April 13, 2005, the Senate agreed to the request of the House of Representatives for
a committee conference on the disagreeing provisions of the proposed bills.

Before long, the Conference Committee on the Disagreeing Provisions of House Bill No. 3555, House Bill
No. 3705, and Senate Bill No. 1950, "after having met and discussed in full free and conference,"
recommended the approval of its report, which the Senate did on May 10, 2005, and with the House of
Representatives agreeing thereto the next day, May 11, 2005.

On May 23, 2005, the enrolled copy of the consolidated House and Senate version was transmitted to
the President, who signed the same into law on May 24, 2005. Thus, came R.A. No. 9337.

July 1, 2005 is the effectivity date of R.A. No. 9337.5 When said date came, the Court issued a temporary
restraining order, effective immediately and continuing until further orders, enjoining respondents from
enforcing and implementing the law.

Oral arguments were held on July 14, 2005. Significantly, during the hearing, the Court speaking through
Mr. Justice Artemio V. Panganiban, voiced the rationale for its issuance of the temporary restraining
order on July 1, 2005, to wit:

J. PANGANIBAN : . . . But before I go into the details of your presentation, let me just tell you a little
background. You know when the law took effect on July 1, 2005, the Court issued a TRO at about 5
oclock in the afternoon. But before that, there was a lot of complaints aired on television and on radio.
Some people in a gas station were complaining that the gas prices went up by 10%. Some people were
complaining that their electric bill will go up by 10%. Other times people riding in domestic air carrier
were complaining that the prices that theyll have to pay would have to go up by 10%. While all that was
being aired, per your presentation and per our own understanding of the law, thats not true. Its not
true that the e-vat law necessarily increased prices by 10% uniformly isnt it?

ATTY. BANIQUED : No, Your Honor.

J. PANGANIBAN : It is not?

ATTY. BANIQUED : Its not, because, Your Honor, there is an Executive Order that granted the Petroleum
companies some subsidy . . . interrupted

J. PANGANIBAN : Thats correct . . .

ATTY. BANIQUED : . . . and therefore that was meant to temper the impact . . . interrupted

J. PANGANIBAN : . . . mitigating measures . . .

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : As a matter of fact a part of the mitigating measures would be the elimination of the
Excise Tax and the import duties. That is why, it is not correct to say that the VAT as to petroleum
dealers increased prices by 10%.

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : And therefore, there is no justification for increasing the retail price by 10% to cover
the E-Vat tax. If you consider the excise tax and the import duties, the Net Tax would probably be in the
neighborhood of 7%? We are not going into exact figures I am just trying to deliver a point that different
industries, different products, different services are hit differently. So its not correct to say that all
prices must go up by 10%.

ATTY. BANIQUED : Youre right, Your Honor.

J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr. Counsel, are at present imposed a
Sales Tax of 3%. When this E-Vat law took effect the Sales Tax was also removed as a mitigating
measure. So, therefore, there is no justification to increase the fares by 10% at best 7%, correct?

ATTY. BANIQUED : I guess so, Your Honor, yes.

J. PANGANIBAN : There are other products that the people were complaining on that first day, were
being increased arbitrarily by 10%. And thats one reason among many others this Court had to issue
TRO because of the confusion in the implementation. Thats why we added as an issue in this case, even
if its tangentially taken up by the pleadings of the parties, the confusion in the implementation of the E-
vat. Our people were subjected to the mercy of that confusion of an across the board increase of 10%,
which you yourself now admit and I think even the Government will admit is incorrect. In some cases, it
should be 3% only, in some cases it should be 6% depending on these mitigating measures and the
location and situation of each product, of each service, of each company, isnt it?

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : Alright. So thats one reason why we had to issue a TRO pending the clarification of all
these and we wish the government will take time to clarify all these by means of a more detailed
implementing rules, in case the law is upheld by this Court. . . .6

The Court also directed the parties to file their respective Memoranda.

G.R. No. 168056

Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a petition for
prohibition on May 27, 2005. They question the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337,
amending Sections 106, 107 and 108, respectively, of the National Internal Revenue Code (NIRC).
Section 4 imposes a 10% VAT on sale of goods and properties, Section 5 imposes a 10% VAT on
importation of goods, and Section 6 imposes a 10% VAT on sale of services and use or lease of
properties. These questioned provisions contain a uniform proviso authorizing the President, upon
recommendation of the Secretary of Finance, to raise the VAT rate to 12%, effective January 1, 2006,
after any of the following conditions have been satisfied, to wit:

. . . That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1,
2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has
been satisfied:

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

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

Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of its
exclusive authority to fix the rate of taxes under Article VI, Section 28(2) of the 1987 Philippine
Constitution.

G.R. No. 168207

On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition for certiorari likewise assailing the
constitutionality of Sections 4, 5 and 6 of R.A. No. 9337.

Aside from questioning the so-called stand-by authority of the President to increase the VAT rate to
12%, on the ground that it amounts to an undue delegation of legislative power, petitioners also
contend that the increase in the VAT rate to 12% contingent on any of the two conditions being satisfied
violates the due process clause embodied in Article III, Section 1 of the Constitution, as it imposes an
unfair and additional tax burden on the people, in that: (1) the 12% increase is ambiguous because it
does not state if the rate would be returned to the original 10% if the conditions are no longer satisfied;
(2) the rate is unfair and unreasonable, as the people are unsure of the applicable VAT rate from year to
year; and (3) the increase in the VAT rate, which is supposed to be an incentive to the President to raise
the VAT collection to at least 2 4/5 of the GDP of the previous year, should only be based on fiscal
adequacy.

Petitioners further claim that the inclusion of a stand-by authority granted to the President by the
Bicameral Conference Committee is a violation of the "no-amendment rule" upon last reading of a bill
laid down in Article VI, Section 26(2) of the Constitution.

G.R. No. 168461

Thereafter, a petition for prohibition was filed on June 29, 2005, by the Association of Pilipinas Shell
Dealers, Inc., et al., assailing the following provisions of R.A. No. 9337:

1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the input tax on depreciable goods
shall be amortized over a 60-month period, if the acquisition, excluding the VAT components, exceeds
One Million Pesos (P1, 000,000.00);

2) Section 8, amending Section 110 (B) of the NIRC, imposing a 70% limit on the amount of input tax to
be credited against the output tax; and

3) Section 12, amending Section 114 (c) of the NIRC, authorizing the Government or any of its political
subdivisions, instrumentalities or agencies, including GOCCs, to deduct a 5% final withholding tax on
gross payments of goods and services, which are subject to 10% VAT under Sections 106 (sale of goods
and properties) and 108 (sale of services and use or lease of properties) of the NIRC.

Petitioners contend that these provisions are unconstitutional for being arbitrary, oppressive, excessive,
and confiscatory.

Petitioners argument is premised on the constitutional right of non-deprivation of life, liberty or
property without due process of law under Article III, Section 1 of the Constitution. According to
petitioners, the contested sections impose limitations on the amount of input tax that may be claimed.
Petitioners also argue that the input tax partakes the nature of a property that may not be confiscated,
appropriated, or limited without due process of law. Petitioners further contend that like any other
property or property right, the input tax credit may be transferred or disposed of, and that by limiting
the same, the government gets to tax a profit or value-added even if there is no profit or value-added.

Petitioners also believe that these provisions violate the constitutional guarantee of equal protection of
the law under Article III, Section 1 of the Constitution, as the limitation on the creditable input tax if: (1)
the entity has a high ratio of input tax; or (2) invests in capital equipment; or (3) has several transactions
with the government, is not based on real and substantial differences to meet a valid classification.

Lastly, petitioners contend that the 70% limit is anything but progressive, violative of Article VI, Section
28(1) of the Constitution, and that it is the smaller businesses with higher input tax to output tax ratio
that will suffer the consequences thereof for it wipes out whatever meager margins the petitioners
make.

G.R. No. 168463

Several members of the House of Representatives led by Rep. Francis Joseph G. Escudero filed this
petition for certiorari on June 30, 2005. They question the constitutionality of R.A. No. 9337 on the
following grounds:

1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of legislative power, in violation
of Article VI, Section 28(2) of the Constitution;

2) The Bicameral Conference Committee acted without jurisdiction in deleting the no pass on provisions
present in Senate Bill No. 1950 and House Bill No. 3705; and

3) Insertion by the Bicameral Conference Committee of Sections 27, 28, 34, 116, 117, 119, 121, 125,7
148, 151, 236, 237 and 288, which were present in Senate Bill No. 1950, violates Article VI, Section 24(1)
of the Constitution, which provides that all appropriation, revenue or tariff bills shall originate
exclusively in the House of Representatives

G.R. No. 168730

On the eleventh hour, Governor Enrique T. Garcia filed a petition for certiorari and prohibition on July
20, 2005, alleging unconstitutionality of the law on the ground that the limitation on the creditable input
tax in effect allows VAT-registered establishments to retain a portion of the taxes they collect, thus
violating the principle that tax collection and revenue should be solely allocated for public purposes and
expenditures. Petitioner Garcia further claims that allowing these establishments to pass on the tax to
the consumers is inequitable, in violation of Article VI, Section 28(1) of the Constitution.

RESPONDENTS COMMENT

The Office of the Solicitor General (OSG) filed a Comment in behalf of respondents. Preliminarily,
respondents contend that R.A. No. 9337 enjoys the presumption of constitutionality and petitioners
failed to cast doubt on its validity.

Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA

630 (1994), respondents argue that the procedural issues raised by petitioners, i.e., legality of the
bicameral proceedings, exclusive origination of revenue measures and the power of the Senate
concomitant thereto, have already been settled. With regard to the issue of undue delegation of
legislative power to the President, respondents contend that the law is complete and leaves no
discretion to the President but to increase the rate to 12% once any of the two conditions provided
therein arise.

Respondents also refute petitioners argument that the increase to 12%, as well as the 70% limitation on
the creditable input tax, the 60-month amortization on the purchase or importation of capital goods
exceeding P1,000,000.00, and the 5% final withholding tax by government agencies, is arbitrary,
oppressive, and confiscatory, and that it violates the constitutional principle on progressive taxation,
among others.

Finally, respondents manifest that R.A. No. 9337 is the anchor of the governments fiscal reform agenda.
A reform in the value-added system of taxation is the core revenue measure that will tilt the balance
towards a sustainable macroeconomic environment necessary for economic growth.

ISSUES

The Court defined the issues, as follows:

PROCEDURAL ISSUE

Whether R.A. No. 9337 violates the following provisions of the Constitution:

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

SUBSTANTIVE ISSUES

1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC,
violate the following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article VI, Section 28(2)

2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section
12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the following provisions of the
Constitution:

a. Article VI, Section 28(1), and

b. Article III, Section 1

RULING OF THE COURT

As a prelude, the Court deems it apt to restate the general principles and concepts of value-added tax
(VAT), as the confusion and inevitably, litigation, breeds from a fallacious notion of its nature.

The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of goods
or properties and services.8 Being an indirect tax on expenditure, the seller of goods or services may
pass on the amount of tax paid to the buyer,9 with the seller acting merely as a tax collector.10 The
burden of VAT is intended to fall on the immediate buyers and ultimately, the end-consumers.

In contrast, a direct tax is a tax for which a taxpayer is directly liable on the transaction or business it
engages in, without transferring the burden to someone else.11 Examples are individual and corporate
income taxes, transfer taxes, and residence taxes.12

In the Philippines, the value-added system of sales taxation has long been in existence, albeit in a
different mode. Prior to 1978, the system was a single-stage tax computed under the "cost deduction
method" and was payable only by the original sellers. The single-stage system was subsequently
modified, and a mixture of the "cost deduction method" and "tax credit method" was used to determine
the value-added tax payable.13 Under the "tax credit method," 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.14

It was only in 1987, when President Corazon C. Aquino issued Executive Order No. 273, that the VAT
system was rationalized by imposing a multi-stage tax rate of 0% or 10% on all sales using the "tax credit
method."15

E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law,16 R.A. No. 8241 or the Improved
VAT Law,17 R.A. No. 8424 or the Tax Reform Act of 1997,18 and finally, the presently beleaguered R.A.
No. 9337, also referred to by respondents as the VAT Reform Act.

The Court will now discuss the issues in logical sequence.

PROCEDURAL ISSUE

I.

Whether R.A. No. 9337 violates the following provisions of the Constitution:

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

A. The Bicameral Conference Committee

Petitioners Escudero, et al., and Pimentel, et al., allege that the Bicameral Conference Committee
exceeded its authority by:

1) Inserting the stand-by authority in favor of the President in Sections 4, 5, and 6 of R.A. No. 9337;

2) Deleting entirely the no pass-on provisions found in both the House and Senate bills;

3) Inserting the provision imposing a 70% limit on the amount of input tax to be credited against the
output tax; and

4) Including the amendments introduced only by Senate Bill No. 1950 regarding other kinds of taxes in
addition to the value-added tax.

Petitioners now beseech the Court to define the powers of the Bicameral Conference Committee.

It should be borne in mind that the power of internal regulation and discipline are intrinsic in any
legislative body for, as unerringly elucidated by Justice Story, "[i]f the power did not exist, it would be
utterly impracticable to transact the business of the nation, either at all, or at least with decency,
deliberation, and order."19 Thus, Article VI, Section 16 (3) of the Constitution provides that "each House
may determine the rules of its proceedings." Pursuant to this inherent constitutional power to
promulgate and implement its own rules of procedure, the respective rules of each house of Congress
provided for the creation of a Bicameral Conference Committee.

Thus, Rule XIV, Sections 88 and 89 of the Rules of House of Representatives provides as follows:

Sec. 88. Conference Committee. In the event that the House does not agree with the Senate on the
amendment to any bill or joint resolution, the differences may be settled by the conference committees
of both chambers.

In resolving the differences with the Senate, the House panel shall, as much as possible, adhere to and
support the House Bill. If the differences with the Senate are so substantial that they materially impair
the House Bill, the panel shall report such fact to the House for the latters appropriate action.

Sec. 89. Conference Committee Reports. . . . Each report shall contain a detailed, sufficiently explicit
statement of the changes in or amendments to the subject measure.

. . .

The Chairman of the House panel may be interpellated on the Conference Committee Report prior to
the voting thereon. The House shall vote on the Conference Committee Report in the same manner and
procedure as it votes on a bill on third and final reading.


Rule XII, Section 35 of the Rules of the Senate states:

Sec. 35. In the event that the Senate does not agree with the House of Representatives on the provision
of any bill or joint resolution, the differences shall be settled by a conference committee of both Houses
which shall meet within ten (10) days after their composition. The President shall designate the
members of the Senate Panel in the conference committee with the approval of the Senate.

Each Conference Committee Report shall contain a detailed and sufficiently explicit statement of the
changes in, or amendments to the subject measure, and shall be signed by a majority of the members of
each House panel, voting separately.

A comparative presentation of the conflicting House and Senate provisions and a reconciled version
thereof with the explanatory statement of the conference committee shall be attached to the report.

. . .

The creation of such conference committee was apparently in response to a problem, not addressed by
any constitutional provision, where the two houses of Congress find themselves in disagreement over
changes or amendments introduced by the other house in a legislative bill. Given that one of the most
basic powers of the legislative branch is to formulate and implement its own rules of proceedings and to
discipline its members, may the Court then delve into the details of how Congress complies with its
internal rules or how it conducts its business of passing legislation? Note that in the present petitions,
the issue is not whether provisions of the rules of both houses creating the bicameral conference
committee are unconstitutional, but whether the bicameral conference committee has strictly complied
with the rules of both houses, thereby remaining within the jurisdiction conferred upon it by Congress.

In the recent case of Farias vs. The Executive Secretary,20 the Court En Banc, unanimously reiterated
and emphasized its adherence to the "enrolled bill doctrine," thus, declining therein petitioners plea for
the Court to go behind the enrolled copy of the bill. Assailed in said case was Congresss creation of two
sets of bicameral conference committees, the lack of records of said committees proceedings, the
alleged violation of said committees of the rules of both houses, and the disappearance or deletion of
one of the provisions in the compromise bill submitted by the bicameral conference committee. It was
argued that such irregularities in the passage of the law nullified R.A. No. 9006, or the Fair Election Act.

Striking down such argument, the Court held thus:

Under the "enrolled bill doctrine," the signing of a bill by the Speaker of the House and the Senate
President and the certification of the Secretaries of both Houses of Congress that it was passed are
conclusive of its due enactment. A review of cases reveals the Courts consistent adherence to the rule.
The Court finds no reason to deviate from the salutary rule in this case where the irregularities alleged
by the petitioners mostly involved the internal rules of Congress, e.g., creation of the 2nd or 3rd
Bicameral Conference Committee by the House. This Court is not the proper forum for the enforcement
of these internal rules of Congress, whether House or Senate. Parliamentary rules are merely procedural
and with their observance the courts have no concern. Whatever doubts there may be as to the formal
validity of Rep. Act No. 9006 must be resolved in its favor. The Court reiterates its ruling in Arroyo vs. De
Venecia, viz.:

But the cases, both here and abroad, in varying forms of expression, all deny to the courts the power to
inquire into allegations that, in enacting a law, a House of Congress failed to comply with its own rules,
in the absence of showing that there was a violation of a constitutional provision or the rights of private
individuals. In Osmea v. Pendatun, it was held: "At any rate, courts have declared that the rules
adopted by deliberative bodies are subject to revocation, modification or waiver at the pleasure of the
body adopting them. And it has been said that "Parliamentary rules are merely procedural, and with
their observance, the courts have no concern. They may be waived or disregarded by the legislative
body." Consequently, "mere failure to conform to parliamentary usage will not invalidate the action
(taken by a deliberative body) when the requisite number of members have agreed to a particular
measure."21 (Emphasis supplied)

The foregoing declaration is exactly in point with the present cases, where petitioners allege
irregularities committed by the conference committee in introducing changes or deleting provisions in
the House and Senate bills. Akin to the Farias case,22 the present petitions also raise an issue regarding
the actions taken by the conference committee on matters regarding Congress compliance with its own
internal rules. As stated earlier, one of the most basic and inherent power of the legislature is the power
to formulate rules for its proceedings and the discipline of its members. Congress is the best judge of
how it should conduct its own business expeditiously and in the most orderly manner. It is also the sole

concern of Congress to instill discipline among the members of its conference committee if it believes
that said members violated any of its rules of proceedings. Even the expanded jurisdiction of this Court
cannot apply to questions regarding only the internal operation of Congress, thus, the Court is wont to
deny a review of the internal proceedings of a co-equal branch of government.

Moreover, as far back as 1994 or more than ten years ago, in the case of Tolentino vs. Secretary of
Finance,23 the Court already made the pronouncement that "[i]f a change is desired in the practice [of
the Bicameral Conference Committee] it must be sought in Congress since this question is not covered
by any constitutional provision but is only an internal rule of each house." 24 To date, Congress has not
seen it fit to make such changes adverted to by the Court. It seems, therefore, that Congress finds the
practices of the bicameral conference committee to be very useful for purposes of prompt and efficient
legislative action.

Nevertheless, just to put minds at ease that no blatant irregularities tainted the proceedings of the
bicameral conference committees, the Court deems it necessary to dwell on the issue. The Court
observes that there was a necessity for a conference committee because a comparison of the provisions
of House Bill Nos. 3555 and 3705 on one hand, and Senate Bill No. 1950 on the other, reveals that there
were indeed disagreements. As pointed out in the petitions, said disagreements were as follows:

House Bill No. 3555


House Bill No.3705


Senate Bill No. 1950

With regard to "Stand-By Authority" in favor of President

Provides for 12% VAT on every sale of goods or properties (amending Sec. 106 of NIRC); 12% VAT on
importation of goods (amending Sec. 107 of NIRC); and 12% VAT on sale of services and use or lease of
properties (amending Sec. 108 of NIRC)


Provides for 12% VAT in general on sales of goods or properties and reduced rates for sale of certain
locally manufactured goods and petroleum products and raw materials to be used in the manufacture
thereof (amending Sec. 106 of NIRC); 12% VAT on importation of goods and reduced rates for certain
imported products including petroleum products (amending Sec. 107 of NIRC); and 12% VAT on sale of
services and use or lease of properties and a reduced rate for certain services including power
generation (amending Sec. 108 of NIRC)


Provides for a single rate of 10% VAT on sale of goods or properties (amending Sec. 106 of NIRC), 10%
VAT on sale of services including sale of electricity by generation companies, transmission and
distribution companies, and use or lease of properties (amending Sec. 108 of NIRC)

With regard to the "no pass-on" provision

No similar provision


Provides that the VAT imposed on power generation and on the sale of petroleum products shall be
absorbed by generation companies or sellers, respectively, and shall not be passed on to consumers


Provides that the VAT imposed on sales of electricity by generation companies and services of
transmission companies and distribution companies, as well as those of franchise grantees of electric
utilities shall not apply to residential

end-users. VAT shall be absorbed by generation, transmission, and distribution companies.

With regard to 70% limit on input tax credit

Provides that the input tax credit for capital goods on which a VAT has been paid shall be equally
distributed over 5 years or the depreciable life of such capital goods; the input tax credit for goods and
services other than capital goods shall not exceed 5% of the total amount of such goods and services;
and for persons engaged in retail trading of goods, the allowable input tax credit shall not exceed 11% of
the total amount of goods purchased.


No similar provision


Provides that the input tax credit for capital goods on which a VAT has been paid shall be equally
distributed over 5 years or the depreciable life of such capital goods; the input tax credit for goods and
services other than capital goods shall not exceed 90% of the output VAT.

With regard to amendments to be made to NIRC provisions regarding income and excise taxes

No similar provision


No similar provision


Provided for amendments to several NIRC provisions regarding corporate income, percentage, franchise
and excise taxes

The disagreements between the provisions in the House bills and the Senate bill were with regard to (1)
what rate of VAT is to be imposed; (2) whether only the VAT imposed on electricity generation,
transmission and distribution companies should not be passed on to consumers, as proposed in the
Senate bill, or both the VAT imposed on electricity generation, transmission and distribution companies
and the VAT imposed on sale of petroleum products should not be passed on to consumers, as proposed
in the House bill; (3) in what manner input tax credits should be limited; (4) and whether the NIRC
provisions on corporate income taxes, percentage, franchise and excise taxes should be amended.

There being differences and/or disagreements on the foregoing provisions of the House and Senate bills,
the Bicameral Conference Committee was mandated by the rules of both houses of Congress to act on
the same by settling said differences and/or disagreements. The Bicameral Conference Committee acted
on the disagreeing provisions by making the following changes:

1. With regard to the disagreement on the rate of VAT to be imposed, it would appear from the
Conference Committee Report that the Bicameral Conference Committee tried to bridge the gap in the
difference between the 10% VAT rate proposed by the Senate, and the various rates with 12% as the
highest VAT rate proposed by the House, by striking a compromise whereby the present 10% VAT rate
would be retained until certain conditions arise, i.e., the value-added tax collection as a percentage of
gross domestic product (GDP) of the previous year exceeds 2 4/5%, or National Government deficit as a
percentage of GDP of the previous year exceeds 1%, when the President, upon recommendation of the
Secretary of Finance shall raise the rate of VAT to 12% effective January 1, 2006.

2. With regard to the disagreement on whether only the VAT imposed on electricity generation,
transmission and distribution companies should not be passed on to consumers or whether both the
VAT imposed on electricity generation, transmission and distribution companies and the VAT imposed
on sale of petroleum products may be passed on to consumers, the Bicameral Conference Committee
chose to settle such disagreement by altogether deleting from its Report any no pass-on provision.

3. With regard to the disagreement on whether input tax credits should be limited or not, the Bicameral
Conference Committee decided to adopt the position of the House by putting a limitation on the
amount of input tax that may be credited against the output tax, although it crafted its own language as
to the amount of the limitation on input tax credits and the manner of computing the same by providing
thus:

(A) Creditable Input Tax. . . .

. . .

Provided, The input tax on goods purchased or imported in a calendar month for use in trade or
business for which deduction for depreciation is allowed under this Code, shall be spread evenly over
the month of acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition cost for
such goods, excluding the VAT component thereof, exceeds one million Pesos (P1,000,000.00):
PROVIDED, however, that if the estimated useful life of the capital good is less than five (5) years, as
used for depreciation purposes, then the input VAT shall be spread over such shorter period: . . .

(B) Excess Output or Input Tax. If at the end of any taxable quarter the output tax exceeds the input
tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the
excess shall be carried over to the succeeding quarter or quarters: PROVIDED that the input tax inclusive
of input VAT carried over from the previous quarter that may be credited in every quarter shall not
exceed seventy percent (70%) of the output VAT: PROVIDED, HOWEVER, THAT any input tax attributable
to zero-rated sales by a VAT-registered person may at his option be refunded or credited against other
internal revenue taxes, . . .

4. With regard to the amendments to other provisions of the NIRC on corporate income tax, franchise,
percentage and excise taxes, the conference committee decided to include such amendments and
basically adopted the provisions found in Senate Bill No. 1950, with some changes as to the rate of the
tax to be imposed.

Under the provisions of both the Rules of the House of Representatives and Senate Rules, the Bicameral
Conference Committee is mandated to settle the differences between the disagreeing provisions in the
House bill and the Senate bill. The term "settle" is synonymous to "reconcile" and "harmonize."25 To
reconcile or harmonize disagreeing provisions, the Bicameral Conference Committee may then (a) adopt
the specific provisions of either the House bill or Senate bill, (b) decide that neither provisions in the
House bill or the provisions in the Senate bill would

be carried into the final form of the bill, and/or (c) try to arrive at a compromise between the
disagreeing provisions.

In the present case, the changes introduced by the Bicameral Conference Committee on disagreeing
provisions were meant only to reconcile and harmonize the disagreeing provisions for it did not inject
any idea or intent that is wholly foreign to the subject embraced by the original provisions.

The so-called stand-by authority in favor of the President, whereby the rate of 10% VAT wanted by the
Senate is retained until such time that certain conditions arise when the 12% VAT wanted by the House
shall be imposed, appears to be a compromise to try to bridge the difference in the rate of VAT
proposed by the two houses of Congress. Nevertheless, such compromise is still totally within the
subject of what rate of VAT should be imposed on taxpayers.

The no pass-on provision was deleted altogether. In the transcripts of the proceedings of the Bicameral
Conference Committee held on May 10, 2005, Sen. Ralph Recto, Chairman of the Senate Panel,
explained the reason for deleting the no pass-on provision in this wise:

. . . the thinking was just to keep the VAT law or the VAT bill simple. And we were thinking that no sector
should be a beneficiary of legislative grace, neither should any sector be discriminated on. The VAT is an
indirect tax. It is a pass on-tax. And lets keep it plain and simple. Lets not confuse the bill and put a no
pass-on provision. Two-thirds of the world have a VAT system and in this two-thirds of the globe, I have
yet to see a VAT with a no pass-though provision. So, the thinking of the Senate is basically simple, lets
keep the VAT simple.26 (Emphasis supplied)

Rep. Teodoro Locsin further made the manifestation that the no pass-on provision "never really enjoyed
the support of either House."27

With regard to the amount of input tax to be credited against output tax, the Bicameral Conference
Committee came to a compromise on the percentage rate of the limitation or cap on such input tax
credit, but again, the change introduced by the Bicameral Conference Committee was totally within the
intent of both houses to put a cap on input tax that may be

credited against the output tax. From the inception of the subject revenue bill in the House of
Representatives, one of the major objectives was to "plug a glaring loophole in the tax policy and
administration by creating vital restrictions on the claiming of input VAT tax credits . . ." and "[b]y
introducing limitations on the claiming of tax credit, we are capping a major leakage that has placed our
collection efforts at an apparent disadvantage."28

As to the amendments to NIRC provisions on taxes other than the value-added tax proposed in Senate
Bill No. 1950, since said provisions were among those referred to it, the conference committee had to
act on the same and it basically adopted the version of the Senate.

Thus, all the changes or modifications made by the Bicameral Conference Committee were germane to
subjects of the provisions referred

to it for reconciliation. Such being the case, the Court does not see any grave abuse of discretion
amounting to lack or excess of jurisdiction committed by the Bicameral Conference Committee. In the
earlier cases of Philippine Judges Association vs. Prado29 and Tolentino vs. Secretary of Finance,30 the
Court recognized the long-standing legislative practice of giving said conference committee ample
latitude for compromising differences between the Senate and the House. Thus, in the Tolentino case, it
was held that:

. . . it is within the power of a conference committee to include in its report an entirely new provision
that is not found either in the House bill or in the Senate bill. If the committee can propose an
amendment consisting of one or two provisions, there is no reason why it cannot propose several
provisions, collectively considered as an "amendment in the nature of a substitute," so long as such
amendment is germane to the subject of the bills before the committee. After all, its report was not final
but needed the approval of both houses of Congress to become valid as an act of the legislative
department. The charge that in this case the Conference Committee acted as a third legislative chamber
is thus without any basis.31 (Emphasis supplied)

B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of the Constitution on the "No-Amendment
Rule"

Article VI, Sec. 26 (2) of the Constitution, states:

No bill passed by either House shall become a law unless it has passed three readings on separate days,
and printed copies thereof in its final form have been distributed to its Members three days before its
passage, except when the President certifies to the necessity of its immediate enactment to meet a
public calamity or emergency. Upon the last reading of a bill, no amendment thereto shall be allowed,
and the vote thereon shall be taken immediately thereafter, and the yeas and nays entered in the
Journal.

Petitioners argument that the practice where a bicameral conference committee is allowed to add or
delete provisions in the House bill and the Senate bill after these had passed three readings is in effect a
circumvention of the "no amendment rule" (Sec. 26 (2), Art. VI of the 1987 Constitution), fails to
convince the Court to deviate from its ruling in the Tolentino case that:

Nor is there any reason for requiring that the Committees Report in these cases must have undergone
three readings in each of the two houses. If that be the case, there would be no end to negotiation since
each house may seek modification of the compromise bill. . . .

Art. VI. 26 (2) must, therefore, be construed as referring only to bills introduced for the first time in
either house of Congress, not to the conference committee report.32 (Emphasis supplied)

The Court reiterates here that the "no-amendment rule" refers only to the procedure to be followed by
each house of Congress with regard to bills initiated in each of said respective houses, before said bill is
transmitted to the other house for its concurrence or amendment. Verily, to construe said provision in a
way as to proscribe any further changes to a bill after one house has voted on it would lead to absurdity
as this would mean that the other house of Congress would be deprived of its constitutional power to
amend or introduce changes to said bill. Thus, Art. VI, Sec. 26 (2) of the Constitution cannot be taken to
mean that the introduction by the Bicameral Conference Committee of amendments and modifications
to disagreeing provisions in bills that have been acted upon by both houses of Congress is prohibited.

C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the Constitution on Exclusive Origination of
Revenue Bills

Coming to the issue of the validity of the amendments made regarding the NIRC provisions on corporate
income taxes and percentage, excise taxes. Petitioners refer to the following provisions, to wit:

Section 27

Rates of Income Tax on Domestic Corporation

28(A)(1)

Tax on Resident Foreign Corporation

28(B)(1)

Inter-corporate Dividends

34(B)(1)

Inter-corporate Dividends

116

Tax on Persons Exempt from VAT

117

Percentage Tax on domestic carriers and keepers of Garage

119

Tax on franchises

121

Tax on banks and Non-Bank Financial Intermediaries

148

Excise Tax on manufactured oils and other fuels

151

Excise Tax on mineral products

236

Registration requirements

237

Issuance of receipts or sales or commercial invoices

288

Disposition of Incremental Revenue

Petitioners claim that the amendments to these provisions of the NIRC did not at all originate from the
House. They aver that House Bill No. 3555 proposed amendments only regarding Sections 106, 107, 108,
110 and 114 of the NIRC, while House Bill No. 3705 proposed amendments only to Sections 106,
107,108, 109, 110 and 111 of the NIRC; thus, the other sections of the NIRC which the Senate amended
but which amendments were not found in the House bills are not intended to be amended by the House
of Representatives. Hence, they argue that since the proposed amendments did not originate from the
House, such amendments are a violation of Article VI, Section 24 of the Constitution.

The argument does not hold water.

Article VI, Section 24 of the Constitution reads:

Sec. 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local
application, and private bills shall originate exclusively in the House of Representatives but the Senate
may propose or concur with amendments.

In the present cases, petitioners admit that it was indeed House Bill Nos. 3555 and 3705 that initiated
the move for amending provisions of the NIRC dealing mainly with the value-added tax. Upon
transmittal of said House bills to the Senate, the Senate came out with Senate Bill No. 1950 proposing
amendments not only to NIRC provisions on the value-added tax but also amendments to NIRC
provisions on other kinds of taxes. Is the introduction by the Senate of provisions not dealing directly
with the value- added tax, which is the only kind of tax being amended in the House bills, still within the
purview of the constitutional provision authorizing the Senate to propose or concur with amendments
to a revenue bill that originated from the House?

The foregoing question had been squarely answered in the Tolentino case, wherein the Court held, thus:

. . . To begin with, it is not the law but the revenue bill which is required by the Constitution to
"originate exclusively" in the House of Representatives. It is important to emphasize this, because a bill
originating in the House may undergo such extensive changes in the Senate that the result may be a
rewriting of the whole. . . . At this point, what is important to note is that, as a result of the Senate
action, a distinct bill may be produced. To insist that a revenue statute and not only the bill which
initiated the legislative process culminating in the enactment of the law must substantially be the
same as the House bill would be to deny the Senates power not only to "concur with amendments" but
also to "propose amendments." It would be to violate the coequality of legislative power of the two
houses of Congress and in fact make the House superior to the Senate.



Given, then, the power of the Senate to propose amendments, the Senate can propose its own version
even with respect to bills which are required by the Constitution to originate in the House.

. . .

Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff or tax bills, bills
authorizing an increase of the public debt, private bills and bills of local application must come from the
House of Representatives on the theory that, elected as they are from the districts, the members of the
House can be expected to be more sensitive to the local needs and problems. On the other hand, the
senators, who are elected at large, are expected to approach the same problems from the national
perspective. Both views are thereby made to bear on the enactment of such laws.33 (Emphasis
supplied)

Since there is no question that the revenue bill exclusively originated in the House of Representatives,
the Senate was acting within its

constitutional power to introduce amendments to the House bill when it included provisions in Senate
Bill No. 1950 amending corporate income taxes, percentage, excise and franchise taxes. Verily, Article
VI, Section 24 of the Constitution does not contain any prohibition or limitation on the extent of the
amendments that may be introduced by the Senate to the House revenue bill.

Furthermore, the amendments introduced by the Senate to the NIRC provisions that had not been
touched in the House bills are still in furtherance of the intent of the House in initiating the subject
revenue bills. The Explanatory Note of House Bill No. 1468, the very first House bill introduced on the
floor, which was later substituted by House Bill No. 3555, stated:

One of the challenges faced by the present administration is the urgent and daunting task of solving the
countrys serious financial problems. To do this, government expenditures must be strictly monitored
and controlled and revenues must be significantly increased. This may be easier said than done, but our
fiscal authorities are still optimistic the government will be operating on a balanced budget by the year
2009. In fact, several measures that will result to significant expenditure savings have been identified by
the administration. It is supported with a credible package of revenue measures that include measures
to improve tax administration and control the leakages in revenues from income taxes and the value-
added tax (VAT). (Emphasis supplied)

Rep. Eric D. Singson, in his sponsorship speech for House Bill No. 3555, declared that:

In the budget message of our President in the year 2005, she reiterated that we all acknowledged that
on top of our agenda must be the restoration of the health of our fiscal system.

In order to considerably lower the consolidated public sector deficit and eventually achieve a balanced
budget by the year 2009, we need to seize windows of opportunities which might seem poignant in the
beginning, but in the long run prove effective and beneficial to the overall status of our economy. One
such opportunity is a review of existing tax rates, evaluating the relevance given our present
conditions.34 (Emphasis supplied)

Notably therefore, the main purpose of the bills emanating from the House of Representatives is to
bring in sizeable revenues for the government

to supplement our countrys serious financial problems, and improve tax administration and control of
the leakages in revenues from income taxes and value-added taxes. As these house bills were
transmitted to the Senate, the latter, approaching the measures from the point of national perspective,
can introduce amendments within the purposes of those bills. It can provide for ways that would soften
the impact of the VAT measure on the consumer, i.e., by distributing the burden across all sectors
instead of putting it entirely on the shoulders of the consumers. The sponsorship speech of Sen. Ralph
Recto on why the provisions on income tax on corporation were included is worth quoting:

All in all, the proposal of the Senate Committee on Ways and Means will raise P64.3 billion in additional
revenues annually even while by mitigating prices of power, services and petroleum products.

However, not all of this will be wrung out of VAT. In fact, only P48.7 billion amount is from the VAT on
twelve goods and services. The rest of the tab P10.5 billion- will be picked by corporations.

What we therefore prescribe is a burden sharing between corporate Philippines and the consumer. Why
should the latter bear all the pain? Why should the fiscal salvation be only on the burden of the
consumer?

The corporate worlds equity is in form of the increase in the corporate income tax from 32 to 35
percent, but up to 2008 only. This will raise P10.5 billion a year. After that, the rate will slide back, not to
its old rate of 32 percent, but two notches lower, to 30 percent.

Clearly, we are telling those with the capacity to pay, corporations, to bear with this emergency
provision that will be in effect for 1,200 days, while we put our fiscal house in order. This fiscal medicine
will have an expiry date.

For their assistance, a reward of tax reduction awaits them. We intend to keep the length of their
sacrifice brief. We would like to assure them that not because there is a light at the end of the tunnel,
this government will keep on making the tunnel long.

The responsibility will not rest solely on the weary shoulders of the small man. Big business will be there
to share the burden.35

As the Court has said, the Senate can propose amendments and in fact, the amendments made on
provisions in the tax on income of corporations are germane to the purpose of the house bills which is to
raise revenues for the government.

Likewise, the Court finds the sections referring to other percentage and excise taxes germane to the
reforms to the VAT system, as these sections would cushion the effects of VAT on consumers.
Considering that certain goods and services which were subject to percentage tax and excise tax would
no longer be VAT-exempt, the consumer would be burdened more as they would be paying the VAT in
addition to these taxes. Thus, there is a need to amend these sections to soften the impact of VAT.
Again, in his sponsorship speech, Sen. Recto said:

However, for power plants that run on oil, we will reduce to zero the present excise tax on bunker fuel,
to lessen the effect of a VAT on this product.

For electric utilities like Meralco, we will wipe out the franchise tax in exchange for a VAT.

And in the case of petroleum, while we will levy the VAT on oil products, so as not to destroy the VAT
chain, we will however bring down the excise tax on socially sensitive products such as diesel, bunker,
fuel and kerosene.

. . .

What do all these exercises point to? These are not contortions of giving to the left hand what was taken
from the right. Rather, these sprang from our concern of softening the impact of VAT, so that the people
can cushion the blow of higher prices they will have to pay as a result of VAT.36

The other sections amended by the Senate pertained to matters of tax administration which are
necessary for the implementation of the changes in the VAT system.

To reiterate, the sections introduced by the Senate are germane to the subject matter and purposes of
the house bills, which is to supplement our countrys fiscal deficit, among others. Thus, the Senate acted
within its power to propose those amendments.

SUBSTANTIVE ISSUES

I.

Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate
the following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article VI, Section 28(2)

A. No Undue Delegation of Legislative Power

Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al., and Escudero, et al. contend in
common that Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of
the NIRC giving the President the stand-by authority to raise the VAT rate from 10% to 12% when a
certain condition is met, constitutes undue delegation of the legislative power to tax.

The assailed provisions read as follows:

SEC. 4. Sec. 106 of the same Code, as amended, is hereby further amended to read as follows:

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

(A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or
exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling
price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid
by the seller or transferor: provided, that the President, upon the recommendation of the Secretary of
Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after
any of the following conditions has been satisfied.

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

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

SEC. 5. Section 107 of the same Code, as amended, is hereby further amended to read as follows:

SEC. 107. Value-Added Tax on Importation of Goods.

(A) In General. There shall be levied, assessed and collected on every importation of goods a value-
added tax equivalent to ten percent (10%) based on the total value used by the Bureau of Customs in
determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such
tax to be paid by the importer prior to the release of such goods from customs custody: Provided, That
where the customs duties are determined on the basis of the quantity or volume of the goods, the
value-added tax shall be based on the landed cost plus excise taxes, if any: provided, further, that the
President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise
the rate of value-added tax to twelve percent (12%) after any of the following conditions has been
satisfied.

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

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

SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows:

SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties

(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to
ten percent (10%) of gross receipts derived from the sale or exchange of services: provided, that the
President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise
the rate of value-added tax to twelve percent (12%), after any of the following conditions has been
satisfied.

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

(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1 %). (Emphasis supplied)

Petitioners allege that the grant of the stand-by authority to the President to increase the VAT rate is a
virtual abdication by Congress of its exclusive power to tax because such delegation is not within the
purview of Section 28 (2), Article VI of the Constitution, which provides:

The Congress may, by law, authorize the President to fix within specified limits, and may impose, tariff
rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the
framework of the national development program of the government.

They argue that the VAT is a tax levied on the sale, barter or exchange of goods and properties as well as
on the sale or exchange of services, which cannot be included within the purview of tariffs under the
exempted delegation as the latter refers to customs duties, tolls or tribute payable upon merchandise to
the government and usually imposed on goods or merchandise imported or exported.

Petitioners ABAKADA GURO Party List, et al., further contend that delegating to the President the
legislative power to tax is contrary to republicanism. They insist that accountability, responsibility and
transparency should dictate the actions of Congress and they should not pass to the President the
decision to impose taxes. They also argue that the law also effectively nullified the Presidents power of
control, which includes the authority to set aside and nullify the acts of her subordinates like the
Secretary of Finance, by mandating the fixing of the tax rate by the President upon the recommendation
of the Secretary of Finance.

Petitioners Pimentel, et al. aver that the President has ample powers to cause, influence or create the
conditions provided by the law to bring about either or both the conditions precedent.

On the other hand, petitioners Escudero, et al. find bizarre and revolting the situation that the
imposition of the 12% rate would be subject to the whim of the Secretary of Finance, an unelected
bureaucrat, contrary to the principle of no taxation without representation. They submit that the
Secretary of Finance is not mandated to give a favorable recommendation and he may not even give his
recommendation. Moreover, they allege that no guiding standards are provided in the law on what basis
and as to how he will make his recommendation. They claim, nonetheless, that any recommendation of
the Secretary of Finance can easily be brushed aside by the President since the former is a mere alter
ego of the latter, such that, ultimately, it is the President who decides whether to impose the increased
tax rate or not.

A brief discourse on the principle of non-delegation of powers is instructive.

The principle of separation of powers ordains that each of the three great branches of government has
exclusive cognizance of and is supreme in matters falling within its own constitutionally allocated
sphere.37 A logical

corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as
expressed in the Latin maxim: potestas delegata non delegari potest which means "what has been
delegated, cannot be delegated."38 This doctrine is based on the ethical principle that such as delegated
power constitutes not only a right but a duty to be performed by the delegate through the
instrumentality of his own judgment and not through the intervening mind of another.39

With respect to the Legislature, Section 1 of Article VI of the Constitution provides that "the Legislative
power shall be vested in the Congress of the Philippines which shall consist of a Senate and a House of
Representatives." The powers which Congress is prohibited from delegating are those which are strictly,
or inherently and exclusively, legislative. Purely legislative power, which can never be delegated, has
been described as the authority to make a complete law complete as to the time when it shall take
effect and as to whom it shall be applicable and to determine the expediency of its enactment.40
Thus, the rule is that in order that a court may be justified in holding a statute unconstitutional as a
delegation of legislative power, it must appear that the power involved is purely legislative in nature
that is, one appertaining exclusively to the legislative department. It is the nature of the power, and not
the liability of its use or the manner of its exercise, which determines the validity of its delegation.

Nonetheless, the general rule barring delegation of legislative powers is subject to the following
recognized limitations or exceptions:

(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the Constitution;

(2) Delegation of emergency powers to the President under Section 23 (2) of Article VI of the
Constitution;

(3) Delegation to the people at large;

(4) Delegation to local governments; and

(5) Delegation to administrative bodies.

In every case of permissible delegation, there must be a showing that the delegation itself is valid. It is
valid only if the law (a) is complete in itself, setting forth therein the policy to be executed, carried out,
or implemented by the delegate;41 and (b) fixes a standard the limits of which are sufficiently
determinate and determinable to which the delegate must conform in the performance of his
functions.42 A sufficient standard is one which defines legislative policy, marks its limits, maps out its
boundaries and specifies the public agency to apply it. It indicates the circumstances under which the
legislative command is to be effected.43 Both tests are intended to prevent a total transference of
legislative authority to the delegate, who is not allowed to step into the shoes of the legislature and
exercise a power essentially legislative.44

In People vs. Vera,45 the Court, through eminent Justice Jose P. Laurel, expounded on the concept and
extent of delegation of power in this wise:

In testing whether a statute constitutes an undue delegation of legislative power or not, it is usual to
inquire whether the statute was complete in all its terms and provisions when it left the hands of the
legislature so that nothing was left to the judgment of any other appointee or delegate of the
legislature.

. . .

The true distinction, says Judge Ranney, is between the delegation of power to make the law, which
necessarily involves a discretion as to what it shall be, and conferring an authority or discretion as to its
execution, to be exercised under and in pursuance of the law. The first cannot be done; to the latter no
valid objection can be made.

. . .

It is contended, however, that a legislative act may be made to the effect as law after it leaves the hands
of the legislature. It is true that laws may be made effective on certain contingencies, as by proclamation
of the executive or the adoption by the people of a particular community. In Wayman vs. Southard, the
Supreme Court of the United States ruled that the legislature may delegate a power not legislative
which it may itself rightfully exercise. The power to ascertain facts is such a power which may be
delegated. There is nothing essentially legislative in ascertaining the existence of facts or conditions as
the basis of the taking into effect of a law. That is a mental process common to all branches of the
government. Notwithstanding the apparent tendency, however, to relax the rule prohibiting delegation
of legislative authority on account of the complexity arising from social and economic forces at work in
this modern industrial age, the orthodox pronouncement of Judge Cooley in his work on Constitutional
Limitations finds restatement in Prof. Willoughby's treatise on the Constitution of the United States in
the following language speaking of declaration of legislative power to administrative agencies: The
principle which permits the legislature to provide that the administrative agent may determine when
the circumstances are such as require the application of a law is defended upon the ground that at the
time this authority is granted, the rule of public policy, which is the essence of the legislative act, is
determined by the legislature. In other words, the legislature, as it is its duty to do, determines that,
under given circumstances, certain executive or administrative action is to be taken, and that, under
other circumstances, different or no action at all is to be taken. What is thus left to the administrative
official is not the legislative determination of what public policy demands, but simply the ascertainment
of what the facts of the case require to be done according to the terms of the law by which he is
governed. The efficiency of an Act as a declaration of legislative will must, of course, come from
Congress, but the ascertainment of the contingency upon which the Act shall take effect may be left to
such agencies as it may designate. The legislature, then, may provide that a law shall take effect upon
the happening of future specified contingencies leaving to some other person or body the power to
determine when the specified contingency has arisen. (Emphasis supplied).46

In Edu vs. Ericta,47 the Court reiterated:

What cannot be delegated is the authority under the Constitution to make laws and to alter and repeal
them; the test is the completeness of the statute in all its terms and provisions when it leaves the hands
of the legislature. To determine whether or not there is an undue delegation of legislative power, the
inquiry must be directed to the scope and definiteness of the measure enacted. The legislative does not
abdicate its functions when it describes what job must be done, who is to do it, and what is the scope of
his authority. For a complex economy, that may be the only way in which the legislative process can go
forward. A distinction has rightfully been made between delegation of power to make the laws which
necessarily involves a discretion as to what it shall be, which constitutionally may not be done, and
delegation of authority or discretion as to its execution to be exercised under and in pursuance of the
law, to which no valid objection can be made. The Constitution is thus not to be regarded as denying the
legislature the necessary resources of flexibility and practicability. (Emphasis supplied).48

Clearly, the legislature may delegate to executive officers or bodies the power to determine certain facts
or conditions, or the happening of contingencies, on which the operation of a statute is, by its terms,
made to depend, but the legislature must prescribe sufficient standards, policies or limitations on their
authority.49 While the power to tax cannot be delegated to executive agencies, details as to the
enforcement and administration of an exercise of such power may be left to them, including the power
to determine the existence of facts on which its operation depends.50

The rationale for this is that the preliminary ascertainment of facts as basis for the enactment of
legislation is not of itself a legislative function, but is simply ancillary to legislation. Thus, the duty of
correlating information and making recommendations is the kind of subsidiary activity which the
legislature may perform through its members, or which it may delegate to others to perform. Intelligent
legislation on the complicated problems of modern society is impossible in the absence of accurate
information on the part of the legislators, and any reasonable method of securing such information is
proper.51 The Constitution as a continuously operative charter of government does not require that
Congress find for itself

every fact upon which it desires to base legislative action or that it make for itself detailed
determinations which it has declared to be prerequisite to application of legislative policy to particular
facts and circumstances impossible for Congress itself properly to investigate.52

In the present case, the challenged section of R.A. No. 9337 is the common proviso in Sections 4, 5 and 6
which reads as follows:

That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1,
2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has
been satisfied:

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

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

The case before the Court is not a delegation of legislative power. It is simply a delegation of
ascertainment of facts upon which enforcement and administration of the increase rate under the law is
contingent. The legislature has made the operation of the 12% rate effective January 1, 2006, contingent
upon a specified fact or condition. It leaves the entire operation or non-operation of the 12% rate upon
factual matters outside of the control of the executive.

No discretion would be exercised by the President. Highlighting the absence of discretion is the fact that
the word shall is used in the common proviso. The use of the word shall connotes a mandatory order. Its
use in a statute denotes an imperative obligation and is inconsistent with the idea of discretion.53
Where the law is clear and unambiguous, it must be taken to mean exactly what it says, and courts have
no choice but to see to it that the mandate is obeyed.54

Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the existence
of any of the conditions specified by Congress. This is a duty which cannot be evaded by the President.
Inasmuch as the law specifically uses the word shall, the exercise of discretion by the President does not
come into play. It is a clear directive to impose the 12% VAT rate when the specified conditions are
present. The time of taking into effect of the 12% VAT rate is based on the happening of a certain
specified contingency, or upon the ascertainment of certain facts or conditions by a person or body
other than the legislature itself.

The Court finds no merit to the contention of petitioners ABAKADA GURO Party List, et al. that the law
effectively nullified the Presidents power of control over the Secretary of Finance by mandating the
fixing of the tax rate by the President upon the recommendation of the Secretary of Finance. The Court
cannot also subscribe to the position of petitioners

Pimentel, et al. that the word shall should be interpreted to mean may in view of the phrase "upon the
recommendation of the Secretary of Finance." Neither does the Court find persuasive the submission of
petitioners Escudero, et al. that any recommendation by the Secretary of Finance can easily be brushed
aside by the President since the former is a mere alter ego of the latter.

When one speaks of the Secretary of Finance as the alter ego of the President, it simply means that as
head of the Department of Finance he is the assistant and agent of the Chief Executive. The multifarious
executive and administrative functions of the Chief Executive are performed by and through the
executive departments, and the acts of the secretaries of such departments, such as the Department of
Finance, performed and promulgated in the regular course of business, are, unless disapproved or
reprobated by the Chief Executive, presumptively the acts of the Chief Executive. The Secretary of
Finance, as such, occupies a political position and holds office in an advisory capacity, and, in the
language of Thomas Jefferson, "should be of the President's bosom confidence" and, in the language of
Attorney-General Cushing, is "subject to the direction of the President."55

In the present case, in making his recommendation to the President on the existence of either of the
two conditions, the Secretary of Finance is not acting as the alter ego of the President or even her
subordinate. In such instance, he is not subject to the power of control and direction of the President.
He is acting as the agent of the legislative department, to determine and declare the event upon which
its expressed will is to take effect.56 The Secretary of Finance becomes the means or tool by which
legislative policy is determined and implemented, considering that he possesses all the facilities to
gather data and information and has a much broader perspective to properly evaluate them. His
function is to gather and collate statistical data and other pertinent information and verify if any of the
two conditions laid out by Congress is present. His personality in such instance is in reality but a
projection of that of Congress. Thus, being the agent of Congress and not of the President, the President
cannot alter or modify or nullify, or set aside the findings of the Secretary of Finance and to substitute
the judgment of the former for that of the latter.

Congress simply granted the Secretary of Finance the authority to ascertain the existence of a fact,
namely, whether by December 31, 2005, the value-added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (24/5%) or the national
government deficit as a percentage of GDP of the previous year exceeds one and one-half percent
(1%). If either of these two instances has occurred, the Secretary of Finance, by legislative mandate,
must submit such information to the President. Then the 12% VAT rate must be imposed by the
President effective January 1, 2006. There is no undue delegation of legislative power but only of the
discretion as to the execution of a law. This is constitutionally permissible.57 Congress does not abdicate
its functions or unduly delegate power when it describes what job must be done, who must do it, and
what is the scope of his authority; in our complex economy that is frequently the only way in which the
legislative process can go forward.58

As to the argument of petitioners ABAKADA GURO Party List, et al. that delegating to the President the
legislative power to tax is contrary to the principle of republicanism, the same deserves scant
consideration. Congress did not delegate the power to tax but the mere implementation of the law. The
intent and will to increase the VAT rate to 12% came from Congress and the task of the President is to
simply execute the legislative policy. That Congress chose to do so in such a manner is not within the
province of the Court to inquire into, its task being to interpret the law.59

The insinuation by petitioners Pimentel, et al. that the President has ample powers to cause, influence
or create the conditions to bring about either or both the conditions precedent does not deserve any
merit as this argument is highly speculative. The Court does not rule on allegations which are manifestly
conjectural, as these may not exist at all. The Court deals with facts, not fancies; on realities, not
appearances. When the Court acts on appearances instead of realities, justice and law will be short-
lived.

B. The 12% Increase VAT Rate Does Not Impose an Unfair and Unnecessary Additional Tax Burden

Petitioners Pimentel, et al. argue that the 12% increase in the VAT rate imposes an unfair and additional
tax burden on the people. Petitioners also argue that the 12% increase, dependent on any of the 2
conditions set forth in the contested provisions, is ambiguous because it does not state if the VAT rate
would be returned to the original 10% if the rates are no longer satisfied. Petitioners also argue that
such rate is unfair and unreasonable, as the people are unsure of the applicable VAT rate from year to
year.

Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of the two conditions set
forth therein are satisfied, the President shall increase the VAT rate to 12%. The provisions of the law
are clear. It does not provide for a return to the 10% rate nor does it empower the President to so revert
if, after the rate is increased to 12%, the VAT collection goes below the 24/5 of the GDP of the previous
year or that the national government deficit as a percentage of GDP of the previous year does not
exceed 1%.

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.60

Thus, in the absence of any provision providing for a return to the 10% rate, which in this case the Court
finds none, petitioners argument is, at best, purely speculative. There is no basis for petitioners fear of
a fluctuating VAT rate because the law itself does not provide that the rate should go back to 10% if the
conditions provided in Sections 4, 5 and 6 are no longer present. The rule is that where the provision of
the law is clear and unambiguous, so that there is no occasion for the court's seeking the legislative
intent, the law must be taken as it is, devoid of judicial addition or subtraction.61

Petitioners also contend that the increase in the VAT rate, which was allegedly an incentive to the
President to raise the VAT collection to at least 2 4/5 of the GDP of the previous year, should be based
on fiscal adequacy.

Petitioners obviously overlooked that increase in VAT collection is not the only condition. There is
another condition, i.e., the national government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1 %).

Respondents explained the philosophy behind these alternative conditions:

1. VAT/GDP Ratio > 2.8%

The condition set for increasing VAT rate to 12% have economic or fiscal meaning. If VAT/GDP is less
than 2.8%, it means that government has weak or no capability of implementing the VAT or that VAT is
not effective in the function of the tax collection. Therefore, there is no value to increase it to 12%
because such action will also be ineffectual.

2. Natl Govt Deficit/GDP >1.5%

The condition set for increasing VAT when deficit/GDP is 1.5% or less means the fiscal condition of
government has reached a relatively sound position or is towards the direction of a balanced budget
position. Therefore, there is no need to increase the VAT rate since the fiscal house is in a relatively
healthy position. Otherwise stated, if the ratio is more than 1.5%, there is indeed a need to increase the
VAT rate.62

That the first condition amounts to an incentive to the President to increase the VAT collection does not
render it unconstitutional so long as there is a public purpose for which the law was passed, which in
this case, is mainly to raise revenue. In fact, fiscal adequacy dictated the need for a raise in revenue.

The principle of fiscal adequacy as a characteristic of a sound tax system was originally stated by Adam
Smith in his Canons of Taxation (1776), as:

IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people
as little as possible over and above what it brings into the public treasury of the state.63

It simply means that sources of revenues must be adequate to meet government expenditures and their
variations.64

The dire need for revenue cannot be ignored. Our country is in a quagmire of financial woe. During the
Bicameral Conference Committee hearing, then Finance Secretary Purisima bluntly depicted the
countrys gloomy state of economic affairs, thus:

First, let me explain the position that the Philippines finds itself in right now. We are in a position where
90 percent of our revenue is used for debt service. So, for every peso of revenue that we currently raise,
90 goes to debt service. Thats interest plus amortization of our debt. So clearly, this is not a sustainable
situation. Thats the first fact.

The second fact is that our debt to GDP level is way out of line compared to other peer countries that
borrow money from that international financial markets. Our debt to GDP is approximately equal to our
GDP. Again, that shows you that this is not a sustainable situation.

The third thing that Id like to point out is the environment that we are presently operating in is not as
benign as what it used to be the past five years.

What do I mean by that?

In the past five years, weve been lucky because we were operating in a period of basically global growth
and low interest rates. The past few months, we have seen an inching up, in fact, a rapid increase in the
interest rates in the leading economies of the world. And, therefore, our ability to borrow at reasonable
prices is going to be challenged. In fact, ultimately, the question is our ability to access the financial
markets.

When the President made her speech in July last year, the environment was not as bad as it is now, at
least based on the forecast of most financial institutions. So, we were assuming that raising 80 billion
would put us in a position where we can then convince them to improve our ability to borrow at lower
rates. But conditions have changed on us because the interest rates have gone up. In fact, just within
this room, we tried to access the market for a billion dollars because for this year alone, the Philippines
will have to borrow 4 billion dollars. Of that amount, we have borrowed 1.5 billion. We issued last
January a 25-year bond at 9.7 percent cost. We were trying to access last week and the market was not
as favorable and up to now we have not accessed and we might pull back because the conditions are not
very good.

So given this situation, we at the Department of Finance believe that we really need to front-end our
deficit reduction. Because it is deficit that is causing the increase of the debt and we are in what we call
a debt spiral. The more debt you have, the more deficit you have because interest and debt service eats
and eats more of your revenue. We need to get out of this debt spiral. And the only way, I think, we can
get out of this debt spiral is really have a front-end adjustment in our revenue base.65

The image portrayed is chilling. Congress passed the law hoping for rescue from an inevitable
catastrophe. Whether the law is indeed sufficient to answer the states economic dilemma is not for the
Court to judge. In the Farias case, the Court refused to consider the various arguments raised therein
that dwelt on the wisdom of Section 14 of R.A. No. 9006 (The Fair Election Act), pronouncing that:

. . . policy matters are not the concern of the Court. Government policy is within the exclusive dominion
of the political branches of the government. It is not for this Court to look into the wisdom or propriety
of legislative determination. Indeed, whether an enactment is wise or unwise, whether it is based on
sound economic theory, whether it is the best means to achieve the desired results, whether, in short,
the legislative discretion within its prescribed limits should be exercised in a particular manner are
matters for the judgment of the legislature, and the serious conflict of opinions does not suffice to bring
them within the range of judicial cognizance.66

In the same vein, the Court in this case will not dawdle on the purpose of Congress or the executive
policy, given that it is not for the judiciary to "pass upon questions of wisdom, justice or expediency of
legislation."67

II.

Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section
12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the following provisions of the
Constitution:

a. Article VI, Section 28(1), and

b. Article III, Section 1

A. Due Process and Equal Protection Clauses

Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that Section 8 of R.A. No. 9337,
amending Sections 110 (A)(2), 110 (B), and Section 12 of R.A. No. 9337, amending Section 114 (C) of the
NIRC are arbitrary, oppressive, excessive and confiscatory. Their argument is premised on the
constitutional right against deprivation of life, liberty of property without due process of law, as
embodied in Article III, Section 1 of the Constitution.

Petitioners also contend that these provisions violate the constitutional guarantee of equal protection of
the law.

The doctrine is that where the due process and equal protection clauses are invoked, considering that
they are not fixed rules but rather broad standards, there is a need for proof of such persuasive
character as would lead to such a conclusion. Absent such a showing, the presumption of validity must
prevail.68

Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a limitation on the amount of
input tax that may be credited against the output tax. It states, in part: "[P]rovided, that the input tax
inclusive of the input VAT carried over from the previous quarter that may be credited in every quarter
shall not exceed seventy percent (70%) of the output VAT: "

Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-added tax due from or
paid by a VAT-registered person on the importation of goods or local purchase of good and services,
including lease or use of property, in the course of trade or business, from a VAT-registered person, and
Output Tax is the value-added tax due on the sale or lease of taxable goods or properties or services by
any person registered or required to register under the law.

Petitioners claim that the contested sections impose limitations on the amount of input tax that may be
claimed. In effect, a portion of the input tax that has already been paid cannot now be credited against
the output tax.

Petitioners argument is not absolute. It assumes that the input tax exceeds 70% of the output tax, and
therefore, the input tax in excess of 70% remains uncredited. However, to the extent that the input tax
is less than 70% of the output tax, then 100% of such input tax is still creditable.

More importantly, the excess input tax, if any, is retained in a businesss books of accounts and remains
creditable in the succeeding quarter/s. This is explicitly allowed by Section 110(B), which provides that
"if the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or
quarters." In addition, Section 112(B) allows a VAT-registered person to apply for the issuance of a tax
credit certificate or refund for any unused input taxes, to the extent that such input taxes have not been
applied against the output taxes. Such unused input tax may be used in payment of his other internal
revenue taxes.

The non-application of the unutilized input tax in a given quarter is not ad infinitum, as petitioners
exaggeratedly contend. Their analysis of the effect of the 70% limitation is incomplete and one-sided. It
ends at the net effect that there will be unapplied/unutilized inputs VAT for a given quarter. It does not
proceed further to the fact that such unapplied/unutilized input tax may be credited in the subsequent
periods as allowed by the carry-over provision of Section 110(B) or that it may later on be refunded
through a tax credit certificate under Section 112(B).

Therefore, petitioners argument must be rejected.

On the other hand, it appears that petitioner Garcia failed to comprehend the operation of the 70%
limitation on the input tax. According to petitioner, the limitation on the creditable input tax in effect
allows VAT-registered establishments to retain a portion of the taxes they collect, which violates the
principle that tax collection and revenue should be for public purposes and expenditures

As earlier stated, the input tax is the tax paid by a person, passed on to him by the seller, when he buys
goods. Output tax meanwhile is the tax due to the person when he sells goods. In computing the VAT
payable, three possible scenarios may arise:

First, if at the end of a taxable quarter the output taxes charged by the seller are equal to the input taxes
that he paid and passed on by the suppliers, then no payment is required;

Second, when the output taxes exceed the input taxes, the person shall be liable for the excess, which
has to be paid to the Bureau of Internal Revenue (BIR);69 and

Third, if 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,
any excess over the output taxes shall instead be refunded to the taxpayer or credited against other
internal revenue taxes, at the taxpayers option.70

Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax. Thus, a person can credit
his input tax only up to the extent of 70% of the output tax. In laymans term, the value-added taxes that
a person/taxpayer paid and passed on to him by a seller can only be credited up to 70% of the value-
added taxes that is due to him on a taxable transaction. There is no retention of any tax collection
because the person/taxpayer has already previously paid the input tax to a seller, and the seller will
subsequently remit such input tax to the BIR. The party directly liable for the payment of the tax is the
seller.71 What only needs to be done is for the person/taxpayer to apply or credit these input taxes, as
evidenced by receipts, against his output taxes.

Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that the input tax partakes the
nature of a property that may not be confiscated, appropriated, or limited without due process of law.

The input tax is not a property or a property right within the constitutional purview of the due process
clause. A VAT-registered persons entitlement to the creditable input tax is a mere statutory privilege.

The distinction between statutory privileges and vested rights must be borne in mind for persons have
no vested rights in statutory privileges. The state may change or take away rights, which were created
by the law of the state, although it may not take away property, which was vested by virtue of such
rights.72

Under the previous system of single-stage taxation, taxes paid at every level of distribution are not
recoverable from the taxes payable, although it becomes part of the cost, which is deductible from the
gross revenue. When Pres. Aquino issued E.O. No. 273 imposing a 10% multi-stage tax on all sales, it was
then that the crediting of the input tax paid on purchase or importation of goods and services by VAT-
registered persons against the output tax was introduced.73 This was adopted by the Expanded VAT
Law (R.A. No. 7716),74 and The Tax Reform Act of 1997 (R.A. No. 8424).75 The right to credit input tax
as against the output tax is clearly a privilege created by law, a privilege that also the law can remove, or
in this case, limit.

Petitioners also contest as arbitrary, oppressive, excessive and confiscatory, Section 8 of R.A. No. 9337,
amending Section 110(A) of the NIRC, which provides:

SEC. 110. Tax Credits.

(A) Creditable Input Tax.

Provided, That the input tax on goods purchased or imported in a calendar month for use in trade or
business for which deduction for depreciation is allowed under this Code, shall be spread evenly over
the month of acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition cost for
such goods, excluding the VAT component thereof, exceeds One million pesos (P1,000,000.00):
Provided, however, That if the estimated useful life of the capital goods is less than five (5) years, as
used for depreciation purposes, then the input VAT shall be spread over such a shorter period: Provided,
finally, That in the case of purchase of services, lease or use of properties, the input tax shall be
creditable to the purchaser, lessee or license upon payment of the compensation, rental, royalty or fee.

The foregoing section imposes a 60-month period within which to amortize the creditable input tax on
purchase or importation of capital goods with acquisition cost of P1 Million pesos, exclusive of the VAT
component. Such spread out only poses a delay in the crediting of the input tax. Petitioners argument is
without basis because the taxpayer is not permanently deprived of his privilege to credit the input tax.

It is worth mentioning that Congress admitted that the spread-out of the creditable input tax in this case
amounts to a 4-year interest-free loan to the government.76 In the same breath, Congress also justified
its move by saying that the provision was designed to raise an annual revenue of 22.6 billion.77 The
legislature also dispelled the fear that the provision will fend off foreign investments, saying that foreign
investors have other tax incentives provided by law, and citing the case of China, where despite a 17.5%
non-creditable VAT, foreign investments were not deterred.78 Again, for whatever is the purpose of the
60-month amortization, this involves executive economic policy and legislative wisdom in which the
Court cannot intervene.

With regard to the 5% creditable withholding tax imposed on payments made by the government for
taxable transactions, Section 12 of R.A. No. 9337, which amended Section 114 of the NIRC, reads:

SEC. 114. Return and Payment of Value-added Tax.

(C) Withholding of Value-added Tax. The Government or any of its political subdivisions,
instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall,
before making payment on account of each purchase of goods and services which are subject to the
value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold a final value-added
tax at the rate of five percent (5%) of the gross payment thereof: Provided, That the payment for lease
or use of properties or property rights to nonresident owners shall be subject to ten percent (10%)
withholding tax at the time of payment. For purposes of this Section, the payor or person in control of
the payment shall be considered as the withholding agent.

The value-added tax withheld under this Section shall be remitted within ten (10) days following the end
of the month the withholding was made.

Section 114(C) merely provides a method of collection, or as stated by respondents, a more simplified
VAT withholding system. The government in this case is constituted as a withholding agent with respect
to their payments for goods and services.

Prior to its amendment, Section 114(C) provided for different rates of value-added taxes to be withheld -
- 3% on gross payments for purchases of goods; 6% on gross payments for services supplied by
contractors other than by public works contractors; 8.5% on gross payments for services supplied by
public work contractors; or 10% on payment for the lease or use of properties or property rights to
nonresident owners. Under the present Section 114(C), these different rates, except for the 10% on
lease or property rights payment to nonresidents, were deleted, and a uniform rate of 5% is applied.

The Court observes, however, that the law the used the word final. In tax usage, final, as opposed to
creditable, means full. Thus, it is provided in Section 114(C): "final value-added tax at the rate of five
percent (5%)."

In Revenue Regulations No. 02-98, implementing R.A. No. 8424 (The Tax Reform Act of 1997), the
concept of final withholding tax on income was explained, to wit:

SECTION 2.57. Withholding of Tax at Source

(A) Final Withholding Tax. Under the final withholding tax system the amount of income tax withheld
by the withholding agent is constituted as full and final payment of the income tax due from the payee
on the said income. The liability for payment of the tax rests primarily on the payor as a withholding
agent. Thus, in case of his failure to withhold the tax or in case of underwithholding, the deficiency tax
shall be collected from the payor/withholding agent.

(B) Creditable Withholding Tax. Under the creditable withholding tax system, taxes withheld on certain
income payments are intended to equal or at least approximate the tax due of the payee on said
income. Taxes withheld on income payments covered by the expanded withholding tax (referred to in
Sec. 2.57.2 of these regulations) and compensation income (referred to in Sec. 2.78 also of these
regulations) are creditable in nature.

As applied to value-added tax, this means that taxable transactions with the government are subject to
a 5% rate, which constitutes as full payment of the tax payable on the transaction. This represents the
net VAT payable of the seller. The other 5% effectively accounts for the standard input VAT (deemed
input VAT), in lieu of the actual input VAT directly or attributable to the taxable transaction.79

The Court need not explore the rationale behind the provision. It is clear that Congress intended to treat
differently taxable transactions with the government.80 This is supported by the fact that under the old
provision, the 5% tax withheld by the government remains creditable against the tax liability of the seller
or contractor, to wit:

SEC. 114. Return and Payment of Value-added Tax.

(C) Withholding of Creditable Value-added Tax. The Government or any of its political subdivisions,
instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall,
before making payment on account of each purchase of goods from sellers and services rendered by
contractors which are subject to the value-added tax imposed in Sections 106 and 108 of this Code,
deduct and withhold the value-added tax due at the rate of three percent (3%) of the gross payment for
the purchase of goods and six percent (6%) on gross receipts for services rendered by contractors on
every sale or installment payment which shall be creditable against the value-added tax liability of the
seller or contractor: Provided, however, That in the case of government public works contractors, the
withholding rate shall be eight and one-half percent (8.5%): Provided, further, That the payment for
lease or use of properties or property rights to nonresident owners shall be subject to ten percent (10%)
withholding tax at the time of payment. For this purpose, the payor or person in control of the payment
shall be considered as the withholding agent.

The valued-added tax withheld under this Section shall be remitted within ten (10) days following the
end of the month the withholding was made. (Emphasis supplied)

As amended, the use of the word final and the deletion of the word creditable exhibits Congresss
intention to treat transactions with the government differently. Since it has not been shown that the
class subject to the 5% final withholding tax has been unreasonably narrowed, there is no reason to
invalidate the provision. Petitioners, as petroleum dealers, are not the only ones subjected to the 5%
final withholding tax. It applies to all those who deal with the government.

Moreover, the actual input tax is not totally lost or uncreditable, as petitioners believe. Revenue
Regulations No. 14-2005 or the Consolidated Value-Added Tax Regulations 2005 issued by the BIR,
provides that should the actual input tax exceed 5% of gross payments, the excess may form part of the
cost. Equally, should the actual input tax be less than 5%, the difference is treated as income.81

Petitioners also argue that by imposing a limitation on the creditable input tax, the government gets to
tax a profit or value-added even if there is no profit or value-added.

Petitioners stance is purely hypothetical, argumentative, and again, one-sided. The Court will not
engage in a legal joust where premises are what ifs, arguments, theoretical and facts, uncertain. Any
disquisition by the Court on this point will only be, as Shakespeare describes life in Macbeth,82 "full of
sound and fury, signifying nothing."

Whats more, petitioners contention assumes the proposition that there is no profit or value-added. It
need not take an astute businessman to know that it is a matter of exception that a business will sell
goods or services without profit or value-added. It cannot be overstressed that a business is created
precisely for profit.

The equal protection clause under the Constitution means that "no person or class of persons shall be
deprived of the same protection of laws which is enjoyed by other persons or other classes in the same
place and in like circumstances."83

The power of the State to make reasonable and natural classifications for the purposes of taxation has
long been established. Whether it relates to the subject of taxation, the kind of property, the rates to be
levied, or the amounts to be raised, the methods of assessment, valuation and collection, the States
power is entitled to presumption of validity. As a rule, the judiciary will not interfere with such power
absent a clear showing of unreasonableness, discrimination, or arbitrariness.84

Petitioners point out that the limitation on the creditable input tax if the entity has a high ratio of input
tax, or invests in capital equipment, or has several transactions with the government, is not based on
real and substantial differences to meet a valid classification.

The argument is pedantic, if not outright baseless. The law does not make any classification in the
subject of taxation, the kind of property, the rates to be levied or the amounts to be raised, the methods
of assessment, valuation and collection. Petitioners alleged distinctions are based on variables that bear
different consequences. While the implementation of the law may yield varying end results depending
on ones profit margin and value-added, the Court cannot go beyond what the legislature has laid down
and interfere with the affairs of business.

The equal protection clause does not require the universal application of the laws on all persons or
things without distinction. This might in fact sometimes result in unequal protection. What the clause
requires is equality among equals as determined according to a valid classification. By classification is
meant the grouping of persons or things similar to each other in certain particulars and different from all
others in these same particulars.85

Petitioners brought to the Courts attention the introduction of Senate Bill No. 2038 by Sens. S.R.
Osmea III and Ma. Ana Consuelo A.S. Madrigal on June 6, 2005, and House Bill No. 4493 by Rep. Eric
D. Singson. The proposed legislation seeks to amend the 70% limitation by increasing the same to 90%.
This, according to petitioners, supports their stance that the 70% limitation is arbitrary and confiscatory.
On this score, suffice it to say that these are still proposed legislations. Until Congress amends the law,
and absent any unequivocal basis for its unconstitutionality, the 70% limitation stays.

B. Uniformity and Equitability of Taxation

Article VI, Section 28(1) of the Constitution reads:

The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of
taxation.

Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be
taxed at the same rate. Different articles may be taxed at different amounts provided that the rate is
uniform on the same class everywhere with all people at all times.86

In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all goods and
services. Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the
NIRC, provide for a rate of 10% (or 12%) on sale of goods and properties, importation of goods, and sale
of services and use or lease of properties. These same sections also provide for a 0% rate on certain
sales and transaction.

Neither does the law make any distinction as to the type of industry or trade that will bear the 70%
limitation on the creditable input tax, 5-year amortization of input tax paid on purchase of capital goods
or the 5% final withholding tax by the government. It must be stressed that the rule of uniform taxation
does not deprive Congress of the power to classify subjects of taxation, and only demands uniformity
within the particular class.87

R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate of 0% or 10%
(or 12%) does not apply to sales of goods or services with gross annual sales or receipts not exceeding
P1,500,000.00.88 Also, basic marine and agricultural food products in their original state are still not
subject to the tax,89 thus ensuring that prices at the grassroots level will remain accessible. As was
stated in Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan:90

The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons
engaged in business with an aggregate gross annual sales exceeding P200,000.00. Small corner sari-sari
stores are consequently exempt from its application. Likewise exempt from the tax are sales of farm and
marine products, so that the costs of basic food and other necessities, spared as they are from the
incidence of the VAT, are expected to be relatively lower and within the reach of the general public.

It is admitted that R.A. No. 9337 puts a premium on businesses with low profit margins, and unduly
favors those with high profit margins. Congress was not oblivious to this. Thus, to equalize the weighty
burden the law entails, the law, under Section 116, imposed a 3% percentage tax on VAT-exempt
persons under Section 109(v), i.e., transactions with gross annual sales and/or receipts not exceeding
P1.5 Million. This acts as a equalizer because in effect, bigger businesses that qualify for VAT coverage
and VAT-exempt taxpayers stand on equal-footing.

Moreover, Congress provided mitigating measures to cushion the impact of the imposition of the tax on
those previously exempt. Excise taxes on petroleum products91 and natural gas92 were reduced.
Percentage tax on domestic carriers was removed.93 Power producers are now exempt from paying
franchise tax.94

Aside from these, Congress also increased the income tax rates of corporations, in order to distribute
the burden of taxation. Domestic, foreign, and non-resident corporations are now subject to a 35%
income tax rate, from a previous 32%.95 Intercorporate dividends of non-resident foreign corporations
are still subject to 15% final withholding tax but the tax credit allowed on the corporations domicile was
increased to 20%.96 The Philippine Amusement and Gaming Corporation (PAGCOR) is not exempt from
income taxes anymore.97 Even the sale by an artist of his works or services performed for the
production of such works was not spared.

All these were designed to ease, as well as spread out, the burden of taxation, which would otherwise
rest largely on the consumers. It cannot therefore be gainsaid that R.A. No. 9337 is equitable.

C. Progressivity of Taxation

Lastly, petitioners contend that the limitation on the creditable input tax is anything but regressive. It is
the smaller business with higher input tax-output tax ratio that will suffer the consequences.

Progressive taxation is built on the principle of the taxpayers ability to pay. This principle was also lifted
from Adam Smiths Canons of Taxation, and it states:

I. The subjects of every state ought to contribute towards the support of the government, as nearly as
possible, in proportion to their respective abilities; that is, in proportion to the revenue which they
respectively enjoy under the protection of the state.

Taxation is progressive when its rate goes up depending on the resources of the person affected.98

The VAT is an antithesis of progressive taxation. By its very nature, it is regressive. The principle of
progressive taxation has no relation with the VAT system inasmuch as the VAT paid by the consumer or
business for every goods bought or services enjoyed is the same regardless of income. In

other words, the VAT paid eats the same portion of an income, whether big or small. The disparity lies in
the income earned by a person or profit margin marked by a business, such that the higher the income
or profit margin, the smaller the portion of the income or profit that is eaten by VAT. A converso, the
lower the income or profit margin, the bigger the part that the VAT eats away. At the end of the day, it is
really the lower income group or businesses with low-profit margins that is always hardest hit.

Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like the VAT.
What it simply provides is that Congress shall "evolve a progressive system of taxation." The Court
stated in the Tolentino case, thus:

The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are
regressive. What it simply provides is that Congress shall evolve a progressive system of taxation. The
constitutional provision has been interpreted to mean simply that direct taxes are . . . to be preferred
*and+ as much as possible, indirect taxes should be minimized. (E. FERNANDO, THE CONSTITUTION OF
THE PHILIPPINES 221 (Second ed. 1977)) Indeed, the mandate to Congress is not to prescribe, but to
evolve, a progressive tax system. Otherwise, sales taxes, which perhaps are the oldest form of indirect
taxes, would have been prohibited with the proclamation of Art. VIII, 17 (1) of the 1973 Constitution
from which the present Art. VI, 28 (1) was taken. Sales taxes are also regressive.

Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not
impossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay. In the case
of the VAT, the law minimizes the regressive effects of this imposition by providing for zero rating of
certain transactions (R.A. No. 7716, 3, amending 102 (b) of the NIRC), while granting exemptions to
other transactions. (R.A. No. 7716, 4 amending 103 of the NIRC)99

CONCLUSION

It has been said that taxes are the lifeblood of the government. In this case, it is just an enema, a first-
aid measure to resuscitate an economy in distress. The Court is neither blind nor is it turning a deaf ear
on the plight of the masses. But it does not have the panacea for the malady that the law seeks to
remedy. As in other cases, the Court cannot strike down a law as unconstitutional simply because of its
yokes.

Let us not be overly influenced by the plea that for every wrong there is a remedy, and that the judiciary
should stand ready to afford relief. There are undoubtedly many wrongs the judicature may not correct,
for instance, those involving political questions. . . .

Let us likewise disabuse our minds from the notion that the judiciary is the repository of remedies for all
political or social ills; We should not forget that the Constitution has judiciously allocated the powers of
government to three distinct and separate compartments; and that judicial interpretation has tended to
the preservation of the independence of the three, and a zealous regard of the prerogatives of each,
knowing full well that one is not the guardian of the others and that, for official wrong-doing, each may
be brought to account, either by impeachment, trial or by the ballot box.100

The words of the Court in Vera vs. Avelino101 holds true then, as it still holds true now. All things
considered, there is no raison d'tre for the unconstitutionality of R.A. No. 9337.

WHEREFORE, Republic Act No. 9337 not being unconstitutional, the petitions in G.R. Nos. 168056,
168207, 168461, 168463, and 168730, are hereby DISMISSED.

There being no constitutional impediment to the full enforcement and implementation of R.A. No. 9337,
the temporary restraining order issued by the Court on July 1, 2005 is LIFTED upon finality of herein
decision.

SO ORDERED.
G.R. No. 152609 June 29, 2005

COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
AMERICAN EXPRESS INTERNATIONAL, INC. (PHILIPPINE BRANCH), Respondent.

D E C I S I O N

PANGANIBAN, J.:

As a general rule, the value-added tax (VAT) system uses the destination principle. However, our VAT
law itself provides for a clear exception, under which the supply of service shall be zero-rated when the
following requirements are met: (1) the service is performed in the Philippines; (2) the service falls
under any of the categories provided in Section 102(b) of the Tax Code; and (3) it is paid for in
acceptable foreign currency that is accounted for in accordance with the regulations of the Bangko
Sentral ng Pilipinas. Since respondents services meet these requirements, they are zero-rated.
Petitioners Revenue Regulations that alter or revoke the above requirements are ultra vires and invalid.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the February 28, 2002
Decision2 of the Court of Appeals (CA) in CA-GR SP No. 62727. The assailed Decision disposed as follows:

"WHEREFORE, premises considered, the petition is hereby DISMISSED for lack of merit. The assailed
decision of the Court of Tax Appeals (CTA) is AFFIRMED in toto."3

The Facts

Quoting the CTA, the CA narrated the undisputed facts as follows:

"[Respondent] is a Philippine branch of American Express International, Inc., a corporation duly
organized and existing under and by virtue of the laws of the State of Delaware, U.S.A., with office in the
Philippines at the Ground Floor, ACE Building, corner Rada and de la Rosa Streets, Legaspi Village,
Makati City. It is a servicing unit of American Express International, Inc. - Hongkong Branch (Amex-HK)
and is engaged primarily to facilitate the collections of Amex-HK receivables from card members
situated in the Philippines and payment to service establishments in the Philippines.

"Amex Philippines registered itself with the Bureau of Internal Revenue (BIR), Revenue District Office
No. 47 (East Makati) as a value-added tax (VAT) taxpayer effective March 1988 and was issued VAT
Registration Certificate No. 088445 bearing VAT Registration No. 32A-3-004868. For the period January
1, 1997 to December 31, 1997, [respondent] filed with the BIR its quarterly VAT returns as follows:

Exhibit Period Covered Date Filed
D 1997 1st Qtr. April 18, 1997
F 2nd Qtr. July 21, 1997
G 3rd Qtr. October 2, 1997
H 4th Qtr. January 20, 1998
"On March 23, 1999, however, [respondent] amended the aforesaid returns and declared the following:

Exh 1997 Taxable Sales Output
VAT Zero-rated
Sales Domestic
Purchases Input
VAT
I 1st qtr P59,597.20 P5,959.72 P17,513,801.11 P6,778,182.30 P677,818.23
J 2nd qtr 67,517.20 6,751.72 17,937,361.51 9,333,242.90 933,324.29
K 3rd qtr 51,936.60 5,193.66 19,627,245.36 8,438,357.00 843,835.70
L 4th qtr 67,994.30 6,799.43 25,231,225.22 13,080,822.10 1,308,082.21
Total
P247,045.30
P24,704.53
P80,309,633.20
P37,630,604.30
P3,763,060.43
"On April 13, 1999, [respondent] filed with the BIR a letter-request for the refund of its 1997 excess
input taxes in the amount of P3,751,067.04, which amount was arrived at after deducting from its total
input VAT paid of P3,763,060.43 its applied output VAT liabilities only for the third and fourth quarters
of 1997 amounting to P5,193.66 and P6,799.43, respectively. [Respondent] cites as basis therefor,
Section 110 (B) of the 1997 Tax Code, to state:

Section 110. Tax Credits. -

x x x x x x x x x

(B) Excess Output or Input Tax. - If at the end of any taxable quarter the output tax exceeds the input
tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the
excess shall be carried over to the succeeding quarter or quarters. Any input tax attributable to the
purchase of capital goods or to zero-rated sales by a VAT-registered person may at his option be
refunded or credited against other internal revenue taxes, subject to the provisions of Section 112.

"There being no immediate action on the part of the *petitioner+, *respondents+ petition was filed on
April 15, 1999.

"In support of its Petition for Review, the following arguments were raised by [respondent]:

A. Export sales by a VAT-registered person, the consideration for which is paid for in acceptable foreign
currency inwardly remitted to the Philippines and accounted for in accordance with existing regulations
of the Bangko Sentral ng Pilipinas, are subject to [VAT] at zero percent (0%). According to [respondent],
being a VAT-registered entity, it is subject to the VAT imposed under Title IV of the Tax Code, to wit:

Section 102.(sic) Value-added tax on sale of services.- (a) Rate and base of tax. - There shall be levied,
assessed and collected, a value-added tax equivalent to 10% percent of gross receipts derived by any
person engaged in the sale of services. The phrase "sale of services" means the performance of all kinds
of services for others for a fee, remuneration or consideration, including those performed or rendered
by construction and service contractors: stock, real estate, commercial, customs and immigration
brokers; lessors of personal property; lessors or distributors of cinematographic films; persons engaged
in milling, processing, manufacturing or repacking goods for others; and similar services regardless of
whether o[r] not the performance thereof calls for the exercise or use of the physical or mental
faculties: Provided That the following services performed in the Philippines by VAT-registered persons
shall be subject to 0%:

(1) x x x

(2) Services other than those mentioned in the preceding subparagraph, the consideration is paid for in
acceptable foreign currency which is remitted inwardly to the Philippines and accounted for in
accordance with the rules and regulations of the BSP. x x x.

In addition, [respondent] relied on VAT Ruling No. 080-89, dated April 3, 1989, the pertinent portion of
which reads as follows:

In Reply, please be informed that, as a VAT registered entity whose service is paid for in acceptable
foreign currency which is remitted inwardly to the Philippines and accounted for in accordance with the
rules and regulations of the Central [B]ank of the Philippines, your service income is automatically zero
rated effective January 1, 1998. [Section 102(a)(2) of the Tax Code as amended].4 For this, there is no
need to file an application for zero-rate.

B. Input taxes on domestic purchases of taxable goods and services related to zero-rated revenues are
available as tax refund in accordance with Section 106 (now Section 112) of the [Tax Code] and Section
8(a) of [Revenue] Regulations [(RR)] No. 5-87, to state:

Section 106. Refunds or tax credits of input tax. -

(A) Zero-rated or effectively Zero-rated Sales. - Any VAT-registered person, except those covered by
paragraph (a) above, whose sales are zero-rated or are effectively zero-rated, may, within two (2) years
after the close of the taxable quarter when such sales were made, apply for the issuance of tax credit
certificate or refund of the input taxes due or attributable to such sales, to the extent that such input tax
has not been applied against output tax. x x x. *Section 106(a) of the Tax Code+5

Section 8. Zero-rating. - (a) In general. - A zero-rated sale is a taxable transaction for value-added tax
purposes. A sale by a VAT-registered person of goods and/or services taxed at zero rate shall not result
in any output tax. The input tax on his purchases of goods or services related to such zero-rated sale
shall be available as tax credit or refundable in accordance with Section 16 of these Regulations. x x x.
[Section 8(a), [RR] 5-87+.6

"[Petitioner], in his Answer filed on May 6, 1999, claimed by way of Special and Affirmative Defenses
that:

7. The claim for refund is subject to investigation by the Bureau of Internal Revenue;

8. Taxes paid and collected are presumed to have been made in accordance with laws and regulations,
hence, not refundable. Claims for tax refund are construed strictly against the claimant as they partake
of the nature of tax exemption from tax and it is incumbent upon the [respondent] to prove that it is
entitled thereto under the law and he who claims exemption must be able to justify his claim by the
clearest grant of organic or statu[t]e law. An exemption from the common burden [cannot] be
permitted to exist upon vague implications;

9. Moreover, [respondent] must prove that it has complied with the governing rules with reference to
tax recovery or refund, which are found in Sections 204(c) and 229 of the Tax Code, as amended, which
are quoted as follows:

Section 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. - The
Commissioner may - x x x.

(C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority,
refund the value of internal revenue stamps when they are returned in good condition by the purchaser,
and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and
refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed
unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2)
years after payment of the tax or penalty: Provided, however, That a return filed with an overpayment
shall be considered a written claim for credit or refund.

Section 229. Recovery of tax erroneously or illegally collected.- No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have
been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected
without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected,
until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding
may be maintained, whether or not such tax, penalty or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be begun (sic) after the expiration of two (2) years from the
date of payment of the tax or penalty regardless of any supervening cause that may arise after payment:
Provided, however, That the Commissioner may, even without written claim therefor, refund or credit
any tax, where on the face of the return upon which payment was made, such payment appears clearly
to have been erroneously paid.

"From the foregoing, the [CTA], through the Presiding Judge Ernesto D. Acosta rendered a decision7 in
favor of the herein respondent holding that its services are subject to zero-rate pursuant to Section
108(b) of the Tax Reform Act of 1997 and Section 4.102-2 (b)(2) of Revenue Regulations 5-96, the
decretal portion of which reads as follows:

WHEREFORE, in view of all the foregoing, this Court finds the [petition] meritorious and in accordance
with law. Accordingly, [petitioner] is hereby ORDERED to REFUND to [respondent] the amount of
P3,352,406.59 representing the latters excess input VAT paid for the year 1997."8

Ruling of the Court of Appeals

In affirming the CTA, the CA held that respondents services fell under the first type enumerated in
Section 4.102-2(b)(2) of RR 7-95, as amended by RR 5-96. More particularly, its "services were not of the
same class or of the same nature as project studies, information, or engineering and architectural
designs" for non-resident foreign clients; rather, they were "services other than the processing,
manufacturing or repacking of goods for persons doing business outside the Philippines." The
consideration in both types of service, however, was paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas.

Furthermore, the CA reasoned that reliance on VAT Ruling No. 040-98 was unwarranted. By requiring
that respondents services be consumed abroad in order to be zero-rated, petitioner went beyond the
sphere of interpretation and into that of legislation. Even granting that it is valid, the ruling cannot be
given retroactive effect, for it will be harsh and oppressive to respondent, which has already relied upon
VAT Ruling No. 080-89 for zero rating.

Hence, this Petition.9

The Issue

Petitioner raises this sole issue for our consideration:

"Whether or not the Court of Appeals committed reversible error in holding that respondent is entitled
to the refund of the amount of P3,352,406.59 allegedly representing excess input VAT for the year
1997."10

The Courts Ruling

The Petition is unmeritorious.

Sole Issue:

Entitlement to Tax Refund

Section 102 of the Tax Code11 provides:

"Sec. 102. Value-added tax on sale of services and use or lease of properties. -- (a) Rate and base of tax. -
- There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of
gross receipts derived from the sale or exchange of services x x x.

"The phrase 'sale or exchange of services' means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or rendered
by x x x persons engaged in milling, processing, manufacturing or repacking goods for others; x x x
services of banks, non-bank financial intermediaries and finance companies; x x x and similar services
regardless of whether or not the performance thereof calls for the exercise or use of the physical or
mental faculties. The phrase 'sale or exchange of services' shall likewise include:

x x x x x x x x x

(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);

x x x x x x x x x

(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;

x x x x x x x x x

"The term 'gross receipts means the total amount of money or its equivalent representing the contract
price, compensation, service fee, rental or royalty, including the amount charged for materials supplied
with the services and deposits and advanced payments actually or constructively received during the
taxable quarter for the services performed or to be performed for another person, excluding value-
added tax.

"(b) Transactions subject to zero percent (0%) rate. -- The following services performed in the
Philippines by VAT-registered persons shall be subject to zero percent (0%) rate[:]

(1) Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP);

(2) Services other than those mentioned in the preceding subparagraph, the consideration for which is
paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations
of the *BSP+;"

x x x x x x x x x

Zero Rating of "Other" Services

The law is very clear. Under the last paragraph quoted above, services performed by VAT-registered
persons in the Philippines (other than the processing, manufacturing or repacking of goods for persons
doing business outside the Philippines), when paid in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP, are zero-rated.

Respondent is a VAT-registered person that facilitates the collection and payment of receivables
belonging to its non-resident foreign client, for which it gets paid in acceptable foreign currency
inwardly remitted and accounted for in conformity with BSP rules and regulations. Certainly, the service
it renders in the Philippines is not in the same category as "processing, manufacturing or repacking of
goods" and should, therefore, be zero-rated. In reply to a query of respondent, the BIR opined in VAT
Ruling No. 080-89 that the income respondent earned from its parent companys regional operating
centers (ROCs) was automatically zero-rated effective January 1, 1988.12

Service has been defined as "the art of doing something useful for a person or company for a fee"13 or
"useful labor or work rendered or to be rendered by one person to another."14 For facilitating in the
Philippines the collection and payment of receivables belonging to its Hong Kong-based foreign client,
and getting paid for it in duly accounted acceptable foreign currency, respondent renders service falling
under the category of zero rating. Pursuant to the Tax Code, a VAT of zero percent should, therefore, be
levied upon the supply of that service.15

The Credit Card System and Its Components

For sure, the ancillary business of facilitating the said collection is different from the main business of
issuing credit cards.16 Under the credit card system, the credit card company extends credit
accommodations to its card holders for the purchase of goods and services from its member
establishments, to be reimbursed by them later on upon proper billing. Given the complexities of
present-day business transactions, the components of this system can certainly function as separate
billable services.

Under RA 8484,17 the credit card that is issued by banks18 in general, or by non-banks in particular,
refers to "any card x x x or other credit device existing for the purpose of obtaining x x x goods x x x or
services x x x on credit;"19 and is being used "usually on a revolving basis."20 This means that the
consumer-credit arrangement that exists between the issuer and the holder of the credit card enables
the latter to procure goods or services "on a continuing basis as long as the outstanding balance does
not exceed a specified limit."21 The card holder is, therefore, given "the power to obtain present control
of goods or service on a promise to pay for them in the future."22

Business establishments may extend credit sales through the use of the credit card facilities of a non-
bank credit card company to avoid the risk of uncollectible accounts from their customers. Under this
system, the establishments do not deposit in their bank accounts the credit card drafts23 that arise from
the credit sales. Instead, they merely record their receivables from the credit card company and
periodically send the drafts evidencing those receivables to the latter.

The credit card company, in turn, sends checks as payment to these business establishments, but it does
not redeem the drafts at full price. The agreement between them usually provides for discounts to be
taken by the company upon its redemption of the drafts.24 At the end of each month, it then bills its
credit card holders for their respective drafts redeemed during the previous month. If the holders fail to
pay the amounts owed, the company sustains the loss.25

In the present case, respondents role in the consumer credit26 process described above primarily
consists of gathering the bills and credit card drafts of different service establishments located in the
Philippines and forwarding them to the ROCs outside the country. Servicing the bill is not the same as
billing. For the former type of service alone, respondent already gets paid.

The parent company -- to which the ROCs and respondent belong -- takes charge not only of redeeming
the drafts from the ROCs and sending the checks to the service establishments, but also of billing the
credit card holders for their respective drafts that it has redeemed. While it usually imposes finance
charges27 upon the holders, none may be exacted by respondent upon either the ROCs or the card
holders.

Branch and Home Office

By designation alone, respondent and the ROCs are operated as branches. This means that each of them
is a unit, "an offshoot, lateral extension, or division"28 located at some distance from the home office29
of the parent company; carrying separate inventories; incurring their own expenses; and generating
their respective incomes. Each may conduct sales operations in any locality as an extension of the
principal office.30

The extent of accounting activity at any of these branches depends upon company policy,31 but the
financial reports of the entire business enterprise -- the credit card company to which they all belong --
must always show its financial position, results of operation, and changes in its financial position as a
single unit.32 Reciprocal accounts are reconciled or eliminated, because they lose all significance when
the branches and home office are viewed as a single entity.33 In like manner, intra-company profits or
losses must be offset against each other for accounting purposes.

Contrary to petitioners assertion,34 respondent can sell its services to another branch of the same
parent company.35 In fact, the business concept of a transfer price allows goods and services to be sold
between and among intra-company units at cost or above cost.36 A branch may be operated as a
revenue center, cost center, profit center or investment center, depending upon the policies and
accounting system of its parent company.37 Furthermore, the latter may choose not to make any sale
itself, but merely to function as a control center, where most or all of its expenses are allocated to any
of its branches.38

Gratia argumenti that the sending of drafts and bills by service establishments to respondent is
equivalent to the act of sending them directly to its parent company abroad, and that the parent
companys subsequent redemption of these drafts and billings of credit card holders is also attributable
to respondent, then with greater reason should the service rendered by respondent be zero-rated under
our VAT system. The service partakes of the nature of export sales as applied to goods,39 especially
when rendered in the Philippines by a VAT-registered person40 that gets paid in acceptable foreign
currency accounted for in accordance with BSP rules and regulations.

VAT Requirements for the Supply of Service

The VAT is a tax on consumption41 "expressed as a percentage of the value added to goods or
services"42 purchased by the producer or taxpayer.43 As an indirect tax44 on services,45 its main object
is the transaction46 itself or, more concretely, the performance of all kinds of services47 conducted in
the course of trade or business in the Philippines.48 These services must be regularly conducted in this
country; undertaken in "pursuit of a commercial or an economic activity;"49 for a valuable
consideration; and not exempt under the Tax Code, other special laws, or any international
agreement.50

Without doubt, the transactions respondent entered into with its Hong Kong-based client meet all these
requirements.

First, respondent regularly renders in the Philippines the service of facilitating the collection and
payment of receivables belonging to a foreign company that is a clearly separate and distinct entity.

Second, such service is commercial in nature; carried on over a sustained period of time; on a significant
scale; with a reasonable degree of frequency; and not at random, fortuitous or attenuated.

Third, for this service, respondent definitely receives consideration in foreign currency that is accounted
for in conformity with law.

Finally, respondent is not an entity exempt under any of our laws or international agreements.

Services Subject to Zero VAT

As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional reach of
the tax.51 Goods and services are taxed only in the country where they are consumed. Thus, exports are
zero-rated, while imports are taxed.

Confusion in zero rating arises because petitioner equates the performance of a particular type of
service with the consumption of its output abroad. In the present case, the facilitation of the collection
of receivables is different from the utilization or consumption of the outcome of such service. While the
facilitation is done in the Philippines, the consumption is not. Respondent renders assistance to its
foreign clients -- the ROCs outside the country -- by receiving the bills of service establishments located
here in the country and forwarding them to the ROCs abroad. The consumption contemplated by law,
contrary to petitioners administrative interpretation,52 does not imply that the service be done abroad
in order to be zero-rated.

Consumption is "the use of a thing in a way that thereby exhausts it."53 Applied to services, the term
means the performance or "successful completion of a contractual duty, usually resulting in the
performers release from any past or future liability x x x."54 The services rendered by respondent are
performed or successfully completed upon its sending to its foreign client the drafts and bills it has
gathered from service establishments here. Its services, having been performed in the Philippines, are
therefore also consumed in the Philippines.

Unlike goods, services cannot be physically used in or bound for a specific place when their destination
is determined. Instead, there can only be a "predetermined end of a course"55 when determining the
service "location or position x x x for legal purposes."56 Respondents facilitation service has no physical
existence, yet takes place upon rendition, and therefore upon consumption, in the Philippines. Under
the destination principle, as petitioner asserts, such service is subject to VAT at the rate of 10 percent.

Respondents Services Exempt from the Destination Principle

However, the law clearly provides for an exception to the destination principle; that is, for a zero
percent VAT rate for services that are performed in the Philippines, "paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the [BSP]."57 Thus, for the
supply of service to be zero-rated as an exception, the law merely requires that first, the service be
performed in the Philippines; second, the service fall under any of the categories in Section 102(b) of the
Tax Code; and, third, it be paid in acceptable foreign currency accounted for in accordance with BSP
rules and regulations.

Indeed, these three requirements for exemption from the destination principle are met by respondent.
Its facilitation service is performed in the Philippines. It falls under the second category found in Section
102(b) of the Tax Code, because it is a service other than "processing, manufacturing or repacking of
goods" as mentioned in the provision. Undisputed is the fact that such service meets the statutory
condition that it be paid in acceptable foreign currency duly accounted for in accordance with BSP rules.
Thus, it should be zero-rated.

Performance of Service versus Product Arising from Performance

Again, contrary to petitioners stand, for the cost of respondents service to be zero-rated, it need not be
tacked in as part of the cost of goods exported.58 The law neither imposes such requirement nor
associates services with exported goods. It simply states that the services performed by VAT-registered
persons in the Philippines -- services other than the processing, manufacturing or repacking of goods for
persons doing business outside this country -- if paid in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP, are zero-rated. The service rendered by
respondent is clearly different from the product that arises from the rendition of such service. The
activity that creates the income must not be confused with the main business in the course of which
that income is realized.59

Tax Situs of a Zero-Rated Service

The law neither makes a qualification nor adds a condition in determining the tax situs of a zero-rated
service. Under this criterion, the place where the service is rendered determines the jurisdiction60 to
impose the VAT.61 Performed in the Philippines, such service is necessarily subject to its jurisdiction,62
for the State necessarily has to have "a substantial connection"63 to it, in order to enforce a zero rate.64
The place of payment is immaterial;65 much less is the place where the output of the service will be
further or ultimately used.

Statutory Construction or Interpretation Unnecessary

As mentioned at the outset, Section 102(b)(2) of the Tax Code is very clear. Therefore, no statutory
construction or interpretation is needed. Neither can conditions or limitations be introduced where
none is provided for. Rewriting the law is a forbidden ground that only Congress may tread upon.

The Court may not construe a statute that is free from doubt.66 "[W]here the law speaks in clear and
categorical language, there is no room for interpretation. There is only room for application."67 The
Court has no choice but to "see to it that its mandate is obeyed."68

No Qualifications Under RR 5-87

In implementing the VAT provisions of the Tax Code, RR 5-87 provides for the zero rating of services
other than the processing, manufacturing or repacking of goods -- in general and without qualifications -
- when paid for by the person to whom such services are rendered in acceptable foreign currency
inwardly remitted and duly accounted for in accordance with the BSP (then Central Bank) regulations.
Section 8 of RR 5-87 states:

"SECTION 8. Zero-rating. -- (a) In general. -- A zero-rated sale is a taxable transaction for value-added tax
purposes. A sale by a VAT-registered person of goods and/or services taxed at zero rate shall not result
in any output tax. The input tax on his purchases of goods or services related to such zero-rated sale
shall be available as tax credit or refundable in accordance with Section 16 of these Regulations.

x x x x x x x x x

" (c) Zero-rated sales of services. -- The following services rendered by VAT-registered persons are zero-
rated:

(1) Services in connection with the processing, manufacturing or repacking of goods for persons doing
business outside the Philippines, where such goods are actually shipped out of the Philippines to said
persons or their assignees and the services are paid for in acceptable foreign currency inwardly remitted
and duly accounted for under the regulations of the Central Bank of the Philippines.

x x x x x x x x x

(3) Services performed in the Philippines other than those mentioned in subparagraph (1) above which
are paid for by the person or entity to whom the service is rendered in acceptable foreign currency
inwardly remitted and duly accounted for in accordance with Central Bank regulations. Where the
contract involves payment in both foreign and local currency, only the service corresponding to that
paid in foreign currency shall enjoy zero-rating. The portion paid for in local currency shall be subject to
VAT at the rate of 10%."

RR 7-95 Broad Enough

RR 7-95, otherwise known as the "Consolidated VAT Regulations,"69 reiterates the above-quoted
provision and further presents as examples only the services performed in the Philippines by VAT-
registered hotels and other service establishments. Again, the condition remains that these services
must be paid in acceptable foreign currency inwardly remitted and accounted for in accordance with the
rules and regulations of the BSP. The term "other service establishments" is obviously broad enough to
cover respondents facilitation service. Section 4.102-2 of RR 7-95 provides thus:

"SECTION 4.102-2. Zero-Rating. -- (a) In general. -- A zero-rated sale by a VAT registered person, which is
a taxable transaction for VAT purposes, shall not result in any output tax. However, the input tax on his
purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit
or refund in accordance with these regulations.

"(b) Transaction subject to zero-rate. -- The following services performed in the Philippines by VAT-
registered persons shall be subject to 0%:

(1) Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the BSP;

(2) Services other than those mentioned in the preceding subparagraph, e.g. those rendered by hotels
and other service establishments, the consideration for which is paid for in acceptable foreign currency
and accounted for in accordance with the rules and regulations of the BSP;"

x x x x x x x x x

Meaning of "as well as" in RR 5-96

Section 4.102-2(b)(2) of RR 7-95 was subsequently amended by RR 5-96 to read as follows:

"Section 4.102-2(b)(2) -- Services other than processing, manufacturing or repacking for other persons
doing business outside the Philippines for goods which are subsequently exported, as well as services by
a resident to a non-resident foreign client such as project studies, information services, engineering and
architectural designs and other similar services, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the BSP."

Aside from the already scopious coverage of services in Section 4.102-2(b)(2) of RR 7-95, the
amendment introduced by RR 5-96 further enumerates specific services entitled to zero rating. Although
superfluous, these sample services are meant to be merely illustrative. In this provision, the use of the
term "as well as" is not restrictive. As a prepositional phrase with an adverbial relation to some other
word, it simply means "in addition to, besides, also or too."70

Neither the law nor any of the implementing revenue regulations aforequoted categorically defines or
limits the services that may be sold or exchanged for a fee, remuneration or consideration. Rather, both
merely enumerate the items of service that fall under the term "sale or exchange of services."71

Ejusdem Generis
Inapplicable

The canon of statutory construction known as ejusdem generis or "of the same kind or specie" does not
apply to Section 4.102-2(b)(2) of RR 7-95 as amended by RR 5-96.

First, although the regulatory provision contains an enumeration of particular or specific words,
followed by the general phrase "and other similar services," such words do not constitute a readily
discernible class and are patently not of the same kind.72 Project studies involve investments or
marketing; information services focus on data technology; engineering and architectural designs require
creativity. Aside from calling for the exercise or use of mental faculties or perhaps producing written
technical outputs, no common denominator to the exclusion of all others characterizes these three
services. Nothing sets them apart from other and similar general services that may involve advertising,
computers, consultancy, health care, management, messengerial work -- to name only a few.

Second, there is the regulatory intent to give the general phrase "and other similar services" a broader
meaning.73 Clearly, the preceding phrase "as well as" is not meant to limit the effect of "and other
similar services."

Third, and most important, the statutory provision upon which this regulation is based is by itself not
restrictive. The scope of the word "services" in Section 102(b)(2) of the Tax Code is broad; it is not
susceptible of narrow interpretation.741avvphi1.zw+

VAT Ruling Nos. 040-98 and 080-89

VAT Ruling No. 040-98 relied upon by petitioner is a less general interpretation at the administrative
level,75 rendered by the BIR commissioner upon request of a taxpayer to clarify certain provisions of the
VAT law. As correctly held by the CA, when this ruling states that the service must be "destined for
consumption outside of the Philippines"76 in order to qualify for zero rating, it contravenes both the law
and the regulations issued pursuant to it.77 This portion of VAT Ruling No. 040-98 is clearly ultra vires
and invalid.78

Although "[i]t is widely accepted that the interpretation placed upon a statute by the executive officers,
whose duty is to enforce it, is entitled to great respect by the courts,"79 this interpretation is not
conclusive and will have to be "ignored if judicially found to be erroneous"80 and "clearly absurd x x x or
improper."81 An administrative issuance that overrides the law it merely seeks to interpret, instead of
remaining consistent and in harmony with it, will not be countenanced by this Court.82

In the present case, respondent has relied upon VAT Ruling No. 080-89, which clearly recognizes its zero
rating. Changing this status will certainly deprive respondent of a refund of the substantial amount of
excess input taxes to which it is entitled.

Again, assuming arguendo that VAT Ruling No. 040-98 revoked VAT Ruling No. 080-89, such revocation
could not be given retroactive effect if the application of the latter ruling would only be prejudicial to
respondent.83 Section 246 of the Tax Code categorically declares that "[a]ny revocation x x x of x x x any
of the rulings x x x promulgated by the Commissioner shall not be given retroactive application if the
revocation x x x will be prejudicial to the taxpayers."84

It is also basic in law that "no x x x rule x x x shall be given retrospective effect85 unless explicitly
stated."86 No indication of such retroactive application to respondent does the Court find in VAT Ruling
No. 040-98. Neither do the exceptions enumerated in Section 24687 of the Tax Code apply.

Though vested with the power to interpret the provisions of the Tax Code88 and not bound by
predecessors acts or rulings, the BIR commissioner may render a different construction to a statute89
only if the new interpretation is in congruence with the law. Otherwise, no amount of interpretation can
ever revoke, repeal or modify what the law says.

"Consumed Abroad" Not Required by Legislature

Interpellations on the subject in the halls of the Senate also reveal a clear intent on the part of the
legislators not to impose the condition of being "consumed abroad" in order for services performed in
the Philippines by a VAT-registered person to be zero-rated. We quote the relevant portions of the
proceedings:

"Senator Maceda: Going back to Section 102 just for the moment. Will the Gentleman kindly explain to
me - I am referring to the lower part of the first paragraph with the Provided. Section 102. Provided
that the following services performed in the Philippines by VAT registered persons shall be subject to
zero percent. There are three here. What is the difference between the three here which is subject to
zero percent and Section 103 which is exempt transactions, to being with?

"Senator Herrera: Mr. President, in the case of processing and manufacturing or repacking goods for
persons doing business outside the Philippines which are subsequently exported, and where the services
are paid for in acceptable foreign currencies inwardly remitted, this is considered as subject to 0%. But if
these conditions are not complied with, they are subject to the VAT.

"In the case of No. 2, again, as the Gentleman pointed out, these three are zero-rated and the other one
that he indicated are exempted from the very beginning. These three enumerations under Section 102
are zero-rated provided that these conditions indicated in these three paragraphs are also complied
with. If they are not complied with, then they are not entitled to the zero ratings. Just like in the export
of minerals, if these are not exported, then they cannot qualify under this provision of zero rating.

"Senator Maceda: Mr. President, just one small item so we can leave this. Under the proviso, it is
required that the following services be performed in the Philippines.

"Under No. 2, services other than those mentioned above includes, let us say, manufacturing computers
and computer chips or repacking goods for persons doing business outside the Philippines. Meaning to
say, we ship the goods to them in Chicago or Washington and they send the payment inwardly to the
Philippines in foreign currency, and that is, of course, zero-rated.lawphil.net

"Now, when we say services other than those mentioned in the preceding subsection*,+ may I have
some examples of these?

"Senator Herrera: Which portion is the Gentleman referring to?

"Senator Maceda: I am referring to the second paragraph, in the same Section 102. The first paragraph
is when one manufactures or packages something here and he sends it abroad and they pay him, that is
covered. That is clear to me. The second paragraph says Services other than those mentioned in the
preceding subparagraph, the consideration of which is paid for in acceptable foreign currency

"One example I could immediately think of -- I do not know why this comes to my mind tonight -- is for
tourism or escort services. For example, the services of the tour operator or tour escort -- just a good
name for all kinds of activities -- is made here at the Midtown Ramada Hotel or at the Philippine Plaza,
but the payment is made from outside and remitted into the country.

"Senator Herrera: What is important here is that these services are paid in acceptable foreign currency
remitted inwardly to the Philippines.

"Senator Maceda: Yes, Mr. President. Like those Japanese tours which include $50 for the services of a
woman or a tourist guide, it is zero-rated when it is remitted here.

"Senator Herrera: I guess it can be interpreted that way, although this tourist guide should also be
considered as among the professionals. If they earn more than P200,000, they should be covered.

x x x x x x x x x

Senator Maceda: So, the services by Filipino citizens outside the Philippines are subject to VAT, and I am
talking of all services. Do big contractual engineers in Saudi Arabia pay VAT?

"Senator Herrera: This provision applies to a VAT-registered person. When he performs services in the
Philippines, that is zero-rated.

"Senator Maceda: That is right."90

Legislative Approval By Reenactment

Finally, upon the enactment of RA 8424, which substantially carries over the particular provisions on
zero rating of services under Section 102(b) of the Tax Code, the principle of legislative approval of
administrative interpretation by reenactment clearly obtains. This principle means that "the
reenactment of a statute substantially unchanged is persuasive indication of the adoption by Congress
of a prior executive construction."91

The legislature is presumed to have reenacted the law with full knowledge of the contents of the
revenue regulations then in force regarding the VAT, and to have approved or confirmed them because
they would carry out the legislative purpose. The particular provisions of the regulations we have
mentioned earlier are, therefore, re-enforced. "When a statute is susceptible of the meaning placed
upon it by a ruling of the government agency charged with its enforcement and the [l]egislature
thereafter [reenacts] the provisions [without] substantial change, such action is to some extent
confirmatory that the ruling carries out the legislative purpose."92

In sum, having resolved that transactions of respondent are zero-rated, the Court upholds the formers
entitlement to the refund as determined by the appellate court. Moreover, there is no conflict between
the decisions of the CTA and CA. This Court respects the findings and conclusions of a specialized court
like the CTA "which, by the nature of its functions, is dedicated exclusively to the study and
consideration of tax cases and has necessarily developed an expertise on the subject."93

Furthermore, under a zero-rating scheme, the sale or exchange of a particular service is completely
freed from the VAT, because the seller is entitled to recover, by way of a refund or as an input tax credit,
the tax that is included in the cost of purchases attributable to the sale or exchange.94 "[T]he tax paid or
withheld is not deducted from the tax base."95 Having been applied for within the reglementary
period,96 respondents refund is in order.

WHEREFORE, the Petition is hereby DENIED, and the assailed Decision AFFIRMED. No pronouncement as
to costs.

SO ORDERED.
ABAKADA Guro Party List vs. Ermita

G.R. No. 168056 September 1, 2005


FACTS:
Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a petition for
prohibition on May 27, 2005 questioning the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337,
amending Sections 106, 107 and 108, respectively, of the National Internal Revenue Code (NIRC).
Section 4 imposes a 10% VAT on sale of goods and properties, Section 5 imposes a 10% VAT on
importation of goods, and Section 6 imposes a 10% VAT on sale of services and use or lease of
properties. These questioned provisions contain a uniformp ro v is o authorizing the President, upon
recommendation of the Secretary of Finance, to raise the VAT rate to 12%, effective January 1, 2006,
after specified conditions have been satisfied. Petitioners argue that the law is unconstitutional.

ISSUES:

1. Whether or not there is a violation of Article VI, Section 24 of the Constitution.

2. Whether or not there is undue delegation of legislative power in violation of Article VI Sec 28(2) of the
Constitution.

3. Whether or not there is a violation of the due process and equal protection under Article III Sec. 1 of
the Constitution.

RULING:

1. Since there is no question that the revenue bill exclusively originated in the House of Representatives,
the Senate was acting within its constitutional power to introduce amendments to the House bill when
it included provisions in Senate Bill No. 1950 amending corporate income taxes, percentage, and excise
and franchise taxes.

2. There is no undue delegation of legislative power but only of the discretion as to the execution of a
law. This is constitutionally permissible. Congress does not abdicate its functions or unduly delegate
power when it describes what job must be done, who must do it, and what is the scope of his authority;
in our complex economy that is frequently the only way in which the legislative process can go forward.

3. The power of the State to make reasonable and natural classifications for the purposes of taxation has
long been established. Whether it relates to the subject of taxation, the kind of property, the rates to be
levied, or the amounts to be raised, the methods of assessment, valuation and collection, the States
power is entitled to presumption of validity. As a rule, the judiciary will not interfere with such power
absent a clear showing of unreasonableness, discrimination, or arbitrariness.


















Tan vs. Del Rosario

237 SCRA 324


Facts:

Petitioners challenge the constitutionality of RA 7496 or the simplified income taxation scheme
(SNIT) under Arts (26) and (28) and III (1). The SNIT contained changes in the tax schedules and different
treatment in the professionals which petitioners assail as unconstitutional for being isolative of the
equal protection clause in the constitution.

Issue:
Is the contention meritorious?

Ruling:

No. uniformity of taxation, like the hindered concept of equal protection, merely require that
all subjects or objects of taxation similarly situated are to be treated alike both privileges and liabilities.
Uniformity, does not offend classification as long as it rest on substantial distinctions, it is germane to
the purpose of the law. It is not limited to existing only and must apply equally to all members of the
same class.

The legislative intent is to increasingly shift the income tax system towards the scheduled
approach in taxation of individual taxpayers and maintain the present global treatment on taxable
corporations. This classification is neither arbitrary nor inappropriate.






Tan vs. Del Rosario

237 SCRA 324

Facts:
Petitioner seeks declaration of unconstitutionality of RA7496 (also known as Simplified Net Income
Taxation) due to violation of the following constitutional provision:
Article VI, Section 26(1) Every bill passed by the Congress shall embrace only one subject which shall
be expressed in the title thereof.
Article VI, Section 28(1) The rule of taxation shall be uniform and equitable. The Congress shall evolve
a progressive system of taxation.
The petitioner stressed that it violates the equal protection clause as it only imposed taxes upon one
who practice his profession and not to those who are engaged to single proprietorship.
Article III, Section 1 No person shall be deprived of . . . property without due process of law, nor shall
any person be denied the equal protection of the laws.

Issue:
Whether or not RA 7496 violates the aforestated provision of the constitution

Held:
The SC ruled in the negative. The said law is not arbitrary; it is germane to the purpose of the law and;
applies to all things of equal conditions and of same class.
It is neither violative of equal protection clause due to the existence of substantial difference between
one who practice his profession alone and one who is engaged to proprietorship. Further, the SC said
that RA 7496 is just an amendatory provision of the code of taxpayers where it classifies taxpayers in to
four main groups: Individuals, Corporations, Estate under Judicial Settlement and Irrevocable Trust. The
court would have appreciated the contention of the petitioner if RA 7496 was an independent law. But
since it is attached to a law that has already classified taxpayers, there is no violation of equal protection
clause.





CALTEX PHILIPPINES VS CA
G.R. 925585 MAY 8, 1992


FACTS:
In 1989, COA sent a letter to Caltex directing it to remit to OPSF its collection of the additional tax on
petroleum authorized under PD 1956 and pending such remittance, all of its claims from the OPSF shall
be held in abeyance. Petitioner requested COA for the early release of its reimbursement certificates
from the OPSF covering claims with the Office of Energy Affairs. COA denied the same.

ISSUE:
Whether or not petitioner can avail of the right to offset any amount that it may be required under the
law to remit to the OPSF against any amount that it may receive by way of reimbursement.

RULING:
It is a settled rule that a taxpayer may not offset taxes due from the claims that he may have against the
government. Taxes cannot be the subject of compensation because the government and taxpayer are
not mutually debtors and creditors of each other and a claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off.
The oil companies merely acted as agents for the government in the latters collection since taxes are
passed unto the end-users, the consuming public.







G.R. No. L-28896 February 17, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.

FACTS:
The Philippine Sugar Estate Development Company had earlier appointed Algue as its agent, authorizing
it to sell its land, factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara,
Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of
the Vegetable Oil Investment Corporation, inducing other persons to invest in it. Ultimately, after its
incorporation largely through the promotion of the said persons, this new corporation purchased the
PSEDC properties. For this sale, Algue received as agent a commission of P126, 000.00, and it was from
this commission that the P75, 000.00 promotional fees were paid to the a forenamed individuals.

The petitioner contends that the claimed deduction of P75, 000.00 was properly disallowed because it
was not an ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it
differently. Agreeing with Algue, it held that the said amount had been legitimately paid by the private
respondent for actual services rendered. The payment was in the form of promotional fees.

ISSUE:

Whether or not the Collector of Internal Revenue correctly disallowed the P75, 000.00 deduction
claimed by private respondent Algue as legitimate business expenses in its income tax returns.

RULING:

The Supreme Court agrees with the respondent court that the amount of the promotional fees was not
excessive. The amount of P75,000.00 was 60% of the total commission. This was a reasonable
proportion, considering that it was the payees who did practically everything, from the formation of the
Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate properties.

It is said that taxes are what we pay for civilization society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance
to surrender part of one's hard earned income to the taxing authorities, every person who is able to
must contribute his share in the running of the government.










[G.R. No. 153866. February 11, 2005]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SEAGATE TECHNOLOGY (PHILIPPINES),
respondent.
D E C I S I O N
PANGANIBAN, J.:
Business companies registered in and operating from the Special Economic Zone in Naga, Cebu -- like
herein respondent -- are entities exempt from all internal revenue taxes and the implementing rules
relevant thereto, including the value-added taxes or VAT. Although export sales are not deemed
exempt transactions, they are nonetheless zero-rated. Hence, in the present case, the distinction
between exempt entities and exempt transactions has little significance, because the net result is that
the taxpayer is not liable for the VAT. Respondent, a VAT-registered enterprise, has complied with all
requisites for claiming a tax refund of or credit for the input VAT it paid on capital goods it purchased.
Thus, the Court of Tax Appeals and the Court of Appeals did not err in ruling that it is entitled to such
refund or credit.
The Case
Before us is a Petition for Review under Rule 45 of the Rules of Court, seeking to set aside the May 27,
2002 Decision of the Court of Appeals (CA) in CA-GR SP No. 66093. The decretal portion of the Decision
reads as follows:
WHEREFORE, foregoing premises considered, the petition for review is DENIED for lack of merit.
The Facts
The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as follows:
As jointly stipulated by the parties, the pertinent facts x x x involved in this case are as follows:
1. [Respondent] is a resident foreign corporation duly registered with the Securities and Exchange
Commission to do business in the Philippines, with principal office address at the new Cebu Township
One, Special Economic Zone, Barangay Cantao-an, Naga, Cebu;
2. [Petitioner] is sued in his official capacity, having been duly appointed and empowered to perform
the duties of his office, including, among others, the duty to act and approve claims for refund or tax
credit;
3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and has been issued
PEZA Certificate No. 97-044 pursuant to Presidential Decree No. 66, as amended, to engage in the
manufacture of recording components primarily used in computers for export. Such registration was
made on 6 June 1997;
4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT Registration
Certification No. 97-083-000600-V issued on 2 April 1997;
5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by [respondent];
6. An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with
supporting documents (inclusive of the P12,267,981.04 VAT input taxes subject of this Petition for
Review), was filed on 4 October 1999 with Revenue District Office No. 83, Talisay Cebu;
7. No final action has been received by *respondent+ from *petitioner+ on *respondents+ claim for VAT
refund.
The administrative claim for refund by the [respondent] on October 4, 1999 was not acted upon by the
[petitioner] prompting the [respondent] to elevate the case to [the CTA] on July 21, 2000 by way of
Petition for Review in order to toll the running of the two-year prescriptive period.
For his part, *petitioner+ x x x raised the following Special and Affirmative Defenses, to wit:
1. *Respondents+ alleged claim for tax refund/credit is subject to administrative routinary
investigation/examination by *petitioners+ Bureau;
2. Since taxes are presumed to have been collected in accordance with laws and regulations, the
[respondent] has the burden of proof that the taxes sought to be refunded were erroneously or illegally
collected x x x;
3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court ruled that:
A claimant has the burden of proof to establish the factual basis of his or her claim for tax
credit/refund.
4. Claims for tax refund/tax credit are construed in strictissimi juris against the taxpayer. This is due to
the fact that claims for refund/credit [partake of] the nature of an exemption from tax. Thus, it is
incumbent upon the [respondent] to prove that it is indeed entitled to the refund/credit sought. Failure
on the part of the [respondent] to prove the same is fatal to its claim for tax credit. He who claims
exemption must be able to justify his claim by the clearest grant of organic or statutory law. An
exemption from the common burden cannot be permitted to exist upon vague implications;
5. Granting, without admitting, that [respondent] is a Philippine Economic Zone Authority (PEZA)
registered Ecozone Enterprise, then its business is not subject to VAT pursuant to Section 24 of Republic
Act No. ([RA]) 7916 in relation to Section 103 of the Tax Code, as amended. As *respondents+ business
is not subject to VAT, the capital goods and services it alleged to have purchased are considered not
used in VAT taxable business. As such, [respondent] is not entitled to refund of input taxes on such
capital goods pursuant to Section 4.106.1 of Revenue Regulations No. ([RR])7-95, and of input taxes on
services pursuant to Section 4.103 of said regulations.
6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229 of the 1997 Tax
Code on filing of a written claim for refund within two (2) years from the date of payment of tax.
On July 19, 2001, the Tax Court rendered a decision granting the claim for refund.
Ruling of the Court of Appeals
The CA affirmed the Decision of the CTA granting the claim for refund or issuance of a tax credit
certificate (TCC) in favor of respondent in the reduced amount of P12,122,922.66. This sum represented
the unutilized but substantiated input VAT paid on capital goods purchased for the period covering April
1, 1998 to June 30, 1999.
The appellate court reasoned that respondent had availed itself only of the fiscal incentives under
Executive Order No. (EO) 226 (otherwise known as the Omnibus Investment Code of 1987), not of those
under both Presidential Decree No. (PD) 66, as amended, and Section 24 of RA 7916. Respondent was,
therefore, considered exempt only from the payment of income tax when it opted for the income tax
holiday in lieu of the 5 percent preferential tax on gross income earned. As a VAT-registered entity,
though, it was still subject to the payment of other national internal revenue taxes, like the VAT.
Moreover, the CA held that neither Section 109 of the Tax Code nor Sections 4.106-1 and 4.103-1 of RR
7-95 were applicable. Having paid the input VAT on the capital goods it purchased, respondent correctly
filed the administrative and judicial claims for its refund within the two-year prescriptive period. Such
payments were -- to the extent of the refundable value -- duly supported by VAT invoices or official
receipts, and were not yet offset against any output VAT liability.
Hence this Petition.
Sole Issue
Petitioner submits this sole issue for our consideration:
Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate in the amount
of P12,122,922.66 representing alleged unutilized input VAT paid on capital goods purchased for the
period April 1, 1998 to June 30, 1999.
The Courts Ruling
The Petition is unmeritorious.
[G.R. No. 153866. February 11, 2005]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SEAGATE TECHNOLOGY (PHILIPPINES),
respondent.
D E C I S I O N
PANGANIBAN, J.:

Business companies registered in and operating from the Special Economic Zone in Naga, Cebu -- like
herein respondent -- are entities exempt from all internal revenue taxes and the implementing rules
relevant thereto, including the value-added taxes or VAT. Although export sales are not deemed
exempt transactions, they are nonetheless zero-rated. Hence, in the present case, the distinction
between exempt entities and exempt transactions has little significance, because the net result is that
the taxpayer is not liable for the VAT. Respondent, a VAT-registered enterprise, has complied with all
requisites for claiming a tax refund of or credit for the input VAT it paid on capital goods it purchased.
Thus, the Court of Tax Appeals and the Court of Appeals did not err in ruling that it is entitled to such
refund or credit.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to set aside the May
27, 2002 Decision[2] of the Court of Appeals (CA) in CA-GR SP No. 66093. The decretal portion of the
Decision reads as follows:

WHEREFORE, foregoing premises considered, the petition for review is DENIED for lack of merit.*3+

The Facts

The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as follows:

As jointly stipulated by the parties, the pertinent facts x x x involved in this case are as follows:

1. [Respondent] is a resident foreign corporation duly registered with the Securities and Exchange
Commission to do business in the Philippines, with principal office address at the new Cebu Township
One, Special Economic Zone, Barangay Cantao-an, Naga, Cebu;

2. [Petitioner] is sued in his official capacity, having been duly appointed and empowered to perform
the duties of his office, including, among others, the duty to act and approve claims for refund or tax
credit;

3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and has been issued
PEZA Certificate No. 97-044 pursuant to Presidential Decree No. 66, as amended, to engage in the
manufacture of recording components primarily used in computers for export. Such registration was
made on 6 June 1997;

4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT Registration
Certification No. 97-083-000600-V issued on 2 April 1997;

5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by [respondent];

6. An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with
supporting documents (inclusive of the P12,267,981.04 VAT input taxes subject of this Petition for
Review), was filed on 4 October 1999 with Revenue District Office No. 83, Talisay Cebu;

7. No final action has been received by *respondent+ from *petitioner+ on *respondents+ claim for VAT
refund.

The administrative claim for refund by the *respondent+ on October 4, 1999 was not acted upon by the
[petitioner] prompting the [respondent] to elevate the case to [the CTA] on July 21, 2000 by way of
Petition for Review in order to toll the running of the two-year prescriptive period.

For his part, *petitioner+ x x x raised the following Special and Affirmative Defenses, to wit:

1. *Respondents+ alleged claim for tax refund/credit is subject to administrative routinary
investigation/examination by *petitioners+ Bureau;

2. Since taxes are presumed to have been collected in accordance with laws and regulations, the
[respondent] has the burden of proof that the taxes sought to be refunded were erroneously or illegally
collected x x x;

3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court ruled that:

A claimant has the burden of proof to establish the factual basis of his or her claim for tax
credit/refund.

4. Claims for tax refund/tax credit are construed in strictissimi juris against the taxpayer. This is due to
the fact that claims for refund/credit [partake of] the nature of an exemption from tax. Thus, it is
incumbent upon the [respondent] to prove that it is indeed entitled to the refund/credit sought. Failure
on the part of the [respondent] to prove the same is fatal to its claim for tax credit. He who claims
exemption must be able to justify his claim by the clearest grant of organic or statutory law. An
exemption from the common burden cannot be permitted to exist upon vague implications;

5. Granting, without admitting, that [respondent] is a Philippine Economic Zone Authority (PEZA)
registered Ecozone Enterprise, then its business is not subject to VAT pursuant to Section 24 of Republic
Act No. (*RA+) 7916 in relation to Section 103 of the Tax Code, as amended. As *respondents+ business
is not subject to VAT, the capital goods and services it alleged to have purchased are considered not
used in VAT taxable business. As such, [respondent] is not entitled to refund of input taxes on such
capital goods pursuant to Section 4.106.1 of Revenue Regulations No. ([RR])7-95, and of input taxes on
services pursuant to Section 4.103 of said regulations.

6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229 of the 1997 Tax
Code on filing of a written claim for refund within two (2) years from the date of payment of tax.

On July 19, 2001, the Tax Court rendered a decision granting the claim for refund.*4+

Ruling of the Court of Appeals

The CA affirmed the Decision of the CTA granting the claim for refund or issuance of a tax credit
certificate (TCC) in favor of respondent in the reduced amount of P12,122,922.66. This sum represented
the unutilized but substantiated input VAT paid on capital goods purchased for the period covering April
1, 1998 to June 30, 1999.

The appellate court reasoned that respondent had availed itself only of the fiscal incentives under
Executive Order No. (EO) 226 (otherwise known as the Omnibus Investment Code of 1987), not of those
under both Presidential Decree No. (PD) 66, as amended, and Section 24 of RA 7916. Respondent was,
therefore, considered exempt only from the payment of income tax when it opted for the income tax
holiday in lieu of the 5 percent preferential tax on gross income earned. As a VAT-registered entity,
though, it was still subject to the payment of other national internal revenue taxes, like the VAT.

Moreover, the CA held that neither Section 109 of the Tax Code nor Sections 4.106-1 and 4.103-1 of RR
7-95 were applicable. Having paid the input VAT on the capital goods it purchased, respondent correctly
filed the administrative and judicial claims for its refund within the two-year prescriptive period. Such
payments were -- to the extent of the refundable value -- duly supported by VAT invoices or official
receipts, and were not yet offset against any output VAT liability.

Hence this Petition.[5]

Sole Issue

Petitioner submits this sole issue for our consideration:

Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate in the amount
of P12,122,922.66 representing alleged unutilized input VAT paid on capital goods purchased for the
period April 1, 1998 to June 30, 1999.*6+

The Courts Ruling

The Petition is unmeritorious.

Sole Issue:
Entitlement of a VAT-Registered PEZA Enterprise to
a Refund of or Credit for Input VAT

No doubt, as a PEZA-registered enterprise within a special economic zone,[7] respondent is entitled to
the fiscal incentives and benefits[8] provided for in either PD 66[9] or EO 226.[10] It shall, moreover,
enjoy all privileges, benefits, advantages or exemptions under both Republic Act Nos. (RA) 7227[11] and
7844.[12]

Preferential Tax Treatment
Under Special Laws

If it avails itself of PD 66, notwithstanding the provisions of other laws to the contrary, respondent shall
not be subject to internal revenue laws and regulations for raw materials, supplies, articles, equipment,
machineries, spare parts and wares, except those prohibited by law, brought into the zone to be stored,
broken up, repacked, assembled, installed, sorted, cleaned, graded or otherwise processed,
manipulated, manufactured, mixed or used directly or indirectly in such activities.[13] Even so,
respondent would enjoy a net-operating loss carry over; accelerated depreciation; foreign exchange and
financial assistance; and exemption from export taxes, local taxes and licenses.[14]

Comparatively, the same exemption from internal revenue laws and regulations applies if EO 226[15] is
chosen. Under this law, respondent shall further be entitled to an income tax holiday; additional
deduction for labor expense; simplification of customs procedure; unrestricted use of consigned
equipment; access to a bonded manufacturing warehouse system; privileges for foreign nationals
employed; tax credits on domestic capital equipment, as well as for taxes and duties on raw materials;
and exemption from contractors taxes, wharfage dues, taxes and duties on imported capital equipment
and spare parts, export taxes, duties, imposts and fees,[16] local taxes and licenses, and real property
taxes.[17]

A privilege available to respondent under the provision in RA 7227 on tax and duty-free importation of
raw materials, capital and equipment[18] -- is, ipso facto, also accorded to the zone[19] under RA 7916.
Furthermore, the latter law -- notwithstanding other existing laws, rules and regulations to the contrary
-- extends[20] to that zone the provision stating that no local or national taxes shall be imposed
therein.[21] No exchange control policy shall be applied; and free markets for foreign exchange, gold,
securities and future shall be allowed and maintained.[22] Banking and finance shall also be liberalized
under minimum Bangko Sentral regulation with the establishment of foreign currency depository units
of local commercial banks and offshore banking units of foreign banks.[23]

In the same vein, respondent benefits under RA 7844 from negotiable tax credits[24] for locally-
produced materials used as inputs. Aside from the other incentives possibly already granted to it by the
Board of Investments, it also enjoys preferential credit facilities[25] and exemption from PD 1853.[26]

From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax treatment.[27]
It is not subject to internal revenue laws and regulations and is even entitled to tax credits. The VAT on
capital goods is an internal revenue tax from which petitioner as an entity is exempt. Although the
transactions involving such tax are not exempt, petitioner as a VAT-registered person,[28] however, is
entitled to their credits.

Nature of the VAT and
the Tax Credit Method

Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent levied on
every importation of goods, whether or not in the course of trade or business, or imposed on each sale,
barter, exchange or lease of goods or properties or on each rendition of services in the course of trade
or business[29] as they pass along the production and distribution chain, the tax being limited only to
the value added[30] to such goods, properties or services by the seller, transferor or lessor.[31] It is an
indirect tax that may be shifted or passed on to the buyer, transferee or lessee of the goods, properties
or services.[32] As such, it should be understood not in the context of the person or entity that is
primarily, directly and legally liable for its payment, but in terms of its nature as a tax on
consumption.[33] In either case, though, the same conclusion is arrived at.

The law[34] that originally imposed the VAT in the country, as well as the subsequent amendments of
that law, has been drawn from the tax credit method.[35] Such method adopted the mechanics and self-
enforcement features of the VAT as first implemented and practiced in Europe and subsequently
adopted in New Zealand and Canada.[36] Under the present method that relies on invoices, an entity
can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its
purchases, inputs and imports.[37]

If at the end of a taxable quarter the output taxes[38] charged by a seller[39] are equal to the input
taxes[40] passed on by the suppliers, no payment is required. It is when the output taxes exceed the
input taxes that the excess has to be paid.[41] If, however, the input taxes exceed the output taxes, the
excess shall be carried over to the succeeding quarter or quarters.[42] Should the input taxes result from
zero-rated or effectively zero-rated transactions or from the acquisition of capital goods,[43] any excess
over the output taxes shall instead be refunded[44] to the taxpayer or credited[45] against other
internal revenue taxes.[46]

Zero-Rated and Effectively
Zero-Rated Transactions

Although both are taxable and similar in effect, zero-rated transactions differ from effectively zero-rated
transactions as to their source.

Zero-rated transactions generally refer to the export sale of goods and supply of services.[47] The tax
rate is set at zero.[48] When applied to the tax base, such rate obviously results in no tax chargeable
against the purchaser. The seller of such transactions charges no output tax,[49] but can claim a refund
of or a tax credit certificate for the VAT previously charged by suppliers.

Effectively zero-rated transactions, however, refer to the sale of goods[50] or supply of services[51] to
persons or entities whose exemption under special laws or international agreements to which the
Philippines is a signatory effectively subjects such transactions to a zero rate.[52] Again, as applied to
the tax base, such rate does not yield any tax chargeable against the purchaser. The seller who charges
zero output tax on such transactions can also claim a refund of or a tax credit certificate for the VAT
previously charged by suppliers.

Zero Rating and
Exemption

In terms of the VAT computation, zero rating and exemption are the same, but the extent of relief that
results from either one of them is not.

Applying the destination principle[53] to the exportation of goods, automatic zero rating[54] is primarily
intended to be enjoyed by the seller who is directly and legally liable for the VAT, making such seller
internationally competitive by allowing the refund or credit of input taxes that are attributable to export
sales.[55] Effective zero rating, on the contrary, is intended to benefit the purchaser who, not being
directly and legally liable for the payment of the VAT, will ultimately bear the burden of the tax shifted
by the suppliers.

In both instances of zero rating, there is total relief for the purchaser from the burden of the tax.[56] But
in an exemption there is only partial relief,[57] because the purchaser is not allowed any tax refund of or
credit for input taxes paid.[58]

Exempt Transaction
and Exempt Party

The object of exemption from the VAT may either be the transaction itself or any of the parties to the
transaction.[59]

An exempt transaction, on the one hand, involves goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax
status -- VAT-exempt or not -- of the party to the transaction.[60] Indeed, such transaction is not subject
to the VAT, but the seller is not allowed any tax refund of or credit for any input taxes paid.

An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a
special law or an international agreement to which the Philippines is a signatory, and by virtue of which
its taxable transactions become exempt from the VAT.[61] Such party is also not subject to the VAT, but
may be allowed a tax refund of or credit for input taxes paid, depending on its registration as a VAT or
non-VAT taxpayer.

As mentioned earlier, the VAT is a tax on consumption, the amount of which may be shifted or passed
on by the seller to the purchaser of the goods, properties or services.[62] While the liability is imposed
on one person, the burden may be passed on to another. Therefore, if a special law merely exempts a
party as a seller from its direct liability for payment of the VAT, but does not relieve the same party as a
purchaser from its indirect burden of the VAT shifted to it by its VAT-registered suppliers, the purchase
transaction is not exempt. Applying this principle to the case at bar, the purchase transactions entered
into by respondent are not VAT-exempt.

Special laws may certainly exempt transactions from the VAT.[63] However, the Tax Code provides that
those falling under PD 66 are not. PD 66 is the precursor of RA 7916 -- the special law under which
respondent was registered. The purchase transactions it entered into are, therefore, not VAT-exempt.
These are subject to the VAT; respondent is required to register.

Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 10 percent,[64]
depending again on the application of the destination principle.[65]

If respondent enters into such sales transactions with a purchaser -- usually in a foreign country -- for
use or consumption outside the Philippines, these shall be subject to 0 percent.[66] If entered into with
a purchaser for use or consumption in the Philippines, then these shall be subject to 10 percent,[67]
unless the purchaser is exempt from the indirect burden of the VAT, in which case it shall also be zero-
rated.

Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero. Its
exemption under both PD 66 and RA 7916 effectively subjects such transactions to a zero rate,[68]
because the ecozone within which it is registered is managed and operated by the PEZA as a separate
customs territory.[69] This means that in such zone is created the legal fiction of foreign territory.[70]
Under the cross-border principle[71] of the VAT system being enforced by the Bureau of Internal
Revenue (BIR),[72] no VAT shall be imposed to form part of the cost of goods destined for consumption
outside of the territorial border of the taxing authority. If exports of goods and services from the
Philippines to a foreign country are free of the VAT,[73] then the same rule holds for such exports from
the national territory -- except specifically declared areas -- to an ecozone.

Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are
considered exports to a foreign country; conversely, sales by a PEZA-registered entity to a VAT-
registered person in the customs territory are deemed imports from a foreign country.[74] An ecozone -
- indubitably a geographical territory of the Philippines -- is, however, regarded in law as foreign soil.[75]
This legal fiction is necessary to give meaningful effect to the policies of the special law creating the
zone.[76] If respondent is located in an export processing zone[77] within that ecozone, sales to the
export processing zone, even without being actually exported, shall in fact be viewed as constructively
exported under EO 226.[78] Considered as export sales,[79] such purchase transactions by respondent
would indeed be subject to a zero rate.[80]

Tax Exemptions
Broad and Express

Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal
revenue laws and regulations.

This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a tax
on consumption, for which the direct liability is imposed on one person but the indirect burden is passed
on to another. Respondent, as an exempt entity, can neither be directly charged for the VAT on its sales
nor indirectly made to bear, as added cost to such sales, the equivalent VAT on its purchases. Ubi lex
non distinguit, nec nos distinguere debemus. Where the law does not distinguish, we ought not to
distinguish.

Moreover, the exemption is both express and pervasive for the following reasons:

First, RA 7916 states that no taxes, local and national, shall be imposed on business establishments
operating within the ecozone.*81+ Since this law does not exclude the VAT from the prohibition, it is
deemed included. Exceptio firmat regulam in casibus non exceptis. An exception confirms the rule in
cases not excepted; that is, a thing not being excepted must be regarded as coming within the purview
of the general rule.

Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be
passed on and, therefore, indirectly imposed on the same entity -- a patent circumvention of the law.
That no VAT shall be imposed directly upon business establishments operating within the ecozone under
RA 7916 also means that no VAT may be passed on and imposed indirectly. Quando aliquid prohibetur
ex directo prohibetur et per obliquum. When anything is prohibited directly, it is also prohibited
indirectly.

Second, when RA 8748 was enacted to amend RA 7916, the same prohibition applied, except for real
property taxes that presently are imposed on land owned by developers.[82] This similar and repeated
prohibition is an unambiguous ratification of the laws intent in not imposing local or national taxes on
business enterprises within the ecozone.

Third, foreign and domestic merchandise, raw materials, equipment and the like shall not be subject to
x x x internal revenue laws and regulations under PD 66*83+ -- the original charter of PEZA (then EPZA)
that was later amended by RA 7916.[84] No provisions in the latter law modify such exemption.

Although this exemption puts the government at an initial disadvantage, the reduced tax collection
ultimately redounds to the benefit of the national economy by enticing more business investments and
creating more employment opportunities.[85]

Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise -- except those
prohibited by law -- shall not be subject to x x x internal revenue laws and regulations x x x*86+ if
brought to the ecozones restricted area[87] for manufacturing by registered export enterprises,[88] of
which respondent is one. These rules also apply to all enterprises registered with the EPZA prior to the
effectivity of such rules.[89]

Fifth, export processing zone enterprises registered[90] with the Board of Investments (BOI) under EO
226 patently enjoy exemption from national internal revenue taxes on imported capital equipment
reasonably needed and exclusively used for the manufacture of their products;[91] on required supplies
and spare part for consigned equipment;[92] and on foreign and domestic merchandise, raw materials,
equipment and the like -- except those prohibited by law -- brought into the zone for manufacturing.[93]
In addition, they are given credits for the value of the national internal revenue taxes imposed on
domestic capital equipment also reasonably needed and exclusively used for the manufacture of their
products,[94] as well as for the value of such taxes imposed on domestic raw materials and supplies that
are used in the manufacture of their export products and that form part thereof.[95]

Sixth, the exemption from local and national taxes granted under RA 7227[96] are ipso facto accorded to
ecozones.[97] In case of doubt, conflicts with respect to such tax exemption privilege shall be resolved in
favor of the ecozone.[98]

And seventh, the tax credits under RA 7844 -- given for imported raw materials primarily used in the
production of export goods,[99] and for locally produced raw materials, capital equipment and spare
parts used by exporters of non-traditional products[100] -- shall also be continuously enjoyed by similar
exporters within the ecozone.[101] Indeed, the latter exporters are likewise entitled to such tax
exemptions and credits.

Tax Refund as
Tax Exemption

To be sure, statutes that grant tax exemptions are construed strictissimi juris[102] against the
taxpayer[103] and liberally in favor of the taxing authority.[104]

Tax refunds are in the nature of such exemptions.[105] Accordingly, the claimants of those refunds bear
the burden of proving the factual basis of their claims;[106] and of showing, by words too plain to be
mistaken, that the legislature intended to exempt them.[107] In the present case, all the cited legal
provisions are teeming with life with respect to the grant of tax exemptions too vivid to pass unnoticed.
In addition, respondent easily meets the challenge.

Respondent, which as an entity is exempt, is different from its transactions which are not exempt. The
end result, however, is that it is not subject to the VAT. The non-taxability of transactions that are
otherwise taxable is merely a necessary incident to the tax exemption conferred by law upon it as an
entity, not upon the transactions themselves.[108] Nonetheless, its exemption as an entity and the non-
exemption of its transactions lead to the same result for the following considerations:

First, the contemporaneous construction of our tax laws by BIR authorities who are called upon to
execute or administer such laws[109] will have to be adopted. Their prior tax issuances have held
inconsistent positions brought about by their probable failure to comprehend and fully appreciate the
nature of the VAT as a tax on consumption and the application of the destination principle.[110]
Revenue Memorandum Circular No. (RMC) 74-99, however, now clearly and correctly provides that any
VAT-registered suppliers sale of goods, property or services from the customs territory to any
registered enterprise operating in the ecozone -- regardless of the class or type of the latters PEZA
registration -- is legally entitled to a zero rate.[111]

Second, the policies of the law should prevail. Ratio legis est anima. The reason for the law is its very
soul.

In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as the establishment of
export processing zones, seeks to encourage and promote foreign commerce as a means of x x x
strengthening our export trade and foreign exchange position, of hastening industrialization, of reducing
domestic unemployment, and of accelerating the development of the country.*112+

RA 7916, as amended by RA 8748, declared that by creating the PEZA and integrating the special
economic zones, the government shall actively encourage, promote, induce and accelerate a sound and
balanced industrial, economic and social development of the country x x x through the establishment,
among others, of special economic zones x x x that shall effectively attract legitimate and productive
foreign investments.*113+

Under EO 226, the State shall encourage x x x foreign investments in industry x x x which shall x x x
meet the tests of international competitiveness[,] accelerate development of less developed regions of
the country[,] and result in increased volume and value of exports for the economy.*114+ Fiscal
incentives that are cost-efficient and simple to administer shall be devised and extended to significant
projects to compensate for market imperfections, to reward performance contributing to economic
development,*115+ and to stimulate the establishment and assist initial operations of the
enterprise.*116+

Wisely accorded to ecozones created under RA 7916*117+ was the governments policy -- spelled out
earlier in RA 7227 -- of converting into alternative productive uses[118] the former military reservations
and their extensions,[119] as well as of providing them incentives[120] to enhance the benefits that
would be derived from them[121] in promoting economic and social development.[122]

Finally, under RA 7844, the State declares the need to evolve export development into a national
effort*123+ in order to win international markets. By providing many export and tax incentives,*124+
the State is able to drive home the point that exporting is indeed the key to national survival and the
means through which the economic goals of increased employment and enhanced incomes can most
expeditiously be achieved.*125+

The Tax Code itself seeks to promote sustainable economic growth x x x; x x x increase economic
activity; and x x x create a robust environment for business to enable firms to compete better in the
regional as well as the global market.*126+ After all, international competitiveness requires economic
and tax incentives to lower the cost of goods produced for export. State actions that affect global
competition need to be specific and selective in the pricing of particular goods or services.[127]

All these statutory policies are congruent to the constitutional mandates of providing incentives to
needed investments,[128] as well as of promoting the preferential use of domestic materials and locally
produced goods and adopting measures to help make these competitive.[129] Tax credits for domestic
inputs strengthen backward linkages. Rightly so, the rule of law and the existence of credible and
efficient public institutions are essential prerequisites for sustainable economic development.*130+

VAT Registration, Not Application
for Effective Zero Rating,
Indispensable to VAT Refund

Registration is an indispensable requirement under our VAT law.[131] Petitioner alleges that respondent
did register for VAT purposes with the appropriate Revenue District Office. However, it is now too late
in the day for petitioner to challenge the VAT-registered status of respondent, given the latters prior
representation before the lower courts and the mode of appeal taken by petitioner before this Court.

The PEZA law, which carried over the provisions of the EPZA law, is clear in exempting from internal
revenue laws and regulations the equipment -- including capital goods -- that registered enterprises will
use, directly or indirectly, in manufacturing.[132] EO 226 even reiterates this privilege among the
incentives it gives to such enterprises.[133] Petitioner merely asserts that by virtue of the PEZA
registration alone of respondent, the latter is not subject to the VAT. Consequently, the capital goods
and services respondent has purchased are not considered used in the VAT business, and no VAT refund
or credit is due.*134+ This is a non sequitur. By the VATs very nature as a tax on consumption, the
capital goods and services respondent has purchased are subject to the VAT, although at zero rate.
Registration does not determine taxability under the VAT law.

Moreover, the facts have already been determined by the lower courts. Having failed to present
evidence to support its contentions against the income tax holiday privilege of respondent,[135]
petitioner is deemed to have conceded. It is a cardinal rule that issues and arguments not adequately
and seriously brought below cannot be raised for the first time on appeal.*136+ This is a matter of
procedure*137+ and a question of fairness.*138+ Failure to assert within a reasonable time warrants
a presumption that the party entitled to assert it either has abandoned or declined to assert it.*139+

The BIR regulations additionally requiring an approved prior application for effective zero rating[140]
cannot prevail over the clear VAT nature of respondents transactions. The scope of such regulations is
not within the statutory authority x x x granted by the legislature.*141+

First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the former cannot
purport to do any more than interpret the latter.[142] The courts will not countenance one that
overrides the statute it seeks to apply and implement.[143]

Other than the general registration of a taxpayer the VAT status of which is aptly determined, no
provision under our VAT law requires an additional application to be made for such taxpayers
transactions to be considered effectively zero-rated. An effectively zero-rated transaction does not and
cannot become exempt simply because an application therefor was not made or, if made, was denied.
To allow the additional requirement is to give unfettered discretion to those officials or agents who,
without fluid consideration, are bent on denying a valid application. Moreover, the State can never be
estopped by the omissions, mistakes or errors of its officials or agents.[144]

Second, grantia argumenti that such an application is required by law, there is still the presumption of
regularity in the performance of official duty.*145+ Respondents registration carries with it the
presumption that, in the absence of contradictory evidence, an application for effective zero rating was
also filed and approval thereof given. Besides, it is also presumed that the law has been obeyed[146] by
both the administrative officials and the applicant.

Third, even though such an application was not made, all the special laws we have tackled exempt
respondent not only from internal revenue laws but also from the regulations issued pursuant thereto.
Leniency in the implementation of the VAT in ecozones is an imperative, precisely to spur economic
growth in the country and attain global competitiveness as envisioned in those laws.

A VAT-registered status, as well as compliance with the invoicing requirements,[147] is sufficient for the
effective zero rating of the transactions of a taxpayer. The nature of its business and transactions can
easily be perused from, as already clearly indicated in, its VAT registration papers and photocopied
documents attached thereto. Hence, its transactions cannot be exempted by its mere failure to apply
for their effective zero rating. Otherwise, their VAT exemption would be determined, not by their
nature, but by the taxpayers negligence -- a result not at all contemplated. Administrative convenience
cannot thwart legislative mandate.

Tax Refund or
Credit in Order

Having determined that respondents purchase transactions are subject to a zero VAT rate, the tax
refund or credit is in order.

As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal incentives in EO
226 over those in RA 7916 and PD 66. It opted for the income tax holiday regime instead of the 5
percent preferential tax regime.

The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA law,[148] for
EO 226[149] also has provisions to contend with. These two regimes are in fact incompatible and
cannot be availed of simultaneously by the same entity. While EO 226 merely exempts it from income
taxes, the PEZA law exempts it from all taxes.

Therefore, respondent can be considered exempt, not from the VAT, but only from the payment of
income tax for a certain number of years, depending on its registration as a pioneer or a non-pioneer
enterprise. Besides, the remittance of the aforesaid 5 percent of gross income earned in lieu of local
and national taxes imposable upon business establishments within the ecozone cannot outrightly
determine a VAT exemption. Being subject to VAT, payments erroneously collected thereon may then
be refunded or credited.

Even if it is argued that respondent is subject to the 5 percent preferential tax regime in RA 7916,
Section 24 thereof does not preclude the VAT. One can, therefore, counterargue that such provision
merely exempts respondent from taxes imposed on business. To repeat, the VAT is a tax imposed on
consumption, not on business. Although respondent as an entity is exempt, the transactions it enters
into are not necessarily so. The VAT payments made in excess of the zero rate that is imposable may
certainly be refunded or credited.

Compliance with All Requisites
for VAT Refund or Credit

As further enunciated by the Tax Court, respondent complied with all the requisites for claiming a VAT
refund or credit.[150]

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

Second, the input taxes paid on the capital goods of respondent are duly supported by VAT invoices and
have not been offset against any output taxes. Although enterprises registered with the BOI after
December 31, 1994 would no longer enjoy the tax credit incentives on domestic capital equipment -- as
provided for under Article 39(d), Title III, Book I of EO 226[152] -- starting January 1, 1996, respondent
would still have the same benefit under a general and express exemption contained in both Article
77(1), Book VI of EO 226; and Section 12, paragraph 2 (c) of RA 7227, extended to the ecozones by RA
7916.

There was a very clear intent on the part of our legislators, not only to exempt investors in ecozones
from national and local taxes, but also to grant them tax credits. This fact was revealed by the
sponsorship speeches in Congress during the second reading of House Bill No. 14295, which later
became RA 7916, as shown below:

MR. RECTO. x x x Some of the incentives that this bill provides are exemption from national and local
taxes; x x x tax credit for locally-sourced inputs x x x.

x x x x x x x x x

MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an environment
conducive for investors, the bill offers incentives such as the exemption from local and national taxes, x
x x tax credits for locally sourced inputs x x x.*153+

And third, no question as to either the filing of such claims within the prescriptive period or the validity
of the VAT returns has been raised. Even if such a question were raised, the tax exemption under all the
special laws cited above is broad enough to cover even the enforcement of internal revenue laws,
including prescription.[154]

Summary

To summarize, special laws expressly grant preferential tax treatment to business establishments
registered and operating within an ecozone, which by law is considered as a separate customs territory.
As such, respondent is exempt from all internal revenue taxes, including the VAT, and regulations
pertaining thereto. It has opted for the income tax holiday regime, instead of the 5 percent preferential
tax regime. As a matter of law and procedure, its registration status entitling it to such tax holiday can
no longer be questioned. Its sales transactions intended for export may not be exempt, but like its
purchase transactions, they are zero-rated. No prior application for the effective zero rating of its
transactions is necessary. Being VAT-registered and having satisfactorily complied with all the requisites
for claiming a tax refund of or credit for the input VAT paid on capital goods purchased, respondent is
entitled to such VAT refund or credit.

WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No pronouncement as to costs.

SO ORDERED.
Digested Cases in Taxation

1. CIR V PASCOR REALTY & DEVT CORP et. al.
GR No. 128315, June 29, 1999

Facts: The CIR authorized certain BIR officers to examine the books of accounts and other accounting
records of Pascor Realty and Development Corp. (PRDC) for 1986, 1987 and 1988. The examination
resulted in recommendation for the issuance of an assessment of P7,498,434.65 and P3,015,236.35 for
1986 and 1987, respectively. The Commissioner filed a criminal complaint for tax evasion against PRDC,
its president and treasurer before the DOJ. Private respondents filed immediately an urgent request for
reconsideration on reinvestigation disputing the tax assessment and tax liability. The Commissioner
denied private respondents request for reconsideration/reinvestigation on the ground that no formal
assessment has been issued which the latter elevated to the CTA on a petition for review. The
Commissioners motion to dismiss on the ground of the CTAs lack of jurisdiction denied by CTA and
ordered the Commissioner to file an answer. Instead of complying with the order of CTA, Commissioner
filed a petition with the CA alleging grave abuse of discretion and lack of jurisdiction on the part of CTA
for considering the affidavit/report of the revenue officers and the endorsement of said report as
assessment which may be appealed to the CTA. The CA sustained the CTA decision and dismissed the
petition.

Issues: (1) Whether or not the criminal complaint for tax evasion can be construed as an assessment. (2)
Whether or not an assessment is necessary before criminal charges for tax evasion may be instituted.

Held: The filing of the criminal complaint with the DOJ cannot be construed as a formal assessment.
Neither the Tax Code nor the revenue regulations governing the protest assessments provide a specific
definition or form of an assessment.

An assessment must be sent to and received by the taxpayer, and must demand payment of the taxes
described therein within a specific period. The revenue officers affidavit merely contained a
computation of respondents tax liability. It did not state a demand or period for payment. It was
addressed to the Secretary of Justice not to the taxpayer. They joint affidavit was meant to support the
criminal complaint for tax evasion; it was not meant to be a notice of tax due and a demand to private
respondents for the payment thereof. The fact that the complaint was sent to the DOJ, and not to
private respondent, shows that commissioner intended to file a criminal complaint for tax evasion, not
to issue an assessment.

An assessment is not necessary before criminal charges can be filed. A criminal charge need not only be
supported by a prima facie showing of failure to file a required return. The CIR had, in such tax evasion
cases, discretion on whether to issue an assessment, or to file a criminal case against the taxpayer, or to
do both.

2. Marcos II vs. CA
273 SCRA 47 1997

Facts: Ferdinand R. Marcos II assailed the decision of the Court of Appeals declaring the deficiency
income tax assessments and estate tax assessments upon the estate and properties of his late father
despite the pendency of the probate proceedings of the will of the late President. On the other hand,
the BIR argued that the States authority to collect internal revenue taxes is paramount.

Petitioner further argues that "the numerous pending court cases questioning the late president's
ownership or interests in several properties (both real and personal) make the total value of his estate,
and the consequent estate tax due, incapable of exact pecuniary determination at this time. Thus,
respondents' assessment of the estate tax and their issuance of the Notices of Levy and sale are
premature and oppressive." He points out the pendency of Sandiganbayan Civil Case Nos. 0001-0034
and 0141, which were filed by the government to question the ownership and interests of the late
President in real and personal properties located within and outside the Philippines. Petitioner,
however, omits to allege whether the properties levied upon by the BIR in the collection of estate taxes
upon the decedent's estate were among those involved in the said cases pending in the Sandiganbayan.
Indeed, the court is at a loss as to how these cases are relevant to the matter at issue. The mere fact
that the decedent has pending cases involving ill-gotten wealth does not affect the enforcement of tax
assessments over the properties indubitably included in his estate.

Issue: Is the contention of Marcos correct?

Held: No. The approval of the court, sitting in probate or as a settlement tribunal over the deceaseds
estate, is not a mandatory requirement in the collection of estate taxes.

There is nothing in the Tax Code, and in the pertinent remedial laws that implies the necessity of the
probate or estate settlement court's approval of the state's claim for estate taxes, before the same can
be enforced and collected.

The enforcement of tax laws and the collection of taxes are of paramount importance for the
sustenance of government. Taxes are the lifeblood of government and should be collected without
unnecessary hindrance. However, such collection should be made in accordance with law as any
arbitrariness will negate the existence of government itself.

It is not the Department of Justice which is the government agency tasked to determine the amount of
taxes due upon the subject estate, but the Bureau of Internal Revenue whose determinations and
assessments are presumed correct and made in good faith. The taxpayer has the duty of proving
otherwise. In the absence of proof of any irregularities in the performance of official duties, an
assessment will not be disturbed. Even an assessment based on estimates is prima facie valid and lawful
where it does not appear to have been arrived at arbitrarily or capriciously. The burden of proof is upon
the complaining party to show clearly that the assessment is erroneous. Failure to present proof of
error in the assessment will justify the judicial affirmance of said assessment. In this instance, petitioner
has not pointed out one single provision in the Memorandum of the Special Audit Team which gave rise
to the questioned assessment, which bears a trace of falsity. Indeed, the petitioner's attack on the
assessment bears mainly on the alleged improbable and unconscionable amount of the taxes charged.
But mere rhetoric cannot supply the basis for the charge of impropriety of the assessments made.

3. Meralco Securities Corporation vs. Savellano
GR No. L-36181 October 23, 1982

Facts: On May 22, 1967, the late Juan G. Maniago (substituted in these proceedings by his wife and
children) submitted to petitioner Commissioner of Internal Revenue confidential denunciation against
the Meralco Securities Corporation for tax evasion for having paid income tax only on 25 % of the
dividends it received from the Manila Electric Co. for the years 1962-1966, thereby allegedly
shortchanging the government of income tax due from 75% of the said dividends.

Petitioner Commissioner of Internal Revenue caused the investigation of the denunciation after which
he found and held that no deficiency corporate income tax was due from the Meralco Securities
Corporation on the dividends it received from the Manila Electric Co. and accordingly denied Maniago's
claim for informer's reward on a non-existent deficiency.
On August 28, 1970, Maniago filed a petition for mandamus, and subsequently an amended petition for
mandamus, in the Court of First Instance of Manila, docketed therein as Civil Case No. 80830, against
the Commissioner of Internal Revenue and the Meralco Securities Corporation to compel the
Commissioner to impose the alleged deficiency tax assessment on the Meralco Securities Corporation
and to award to him the corresponding informer's reward under the provisions of R.A. 2338.
Respondent judge granted the said petition and thereafter, denied the motions for reconsideration filed
by all the parties.

Issues: (1) Whether or not respondent judge has jurisdiction over the subject matter of the case; (2)
Whether or not respondent heirs of Maniago are entitled to informers reward.

Held: (1) Respondent judge has no jurisdiction to take cognizance of the case because the subject matter
thereof clearly falls within the scope of cases now exclusively within the jurisdiction of the Court of Tax
Appeals. Section 7 of Republic Act No. 1125, enacted June 16, 1954, granted to the Court of Tax Appeals
exclusive appellate jurisdiction to review by appeal, among others, 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 or other law or part of law administered by the Bureau of Internal Revenue. The
law transferred to the Court of Tax Appeals jurisdiction over all cases involving said assessments
previously cognizable by courts of first instance, and even those already pending in said courts. The
question of whether or not to impose a deficiency tax assessment on Meralco Securities Corporation
undoubtedly comes within the purview of the words "disputed assessments" or of "other matters
arising under the National Internal Revenue Code . . . .In the case of Blaquera vs. Rodriguez, et al, this
Court ruled that "the determination of the correctness or incorrectness of a tax assessment to which the
taxpayer is not agreeable, falls within the jurisdiction of the Court of Tax Appeals and not of the Court of
First Instance, for under the provisions of Section 7 of Republic Act No. 1125, the Court of Tax Appeals
has exclusive appellate jurisdiction to review, on appeal, any decision of the Collector of Internal
Revenue in cases involving disputed assessments and other matters arising under the National Internal
Revenue Code or other law or part of law administered by the Bureau of Internal Revenue."

(2) Considering then that respondent judge may not order by mandamus the Commissioner to issue the
assessment against Meralco Securities Corporation when no such assessment has been found to be due,
no deficiency taxes may therefore be assessed and collected against the said corporation. Since no taxes
are to be collected, no informer's reward is due to private respondents as the informer's heirs.
Informer's reward is contingent upon the payment and collection of unpaid or deficiency taxes. An
informer is entitled by way of reward only to a percentage of the taxes actually assessed and collected.
Since no assessment, much less any collection, has been made in the instant case, respondent judge's
writ for the Commissioner to pay respondents 25% informer's reward is gross error and without factual
nor legal basis.

Petitions granted and the questioned decision of respondent judge and order reversed and set aside.

4. SY PO vs. CTA
G.R. No. 81446; August 18, 1988

Facts: Po Bien Sing, the sole proprietor of Silver Cup Wine Factory (SCWF), engaged in the business of
manufacture and sale of compounded liquors. On the basis of a denunciation against SCWF allegedly
"for tax evasion amounting to millions of pesos, Secretary of Finance directed the Finance-BIR--NBI team
to investigate.

On the basis of the team's report of investigation, the respondent Commissioner of Internal Revenue
assessed Mr. Po Bien Sing deficiency income tax for 1966 to 1970 in the amount of P7,154,685.16 and
for deficiency specific tax for January 2,1964 to January 19, 1972 in the amount of P5,595,003.68

Petitioner protested the deficiency assessments. The BIR recommended the reiteration of the
assessments in view of the taxpayer's persistent failure to present the books of accounts for
examination.

Issue: WON the assessments have valid and legal basis.

Held: The law is specific and clear. The rule on The Best Evidence Obtainable applies when a tax report
required by law for the purpose of assessment is not available or when tax report is incomplete or
fraudulent.

The tax assessment by tax examiners are presumed correct and made in good faith. The taxpayer has
the duty to prove otherwise. In the absence of proof of irregularities in the performance of duties, an
assessment duly made by the BIR examiner and approved by his superior officers will not be disturbed.
All presumptions are in favour of the correctness of tax assessments.

5. CIR vs. CA, CTA and FORTUNE TOBACCO CORP.
G.R. No. 119761; August 29, 1996

Facts: Fortune Tobacco Corporation ("Fortune Tobacco"), engaged in the manufacture of different
brands of cigarettes, registered "Champion," "Hope," and "More" cigarettes. BIR classified them as
foreign brands since they were listed in the World Tobacco Directory as belonging to foreign companies.
However, Fortun changed the names of 'Hope' to 'Hope Luxury' and 'More' to 'Premium More,' thereby
removing the said brands from the foreign brand category.

A 45% Ad Valorem taxes were imposed on these brands. Then Republic Act ("RA") No. 7654 was enacted
55% for locally manufactured foreign brand while 45% for locally manufactured brands. 2 days before
the effectivity of RA 7654, Revenue Memorandum Circular No. 37-93 ("RMC 37-93"), was issued by the
BIR saying since there is no showing who the real owner/s are of Champion, Hope and More, it follows
that the same shall be considered locally manufactured foreign brand for purposes of determining the
ad valorem tax - 55%. BIR sent via telefax a copy of RMC 37-93 to Fortune Tobacco addressed to no one
in particular. Then Fortune Tobacco received, by ordinary mail, a certified xerox copy of RMC 37-93. CIR
assessed Fortune Tobacco for ad valorem tax deficiency amounting to P9,598,334.00.

Fortune Tobacco filed a petition for review with the CTA. 8 CTA upheld the position of Fortune. CA
affirmed.

Issue: WON it was necessary for BIR to follow the legal requirements when it issued its RMC

Held. YES. CIR may not disregard legal requirements in the exercise of its quasi-legislative powers which
publication, filing, and prior hearing.
When an administrative rule is merely interpretative in nature, its applicability needs nothing further
than its bare issuance for it gives no real consequence more than what the law itself has already
prescribed. BUT when, upon the other hand, the administrative rule goes beyond merely providing for
the means that can facilitate or render least cumbersome the implementation of the law but
substantially increases the burden of those governed, the agency must accord, at least to those directly
affected, a chance to be heard, before that new issuance is given the force and effect of law.
RMC 37-93 cannot be viewed simply as construing Section 142(c)(1) of the NIRC, as amended, but has, in
fact and most importantly, been made in order to place "Hope Luxury," "Premium More" and
"Champion" within the classification of locally manufactured cigarettes bearing foreign brands and to
thereby have them covered by RA 7654 which subjects mentioned brands to 55% the BIR not simply
interpreted the law; verily, it legislated under its quasi-legislative authority. The due observance of the
requirements of notice, of hearing, and of publication should not have been then ignored.

6. CIR v. Benguet Corp
G.R. Nos. 134587 and 134588; January 8, 2005

Facts: Benguet Corporation is a domestic corporation engaged in the exploration, development and
operation of mineral resources, and the sale or marketing thereof to various entities. It is a VAT
registered enterprise.

The transactions in question occurred during the period between 1988 and 1991. Under Sec. 99 of NIRC
as amended by E.O. 273 s. 1987 then in effect, any person who, in the course of trade or business, sells,
barters or exchanges goods, renders services, or engages in similar transactions and any person who
imports goods is liable for output VAT at rates of either 10% or 0% (zero-rated) depending on the
classification of the transaction under Sec. 100 of the NIRC.

In January of 1988, Benguet applied for and was granted by the BIR zero-rated status on its sale of gold
to Central Bank. On 28 August 1988 VAT Ruling No. 3788-88 was issued which declared that the sale of
gold to Central Bank is considered as export sale subject to zero-rate pursuant to
Section 100 of the Tax Code, as amended by EO 273.

Relying on its zero-rated status and the above issuances, Benguet sold gold to the Central Bank during
the period of 1 August 1989 to 31 July 1991 and entered into transactions that resulted in input VAT
incurred in relation to the subject sales of gold. It then filed applications for tax refunds/credits
corresponding to input VAT.

However, such request was not granted due to BIR VAT Ruling No. 008-92 dated 23 January 1992 that
was issued subsequent to the consummation of the subject sales of gold to the Central Ban`k which
provides that sales of gold to the Central Bank shall not be considered as export sales and thus, shall be
subject to 10% VAT. BIR VAT Ruling No. 008-92 withdrew, modified, and superseded all inconsistent BIR
issuances.
Both petitioner and Benguet agree that the retroactive application of VAT Ruling No. 008-92 is valid only
if such application would not be prejudicial to the Benguet pursuant Sec. 246 of the NIRC.

Issues: (1) WON Benguets sale of gold to the Central Bank during the
period when such was classified by BIR issuances as zerorated could be taxed validly at a 10% rate after
the consummation of the transactions involved; (2) WON there was prejudice to Benguet Corp due to
the new BIR VAT Ruling.

Held: (1) NO. At the time when the subject transactions were consummated, the prevailing BIR
regulations relied upon by Benguet ordained that gold sales to the Central Bank were zero-rated.
Benguet should not be faulted for relying on the BIRs interpretation of the said laws and regulations.

While it is true, as CIR alleges, that government is not estopped from collecting taxes which remain
unpaid on account of the errors or mistakes of its agents and/or officials and there could be no vested
right arising from an erroneous interpretation of law, these principles must give way to
exceptions based on and in keeping with the interest of justice and fair play. (then the Court cited the
ABS-CBN case).

(2) YES. The adverse effect is that Benguet Corp became the unexpected and unwilling debtor to the BIR
of the amount equivalent to the total VAT cost of its product, a liability it previously could have
recovered from the BIR in a zero-rated scenario or at least passed on to the Central Bank had it known it
would have been taxed at a 10% rate. Thus, it is clear that Benguet suffered economic prejudice when it
consummated sales of gold to the Central Bank were taken out of the zero-rated category. The change
in the VAT rating of Benguets transactions with the Central Bank resulted in the twin loss of its
exemption from payment of output VAT and its opportunity to recover input VAT, and at the same time
subjected it to the 10% VAT sans the option to pass on this cost to the Central Bank, with the total
prejudice in money terms being equivalent to the 10% VAT levied on its sales of gold to the Central
Bank.

Even assuming that the right to recover Benguets excess payment of income tax has not yet prescribed,
this relief would only address Benguets overpayment of income tax but not the other burdens
discussed above. Verily, this remedy is not a feasible option for Benguet because the very reason why it
was issued a deficiency tax assessment is that its input VAT
was not enough to offset its retroactive output VAT. Indeed, the burden of having to go through an
unnecessary and cumbersome refund process is prejudice enough.

7. CIR v Bursmeiters & Wain Scandinavian
GR 153205; January 22, 2007

Facts: A foreign consortium, parent company of Burmeister, entered into an O&M contract with NPC.
The foreign entity then subcontracted the actual O&M to Burmeister. NPC paid the foreign consortium a
mixture of currencies while the consortium, in turn, paid Burmeister foreign currency inwardly remitted
into the Philippines. BIR did not want to grant refund since the services are not destined for
consumption abroad (or the destination principle).

Issue: Are the receipts of Burmeister entitled to VAT zero-rated status?

Held: PARTIALLY. Respondent is entitled to the refund prayed for BUT ONLY for the period covered prior
to the filing of CIRs Answer in the CTA.

The claim has no merit since the consortium, which was the recipient of services rendered by
Burmeister, was deemed doing business within the Philippines since its 15-year O&M with NPC can not
be interpreted as an isolated transaction.

In addition, the services referring to processing, manufacturing, repacking and services other than
those in (1) of Sec. 102 both require (i) payment in foreign currency; (ii) inward remittance; (iii)
accounted for by the BSP; AND (iv) that the service recipient is doing business outside the Philippines.
The Court ruled that if this is not the case, taxpayers can circumvent just by stipulating payment in
foreign currency.

The refund was partially allowed since Burmeister secured a ruling from the BIR allowing zero-rating of
its sales to foreign consortium. However, the ruling is only valid until the time that CIR filed its Answer in
the CTA which is deemed revocation of the previously-issued ruling. The Court said the revocation can
not retroact since none of the instances in Section 246 (bad faith, omission of facts, etc.) are present.


8. CIR vs. HANTEX TRADING CO., INC.
G.R. No. 136975; March 31, 2005

Facts: Hantex Trading Co is a company organized under the Philippines. It is engaged in the sale of
plastic products, it imports synthetic resin and other chemicals for the manufacture of its products. For
this purpose, it is required to file an Import Entry and Internal Revenue Declaration (Consumption Entry)
with the Bureau of Customs under Section 1301 of the Tariff and Customs Code. Sometime in October
1989, Lt. Vicente Amoto, Acting Chief of Counter-Intelligence Division of the Economic Intelligence and
Investigation Bureau (EIIB), received confidential information that the respondent had imported
synthetic resin amounting to P115,599,018.00 but only declared P45,538,694.57. Thus, Hentex receive a
subpoena to present its books of account which it failed to do. The bureau cannot find any original
copies of the products Hentex imported since the originals were eaten by termites. Thus, the Bureau
relied on the certified copies of the respondents Profit and Loss Statement for 1987 and 1988 on file
with the SEC, the machine copies of the Consumption Entries, Series of 1987, submitted by the informer,
as well as excerpts from the entries certified by Tomas and Danganan. The case was submitted to the
CTA which ruled that Hentex have tax deficiency and is ordered to pay, per investigation of the Bureau.
The CA ruled that the income and sales tax deficiency assessments issued by the petitioner were
unlawful and baseless since the copies of the import entries relied upon in computing the deficiency tax
of the respondent were not duly authenticated by the public officer charged with their custody, nor
verified under oath by the EIIB and the BIR investigators.

Issue: Whether or not the final assessment of the petitioner against the respondent for deficiency
income tax and sales tax for the latters 1987 importation of resins and calcium bicarbonate is based on
competent evidence and the law.

Held: Central to the second issue is Section 16 of the NIRC of 1977, as amended which provides that the
Commissioner of Internal Revenue has the power to make assessments and prescribe additional
requirements for tax administration and enforcement. Among such powers are those provided in
paragraph (b), which provides that Failure to submit required returns, statements, reports and other
documents. When a report required by law as a basis for the assessment of any national internal
revenue tax shall not be forthcoming within the time fixed by law or regulation or when there is reason
to believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the
proper tax on the best evidence obtainable. This provision applies when the Commissioner of Internal
Revenue undertakes to perform her administrative duty of assessing the proper tax against a taxpayer,
to make a return in case of a taxpayers failure to file one, or to amend a return already filed in the BIR.
The best evidence envisaged in Section 16 of the 1977 NIRC, as amended, includes the corporate and
accounting records of the taxpayer who is the subject of the assessment process, the accounting records
of other taxpayers engaged in the same line of business, including their gross profit and net profit sales.
Such evidence also includes data, record, paper, document or any evidence gathered by internal
revenue officers from other taxpayers who had personal transactions or from whom the subject
taxpayer received any income; and record, data, document and information secured from government
offices or agencies, such as the SEC, the Central Bank of the Philippines, the Bureau of Customs, and the
Tariff and Customs Commission. However, the best evidence obtainable under Section 16 of the 1977
NIRC, as amended, does not include mere photocopies of records/documents. The petitioner, in making
a preliminary and final tax deficiency assessment against a taxpayer, cannot anchor the said assessment
on mere machine copies of records/documents. Mere photocopies of the Consumption Entries have no
probative weight if offered as proof of the contents thereof. The reason for this is that such copies are
mere scraps of paper and are of no probative value as basis for any deficiency income or business taxes
against a taxpayer.

Companies exempt from zero-rate tax

9. BPI v CIR
G.R No. 139786O; ctober 17, 2005

Facts: The BIR issued an Assessment for a deficiency of Documentary Stamp Tax (DST). The petitioner
filed a protest letter, requesting for reconsideration with BIR however the latter did not reply. Instead,
BIR issued a warrant for distraint/levy against petitioner BPI. The petitioner did not hear from BIR until
September 11, 1997 when then Commissioner Liwayway Vinzons-Chado, denied its request for
reconsideration. Subsequently, the petitioner filed a petition for review with the CTA, raising the
defense of prescription. The CTA denied the petition and held that the period of prescription had not yet
prescribed nonetheless, it held that the petitioner was not liable for the deficiency of DST. On appeal,
the CA reversed the ruling of CTA on the issue of DST tax and held that the petitioner was indeed liable
for DST.

Issue: Whether or not the right of the respondent to collect from petitioner BPIis barred by prescription?

Held : Yes, the Court ruled that the period to collect has already prescribed. The BIR has three years,
counted from the date of actual filing of the return or from the last date prescribed by law for the filing
of such return, whichever comes later, to assess a national internal revenue tax or to begin a court
proceeding or the collection thereof without an assessment. In case of a false or fraudulent return with
intent to evade tax or the failure to file any return at all, the prescriptive period for assessment of the
tax due shall be 10 years from discovery by the BIR of the falsity, fraud, or omission. When the BIR
validly issues an assessment, within either the three-year or ten-year period, whichever is appropriate,
then the BIR has another three years after the assessment within which to collect the national internal
revenue tax due thereon by distraint, levy, and/or court proceeding. The assessment of the tax is
deemed made and the three-year period for collection of the assessed tax begins to run on the date the
assessment notice had been released, mailed or sent by the BIR to the taxpayer.

In their Decisions, both the CTA and the Court of Appeals found that the filing by petitioner BPI of a
protest letter suspended the running of the prescriptive period for collecting the assessed DST. This
Court, however, takes the opposing view, and, based on the succeeding discussion, concludes that there
is no valid ground for suspending the running of the prescriptive period for collection of the deficiency
DST assessed against petitioner BPI.

The statute of limitations on assessment and collection of taxes is for the protection of the taxpayer and,
thus, shall be construed liberally in his favor


10. ESTATE OF THE LATE JULIANA DIEZ VDA. DE GABRIEL vs. CIR
GR. No. 155541; January 27, 2004

Facts: During the lifetime of the decedent Juliana vda. De Gabriel, her business affairs were managed by
the Philippine Trust Company (PhilTrust). The decedent died on April 3, 1979 but two days after her
death, PhilTrust filed her income tax return for 1978 not indicating that the decedent had died. The BIR
conducted an administrative investigation of the decedents tax liability and found a deficiency income
tax for the year 1997 in the amount of P318,233.93. Thus, in November 18, 1982, the BIR sent by
registered mail a demand letter and assessment notice addressed to the decedent c/o PhilTrust, Sta.
Cruz, Manila, which was the address stated in her 1978 income tax return. On June 18, 1984,
respondent Commissioner of Internal Revenue issued warrants of distraint and levy to enforce the
collection of decedents deficiency income tax liability and serve the same upon her heir, Francisco
Gabriel. On November 22, 1984, Commissioner filed a motion to allow his claim with probate court for
the deficiency tax. The Court denied BIRs claim against the estate on the ground that no proper notice
of the tax assessment was made on the proper party. On appeal, the CA held that BIRs service on
PhilTrust of the notice of assessment was binding on the estate as PhilTrust failed in its legal duty to
inform the respondent of antecedents death. Consequently, as the estate failed to question the
assessment within the statutory period of thirty days, the assessment became final, executory, and
incontestable.

Issue: (1) Whether or not the CA erred in holding that the service of deficiency tax assessment on Juliana
through PhilTrust was a valid service as to bind the estate; (2) Whether or not the CA erred in holding
that the tax assessment had become final, executory, and incontestable.

Held: (1) Since the relationship between PhilTrust and the decedent was automatically severed the
moment of the taxpayers death, none of the PhilTrusts acts or omissions could bind the estate of the
taxpayer. Although the administrator of the estate may have been remiss in his legal obligation to
inform respondent of the decedents death, the consequence thereof merely refer to the imposition of
certain penal sanction on the administrator. These do not include the indefinite tolling of the
prescriptive period for making deficiency tax assessment or waiver of the notice requirement for such
assessment.

(2) The assessment was served not even on an heir or the estate but on a completely disinterested
party. This improper service was clearly not binding on the petitioner. The most crucial point to be
remembered is that PhilTust had absolutely no legal relationship with the deceased or to her Estate.
There was therefore no assessment served on the estate as to the alleged underpayment of tax. Absent
this assessment, no proceeding could be initiated in court for collection of said tax; therefore, it could
not have become final, executory and incontestable. Respondents claim for collection filed with the
court only on November 22, 1984 was barred for having been made beyond the five-year prescriptive
period set by law.

11. CIR v. Tulio
GR139858; October 25, 2005.

Facts: This involves the collection of percentage taxes for 1986 and 1987. Tulio did not file tax returns.
BIR discovered on September 14 1989. RTC dismissed BIR collection case on the ground of prescription.
It counted 3 years from the return was supposed to be filed with the BIR instead of 10 yrs from
discovery of omission to file return by the respondent.

Issue: Whether petitioners cause of action for the collection of deficiency percentage taxes against
respondent has prescribed.
The lower court erroneously applied Section 203 of the same Code providing for the three-year
prescriptive period from the filing of the tax return within which internal revenue taxes shall be
assessed. It held that such period should be counted from the day the return was filed, or from August
15, 1990 up to August 15, 1993. However, as shown by the records, respondent failed to file a tax
return, forcing petitioner to invoke the powers of his office in tax administration and enforcement.
Respondents failure to file his tax returns is thus covered by Section 223 providing for a ten-year
prescriptive period within which a proceeding in court may be filed.
Here, respondent failed to file his tax returns for 1986 and 1987. On September 14, 1989, petitioner
found respondents omission. Hence, the running of the ten-year prescriptive period within which to
assess and collect the taxes due from respondent commenced on that date until September 14, 1999.
The two final assessment notices were issued on February 28, 1991, well within the prescriptive period
of three (3) years. When respondent failed to question or protest the deficiency assessments thirty (30)
days therefrom, or until March 30, 1991, the same became final and executory.

12. Oceanic Wireless v. CIR
GR NO. 148380, December 9, 2005


Facts: On March 17, 1988, petitioner received from the Bureau of Internal Revenue (BIR) deficiency tax
assessments for the taxable year 1984 in the total amount of P8,644,998.71. Petitioner filed its protest
against the tax assessments and requested a reconsideration or cancellation of the same in a letter to
the BIR Commissioner.

Acting in behalf of the BIR Commissioner, then Chief of the BIR Accounts Receivable and Billing Division,
Mr. Severino B. Buot, reiterated the tax assessments while denying petitioners request for
reinvestigation. Said letter likewise requested petitioner to pay within 10 days from receipt thereof,
otherwise the case shall be referred to the Collection Enforcement Division of the BIR National Office for
the issuance of a warrant of distraint and levy without further notice.

Upon petitioners failure to pay the subject tax assessments within the prescribed period, the Assistant
Commissioner for Collection, acting for the Commissioner of Internal Revenue, issued the corresponding
warrants of distraint and/or levy and garnishment.

Petitioner filed a Petition for Review with the Court of Tax Appeals (CTA) to contest the issuance of the
warrants to enforce the collection of the tax assessments. The CTA dismissed the petition for lack of
jurisdiction.
Petitioner filed a Motion for Reconsideration arguing that the demand letter cannot be considered as
the final decision of the Commissioner of Internal Revenue on its protest because the same was signed
by a mere subordinate and not by the Commissioner himself.

With the denial of its motion for reconsideration, petitioner consequently filed a Petition for Review
with the Court of Appeals contending that there was no final decision to speak of because the
Commissioner had yet to make a personal determination as regards the merits of petitioners case.

The Court of Appeals denied the petition.
Issue: Whether the demand letter for tax deficiency issued and signed by a subordinate officer who was
acting in behalf of the CIR is deemed final and executor and subject to an appeal to the CTA.

Held: YES. A demand letter for payment of delinquent taxes may be considered a decision on a disputed
or protested assessment. The determination on whether or not a demand letter is final is conditioned
upon the language used or the tenor of the letter being sent to the taxpayer. In this case, the letter of
demand, unquestionably constitutes the final action taken by the Bureau of Internal Revenue on
petitioners request for reconsideration when it reiterated the tax deficiency assessments due from
petitioner, and requested its payment. Failure to do so would result in the issuance of a warrant of
distraint and levy to enforce its collection without further notice. In addition, the letter contained a
notation indicating that petitioners request for reconsideration had been denied for lack of supporting
documents. The demand letter received by petitioner verily signified a character of finality. Therefore, it
was tantamount to a rejection of the request for reconsideration.

This now brings us to the crux of the matter as to whether said demand letter indeed attained finality
despite the fact that it was issued and signed by the Chief of the Accounts Receivable and Billing Division
instead of the BIR Commissioner.

The general rule is that the Commissioner of Internal Revenue may delegate any power vested upon him
by law to Division Chiefs or to officials of higher rank. He cannot, however, delegate the four powers
granted to him under the National Internal Revenue Code (NIRC) enumerated in Section .

As amended by Republic Act No. 8424, Section 7 of the Code authorizes the BIR Commissioner to
delegate the powers vested in him under the pertinent provisions of the Code to any subordinate official
with the rank equivalent to a division chief or higher, except the following:

(a) The power to recommend the promulgation of rules and regulations by the Secretary of Finance;
(b) The power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of
the Bureau;

(c) The power to compromise or abate under Section 204(A) and (B) of this Code, any tax deficiency:
Provided, however, that assessments issued by the Regional Offices involving basic deficiency taxes of
five hundred thousand pesos (P500,000) or less, and minor criminal violations as may be determined by
rules and regulations to be promulgated by the Secretary of Finance, upon the recommendation of the
Commissioner, discovered by regional and district officials, may be compromised by a regional
evaluation board which shall be composed of the Regional Director as Chairman, the Assistant Regional
Director, heads of the Legal, Assessment and Collection Divisions and the Revenue District Officer having
jurisdiction over the taxpayer, as members; and

(d) The power to assign or reassign internal revenue officers to establishments where articles subject to
excise tax are produced or kept.
It is clear from the above provision that the act of issuance of the demand letter by the Chief of the
Accounts Receivable and Billing Division does not fall under any of the exceptions that have been
mentioned as non-delegable.

Thus, the authority to make tax assessments may be delegated to subordinate officers. Said assessment
has the same force and effect.

13. Philam Asset Management, Inc. vs CTA
G.R.156637 and 162004; December 14, 2005

Facts: Petitioner acts as investment manager of PFI &PBFI. It provides management &technical services
and thus respectively paid for its services. PFI & PBFI withhold the amount of equivalent to 5%
creditable tax regulation. On April 3, 1998, filed ITR with a net loss thus incurred withholding tax.
Petitioner filed for refund from BIR but was unanswered . CTA denied the petition for review. CA held
that to request for either a refund or credit of income tax paid, a corporation must signify its intention
by marking the corresponding box on its annual corporate adjustment return.

Issue: Whether or not petitioner is entitled to a refund of its creditible taxes.

Ruling: Any tax income that is paid in excess of its amount due to the government may be refunded,
provided that a taxpayer properly applies for the refund. One can not get a tax refund and a tax credit at
the same time for the same excess to income taxes paid. Failure to signify ones intention in Final
Assessment Return (FAR) does not mean outright barring of a valid request for a refund

Requiring that the ITR on the FAR of the succeeding year be presented to the BIR in requesting a tax
refund has no basis in law and jurisprudence. The Tax Code likewise allows the refund of taxes to
taxpayer that claims it in writing within 2 years after payment of the taxes. Technicalities and legalism
should not be misused by the government to keep money not belonging to it, and thereby enriched
itself at the expense of its law-abiding citizens.


14. Philippine Journalist, Inc. v. CIR
G.R. No. 162852; December 16, 2004

Facts: In 1995, the Bureau of Internal Revenue (BIR) issued Letter of Authority for two Revenue Officers
to examine petitioners books of account and other accounting records for internal revenue taxes for
the period January 1, 1994 to December 31, 1994.
In 1997, petitioners Comptroller, executed a "Waiver of the Statute of Limitation Under the National
Internal Revenue Code (NIRC)". The document "waive[d] the running of the prescriptive period provided
by Sections 223 and 224 and other relevant provisions of the NIRC and consent[ed] to the assessment
and collection of taxes which may be found due after the examination at any time after the lapse of the
period of limitations fixed by said Sections 223 and 224 and other relevant provisions of the NIRC, until
the completion of the investigation.
In 1998, Revenue Officer submitted his audit report recommending the issuance of an assessment and
finding that petitioner had deficiency taxes. Subsequently, the Assessment Division of the BIR issued
Pre-Assessment Notices which informed petitioner of the results of the investigation. Thus, BIR issued
Assessment/Demand stating the deficiency taxes, inclusive of interest and compromise penalty
On March 16, 1999, a Preliminary Collection Letter was sent by Deputy Commissioner Romeo S.
Panganiban to the petitioner to pay the assessment within ten (10) days from receipt of the letter. On
November 10, 1999, a Final Notice Before Seizure was issued by the same deputy commissioner giving
the petitioner ten (10) days from receipt to pay. Petitioner received a copy of the final notice on
November 24, 1999. By letters dated November 26, 1999, petitioner asked to be clarified how the tax
liability of P111,291,214.46 was reached and requested an extension of thirty (30) days from receipt of
the clarification within which to reply.
The BIR received a follow-up letter from the petitioner asserting that its (PJI) records do not show
receipt of Tax Assessment/Demand. Petitioner also contested that the assessment had no factual and
legal basis. On March 28, 2000, a Warrant of Distraint and/or Levy was received by the petitioner.
Petitioner filed a Petition for Review with the Court of Tax Appeals (CTA) which was amended on May
12, 2000. Petitioner complains: (a) that no assessment or demand was received from the BIR; (b) that
the warrant of distraint and/or levy was without factual and legal bases as its issuance was premature;
(c) that the assessment, having been made beyond the 3-year prescriptive period, is null and void; (d)
that the issuance of the warrant without being given the opportunity to dispute the same violates its
right to due process; and (e) that the grave prejudice that will be sustained if the warrant is enforced is
enough basis for the issuance of the writ of preliminary injunction.
CTA ruled in favor of PJI. It declared that the deficiency income, value-added and expanded withholding
tax assessments issued by the respondent against the petitioner on December 9, 1998, in the total
amount of P111,291,214.46 for the year 1994 ANCELLED, WITHDRAWN and WITH NO FORCE AND
EFFECT. Likewise, it declared that the Warrant of Distraint and/or Levy No. 33-06-046 NULL and VOID.
On appeal CA ruled that Mere assessment notices which have become final after the lapse of the thirty
(30)-day reglementary period are not appealable. Thus, the CTA should not have entertained the
petition at all. Also, it ruled that there is a valid waiver thus the running of the prescriptive period is
tolled.
Issues: (1) whether or not CTA has jurisdiction over the issues in this case. (2) Whether or not the Waiver
of the Statute of Limitations is valid and binding on the petitioner
Held: (1) No. The appellate jurisdiction of the CTA is not limited to cases which involve decisions of the
Commissioner of Internal Revenue on matters relating to assessments or refunds. The second part of
the provision covers other cases that arise out of the NIRC or related laws administered by the Bureau of
Internal Revenue. The wording of the provision is clear and simple. It gives the CTA the jurisdiction to
determine if the warrant of distraint and levy issued by the BIR is valid and to rule if the Waiver of
Statute of Limitations was validly effected.
(2) No. As found by the CTA, the Waiver of Statute of Limitations, signed by petitioners comptroller on
September 22, 1997 is not valid and binding because it does not conform with the provisions of RMO
No. 20-90. It did not specify a definite agreed date between the BIR and petitioner, within which the
former may assess and collect revenue taxes. Thus, petitioners waiver became unlimited in time,
violating Section 222(b) of the NIRC.
The waiver document is being incomplete and defective, the three-year prescriptive period was not
tolled or extended and continued to run until April 17, 1998. Consequently, the Assessment/Demand
No. 33-1-000757-94 issued on December 9, 1998 was invalid because it was issued beyond the three (3)
year period. In the same manner, Warrant of Distraint and/or Levy No. 33-06-046 which petitioner
received on March 28, 2000 is also null and void for having been issued pursuant to an invalid
assessment.

15. Rafael Arsenio S. Dizon, v. CTA and CIR
G.R. No. 140944; April 30, 2008

Facts: Jose P. Fernandez died in November 7, 1987. Thereafter, a petition for the probate of his will was
filed. The probate court appointed Atty. Rafael Arsenio P. Dizon as administrator of the Estate of Jose
Fernandez.

An estate tax return was filed later on which showed ZERO estate tax liability. BIR thereafter issued a
deficiency estate tax assessment, demanding payment of Php 66.97 million as deficiency estate tax. This
was subsequently reduced by CTA to Php 37.42 million. The CA affirmed the CTAs ruling, hence, the
instant petition.

The petitioner claims that in as much as the valid claims of creditors against the Estate are in excess of
the gross estate, no estate tax was due. On the other hand, respondents argue that since the claims of
the Estates creditors have been condoned, such claims may no longer be deducted from the gross
estate of the decedent.

Issue: Whether the actual claims of creditors may be fully allowed as deductions from the gross estate of
Jose despite the fact that the said claims were reduced or condoned through compromise agreements
entered into by the Estate with its creditors

Held: YES. Following the US Supreme Courts ruling in Ithaca Trust Co. v. United States, the Court held
that post-death developments are not material in determining the amount of deduction. This is because
estate tax is a tax imposed on the act of transferring property by will or intestacy and, because the act
on which the tax is levied occurs at a discrete time, i.e., the instance of death, the net value of the
property transferred should be ascertained, as nearly as possible, as of the that time. This is the date-of-
death valuation rule.

The Court, in adopting the date-of-death valuation principle, explained that: First. There is no law, nor
do we discern any legislative intent in our tax laws, which disregards the date-of-death valuation
principle and particularly provides that post-death developments must be considered in determining the
net value of the estate. It bears emphasis that tax burdens are not to be imposed, nor presumed to be
imposed, beyond what the statute expressly and clearly imports, tax statutes being construed
strictissimi juris against the government. Second. Such construction finds relevance and consistency in
our Rules on Special Proceedings wherein the term "claims" required to be presented against a
decedent's estate is generally construed to mean debts or demands of a pecuniary nature which could
have been enforced against the deceased in his lifetime, or liability contracted by the deceased before
his death. Therefore, the claims existing at the time of death are significant to, and should be made the
basis of, the determination of allowable deductions.

16. Pilipinas Shell Petrolium Corp v. CIR
G.R. No. 172598; December 21, 2007

Facts: In 1988, BIR sent a collection letter to Petitioner Pilipinas Shell Petroleum Corporation (PSPC) for
alleged deficiency excise tax liabilities of PhP 1,705,028,008.06 for the taxable years 1992 and 1994 to
1997, inclusive of delinquency surcharges and interest. As basis for the collection letter, the BIR alleged
that PSPC is not a qualified transferee of the TCCs it acquired from other BOI-registered companies.
These alleged excise tax deficiencies covered by the collection letter were already paid by PSPC with
TCCs acquired through, and issued and duly authorized by the Center, and duly covered by Tax Debit
Memoranda (TDM) of both the Center and BIR, with the latter also issuing the corresponding Accept
Payment for Excise Taxes (APETs).

PSPC protested the collection letter, but it was denied. Because of respondent inaction on a motion for
reconsideration PSPC filed a petition for review before the CTA.

In 1999, the CTA ruled that the use by PSPC of the TCCs was legal and valid, and that respondents
attempt to collect alleged delinquent taxes and penalties from PSPC without an assessment constitutes
denial of due process. Respondent elevated CTA Decision to the Court of Appeals (CA) through a
petition for review.

Despite the pendency of this case, PSPC received assessment letter from respondent for excise tax
deficiencies, surcharges, and interest based on the first batch of cancelled TCCs and TDM covering
PSPCs use of the TCCs. All these cancelled TDM and TCCs were also part of the subject matter of the
now pending before the CA.

PSPC protested the assessment letter, but the protest was denied by the BIR, constraining it to file
another case before the CTA. Subsequently, CTA ruled in favor of PSPC and accordingly cancelled and
set aside the assessment issued by the respondent. Respondent motion for reconsideration of the above
decision which was rejected thus respondent appealed the above decision before the CTA En Banc.

The CTA En Banc ruled in favor of respondent and ordered PSPC to pay the amount of P570,577,401.61
as deficiency excise tax for the taxable years 1992 and 1994 to 1997, inclusive of 25% surcharge and 20%
interest.
Issue: Whether or not petitioner is liable for the assessment of deficiency excise tax after the validly
issued TCCs were subsequently cancelled for having been issued fraudulently

Held: No. Petitioner is not liable for the assessment of deficiency excise tax.

In the instant case, with due application, approval, and acceptance of the payment by PSPC of the
subject TCCs for its then outstanding excise tax liabilities in 1992 and 1994 to 1997, the subject TCCs
have been canceled as the money value of the tax credits these represented have been used up.
Therefore, the DOF through the Center may not now cancel the subject TCCs as these have already been
canceled and used up after their acceptance as payment for PSPCs excise tax liabilities. What has been
used up, debited, and canceled cannot anymore be declared to be void, ineffective, and canceled anew.

Besides, it is indubitable that with the issuance of the corresponding TDM, not only is the TCC canceled
when fully utilized, but the payment is also final subject only to a post-audit on computational errors.
Under RR 5-2000, a TDM is a certification, duly issued by the Commissioner or his duly authorized
representative, reduced in a BIR Accountable Form in accordance with the prescribed formalities,
acknowledging that the taxpayer named therein has duly paid his internal revenue tax liability in the
form of and through the use of a Tax Credit Certificate, duly issued and existing in accordance with the
provisions of these Regulations. The Tax Debit Memo shall serve as the official receipt from the BIR
evidencing a taxpayers payment or satisfaction of his tax obligation. The amount shown therein shall
be charged against and deducted from the credit balance of the aforesaid Tax Credit Certificate.

Thus, with the due issuance of TDM by the Center and TDM by the BIR, the payments made by PSPC
with the use of the subject TCCs have been effected and consummated as the TDMs serve as the official
receipts evidencing PSPCs payment or satisfaction of its tax obligation. Moreover, the BIR not only
issued the corresponding TDM, but it also issued ATAPETs which doubly show the payment of the
subject excise taxes of PSPC.

Based on the above discussion, we hold that respondent erroneously and without factual and legal basis
levied the assessment. Consequently, the CTA En Banc erred in sustaining respondents assessment.

17. CIR v. Primetown Property Group
GR 161155; August 28, 2007

Facts: Gilbert Yap, vice chair of respondent Primetown Property Group, Inc., applied for the refund or
credit of income tax respondents paid in 1997.

The CTA found that respondent filed its final adjusted return on April 14, 1998. Thus, its right to claim a
refund or credit commenced on that date. According to the CTA, the two-year prescriptive period under
Section 229 of the NIRC for the filing of judicial claims was equivalent to 730 days. Because the year
2000 was a leap year, respondent's petition, which was filed 731 days after respondent filed its final
adjusted return, was filed beyond the reglementary period.

On appeal, the CA reversed and set aside the decision of the CTA. It ruled that Article 13 of the Civil
Code did not distinguish between a regular year and a leap year. According to the CA, even if the year
2000 was a leap year, the periods covered by April 15, 1998 to April 14, 1999 and April 15, 1999 to April
14, 2000 should still be counted as 365 days each or a total of 730 days. A statute which is clear and
explicit shall be neither interpreted nor construed.

Issue: Whether or not the counting of the 2-year prescriptive period for filing claim of refund is
governed by the Civil Code.

Held: Counting of 2-year period for filing claim for refund is no longer in accordance with Art 13 of the
Civil Code but under Sec 31 of EO 227 - The Administrative Code of 1987.

As between the Civil Code, which provides that a year is equivalent to 365 days, and the Administrative
Code of 1987, which states that a year is composed of 12 calendar months, it is the latter that must
prevail being the more recent law, following the legal maxim, Lex posteriori derogat priori.

In the case at bar, there are 24 calendar months in 2 years. For a Final Corporate ITR filed on Apr 14,
1998, the counting should start from Apr 15, 1998 and end on Apr 14, 2000. The procedure is 1st month
-Apr 15, 1998 to May 14, 1998 . 24th month - Mar 15, 2000 to Apr 14, 2000. National Marketing v.
Tecson, 139 Phil 584 (1969) is no longer controlling. The 2-year period should start to run from filing of
the final adjusted return.
We therefore hold that respondent's petition (filed on April 14, 2000) was filed on the last day of the
24th calendar month from the day respondent filed its final adjusted return. Hence, it was filed within
the reglementary period

18. CIR vs. Reyes and Reyes vs. CIR
GR Nos. 159694 & 163581

Facts: Decedent Tancinco left a 1,292 square-meter residential lot and an old house thereon. The heirs
of the decedent received a final estate tax assessment notice and a demand letter, both dated April 22,
1998, for the amount of P14,912,205.47, inclusive of surcharge and interest. The CIR issued a
preliminary collection letter to Reyes, followed by a Final Notice Before Seizure. Subsequently, a
Warrant of Distraint and/or Levy was served upon the estate. Reyes initially protested the notice of levy
but then the heirs proposed a compromise settlement of P1,000,000.00. The CIR rejected Reyess offer,
pointing out that since the estate tax is a charge on the estate and not on the heirs, the latters financial
incapacity is immaterial as, in fact, the gross value of the estate amounting to P32,420,360.00 is more
than sufficient to settle the tax liability. As the estate failed to pay its tax liability within the deadline, BIR
notified Reyes that the subject property would be sold at public auction on August 8, 2000. Reyes filed a
protest with the BIR Appellate Division. Assailing the scheduled auction sale, she asserted that the
assessment, letter of demand, and the whole tax proceedings against the estate are void ab initio. She
offered to file the corresponding estate tax return and pay the correct amount of tax without surcharge
or interest.

Issue: WON the assessment in this case can be used as a basis for the perfection of a tax compromise.

Held: NO. The 2nd paragraph of Sec. 228 of NIRC is clear and mandatory insofar as taxpayers shall be
informed in writing of the law and the facts on which the assessment is made, otherwise the assessment
shall be void. RA 8424 has already amended the provisions of Sec. 229 of NIRC on protesting an
assessment. The old requirement of merely notifying the taxpayer of the CIRs findings was changed in
1998 of informing the taxpayer of not only the law, but also of the facts on which an assessment would
be made, otherwise, the assessment itself would be invalid. Being invalid, the assessment canot be in
turn be used as a basis for the perfection of a tax compromise.

Hence, it is premature to declare the compromise on the tax liability of the estate perfected and
consummated considering that the tax assessment is void. While administrative agencies, like the BIR,
were not bound by procedural requirements, they were still required by law and equity to observe
substantive due process. The reason behind this requirement, said the CA, was to ensure that taxpayers
would be duly apprised of -- and could effectively protest -- the basis of tax assessments against them.7
Since the assessment and the demand were void, the proceedings emanating from them were likewise
void, and any order emanating from them could never attain finality.

20. CIR vs. First Express Pawnshop Company, Inc.
G.R. Nos. 172045-46; June 16 2009

Facts: CIR issued assessment notices against Respondent for deficiency income tax, VAT and
documentary stamp tax on deposit on subscription and on pawn tickets. Respondent filed its written
protest on the assessments. When CIR did not act on the protest during the 180-day period, respondent
filed a petition before the CTA.

Issue: Has Respondents right to dispute the assessment in the CTA prescribed?

Held: NO. The assessment against Respondent has not become final and unappealable. It cannot be said
that respondent failed to submit relevant supporting documents that would render the assessment final
because when respondent submitted its protest, respondent attached all the documents it felt were
necessary to support its claim. Further, CIR cannot insist on the submission of proof of DST payment
because such document does not exist as respondent claims that it is not liable to pay, and has not paid,
the DST on the deposit on subscription.

The term "relevant supporting documents" are those documents necessary to support the legal basis in
disputing a tax assessment as determined by the taxpayer. The BIR can only inform the taxpayer to
submit additional documents and cannot demand what type of supporting documents should be
submitted. Otherwise, a taxpayer will be at the mercy of the BIR, which may require the production of
documents that a taxpayer cannot submit. Since the taxpayer is deemed to have submitted all
supporting documents at the time of filing of its protest, the 180-day period likewise started to run on
that same date.

21. CIR vs. Enron Subic Power Corp
GR No. 166387; January 19, 2009

Facts: The BIR assessed Enron which countered by filing a Petition for Review with the CTA stating that
the assessment disregarded the provisions of the Tax Code and of RR No. 12-99, when the assessment
failed to provide the legal and factual bases of the assessment. The CTA and CA ruled that the
assessment notice must not only refer to the supporting revenue laws or regulations for the assessment
but must also justify their applicability to the factual milieu of the assessment.

Issue: Is the disputed assessment valid?

Held: NO. The assessment is not valid. Although the revenue examiners discussed their findings with
Respondents representative during the pre-assessment stage, the same, together with the Preliminary
Five-Day Letter and Petitioners Annex G, were not sufficient to comply with the procedural requirement
of due process. The Tax Code provides that a taxpayer shall be informed (and not merely notified as
was the requirement before) in writing of the law and the facts on which the assessment is made;
otherwise, the assessment shall be void. The use of the word shall indicates the mandatory nature of
the requirement.

22. TFS Inc. v. CIR
G.R. No. 166829; April 19, 2010

Facts: The CTA rendered a Decision upholding the assessment issued against petitioner in the amount of
P11,905,696.32, representing deficiency VAT for the year 1998, inclusive of 25% surcharge and 20%
deficiency interest, plus 20% delinquency interest from February 25, 2002 until full payment, pursuant
to Sections 248 and 249(B) of the National Internal Revenue Code of 1997 (NIRC). The CTA ruled that
pawnshops are subject to VAT under Section 108(A) of the NIRC as they are engaged in the sale of
services for a fee, remuneration or consideration.

Petitioner filed before the Court of Appeals a Petition for Review but it was dismissed by the CA for lack
of jurisdiction in view of the enactment of Republic Act No. 9282 (RA 9282).

Realizing its error, petitioner filed a Petition for Review with the CTA En Banc. The petition, however,
was dismissed for having been filed out of time. Petitioner filed a Motion for Reconsideration but it was
denied.
Issues: (1) Whether the Honorable court of Tax Appeal en banc should have given due course to the
petition for review and not strictly applied the technical rules of procedure to the detriment of justice;
(2) Whether or not petitioner is subject to the 10% VAT.

Held: (1) The petition is meritorious. Jurisdiction to review decisions or resolutions issued by the
Divisions of the CTA is no longer with the CA but with the CTA En Banc. This rule is embodied in Section
11 of RA 9282.
In the instant case, we are constrained to disregard procedural rules because we cannot in conscience
allow the government to collect deficiency VAT from petitioner considering that the government has no
right at all to collect or to receive the same. Besides, dismissing this case on a mere technicality would
lead to the unjust enrichment of the government at the expense of petitioner, which we cannot permit.
Technicalities should never be used as a shield to perpetrate or commit an injustice.

(2) Petitioner disputes the assessment made by the BIR for VAT deficiency in the amount of
P11,905,696.32 for taxable year 1998 on the ground that pawnshops are not included in the coverage of
VAT.

We agree. x x x Since petitioner is a non-bank financial intermediary, it is subject to 10% VAT for the tax
years 1996 to 2002; however, with the levy, assessment and collection of VAT from non-bank financial
intermediaries being specifically deferred by law, then petitioner is not liable for VAT during these tax
years. But with the full implementation of the VAT system on non-bank financial intermediaries starting
January 1, 2003, petitioner is liable for 10% VAT for said tax year. And beginning 2004 up to the present,
by virtue of R.A. No. 9238, petitioner is no longer liable for VAT but it is subject to percentage tax on
gross receipts from 0% to 5%, as the case may be.

Guided by the foregoing, petitioner is not liable for VAT for the year 1998. Consequently, the VAT
deficiency assessment issued by the BIR against petitioner has no legal basis and must therefore be
cancelled. In the same vein, the imposition of surcharge and interest must be deleted.