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ESTATE TAX

1. Dizon vs CIR
DONORS TAX
1. Metro Pac Corp vs CIR
VAT
1. Fort Boni Devt Corp vs CIR
2. San Roque v CIR
3. KEPCO Phil vs CIR
4. Mindanao Geo Partnership vs CIR
5. CIR vs Sony
6. Medicard Phil Inc vs CIR
7. LVM construction vs Corp vs Sanchez
8. Accenture vs CIR
9. Luzon Hydro vs CIR

THIRD DIVISION
RAFAEL ARSENIO S. DIZON, in his capacity as
the Judicial Administrator of the Estate of
the deceased JOSE P. FERNANDEZ,
Petitioner,
- versus COURT OF TAX APPEALS andCOMMISSIONER
OF INTERNAL REVENUE,
Respondents.

G.R. No. 140944


Present:
YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.
Promulgated:
April 30, 2008

x------------------------------------------------------------------------------------x
DECISION
NACHURA, J.:
Before this Court is a Petition for Review on Certiorari[1] under Rule 45 of the Rules of Civil Procedure
seeking the reversal of the Court of Appeals (CA) Decision [2] datedApril 30, 1999 which affirmed the
Decision[3] of the Court of Tax Appeals (CTA) dated June 17, 1997.[4]
The Facts

On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate of his will [5] was
filed with Branch 51 of the Regional Trial Court (RTC) of Manila(probate court).[6] The probate court then
appointed retired Supreme Court Justice Arsenio P. Dizon (Justice Dizon) and petitioner, Atty. Rafael Arsenio
P. Dizon (petitioner) as Special and Assistant Special Administrator, respectively, of the Estate of Jose

(Estate). In a letter[7] dated October 13, 1988, Justice Dizon informed respondent Commissioner of the
Bureau of Internal Revenue (BIR) of the special proceedings for the Estate.
Petitioner alleged that several requests for extension of the period to file the required estate tax return
were granted by the BIR since the assets of the estate, as well as the claims against it, had yet to be
collated, determined and identified. Thus, in a letter [8] dated March 14, 1990, Justice Dizon authorized Atty.
Jesus M. Gonzales (Atty. Gonzales) to sign and file on behalf of the Estate the required estate tax return
and to represent the same in securing a Certificate of Tax Clearance. Eventually, on April 17, 1990, Atty.
Gonzales wrote a letter[9] addressed to the BIR Regional Director for San Pablo City and filed the estate tax
return[10] with the same BIR Regional Office, showing therein a NIL estate tax liability, computed as follows:

COMPUTATION OF TAX
Conjugal Real Property (Sch. 1) P10,855,020.00
Conjugal Personal Property (Sch.2) 3,460,591.34
Taxable Transfer (Sch. 3)
Gross Conjugal Estate 14,315,611.34
Less: Deductions (Sch. 4) 187,822,576.06
Net Conjugal Estate NIL
Less: Share of Surviving Spouse NIL .
Net Share in Conjugal Estate NIL
xxx
Net Taxable Estate NIL .
Estate Tax Due NIL .[11]

On April 27, 1990, BIR Regional Director for San Pablo City, Osmundo G. Umali issued Certification
Nos. 2052[12] and 2053[13] stating that the taxes due on the transfer of real and personal properties [14] of
Jose had been fully paid and said properties may be transferred to his heirs. Sometime in August 1990,
Justice Dizon passed away. Thus, onOctober 22, 1990, the probate court appointed petitioner as the
administrator of the Estate.[15]
Petitioner requested the probate court's authority to sell several properties forming part of the
Estate, for the purpose of paying its creditors, namely: Equitable Banking Corporation (P19,756,428.31),
Banque de L'Indochine et. de Suez (US$4,828,905.90 as of January 31, 1988), Manila Banking Corporation
(P84,199,160.46 as of February 28, 1989) and State Investment House, Inc. (P6,280,006.21). Petitioner
manifested that Manila Bank, a major creditor of the Estate was not included, as it did not file a claim with
the probate court since it had security over several real estate properties forming part of the Estate. [16]

However, on November 26, 1991, the Assistant Commissioner for Collection of the BIR,
Themistocles Montalban, issued Estate Tax Assessment Notice No. FAS-E-87-91-003269, [17] demanding the
payment of P66,973,985.40 as deficiency estate tax, itemized as follows:
Deficiency Estate Tax- 1987

Estate tax P31,868,414.48


25% surcharge- late filing 7,967,103.62
late payment 7,967,103.62
Interest 19,121,048.68
Compromise-non filing 25,000.00
non payment 25,000.00
no notice of death 15.00
no CPA Certificate 300.00
Total amount due & collectible P66,973,985.40[18]

In his letter[19] dated December 12, 1991, Atty. Gonzales moved for the reconsideration of the said estate
tax assessment. However, in her letter [20] dated April 12, 1994, the BIR Commissioner denied the request
and reiterated that the estate is liable for the payment of P66,973,985.40 as deficiency estate tax. On May
3, 1994, petitioner received the letter of denial. On June 2, 1994, petitioner filed a petition for
review[21] before respondent CTA. Trial on the merits ensued.

As found by the CTA, the respective parties presented the following pieces of evidence, to wit:
In the hearings conducted, petitioner did not present testimonial evidence but merely
documentary evidence consisting of the following:
Nature of Document (sic) Exhibits
1. Letter dated October 13, 1988
from Arsenio P. Dizon addressed
to the Commissioner of Internal
Revenue informing the latter of
the special proceedings for the
settlement of the estate (p. 126,
BIR records); "A"
2. Petition for the probate of the
will and issuance of letter of
administration filed with the
Regional Trial Court (RTC) of
Manila, docketed as Sp. Proc.
No. 87-42980 (pp. 107-108, BIR
records); "B" & "B-1
3. Pleading entitled "Compliance"
filed with the probate Court
submitting the final inventory
of all the properties of the
deceased (p. 106, BIR records); "C"
4. Attachment to Exh. "C" which
is the detailed and complete
listing of the properties of
the deceased (pp. 89-105, BIR rec.); "C-1" to "C-17"
5. Claims against the estate filed
by Equitable Banking Corp. with
the probate Court in the amount

of P19,756,428.31 as of March 31,


1988, together with the Annexes
to the claim (pp. 64-88, BIR records); "D" to "D-24"
6. Claim filed by Banque de L'
Indochine et de Suez with the
probate Court in the amount of
US $4,828,905.90 as of January 31,
1988 (pp. 262-265, BIR records); "E" to "E-3"
7. Claim of the Manila Banking
Corporation (MBC) which as of
November 7, 1987 amounts to
P65,158,023.54, but recomputed
as of February 28, 1989 at a
total amount of P84,199,160.46;
together with the demand letter
from MBC's lawyer (pp. 194-197,
BIR records); "F" to "F-3"
8. Demand letter of Manila Banking
Corporation prepared by Asedillo,
Ramos and Associates Law Offices
addressed to Fernandez Hermanos,
Inc., represented by Jose P.
Fernandez, as mortgagors, in the
total amount of P240,479,693.17
as of February 28, 1989
(pp. 186-187, BIR records); "G" & "G-1"
9. Claim of State Investment
House, Inc. filed with the
RTC, Branch VII of Manila,
docketed as Civil Case No.
86-38599 entitled "State
Investment House, Inc.,
Plaintiff, versus Maritime
Company Overseas, Inc. and/or
Jose P. Fernandez, Defendants,"
(pp. 200-215, BIR records); "H" to "H-16"
10. Letter dated March 14, 1990
of Arsenio P. Dizon addressed
to Atty. Jesus M. Gonzales,
(p. 184, BIR records); "I"
11. Letter dated April 17, 1990
from J.M. Gonzales addressed
to the Regional Director of
BIR in San Pablo City
(p. 183, BIR records); "J"
12. Estate Tax Return filed by
the estate of the late Jose P.
Fernandez through its authorized
representative, Atty. Jesus M.
Gonzales, for Arsenio P. Dizon,
with attachments (pp. 177-182,
BIR records); "K" to "K-5"

13. Certified true copy of the


Letter of Administration
issued by RTC Manila, Branch
51, in Sp. Proc. No. 87-42980
appointing Atty. Rafael S.
Dizon as Judicial Administrator
of the estate of Jose P.
Fernandez; (p. 102, CTA records)
and "L"
14. Certification of Payment of
estate taxes Nos. 2052 and
2053, both dated April 27, 1990,
issued by the Office of the
Regional Director, Revenue
Region No. 4-C, San Pablo
City, with attachments
(pp. 103-104, CTA records.). "M" to "M-5"
Respondent's [BIR] counsel presented on June 26, 1995 one witness in the person
of Alberto Enriquez, who was one of the revenue examiners who conducted the
investigation on the estate tax case of the late Jose P. Fernandez. In the course of
the direct examination of the witness, he identified the following:
Documents/
Signatures BIR Record
1. Estate Tax Return prepared by
the BIR; p. 138
2. Signatures of Ma. Anabella
Abuloc and Alberto Enriquez,
Jr. appearing at the lower
Portion of Exh. "1"; -do3. Memorandum for the Commissioner,
dated July 19, 1991, prepared by
revenue examiners, Ma. Anabella A.
Abuloc, Alberto S. Enriquez and
Raymund S. Gallardo; Reviewed by
Maximino V. Tagle pp. 143-144
4. Signature of Alberto S.
Enriquez appearing at the
lower portion on p. 2 of Exh. "2"; -do5. Signature of Ma. Anabella A.
Abuloc appearing at the
lower portion on p. 2 of Exh. "2"; -do6. Signature of Raymund S.
Gallardo appearing at the
Lower portion on p. 2 of Exh. "2"; -do7. Signature of Maximino V.
Tagle also appearing on
p. 2 of Exh. "2"; -do8. Summary of revenue
Enforcement Officers Audit
Report, dated July 19, 1991; p. 139

9. Signature of Alberto
Enriquez at the lower
portion of Exh. "3"; -do10. Signature of Ma. Anabella A.
Abuloc at the lower
portion of Exh. "3"; -do11. Signature of Raymond S.
Gallardo at the lower
portion of Exh. "3"; -do12. Signature of Maximino
V. Tagle at the lower
portion of Exh. "3"; -do13. Demand letter (FAS-E-87-91-00),
signed by the Asst. Commissioner
for Collection for the Commissioner
of Internal Revenue, demanding
payment of the amount of
P66,973,985.40; and p. 169
14. Assessment Notice FAS-E-87-91-00 pp. 169-170[22]
The CTA's Ruling

On June 17, 1997, the CTA denied the said petition for review. Citing this Court's ruling in Vda. de Oate v.
Court of Appeals,[23] the CTA opined that the aforementioned pieces of evidence introduced by the BIR were
admissible in evidence. The CTA ratiocinated:
Although the above-mentioned documents were not formally offered as evidence for
respondent, considering that respondent has been declared to have waived the presentation
thereof during the hearing on March 20, 1996, still they could be considered as evidence for
respondent since they were properly identified during the presentation of respondent's
witness, whose testimony was duly recorded as part of the records of this case. Besides, the
documents marked as respondent's exhibits formed part of the BIR records of the case. [24]

Nevertheless, the CTA did not fully adopt the assessment made by the BIR and it came up with its own
computation of the deficiency estate tax, to wit:
Conjugal Real Property P 5,062,016.00
Conjugal Personal Prop. 33,021,999.93
Gross Conjugal Estate 38,084,015.93
Less: Deductions 26,250,000.00
Net Conjugal Estate P 11,834,015.93
Less: Share of Surviving Spouse 5,917,007.96
Net Share in Conjugal Estate P 5,917,007.96
Add: Capital/Paraphernal
Properties P44,652,813.66
Less: Capital/Paraphernal
Deductions 44,652,813.66
Net Taxable Estate P 50,569,821.62
============

Estate Tax Due P 29,935,342.97


Add: 25% Surcharge for Late Filing 7,483,835.74
Add: Penalties for-No notice of death 15.00
No CPA certificate 300.00
Total deficiency estate tax P 37,419,493.71
=============
exclusive of 20% interest from due date of its payment until full payment thereof
[Sec. 283 (b), Tax Code of 1987].[25]
Thus, the CTA disposed of the case in this wise:
WHEREFORE, viewed from all the foregoing, the Court finds the petition unmeritorious and
denies the same. Petitioner and/or the heirs of Jose P. Fernandez are hereby ordered to pay
to respondent the amount of P37,419,493.71 plus 20% interest from the due date of its
payment until full payment thereof as estate tax liability of the estate of Jose P. Fernandez
who died on November 7, 1987.
SO ORDERED.[26]

Aggrieved, petitioner, on March 2, 1998, went to the CA via a petition for review. [27]
The CA's Ruling

On April 30, 1999, the CA affirmed the CTA's ruling. Adopting in full the CTA's findings, the CA ruled that
the petitioner's act of filing an estate tax return with the BIR and the issuance of BIR Certification Nos.
2052 and 2053 did not deprive the BIR Commissioner of her authority to re-examine or re-assess the said
return filed on behalf of the Estate.[28]

On May 31, 1999, petitioner filed a Motion for Reconsideration [29] which the CA denied in its
Resolution[30] dated November 3, 1999.
Hence, the instant Petition raising the following issues:
1.

Whether or not the admission of evidence which were not formally offered by the
respondent BIR by the Court of Tax Appeals which was subsequently upheld by the Court
of Appeals is contrary to the Rules of Court and rulings of this Honorable Court;

2. Whether or not the Court of Tax Appeals and the Court of Appeals erred in
recognizing/considering the estate tax return prepared and filed by respondent BIR
knowing that the probate court appointed administrator of the estate of Jose P. Fernandez
had previously filed one as in fact, BIR Certification Clearance Nos. 2052 and 2053 had
been issued in the estate's favor;
3. Whether or not the Court of Tax Appeals and the Court of Appeals erred in disallowing the
valid and enforceable claims of creditors against the estate, as lawful deductions despite
clear and convincing evidence thereof; and

4. Whether or not the Court of Tax Appeals and the Court of Appeals erred in validating
erroneous double imputation of values on the very same estate properties in the estate
tax return it prepared and filed which effectively bloated the estate's assets. [31]

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; that the lack of a formal offer of evidence is fatal to BIR's cause; that
the doctrine laid down in Vda. de Oate has already been abandoned in a long line of cases in which the
Court held that evidence not formally offered is without any weight or value; that Section 34 of Rule 132 of
the Rules on Evidence requiring a formal offer of evidence is mandatory in character; that, while BIR's
witness Alberto Enriquez (Alberto) in his testimony before the CTA identified the pieces of evidence
aforementioned such that the same were marked, BIR's failure to formally offer said pieces of evidence
and depriving petitioner the opportunity to cross-examine Alberto, render the same inadmissible in
evidence; that assuming arguendo that the ruling in Vda. de Oate is still applicable, BIR failed to comply
with the doctrine's requisites because the documents herein remained simply part of the BIR records and
were not duly incorporated in the court records; that the BIR failed to consider that although the actual
payments made to the Estate creditors were lower than their respective claims, such were compromise
agreements reached long after the Estate's liability had been settled by the filing of its estate tax return
and the issuance of BIR Certification Nos. 2052 and 2053; and that the reckoning date of the claims
against the Estate and the settlement of the estate tax due should be at the time the estate tax return was
filed by the judicial administrator and the issuance of said BIR Certifications and not at the time the
aforementioned Compromise Agreements were entered into with the Estate's creditors. [32]

On the other hand, respondent counters that the documents, being part of the records of the case and duly
identified in a duly recorded testimony are considered evidence even if the same were not formally
offered; that the filing of the estate tax return by the Estate and the issuance of BIR Certification Nos. 2052
and 2053 did not deprive the BIR of its authority to examine the return and assess the estate tax; and that
the factual findings of the CTA as affirmed by the CA may no longer be reviewed by this Court via a petition
for review.[33]
The Issues
There are two ultimate issues which require resolution in this case:
First. Whether or not the CTA and the CA gravely erred in allowing the admission of the pieces of evidence
which were not formally offered by the BIR; and
Second. Whether or not the CA erred in affirming the CTA in the latter's determination of the deficiency
estate tax imposed against the Estate.
The Courts Ruling

The Petition is impressed with merit.


Under Section 8 of RA 1125, the CTA is categorically described as a court of record. As cases filed before it
are litigated de novo, party-litigants shall prove every minute aspect of their cases. Indubitably, no
evidentiary value can be given the pieces of evidence submitted by the BIR, as the rules on documentary
evidence require that these documents must be formally offered before the CTA. [34] Pertinent is Section 34,
Rule 132 of the Revised Rules on Evidence which reads:
SEC. 34. Offer of evidence. The court shall consider no evidence which has not been
formally offered. The purpose for which the evidence is offered must be specified.

The CTA and the CA rely solely on the case of Vda. de Oate, which reiterated this Court's previous
rulings in People v. Napat-a[35] and People v. Mate[36] on the admission and consideration of exhibits which
were not formally offered during the trial. Although in a long line of cases many of which were decided
after Vda. de Oate, we held that courts cannot consider evidence which has not been formally offered,
[37]

nevertheless, petitioner cannot validly assume that the doctrine laid down in Vda. de Oate has already

been abandoned. Recently, in Ramos v. Dizon,[38] this Court, applying the said doctrine, ruled that the trial
court judge therein committed no error when he admitted and considered the respondents' exhibits in the
resolution of the case, notwithstanding the fact that the same were not formally offered. Likewise, in Far
East Bank & Trust Company v. Commissioner of Internal Revenue,[39] the Court made reference to said
doctrine in resolving the issues therein. Indubitably, the doctrine laid down in Vda. De Oate still subsists in
this jurisdiction. In Vda. de Oate, we held that:
From the foregoing provision, it is clear that for evidence to be considered, the same must
be formally offered. Corollarily, the mere fact that a particular document is identified and
marked as an exhibit does not mean that it has already been offered as part of the evidence
of a party. In Interpacific Transit, Inc. v. Aviles [186 SCRA 385], we had the occasion to make
a distinction between identification of documentary evidence and its formal offer as an
exhibit. We said that the first is done in the course of the trial and is accompanied by the
marking of the evidence as an exhibit while the second is done only when the party rests its
case and not before. A party, therefore, may opt to formally offer his evidence if he believes
that it will advance his cause or not to do so at all. In the event he chooses to do the latter,
the trial court is not authorized by the Rules to consider the same.
However, in People v. Napat-a [179 SCRA 403] citing People v. Mate [103 SCRA 484], we
relaxed the foregoing rule and allowed evidence not formally offered to be
admitted and considered by the trial court provided the following requirements
are present, viz.: first, the same must have been duly identified by testimony duly
recorded and, second, the same must have been incorporated in the records of
the case.[40]
From the foregoing declaration, however, it is clear that Vda. de Oate is merely an exception to the
general rule. Being an exception, it may be applied only when there is strict compliance with the requisites

mentioned therein; otherwise, the general rule in Section 34 of Rule 132 of the Rules of Court should
prevail.
In this case, we find that these requirements have not been satisfied. The assailed pieces of evidence were
presented and marked during the trial particularly when Alberto took the witness stand. Alberto identified
these pieces of evidence in his direct testimony. [41] He was also subjected to cross-examination and recross examination by petitioner.[42]But Albertos account and the exchanges between Alberto and petitioner
did not sufficiently describe the contents of the said pieces of evidence presented by the BIR. In fact,
petitioner sought that the lead examiner, one Ma. Anabella A. Abuloc, be summoned to testify, inasmuch
as Alberto was incompetent to answer questions relative to the working papers. [43] The lead examiner
never testified. Moreover, while Alberto's testimony identifying the BIR's evidence was duly recorded, the
BIR documents themselves were not incorporated in the records of the case.
A common fact threads through Vda. de Oate and Ramos that does not exist at all in the instant case. In
the aforementioned cases, the exhibits were marked at the pre-trial proceedings to warrant the
pronouncement that the same were duly incorporated in the records of the case. Thus, we held in Ramos:
In this case, we find and so rule that these requirements have been satisfied. The exhibits
in question were presented and marked during the pre-trial of the case thus, they
have been incorporated into the records. Further, Elpidio himself explained the
contents of these exhibits when he was interrogated by respondents' counsel...
xxxx
But what further defeats petitioner's cause on this issue is that respondents' exhibits were
marked and admitted during the pre-trial stage as shown by the Pre-Trial Order quoted
earlier.[44]
While the CTA is not governed strictly by technical rules of evidence, [45] as rules of procedure are not ends
in themselves and are primarily intended as tools in the administration of justice, the presentation of the
BIR's evidence is not a mere procedural technicality which may be disregarded considering that it is the
only means by which the CTA may ascertain and verify the truth of BIR's claims against the Estate. [46] The
BIR's failure to formally offer these pieces of evidence, despite CTA's directives, is fatal to its cause. [47] Such
failure is aggravated by the fact that not even a single reason was advanced by the BIR to justify such fatal
omission. This, we take against the BIR.
Per the records of this case, the BIR was directed to present its evidence [48] in the hearing of February 21,
1996, but BIR's counsel failed to appear. [49] The CTA denied petitioner's motion to consider BIR's
presentation of evidence as waived, with a warning to BIR that such presentation would be considered
waived if BIR's evidence would not be presented at the next hearing. Again, in the hearing of March 20,
1996, BIR's counsel failed to appear. [50] Thus, in its Resolution[51] dated March 21, 1996, the CTA considered
the BIR to have waived presentation of its evidence. In the same Resolution, the parties were directed to
file their respective memorandum. Petitioner complied but BIR failed to do so. [52] In all of these

proceedings, BIR was duly notified. Hence, in this case, we are constrained to apply our ruling in Heirs of
Pedro Pasag v. Parocha:[53]
A formal offer is necessary because judges are mandated to rest their findings of
facts and their judgment only and strictly upon the evidence offered by the parties at the
trial. Its function is to enable the trial judge to know the purpose or purposes for which the
proponent is presenting the evidence. On the other hand, this allows opposing parties to
examine the evidence and object to its admissibility. Moreover, it facilitates review as the
appellate court will not be required to review documents not previously scrutinized by the
trial court.
Strict adherence to the said rule is not a trivial matter. The Court in Constantino v. Court of
Appeals ruled that the formal offer of one's evidence is deemed waived after failing
to submit it within a considerable period of time. It explained that the court
cannot admit an offer of evidence made after a lapse of three (3) months because
to do so would "condone an inexcusable laxity if not non-compliance with a court
order which, in effect, would encourage needless delays and derail the speedy
administration of justice."
Applying the aforementioned principle in this case, we find that the trial court had
reasonable ground to consider that petitioners had waived their right to make a formal offer
of documentary or object evidence. Despite several extensions of time to make their formal
offer, petitioners failed to comply with their commitment and allowed almost five months to
lapse before finally submitting it. Petitioners' failure to comply with the rule on
admissibility of evidence is anathema to the efficient, effective, and expeditious
dispensation of justice.

Having disposed of the foregoing procedural issue, we proceed to discuss the merits of the case.
Ordinarily, the CTA's findings, as affirmed by the CA, are entitled to the highest respect and will not
be disturbed on appeal unless it is shown that the lower courts committed gross error in the appreciation
of facts.[54] In this case, however, we find the decision of the CA affirming that of the CTA tainted with
palpable error.
It is admitted that the claims of the Estate's aforementioned creditors have been condoned. As a mode of
extinguishing an obligation,[55] condonation or remission of debt[56] is defined as:
an act of liberality, by virtue of which, without receiving any equivalent, the creditor
renounces the enforcement of the obligation, which is extinguished in its entirety or in that
part or aspect of the same to which the remission refers. It is an essential characteristic of
remission that it be gratuitous, that there is no equivalent received for the benefit given;
once such equivalent exists, the nature of the act changes. It may become dation in
payment when the creditor receives a thing different from that stipulated; or novation, when
the object or principal conditions of the obligation should be changed; or compromise, when
the matter renounced is in litigation or dispute and in exchange of some concession which
the creditor receives.[57]

Verily, the second issue in this case involves the construction of Section 79 [58] of the National Internal
Revenue Code[59] (Tax Code) which provides for the allowable deductions from the gross estate of the
decedent. The specific question is whether the actual claims of the aforementioned 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.
Claims against the estate, as allowable deductions from the gross estate under Section 79 of the Tax Code,
are basically a reproduction of the deductions allowed under Section 89 (a) (1) (C) and (E) of
Commonwealth Act No. 466 (CA 466), otherwise known as the National Internal Revenue Code of 1939,
and which was the first codification of Philippine tax laws. Philippine tax laws were, in turn, based on the
federal tax laws of the United States. Thus, pursuant to established rules of statutory construction, the
decisions of American courts construing the federal tax code are entitled to great weight in the
interpretation of our own tax laws.[60]
It is noteworthy that even in the United States, there is some dispute as to whether the deductible amount
for a claim against the estate is fixed as of the decedent's death which is the general rule, or the same
should be adjusted to reflect post-death developments, such as where a settlement between the parties
results in the reduction of the amount actually paid. [61] On one hand, the U.S. court ruled that the
appropriate deduction is the value that the claim had at the date of the decedent's death. [62] Also, as held
in Propstra v. U.S.,[63] where a lien claimed against the estate was certain and enforceable on the date of
the decedent's death, the fact that the claimant subsequently settled for lesser amount did not preclude
the estate from deducting the entire amount of the claim for estate tax purposes. These pronouncements
essentially confirm the general principle that post-death developments are not material in determining the
amount of the deduction.

On the other hand, the Internal Revenue Service (Service) opines that post-death settlement should
be taken into consideration and the claim should be allowed as a deduction only to the extent of the
amount actually paid.[64] Recognizing the dispute, the Service released Proposed Regulations in 2007
mandating that the deduction would be limited to the actual amount paid. [65]
In announcing its agreement with Propstra,[66] the U.S. 5th Circuit Court of Appeals held:
We are persuaded that the Ninth Circuit's decision...in Propstra correctly apply the Ithaca
Trust date-of-death valuation principle to enforceable claims against the estate. As we
interpret Ithaca Trust, when the Supreme Court announced the date-of-death valuation
principle, it was making a judgment about the nature of the federal estate tax specifically,
that it 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 that
time. This analysis supports broad application of the date-of-death valuation rule. [67]

We express our agreement with the date-of-death valuation rule, made pursuant to the ruling of the U.S.
Supreme Court in Ithaca Trust Co. v. United States.[68] 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.[69] Any doubt on whether a person, article or activity is taxable is generally resolved against
taxation.[70] 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.[71] Therefore, the claims existing at the
time of death are significant to, and should be made the basis of, the determination of allowable
deductions.
WHEREFORE, the instant Petition is GRANTED. Accordingly, the assailed Decision dated April 30, 1999
and the Resolution dated November 3, 1999 of the Court of Appeals in CA-G.R. S.P. No. 46947
are REVERSED and SET ASIDE. The Bureau of Internal Revenue's deficiency estate tax assessment
against the Estate of Jose P. Fernandez is hereby NULLIFIED. No costs.
SO ORDERED.
FORT BONIFACIO DEVELOPMENT G.R. No. 158885
CORPORATION,
Petitioner, Present:
PUNO, C.J.,
QUISUMBING,
YNARES-SANTIAGO,
CARPIO,
AUSTRIA-MARTINEZ,
CORONA,
- versus - CARPIO MORALES,
TINGA,
CHICO-NAZARIO,
VELASCO, JR.,

NACHURA,

LEONARDO DE CASTRO,
BRION, and
COMMISSIONER OF INTERNAL PERALTA, JJ.
REVENUE, REGIONAL DIRECTOR,
REVENUE REGION NO. 8, and
CHIEF, ASSESSMENT DIVISION, Promulgated:
REVENUE REGION NO. 8, BIR,
Respondents. April 2, 2009
x--------------------------------------------------------------------------- x
FORT BONIFACIO DEVELOPMENT G.R. No. 170680
CORPORATION,
Petitioner,

versus -

COMMISSIONER OF INTERNAL REVENUE


and REVENUE DISTRICT OFFICER,
REVENUE DISTRICT NO. 44, TAGUIG
and PATEROS, BUREAU OF INTERNAL
REVENUE,
Respondents.
x---------------------------------------------------------------------------x
DECISION
TINGA, J.:

The value-added tax (VAT) system was first introduced in the Philippines on 1 January 1988, with the tax
imposable on any person who, in the course of trade or business, sells, barters or exchanges goods,
renders services, or engages in similar transactions and any person who imports goods. [1] The first VAT law
is found in Executive Order No. 273 (E.O. 273), which amended several provisions of the then National
Internal Revenue Code of 1986 (Old NIRC). E.O. No. 273 likewise accommodated the potential burdens of
the shift to the VAT system by allowing newly liable VAT-registered persons to avail of a transitional input
tax credit, as provided for in Section 105 of the old NIRC, as amended by E.O. No. 273. Said Section 105 is
quoted, thus:
SEC. 105. Transitional input tax credits. A person who becomes liable to value-added tax or
any person who elects to be a VAT-registered person shall, subject to the filing of an inventory as
prescribed by regulations, be allowed input tax on his beginning inventory of goods, materials and supplies
equivalent to 8% of the value of such inventory or the actual value-added tax paid on such goods,
materials and supplies, whichever is higher, which shall be creditable against the output tax. [2]
There are other measures contained in E.O. No. 273 which were similarly intended to ease the shift
to the VAT system. These measures also took the form of transitional input taxes which can be credited
against output tax,[3] and are found in Section 25 of E.O. No. 273, the section entitled Transitory Provisions.
Said transitory provisions, which were never incorporated in the Old NIRC, read:

Sec. 25. Transitory provisions. (a) All VAT-registered persons shall be allowed
transitional input taxes which can be credited against output tax in the same manner as
provided in Sections 104 of the National Internal Revenue Code as follows:
1) The balance of the deferred sales tax credit account as of December 31, 1987 which
are accounted for in accordance with regulations prescribed therefor;
2) A presumptive input tax equivalent to 8% of the value of the inventory as of
December 31, 1987 of materials and supplies which are not for sale, the tax on which
was not taken up or claimed as deferred sales tax credit; and

3) A presumptive input tax equivalent to 8% of the value of the inventory as of


December 31, 1987 as goods for sale, the tax on which was not taken up or claimed as
deferred sales tax credit.
Tax credit prescribed in paragraphs (2) and (3) above shall be allowed only to a VATregistered person who files an inventory of the goods referred to in said paragraphs as
provided in regulations.
(b) Any unused tax credit certificate issued prior to January 1, 1988 for excess tax credits
which are applicable against advance sales tax shall be surrendered to, and replaced by the
Commissioner with new tax credit certificates which can be used in payment for value-added
tax liabilities.
(c) Any person already engaged in business whose gross sales or receipts for a 12-month
period from September 1, 1986 to August 1, 1987, exceed the amount of P200,000.00, or any
person who has been in business for less than 12 months as of August 1, 1987 but expects
his gross sales or receipts to exceed P200,000 on or before December 31, 1987, shall apply
for registration on or before October 29, 1987.[4]

On 1 January 1996, Republic Act (Rep. Act) No. 7716 took effect.[5] It amended provisions of the Old
NIRC principally by restructuring the VAT system. It was under Rep. Act No. 7716 that VAT was imposed for
the first time on the sale of real properties. This was accomplished by amending Section 100 of the NIRC to
include real properties among the goods or properties, the sale, barter or exchange of which is made
subject to VAT. The relevant portions of Section 100, as amended by Rep. Act No. 7716, thus read:

Sec. 100. Value-added-tax on sale of goods or properties.


(a) Rate and base of tax. There shall be levied, assessed and collected on every sale,
barter or exchange of goods or properties, a value-added tax equivalent to 10% of the gross
selling price or gross value in money of the goods, or properties sold, bartered or
exchanged, such tax to be paid by the seller or transferor.
(1) The term 'goods or properties' shall mean all tangible and intangible objects
which are capable of pecuniary estimation and shall include:
(A) Real properties held primarily for sale to customers or held for lease in the
ordinary course of trade or business; xxx[6]

The provisions of Section 105 of the NIRC, on the transitional input tax credit, had remained intact
despite the enactment of Rep. Act No. 7716. Said provisions would however be amended following the
passage of the new National Internal Revenue Code of 1997 (New NIRC), also officially known as Rep Act
No. 8424. The section on the transitional input tax credit was renumbered from Section 105 of the Old NIRC
to Section 111(A) of the New NIRC. The new amendments on the transitional input tax credit are relatively
minor, hardly material to the case at bar. They are highlighted below for easy reference:
Section 111. Transitional/Presumptive Input Tax Credits. (A) Transitional Input Tax Credits. - A person who becomes liable to value-added tax or
any person who elects to be a VAT-registered person shall, subject to the filing of an
inventoryaccording to rules and regulations prescribed by the Secretary of finance,

upon recommendation of the Commissioner, be allowed input tax on his beginning


inventory of goods, materials and supplies equivalent for eight percent (8%) of the value of
such inventory or the actual value-added tax paid on such goods, materials and supplies,
whichever is higher, which shall be creditable against the output tax. [7] (Emphasis supplied).

Rep. Act No. 8424 also made part of the NIRC, for the first time, the concept of presumptive input tax
credits, with Section 111(b) of the New NIRC providing as follows:
(B) Presumptive Input Tax Credits. (1) Persons or firms engaged in the processing of sardines, mackerel and milk, and in
manufacturing refined sugar and cooking oil, shall be allowed a presumptive input tax,
creditable against the output tax, equivalent to one and one-half percent (1 1/2%) of
the gross value in money of their purchases of primary agricultural products which are
used as inputs to their production.
As used in this Subsection, the term 'processing' shall mean pasteurization, canning
and activities which through physical or chemical process alter the exterior texture or
form or inner substance of a product in such manner as to prepare it for special use to
which it could not have been put in its original form or condition.
(2) Public works contractors shall be allowed a presumptive input tax equivalent to
one and one-half percent (1 1/2%) of the contract price with respect to government
contracts only in lieu of actual input taxes therefrom.[8]
What we have explained above are the statutory antecedents that underlie the present petitions for
review. We now turn to the factual antecedents.
I.

Petitioner Fort Bonifacio Development Corporation (FBDC) is engaged in the development and sale of real
property. On 8 February 1995, FBDC acquired by way of sale from the national government, a vast tract of
land that formerly formed part of the Fort Bonifacio military reservation, located in what is now
the Fort Bonifacio Global City (GlobalCity) in Taguig City.[9] Since the sale was consummated prior to the
enactment of Rep. Act No. 7716, no VAT was paid thereon. FBDC then proceeded to develop the tract of
land, and from October, 1966 onwards it has been selling lots located in the Global City to interested
buyers.[10]

Following the effectivity of Rep. Act No. 7716, real estate transactions such as those regularly
engaged in by FBDC have since been made subject to VAT. As the vendor, FBDC from thereon has become
obliged to remit to the Bureau of Internal Revenue (BIR) output VAT payments it received from the sale of
its properties to the Bureau of Internal Revenue (BIR). FBDC likewise invoked its right to avail of the
transitional input tax credit and accordingly submitted an inventory list of real properties it owned, with a
total book value of P71,227,503,200.00.[11]

On 14 October 1996, FBDC executed in favor of Metro Pacific Corporation two (2) contracts to sell,
separately conveying two (2) parcels of land within the Global City in consideration of the purchase prices
at P1,526,298,949.00 and P785,009,018.00, both payable in installments. [12] For the fourth quarter of 1996,
FBDC earned a total ofP3,498,888,713.60 from the sale of its lots, on which the output VAT payable to the
BIR was P318,080,792.14. In the context of remitting its output VAT payments to the BIR, FBDC paid a total
of P269,340,469.45

and

utilized

(a) P28,413,783.00

representing

portion

of

its

then

total

transitional/presumptive input tax credit of P5,698,200,256.00, which petitioner allocated for the two (2)
lots sold to Metro Pacific; and (b) its regular input tax credit of P20,326,539.69 on the purchase of goods
and services.[13]

Between July and October 1997, FBDC sent two (2) letters to the BIR requesting appropriate action
on whether its use of its presumptive input VAT on its land inventory, to the extent of P28,413,783.00 in
partial payment of its output VAT for the fourth quarter of 1996, was in order. After investigating the
matter, the BIR recommended that the claimed presumptive
[14]

input tax credit be

disallowed.

Consequently, the BIR issued to FBDC a Pre-Assessment Notice (PAN) dated 23 December 1997 for

deficiency VAT for the 4th quarter of 1996. This was followed by a letter of respondent Commissioner of
Internal Revenue (CIR),[15] addressed to and received by FBDC on 5 March 1998, disallowing the
presumptive input tax credit arising from the land inventory on the basis of Revenue Regulation 7-95 (RR
7-95) and Revenue Memorandum Circular 3-96 (RMC 3-96). Section 4.105-1 of RR 7-95 provided the basis
in main for the CIRs opinion, the section reading, thus:
Sec. 4.105-1. Transitional input tax on beginning inventories. Taxpayers who became
VAT-registered persons upon effectivity of RA No. 7716 who have exceeded the minimum
turnover of P500,000.00 or who voluntarily register even if their turnover does not
exceed P500,000.00 shall be entitled to a presumptive input tax on the inventory on hand as
of December 31, 1995 on the following: (a) goods purchased for resale in their present
condition; (b) materials purchased for further processing, but which have not yet undergone
processing; (c) goods which have been manufactured by the taxpayer; (d) goods in process
and supplies, all of which are for sale or for use in the course of the taxpayers trade or
business as a VAT-registered person.

However, in the case of real estate dealers, the basis of the presumptive input tax
shall be the improvements, such as buildings, roads, drainage systems, and other similar
structures, constructed on or after the effectivity of EO 273 (January 1, 1988).
The transitional input tax shall be 8% of the value of the inventory or actual VAT paid,
whichever is higher, which amount may be allowed as tax credit against the output tax of the
VAT-registered person.

The CIR likewise cited from the Transitory Provisions of RR 7-95, particularly the following:
(a) Presumptive Input Tax Credits xxx
(iii) For real estate dealers, the presumptive input tax of 8% of the book value of
improvements on or after January 1, 1988 (the effectivity of E.O. 273) shall be allowed.
For purposes of sub-paragraphs (i), (ii) and (iii) above, an inventory as of December
31, 1995 of such goods or properties and improvements showing the quantity, description
and amount filed with the RDO not later than Janaury 31, 1996.
xxx

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


deficiency VAT for the 4th quarter of 1996, including surcharge, interest and penalty. After respondent
Regional Director denied FBDCs motion for reconsideration/protest, FBDC filed a petition for review with
the Court of Tax Appeals (CTA), docketed as C.T.A. Case No. 5665. [16] On 11 August 2000, the CTA rendered
a decision affirming the assessment made by the respondents. [17] FBDC assailed the CTA decision through a
petition for review filed with the Court of Appeals, docketed as CA-G.R. SP No. 60477. On 15 November
2002, the Court of Appeals rendered a decision affirming the CTA decision, but removing the surcharge,
interests and penalties, thus reducing the amount due to P28,413,783.00.[18] From said decision, FBDC filed
a petition for review with this Court, the first of the two petitions now before us, seeking the reversal of the
CTA

decision

dated 11

August

2000 and

pronouncement

that

FBDC

is

entitled

to

the

transitional/presumptive input tax credit of P28,413,783.00. This petition has been docketed as G.R. No.
158885.

The second petition, which is docketed as G.R. No. 170680, involves the same parties and legal
issues, but concerns the claim of FBDC that it is entitled to claim a similar transitional/presumptive input
tax credit, this time for the third quarter of 1997. A brief recital of the anteceding facts underlying this
second claim is in order.

For the third quarter of 1997, FBDC derived the total amount of P3,591,726,328.11 from its sales
and lease of lots, on which the output VAT payable to the BIR wasP359,172,632.81.[19] Accordingly, FBDC
made cash payments totaling P347,741,695.74 and utilized its regular input tax credit of P19,743,565.73
on purchases of goods and services. [20] On 11 May 1999, FBDC filed with the BIR a claim for refund of the
amount of P347,741,695.74 which it had paid as VAT for the third quarter of 1997. [21] No action was taken

on the refund claim, leading FBDC to file a petition for review with the CTA, docketed as CTA Case No.
5926. Utilizing the same valuation[22] of 8% of the total book value of its beginning inventory of real
properties (or P71,227,503,200.00) FBDC argued that its input tax credit was more than enough to offset
the VAT paid by it for the third quarter of 1997.[23]

On 17 October 2000, the CTA promulgated its decision [24] in CTA Case No. 5926, denying the claim
for refund. FBDC then filed a petition for review with the Court of Appeals, docketed as CA-G.R. SP No.
61517. On 3 October 2003, the Court of Appeals rendered a decision [25] affirming the judgment of the CTA.
As a result, FBDC filed its second petition, docketed as G.R. No. 170680.
I.
The two petitions were duly consolidated [26] and called for oral argument on 18 April 2006. During
the oral arguments, the parties were directed to discuss the following issues:
1.

In determining the 10% value-added tax in Section 100 of the [Old NIRC]
on the sale of real properties by real estate dealers, is the 8% transitional input tax
credit in Section 105 applied only to the improvements on the real property or is it
applied on the value of the entire real property?

2.

Are Section 4.105.1 and paragraph (a)(III) of the Transitory Provisions of


Revenue Regulations No. 7-95 valid in limiting the 8% transitional input tax to the
improvements on the real property?

While the two issues are linked, the main issue is evidently whether Section 105 of the Old NIRC
may be interpreted in such a way as to restrict its application in the case of real estate dealers only to the
improvements on the real property belonging to their beginning inventory, and not the entire real property
itself. There would be no controversy before us if the Old NIRC had itself supplied that limitation, yet the
law is tellingly silent in that regard. RR 7-95, which imposes such restrictions on real estate dealers, is
discordant with the Old NIRC, so it is alleged.
III.
On its face, there is nothing in Section 105 of the Old NIRC that prohibits the inclusion of real properties,
together with the improvements thereon, in the beginning inventory of goods, materials and supplies,
based on which inventory the transitional input tax credit is computed. It can be conceded that when it
was drafted Section 105 could not have possibly contemplated concerns specific to real properties, as real
estate transactions were not originally subject to VAT. At the same time, when transactions on real
properties were finally made subject to VAT beginning with Rep. Act No. 7716, no corresponding
amendment was adopted as regards Section 105 to provide for a differentiated treatment in the
application of the transitional input tax credit with respect to real properties or real estate dealers.

It was Section 100 of the Old NIRC, as amended by Rep. Act No. 7716, which made real estate transactions
subject to VAT for the first time. Prior to the amendment, Section 100 had imposed the VAT on every sale,
barter or exchange of goods, without however specifying the kind of properties that fall within or under the
generic class goods subject to the tax.
Rep. Act No. 7716, which significantly is also known as the Expanded Value-Added Tax (EVAT) law,
expanded the coverage of the VAT by amending Section 100 of the Old NIRC in several respects, some of
which we will enumerate. First, it made every sale, barter or exchange of goods or properties subject to
VAT.[27] Second, it generally defined goods or properties as all tangible and intangible objects which are
capable of pecuniary estimation.[28] Third, it included a non-exclusive enumeration of various objects that
fall under the class goods or properties subject to VAT, including [r]eal properties held primarily for sale to
customers or held for lease in the ordinary course of trade or business. [29]

From these amendments to Section 100, is there any differentiated VAT treatment on real
properties or real estate dealers that would justify the suggested limitations on the application of the
transitional input tax on them? We see none.

Rep. Act No. 7716 clarifies that it is the real properties held primarily for sale to customers or held
for lease in the ordinary course of trade or business that are subject to the VAT, and not when the real
estate transactions are engaged in by persons who do not sell or lease properties in the ordinary course of
trade or business. It is clear that those regularly engaged in the real estate business are accorded the
same treatment as the merchants of other goods or properties available in the market. In the same way
that a milliner considers hats as his goods and a rancher considers cattle as his goods, a real estate dealer
holds real property, whether or not it contains improvements, as his goods.

Had Section 100 itself supplied any differentiation between the treatment of real properties or real
estate dealers and the treatment of the transactions involving other commercial goods, then such differing
treatment would have constituted the statutory basis for the CIR to engage in such differentiation which
said respondent did seek to accomplish in this case through Section 4.105-1 of RR 7-95. Yet the
amendments introduced by Rep. Act No. 7716 to Section 100, coupled with the fact that the said law left
Section 105 intact, reveal the lack of any legislative intention to make persons or entities in the real estate
business subject to a VAT treatment different from those engaged in the sale of other goods or properties
or in any other commercial trade or business.

If the plain text of Rep. Act No. 7716 fails to supply any apparent justification for limiting the
beginning inventory of real estate dealers only to the improvements on their properties, how then were the
CIR and the courts a quo able to justify such a view?

IV.

The fact alone that the denial of FBDCs claims is in accord with Section 4.105-1 of RR 7-95 does
not, of course, put this inquiry to rest. If Section 4.105-1 is itself incongruent to Rep. Act No. 7716, the
incongruence cannot by itself justify the denial of the claims. We need to inquire into the rationale behind
Section 4.105-1, as well as the question whether the interpretation of the law embodied therein is
validated by the law itself.

The CTA, in its rulings, proceeded from a thesis which is not readily apparent from the texts of the
laws we have cited. The transitional input tax credit is conditioned on the prior payment of sales taxes or
the VAT, so the CTA observed. The introduction of the VAT through E.O. No. 273 and its subsequent
expansion through Rep. Act No. 7716 subjected various persons to the tax for the very first time, leaving
them unable to claim the input tax credit based on their purchases before they became subject to the VAT.
Hence, the transitional input tax credit was designed to alleviate that relatively iniquitous loss. Given that
rationale, according to the CTA, it would be improper to allow FBDC, which had acquired its properties
through a tax-free purchase, to claim the transitional input tax credit. The CTA added that Section 105.4.1
of RR 7-95 is consonant with its perceived rationale behind the transitional input tax credit since the
materials used for the construction of improvements would have most likely involved the payment of VAT
on their purchase.

Concededly, this theory of the CTA has some sense, extravagantly extrapolated as it is though from
the seeming silence on the part of the provisions of the law. Yet ultimately, the theory is woefully limited in
perspective.

It is correct, as pointed out by the CTA, that upon the shift from sales taxes to VAT in 1987 newlyVAT registered people would have been prejudiced by the inability to credit against the output VAT their
payments by way of sales tax on their existing stocks in trade. Yet that inequity was precisely addressed
by a transitory provision in E.O. No. 273 found in Section 25 thereof. The provision authorized VAT-

registered persons to invoke a presumptive input tax equivalent to 8% of the value of the inventory as of
December 31, 1987 of materials and supplies which are not for sale, the tax on which was not taken up or
claimed as deferred sales tax credit, and a similar presumptive input tax equivalent to 8% of the value of
the inventory as of December 31, 1987 of goods for sale, the tax on which was not taken up or claimed as
deferred sales tax credit.[30]

Section 25 of E.O. No. 273 perfectly remedies the problem assumed by the CTA as the basis for the
introduction of transitional input tax credit in 1987. If the core purpose of the tax credit is only, as hinted
by the CTA, to allow for some mode of accreditation of previously-paid sales taxes, then Section 25 alone
would have sufficed. Yet E.O. No. 273 amended the Old NIRC itself by providing for the transitional input
tax credit under Section 105, thereby assuring that the tax credit would endure long after the last goods
made subject to sales tax have been consumed.

If indeed the transitional input tax credit is integrally related to previously paid sales taxes, the
purported causal link between those two would have been nonetheless extinguished long ago. Yet
Congress has reenacted the transitional input tax credit several times; that fact simply belies the absence
of any relationship between such tax credit and the long-abolished sales taxes. Obviously then, the
purpose behind the transitional input tax credit is not confined to the transition from sales tax to VAT.
There is hardly any constricted definition of "transitional" that will limit its possible meaning to the
shift from the sales tax regime to the VAT regime. Indeed, it could also allude to the transition one
undergoes from not being a VAT-registered person to becoming a VAT-registered person. Such transition
does not take place merely by operation of law, E.O. No. 273 or Rep. Act No. 7716 in particular. It could
also occur when one decides to start a business. Section 105 states that the transitional input tax credits
become available either to (1) a person who becomes liable to VAT; or (2) any person who elects to be
VAT-registered. The clear language of the law entitles new trades or businesses to avail of the tax credit
once they become VAT-registered. The transitional input tax credit, whether under the Old NIRC or the New
NIRC, may be claimed by a newly-VAT registered person such as when a business as it commences
operations. If we view the matter from the perspective of a starting entrepreneur, greater clarity emerges
on the continued utility of the transitional input tax credit.

Following the theory of the CTA, the new enterprise should be able to claim the transitional input
tax credit because it has presumably paid taxes, VAT in particular, in the purchase of the goods, materials
and supplies in its beginning inventory. Consequently, as the CTA held below, if the new enterprise has not
paid VAT in its purchases of such goods, materials and supplies, then it should not be able to claim the tax

credit. However, it is not always true that the acquisition of such goods, materials and supplies entail the
payment of taxes on the part of the new business. In fact, this could occur as a matter of course by virtue
of the operation of various provisions of the NIRC, and not only on account of a specially legislated
exemption.

Let us cite a few examples drawn from the New NIRC. If the goods or properties are not acquired
from a person in the course of trade or business, the transaction would not be subject to VAT under Section
105.[31] The sale would be subject to capital gains taxes under Section 24(D), [32] but since capital gains is a
tax on passive income it is the seller, not the buyer, who generally would shoulder the tax.

If the goods or properties are acquired through donation, the acquisition would not be subject to VAT but to
donors tax under Section 98 instead. [33] It is the donor who would be liable to pay the donors tax, [34] and
the donation would be exempt if the donors total net gifts during the calendar year does not
exceed P100,000.00.[35]

If the goods or properties are acquired through testate or intestate succession, the transfer would not be
subject to VAT but liable instead for estate tax under Title III of the New NIRC. [36] If the net estate does not
exceed P200,000.00, no estate tax would be assessed.[37]

The interpretation proffered by the CTA would exclude goods and properties which are acquired
through sale not in the ordinary course of trade or business, donation or through succession, from the
beginning inventory on which the transitional input tax credit is based. This prospect all but highlights the
ultimate absurdity of the respondents' position. Again, nothing in the Old NIRC (or even the New NIRC)
speaks of such a possibility or qualifies the previous payment of VAT or any other taxes on the goods,
materials and supplies as a pre-requisite for inclusion in the beginning inventory.

It is apparent that the transitional input tax credit operates to benefit newly VAT-registered persons,
whether or not they previously paid taxes in the acquisition of their beginning inventory of goods,
materials and supplies. During that period of transition from non-VAT to VAT status, the transitional input
tax credit serves to alleviate the impact of the VAT on the taxpayer. At the very beginning, the VATregistered taxpayer is obliged to remit a significant portion of the income it derived from its sales as output
VAT. The transitional input tax credit mitigates this initial diminution of the taxpayers income by affording

the opportunity to offset the losses incurred through the remittance of the output VAT at a stage when the
person is yet unable to credit input VAT payments.

There is another point that weighs against the CTAs interpretation. Under Section 105 of the Old
NIRC, the rate of the transitional input tax credit is 8% of the value of such inventory or the actual valueadded tax paid on such goods, materials and supplies, whichever is higher. [38] If indeed the transitional
input tax credit is premised on the previous payment of VAT, then it does not make sense to afford the
taxpayer the benefit of such credit based on 8% of the value of such inventory should the same prove
higher than the actual VAT paid. This intent that the CTA alluded to could have been implemented with
ease had the legislature shared such intent by providing the actual VAT paid as the sole basis for the rate
of the transitional input tax credit.

The CTA harped on the circumstance that FBDC was excused from paying any tax on the purchase
of its properties from the national government, even claiming that to allow the transitional input tax credit
is "tantamount to giving an undeserved bonus to real estate dealers similarly situated as [FBDC] which the
Government cannot afford to provide." Yet the tax laws in question, and all tax laws in general, are
designed to enforce uniform tax treatment to persons or classes of persons who share minimum legislated
standards. The common standard for the application of the transitional input tax credit, as enacted by E.O.
No. 273 and all subsequent tax laws which reinforced or reintegrated the tax credit, is simply that the
taxpayer in question has become liable to VAT or has elected to be a VAT-registered person. E.O. No. 273
and the subsequent tax laws are all decidedly neutral and accommodating in ascertaining who should be
entitled to the tax credit, and it behooves the CIR and the CTA to adopt a similarly judicious perspective.

IV.

Given the fatal flaws in the theory offered by the CTA as supposedly underlying the transitional
input tax credit, is there any other basis to justify the limitations imposed by the CIR through RR 7-95? We
discern nothing more. As seen in our discussion, there is no logic that coheres with either E.O. No. 273 or
Rep. Act No. 7716 which supports the restriction imposed on real estate brokers and their ability to claim
the transitional input tax credit based on the value of their real properties. In addition, the very idea of
excluding the real properties itself from the beginning inventory simply runs counter to what the

transitional input tax credit seeks to accomplish for persons engaged in the sale of goods, whether or not
such goods take the form of real properties or more mundane commodities.

Under Section 105, the beginning inventory of goods forms part of the valuation of the transitional
input tax credit. Goods, as commonly understood in the business sense, refers to the product which the
VAT-registered person offers for sale to the public. With respect to real estate dealers, it is the real
properties themselves which constitute their goods. Such real properties are the operating assets of the
real estate dealer.

Section 4.100-1 of RR No. 7-95 itself includes in its enumeration of goods or properties such real
properties held primarily for sale to customers or held for lease in the ordinary course of trade or business.
Said definition was taken from the very statutory language of Section 100 of the Old NIRC. By limiting the
definition of goods to improvements in Section 4.105-1, the BIR not only contravened the definition of
goods as provided in the Old NIRC, but also the definition which the same revenue regulation itself has
provided.

The Court of Tax Appeals claimed that under Section 105 of the Old NIRC the basis for the inventory
of goods, materials and supplies upon which the transitional input VAT would be based shall be left to
regulation by the appropriate administrative authority. This is based on the phrase filing of an inventory as
prescribed by regulations found in Section 105. Nonetheless, Section 105 does include the particular
properties to be included in the inventory, namely goods, materials and supplies. It is questionable
whether the CIR has the power to actually redefine the concept of goods, as she did when she excluded
real properties from the class of goods which real estate companies in the business of selling real
properties may include in their inventory. The authority to prescribe regulations can pertain to more
technical matters, such as how to appraise the value of the inventory or what papers need to be filed to
properly itemize the contents of such inventory. But such authority cannot go as far as to amend Section
105 itself, which the Commissioner had unfortunately accomplished in this case.

It is of course axiomatic that a rule or regulation must bear upon, and be consistent with, the
provisions of the enabling statute if such rule or regulation is to be valid. [39]In case of conflict between a
statute and an administrative order, the former must prevail. [40] Indeed, the CIR has no power to limit the
meaning and coverage of the term goods in Section 105 of the Old NIRC absent statutory authority or basis
to make and justify such limitation. A contrary conclusion would mean the CIR could very well moot the law
or arrogate legislative authority unto himself by retaining sole discretion to provide the definition and
scope of the term goods.

V.
At this juncture, we turn to some of the points raised in the dissent of the esteemed Justice Antonio T.
Carpio.

The dissent adopts the CTAs thesis that the transitional input tax credit applies only when taxes were
previously paid on the properties in the beginning inventory. Had the dissenting view won, it would have
introduced a new requisite to the application of the transitional input tax credit and required the taxpayer
to supply proof that it had previously paid taxes on the acquisition of goods, materials and supplies
comprising its beginning inventory. We have sufficiently rebutted this thesis, but the dissent adds a twist to
the argument by using the term presumptive input tax credit to imply that the transitional input tax credit
involves a presumption that there was a previous payment of taxes.
Let us clarify the distinction between the presumptive input tax credit and the transitional input tax credit.
As with the transitional input tax credit, the presumptive input tax credit is creditable against the output
VAT. It necessarily has come into existence in our tax structure only after the introduction of the VAT. As
quoted earlier,[41] E.O. No. 273 provided for a presumptive input tax credit as one of the transitory
measures in the shift from sales taxes to VAT, but such presumptive input tax credit was never integrated
in the NIRC itself. It was only in 1997, or eleven years after the VAT was first introduced, that the
presumptive input tax credit was first incorporated in the NIRC, more particularly in Section 111(B) of the
New NIRC. As borne out by the text of the provision, [42] it is plain that the presumptive input tax credit is
highly limited in application as it may be claimed only by persons or firms engaged in the processing of
sardines, mackerel and milk, and in manufacturing refined sugar and cooking oil; [43] and public works
contractors.[44]

Clearly, for more than a decade now, the term presumptive input tax credit has contemplated a
particularly idiosyncratic tax credit far divorced from its original usage in the transitory provisions of E.O.
No. 273. There is utterly no sense then in latching on to the term as having any significant meaning for the
purpose of the cases at bar.

The dissent, in arguing for the effectivity of Section 4.105-1 of RR 7-95, ratiocinates in this manner:
(1) Section 4.105-1 finds basis in Section 105 of the Old NIRC, which provides that the input tax is allowed
on the beginning inventory of goods, materials and supplies; (2) input taxes must have been paid on such
goods, materials and supplies; (3) unlike real property itself, the improvements thereon were already
subject to VAT even prior to the passage of Rep. Act No. 7716; (4) since no VAT was paid on the real

property prior to the passage of Rep. Act No. 7716, it could not form part of the beginning inventory of
goods, materials and supplies.

This chain of premises have already been debunked. It is apparent that the dissent believes that
only those goods, materials and supplies on which input VAT was paid could form the basis of valuation of
the input tax credit. Thus, if the VAT-registered person acquired all the goods, materials and supplies of the
beginning inventory through a sale not in the ordinary course of trade or business, or through succession
or donation, said person would be unable to receive a transitional input tax credit. Yet even RR 7-95, which
imposes the restriction only on real estate dealers permits such other persons who obtained their
beginning inventory through tax-free means to claim the transitional input tax credit. The dissent thus
betrays a view that is even more radical and more misaligned with the language of the law than that
expressed by the CIR.

VI.

A final observation. Section 4.105.1 of RR No. 7-95, insofar as it disallows real estate dealers from
including the value of their real properties in the beginning inventory of goods, materials and supplies, has
in fact already been repealed. The offending provisions were deleted with the enactment of Revenue
Regulation No. 6-97 (RR 6-97) dated 2 January 1997, which amended RR 7-95. [45] The repeal of the basis for
the present assessments by RR 6-97 only highlights the continuing absurdity of the position of the BIR
towards FBDC.

FBDC points out that while the transactions involved in G.R. No. 158885 took place during the
effectivity of RR 7-95, the transactions involved in G.R. No. 170680 in fact took place after RR No. 6-97 had
taken effect. Indeed, the assessments subject of G.R. No. 170680 were for the third quarter of 1997, or
several months after the effectivity of RR 6-97. That fact provides additional reason to sustain FBDCs claim
for refund of its 1997 Third Quarter VAT payments. Nevertheless, since the assailed restrictions
implemented by RR 7-95 were not sanctioned by law in the first place there is no longer need to dwell on
such fact.
WHEREFORE, the petitions are GRANTED. The assailed decisions of the Court of Tax Appeals and the
Court of Appeals are REVERSED and SET ASIDE. Respondents are hereby (1) restrained from collecting
from petitioner the amount of P28,413,783.00 representing the transitional input tax credit due it for the
fourth quarter of 1996; and (2) directed to refund to petitioner the amount of P347,741,695.74 paid as

output VAT for the third quarter of 1997 in light of the persisting transitional input tax credit available to
petitioner for the said quarter, or to issue a tax credit corresponding to such amount. No pronouncement
as to costs.

SO ORDERED.

THIRD DIVISION

SAN
ROQUE
CORPORATION,

POWER
G.R. No. 180345

Petitioner,
Present:

CORONA, J.,
Chairperson,

- versus -

CHICO-NAZARIO,
VELASCO, JR.,
NACHURA, and
PERALTA, JJ.
COMMISSIONER
REVENUE,

OF

INTERNAL
Promulgated:

Respondent.

November 25, 2009


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

DECISION

CHICO-NAZARIO, J.:

In this Petition for Review on Certiorari, under Rule 45 of the Revised Rules of Court, petitioner San
Roque Power Corporation assails the Decision[1] of the Court of Tax Appeals (CTA) En Banc dated 20
September 2007 in CTA EB No. 248, affirming the Decision [2] dated 23 March 2006 of the CTA Second
Division in CTA Case No. 6916, which dismissed the claim of petitioner for the refund and/or issuance of a
tax credit certificate in the amount of Two Hundred Forty-Nine Million Three Hundred Ninety-Seven
Thousand Six Hundred Twenty Pesos and 18/100 (P249,397,620.18) allegedly representing unutilized input
Value Added Tax (VAT) for the period covering January to December 2002.

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

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

(A) Zero-rated or Effectively Zero-rated SalesAny VAT-registered person, whose


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

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

On the other hand, petitioner is a domestic corporation organized under the corporate laws of the
Republic of the Philippines. On 14 October 1997, it was incorporated for the sole purpose of building and
operating the San Roque Multipurpose Project in San Manuel, Pangasinan, which is an indivisible project
consisting of the power station, the dam, spillway, and other related facilities. [4] It is registered with the
Board of Investments (BOI) on a preferred pioneer status to engage in the design, construction, erection,
assembly, as well as own, commission, and operate electric power-generating plants and related activities,
for which it was issued the Certificate of Registration No. 97-356 dated11 February 1998. [5] As a seller of
services, petitioner is registered with the BIR as a VAT taxpayer under Certificate of Registration No. OCN98-006-007394.[6]
On 11 October 1997, petitioner entered into a Power Purchase Agreement (PPA) with the National
Power Corporation (NPC) to develop the hydro potential of the LowerAgno River, and to be able to generate
additional power and energy for the Luzon Power Grid, by developing and operating the San Roque
Multipurpose Project. The PPA provides that petitioner shall be responsible for the design, construction,
installation, completion and testing and commissioning of the Power Station and it shall operate and
maintain the same, subject to the instructions of the NPC. During the cooperation period of 25 years
commencing from the completion date of the Power Station, the NPC shall purchase all the electricity
generated by the Power Plant.[7]
Because of the exclusive nature of the PPA between petitioner and the NPC, petitioner applied for
and was granted five Certificates of Zero Rate by the BIR, through the Chief Regulatory Operations
Monitoring Division, now the Audit Information, Tax Exemption & Incentive Division. Based on these
certificates, the zero-rated status of petitioner commenced on 27 September 1998 and continued
throughout the year 2002.[8]
For the period January to December 2002, petitioner filed with the respondent its Monthly VAT
Declarations and Quarterly VAT Returns. Its Quarterly VAT Returns showed excess input VAT payments on
account of its importation and domestic purchases of goods and services, as follows [9]:

Period Covered Date Filed


1st Quarter

April 20,
2002

Particulars

Amount

Tax Due for the Quarter (Box 13C)

26,24
7.27

Input Tax carried over from previous

296,124,429.

qtr (22B)

21

Input VAT on Domestic Purchases for


the Qtr
(22D)

95,003,348.9
1

Input VAT on Importation of Goods for


the Qtr

(January 1,
2002to

March 31, 2002)

2nd Quarter

(April 1,
2002 to

July 24,
2002

(22F)

20,758,668.0
0

Total Available Input tax (23)

411,886,446.
12

VAT Refund/TCC Claimed


(24A)

173,909,435.
66

Net Creditable Input Tax (25)

237,977,010.
46

VAT payable (Excess Input Tax) (26)

(237,950,763.
19)

Tax Payable (overpayment) (28)

(237,950,763.
19)

Tax Due for the Quarter


(Box 13C)
Input Tax carried over from previous
qtr (22B)

P blank
237,950,763.1
9

Input VAT on Domestic Purchases for


the Qtr
June 30, 2002)

(22D)

65,206,499.8
3

Input VAT on Importation of Goods for


the Qtr
(22F)

18,485,758.0
0

Total Available Input tax (23)

321,643,021.
02

VAT Refund/TCC Claimed (24A)

237,950,763.
19

Net Creditable Input Tax (25)

83,692,257.8
3

VAT payable (Excess Input Tax) (26)

(83,692,257.8

3)
Tax Payable (overpayment) (28)

3rd Quarter

October
25, 2002

Tax Due for the Quarter


(Box 13C)
Input Tax carried over from previous
qtr (22B)

(July 1,
2002 to

(83,692,257.8
3)

P blank
199,428,027.4
7

Input VAT on Domestic Purchases for


the Qtr
September 30,
2002)

(22D)
Input VAT on Importation of Goods for
the Qtr
(22F)
Total Available Input tax (23)
VAT Refund/TCC Claimed (24A)

4th Quarter

(October 1,
2002to

28,924,020.79

January
23, 2003

1,465,875.00
229,817,923.2
6
Blank

Net Creditable Input Tax (25)

229,817,923.2
6

VAT payable (Excess Input Tax) (26)

(229,817,923.
26)

Tax Payable (overpayment) (28)

(229,817,923.
26)

Tax Due for the Quarter


(Box 13C)
Input Tax carried over from previous
qtr (22B)

P 34,996.36
114,082,153.6
2

Input VAT on Domestic Purchases for


the Qtr
December 31,
2002)

(22D)

18,166,330.54

Input VAT on Importation of Goods for


the Qtr
(22F)

2,308,837.00

Total Available Input tax (23)

134,557,321.1
6

VAT Refund/TCC Claimed (24A)

83,692,257.83

Net Creditable Input Tax (25)

50,865,063.33

VAT payable (Excess Input Tax) (26)

(50,830,066.9
7)

Tax Payable (overpayment) (28)

(50,830,066.9
7)

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

Qtr
Involved Output Tax

Input Tax
Domestic
Purchases

(A)

(B)

Importations

Excess Input Tax

(C)

(D) = (B) + (C)


(A)

1st

P 26,247.27

2nd

65,206,499.83

18,485,758.00

83,692,257.83

3rd

28,924,020.79

1,465,875.00

30,389,895.79

4th

34,996.36

18,166,330.54

2,308,837.00

20,440,171.18

P207,300,200.07 P43,019,138.00

P250,258,094.4
4

P61,243.63

P95,003,348.91 P20,758,668.00

P115,735,769.8
4

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

Period Covered Date Filed


1st Quarter

April 24,
2003

Particulars
Tax Due for the Quarter (Box 13C)
Input Tax carried over from previous
qtr (22B)

(January 1,
2002 to

Amount
P

26,247.2
7
297,719,296.25

Input VAT on Domestic Purchases for


the Qtr
March 31,
2002)

2nd Quarter

April 24,
2003

(22D)

95,126,981.69

(22F)

20,758,668.00

Total Available Input tax (23)

413,604,945.94

VAT Refund/TCC Claimed (24A)

175,544,002.27

Net Creditable Input Tax (25)

175,544,002.27

VAT payable (Excess Input Tax) (26)

(238,060,943.67)

Tax Payable (overpayment) (28)

(238,034,696.40)

Tax Due for the Quarter


(Box 13C)
Input Tax carried over from previous
qtr (22B)

(April 1,
2002 to

P blank
238,034,696.40

Input VAT on Domestic Purchases for


the Qtr
June 30, 2002)

(22D)

65,206,499.83

Input VAT on Importation of Goods for


the Qtr
(22F)
Total Available Input tax (23)

321,643,021.02

VAT Refund/TCC Claimed (24A)

237,950,763.19

Net Creditable Input Tax (25)

3rd Quarter

October
2002

18,485,758.00

83,692,257.83

VAT payable (Excess Input Tax) (26)

(83,692,257.83)

Tax Payable (overpayment) (28)

(83,692,257.83)

25, Tax Due for the Quarter


(Box13C)

P blank

Input Tax carried over from previous


qtr (22B)

(July 1,
2002 to

Input VAT on Domestic Purchases for


the Qtr
(22D)

September 30,
2002)

Total Available Input tax (23)


VAT Refund/TCC Claimed
(24A)
Net Creditable Input Tax (25)

(October 1,
2002to

28,924,020.79

Input VAT on Importation of Goods for


the Qtr
(22F)

4th Quarter

83,692,257.83

January
2003

1,465,875.00
114,082,153.62
Blank
114,082,153.62

VAT payable (Excess Input Tax) (26)

(114,082,153.62
)

Tax Payable (overpayment) (28)

(114,082,153.62
)

23, Tax Due for the Quarter


(Box 13C)
Input Tax carried over from previous
qtr (22B)

P 34,996.36
114,082,153.6
2

Input VAT on Domestic Purchases for


the Qtr
December 31,
2002)

(22D)

17,918,056.50

Input VAT on Importation of Goods for


the Qtr
(22F)

1,573,004.00

Total Available Input tax (23)

133,573,214.1
2

VAT Refund/TCC Claimed (24A)

83,692,257.83

Net Creditable Input Tax (25)

49,880,956.29

VAT payable (Excess Input Tax) (26)

(49,845,959.9
3)

Tax Payable (overpayment) (28)

(49,845,959.9
3)

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

Qtr
Involved Date Filed

Output Tax

Input Tax
Domestic
Purchases

(A)

(B)

1st

30-May-03 P 26,247.2
7

2nd

25-Oct-02

3rd
4th

Importations

Excess Input Tax

(C)

(D) = (B) + (C)


(A)

P95,126,981.69 P20,758,668.0
0

P115,859,402.42

65,206,499.83 18,185,758.00

83,692,257.83

27-Feb-03

28,924,920.79

1,465,875,00

30,389,895.79

31-Jul-03

34,996.36

17,918,056.50

1,573,004.00

19,456,064.14

P207,175,558.81 P42,283,305.0
0

P249,397,620.18

P61,243.6
3

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

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

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

1.

Whether or not petitioners sales are subject to value-added taxes at effectively zero
percent (0%) rate;

2.

Whether or not petitioner incurred input taxes which are attributable to its effectively
zero-rated transactions;

3.

Whether or not petitioners importation and purchases of capital goods and related
services are within the scope and meaning of capital goods under Revenue
Regulations No. 7-95;

4.

Whether or not petitioners input taxes are sufficiently substantiated with VAT
invoices or official receipts;

5.

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

6.

Whether or not petitioner is entitled to a refund of VAT input taxes it paid


from January 1, 2002 to December 31, 2002 in the total amount of Two Hundred Forty
Nine Million Three Hundred Ninety Seven Thousand Six Hundred Twenty and 18/100
Pesos (P249,397,620.18).

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

After a hearing on the merits, the CTA Second Division rendered a Decision [16] dated 23 March
2006 denying petitioners claim for tax refund or credit. The CTA noted that petitioner based its claim on
creditable input VAT paid, which is attributable to (1) zero-rated or effectively zero-rated sale, as provided
under Section 112(A) of the NIRC, and (2) purchases of capital goods, in accordance with Section 112(B) of
the NIRC. The court ruled that in order for petitioner to be entitled to the refund or issuance of a tax credit

certificate on the basis of Section 112(A) of the NIRC, it must establish that it had incurred zero-rated sales
or effectively zero-rated sales for the taxable year 2002.

Since records show that petitioner did not make

any zero-rated or effectively-zero rated sales for the taxable year 2002, the CTA reasoned that petitioners
claim must be denied. Parenthetically, the court declared that the claim for tax refund or credit based on
Section 112(B) of the NIRC requires petitioner to prove that it paid input VAT on capital goods purchased,
based on the definition of capital goods provided under Section 4.112-1(b) of Revenue Regulations No. 795i.e., goods or properties which have an estimated useful life of greater than one year, are treated as
depreciable assets under Section 34(F) of the NIRC, and are used directly or indirectly in the production or
sale of taxable goods and services. The CTA found that the evidence offered by petitionerthe suppliers
invoices and official receipts and Import Entries and Internal Revenue Declarations and the audit report of
the Court-commissioned Independent Certified Public Accountant (CPA) are insufficient to prove that the
importations and domestic purchases were classified as capital goods and properties entered as part of the
Property, Plant and Equipment account of the petitioner. The dispositive part of the said Decision reads:

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

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

Petitioner filed an appeal with the CTA En Banc, docketed as CTA EB No. 248. The CTA En
Banc promulgated

its Decision[19] on 20

September

2007 denying

petitioners

appeal. The

CTA En

Banc reiterated the ruling of the Division that petitioners claim based on Section 112(A) of the NIRC should
be denied since it did not present any records of any zero-rated or effectively zero-rated transactions. It
clarified that since petitioner failed to prove that any sale of its electricity had transpired, petitioner may
base its claim only on Section 112(B) of the NIRC, the provision governing the purchase of capital
goods. The court noted that the report of the Court-commissioned auditing firm, Punongbayan & Araullo,
dealt specifically with the unutilized input taxes paid or incurred by petitioner on its local and foreign
purchases of goods and services attributable to its zero-rated sales, and not to purchases of capital
goods. It decided that petitioner failed to prove that the purchases evidenced by the invoices and receipts,
which petitioner presented, were classified as capital goods which formed part of its Property, Plant and
Equipment, especially since petitioner failed to present its books of account. The dispositive part of the
said Decision reads:

WHEREFORE, premises
hereby DISMISSED. Accordingly,
hereby AFFIRMED.[20]

considered, the
instant
the
assailed
Decision
and

petition
Resolution

is
are

The CTA En Banc denied petitioners Motion for Reconsideration in a Resolution


dated 22 October 2007.[21]
Hence, the present Petition for Review where the petitioner raises the following errors allegedly
committed by the CTA En banc:
I

THE COURT OF TAX APPEALS EN BANC COMMITTED SERIOUS ERROR AND ACTED WITH
GRAVE ABUSE OF DISCRETION TANTAMOUNT TO LACK OR EXCESS OF JURISDICTION IN
FAILING OR REFUSING TO APPRECIATE THE OVERWHELMING AND UNCONTROVERTED
EVIDENCE SUBMITTED BY THE PETITIONER, THUS DEPRIVING PETITIONER OF ITS PROPERTY
WITHOUT DUE PROCESS; AND
II
THE COURT OF TAX APPEALS COMMITTED SERIOUS ERROR AND ACTED WITH GRAVE ABUSE
OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN RULING THAT THE
ABSENCE OF ZERO-RATED SALES BY PETITIONER DURING THE YEAR COVERED BY THE CLAIM
FOR REFUND DOES NOT ENTITLE PETITIONER TO A REFUND OF ITS EXCESS VAT INPUT TAXES
ATTRIBUTABLE TO ZERO-RATED SALES, CONTRARY TO PROVISIONS OF LAW. [22]

The present Petition is meritorious.

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

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

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

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

(A) Zero-rated or Effectively Zero-rated SalesAny VAT-registered person, whose


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

To claim refund or tax credit under Section 112(A), petitioner must comply with the following
criteria: (1) the taxpayer is VAT registered; (2) the taxpayer is engaged in zero-rated or effectively zerorated sales; (3) the input taxes are due or paid; (4) the input taxes are not transitional input taxes; (5) the
input taxes have not been applied against output taxes during and in the succeeding quarters; (6) the
input taxes claimed are attributable to zero-rated or effectively zero-rated sales; (7) for zero-rated sales
under Section 106(A)(2)(1) and (2); 106(B); and 108(B)(1) and (2), the acceptable foreign currency
exchange proceeds have been duly accounted for in accordance with BSP rules and regulations; (8) where
there are both zero-rated or effectively zero-rated sales and taxable or exempt sales, and the input taxes
cannot be directly and entirely attributable to any of these sales, the input taxes shall be proportionately
allocated on the basis of sales volume; and (9) the claim is filed within two years after the close of the
taxable quarter when such sales were made.[24]

Based

on

the

evidence

presented,

petitioner

complied

with

the

abovementioned

requirements. Firstly, petitioner had adequately proved that it is a VAT registered taxpayer when it
presented Certificate of Registration No. OCN-98-006-007394, which it attached to its Petition for Review
dated 29 March 2004 filed before the CTA in Division. Secondly, it is unquestioned that petitioner is
engaged in providing electricity for NPC, an activity which is subject to zero rate, under Section 108(B)(3)
of the NIRC. Thirdly, petitioner offered as evidence suppliers VAT invoices or official receipts, as well as
Import Entries and Internal Revenue Declarations (Exhibits J-4-A1 to J-4-L265), which were examined in
the audit conducted by Aguilar, the Court-commissioned Independent CPA. Significantly, Aguilar noted in
his audit report (Exhibit J-2) that of theP249,397,620.18 claimed by petitioner, he identified items with
incomplete documentation and errors in computation with a total amount of P3,266,009.78. Based on

these findings, the remaining input VAT of P246,131,610.40 was properly documented and recorded in the
books. The said report reads:

In performing the procedures referred under the Procedures Performed section of this report,
no matters came to our attention that cause us to believe that the amount of input VAT
applied for as tax credit certificate/refund of P249,397,620.18 for the period January 1, 2002
to December 31, 2002 should be adjusted except for input VAT claimed with incomplete
documentation, those with various and other exceptions on the supporting documents and
those with errors in computation totaling P3,266,009.78, as discussed in the Findings and
Results of the Agreed-Upon Audit Procedures Performed sections of this report. We have
also ascertained that the input VAT claimed are properly recorded in the books and, except
as specifically identified in the Findings and Results of the Agreed-Upon Audit Procedures
Performed sections of this report, are properly supported by original and appropriate
suppliers VAT invoices and/or official receipts.[25]
Fourthly, the input taxes claimed, which consisted of local purchases and importations made in
2002, are not transitional input taxes, which Section 111 of the NIRC defines as input taxes allowed
on the beginning inventory of goods, materials and supplies. [26] Fifthly, the audit report of Aguilar
affirms that the input VAT being claimed for tax refund or credit is net of the input VAT that was
already offset against output VAT amounting to P26,247.27 for the first quarter of 2002
and P34,996.36 for the fourth quarter of 2002,[27] as reflected in the Quarterly VAT Returns.[28]
The main dispute in this case is whether or not petitioners claim complied with the sixth
requirementthe existence of zero-rated or effectively zero-rated sales, to which creditable input taxes
may be attributed. The CTA in Division and en banc denied petitioners claim solely on this ground. The
tax courts based this conclusion on the audited report, marked as Exhibit J-2, stating that petitioner
made no sale of electricity to NPC in 2002. [29] Moreover, the affidavit of Echevarria (Exhibit L),
petitioners Vice President and Director for Finance, contained an admission that no commercial sale of
electricity had been made in favor of NPC in 2002 since the project was still under construction at that
time.[30]

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

A: San Roque Power Corporation has had no sale yet during 2002. The P42,500,000.00
which was paid to us by Napocor was something similar to a more cost recovery
scheme. The pre-agreed amount would be about equal to our costs for producing the
electricity during the testing period and we just reflected this in our 4 th quarter return as a
zero-rated sale. x x x.

The Court is not unmindful of the fact that the transaction described hereinabove was not a
commercial sale. In granting the tax benefit to VAT-registered zero-rated or effectively zero-rated
taxpayers, Section 112(A) of the NIRC does not limit the definition of sale to commercial transactions in
the normal course of business. Conspicuously, Section 106(B) of the NIRC, which deals with the imposition
of the VAT, does not limit the term sale to commercial sales, rather it extends the term to transactions
that are deemed sale, which are thus enumerated:

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

xxxx

(B)

Transactions Deemed Sale.The following transactions shall be deemed sale:

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


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

(2) Distribution or transfer to:

(a) Shareholders or investors as share in the profits of the VATregistered persons; or

(b) Creditors in payment of debt;

(3) Consignment of goods if actual sale is not made within sixty (60) days
following the date such goods were consigned; and

(4) Retirement from or cessation of business, with respect to inventories of


taxable goods existing as of such retirement or cessation. (Our emphasis.)

After carefully examining this provision, this Court finds it an equitable construction of the law that when
the term sale is made to include certain transactions for the purpose of imposing a tax, these same
transactions should be included in the term sale when considering the availability of an exemption or tax

benefit from the same revenue measures. It is undisputed that during the fourth quarter of 2002,
petitioner transferred to NPC all the electricity that was produced during the trial period. The fact that it
was not transferred through a commercial sale or in the normal course of business does not deflect from
the fact that such transaction is deemed as a sale under the law.

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

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

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

Substantial justice, equity and fair play are on the side of petitioner. Technicalities
and legalisms, however exalted, should not be misused by the government to keep money

not belonging to it, thereby enriching itself at the expense of its law-abiding citizens. Under
the principle of solutio indebiti provided in Art. 2154, Civil Code, the BIR received something
when there [was] no right to demand it, and thus, it has the obligation to return it. Heavily
militating against respondent Commissioner is the ancient principle that no one, not even
the State, shall enrich oneself at the expense of another. Indeed, simple justice requires the
speedy refund of the wrongly held taxes.[35]
It bears emphasis that effective zero-rating is not intended as a benefit to the person legally
liable to pay the tax, such as petitioner, but to relieve certain exempt entities, such as the
NPC, from the burden of indirect tax so as to encourage the development of particular
industries. Before, as well as after, the adoption of the VAT, certain special laws were
enacted for the benefit of various entities and international agreements were entered into by
the Philippines with foreign governments and institutions exempting sale of goods or supply
of services from indirect taxes at the level of their suppliers. Effective zero-rating was
intended to relieve the exempt entity from being burdened with the indirect tax which is or
which will be shifted to it had there been no exemption. In this case, petitioner is being
exempted from paying VAT on its purchases to relieve NPC of the burden of additional costs
that petitioner may shift to NPC by adding to the cost of the electricity sold to the latter. [36]

Section 13 of Republic Act No. 6395, otherwise known as the NPC Charter, further clarifies that it is
the lawmakers intention that NPC be made completely exempt from all taxes, both direct and indirect:

Sec. 13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties,
Fees, Imposts and Other Charges by Government and Governmental Instrumentalities. - The
corporation shall be non-profit and shall devote all its returns from its capital investment, as
well as excess revenues from its operation, for expansion. To enable the corporation to pay
its indebtedness and obligations and in furtherance and effective implementation of the
policy enunciated in Section 1 of this Act, the corporation is hereby declared exempt:

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

(b)
From all income taxes, franchise taxes, and realty taxes to be paid to the
National Government, its provinces, cities, municipalities and other government agencies
and instrumentalities;

(c)
From all import duties, compensating taxes and advanced sales tax and
wharfage fees on import of foreign goods, required for its operations and projects; and

(d)
From all taxes, duties, fees, imposts, and all other charges imposed by the
Republic of the Philippines, its provinces, cities, municipalities and other government

agencies and instrumentalities, on all petroleum products used by the corporation in the
generation, transmission, utilization, and sale of electric power.

To limit the exemption granted to the NPC to direct taxes, notwithstanding the general and broad
language of the statute will be to thwart the legislative intention in giving exemption from all forms of
taxes and impositions, without distinguishing between those that are direct and those that are not. [37]

Congress granted NPC a comprehensive tax exemption because of the significant public interest
involved. This is enunciated in Section 1 of Republic Act No. 6395:

Section 1. Declaration of Policy. Congress hereby declares that (1) the


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

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

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

Section 75 of said law succinctly declares that this Act shall, unless the context indicates otherwise,
be construed in favor of the establishment, promotion, preservation of competition and power
empowerment so that the widest participation of the people, whether directly or indirectly is ensured.

The objectives as set forth in the EPIRA Law can only be achieved if government were to allow
petitioner and others similarly situated to obtain the input tax credits available under the law. Denying
petitioner such credits would go against the declared policies of the EPIRA Law.

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

Having decided that petitioner is entitled to claim refund or tax credit under Section 112(A) of the
NIRC or on the basis of effectively zero-rated sales in the amount ofP246,131,610.40, there is no more
need to establish its right to make the same claim under Section 112(B) of the NIRC or on the basis of
purchase of capital goods.

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

WHEREFORE, the instant Petition for Review is GRANTED. The Decision of the Court of Tax
Appeals En Banc dated 20 September 2007 in CTA EB Case No. 248, affirming the Decision dated 23 March
2006 of the CTA Second Division in CTA Case No. 6916, is REVERSED. Respondent Commissioner of
Internal Revenue is ordered to refund, or in the alternative, to issue a tax credit certificate to petitioner San
Roque Power Corporation in the amount of Two Hundred Forty-Six Million One Hundred Thirty-One

Thousand Six Hundred Ten Pesos and 40/100 (P246,131,610.40), representing unutilized input VAT for the
period 1 January 2002 to 31 December 2002.
KEPCO PHILIPPINES CORPORATION,
Petitioner,

No costs.

G.R. No. 179356


Present:

- versus

COMMISSIONER OF
INTERNAL REVENUE,
Respondent.

PUNO, C.J., Chairperson,


CARPIO MORALES,
LEONARDO-DE CASTRO,
BERSAMIN, and
VILLARAMA, JR., JJ.
Promulgated:

December 14, 2009


x-----------------------------------------------------------------------------------------x
DECISION
CARPIO MORALES, J.:

Korea Electric Power Corporation (KEPCO) Philippines Corporation (petitioner) is an independent power
producer engaged in selling electricity to the National Power Corporation (NPC).
After its incorporation and registration with the Securities and Exchange Commission on June 15, 1995,
petitioner forged a Rehabilitation Operation Maintenance and Management Agreement with NPC for the
rehabilitation and operation of Malaya Power Plant Complex in Pililia, Rizal. [1]
On September 30, 1998, petitioner filed with the Commissioner of Internal Revenue (respondent)
administrative claims for tax refund in the amounts of P4,895,858.01 representing unutilized input Value
Added Tax (VAT) payments on domestic purchases of goods and services for the 3 rd quarter of 1996
and P4,084,867.25 representing creditable VAT withheld from payments received from NPC for the months
of April and June 1996.
Petitioner also filed a judicial claim before the Court of Tax Appeals (CTA), docketed as CTA Case No. 5765,
also based on the above-stated amounts.
Petitioner filed before respondent on December 28, 1998 still another claim for refund representing
unutilized input VAT payments attributable to its zero-rated sale transactions with NPC, including input VAT
payments on domestic goods and services in the amount of P13,191,278.00 for the 4th quarter of
1996. Petitioner also filed the same claim before the CTA on December 29, 1998, docketed as CTA Case
No. 5704.
The two petitions before the CTA for a refund in the total amount of P22,172,003.26 were consolidated.

In his report, the court-commissioned auditor, Ruben R. Rubio, concluded that the claimed amount
of P20,550,953.93 was properly substantiated for VAT purposes and subject of a valid refund.
By Decision of March 18, 2003, the CTA granted petitioner partial refund with respect to unutilized input
VAT payment on domestic goods and services qualifying as capital goods purchased for the
3rd and 4th quarters of 1996 in the amount of P8,325,350.35. All other claims were disallowed.
Petitioner filed an urgent motion for reconsideration, claiming an additional amount of P5,012,875.67.
By Resolution of July 8, 2003, [2] the CTA denied petitioners motion, it holding that part of the additional
amount prayed for P1,557,676.13 involved purchases for the year 1997, and with respect to the
remaining amount of P3,455,199.54, it was not recorded under depreciable asset accounts, hence, it
cannot be considered as capital goods.
Petitioner appealed under Rule 43 of the Rules of Court before the Court of Appeals, [3] praying only for the
refund of P3,455,199.54, claiming that the purchases represented thereby were used in the rehabilitation
of the Malaya Power Plant Complex which should be considered as capital expense to fall within the
purview of capital goods.
The appellate court, by Decision of December 11, 2006, affirmed that of the CTA. In arriving at its
decision, the appellate court considered, among other things, the account vouchers submitted by
petitioner which listed the purchases under inventory accounts as follows:
1)
Inventory supplies/materials
2)
Inventory supplies/lubricants
3)
Inventory supplies/spare parts
4)
Inventory supplies/supplies
5)
Cost/O&M Supplies
6)
Cost/O&M Uniforms and Working Clothes
7)
Cost/O&M/Supplies
8)
Cost/O&M/Repairs and Maintenance
9)
Office Supplies
10) Repair and Maintenance/Mechanics
11) Repair and Maintenance/Common/General
12) Repair and Maintenance/Chemicals

Reconsideration of the appellate courts decision having been denied by Resolution of August 17, 2007, the
present petition for review on certiorari was filed.
In the main, petitioner faults the appellate court for not considering the purchases amounting
to P3,455,199.54 as falling under the definition of capital goods.
The petition is bereft of merit.

Section 4.106-1 (b) of Revenue Regulations No. 7-95 defines capital goods and its scope in this wise:
xxxx
(b) Capital Goods. Only a VAT-registered person may apply for issuance of a tax credit
certificate or refund of input taxes paid on capital goods imported or locally
purchased. The refund shall be allowed to the extent that such input taxes have not
been applied against output taxes. The application should be made within two (2)
years after the close of the taxable quarter when the importation or purchase was
made.
Refund of input taxes on capital goods shall be allowed only to the extent that such
capital goods are used in VAT taxable business. If it is also used in exempt operations,
the input tax refundable shall only be the ratable portion corresponding to taxable
operations.
Capital goods or properties refer to goods or properties with estimated useful life
greater that one year and which are treated as depreciable assets under Section 29
(f) ,[4] used directly or indirectly in the production or sale of taxable goods or
services. (underscoring supplied)
For petitioners purchases of domestic goods and services to be considered as capital goods or properties,
three requisites must concur. First, useful life of goods or properties must exceed one year; second, said
goods or properties are treated as depreciable assets under Section 34 (f) and; third, goods or properties
must be used directly or indirectly in the production or sale of taxable goods and services.

From petitioners evidence, the account vouchers specifically indicate that the disallowed purchases were
recorded under inventory accounts, instead of depreciable accounts. That petitioner failed to indicate
under its fixed assets or depreciable assets account, goods and services allegedly purchased pursuant to
the rehabilitation and maintenance of Malaya Power Plant Complex, militates against its claim for refund.
As correctly found by the CTA, the goods or properties must be recorded and treated as depreciable assets
under Section 34 (F) of the NIRC.
Petitioner further contends that since the disallowed items are treated as capital goods in the general
ledger and accounting records, as testified on by its senior accountant, Karen Bulos, before the CTA, this
should have been given more significance than the account vouchers which listed the items under
inventory accounts.
A general ledger is a record of a business entitys accounts which make up its financial statements.
Information contained in a general ledger is gathered from source documents such as account vouchers,
purchase orders and sales invoices. In case of variance between the source document and the general
ledger, the former is preferred.

The account vouchers presented by petitioner confirm that the purchases cannot qualify as capital goods
for they are held as inventory items and not charged to any depreciable asset account. Petitioner has
proffered no explanation why the disallowed items were not listed under depreciable asset accounts.
It is settled that tax refunds are in the nature of tax exemptions. Laws granting exemptions are
construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. [5] Where the
taxpayer claims a refund, the CTA as a court of record is required to conduct a formal trial (trial de novo) to
prove every minute aspect of the claim.[6]
By the very nature of its functions, the CTA is dedicated exclusively to the resolution of tax
problems and has consequently developed an expertise on the subject. Absent a showing of abuse or
reckless exercise of authority,[7] the Court appreciates no ground to disturb the appellate courts Decision
affirming that of the CTA.
IN FINE, petitioner having failed to establish that the disallowed items should be classified as capital goods,
the assailed Decision of the Court of Appeals must be upheld.
WHEREFORE, the petition is DENIED.
SO ORDERED.

G.R. No. 193301

March 11, 2013

MINDANAO II GEOTHERMAL PARTNERSHIP, Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
x-----------------------x
G.R. No. 194637
MINDANAO I GEOTHERMAL PARTNERSHIP, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
CARPIO, J.:
G.R. No. 193301 is a petition for review1 assailing the Decision2 promulgated on 10 March 2010 as well as
the Resolution3 promulgated on 28 July 2010 by the Court of Tax Appeals En Banc (CTA En Banc) in CTA EB
No. 513. The CTA En Banc affirmed the 22 September 2008 Decision 4 as well as the 26 June 2009 Amended
Decision5 of the First Division of the Court of Tax Appeals (CTA First Division) in CTA Case Nos. 7227, 7287,
and 7317. The CTA First Division denied Mindanao II Geothermal Partnerships (Mindanao II) claims for
refund or tax credit for the first and second quarters of taxable year 2003 for being filed out of time (CTA
Case Nos. 7227 and 7287). The CTA First Division, however, ordered the

Commissioner of Internal Revenue (CIR) to refund or credit to Mindanao II unutilized input value-added tax
(VAT) for the third and fourth quarters of taxable year 2003 (CTA Case No. 7317).
G.R. No. 194637 is a petition for review6 assailing the Decision7 promulgated on 31 May 2010 as well as the
Amended Decision8 promulgated on 24 November 2010 by the CTA En Banc in CTA EB Nos. 476 and 483. In
its Amended Decision, the CTA En Banc reversed its 31 May 2010 Decision and granted the CIRs petition
for review in CTA Case No. 476. The CTA En Banc denied Mindanao I Geothermal Partnerships (Mindanao I)
claims for refund or tax credit for the first (CTA Case No. 7228), second (CTA Case No. 7286), third, and
fourth quarters (CTA Case No. 7318) of 2003.
Both Mindanao I and II are partnerships registered with the Securities and Exchange Commission, value
added taxpayers registered with the Bureau of Internal Revenue (BIR), and Block Power Production
Facilities accredited by the Department of Energy. Republic Act No. 9136, or the Electric Power Industry
Reform Act of 2000 (EPIRA), effectively amended Republic Act No. 8424, or the Tax Reform Act of 1997
(1997 Tax Code),9 when it decreed that sales of power by generation companies shall be subjected to a
zero rate of VAT.10 Pursuant to EPIRA, Mindanao I and II filed with the CIR claims for refund or tax credit of
accumulated unutilized and/or excess input taxes due to VAT zero-rated sales in 2003. Mindanao I and II
filed their claims in 2005.
G.R. No. 193301
Mindanao II v. CIR
The Facts
G.R. No. 193301 covers three CTA First Division cases, CTA Case Nos. 7227, 7287, and 7317, which were
consolidated as CTA EB No. 513. CTA Case Nos. 7227, 7287, and 7317 claim a tax refund or credit of
Mindanao IIs alleged excess or unutilized input taxes due to VAT zero-rated sales. In CTA Case No. 7227,
Mindanao II claims a tax refund or credit of P3,160,984.69 for the first quarter of 2003. In CTA Case No.
7287, Mindanao II claims a tax refund or credit of P1,562,085.33 for the second quarter of 2003. In CTA
Case No. 7317, Mindanao II claims a tax refund or credit of P3,521,129.50 for the third and fourth quarters
of 2003.
The CTA First Divisions narration of the pertinent facts is as follows:
xxxx
On March 11, 1997, [Mindanao II] allegedly entered into a Built (sic)-Operate-Transfer (BOT) contract with
the Philippine National Oil Corporation Energy Development Company (PNOC-EDC) for finance,
engineering, supply, installation, testing, commissioning, operation, and maintenance of a 48.25 megawatt
geothermal power plant, provided that PNOC-EDC shall supply and deliver steam to Mindanao II at no cost.
In turn, Mindanao II shall convert the steam into electric capacity and energy for PNOC-EDC and shall
deliver the same to the National Power Corporation (NPC) for and in behalf of PNOC-EDC. Mindanao II
alleges that its sale of generated power and delivery of electric capacity and energy of Mindanao II to NPC
for and in behalf of PNOC-EDC is its only revenue-generating activity which is in the ambit of VAT zerorated sales under the EPIRA Law, x x x.
xxxx
Hence, the amendment of the NIRC of 1997 modified the VAT rate applicable to sales of generated power
by generation companies from ten (10%) percent to zero (0%) percent.
In the course of its operation, Mindanao II makes domestic purchases of goods and services and
accumulates therefrom creditable input taxes. Pursuant to the provisions of the National Internal Revenue
Code (NIRC), Mindanao II alleges that it can use its accumulated input tax credits to offset its output tax
liability. Considering, however that its only revenue-generating activity is VAT zero-rated under RA No.
9136, Mindanao IIs input tax credits remain unutilized.
Thus, on the belief that its sales qualify for VAT zero-rating, Mindanao II adopted the VAT zero-rating of the
EPIRA in computing for its VAT payable when it filed its Quarterly VAT Returns on the following dates:

CTA Case No.

Period Covered
(2003)

Date of Filing
Original Return

Amended Return

7227

1st Quarter

April 23, 2003

July 3, 2002 (sic),


April 1, 2004 &
October 22, 2004

7287

2nd Quarter

July 22, 2003

April 1, 2004

7317

3rd Quarter

Oct. 27, 2003

April 1, 2004

7317

4th Quarter

Jan. 26, 2004

April 1, 2204

Considering that it has accumulated unutilized creditable input taxes from its only income-generating
activity, Mindanao II filed an application for refund and/or issuance of tax credit certificate with the BIRs
Revenue District Office at Kidapawan City on April 13, 2005 for the four quarters of 2003.
To date (September 22, 2008), the application for refund by Mindanao II remains unacted upon by the CIR.
Hence, these three petitions filed on April 22, 2005 covering the 1st quarter of 2003; July 7, 2005 for the
2nd quarter of 2003; and September 9, 2005 for the 3rd and 4th quarters of 2003. At the instance of
Mindanao II, these petitions were consolidated on March 15, 2006 as they involve the same parties and the
same subject matter. The only difference lies with the taxable periods involved in each petition. 11
The Court of Tax Appeals Ruling: Division
In its 22 September 2008 Decision,12 the CTA First Division found that Mindanao II satisfied the twin
requirements for VAT zero rating under EPIRA: (1) it is a generation company, and (2) it derived sales from
power generation. The CTA First Division also stated that Mindanao II complied with five requirements to be
entitled to a refund:
1. There must be zero-rated or effectively zero-rated sales;
2. That input taxes were incurred or paid;
3. That such input VAT payments are directly attributable to zero-rated sales or effectively zerorated sales;
4. That the input VAT payments were not applied against any output VAT liability; and
5. That the claim for refund was filed within the two-year prescriptive period. 13
With respect to the fifth requirement, the CTA First Division tabulated the dates of filing of Mindanao IIs
return as well as its administrative and judicial claims, and concluded that Mindanao IIs administrative and
judicial claims were timely filed in compliance with this Courts ruling in Atlas Consolidated Mining and
Development Corporation v. Commissioner of Internal Revenue (Atlas). 14 The CTA First Division declared
that the two-year prescriptive period for filing a VAT refund claim should not be counted from the close of
the quarter but from the date of the filing of the VAT return. As ruled in Atlas, VAT liability or entitlement to
a refund can only be determined upon the filing of the quarterly VAT return.
CTA
Case
No.

Period
Covered
(2003)

Date Filing
Original
Return

Amended
Return

Administrati
ve
Return

Judicial
Claim

7227

1st
Quarter

23 April
2003

1 April
2004

13 April
2005

22 April
2005

7287

2nd
Quarter

22 July
2003

1 April
2004

13 April
2005

7 July 2005

7317

3rd
Quarter

25 Oct.
2003

1 April
2004

13 April
2005

9 Sept.
2005

7317

4th
Quarter

26 Jan.
2004

1 April
2004

13 April
2005

9 Sept.
200515

Thus, counting from 23 April 2003, 22 July 2003, 25 October 2003, and 26 January 2004, when Mindanao II
filed its VAT returns, its administrative claim filed on 13 April 2005 and judicial claims filed on 22 April
2005, 7 July 2005, and 9 September 2005 were timely filed in accordance with Atlas.
The CTA First Division found that Mindanao II is entitled to a refund in the modified amount
of P7,703,957.79, after disallowing P522,059.91 from input VAT16 and deducting P18,181.82 from Mindanao
IIs sale of a fully depreciated P200,000.00 Nissan Patrol. The input taxes amounting to P522,059.91 were
disallowed for failure to meet invoicing requirements, while the input VAT on the sale of the Nissan Patrol
was reduced by P18,181.82 because the output VAT for the sale was not included in the VAT declarations.
The dispositive portion of the CTA First Divisions 22 September 2008 Decision reads:
WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the CIR is hereby
ORDERED to REFUND or to ISSUE A TAX CREDIT CERTIFICATE in the modified amount of SEVEN MILLION
SEVEN HUNDRED THREE THOUSAND NINE HUNDRED FIFTY SEVEN AND 79/100 PESOS (P7,703,957.79)
representing its unutilized input VAT for the four (4) quarters of the taxable year 2003.
SO ORDERED.17
Mindanao II filed a motion for partial reconsideration.18 It stated that the sale of the fully depreciated
Nissan Patrol is a one-time transaction and is not incidental to its VAT zero-rated operations. Moreover, the
disallowed input taxes substantially complied with the requirements for refund or tax credit.
The CIR also filed a motion for partial reconsideration. It argued that the judicial claims for the first and
second quarters of 2003 were filed beyond the period allowed by law, as stated in Section 112(A) of the
1997 Tax Code. The CIR further stated that Section 229 is a general provision, and governs cases not
covered by Section 112(A). The CIR countered the CTA First Divisions 22 September 2008 decision by
citing this Courts ruling in Commisioner of Internal Revenue v. Mirant Pagbilao Corporation
(Mirant),19 which stated that unutilized input VAT payments must be claimed within two years reckoned
from the close of the taxable quarter when the relevant sales were made regardless of whether said tax
was paid.
The CTA First Division denied Mindanao IIs motion for partial reconsideration, found the CIRs motion for
partial reconsideration partly meritorious, and rendered an Amended Decision 20 on 26 June 2009. The CTA
First Division stated that the claim for refund or credit with the BIR and the subsequent appeal to the CTA
must be filed within the two-year period prescribed under Section 229. The two-year prescriptive period in
Section 229 was denominated as a mandatory statute of limitations. Therefore, Mindanao IIs claims for
refund for the first and second quarters of 2003 had already prescribed.
The CTA First Division found that the records of Mindanao IIs case are bereft of evidence that the sale of
the Nissan Patrol is not incidental to Mindanao IIs VAT zero-rated operations. Moreover, Mindanao IIs
submitted documents failed to substantiate the requisites for the refund or credit claims.
The CTA First Division modified its 22 September 2008 Decision to read as follows:
WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the CIR is hereby
ORDERED to REFUND or to ISSUE A TAX CREDIT CERTIFICATE to Mindanao II Geothermal Partnership in the
modified amount of TWO MILLION NINE HUNDRED EIGHTY THOUSAND EIGHT HUNDRED EIGHTY SEVEN
AND 77/100 PESOS (P2,980,887.77) representing its unutilized input VAT for the third and fourth quarters
of the taxable year 2003.
SO ORDERED.21

Mindanao II filed a Petition for Review,22 docketed as CTA EB No. 513, before the CTA En Banc.
The Court of Tax Appeals Ruling: En Banc
On 10 March 2010, the CTA En Banc rendered its Decision 23 in CTA EB No. 513 and denied Mindanao IIs
petition. The CTA En Banc ruled that (1) Section 112(A) clearly provides that the reckoning of the two-year
prescriptive period for filing the application for refund or credit of input VAT attributable to zero-rated sales
or effectively zero-rated sales shall be counted from the close of the taxable quarter when the sales were
made; (2) the Atlas and Mirant cases applied different tax codes: Atlas applied the 1977 Tax Code while
Mirant applied the 1997 Tax Code; (3) the sale of the fully-depreciated Nissan Patrol is incidental to
Mindanao IIs VAT zero-rated transactions pursuant to Section 105; (4) Mindanao II failed to comply with
the substantiation requirements provided under Section 113(A) in relation to Section 237 of the 1997 Tax
Code as implemented by Section 4.104-1, 4.104-5, and 4.108-1 of Revenue Regulation No. 7-95; and (5)
the doctrine of strictissimi juris on tax exemptions cannot be relaxed in the present case.
The dispositive portion of the CTA En Bancs 10 March 2010 Decision reads:
WHEREFORE, on the basis of the foregoing considerations, the Petition for Review en banc is DISMISSED for
lack of merit. Accordingly, the Decision dated September 22, 2008 and the Amended Decision dated June
26, 2009 issued by the First Division are AFFIRMED.
SO ORDERED.24
The CTA En Banc issued a Resolution25 on 28 July 2010 denying for lack of merit Mindanao IIs Motion for
Reconsideration.26 The CTA En Banc highlighted the following bases of their previous ruling:
1. The Supreme Court has long decided that the claim for refund of unutilized input VAT must be
filed within two (2) years after the close of the taxable quarter when such sales were made.
2. The Supreme Court is the ultimate arbiter whose decisions all other courts should take bearings.
3. The words of the law are clear, plain, and free from ambiguity; hence, it must be given its literal
meaning and applied without any interpretation. 27
G.R. No. 194637
Mindanao I v. CIR
The Facts
G.R. No. 194637 covers two cases consolidated by the CTA EB: CTA EB Case Nos. 476 and 483. Both CTA
EB cases consolidate three cases from the CTA Second Division: CTA Case Nos. 7228, 7286, and 7318. CTA
Case Nos. 7228, 7286, and 7318 claim a tax refund or credit of Mindanao Is accumulated unutilized and/or
excess input taxes due to VAT zero-rated sales. In CTA Case No. 7228, Mindanao I claims a tax refund or
credit ofP3,893,566.14 for the first quarter of 2003. In CTA Case No. 7286, Mindanao I claims a tax refund
or credit ofP2,351,000.83 for the second quarter of 2003. In CTA Case No. 7318, Mindanao I claims a tax
refund or credit ofP7,940,727.83 for the third and fourth quarters of 2003.
Mindanao I is similarly situated as Mindanao II. The CTA Second Divisions narration of the pertinent facts is
as follows:
xxxx
In December 1994, Mindanao I entered into a contract of Build-Operate-Transfer (BOT) with the Philippine
National Oil Corporation Energy Development Corporation (PNOC-EDC) for the finance, design,
construction, testing, commissioning, operation, maintenance and repair of a 47-megawatt geothermal
power plant. Under the said BOT contract, PNOC-EDC shall supply and deliver steam to Mindanao I at no
cost. In turn, Mindanao I will convert the steam into electric capacity and energy for PNOC-EDC and shall

subsequently supply and deliver the same to the National Power Corporation (NPC), for and in behalf of
PNOC-EDC.
Mindanao Is 47-megawatt geothermal power plant project has been accredited by the Department of
Energy (DOE) as a Private Sector Generation Facility, pursuant to the provision of Executive Order No. 215,
wherein Certificate of Accreditation No. 95-037 was issued.
On June 26, 2001, Republic Act (R.A.) No. 9136 took effect, and the relevant provisions of the National
Internal Revenue Code (NIRC) of 1997 were deemed modified. R.A. No. 9136, also known as the "Electric
Power Industry Reform Act of 2001 (EPIRA), was enacted by Congress to ordain reforms in the electric
power industry, highlighting, among others, the importance of ensuring the reliability, security and
affordability of the supply of electric power to end users. Under the provisions of this Republic Act and its
implementing rules and regulations, the delivery and supply of electric energy by generation companies
became VAT zero-rated, which previously were subject to ten percent (10%) VAT.
xxxx
The amendment of the NIRC of 1997 modified the VAT rate applicable to sales of generated power by
generation companies from ten (10%) percent to zero percent (0%). Thus, Mindanao I adopted the VAT
zero-rating of the EPIRA in computing for its VAT payable when it filed its VAT Returns, on the belief that its
sales qualify for VAT zero-rating.
Mindanao I reported its unutilized or excess creditable input taxes in its Quarterly VAT Returns for the first,
second, third, and fourth quarters of taxable year 2003, which were subsequently amended and filed with
the BIR.
On April 4, 2005, Mindanao I filed with the BIR separate administrative claims for the issuance of tax credit
certificate on its alleged unutilized or excess input taxes for taxable year 2003, in the accumulated amount
ofP14,185, 294.80.
Alleging inaction on the part of CIR, Mindanao I elevated its claims before this Court on April 22, 2005, July
7, 2005, and September 9, 2005 docketed as CTA Case Nos. 7228, 7286, and 7318, respectively. However,
on October 10, 2005, Mindanao I received a copy of the letter dated September 30, 2003 (sic) of the BIR
denying its application for tax credit/refund.28
The Court of Tax Appeals Ruling: Division
On 24 October 2008, the CTA Second Division rendered its Decision 29 in CTA Case Nos. 7228, 7286, and
7318. The CTA Second Division found that (1) pursuant to Section 112(A), Mindanao I can only claim
90.27% of the amount of substantiated excess input VAT because a portion was not reported in its
quarterly VAT returns; (2) out of the P14,185,294.80 excess input VAT applied for refund,
only P11,657,447.14 can be considered substantiated excess input VAT due to disallowances by the
Independent Certified Public Accountant, adjustment on the disallowances per the CTA Second Divisions
further verification, and additional disallowances per the CTA Second Divisions further verification;
(3) Mindanao Is accumulated excess input VAT for the second quarter of 2003 that was carried over to the
third quarter of 2003 is net of the claimed input VAT for the first quarter of 2003, and the same procedure
was done for the second, third, and fourth quarters of 2003; and (4) Mindanao Is administrative claims
were filed within the two-year prescriptive period reckoned from the respective dates of filing of the
quarterly VAT returns.
The dispositive portion of the CTA Second Divisions 24 October 2008 Decision reads:
WHEREFORE, premises considered, the consolidated Petitions for Review are hereby PARTIALLY GRANTED.
Accordingly, the CIR is hereby ORDERED TO ISSUE A TAX CREDIT CERTIFICATE in favor of Mindanao I in the
reduced amount of TEN MILLION FIVE HUNDRED TWENTY THREE THOUSAND ONE HUNDRED SEVENTY
SEVEN PESOS AND 53/100 (P10,523,177.53) representing Mindanao Is unutilized input VAT for the four
quarters of the taxable year 2003.

SO ORDERED.30
Mindanao I filed a motion for partial reconsideration with motion for Clarification 31 on 11 November 2008. It
claimed that the CTA Second Division should not have allocated proportionately Mindanao Is unutilized
creditable input taxes for the taxable year 2003, because the proportionate allocation of the amount of
creditable taxes in Section 112(A) applies only when the creditable input taxes due cannot be directly and
entirely attributed to any of the zero-rated or effectively zero-rated sales. Mindanao I claims that its
unreported collection is directly attributable to its VAT zero-rated sales. The CTA Second Division denied
Mindanao Is motion and maintained the proportionate allocation because there was a portion of the gross
receipts that was undeclared in Mindanao Is gross receipts.
The CIR also filed a motion for partial reconsideration32 on 11 November 2008. It claimed that Mindanao I
failed to exhaust administrative remedies before it filed its petition for review. The CTA Second Division
denied the CIRs motion, and cited Atlas33 as the basis for ruling that it is more practical and reasonable to
count the two-year prescriptive period for filing a claim for refund or credit of input VAT on zero-rated sales
from the date of filing of the return and payment of the tax due.
The dispositive portion of the CTA Second Divisions 10 March 2009 Resolution reads:
WHEREFORE, premises considered, the CIRs Motion for Partial Reconsideration and Mindanao Is Motion for
Partial Reconsideration with Motion for Clarification are hereby DENIED for lack of merit.
SO ORDERED.34
The Ruling of the Court of Tax Appeals: En Banc
On 31 May 2010, the CTA En Banc rendered its Decision 35 in CTA EB Case Nos. 476 and 483 and denied the
petitions filed by the CIR and Mindanao I. The CTA En Banc found no new matters which have not yet been
considered and passed upon by the CTA Second Division in its assailed decision and resolution.
The dispositive portion of the CTA En Bancs 31 May 2010 Decision reads:
WHEREFORE, premises considered, the Petitions for Review are hereby DISMISSED for lack of merit.
Accordingly, the October 24, 2008 Decision and March 10, 2009 Resolution of the CTA Former Second
Division in CTA Case Nos. 7228, 7286, and 7318, entitled "Mindanao I Geothermal Partnership vs.
Commissioner of Internal Revenue" are hereby AFFIRMED in toto.
SO ORDERED.36
Both the CIR and Mindanao I filed Motions for Reconsideration of the CTA En Bancs 31 May 2010 Decision.
In an Amended Decision promulgated on 24 November 2010, the CTA En Banc agreed with the CIRs claim
that Section 229 of the NIRC of 1997 is inapplicable in light of this Courts ruling in Mirant. The CTA En Banc
also ruled that the procedure prescribed under Section 112(D) now 112(C) 37 of the 1997 Tax Code should
be followed first before the CTA En Banc can act on Mindanao Is claim. The CTA En Banc reconsidered its
31 May 2010 Decision in light of this Courts ruling in Commissioner of Internal Revenue v. Aichi Forging
Company of Asia, Inc. (Aichi).38
The pertinent portions of the CTA En Bancs 24 November 2010 Amended Decision read:
C.T.A. Case No. 7228:
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns for the First
Quarter of 2003. Pursuant to Section 112(A) of the NIRC of 1997, as amended, Mindanao I has two
years from March 31, 2003 or until March 31, 2005 within which to file its administrative claim for
refund;

(2) On April 4, 2005, Mindanao I applied for an administrative claim for refund of unutilized input
VAT for the first quarter of taxable year 2003 with the BIR, which is beyond the two-year
prescriptive period mentioned above.
C.T.A. Case No. 7286:
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns for the second
quarter of 2003. Pursuant to
Section 112(A) of the NIRC of 1997, as amended, Mindanao I has two years from June 30, 2003,
within which to file its administrative claim for refund for the second quarter of 2003, or until June
30, 2005;
(2) On April 4, 2005, Mindanao I applied an administrative claim for refund of unutilized input VAT
for the second quarter of taxable year 2003 with the BIR, which is within the two-year prescriptive
period, provided under Section 112 (A) of the NIRC of 1997, as amended;
(3) The CIR has 120 days from April 4, 2005 (presumably the date Mindanao I submitted the
supporting documents together with the application for refund) or until August 2, 2005, to decide
the administrative claim for refund;
(4) Within 30 days from the lapse of the 120-day period or from August 3, 2005 to September 1,
2005, Mindanao I should have elevated its claim for refund to the CTA in Division;
(5) However, on July 7, 2005, Mindanao I filed its Petition for Review with this Court, docketed as
CTA Case No. 7286, even before the 120-day period for the CIR to decide the claim for refund had
lapsed on August 2, 2005. The Petition for Review was, therefore, prematurely filed and there was
failure to exhaust administrative remedies;
xxxx
C.T.A. Case No. 7318:
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns for the third and
fourth quarters of 2003. Pursuant to Section 112(A) of the NIRC of 1997, as amended, Mindanao I
therefore, has two years from September 30, 2003 and December 31, 2003, or until September 30,
2005 and December 31, 2005, respectively, within which to file its administrative claim for the third
and fourth quarters of 2003;
(2) On April 4, 2005, Mindanao I applied an administrative claim for refund of unutilized input VAT
for the third and fourth quarters of taxable year 2003 with the BIR, which is well within the two-year
prescriptive period, provided under Section 112(A) of the NIRC of 1997, as amended;
(3) From April 4, 2005, which is also presumably the date Mindanao I submitted supporting
documents, together with the aforesaid application for refund, the CIR has 120 days or until August
2, 2005, to decide the claim;
(4) Within thirty (30) days from the lapse of the 120-day period or from August 3, 2005 until
September 1, 2005 Mindanao I should have elevated its claim for refund to the CTA;
(5) However, Mindanao I filed its Petition for Review with the CTA in Division only on September 9,
2005, which is 8 days beyond the 30-day period to appeal to the CTA.
Evidently, the Petition for Review was filed way beyond the 30-day prescribed period. Thus, the Petition for
Review should have been dismissed for being filed late.
In recapitulation:

(1) C.T.A. Case No. 7228


Claim for the first quarter of 2003 had already prescribed for having been filed beyond the two-year
prescriptive period;
(2) C.T.A. Case No. 7286
Claim for the second quarter of 2003 should be dismissed for Mindanao Is failure to comply with a
condition precedent when it failed to exhaust administrative remedies by filing its Petition for
Review even before the lapse of the 120-day period for the CIR to decide the administrative claim;
(3) C.T.A. Case No. 7318
Petition for Review was filed beyond the 30-day prescribed period to appeal to the CTA.
xxxx
IN VIEW OF THE FOREGOING, the Commissioner of Internal Revenues Motion for Reconsideration is hereby
GRANTED; Mindanao Is Motion for Partial Reconsideration is hereby DENIED for lack of merit.
The May 31, 2010 Decision of this Court En Banc is hereby REVERSED.
Accordingly, the Petition for Review of the Commissioner of Internal Revenue in CTA EB No. 476 is hereby
GRANTED and the entire claim of Mindanao I Geothermal Partnership for the first, second, third and fourth
quarters of 2003 is hereby DENIED.
SO ORDERED.39
The Issues
G.R. No. 193301
Mindanao II v. CIR
Mindanao II raised the following grounds in its Petition for Review:
I. The Honorable Court of Tax Appeals erred in holding that the claim of Mindanao II for the 1st and
2nd quarters of year 2003 has already prescribed pursuant to the Mirant case.
A. The Atlas case and Mirant case have conflicting interpretations of the law as to the
reckoning date of the two year prescriptive period for filing claims for VAT refund.
B. The Atlas case was not and cannot be superseded by the Mirant case in light of Section
4(3), Article VIII of the 1987 Constitution.
C. The ruling of the Mirant case, which uses the close of the taxable quarter when the sales
were made as the reckoning date in counting the two-year prescriptive period cannot be
applied retroactively in the case of Mindanao II.
II. The Honorable Court of Tax Appeals erred in interpreting Section 105 of the 1997 Tax Code, as
amended in that the sale of the fully depreciated Nissan Patrol is a one-time transaction and is not
incidental to the VAT zero-rated operation of Mindanao II.
III. The Honorable Court of Tax Appeals erred in denying the amount disallowed by the Independent
Certified Public Accountant as Mindanao II substantially complied with the requisites of the 1997 Tax
Code, as amended, for refund/tax credit.
A. The amount of P2,090.16 was brought about by the timing difference in the recording of
the foreign currency deposit transaction.

B. The amount of P2,752.00 arose from the out-of-pocket expenses reimbursed to SGV &
Company which is substantially suppoerted [sic] by an official receipt.
C. The amount of P487,355.93 was unapplied and/or was not included in Mindanao IIs claim
for refund or tax credit for the year 2004 subject matter of CTA Case No. 7507.
IV. The doctrine of strictissimi juris on tax exemptions should be relaxed in the present case. 40
G.R. No. 194637
Mindanao I v. CIR
Mindanao I raised the following grounds in its Petition for Review:
I. The administrative claim and judicial claim in CTA Case No. 7228 were timely filed pursuant to the
case of Atlas Consolidated Mining and Development Corporation vs. Commissioner of Internal
Revenue, which was then the controlling ruling at the time of filing.
A. The recent ruling in the Commissioner of Internal Revenue vs. Mirant Pagbilao
Corporation, which uses the end of the taxable quarter when the sales were made as the
reckoning date in counting the two-year prescriptive period, cannot be applied retroactively
in the case of Mindanao I.
B. The Atlas case promulgated by the Third Division of this Honorable Court on June 8, 2007
was not and cannot be superseded by the Mirant Pagbilao case promulgated by the Second
Division of this Honorable Court on September 12, 2008 in light of the explicit provision of
Section 4(3), Article VIII of the 1987 Constitution.
II. Likewise, the recent ruling of this Honorable Court in Commissioner of Internal Revenue vs. Aichi
Forging Company of Asia, Inc., cannot be applied retroactively to Mindanao I in the present case. 41
In a Resolution dated 14 December 2011,42 this Court resolved to consolidate G.R. Nos. 193301 and
194637 to avoid conflicting rulings in related cases.
The Courts Ruling
Determination of Prescriptive Period
G.R. Nos. 193301 and 194637 both raise the question of the determination of the prescriptive period, or
the interpretation of Section 112 of the 1997 Tax Code, in light of our rulings in Atlas and Mirant.
Mindanao IIs unutilized input VAT tax credit for the first and second quarters of 2003, in the amounts
ofP3,160,984.69 and P1,562,085.33, respectively, are covered by G.R. No. 193301, while Mindanao Is
unutilized input VAT tax credit for the first, second, third, and fourth quarters of 2003, in the amounts
of P3,893,566.14,P2,351,000.83, and P7,940,727.83, respectively, are covered by G.R. No. 194637.
Section 112 of the 1997 Tax Code
The pertinent sections of the 1997 Tax Code, the law applicable at the time of Mindanao IIs and Mindanao
Is administrative and judicial claims, provide:
SEC. 112. Refunds or Tax Credits of Input Tax. -(A) Zero-rated or Effectively Zero-rated Sales. - Any VATregistered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the
close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or
refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the
extent that such input tax has not been applied against output tax: Provided, however, That in the case of
zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable
foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged

in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods or properties or
services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to
any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales.
xxxx
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper cases, the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one
hundred twenty (120) days from the date of submission of complete documents in support of the
application filed in accordance with Subsections (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the period prescribed above, the taxpayer affected may,
within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one
hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.
xxxx

43

(Underscoring supplied)

The relevant dates for G.R. No. 193301 (Mindanao II) are:
CTA
Case
No.

Period
covered by
VAT Sales in
2003 and
amount

Close of
quarter
when
sales
were
made

Last day
for filing
applicatio
n
of tax
refund/ta
x
credit
certificate
with the
CIR

Actual date
of
filing
application
for
tax refund/
credit with
the
CIR
(administrati
ve
claim)44

Last day for


filing case
with CTA45

Actual Date
of filing
case
with CTA
(judicial
claim)

7227

1st Quarter,
P3,160,984.
69

31 March
2003

31 March
2005

13 April 2005 12
September
2005

22 April
2005

7287

2nd Quarter, 30 June


P1,562,085. 2003
33

30 June
2005

13 April 2005 12
September
2005

7 July 2005

7317

3rd and 4th


Quarters,
P3,521,129.
50

30
Septemb
er
2003

30
13 April 2005 12
Septembe
September
r
2005
2005

9
September
2005

31
Decembe
r
2003

2 January
2006
(31
Decembe
r
2005
being
a
Saturday)

The relevant dates for G.R. No. 194637 (Minadanao I) are:


CTA Period
Case covered by

Close of
quarter

Last day
for filing

Actual date of Last day for Actual Date


filing
filing case
of filing case

applicatio
n
of tax
refund/tax
credit
certificate
with the
CIR

application for with CTA47


tax refund/
credit with
the
CIR
(administrativ
e
claim)46

with CTA
(judicial
claim)

1st Quarter,
31 March
P3,893,566.1 2003
4

31 March
2005

4 April 2005

1
September
2005

22 April
2005

728
7

2nd Quarter, 30 June


P2,351,000.8 2003
3

30 June
2005

4 April 2005

1
September
2005

7 July 2005

731
7

3rd
and 4th
Quarters,
P7,940,727.8
3

30
Septembe
r
2005

4 April 2005

1
September
2005

9
September
2005

No.

VAT Sales in
2003 and
amount

722
7

when
sales
were
made

30
Septembe
r
2003

31
2 January
December 2006
2003
(31
December
2005
being
a
Saturday)

When Mindanao II and Mindanao I filed their respective administrative and judicial claims in 2005, neither
Atlas nor Mirant has been promulgated. Atlas was promulgated on 8 June 2007, while Mirant was
promulgated on 12 September 2008. It is therefore misleading to state that Atlas was the controlling
doctrine at the time of filing of the claims. The 1997 Tax Code, which took effect on 1 January 1998, was
the applicable law at the time of filing of the claims in issue. As this Court explained in the recent
consolidated cases of Commissioner of Internal Revenue v. San Roque Power Corporation, Taganito Mining
Corporation v. Commissioner of Internal Revenue, and Philex Mining Corporation v. Commissioner of
Internal Revenue (San Roque):48
Clearly, San Roque failed to comply with the 120-day waiting period, the time expressly given by law to the
Commissioner to decide whether to grant or deny San Roques application for tax refund or credit. It is
indisputable that compliance with the 120-day waiting period is mandatory and jurisdictional. The waiting
period, originally fixed at 60 days only, was part of the provisions of the first VAT law, Executive Order No.
273, which took effect on 1 January 1988. The waiting period was extended to 120 days effective 1 January
1998 under RA 8424 or the Tax Reform Act of 1997. Thus, the waiting period has been in our statute books
for more than fifteen (15) years before San Roque filed its judicial claim.
Failure to comply with the 120-day waiting period violates a mandatory provision of law. It violates the
doctrine of exhaustion of administrative remedies and renders the petition premature and thus without a
cause of action, with the effect that the CTA does not acquire jurisdiction over the taxpayers petition.
Philippine jurisprudence is replete with cases upholding and reiterating these doctrinal principles.
The charter of the CTA expressly provides that its jurisdiction is to review on appeal "decisions of the
Commissioner of Internal Revenue in cases involving x x x refunds of internal revenue taxes." When a
taxpayer prematurely files a judicial claim for tax refund or credit with the CTA without waiting for the
decision of the Commissioner, there is no "decision" of the Commissioner to review and thus the CTA as a
court of special jurisdiction has no jurisdiction over the appeal. The charter of the CTA also expressly
provides that if the Commissioner fails to decide within "a specific period" required by law, such "inaction
shall be deemed a denial" of the application for tax refund or credit. It is the Commissioners decision, or
inaction "deemed a denial," that the taxpayer can take to the CTA for review. Without a decision or an

"inaction x x x deemed a denial" of the Commissioner, the CTA has no jurisdiction over a petition for
review.
San Roques failure to comply with the 120-day mandatory period renders its petition for review with the
CTA void. Article 5 of the Civil Code provides, "Acts executed against provisions of mandatory or
prohibitory laws shall be void, except when the law itself authorizes their validity." San Roques void
petition for review cannot be legitimized by the CTA or this Court because Article 5 of the Civil Code states
that such void petition cannot be legitimized "except when the law itself authorizes its validity." There is no
law authorizing the petitions validity.
It is hornbook doctrine that a person committing a void act contrary to a mandatory provision of law
cannot claim or acquire any right from his void act. A right cannot spring in favor of a person from his own
void or illegal act. This doctrine is repeated in Article 2254 of the Civil Code, which states, "No vested or
acquired right can arise from acts or omissions which are against the law or which infringe upon the rights
of others." For violating a mandatory provision of law in filing its petition with the CTA, San Roque cannot
claim any right arising from such void petition. Thus, San Roques petition with the CTA is a mere scrap of
paper.
This Court cannot brush aside the grave issue of the mandatory and jurisdictional nature of the 120-day
period just because the Commissioner merely asserts that the case was prematurely filed with the CTA and
does not question the entitlement of San Roque to the refund. The mere fact that a taxpayer has
undisputed excess input VAT, or that the tax was admittedly illegally, erroneously or excessively collected
from him, does not entitle him as a matter of right to a tax refund or credit. Strict compliance with the
mandatory and jurisdictional conditions prescribed by law to claim such tax refund or credit is essential
and necessary for such claim to prosper. Well-settled is the rule that tax refunds or credits, just like tax
exemptions, are strictly construed against the taxpayer.
The burden is on the taxpayer to show that he has strictly complied with the conditions for the grant of the
tax refund or credit.
This Court cannot disregard mandatory and jurisdictional conditions mandated by law simply because the
Commissioner chose not to contest the numerical correctness of the claim for tax refund or credit of the
taxpayer. Non-compliance with mandatory periods, non-observance of prescriptive periods, and nonadherence to exhaustion of administrative remedies bar a taxpayers claim for tax refund or credit,
whether or not the Commissioner questions the numerical correctness of the claim of the taxpayer. This
Court should not establish the precedent that non-compliance with mandatory and jurisdictional conditions
can be excused if the claim is otherwise meritorious, particularly in claims for tax refunds or credit. Such
precedent will render meaningless compliance with mandatory and jurisdictional requirements, for then
every tax refund case will have to be decided on the numerical correctness of the amounts claimed,
regardless of non-compliance with mandatory and jurisdictional conditions.
San Roque cannot also claim being misled, misguided or confused by the Atlas doctrine because San
Roque filed its petition for review with the CTA more than four years before Atlas was promulgated. The
Atlas doctrine did not exist at the time San Roque failed to comply with the 120-day period. Thus, San
Roque cannot invoke the Atlas doctrine as an excuse for its failure to wait for the 120-day period to lapse.
In any event, the Atlas doctrine merely stated that the two-year prescriptive period should be counted
from the date of payment of the output VAT, not from the close of the taxable quarter when the sales
involving the input VAT were made. The Atlas doctrine does not interpret, expressly or impliedly, the
120+30 day periods.49 (Emphases in the original; citations omitted)
Prescriptive Period for
the Filing of Administrative Claims
In determining whether the administrative claims of Mindanao I and Mindanao II for 2003 have prescribed,
we see no need to rely on either Atlas or Mirant. Section 112(A) of the 1997 Tax Code is clear: "Any VATregistered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the
close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or
refund of creditable input tax due or paid attributable to such sales x x x."

We rule on Mindanao I and IIs administrative claims for the first, second, third, and fourth quarters of 2003
as follows:
(1) The last day for filing an application for tax refund or credit with the CIR for the first quarter of
2003 was on 31 March 2005. Mindanao II filed its administrative claim before the CIR on 13 April
2005, while Mindanao I filed its administrative claim before the CIR on 4 April 2005. Both claims
have prescribed, pursuant to Section 112(A) of the 1997 Tax Code.
(2) The last day for filing an application for tax refund or credit with the CIR for the second quarter
of 2003 was on 30 June 2005. Mindanao II filed its administrative claim before the CIR on 13 April
2005, while Mindanao I filed its administrative claim before the CIR on 4 April 2005. Both claims
were filed on time, pursuant to Section 112(A) of the 1997 Tax Code.
(3) The last day for filing an application for tax refund or credit with the CIR for the third quarter of
2003 was on 30 September 2005. Mindanao II filed its administrative claim before the CIR on 13
April 2005, while Mindanao I filed its administrative claim before the CIR on 4 April 2005. Both
claims were filed on time, pursuant to Section 112(A) of the 1997 Tax Code.
(4) The last day for filing an application for tax refund or credit with the CIR for the fourth quarter of
2003 was on 2 January 2006. Mindanao II filed its administrative claim before the CIR on 13 April
2005, while Mindanao I filed its administrative claim before the CIR on 4 April 2005. Both claims
were filed on time, pursuant to Section 112(A) of the 1997 Tax Code.
Prescriptive Period for
the Filing of Judicial Claims
In determining whether the claims for the second, third and fourth quarters of 2003 have been properly
appealed, we still see no need to refer to either Atlas or Mirant, or even to Section 229 of the 1997 Tax
Code. The second paragraph of Section 112(C) of the 1997 Tax Code is clear: "In case of full or partial
denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the
application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the
receipt of the decision denying the claim or after the expiration of the one hundred twenty day-period,
appeal the decision or the unacted claim with the Court of Tax Appeals."
The mandatory and jurisdictional nature of the 120+30 day periods was explained in San Roque:
At the time San Roque filed its petition for review with the CTA, the 120+30 day mandatory periods were
already in the law. Section 112(C) expressly grants the Commissioner 120 days within which to decide the
taxpayers claim. The law is clear, plain, and unequivocal: "x x x the Commissioner shall grant a refund or
issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the
date of submission of complete documents." Following the verba legis doctrine, this law must be applied
exactly as worded since it is clear, plain, and unequivocal. The taxpayer cannot simply file a petition with
the CTA without waiting for the Commissioners decision within the 120-day mandatory and jurisdictional
period. The CTA will have no jurisdiction because there will be no "decision" or "deemed a denial" decision
of the Commissioner for the CTA to review. In San Roques case, it filed its petition with the CTA a mere 13
days after it filed its administrative claim with the Commissioner. Indisputably, San Roque knowingly
violated the mandatory 120-day period, and it cannot blame anyone but itself.
Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to the CTA the decision or
inaction of the Commissioner, thus:
x x x the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim
or after the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with
the Court of Tax Appeals. (Emphasis supplied)
This law is clear, plain, and unequivocal. Following the well-settled verba legis doctrine, this law should be
applied exactly as worded since it is clear, plain, and unequivocal. As this law states, the taxpayer may, if
he wishes, appeal the decision of the Commissioner to the CTA within 30 days from receipt of the

Commissioners decision, or if the Commissioner does not act on the taxpayers claim within the 120-day
period, the taxpayer may appeal to the CTA within 30 days from the expiration of the 120-day period.
xxxx
There are three compelling reasons why the 30-day period need not necessarily fall within the two-year
prescriptive period, as long as the administrative claim is filed within the two-year prescriptive period.
First, Section 112(A) clearly, plainly, and unequivocally provides that the taxpayer "may, within two (2)
years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax
credit certificate or refund of the creditable input tax due or paid to such sales." In short, the law states
that the taxpayer may apply with the Commissioner for a refund or credit "within two (2) years," which
means at anytime within two years. Thus, the application for refund or credit may be filed by the taxpayer
with the Commissioner on the last day of the two-year prescriptive period and it will still strictly comply
with the law. The two-year prescriptive period is a grace period in favor of the taxpayer and he can avail of
the full period before his right to apply for a tax refund or credit is barred by prescription.
Second, Section 112(C) provides that the Commissioner shall decide the application for refund or credit
"within one hundred twenty (120) days from the date of submission of complete documents in support of
the application filed in accordance with Subsection (A)." The reference in Section 112(C) of the submission
of documents "in support of the application filed in accordance with Subsection A" means that the
application in Section 112(A) is the administrative claim that the Commissioner must decide within the
120-day period. In short, the two-year prescriptive period in Section 112(A) refers to the period within
which the taxpayer can file an administrative claim for tax refund or credit. Stated otherwise, the two-year
prescriptive period does not refer to the filing of the judicial claim with the CTA but to the filing of the
administrative claim with the Commissioner. As held in Aichi, the "phrase within two years x x x apply for
the issuance of a tax credit or refund refers to applications for refund/credit with the CIR and not to
appeals made to the CTA."
Third, if the 30-day period, or any part of it, is required to fall within the two-year prescriptive period
(equivalent to 730 days), then the taxpayer must file his administrative claim for refund or credit within
the first 610 days of the two-year prescriptive period. Otherwise, the filing of the administrative claim
beyond the first 610 days will result in the appeal to the CTA being filed beyond the two-year prescriptive
period. Thus, if the taxpayer files his administrative claim on the 611th day, the Commissioner, with his
120-day period, will have until the 731st day to decide the claim. If the Commissioner decides only on the
731st day, or does not decide at all, the taxpayer can no longer file his judicial claim with the CTA because
the two-year prescriptive period (equivalent to 730 days) has lapsed. The 30-day period granted by law to
the taxpayer to file an appeal before the CTA becomes utterly useless, even if the taxpayer complied with
the law by filing his administrative claim within the two-year prescriptive period.
The theory that the 30-day period must fall within the two-year prescriptive period adds a condition that is
not found in the law. It results in truncating 120 days from the 730 days that the law grants the taxpayer
for filing his administrative claim with the Commissioner. This Court cannot interpret a law to defeat,
wholly or even partly, a remedy that the law expressly grants in clear, plain, and unequivocal language.
Section 112(A) and (C) must be interpreted according to its clear, plain, and unequivocal language. The
taxpayer can file his administrative claim for refund or credit at anytime within the two-year prescriptive
period. If he files his claim on the last day of the two-year prescriptive
period, his claim is still filed on time. The Commissioner will have 120 days from such filing to decide the
claim. If the Commissioner decides the claim on the 120th day, or does not decide it on that day, the
taxpayer still has 30 days to file his judicial claim with the CTA. This is not only the plain meaning but also
the only logical interpretation of Section 112(A) and (C).50 (Emphases in the original; citations omitted)
In San Roque, this Court ruled that "all taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its
issuance on 10 December 2003 up to its reversal in Aichi on 6 October 2010, where this Court held that
the 120+30 day periods are mandatory and jurisdictional."51 We shall discuss later the effect of San
Roques recognition of BIR Ruling No. DA-489-03 on claims filed between 10 December 2003 and 6 October
2010. Mindanao I and II filed their claims within this period.

We rule on Mindanao I and IIs judicial claims for the second, third, and fourth quarters of 2003 as follows:
G.R. No. 193301
Mindanao II v. CIR
Mindanao II filed its administrative claims for the second, third, and fourth quarters of 2003 on 13 April
2005. Counting 120 days after filing of the administrative claim with the CIR (11 August 2005) and 30 days
after the CIRs denial by inaction, the last day for filing a judicial claim with the CTA for the second, third,
and fourth quarters of 2003 was on 12 September 2005. However, the judicial claim cannot be filed earlier
than 11 August 2005, which is the expiration of the 120-day period for the Commissioner to act on the
claim.
(1) Mindanao II filed its judicial claim for the second quarter of 2003 before the CTA on 7 July 2005,
before the expiration of the 120-day period. Pursuant to Section 112(C) of the 1997 Tax Code,
Mindanao IIs judicial claim for the second quarter of 2003 was prematurely filed.
However, pursuant to San Roques recognition of the effect of BIR Ruling No. DA-489-03, we rule
that Mindanao IIs judicial claim for the second quarter of 2003 qualifies under the exception to the
strict application of the 120+30 day periods.
(2) Mindanao II filed its judicial claim for the third quarter of 2003 before the CTA on 9 September
2005. Mindanao IIs judicial claim for the third quarter of 2003 was thus filed on time, pursuant to
Section 112(C) of the 1997 Tax Code.
(3) Mindanao II filed its judicial claim for the fourth quarter of 2003 before the CTA on 9 September
2005. Mindanao IIs judicial claim for the fourth quarter of 2003 was thus filed on time, pursuant to
Section 112(C) of the 1997 Tax Code.
G.R. No. 194637
Mindanao I v. CIR
Mindanao I filed its administrative claims for the second, third, and fourth quarters of 2003 on 4 April 2005.
Counting 120 days after filing of the administrative claim with the CIR (2 August 2005) and 30 days after
the CIRs denial by inaction,52 the last day for filing a judicial claim with the CTA for the second, third, and
fourth quarters of 2003 was on 1 September 2005. However, the judicial claim cannot be filed earlier than
2 August 2005, which is the expiration of the 120-day period for the Commissioner to act on the claim.
(1) Mindanao I filed its judicial claim for the second quarter of 2003 before the CTA on 7 July 2005,
before the expiration of the 120-day period. Pursuant to Section 112(C) of the 1997 Tax Code,
Mindanao Is judicial claim for the second quarter of 2003 was prematurely filed. However, pursuant
to San Roques recognition of the effect of BIR Ruling No. DA-489-03, we rule that Mindanao Is
judicial claim for the second quarter of 2003 qualifies under the exception to the strict application
of the 120+30 day periods.
(2) Mindanao I filed its judicial claim for the third quarter of 2003 before the CTA on 9 September
2005. Mindanao Is judicial claim for the third quarter of 2003 was thus filed after the prescriptive
period, pursuant to Section 112(C) of the 1997 Tax Code.
(3) Mindanao I filed its judicial claim for the fourth quarter of 2003 before the CTA on 9 September
2005. Mindanao Is judicial claim for the fourth quarter of 2003 was thus filed after the prescriptive
period, pursuant to Section 112(C) of the 1997 Tax Code.
San Roque: Recognition of BIR Ruling No. DA-489-03
In the consolidated cases of San Roque, the Court En Banc 53 examined and ruled on the different claims for
tax refund or credit of three different companies. In San Roque, we reiterated that "following the verba
legis doctrine, Section 112(C) must be applied exactly as worded since it is clear, plain, and unequivocal.
The taxpayer cannot simply file a petition with the CTA without waiting for the Commissioners decision

within the 120-day mandatory and jurisdictional period. The CTA will have no jurisdiction because there will
be no decision or deemed a denial decision of the Commissioner for the CTA to review."
Notwithstanding a strict construction of any claim for tax exemption or refund, the Court in San Roque
recognized that BIR Ruling No. DA-489-03 constitutes equitable estoppel 54 in favor of taxpayers. BIR Ruling
No. DA-489-03 expressly states that the "taxpayer-claimant need not wait for the lapse of the 120-day
period before it could seek judicial relief with the CTA by way of Petition for Review." This Court discussed
BIR Ruling No. DA-489-03 and its effect on taxpayers, thus:
Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner, particularly on a
difficult question of law. The abandonment of the Atlas doctrine by Mirant and Aichi is proof that the
reckoning of the prescriptive periods for input VAT tax refund or credit is a difficult question of law. The
abandonment of the Atlas doctrine did not result in Atlas, or other taxpayers similarly situated, being made
to return the tax refund or credit they received or could have received under Atlas prior to its
abandonment. This Court is applying Mirant and Aichi prospectively. Absent fraud, bad faith or
misrepresentation, the reversal by this Court of a general interpretative rule issued by the Commissioner,
like the reversal of a specific BIR ruling under Section 246, should also apply prospectively. x x x.
xxxx
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule applicable to all
taxpayers or a specific ruling applicable only to a particular taxpayer.
BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a query made, not
by a particular taxpayer, but by a government agency tasked with processing tax refunds and credits, that
is, the One Stop Shop Inter-Agency Tax Credit and Drawback Center of the Department of Finance. This
government agency is also the addressee, or the entity responded to, in BIR Ruling No. DA-489-03. Thus,
while this government agency mentions in its query to the Commissioner the administrative claim of Lazi
Bay Resources Development, Inc., the agency was in fact asking the Commissioner what to do in cases like
the tax claim of Lazi Bay Resources Development, Inc., where the taxpayer did not wait for the lapse of the
120-day period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can rely on BIR Ruling
No. DA-489-03 from the time of its issuance on 10 December 2003 up to its reversal by this Court in Aichi
on 6 October 2010, where this Court held that the 120+30 day periods are mandatory and jurisdictional.
xxxx
Taganito, however, filed its judicial claim with the CTA on 14 February 2007, after the issuance of BIR
Ruling No. DA-489-03 on 10 December 2003. Truly, Taganito can claim that in filing its judicial claim
prematurely without waiting for the 120-day period to expire, it was misled by BIR Ruling No. DA-489-03.
Thus, Taganito can claim the benefit of BIR Ruling No. DA-489-03, which shields the filing of its judicial
claim from the vice of prematurity. (Emphasis in the original)
Summary of Administrative and Judicial Claims
G.R. No. 193301
Mindanao II v. CIR
Administrative
Claim

Judicial Claim

Action on Claim

1st Quarter, 2003

Filed late

--

Deny, pursuant to
Section 112(A) of the
1997 Tax Code

2nd Quarter, 2003

Filed on time

Prematurely filed

Grant, pursuant to
BIR Ruling No. DA-489-03

3rd Quarter, 2003

Filed on time

Filed on time

Grant, pursuant to

Section 112(C) of the


1997 Tax Code
4th Quarter, 2003

Filed on time

Filed on time

Grant, pursuant to
Section 112(C) of the
1997 Tax Code

Administrative
Claim

Judicial Claim

Action on Claim

1st Quarter, 2003

Filed late

--

Deny, pursuant to
Section 112(A) of the
1997 Tax Code

2nd Quarter, 2003

Filed on time

Prematurely filed

Grant, pursuant to
BIR Ruling No. DA-489-03

3rd Quarter, 2003

Filed on time

Filed late

Grant, pursuant to
Section 112(C) of the
1997 Tax Code

4th Quarter, 2003

Filed on time

Filed late

Grant, pursuant to
Section 112(C) of the
1997 Tax Code

G.R. No. 194637


Mindanao I v. CIR

Summary of Rules on Prescriptive Periods Involving VAT


We summarize the rules on the determination of the prescriptive period for filing a tax refund or credit of
unutilized input VAT as provided in Section 112 of the 1997 Tax Code, as follows:
(1) An administrative claim must be filed with the CIR within two years after the close of the taxable
quarter when the zero-rated or effectively zero-rated sales were made.
(2) The CIR has 120 days from the date of submission of complete documents in support of the
administrative claim within which to decide whether to grant a refund or issue a tax credit
certificate. The 120-day period may extend beyond the two-year period from the filing of the
administrative claim if the claim is filed in the later part of the two-year period. If the 120-day
period expires without any decision from the CIR, then the administrative claim may be considered
to be denied by inaction.
(3) A judicial claim must be filed with the CTA within 30 days from the receipt of the CIRs decision
denying the administrative claim or from the expiration of the 120-day period without any action
from the CIR.
(4) All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10
December 2003 up to its reversal by this Court in Aichi on 6 October 2010, as an exception to the
mandatory and jurisdictional 120+30 day periods.
"Incidental" Transaction
Mindanao II asserts that the sale of a fully depreciated Nissan Patrol is not an incidental transaction in the
course of its business; hence, it is an isolated transaction that should not have been subject to 10% VAT.
Section 105 of the 1997 Tax Code does not support Mindanao IIs position:

SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells barters, exchanges,
leases goods or properties, renders services, and any person who imports goods shall be subject to the
value-added tax (VAT) imposed in Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts
of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716.
The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an
economic activity, including transactions incidental thereto, by any person regardless of whether or not the
person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its
net income and whether or not it sells exclusively to members or their guests), or government entity.
The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the
Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or
business. (Emphasis supplied)
Mindanao II relies on Commissioner of Internal Revenue v. Magsaysay Lines, Inc. (Magsaysay) 55 and
Imperial v. Collector of Internal Revenue (Imperial)56 to justify its position. Magsaysay, decided under the
NIRC of 1986, involved the sale of vessels of the National Development Company (NDC) to Magsaysay
Lines, Inc. We ruled that the sale of vessels was not in the course of NDCs trade or business as it was
involuntary and made pursuant to the Governments policy for privatization. Magsaysay, in quoting from
the CTAs decision, imputed upon Imperial the definition of "carrying on business." Imperial, however, is an
unreported case that merely stated that "to engage is to embark in a business or to employ oneself
therein."57
Mindanao IIs sale of the Nissan Patrol is said to be an isolated transaction.1wphi1 However, it does not
follow that an isolated transaction cannot be an incidental transaction for purposes of VAT liability. Indeed,
a reading of Section 105 of the 1997 Tax Code would show that a transaction "in the course of trade or
business" includes "transactions incidental thereto."
Mindanao IIs business is to convert the steam supplied to it by PNOC-EDC into electricity and to deliver the
electricity to NPC. In the course of its business, Mindanao II bought and eventually sold a Nissan Patrol.
Prior to the sale, the Nissan Patrol was part of Mindanao IIs property, plant, and equipment. Therefore, the
sale of the Nissan Patrol is an incidental transaction made in the course of Mindanao IIs business which
should be liable for VAT.
Substantiation Requirements
Mindanao II claims that the CTAs disallowance of a total amount of P492,198.09 is improper as it has
substantially complied with the substantiation requirements of Section 113(A) 58 in relation to Section
23759 of the 1997 Tax Code, as implemented by Section 4.104-1, 4.104-5 and 4.108-1 of Revenue
Regulation No. 7-95.60
We are constrained to state that Mindanao IIs compliance with the substantiation requirements is a finding
of fact. The CTA En Banc evaluated the records of the case and found that the transactions in question are
purchases for services and that Mindanao II failed to comply with the substantiation requirements. We
affirm the CTA En Bancs finding of fact, which in turn affirmed the finding of the CTA First Division. We see
no reason to overturn their findings.
WHEREFORE, we PARTIALLY GRANT the petitions. The Decision of the Court of Tax Appeals En Bane in CT A
EB No. 513 promulgated on 10 March 2010, as well as the Resolution promulgated on 28 July 2010, and the
Decision of the Court of Tax Appeals En Bane in CTA EB Nos. 476 and 483 promulgated on 31 May 2010, as
well as the Amended Decision promulgated on 24 November 2010, are AFFIRMED with MODIFICATION.
For G.R. No. 193301, the claim of Mindanao II Geothermal Partnership for the first quarter of 2003 is
DENIED while its claims for the second, third, and fourth quarters of 2003 are GRANTED. For G.R. No.
19463 7, the claims of Mindanao I Geothermal Partnership for the first, third, and fourth quarters of 2003
are DENIED while its claim for the second quarter of 2003 is GRANTED.

SO ORDERED.
ANTONIO T. CARPIO
Associate Justice
WE CONCUR:
ARTURO D. BRION
Associate Justice
MARTIN S. VILLARAMA, JR.*
Associate Justice

MARIANO C. DEL CASTILLO


Associate Justice

ESTELA M. PERLAS BERNABE


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

COMMISSIONER OF INTERNAL
REVENUE,
Petitioner,

- versus -

SONY PHILIPPINES, INC.,


Respondent.

G.R. No. 178697


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

Promulgated:
November 17, 2010

X ---------------------------------------------------------------------------------------X
DECISION
MENDOZA, J.:

This petition for review on certiorari seeks to set aside the May 17, 2007 Decision and the July 5,
2007 Resolution of the Court of Tax Appeals En Banc [1] (CTA-EB), in C.T.A. EB No. 90, affirming the October
26, 2004 Decision of the CTA-First Division [2] which, in turn, partially granted the petition for review of
respondent Sony Philippines, Inc. (Sony). The CTA-First Division decision cancelled the deficiency
assessment issued by petitioner Commissioner of Internal Revenue (CIR) against Sony for Value Added
Tax (VAT) but upheld the deficiency assessment for expanded withholding tax (EWT) in the amount
of P1,035,879.70 and the penalties for late remittance of internal revenue taxes in the amount of P1,269,
593.90.[3]
THE FACTS:
On November 24, 1998, the CIR issued Letter of Authority No. 000019734 (LOA 19734) authorizing
certain revenue officers to examine Sonys books of accounts and other accounting records regarding
revenue taxes for the period 1997 and unverified prior years. On December 6, 1999, a preliminary
assessment

for

1997

deficiency

taxes

and

penalties

was

issued

by

the

CIR

which

Sony

protested. Thereafter, acting on the protest, the CIR issued final assessment notices, the formal letter of
demand and the details of discrepancies.[4] Said details of the deficiency taxes and penalties for late
remittance of internal revenue taxes are as follows:
DEFICIENCY VALUE -ADDED TAX (VAT)
(Assessment No. ST-VAT-97-0124-2000)
Basic Tax Due

7,958,700.00

3,182,314.41
11,141,014.4
1

1,416,976.90

Add: Penalties
Interest up to 3-31-2000

Compromise

3,157,314.4
1
25,000.00

Deficiency VAT Due


DEFICIENCY EXPANDED WITHHOLDING TAX
(EWT)
(Assessment No. ST-EWT-97-0125-2000)
Basic Tax Due
Add: Penalties
Interest up to 3-31-2000
Compromise
Deficiency EWT Due

DEFICIENCY OF VAT ON ROYALTY


PAYMENTS

550,485.82
25,000.00

575,485.82
P

1,992,462.72

(Assessment No. ST-LR1-97-0126-2000)


Basic Tax Due

Add: Penalties
Surcharge

359,177.80

Interest up to 3-31-2000

87,580.34

Compromise

16,000.00

Penalties Due

462,758.14
P

462,758.14

LATE REMITTANCE OF FINAL WITHHOLDING


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

Add: Penalties
Surcharge

Interest up to 3-31-2000

1,729,690.7
1
508,783.07

Compromise

50,000.00

Penalties Due

2,288,473.78
P

2,288,473.78

LATE REMITTANCE OF INCOME PAYMENTS


(Assessment No. ST-LR3-97-0128-2000)
Basic Tax Due

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

8,865.34
58.29
2,000.00

10,923.60

Penalties Due

10,923.60

GRAND TOTAL

15,895,632.
65[5]

Sony sought re-evaluation of the aforementioned assessment by filing a protest on February 2,


2000. Sony submitted relevant documents in support of its protest on the 16 th of that same month.[6]

On October 24, 2000, within 30 days after the lapse of 180 days from submission of the said
supporting documents to the CIR, Sony filed a petition for review before the CTA. [7]
After trial, the CTA-First Division disallowed the deficiency VAT assessment because the subsidized
advertising expense paid by Sony which was duly covered by a VAT invoice resulted in an input VAT credit.
As regards the EWT, the CTA-First Division maintained the deficiency EWT assessment on Sonys motor
vehicles and on professional fees paid to general professional partnerships. It also assessed the amounts
paid to sales agents as commissions with five percent (5%) EWT pursuant to Section 1(g) of Revenue
Regulations No. 6-85. The CTA-First Division, however, disallowed the EWT assessment on rental expense
since it found that the total rental deposit of P10,523,821.99 was incurred from January to March 1998
which was again beyond the coverage of LOA 19734. Except for the compromise penalties, the CTA-First
Division also upheld the penalties for the late payment of VAT on royalties, for late remittance of final
withholding tax on royalty as of December 1997 and for the late remittance of EWT by some of Sonys
branches.[8] In sum, the CTA-First Division partly granted Sonys petition by cancelling the deficiency VAT
assessment but upheld a modified deficiency EWT assessment as well as the penalties. Thus, the
dispositive portion reads:
WHEREFORE, the petition for review is hereby PARTIALLY GRANTED. Respondent is
ORDERED to CANCEL and WITHDRAW the deficiency assessment for value-added tax for
1997 for lack of merit. However, the deficiency assessments for expanded withholding tax
and penalties for late remittance of internal revenue taxes are UPHELD.
Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency expanded
withholding tax in the amount of P1,035,879.70 and the following penalties for late
remittance of internal revenue taxes in the sum of P1,269,593.90:
1.
2.
3.

VAT on Royalty P 429,242.07


Withholding Tax on Royalty 831,428.20
EWT of Petitioners Branches 8,923.63
Total P 1,269,593.90

Plus 20% delinquency interest from January 17, 2000 until fully paid pursuant to Section
249(C)(3) of the 1997 Tax Code.
SO ORDERED.[9]
The CIR sought a reconsideration of the above decision and submitted the following grounds in
support thereof:
A.

The Honorable Court committed reversible error in holding that petitioner is not
liable for the deficiency VAT in the amount of P11,141,014.41;

B.

The Honorable court committed reversible error in holding that the commission
expense in the amount of P2,894,797.00 should be subjected to 5% withholding tax
instead of the 10% tax rate;

C.

The Honorable Court committed a reversible error in holding that the withholding
tax assessment with respect to the 5% withholding tax on rental deposit in the
amount of P10,523,821.99 should be cancelled; and

D. The Honorable Court committed reversible error in holding that the remittance of
final withholding tax on royalties covering the period January to March 1998 was filed
on time.[10]
On April 28, 2005, the CTA-First Division denied the motion for reconsideration. Unfazed, the CIR
filed a petition for review with the CTA-EB raising identical issues:
1.

Whether or not respondent (Sony) is liable for the deficiency VAT in the amount of
P11,141,014.41;

2.

Whether or not the commission expense in the amount of P2,894,797.00 should be


subjected to 10% withholding tax instead of the 5% tax rate;

3.

Whether or not the withholding assessment with respect to the 5% withholding tax on
rental deposit in the amount of P10,523,821.99 is proper; and

4.

Whether or not the remittance of final withholding tax on royalties covering the period
January to March 1998 was filed outside of time.[11]

Finding no cogent reason to reverse the decision of the CTA-First Division, the CTA-EB dismissed
CIRs petition on May 17, 2007. CIRs motion for reconsideration was denied by the CTA-EB on July 5, 2007.
The CIR is now before this Court via this petition for review relying on the very same grounds it
raised before the CTA-First Division and the CTA-EB. The said grounds are reproduced below:
GROUNDS FOR THE ALLOWANCE OF THE PETITION
I
THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS NOT LIABLE FOR
DEFICIENCY VAT IN THE AMOUNT OF PHP11,141,014.41.
II
AS TO RESPONDENTS DEFICIENCY EXPANDED WITHHOLDING TAX IN THE
AMOUNT OF PHP1,992,462.72:
A.

THE CTA EN BANC ERRED IN RULING THAT THE COMMISSION EXPENSE IN THE
AMOUNT OF PHP2,894,797.00 SHOULD BE SUBJECTED TO A WITHHOLDING TAX
OF 5% INSTEAD OF THE 10% TAX RATE.

B.

THE CTA EN BANC ERRED IN RULING THAT THE ASSESSMENT WITH RESPECT
TO THE 5% WITHHOLDING TAX ON RENTAL DEPOSIT IN THE AMOUNT OF
PHP10,523,821.99 IS NOT PROPER.
III

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

Upon filing of Sonys comment, the Court ordered the CIR to file its reply thereto. The CIR
subsequently filed a manifestation informing the Court that it would no longer file a reply. Thus, on

December 3, 2008, the Court resolved to give due course to the petition and to decide the case on the
basis of the pleadings filed.[13]
The Court finds no merit in the petition.
The CIR insists that LOA 19734, although it states the period 1997 and unverified prior years,
should be understood to mean the fiscal year ending in March 31, 1998. [14]The Court cannot agree.
Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the authority given to the
appropriate revenue officer assigned to perform assessment functions. It empowers or enables said
revenue officer to examine the books of account and other accounting records of a taxpayer for the
purpose of collecting the correct amount of tax. [15]The very provision of the Tax Code that the CIR relies on
is unequivocal with regard to its power to grant authority to examine and assess a taxpayer.
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe
Additional Requirements for Tax Administration and Enforcement.
(A)Examination of Returns and Determination of tax Due. After a return has been filed
as required under the provisions of this Code, the Commissioner or his duly authorized
representative may authorize the examination of any taxpayer and the assessment
of the correct amount of tax: Provided, however, That failure to file a return shall not
prevent the Commissioner from authorizing the examination of any taxpayer. x x x
[Emphases supplied]

Clearly, there must be a grant of authority before any revenue officer can conduct an examination
or assessment. Equally important is that the revenue officer so authorized must not go beyond the
authority given. In the absence of such an authority, the assessment or examination is a nullity.
As earlier stated, LOA 19734 covered the period 1997 and unverified prior years. For said reason,
the CIR acting through its revenue officers went beyond the scope of their authority because the deficiency
VAT assessment they arrived at was based on records from January to March 1998 or using the fiscal year
which ended in March 31, 1998. As pointed out by the CTA-First Division in its April 28, 2005 Resolution,
the CIR knew which period should be covered by the investigation. Thus, if CIR wanted or intended the
investigation to include the year 1998, it should have done so by including it in the LOA or issuing another
LOA.
Upon review, the CTA-EB even added that the coverage of LOA 19734, particularly the phrase and
unverified prior years, violated Section C of Revenue Memorandum Order No. 43-90 dated September 20,
1990, the pertinent portion of which reads:
3. A Letter of Authority should cover a taxable period not exceeding one taxable
year. The practice of issuing L/As covering audit of unverified prior years is hereby
prohibited. If the audit of a taxpayer shall include more than one taxable period, the
other periods or years shall be specifically indicated in the L/A. [16] [Emphasis supplied]

On this point alone, the deficiency VAT assessment should have been disallowed. Be that as it may,
the CIRs argument, that Sonys advertising expense could not be considered as an input VAT credit because
the same was eventually reimbursed by Sony International Singapore (SIS), is also erroneous.
The CIR contends that since Sonys advertising expense was reimbursed by SIS, the former never
incurred any advertising expense. As a result, Sony is not entitled to a tax credit. At most, the CIR
continues, the said advertising expense should be for the account of SIS, and not Sony. [17]
The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed by the CTAEB, Sonys deficiency VAT assessment stemmed from the CIRs disallowance of the input VAT credits that
should have been realized from the advertising expense of the latter. [18] It is evident under Section
110[19] of the 1997 Tax Code that an advertising expense duly covered by a VAT invoice is a legitimate
business expense. This is confirmed by no less than CIRs own witness, Revenue Officer Antonio Aluquin.
[20]

There is also no denying that Sony incurred advertising expense. Aluquin testified that advertising

companies issued invoices in the name of Sony and the latter paid for the same. [21] Indubitably, Sony
incurred and paid for advertising expense/ services. Where the money came from is another matter all
together but will definitely not change said fact.
The CIR further argues that Sony itself admitted that the reimbursement from SIS was income and,
thus, taxable. In support of this, the CIR cited a portion of Sonys protest filed before it:
The fact that due to adverse economic conditions, Sony-Singapore has granted to our
client a subsidy equivalent to the latters advertising expenses will not affect the validity of
the input taxes from such expenses. Thus, at the most, this is an additional income of our
client subject to income tax. We submit further that our client is not subject to VAT on the
subsidy income as this was not derived from the sale of goods or services. [22]
Insofar as the above-mentioned subsidy may be considered as income and, therefore, subject to
income tax, the Court agrees. However, the Court does not agree that the same subsidy should be subject
to the 10% VAT. To begin with, the said subsidy termed by the CIR as reimbursement was not even
exclusively earmarked for Sonys advertising expense for it was but an assistance or aid in view of Sonys
dire or adverse economic conditions, and was only equivalent to the latters (Sonys) advertising expenses.
Section 106 of the Tax Code explains when VAT may be imposed or exacted. Thus:
SEC. 106. Value-added Tax on Sale of Goods or Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale,
barter or exchange of goods or properties, value-added tax equivalent to ten percent (10%)
of the gross selling price or gross value in money of the goods or properties sold, bartered or
exchanged, such tax to be paid by the seller or transferor.
Thus, there must be a sale, barter or exchange of goods or properties before any VAT may be
levied. Certainly, there was no such sale, barter or exchange in the subsidy given by SIS to Sony. It was but
a dole out by SIS and not in payment for goods or properties sold, bartered or exchanged by Sony.

In the case of CIR v. Court of Appeals (CA),[23] the Court had the occasion to rule that services
rendered for a fee even on reimbursement-on-cost basis only and without realizing profit are also subject
to VAT. The case, however, is not applicable to the present case. In that case, COMASERCO rendered
service to its affiliates and, in turn, the affiliates paid the former reimbursement-on-cost which means that
it was paid the cost or expense that it incurred although without profit. This is not true in the present case.
Sony did not render any service to SIS at all. The services rendered by the advertising companies, paid for
by Sony using SIS dole-out, were for Sony and not SIS. SIS just gave assistance to Sony in the amount
equivalent to the latters advertising expense but never received any goods, properties or service from
Sony.
Regarding the deficiency EWT assessment, more particularly Sonys commission expense, the CIR
insists that said deficiency EWT assessment is subject to the ten percent (10%) rate instead of the five
percent (5%) citing Revenue Regulation No. 2-98 dated April 17, 1998. [24] The said revenue regulation
provides that the 10% rate is applied when the recipient of the commission income is a natural person.
According to the CIR, Sonys schedule of Selling, General and Administrative expenses shows the
commission expense as commission/dealer salesman incentive, emphasizing the word salesman.
On the other hand, the application of the five percent (5%) rate by the CTA-First Division is based on
Section 1(g) of Revenue Regulations No. 6-85 which provides:
(g) Amounts paid to certain Brokers and Agents. On gross payments to customs,
insurance, real estate and commercial brokers and agents of professional entertainers five
per centum (5%).[25]
In denying the very same argument of the CIR in its motion for reconsideration, the CTA-First
Division, held:
x x x, commission expense is indeed subject to 10% withholding tax but payments
made to broker is subject to 5% withholding tax pursuant to Section 1(g) of Revenue
Regulations No. 6-85. While the commission expense in the schedule of Selling, General and
Administrative expenses submitted by petitioner (SPI) to the BIR is captioned as
commission/dealer salesman incentive the same does not justify the automatic imposition of
flat 10% rate. As itemized by petitioner, such expense is composed of Commission Expense
in the amount of P10,200.00 and Broker Dealer of P2,894,797.00. [26]
The Court agrees with the CTA-EB when it affirmed the CTA-First Division decision. Indeed, the
applicable rule is Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, which
was the applicable rule during the subject period of examination and assessment as specified in the
LOA. Revenue Regulations No. 2-98, cited by the CIR, was only adopted in April 1998 and, therefore, cannot
be applied in the present case. Besides, the withholding tax on brokers and agents was only increased to
10% much later or by the end of July 2001 under Revenue Regulations No. 6-2001.[27] Until then, the rate
was only 5%.
The Court also affirms the findings of both the CTA-First Division and the CTA-EB on the deficiency
EWT assessment on the rental deposit. According to their findings, Sony incurred the subject rental deposit

in the amount of P10,523,821.99 only from January to March 1998. As stated earlier, in the absence of the
appropriate LOA specifying the coverage, the CIRs deficiency EWT assessment from January to March
1998, is not valid and must be disallowed.
Finally, the Court now proceeds to the third ground relied upon by the CIR.
The CIR initially assessed Sony to be liable for penalties for belated remittance of its FWT on
royalties (i) as of December 1997; and (ii) for the period from January to March 1998. Again, the Court
agrees with the CTA-First Division when it upheld the CIR with respect to the royalties for December 1997
but cancelled that from January to March 1998.
The CIR insists that under Section 3[28] of Revenue Regulations No. 5-82 and Sections 2.57.4 and
2.58(A)(2)(a)[29] of Revenue Regulations No. 2-98, Sony should also be made liable for the FWT on royalties
from January to March of 1998. At the same time, it downplays the relevance of the Manufacturing License
Agreement (MLA) between Sony and Sony-Japan, particularly in the payment of royalties.
The above revenue regulations provide the manner of withholding remittance as well as the
payment of final tax on royalty. Based on the same, Sony is required to deduct and withhold final taxes on
royalty payments when the royalty is paid or is payable. After which, the corresponding return and
remittance must be made within 10 days after the end of each month. The question now is when does the
royalty become payable?
Under Article X(5) of the MLA between Sony and Sony-Japan, the following terms of royalty
payments were agreed upon:
(5)Within two (2) months following each semi-annual period ending June 30 and
December 31, the LICENSEE shall furnish to the LICENSOR a statement, certified by an
officer of the LICENSEE, showing quantities of the MODELS sold, leased or otherwise
disposed of by the LICENSEE during such respective semi-annual period and amount of
royalty due pursuant this ARTICLE X therefore, and the LICENSEE shall pay the royalty
hereunder to the LICENSOR concurrently with the furnishing of the above statement. [30]

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

WHEREFORE, the petition is DENIED.


SO ORDERED.
SECOND DIVISION
LVM
CONSTRUCTION
CORPORATION, represented by its
Managing Director, ANDRES CHUA
LAO,
Petitioner,

- versus -

F.T. SANCHEZ/SOCOR/KIMWA (JOINT


VENTURE),
F.T.
SANCHEZ
CONSTRUCTION
CORPORATION,
SOCOR
CONSTRUCTION
CORPORATION
AND
KIMWA
CONSTRUCTION
AND
DEVELOPMENT CORPORATION all
represented by FORTUNATO O.
SANCHEZ, JR.,
Respondents.

G.R. No. 181961

Present:
CARPIO, J.,
Chairperson,
BRION,
PEREZ,
SERENO, and
REYES, JJ.

Promulgated:

December 5, 2011
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION

PEREZ, J.:

Filed pursuant to Rule 45 of the 1997 Rules of Civil Procedure, the petition for review on certiorari at bench
seeks the reversal of the 28 September 2007 Decision [1] rendered by the then Thirteenth Division of the
Court of Appeals (CA) in CA-G.R. SP No. 94849,[2] the decretal portion of which states:

WHEREFORE, premises considered, the assailed Decision dated April 26, 2006 of the
Construction Industry Arbitration Commission in CIAC Case No. 25-2005 is hereby AFFIRMED.

SO ORDERED.[3]

The Facts

Petitioner LVM Construction Corporation (LVM) is a duly licensed construction firm primarily engaged in the
construction of roads and bridges for the Department of Public Works and Highways (DPWH). Awarded the
construction of the Arterial Road Link Development Project in Southern Leyte (the Project), LVM subcontracted approximately 30% of the contract amount with the Joint Venture composed of respondents F.T.
Sanchez Corporation (FTSC), Socor Construction Corporation (SCC) and Kimwa Construction Development
Corporation (KCDC). For

the

contract

price

of P90,061,917.25

which

was

later

on

reduced

to P86,318,478.38,[4] the Joint Venture agreed to undertake construction of the portion of the Project
starting from Sta. 154 + 210.20 to Sta. 160 + 480.00. With LVM as the Contractor and the Joint Venture
as Sub-Contractor, the 27 November 1996 Sub-Contract Agreement[5] executed by the parties pertinently
provided as follows:

3) That payment to the SUB-CONTRACTOR shall be on item of work accomplished in the subcontracted portion of the project at awarded unit cost of the project less NINE PERCENT
(9%).The SUB-CONTRACTOR shall issue a BIR registered receipt to the CONTRACTOR.
4) Ten percent (10%) retention to be deducted for every billing of sub-contractor as
prescribed under the Tender Documents.
xxxx
13) The payment to the SUB-CONTRACTOR shall be made within seven (7) days after the
check issued by DPWH to CONTRACTOR has already been made good. [6]

For work rendered in the premises, there is no dispute regarding the fact that the Joint Venture sent LVM a
total of 27 Billings. For Billing Nos. 1 to 26, LVM paid the Joint Venture the total sum of P80,414,697.12 and
retained the sum of P8,041,469.79 by way of the 10% retention stipulated in the Sub-Contract Agreement.
[7]

For Billing No. 27 in the sum of P5,903,780.96, on the other hand, LVM paid the Joint Venture the partial

sum of P2,544,934.99 on 31 May 2001,[8] claiming that it had not yet been fully paid by the DPWH.
[9]

Having completed the sub-contracted works, the Joint Venture subsequently demanded from LVM the

settlement of its unpaid claims as well as the release of money retained by the latter in accordance with
the Sub-Contract Agreement. In a letter dated 16 May 2001, however, LVM apprised the Joint Venture of
the fact that its auditors have belatedly discovered that no deductions for E-VAT had been made from its
payments on Billing Nos. 1 to 26 and that it was, as a consequence, going to deduct the 8.5% payments
for said tax from the amount still due in the premises. [10] In its 14 June 2001 Reply, the Joint Venture

claimed that, having issued Official Receipts for every payment it received, it was liable to pay 10% VAT
thereon and that LVM can, in turn, claim therefrom an equivalent input tax of 10%. [11]

With its claims still unpaid despite the lapse of more than four (4) years from the completion of the subcontracted works, the Joint Venture, thru its Managing Director, Fortunato O. Sanchez, Jr., filed against LVM
the 30 June 2005 complaint for sum of money and damages which was docketed before the Construction
Industry Arbitration Commission (CIAC) as CIAC Case No. 25-2005. [12] Having submitted a Bill of Particulars
in response to LVMs motion therefor, [13] the Joint Venture went on to file an Amended Complaint dated 23
December 2005 specifying its claims as follows: (a) P8,041,469.73 as retention monies for Billing Nos. 1 to
26; (b) P3,358,845.97 as unpaid balance on Billing No. 27; (c) P6,186,570.71 as interest on unpaid
retention money computed at 12% per annum reckoned from 6 August 1999 up to 1 January 2006; and
(d)P5,365,677.70 as interest at 12% per annum on delayed payment of monies collected from DPWH on
Billing Nos. 1 to 26. In addition, the Joint Venture sought indemnity for attorneys fees equivalent to 10% of
the amount collected and/or in a sum not less than P1,000,000.00.[14]

In its 21 October 2005 Answer with Compulsory Counterclaim, LVM maintained that it did not release the
10% retention for Billing Nos. 1 to 26 on the ground that it had yet to make the corresponding 8.5%
deductions for E-VAT which the Joint Venture should have paid to the Bureau of Internal Revenue (BIR) and
that there is, as a consequence, a need to offset the sums corresponding thereto from the retention money
still in its possession. Moreover, LVM alleged that the Joint Ventures claims failed to take into consideration
its own outstanding obligation in the total amount of P21,737,094.05, representing the liquidated damages
it incurred as a consequence of its delays in the completion of the project. In addition to said liquidated
damages, LVM prayed for the grant of its counterclaims for exemplary damages and attorneys fees. [15] In
its 2 January 2006 supplemental answer, LVM likewise argued that the Joint Ventures prayer for imposition
of 12% interest on the retention money and the balance of Billing No. 27 is bereft of factual and legal
bases since no interest was stipulated in the parties agreement and it was justified in refusing the release
of said sums claimed.[16]

With the parties assent to the 19 December 2005 Terms of Reference which identified, among other
matters, the issues to be resolved in the case, [17] the CIAC proceeded to receive the parties evidence in
support of their respective causes. On 26 April 2006, the CIAC rendered its decision granting the Joint
Ventures claims for the payment of the retention money for Billing Nos. 1 to 26 as well as the interest
thereon and the unpaid balance billing from 6 August 1999 to 1 January 2006 in the aggregate sum
ofP11,307,646.68. Discounting the contractual and legal bases for LVMs claim that it had the right to offset
its E-VAT payments from the retention money still in its possession, the CIAC ruled that the VAT deductions
the DPWH made from its payments to LVM were for the whole project and already included all its supplies

and subcontractors. Instead of withholding said retention money, LVM was determined to have to its credit
and for its use the input VAT corresponding to the 10% equivalent VAT paid by the Joint Venture based on
the BIR-registered official receipts it issued. Finding that the delays incurred by the Joint Venture were
justified, the CIAC likewise denied LVMs counterclaim for liquidated damages for lack of contractual basis.
[18]

Elevated by LVM to the CA through a petition for review filed pursuant to Rule 43 of the 1997 Rules of Civil
Procedure,[19] the CIACs decision was affirmed in toto in the herein assailed Decision dated 28 September
2007 rendered by said courts Thirteenth Division in CA-G.R. SP No. 94849. [20] In upholding the CIACs
rejection of LVMs insistence on the offsetting of E-VAT payments from the retention money, the CA ruled as
follows:

Clearly, there was no provision in the Sub-Contract Agreement that would hold Sanchez
liable for EVAT on the amounts paid to it by LVM. As pointed out by the CIAC in its Award, the
contract documents provide only for the payment of the awarded cost of the project less
9%. Any other deduction must be clearly stated in the provisions of the contract or upon
agreement of the parties. xxx The tribunal finds no provision that EVAT will be deducted
from the sub-contractor. xxx If [the Joint Venture] should pay or share in the payment of the
EVAT, it must be clearly defined in the sub-contract agreement.
Elucidating further, CIAC pointed out that Sanchez, under the contract was required to issue
official receipts registered with the BIR for every payment LVM makes for the progress
billings, which it did. For these official receipts issued by Sanchez to LVM, Sanchez already
paid 10% VAT to the BIR, thus: The VAT Law is very clear. Everyone must pay 10% VAT based
on their issued official receipts. These receipts must be official receipts and registered with
the BIR. Respondent (LVM) must pay its output Vat based on its receipts. Complainant
(Sanchez) must also pay output VAT based on its receipts. The law however allow each
entity to deduct the input VAT based on the official receipts issued to it. Clearly, therefore,
respondent [LVM], has to its credit the 10% output VAT paid by claimant [Joint
Venture] based on the official receipts issued to it. Respondent [LVM] can use this input VAT
to offset any output VAT respondent [LVM]must pay for any of its other projects.[21]

LVMs motion for reconsideration of the foregoing decision was denied for lack of merit in the CAs 26
February 2008 Resolution,[22] hence, this Rule 45 petition for review oncertiorari.

The Issues

LVM urges the grant of its petition for review upon the following errors imputed against the CA, to wit:

CONTRARY TO THE FINDING OF THE COURT OF APPEALS, RESPONDENTS LIABILITY


TO PAY VALUE ADDED TAX NEED NOT BE STATED IN THE SUB-CONTRACT
AGREEMENT DATED 27 NOVEMBER 1996 AS THE PROVISIONS OF REPUBLIC ACT
8424, OTHERWISE KNOWN AS THE NATIONAL INTERNAL REVENUE CODE OF THE
PHILIPPINES, FORM PART OF, AND ARE DEEMED INCORPORATED AND READ INTO
SAID AGREEMENT.
II
THE COURT OF APPEALS ERRED WHEN IT RULED THAT RESPONDENTS ARE DEEMED
TO HAVE ALREADY PAID VALUE ADDED TAX MERELY BECAUSE RESPONDENTS HAD
ALLEGEDLY ISSUED RECEIPTS FOR SERVICES RENDERED.[23]

The Courts Ruling

The petition is bereft of merit.


For lack of any stipulation regarding the same in the parties Sub-Contract Agreement, we find that the CA
correctly brushed aside LVMs insistence on deducting its supposed E-VAT payments from the retention
money demanded by the Joint Venture. Indeed, a contract constitutes the law between the parties who are,
therefore, bound by its stipulations [24] which, when couched in clear and plain language, should be applied
according to their literal tenor.[25] That there was no agreement regarding the offsetting urged by LVM may
likewise be readily gleaned from the parties contemporaneous and subsequent acts which are given
primordial consideration in determining their intention. [26] The record shows that, except for deducting
sums corresponding to the 10% retention agreed upon, 9% as contingency on sub-contract, 1%
withholding tax and such other itemized miscellaneous expenses, LVM settled the Joint Ventures Billing
Nos. 1 to 26 without any mention of deductions for the E-VAT payments it claims to have advanced. [27] It
was, in fact, only on 16 May 2001 that LVMs Managing Director, Andres C. Lao, apprised the Joint Venture
in writing of its intention to deduct said payments,[28] to wit:

If you would recall, during our last meeting with Deputy Project Manager of the DPWH-PJHL,
Eng. Jimmy T. Chan, last March 2001 at the PJHL Office in Palo, Leyte, our company made a
commitment to pay up to 99% accomplishment and release the retention money up to the
23rd partial billing after receipt by our company of the 27 th partial billing from JBIC and GOP
relative to the above mentioned project.
Much as our company wants to comply with said commitment, our auditors recently
discovered that all payments made by us to your Joint Venture, relative to the above
mentioned projectwere made without the corresponding deduction of the E-VAT of
8.50% x 10/11, which your Joint Venture should have paid to the BIR. Records would
show that from billing number 1 up to 26, no deductions for E-VAT were made. As a matter of
fact, our company was the one who shouldered all payments due for the E-VAT
which should have been deducted from the payments made by us to your Joint
Venture. Copy of the payments made by our company to the BIR relative to the E-VAT is
hereto attached as Annex 1 for your perusal and ready reference.

This being the case and to offset the advances made by our company, we would like to
inform you that our company would deduct the payments made for E-VAT to the amount due
to your Joint Venture. Only by doing so, would our advances be settled and liquidated. We
hope that our auditor and your auditor can discuss this matter to avoid any possible conflict
regarding this matter.

From the foregoing letter, it is evident that LVM unilaterally broached its intention of deducting the subject
E-VAT payments only on 15 May 2001 or long after the projects completion on 9 July 1999. [29] In the
absence of any stipulation thereon, however, the CA correctly disallowed the offsetting of said sums from
the retention money undoubtedly due the Joint Venture. Courts are obliged to give effect to the parties
agreement and enforce the contract to the letter. [30] The rule is settled that they have no authority to alter
a contract by construction or to make a new contract for the parties; their duty is confined to the
interpretation of the one which the parties have made for themselves, without regard to its wisdom or
folly. Courts cannot supply material stipulations, read into the contract words it does not contain [31] or, for
that matter, read into it any other intention that would contradict its plain import. [32] This is particularly
true in this case where, in addition to the dearth of a meeting of minds between the parties, their
contemporaneous and subsequent acts fail to yield any intention to offset the said E-VAT payments from
the retention money still in LVMs possession.

In taking exception to the CAs affirmance of the CIACs rejection of its position for lack of contractual basis,
LVM argues that the Joint Ventures liability for E-VAT as an entity that renders services in the course of
trade or business need not be stated in the Sub-Contract Agreement considering that it is an obligation
imposed by law which forms part of, and is read into, every contract. [33] As correctly argued by the Joint
Venture, however, there are two (2) contracts under the factual milieu of the case: the main contract
DPWH entered into with LVM for the construction of the Arterial Road Link Development Project in Southern
Leyte and the Sub-Contract Agreement the latter in turn concluded with the Joint Venture over 30% of said
projects contract amount. As the entity which directly dealt with the government insofar as the main
contract was concerned, LVM was itself required by law to pay the 8.5% VAT which was withheld by the
DPWH in accordance with Republic Act No. 8424 [34] or the Tax Reform Act of 1997 as well as the National
Internal Revenue Code of 1997 (NIRC). Section 114 (C) of said law provides as follows:

Section 114. Return and Payment of Value-Added Tax.

xxxx
(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 valueadded 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.

For the Sub-Contract Agreement, on the other hand, respondent F. Sanchez Construction, acting on behalf
of the Joint Venture, issued BIR-registered receipts for the sums paid by LVM for Billing Nos. 1 to 26,
indicating the total amount paid by the latter, the retention fee deducted therefrom and the tax due
thereon.[35] These were in consonance with paragraph 3 of the Sub-Contract Agreement which, after stating
that LVMs payment shall be on item of work accomplished in the sub-contracted portion of the project
awarded unit cost of the project less NINE PERCENT (9%), simply provided, that (t)he SUB-CONTRACTOR
shall issue a BIR registered receipt to the CONTRACTOR. [36] As the VAT-registered person, on the other
hand, Fortunato T. Sanchez, Sr. [37] also filed the corresponding Monthly VAT Declarations [38] with the BIR
which, by themselves, are evidence of the Joint Ventures VAT liability for LVMs payments on its billings. In
fixing the base of the tax, the first paragraph A Section 108 of the NIRC provides that (t)here shall be
levied assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived
from the sale or exchange of services, including the use or lease of properties.

In the absence of any stipulation regarding the Joint Ventures sharing in the VAT deducted and
withheld by the DPWH from its payment on the main contract, the CIAC and the CA correctly ruled that LVM
has no basis in offsetting the amounts of said tax from the retention still in its possession. VAT is a uniform
tax 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.[39] It is a tax on transactions, imposed at every stage of the distribution process on the
sale, barter, exchange of goods or property, and on the performance of services, even in the absence of
profit attributable thereto.[40] As an indirect tax that may be shifted or passed on to the buyer, transferee or
lessee of the goods, properties or services, VAT 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.[41]

Neither do we find merit in LVMs harping over the lack of showing in the record that the Joint
Venture has actually paid its liability for VAT. For this purpose, LVM insists that the Official Receipts for its
payments on the Joint Ventures billing were issued by respondent F. Sanchez Construction and that the
Monthly VAT Declarations were, in fact, filed by Fortunato Sanchez, Sr. However, the evidence on record is
to the effect that, failing to register with the Securities and Exchange Commission (SEC) and to obtain a

Mayors Permit and authorization from the BIR to print its official receipts, the Joint Venture apprised LVM of
its intention to use respondent F. Sanchez Constructions BIR-registered receipts. [42] Aside from being
indicative of its knowledge of the foregoing circumstances, LVMs previous unqualified acceptance of said
official receipts should, clearly, bar the belated exceptions it now takes with respect thereto. A party,
having performed affirmative acts upon which another person based his subsequent actions, cannot
thereafter refute his acts or renege on the effects of the same, to the prejudice of the latter. [43]

To recapitulate, LVM, as Contractor for the Project, was liable for the 8.5% VAT which was withheld
by the DPWH from its payments, pursuant to Section 114 (C) of the NIRC. Absent any agreement to that
effect, LVM cannot deduct the amounts thus withheld from the sums it still owed the Joint Venture which,
as Sub-Contractor of 30% of the Project, had its own liability for 10% VAT insofar as the sums paid for the
sub-contracted works were concerned. Although the burden to pay an indirect tax like VAT can, admittedly,
be passed on to the purchaser of the goods or services, it bears emphasizing that the liability to pay the
same remains with the manufacturer or seller like LVM and the Joint Venture. In the same manner that LVM
is liable for the VAT due on the payments made by the DPWH pursuant to the contract on the Project, the
Joint Venture is, consequently, liable for the VAT due on the payments made by LVM pursuant to the parties
Sub-Contract.

WHEREFORE, premises considered, the petition is DENIED for lack of merit and the CAs 28
September 2007 Decision is, accordingly, AFFIRMED in toto.

SO ORDERED.
G.R. No. 190102

July 11, 2012

ACCENTURE, INC., Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
SERENO, J.:
This is a Petition filed under Rule 45 of the 1997 Rules of Civil Procedure, praying for the reversal of the
Decision of the Court of Tax Appeals En Banc (CTA En Banc ) dated 22 September 2009 and its subsequent
Resolution dated 23 October 2009.1
Accenture, Inc. (Accenture) is a corporation engaged in the business of providing management consulting,
business strategies development, and selling and/or licensing of software. 2 It is duly registered with the
Bureau of Internal Revenue (BIR) as a Value Added Tax (VAT) taxpayer or enterprise in accordance with
Section 236 of the National Internal Revenue Code (Tax Code). 3

On 9 August 2002, Accenture filed its Monthly VAT Return for the period 1 July 2002 to 31 August 2002 (1st
period). Its Quarterly VAT Return for the fourth quarter of 2002, which covers the 1st period, was filed on
17 September 2002; and an Amended Quarterly VAT Return, on 21 June 2004. 4 The following are reflected
in Accentures VAT Return for the fourth quarter of 2002:5
1wphi1
Purchases

Amount

Input VAT

Domestic Purchases- Capital Goods

P12,312,722.00

P1,231,272.20

Domestic Purchases- Goods other than capital Goods

P64,789,507.90

P6,478,950.79

Domestic Purchases- Services

P16,455,868.10

P1,645,586.81

Total Input Tax

P9,355,809.80

Zero-rated Sales

P316,113,513.34

Total Sales

P335,640,544.74

Accenture filed its Monthly VAT Return for the month of September 2002 on 24 October 2002; and that for
October 2002, on 12 November 2002. These returns were amended on 9 January 2003. Accentures
Quarterly VAT Return for the first quarter of 2003, which included the period 1 September 2002 to 30
November 2002 (2nd period), was filed on 17 December 2002; and the Amended Quarterly VAT Return, on
18 June 2004. The latter contains the following information: 6
Purchases
Domestic Purchases- Capital Goods
Domestic Purchases- Goods other than capital Goods
Domestic Purchases-Services

Amount

Input VAT

P80,765,294.10

P8,076,529.41

P132,820,541.70

P13,282,054.17

P63,238,758.00

P6,323,875.80

Total Input Tax

P27,682,459.38

Zero-rated Sales

P545,686,639.18

Total Sales

P572,880,982.68

The monthly and quarterly VAT returns of Accenture show that, notwithstanding its application of the input
VAT credits earned from its zero-rated transactions against its output VAT liabilities, it still had excess or
unutilized input VAT credits. These VAT credits are in the amounts of P9,355,809.80 for the 1st period and
P27,682,459.38 for the 2nd period, or a total of P37,038,269.18. 7
Out of the P37,038,269.18, only P35,178,844.21 pertained to the allocated input VAT on Accentures
"domestic purchases of taxable goods which cannot be directly attributed to its zero-rated sale of
services."8 This allocated input VAT was broken down to P8,811,301.66 for the 1st period and
P26,367,542.55 for the 2nd period.9
The excess input VAT was not applied to any output VAT that Accenture was liable for in the same quarter
when the amount was earnedor to any of the succeeding quarters. Instead, it was carried forward to
petitioners 2nd Quarterly VAT Return for 2003.10

Thus, on 1 July 2004, Accenture filed with the Department of Finance (DoF) an administrative claim for the
refund or the issuance of a Tax Credit Certificate (TCC). The DoF did not act on the claim of Accenture.
Hence, on 31 August 2004, the latter filed a Petition for Review with the First Division of the Court of Tax
Appeals (Division), praying for the issuance of a TCC in its favor in the amount of P35,178,844.21.
The Commissioner of Internal Revenue (CIR), in its Answer,11 argued thus:
1. The sale by Accenture of goods and services to its clients are not zero-rated transactions.
2. Claims for refund are construed strictly against the claimant, and Accenture has failed to prove
that it is entitled to a refund, because its claim has not been fully substantiated or documented.
In a 13 November 2008 Decision,12 the Division denied the Petition of Accenture for failing to prove that
the latters sale of services to the alleged foreign clients qualified for zero percent VAT. 13
In resolving the sole issue of whether or not Accenture was entitled to a refund or an issuance of a TCC in
the amount of P35,178,844.21,14 the Division ruled that Accenture had failed to present evidence to prove
that the foreign clients to which the former rendered services did business outside the Philippines. 15 Ruling
that Accentures services would qualify for zero-rating under the 1997 National Internal Revenue Code of
the Philippines (Tax Code) only if the recipient of the services was doing business outside of the
Philippines,16 the Division cited Commissioner of Internal Revenue v. Burmeister and Wain Scandinavian
Contractor Mindanao, Inc. (Burmeister)17 as basis.
Accenture appealed the Divisions Decision through a Motion for Reconsideration (MR). 18 In its MR, it
argued that the reliance of the Division on Burmeister was misplaced19 for the following reasons:
1. The issue involved in Burmeister was the entitlement of the applicant to a refund, given that the
recipient of its service was doing business in the Philippines; it was not an issue of failure of the
applicant to present evidence to prove the fact that the recipient of its services was a foreign
corporation doing business outside the Philippines.20
2. Burmeister emphasized that, to qualify for zero-rating, the recipient of the services should be
doing business outside the Philippines, and Accenture had successfully established that. 21
3. Having been promulgated on 22 January 2007 or after Accenture filed its Petition with the
Division, Burmeister cannot be made to apply to this case.22
Accenture also cited Commissioner of Internal Revenue v. American Express (Amex) 23 in support of its
position. The MR was denied by the Division in its 12 March 2009 Resolution. 24
Accenture appealed to the CTA En Banc. There it argued that prior to the amendment introduced by
Republic Act No. (R.A.) 9337, 25 there was no requirement that the services must be rendered to a person
engaged in business conducted outside the Philippines to qualify for zero-rating. The CTA En Banc agreed
that because the case pertained to the third and the fourth quarters of taxable year 2002, the applicable
law was the 1997 Tax Code, and not R.A. 9337.26 Still, it ruled that even though the provision used in
Burmeister was Section 102(b)(2) of the earlier 1977 Tax Code, the pronouncement therein requiring
recipients of services to be engaged in business outside the Philippines to qualify for zero-rating was
applicable to the case at bar, because Section 108(B)(2) of the 1997 Tax Code was a mere reenactment of
Section 102(b)(2) of the 1977 Tax Code.
The CTA En Banc concluded that Accenture failed to discharge the burden of proving the latters allegation
that its clients were foreign-based.27
Resolute, Accenture filed a Petition for Review with the CTA En Banc, but the latter affirmed the Divisions
Decision and Resolution.28 A subsequent MR was also denied in a Resolution dated 23 October 2009.
Hence, the present Petition for Review29 under Rule 45.

In a Joint Stipulation of Facts and Issues, the parties and the Division have agreed to submit the following
issues for resolution:
1. Whether or not Petitioners sales of goods and services are zero-rated for VAT purposes under
Section 108(B)(2)(3) of the 1997 Tax Code.
2. Whether or not petitioners claim for refund/tax credit in the amount of P35,178,884.21
represents unutilized input VAT paid on its domestic purchases of goods and services for the period
commencing from 1 July 2002 until 30 November 2002.
3. Whether or not Petitioner has carried over to the succeeding taxable quarter(s) or year(s) the
alleged unutilized input VAT paid on its domestic purchases of goods and services for the period
commencing from 1 July 2002 until 30 November 2002, and applied the same fully to its output VAT
liability for the said period.
4. Whether or not Petitioner is entitled to the refund of the amount of P35,178,884.21, representing
the unutilized input VAT on domestic purchases of goods and services for the period commencing
from 1 July 2002 until 30 November 2002, from its sales of services to various foreign clients.
5. Whether or not Petitioners claim for refund/tax credit in the amount of P35,178,884.21, as
alleged unutilized input VAT on domestic purchases of goods and services for the period covering 1
July 2002 until 30 November 2002 are duly substantiated by proper documents. 30
For consideration in the present Petition are the following issues:
1. Should the recipient of the services be "doing business outside the Philippines" for the
transaction to be zero-rated under Section 108(B)(2) of the 1997 Tax Code?
2. Has Accenture successfully proven that its clients are entities doing business outside the
Philippines?
Recipient of services must be doing business outside the Philippines for the transactions to qualify as zerorated.
Accenture anchors its refund claim on Section 112(A) of the 1997 Tax Code, which allows the refund of
unutilized input VAT earned from zero-rated or effectively zero-rated sales. The provision reads:
SEC. 112. Refunds or Tax Credits of Input Tax. (A) Zero-Rated or Effectively Zero-Rated Sales. - Any VAT-registered person, whose sales are zero-rated or
effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were
made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid
attributable to such sales, except transitional input tax, to the extent that such input tax has not been
applied against output tax: Provided, however, That in the case of zero-rated sales under Section 106(A)(2)
(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange proceeds
thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively zerorated sale and also in taxable or exempt sale of goods of properties or services, and the amount of
creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it
shall be allocated proportionately on the basis of the volume of sales. Section 108(B) referred to in the
foregoing provision was first seen when Presidential Decree No. (P.D.) 1994 31 amended Title IV of P.D.
1158,32 which is also known as the National Internal Revenue Code of 1977. Several Decisions have
referred to this as the 1986 Tax Code, even though it merely amended Title IV of the 1977 Tax Code.
Two years thereafter, or on 1 January 1988, Executive Order No. (E.O.) 273 33 further amended provisions of
Title IV. E.O. 273 by transferring the old Title IV provisions to Title VI and filling in the former title with new
provisions that imposed a VAT.

The VAT system introduced in E.O. 273 was restructured through Republic Act No. (R.A.) 7716. 34 This law,
which was approved on 5 May 1994, widened the tax base. Section 3 thereof reads:
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. x x x
xxx

xxx

xxx

"(b) Transactions subject to zero-rate. The following services performed in the Philippines by VATregistered persons shall be subject to 0%:
"(1) Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the 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)."
Essentially, Section 102(b) of the 1977 Tax Codeas amended by P.D. 1994, E.O. 273, and R.A. 7716
provides that if the consideration for the services provided by a VAT-registered person is in a foreign
currency, then this transaction shall be subjected to zero percent rate.
The 1997 Tax Code reproduced Section 102(b) of the 1977 Tax Code in its Section 108(B), to wit:
(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 paragraph, the consideration for which is
paid for in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP); x x x.
On 1 November 2005, Section 6 of R.A. 9337, which amended the foregoing provision, became effective. It
reads:
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. (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 paragraph rendered to a person engaged
in business conducted outside the Philippines or to a nonresident person not engaged in business
who is outside the Philippines when the services are performed, the consideration for which is paid
for in acceptable foreign currency and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP); x x x." (Emphasis supplied)
The meat of Accentures argument is that nowhere does Section 108(B) of the 1997 Tax Code state that
services, to be zero-rated, should be rendered to clients doing business outside the Philippines, the
requirement introduced by R.A. 9337.35 Required by Section 108(B), prior to the amendment, is that the
consideration for the services rendered be in foreign currency and in accordance with the rules of the
Bangko Sentral ng Pilipinas (BSP). Since Accenture has complied with all the conditions imposed in Section
108(B), it is entitled to the refund prayed for.
In support of its claim, Accenture cites Amex, in which this Court supposedly ruled that Section 108(B)
reveals a clear intent on the part of the legislators not to impose the condition of being "consumed abroad"
in order for the services performed in the Philippines to be zero-rated. 36
The Division ruled that this Court, in Amex and Burmeister, did not declare that the requirementthat the
client must be doing business outside the Philippinescan be disregarded, because this requirement is
expressly provided in Article 108(2) of the Tax Code.37
Accenture questions the Divisions application to this case of the pronouncements made in Burmeister.
According to petitioner, the provision applied to the present case was Section 102(b) of the 1977 Tax Code,
and not Section 108(B) of the 1997 Tax Code, which was the law effective when the subject transactions
were entered into and a refund was applied for.
In refuting Accentures theory, the CTA En Banc ruled that since Section 108(B) of the 1997 Tax Code was a
mere reproduction of Section 102(b) of the 1977 Tax Code, this Courts interpretation of the latter may be
used in interpreting the former, viz:
In the Burmeister case, the Supreme Court harmonized both Sections 102(b)(1) and 102(b)(2) of the 1977
Tax Code, as amended, pertaining to zero-rated transactions. A parallel approach should be accorded to
the renumbered provisions of Sections 108(B)(2) and 108(B)(1) of the 1997 NIRC. This means that Section
108(B)(2) must be read in conjunction with Section 108(B)(1). Section 108(B)(2) requires as follows: a)
services other than processing, manufacturing or repacking rendered by VAT registered persons in the
Philippines; and b) the transaction paid for in acceptable foreign currency duly accounted for in accordance
with BSP rules and regulations. The same provision made reference to Section 108(B)(1) further imposing
the requisite c) that the recipient of services must be performing business outside of Philippines.
Otherwise, if both the provider and recipient of service are doing business in the Philippines, the sale
transaction is subject to regular VAT as explained in the Burmeister case x x x.
xxx

xxx

xxx

Clearly, the Supreme Courts pronouncements in the Burmeister case requiring that the recipient of the
services must be doing business outside the Philippines as mandated by law govern the instant case. 38
Assuming that the foregoing is true, Accenture still argues that the tax appeals courts cannot be allowed to
apply to Burmeister this Courts interpretation of Section 102(b) of the 1977 Tax Code, because the Petition
of Accenture had already been filed before the case was even promulgated on 22 January 2007, 39 to wit:
x x x. While the Burmeister case forms part of the legal system and assumes the same authority as the
statute itself, however, the same cannot be applied retroactively against the Petitioner because to do so
will be prejudicial to the latter.40
The CTA en banc is of the opinion that Accenture cannot invoke the non-retroactivity of the rulings of the
Supreme Court, whose interpretation of the law is part of that law as of the date of its enactment. 41
We rule that the recipient of the service must be doing business outside the Philippines for the transaction
to qualify for zero-rating under Section 108(B) of the Tax Code.

This Court upholds the position of the CTA en banc that, because Section 108(B) of the 1997 Tax Code is a
verbatim copy of Section 102(b) of the 1977 Tax Code, any interpretation of the latter holds true for the
former.
Moreover, even though Accentures Petition was filed before Burmeister was promulgated, the
pronouncements made in that case may be applied to the present one without violating the rule against
retroactive application. When this Court decides a case, it does not pass a new law, but merely interprets a
preexisting one.42 When this Court interpreted Section 102(b) of the 1977 Tax Code in Burmeister, this
interpretation became part of the law from the moment it became effective. It is elementary that the
interpretation of a law by this Court constitutes part of that law from the date it was originally passed,
since this Court's construction merely establishes the contemporaneous legislative intent that the
interpreted law carried into effect.43
Accenture questions the CTAs application of Burmeister, because the provision interpreted therein was
Section 102(b) of the 1977 Tax Code. In support of its position that Section 108 of the 1997 Tax Code does
not require that the services be rendered to an entity doing business outside the Philippines, Accenture
invokes this Courts pronouncements in Amex. However, a reading of that case will readily reveal that the
provision applied was Section 102(b) of the 1977 Tax Code, and not Section 108 of the 1997 Tax Code. As
previously mentioned, an interpretation of Section 102(b) of the 1977 Tax Code is an interpretation of
Section 108 of the 1997 Tax Code, the latter being a mere reproduction of the former.
This Court further finds that Accentures reliance on Amex is misplaced.
We ruled in Amex that Section 102 of the 1977 Tax Code does not require that the services be consumed
abroad to be zero-rated. However, nowhere in that case did this Court discuss the necessary qualification
of the recipient of the service, as this matter was never put in question. In fact, the recipient of the service
in Amex is a nonresident foreign client.
The aforementioned case explains how the credit card system works. The issuance of a credit card allows
the holder thereof to obtain, on credit, goods and services from certain establishments. As proof that this
credit is extended by the establishment, a credit card draft is issued. Thereafter, the company issuing the
credit card will pay for the purchases of the credit card holders by redeeming the drafts. The obligation to
collect from the card holders and to bear the lossin case they do not payrests on the issuer of the
credit card.
The service provided by respondent in Amex consisted of gathering the bills and credit card drafts from
establishments located in the Philippines and forwarding them to its parent company's regional operating
centers outside the country. It facilitated in the Philippines the collection and payment of receivables
belonging to its Hong Kong-based foreign client.
The Court explained how the services rendered in Amex were considered to have been performed and
consumed in the Philippines, to wit:
Consumption is "the use of a thing in a way that thereby exhausts it." 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." 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.44
The effect of the place of consumption on the zero-rating of the transaction was not the issue in
Burmeister.1wphi1Instead, this Court addressed the squarely raised issue of whether the recipient of
services should be doing business outside the Philippines for the transaction to qualify for zero-rating. We
ruled that it should. Thus, another essential condition for qualification for zero-rating under Section 102(b)
(2) of the 1977 Tax Code is that the recipient of the business be doing that business outside the
Philippines. In clarifying that there is no conflict between this pronouncement and that laid down in Amex,
we ruled thus:

x x x. As the Court held in Commissioner of Internal Revenue v. American Express International, Inc.
(Philippine Branch), 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. (Emphasis in the original)45
In Amex we ruled that the place of performance and/or consumption of the service is immaterial. In
Burmeister, the Court found that, although the place of the consumption of the service does not affect the
entitlement of a transaction to zero-rating, the place where the recipient conducts its business does.
Amex does not conflict with Burmeister. In fact, to fully understand how Section 102(b)(2) of the 1977 Tax
Codeand consequently Section 108(B)(2) of the 1997 Tax Codewas intended to operate, the two
aforementioned cases should be taken together. The zero-rating of the services performed by respondent
in Amex was affirmed by the Court, because although the services rendered were both performed and
consumed in the Philippines, the recipient of the service was still an entity doing business outside the
Philippines as required in Burmeister.
That the recipient of the service should be doing business outside the Philippines to qualify for zero-rating
is the only logical interpretation of Section 102(b)(2) of the 1977 Tax Code, as we explained in Burmeister:
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.
xxx

xxx

xxx

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 "services 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. (Emphasis in the original) 46
Lastly, it is worth mentioning that prior to the promulgation of Burmeister, Congress had already clarified
the intent behind Sections 102(b)(2) of the 1977 Tax Code and 108(B)(2) of the 1997 Tax Code amending
the earlier provision. R.A. 9337 added the following phrase: "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."
Accenture has failed to establish that the recipients of its services do business outside the Philippines.
Accenture argues that based on the documentary evidence it presented, 47 it was able to establish the
following circumstances:
1. The records of the Securities and Exchange Commission (SEC) show that Accentures clients have
not established any branch office in which to do business in the Philippines.

2. For these services, Accenture bills another corporation, Accenture Participations B.V. (APB), which
is likewise a foreign corporation with no "presence in the Philippines."
3. Only those not doing business in the Philippines can be required under BSP rules to pay in
acceptable currency for their purchase of goods and services from the Philippines. Thus, 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. 48
Accenture claims that these documentary pieces of evidence are supported by the Report of Emmanuel
Mendoza, the Court-commissioned Independent Certified Public Accountant. He ascertained that
Accentures gross billings pertaining to zero-rated sales were all supported by zero-rated Official Receipts
and Billing Statements. These documents show that these zero-rated sales were paid in foreign exchange
currency and duly accounted for in the rules and regulations of the BSP. 49
In the CTAs opinion, however, the documents presented by Accenture merely substantiate the existence
of the sales, receipt of foreign currency payments, and inward remittance of the proceeds of these sales
duly accounted for in accordance with BSP rules. Petitioner presented no evidence whatsoever that these
clients were doing business outside the Philippines.50
Accenture insists, however, that it was able to establish that it had rendered services to foreign
corporations doing business outside the Philippines, unlike in Burmeister, which allegedly involved a
foreign corporation doing business in the Philippines.51
We deny Accentures Petition for a tax refund.
The evidence presented by Accenture may have established that its clients are foreign.1wphi1 This fact
does not automatically mean, however, that these clients were doing business outside the Philippines.
After all, the Tax Code itself has provisions for a foreign corporation engaged in business within the
Philippines and vice versa, to wit:
SEC. 22. Definitions - When used in this Title:
xxx

xxx

xxx

(H) The term "resident foreign corporation" applies to a foreign corporation engaged in trade or
business within the Philippines.
(I) The term nonresident foreign corporation applies to a foreign corporation not engaged in trade
or business within the Philippines. (Emphasis in the original)
Consequently, to come within the purview of Section 108(B)(2), it is not enough that the recipient of the
service be proven to be a foreign corporation; rather, it must be specifically proven to be a nonresident
foreign corporation.
There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. We
ruled thus in Commissioner of Internal Revenue v. British Overseas Airways Corporation: 52
x x x. There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting"
business. Each case must be judged in the light of its peculiar environmental circumstances. The term
implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions normally incident to, and in
progressive prosecution of commercial gain or for the purpose and object of the business organization. "In
order that a foreign corporation may be regarded as doing business within a State, there must be
continuity of conduct and intention to establish a continuous business, such as the appointment of a local
agent, and not one of a temporary character."53
A taxpayer claiming a tax credit or refund has the burden of proof to establish the factual basis of that
claim.1wphi1 Tax refunds, like tax exemptions, are construed strictly against the taxpayer. 54

Accenture failed to discharge this burden. It alleged and presented evidence to prove only that its clients
were foreign entities. However, as found by both the CTA Division and the CTA En Banc, no evidence was
presented by Accenture to prove the fact that the foreign clients to whom petitioner rendered its services
were clients doing business outside the Philippines.
As ruled by the CTA En Banc, the Official Receipts, Intercompany Payment Requests, Billing Statements,
Memo Invoices-Receivable, Memo Invoices-Payable, and Bank Statements presented by Accenture merely
substantiated the existence of sales, receipt of foreign currency payments, and inward remittance of the
proceeds of such sales duly accounted for in accordance with BSP rules, all of these were devoid of any
evidence that the clients were doing business outside of the Philippines. 55
WHEREFORE, the instant Petition is DENIED. The 22 September 2009 Decision and the 23 October 2009
Resolution of the Court of Tax Appeals En Banc in C.T.A. EB No. 477, dismissing the Petition for the refund
of the excess or unutilized input VAT credits of Accenture, Inc., are AFFIRMED.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 188260

November 13, 2013

LUZON HYDRO CORPORATION, Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
BERSAMIN, J.:
This case involves a claim for refund or tax credit to cover petitioner Luzon Hydro Corporation's unutilized
Input Value-Added Tax (VAT) worth 1 2,920,665 .16 corresponding to the four quarters of taxable year
2001.
The Case
The petitioner brought this action in the Court of Tax Appeals (CTA) after the Commissioner of Internal
Revenue (respondent) did not act on the claim (CTA Case No. 6669). The CTA 2nd Division denied the claim
on May 2, 2008 on the ground that the petitioner did not prove that it had zero-rated sales for the four
quarters of 2001.1The CT A En Banc denied the petitioner's motion for reconsideration, and affirmed the
decision of the CTA 2nd Division through its decision dated May 5, 2009. 2 Hence, the petitioner appeals the
decision of the CTA En Banc.
Antecedents
The petitioner, a corporation duly organized under the laws of the Philippines, has been registered with the
Bureau of Internal Revenue (BIR) as a VAT taxpayer under Taxpayer Identification No. 004-266-526. It was
formed as a consortium of several corporations, namely: Northern Mini Hydro Corporation, Aboitiz Equity
Ventures, Inc., Ever Electrical Manufacturing, Inc. and Pacific Hydro Limited.
Pursuant to the Power Purchase Agreement entered into with the National Power Corporation (NPC), the
electricity produced by the petitioner from its operation of the Bakun Hydroelectric Power Plant was to be
sold exclusively to NPC.3 Relative to its sale to NPC, the petitioner was granted by the BIR a certificate for
Zero Rate for VAT purposes in the periods from January 1, 2000 to December 31, 2000; February 1, 2000 to

December 31, 2000 (Certificate No. Z-162-2000); and from January 2, 2001 to December 31, 2001
(Certificate No. 2001-269).4
The petitioner alleged herein that it had incurred input VAT in the amount of P9,795,427.89 on its domestic
purchases of goods and services used in its generation and sales of electricity to NPC in the four quarters
of 2001;5 and that it had declared the input VAT of P9,795,427.89 in its amended VAT returns for the four
quarters on 2001, as follows:6
Exhibit

Date Filed

Period Covered

Input VAT (P)

May 25, 2001

1st quarter 2001

1,903,443.96

July 23, 2001

2nd quarter 2001

2,166,051.96

July 23, 2002

3rd quarter 2001

1,598,482.39

July 24, 2002

4th quarter 2001

4,127,449.58

Total 9,795,427.89
On November 26, 2001, the petitioner filed a written claim for refund or tax credit relative to its unutilized
input VAT for the period from October 1999 to October 2001 aggregating P14,557,004.38.7 Subsequently,
on July 24, 2002, it amended the claim for refund or tax credit to cover the period from October 1999 to
May 2002 forP20,609,047.56.8
The BIR, through Revenue Examiner Felicidad Mangabat of Revenue District Office No. 2 in Vigan City,
concluded an investigation, and made a recommendation in its report dated August 19, 2002 favorable to
the petitioners claim for the period from January 1, 2001 to December 31, 2001. 9
Respondent Commissioner of Internal Revenue (Commissioner) did not ultimately act on the petitioners
claim despite the favorable recommendation. Hence, on April 14, 2003, the petitioner filed its petition for
review in the CTA, praying for the refund or tax credit certificate (TCC) corresponding to the unutilized
input VAT paid for the four quarters of 2001 totalling P9,795,427.88.10
Answering on May 29, 2003,11 the Commissioner denied the claim, and raised the following special and
affirmative defenses, to wit:
xxxx
7. The petitioner has failed to demonstrate that the taxes sought to be refunded were erroneously
or illegally collected;
8. In an action for tax refund, the burden is upon the taxpayer to prove that he is entitled thereto,
and failure to sustain the same is fatal to the action for tax refund;
9. It is incumbent upon petitioner to show compliance with the provisions of Section 112 and
Section 229, both of the National Internal Revenue Code, as amended;
10. Claims for refund are construed strictly against the claimant for the same partakes the nature of
exemption from taxation (Commissioner of Internal Revenue vs. Ledesma, G.R. No. L-13509,
January 30, 1970, 31 SCRA 95) and as such they are looked upon [with] disfavor (Western Minolco
Corp. vs. Commissioner of Internal Revenue, 124 SCRA 121);
11. Taxes paid and collected are presumed to have been made in accordance with the law and
regulations, hence, not refundable.12
xxxx
On October 30, 2003, the parties submitted a Joint Stipulation of Facts and Issues, 13 which the CTA in
Division approved on November 10, 2003. The issues to be resolved were consequently the following:

1. Whether or not the input value added tax being claimed by petitioner is supported by sufficient
documentary evidence;
2. Whether petitioner has excess and unutilized input VAT from its purchases of domestic goods and
services, including capital goods in the amount of P9,795,427.88;
3. Whether or not the input VAT being claimed by petitioner is attributable to its zero-rated sale of
electricity to the NPC;
4.Whether or not the operation of the Bakun Hydroelectric Power Plant is directly connected and
attributable to the generation and sale of electricity to NPC, the sole business of petitioner; and 5.
Whether or not the claim filed by the petitioner was filed within the reglementary period provided
by law.14
While the case was pending hearing, the Commissioner, through the Assistant Commissioner for
Assessment Services, informed the petitioner by the letter dated March 3, 2005 that its claim had been
granted in the amount of P6,874,762.72, net of disallowances of P2,920,665.16. Accompanying the letter
was the TCC forP6,874,762.72 (TCC No. 00002618).15
On May 3, 2005, the petitioner filed a Motion for Leave of Court to Amend Petition for Review in
consideration of the partial grant of the claim through TCC No. 00002618. The CTA in Division granted the
motion on May 11, 2005, and admitted the Amended Petition for Review, whereby the petitioner sought
the refund or tax credit in the reduced amount of P2,920,665.16. The CTA in Division also directed the
respondent to file a supplemental answer within ten days from notice. 16
When no supplemental answer was filed within the period thus allowed, the CTA in Division treated the
answer filed on May 16, 2003 as the Commissioners answer to the Amended Petition for Review. 17
Thereafter, the petitioner presented testimonial and documentary evidence to support its claim. On the
other hand, the Commissioner submitted the case for decision based on the pleadings. 18 On May 2, 2007,
the case was submitted for decision without the memorandum of the Commissioner. 19
Ruling of the CTA in Division
The CTA in Division promulgated its decision in favor of the respondent denying the petition for review, viz:
In petitioners VAT returns for the four quarters of 2001, no amount of zero-rated sales was declared.
Likewise, petitioner did not submit any VAT official receipt of payments for services rendered to NPC. The
only proof submitted by petitioner is a letter from Regional Director Rene Q. Aguas, Revenue Region No. 1,
stating that the financial statements and annual income tax return constitute sufficient secondary proof of
effectively zero-rated and that based on their examination and evaluation of the financial statements and
annual income tax return of petitioner for taxable year 2000, it had annual gross receipts of
PhP187,992,524.00. This Court cannot give credence to the said letter as it refers to taxable year 2000,
while the instant case refers to taxable year 2001.
Without zero-rated sales for the four quarters of 2001, the input VAT payments of PhP9,795,427.88
(including the present claim of PhP2,920,665.16) allegedly attributable thereto cannot be refunded. It is
clear under Section 112 (A) of the NIRC of 1997 that the refund/tax credit of unutilized input VAT is
premised on the existence of zero-rated or effectively zero-rated sales.
xxxx
For petitioners non-compliance with the first requisite of proving that it had effectively zero-rated sales for
the four quarters of 2001, the claimed unutilized input VAT payments of PhP2,920,665.16 cannot be
granted.
WHEREFORE, the instant Petition for Review is hereby DENIED for lack of merit.

SO ORDERED.20
On May 21, 2008, the petitioner moved to reconsider the decision of the CTA in Division. 21 However, the
CTA in Division denied the petitioners motion for reconsideration on September 5, 2008. 22
Decision of the CTA En Banc
On October 17, 2008, the petitioner filed a petition for review in the CTA En Banc (CTA E.B No. 420), posing
the main issue whether or not the CTA in Division erred in denying its claim for refund or tax credit upon a
finding that it had not established its having effectively zero-rated sales for the four quarters of 2001.
On May 5, 2009, the CTA En Banc promulgated the assailed decision affirming the Division, and denying
the claim for refund or tax credit, stating:
The other argument of petitioner that even if the tax credit certificate will not be used as evidence, it was
able to prove that it has zero-rated sale as shown in its financial statements and income tax returns
quoting the letter opinion of Regional Director Rene Q. Aguas that the statements and the return are
considered sufficient to establish that it generated zero-rated sale of electricity is bereft of merit. As found
by the Court a quo, the letter opinion refers to taxable year 2000, while the instant case covers taxable
year 2001; hence, cannot be given credence. Even assuming for the sake of argument that the financial
statements, the return and the letter opinion relates to 2001, the same could not be taken plainly as it is
because there is still a need to produce the supporting documents proving the existence of such zero-rated
sales, which is wanting in this case. Considering that there are no zero-rated sales to speak of for taxable
year 2001, petitioner is, therefore, not entitled to a refund of PhP2,920,665.16 input tax allegedly
attributable thereto since it is basic requirement under Section 112 (A) of the NIRC that there should exists
a zero-rated sales in order to be entitled to a refund of unutilized input tax.
It is settled that tax refunds, like tax exemptions, are construed strictly against the taxpayer and that the
claimant has the burden of proof to establish the factual basis of its claim for tax credit or refund. Failure in
this regard, petitioners claim must therefore, fail.
WHEREFORE, the instant Petition for Review is hereby DENIED for lack of merit.
SO ORDERED.23
On June 10, 2009, the CTA En Banc also denied the petitioners motion for reconsideration. 24
Issue
Aggrieved, the petitioner has appealed, urging as the lone issue:
WHETHER THE CTA EN BANC COMMITTED A REVERSIBLE ERROR IN AFFIRMING THE DECISION OF THE CTA.
In its August 3, 2009 petition for review,25 the petitioner has argued as follows:
(1) Its sale of electricity to NPC was automatically zero-rated pursuant to Republic Act No. 9136
(EPIRA Law); hence, it need not prove that it had zero-rated sales in the period from January 1, 2001
to December 31, 2001 by the presentation of VAT official receipts that would contain all the
necessary information required under Section 113 of the National Internal Revenue Code of 1997,
as implemented by Section 4.108-1 of Revenue Regulations No. 7-95. Evidence of sale of electricity
to NPC other than official receipts could prove zero-rated sales.
(2) The TCC, once issued, constituted an administrative opinion that deserved consideration and
respect by the CTA En Banc.
(3) The CTA En Banc was devoid of any authority to determine the existence of the petitioners
zero-rated sales, inasmuch as that would constitute an encroachment on the powers granted to an
administrative agency having expertise on the matter.

(4) The CTA En Banc manifestly overlooked evidence not disputed by the parties and which, if
properly considered, would justify a different conclusion. 26
The petitioner has prayed for the reversal of the decision of the CTA En Banc, and for the remand of the
case to the CTA for the reception of its VAT official receipts as newly discovered evidence. It has supported
the latter relief prayed for by representing that the VAT official receipts had been misplaced by Edwin
Tapay, its former Finance and Accounting Manager, but had been found only after the CTA En Banc has
already affirmed the decision of the CTA in Division. In the alternative, it has asked that the Commissioner
allow the claim for refund or tax credit of P2,920,665.16.
In the comment submitted on December 3, 2009,27 the Commissioner has insisted that the petitioners
claim cannot be granted because it did not incur any zero-rated sale; that its failure to comply with the
invoicing requirements on the documents supporting the sale of services to NPC resulted in the
disallowance of its claim for the input tax; and the claim should also be denied for not being substantiated
by appropriate and sufficient evidence.
In its reply filed on February 4, 2010,28 the petitioner reiterated its contention that it had established its
claim for refund or tax credit; and that it should be allowed to present the official receipts in a new trial.
Ruling of the Court
The petition is without merit.
Section 112 of the National Internal Revenue Code 1997 provides:
SEC. 112. Refunds or Tax Credits of Input Tax.
(A) Zero-rated or Effectively Zero-rated Sales--Any VAT-registered person, whose sales are zero-rated or
effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were
made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid
attributable to such sales, except transitional input tax, to the extent that such input tax has not been
applied against output tax: Provided, however, That in the case of zero-rated sales under Section 106(A)(2)
(a)(1), (2) and (B) and Section 108(B)(1) and (2), the acceptable foreign currency exchange proceeds
thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively zerorated sale and also in taxable or exempt sale of goods or properties or services, and the amount of
creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it
shall be allocated proportionately on the basis of the volume of sales.
xxxx
A claim for refund or tax credit for unutilized input VAT may be allowed only if the following requisites
concur, namely: (a) the taxpayer is VAT-registered; (b) the taxpayer is engaged in zero-rated or effectively
zero-rated sales; (c) the input taxes are due or paid; (d) the input taxes are not transitional input taxes; (e)
the input taxes have not been applied against output taxes during and in the succeeding quarters; (f) the
input taxes claimed are attributable to zero-rated or effectively zero-rated sales; (g) for zero-rated sales
under Section 106(A)(2)(1) and (2); 106(B); and 108(B)(1) and (2), the acceptable foreignCURRENCY
EXCHANGE proceeds have been duly accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas; (h) where there are both zero-rated or effectively zero-rated sales and taxable
or exempt sales, and the input taxes cannot be directly and entirely attributable to any of these sales, the
input taxes shall be proportionately allocated on the basis of sales volume; and (i) the claim is filed within
two years after the close of the taxable quarter when such sales were made. 29
The petitioner did not competently establish its claim for refund or tax credit.1avvphi1 We agree with the
CTA En Banc that the petitioner did not produce evidence showing that it had zero-rated sales for the four
quarters of taxable year 2001. As the CTA En Banc precisely found, the petitioner did not reflect any zerorated sales from its power generation in its four quarterly VAT returns, which indicated that it had not made
any sale of electricity. Had there been zero-rated sales, it would have reported them in the returns. Indeed,
it carried the burden not only that it was entitled under the substantive law to the allowance of its claim for

refund or tax credit but also that it met all the requirements for evidentiary substantiation of its claim
before the administrative official concerned, or in the de novo litigation before the CTA in Division. 30
Although the petitioner has correctly contended here that the sale of electricity by a power generation
company like it should be subject to zero-rated VAT under Republic Act No. 9136, 31 its assertion that it need
not prove its having actually made zero-rated sales of electricity by presenting the VAT official receipts and
VAT returns cannot be upheld. It ought to be reminded that it could not be permitted to substitute such
vital and material documents with secondary evidence like financial statements.
We further find to be lacking in substance and bereft of merit the petitioners insistence that the CTA En
Banc should not have disregarded the letter opinion by BIR Regional Director Rene Q. Aguas to the effect
that its financial statements and its return were sufficient to establish that it had generated zero-rated sale
of electricity. To recall, the CTA En Banc rejected the insistence because, firstly, the letter opinion referred
to taxable year 2000 but this case related to taxable year 2001, and, secondly, even assuming for the sake
of argument that the financial statements, the return and the letter opinion had related to taxable year
2001, they still could not be taken at face value for the purpose of approving the claim for refund or tax
credit due to the need to produce the supporting documents proving the existence of the zero-rated sales,
which did not happen here. In that respect, the CTA En Banc properly disregarded the letter opinion as
irrelevant to the present claim of the petitioner.
We further see no reason to grant the prayer of the petitioner for the remand of this case to enable it to
present before the CTA newly discovered evidence consisting in VAT official receipts.
Ordinarily, the concept of newly discovered evidence is applicable to litigations in which a litigant seeks a
new trial or the re-opening of the case in the trial court. Seldom is the concept appropriate when the
litigation is already on appeal, particularly in this Court. The absence of a specific rule on newly discovered
evidence at this late stage of the proceedings is not without reason. The propriety of remanding the case
for the purpose of enabling the CTA to receive newly discovered evidence would undo the decision already
on appeal and require the examination of the pieces of newly discovered evidence, an act that the Court
could not do by virtue of its not being a trier of facts. Verily, the Court has emphasized in Atlas
Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue 32 that a judicial
claim for tax refund or tax credit brought to the CTA is by no means an original action but an appeal by
way of a petition for review of the taxpayers unsuccessful administrative claim; hence, the taxpayer has
to convince the CTA that the quasi-judicial agency a quo should not have denied the claim, and to do so
the taxpayer should prove every minute aspect of its case by presenting, formally offering and submitting
its evidence to the CTA, including whatever was required for the successful prosecution of the
administrative claim as the means of demonstrating to the CTA that its administrative claim should have
been granted in the first place.
Nonetheless, on the proposition that we may relax the stringent rules of procedure for the sake of
rendering justice, we still hold that the concept of newly discovered evidence may not apply herein. In
order that newly discovered evidence may be a ground for allowing a new trial, it must be fairly shown
that: (a) the evidence is discovered after the trial; (b) such evidence could not have been discovered and
produced at the trial even with the exercise of reasonable diligence; (c) such evidence is material, not
merely cumulative, corroborative, or impeaching; and (d) such evidence is of such weight that it would
probably change the judgment if admitted.33
The first two requisites are not attendant. To start with, the proposed evidence was plainly not newly
discovered considering the petitioner s admission that its former Finance and Accounting Manager had
misplaced the VAT official receipts. If that was true, the misplaced receipts were forgotten evidence. And,
secondly, the receipts, had they truly existed, could have been sooner discovered and easily produced at
the trial with the exercise of reasonable diligence. But the petitioner made no convincing demonstration
that it had exercised reasonable diligence. The Court cannot accept its tender of such receipts and return
now, for, indeed, the non-production of documents as vital and material as such receipts and return were
to the success of its claim for refund or tax credit was improbable, as it goes against the sound business
practice of safekeeping relevant documents precisely to ensure their future use to support an eventual
substantial claim for refund or tax credit.

WHEREFORE, the Court DENIES the petition for review on certiorari for its lack of merit; AFFIRMS the
decision dated May 5, 2009 of the Court of Tax Appeals En Bane; and ORDERS the petitioner to pay the
costs of suit.
SO ORDERED.