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I.

VAT IN GENERAL

G.R. No. 146984 July 28, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner,


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

DECISION

TINGA, J.:

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

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

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

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

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

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

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

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

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

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

However, the Court of Appeals reversed itself upon reconsidering the case, through a Resolution dated 5 February 2001. 13 This time,
the appellate court ruled that the "change of ownership of business" as contemplated in R.R. No. 5-87 must be a consequence of the
"retirement from or cessation of business" by the owner of the goods, as provided for in Section 100 of the Tax Code. The Court of
Appeals also agreed with the CTA that the classification of transactions "deemed sale" was a classification statute, and not an
exemption statute, thus warranting the resolution of any doubt in favor of the taxpayer.14

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

A brief reiteration of the basic principles governing VAT is in order. VAT is ultimately a tax on consumption, even though it is assessed
on many levels of transactions on the basis of a fixed percentage. 15 It is the end user of consumer goods or services which ultimately
shoulders the tax, as the liability therefrom is passed on to the end users by the providers of these goods or services 16 who in turn may
credit their own VAT liability (or input VAT) from the VAT payments they receive from the final consumer (or output VAT). 17 The final
purchase by the end consumer represents the final link in a production chain that itself involves several transactions and several acts of
consumption. The VAT system assures fiscal adequacy through the collection of taxes on every level of consumption, 18 yet assuages
the manufacturers or providers of goods and services by enabling them to pass on their respective VAT liabilities to the next link of the
chain until finally the end consumer shoulders the entire tax liability.

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

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

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

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

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

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

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

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

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

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

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

WHEREFORE, the petition is DENIED. No costs.

SO ORDERED.
I. VAT IN GENERAL

G.R. No. 153866 February 11, 2005

COMMISSIONER OF INTERNAL REVENUE vs.


SEAGATE TECHNOLOGY (PHILIPPINES)

DECISION

PANGANIBAN, J.:

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

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to set aside the May 27, 2002 Decision2 of the Court of
Appeals (CA) in CA-GR SP No. 66093. The decretal portion of the Decision reads as follows:

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

The Facts

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

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

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

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

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

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

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

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

7. No final action has been received by [respondent] from [petitioner] on [respondent’s] claim for VAT refund.

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

"For his part, [petitioner] x x x raised the following Special and Affirmative Defenses, to wit:
I. VAT IN GENERAL

1. [Respondent’s] alleged claim for tax refund/credit is subject to administrative routinary investigation/examination by [petitioner’s]
Bureau;

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

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

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

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

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

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

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

Ruling of the Court of Appeals

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

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

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

Hence this Petition.5

Sole Issue

Petitioner submits this sole issue for our consideration:

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

The Court’s Ruling

The Petition is unmeritorious.

Sole Issue:

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


I. VAT IN GENERAL

No doubt, as a PEZA-registered enterprise within a special economic zone, 7 respondent is entitled to the fiscal incentives and
benefits8 provided for in either PD 669 or EO 226.10 It shall, moreover, enjoy all privileges, benefits, advantages or exemptions under
both Republic Act Nos. (RA) 722711 and 7844.12

Preferential Tax Treatment Under Special Laws

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

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

A privilege available to respondent under the provision in RA 7227 on tax and duty-free importation of raw materials, capital and
equipment18 -- is, ipso facto, also accorded to the zone 19 under RA 7916. Furthermore, the latter law -- notwithstanding other existing
laws, rules and regulations to the contrary -- extends 20 to that zone the provision stating that no local or national taxes shall be imposed
therein.21 No exchange control policy shall be applied; and free markets for foreign exchange, gold, securities and future shall be
allowed and maintained.22 Banking and finance shall also be liberalized under minimum Bangko Sentral regulation with the
establishment of foreign currency depository units of local commercial banks and offshore banking units of foreign banks.23

In the same vein, respondent benefits under RA 7844 from negotiable tax credits 24 for locally-produced materials used as inputs. Aside
from the other incentives possibly already granted to it by the Board of Investments, it also enjoys preferential credit facilities 25 and
exemption from PD 1853.26

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

Nature of the VAT and the Tax Credit Method

Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent levied on every importation of goods,
whether or not in the course of trade or business, or imposed on each sale, barter, exchange or lease of goods or properties or on each
rendition of services in the course of trade or business 29 as they pass along the production and distribution chain, the tax being limited
only to the value added30 to such goods, properties or services by the seller, transferor or lessor. 31 It is an indirect tax that may be shifted
or passed on to the buyer, transferee or lessee of the goods, properties or services.32 As such, it should be understood not in the
context of the person or entity that is primarily, directly and legally liable for its payment, but in terms of its nature as a tax on
consumption.33 In either case, though, the same conclusion is arrived at.

The law34 that originally imposed the VAT in the country, as well as the subsequent amendments of that law, has been drawn from
the tax credit method.35 Such method adopted the mechanics and self-enforcement features of the VAT as first implemented and
practiced in Europe and subsequently adopted in New Zealand and Canada. 36 Under the present method that relies on invoices, an
entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports.37

If at the end of a taxable quarter the output taxes38 charged by a seller39 are equal to the input taxes40 passed on by the suppliers, no
payment is required. It is when the output taxes exceed the input taxes that the excess has to be paid. 41 If, however, the input taxes
exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters. 42 Should the input taxes result from
zero-rated or effectively zero-rated transactions or from the acquisition of capital goods,43 any excess over the output taxes shall instead
be refunded44 to the taxpayer or credited45 against other internal revenue taxes.46

Zero-Rated and Effectively Zero-Rated Transactions

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

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

Effectively zero-rated transactions, however, refer to the sale of goods50 or supply of services51 to persons or entities whose exemption
under special laws or international agreements to which the Philippines is a signatory effectively subjects such transactions to a zero
rate.52 Again, as applied to the tax base, such rate does not yield any tax chargeable against the purchaser. The seller who charges
zero output tax on such transactions can also claim a refund of or a tax credit certificate for the VAT previously charged by suppliers.

Zero Rating and Exemption

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

Applying the destination principle53 to the exportation of goods, automatic zero rating54 is primarily intended to be enjoyed by the seller
who is directly and legally liable for the VAT, making such seller internationally competitive by allowing the refund or credit of input taxes
that are attributable to export sales.55 Effective zero rating, on the contrary, is intended to benefit the purchaser who, not being directly
and legally liable for the payment of the VAT, will ultimately bear the burden of the tax shifted by the suppliers.

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

Exempt Transaction >and Exempt Party

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

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

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

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

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

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

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

Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero. Its exemption under both PD 66 and RA
7916 effectively subjects such transactions to a zero rate, 68 because the ecozone within which it is registered is managed and operated
by the PEZA as a separate customs territory.69 This means that in such zone is created the legal fiction of foreign territory. 70 Under
the cross-border principle71 of the VAT system being enforced by the Bureau of Internal Revenue (BIR), 72 no VAT shall be imposed to
form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. If exports of goods and
services from the Philippines to a foreign country are free of the VAT, 73 then the same rule holds for such exports from the national
territory -- except specifically declared areas -- to an ecozone.
I. VAT IN GENERAL

Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are considered exports to a foreign country;
conversely, sales by a PEZA-registered entity to a VAT-registered person in the customs territory are deemed imports from a foreign
country.74 An ecozone -- indubitably a geographical territory of the Philippines -- is, however, regarded in law as foreign soil. 75 This legal
fiction is necessary to give meaningful effect to the policies of the special law creating the zone.76 If respondent is located in an export
processing zone77 within that ecozone, sales to the export processing zone, even without being actually exported, shall in fact be
viewed as constructively exported under EO 226.78 Considered as export sales,79 such purchase transactions by respondent would
indeed be subject to a zero rate.80

Tax Exemptions Broad and Express

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

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

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

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

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

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

Third, foreign and domestic merchandise, raw materials, equipment and the like "shall not be subject to x x x internal revenue laws and
regulations" under PD 6683 -- the original charter of PEZA (then EPZA) that was later amended by RA 7916. 84 No provisions in the latter
law modify such exemption.

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

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

Fifth, export processing zone enterprises registered90 with the Board of Investments (BOI) under EO 226 patently enjoy exemption from
national internal revenue taxes on imported capital equipment reasonably needed and exclusively used for the manufacture of their
products;91 on required supplies and spare part for consigned equipment; 92 and on foreign and domestic merchandise, raw materials,
equipment and the like -- except those prohibited by law -- brought into the zone for manufacturing. 93 In addition, they are given credits
for the value of the national internal revenue taxes imposed on domestic capital equipment also reasonably needed and exclusively
used for the manufacture of their products,94 as well as for the value of such taxes imposed on domestic raw materials and supplies that
are used in the manufacture of their export products and that form part thereof.95

Sixth, the exemption from local and national taxes granted under RA 722796 are ipso facto accorded to ecozones.97In case of doubt,
conflicts with respect to such tax exemption privilege shall be resolved in favor of the ecozone.98

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

Tax Refund as Tax Exemption


I. VAT IN GENERAL

To be sure, statutes that grant tax exemptions are construed strictissimi juris102 against the taxpayer103 and liberally in favor of the taxing
authority.104

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

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

First, the contemporaneous construction of our tax laws by BIR authorities who are called upon to execute or administer such
laws109 will have to be adopted. Their prior tax issuances have held inconsistent positions brought about by their probable failure to
comprehend and fully appreciate the nature of the VAT as a tax on consumption and the application of the destination
principle.110 Revenue Memorandum Circular No. (RMC) 74-99, however, now clearly and correctly provides that any VAT-registered
supplier’s sale of goods, property or services from the customs territory to any registered enterprise operating in the ecozone --
regardless of the class or type of the latter’s PEZA registration -- is legally entitled to a zero rate.111

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

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

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

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

Wisely accorded to ecozones created under RA 7916117 was the government’s policy -- spelled out earlier in RA 7227 -- of converting
into alternative productive uses118 the former military reservations and their extensions,119 as well as of providing them incentives120 to
enhance the benefits that would be derived from them121 in promoting economic and social development.122

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

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

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

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

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

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

Moreover, the facts have already been determined by the lower courts. Having failed to present evidence to support its contentions
against the income tax holiday privilege of respondent,135 petitioner is deemed to have conceded. It is a cardinal rule that "issues and
arguments not adequately and seriously brought below cannot be raised for the first time on appeal." 136 This is a "matter of
procedure"137 and a "question of fairness."138 Failure to assert "within a reasonable time warrants a presumption that the party entitled to
assert it either has abandoned or declined to assert it."139

The BIR regulations additionally requiring an approved prior application for effective zero rating 140 cannot prevail over the clear VAT
nature of respondent’s transactions. The scope of such regulations is not "within the statutory authority x x x granted by the
legislature.141

First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the former cannot purport to do any more than
interpret the latter.142 The courts will not countenance one that overrides the statute it seeks to apply and implement.143

Other than the general registration of a taxpayer the VAT status of which is aptly determined, no provision under our VAT law requires
an additional application to be made for such taxpayer’s transactions to be considered effectively zero-rated. An effectively zero-rated
transaction does not and cannot become exempt simply because an application therefor was not made or, if made, was denied. To
allow the additional requirement is to give unfettered discretion to those officials or agents who, without fluid consideration, are bent on
denying a valid application. Moreover, the State can never be estopped by the omissions, mistakes or errors of its officials or agents.144

Second, grantia argumenti that such an application is required by law, there is still the presumption of regularity in the performance of
official duty.145 Respondent’s registration carries with it the presumption that, in the absence of contradictory evidence, an application for
effective zero rating was also filed and approval thereof given. Besides, it is also presumed that the law has been obeyed 146 by both the
administrative officials and the applicant.

Third, even though such an application was not made, all the special laws we have tackled exempt respondent not only from internal
revenue laws but also from the regulations issued pursuant thereto. Leniency in the implementation of the VAT in ecozones is an
imperative, precisely to spur economic growth in the country and attain global competitiveness as envisioned in those laws.

A VAT-registered status, as well as compliance with the invoicing requirements, 147 is sufficient for the effective zero rating of the
transactions of a taxpayer. The nature of its business and transactions can easily be perused from, as already clearly indicated in, its
VAT registration papers and photocopied documents attached thereto. Hence, its transactions cannot be exempted by its mere failure to
apply for their effective zero rating. Otherwise, their VAT exemption would be determined, not by their nature, but by the taxpayer’s
negligence -- a result not at all contemplated. Administrative convenience cannot thwart legislative mandate.

Tax Refund or Credit in Order

Having determined that respondent’s purchase transactions are subject to a zero VAT rate, the tax refund or credit is in order.

As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal incentives in EO 226 over those in RA 7916 and
PD 66. It opted for the income tax holiday regime instead of the 5 percent preferential tax regime.

The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA law, 148 for EO 226149 also has provisions to
contend with. These two regimes are in fact incompatible and cannot be availed of simultaneously by the same entity. While EO 226
merely exempts it from income taxes, the PEZA law exempts it from all taxes.

Therefore, respondent can be considered exempt, not from the VAT, but only from the payment of income tax for a certain number of
years, depending on its registration as a pioneer or a non-pioneer enterprise. Besides, the remittance of the aforesaid 5 percent of
gross income earned in lieu of local and national taxes imposable upon business establishments within the ecozone cannot outrightly
determine a VAT exemption. Being subject to VAT, payments erroneously collected thereon may then be refunded or credited.

Even if it is argued that respondent is subject to the 5 percent preferential tax regime in RA 7916, Section 24 thereof does not preclude
the VAT. One can, therefore, counterargue that such provision merely exempts respondent from taxes imposed on business. To repeat,
the VAT is a tax imposed on consumption, not on business. Although respondent as an entity is exempt, the transactions it enters into
are not necessarily so. The VAT payments made in excess of the zero rate that is imposable may certainly be refunded or credited.
I. VAT IN GENERAL

Compliance with All Requisites for VAT Refund or Credit

As further enunciated by the Tax Court, respondent complied with all the requisites for claiming a VAT refund or credit.150

First, respondent is a VAT-registered entity. This fact alone distinguishes the present case from Contex, in which this Court held that the
petitioner therein was registered as a non-VAT taxpayer.151 Hence, for being merely VAT-exempt, the petitioner in that case cannot claim
any VAT refund or credit.

Second, the input taxes paid on the capital goods of respondent are duly supported by VAT invoices and have not been offset against
any output taxes. Although enterprises registered with the BOI after December 31, 1994 would no longer enjoy the tax credit incentives
on domestic capital equipment -- as provided for under Article 39(d), Title III, Book I of EO 226 152 -- starting January 1, 1996, respondent
would still have the same benefit under a general and express exemption contained in both Article 77(1), Book VI of EO 226; and
Section 12, paragraph 2 (c) of RA 7227, extended to the ecozones by RA 7916.

There was a very clear intent on the part of our legislators, not only to exempt investors in ecozones from national and local taxes, but
also to grant them tax credits. This fact was revealed by the sponsorship speeches in Congress during the second reading of House Bill
No. 14295, which later became RA 7916, as shown below:

"MR. RECTO. x x x Some of the incentives that this bill provides are exemption from national and local taxes; x x x tax credit for locally-
sourced inputs x x x."

xxxxxxxxx

"MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an environment conducive for investors, the bill
offers incentives such as the exemption from local and national taxes, x x x tax credits for locally sourced inputs x x x."153

And third, no question as to either the filing of such claims within the prescriptive period or the validity of the VAT returns has been
raised. Even if such a question were raised, the tax exemption under all the special laws cited above is broad enough to cover even the
enforcement of internal revenue laws, including prescription.154

Summary

To summarize, special laws expressly grant preferential tax treatment to business establishments registered and operating within an
ecozone, which by law is considered as a separate customs territory. As such, respondent is exempt from all internal revenue taxes,
including the VAT, and regulations pertaining thereto. It has opted for the income tax holiday regime, instead of the 5
percent preferential tax regime. As a matter of law and procedure, its registration status entitling it to such tax holiday can no longer be
questioned. Its sales transactions intended for export may not be exempt, but like its purchase transactions, they are zero-rated. No
prior application for the effective zero rating of its transactions is necessary. Being VAT-registered and having satisfactorily complied
with all the requisites for claiming a tax refund of or credit for the input VAT paid on capital goods purchased, respondent is entitled to
such VAT refund or credit.

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

SO ORDERED.
I. VAT IN GENERAL

G.R. No. 151135 July 2, 2004

CONTEX CORPORATION, petitioner,


vs.
HON. COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

QUISUMBING, J.:

For review is the Decision1 dated September 3, 2001, of the Court of Appeals, in CA-G.R. SP No. 62823, which reversed and set aside
the decision2 dated October 13, 2000, of the Court of Tax Appeals (CTA). The CTA had ordered the Commissioner of Internal Revenue
(CIR) to refund the sum of P683,061.90 to petitioner as erroneously paid input value-added tax (VAT) or in the alternative, to issue a tax
credit certificate for said amount. Petitioner also assails the appellate court’s Resolution, 3 dated December 19, 2001, denying the motion
for reconsideration.

Petitioner is a domestic corporation engaged in the business of manufacturing hospital textiles and garments and other hospital
supplies for export. Petitioner’s place of business is at the Subic Bay Freeport Zone (SBFZ). It is duly registered with the Subic Bay
Metropolitan Authority (SBMA) as a Subic Bay Freeport Enterprise, pursuant to the provisions of Republic Act No. 7227. 4 As an SBMA-
registered firm, petitioner is exempt from all local and national internal revenue taxes except for the preferential tax provided for in
Section 12 (c)5 of Rep. Act No. 7227. Petitioner also registered with the Bureau of Internal Revenue (BIR) as a non-VAT taxpayer under
Certificate of Registration RDO Control No. 95-180-000133.

From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and materials necessary in the conduct of its
manufacturing business. The suppliers of these goods shifted unto petitioner the 10% VAT on the purchased items, which led the
petitioner to pay input taxes in the amounts of P539,411.88 and P504,057.49 for 1997 and 1998, respectively.6

Acting on the belief that it was exempt from all national and local taxes, including VAT, pursuant to Rep. Act No. 7227, petitioner filed
two applications for tax refund or tax credit of the VAT it paid. Mr. Edilberto Carlos, revenue district officer of BIR RDO No. 19, denied
the first application letter, dated December 29, 1998.

Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax refund/credit, this time directly with Atty. Alberto
Pagabao, the regional director of BIR Revenue Region No. 4. The second letter sought a refund or issuance of a tax credit certificate in
the amount of P1,108,307.72, representing erroneously paid input VAT for the period January 1, 1997 to November 30, 1998.

When no response was forthcoming from the BIR Regional Director, petitioner then elevated the matter to the Court of Tax Appeals, in a
petition for review docketed as CTA Case No. 5895. Petitioner stressed that Section 112(A) 7 if read in relation to Section 106(A)(2)(a)8 of
the National Internal Revenue Code, as amended and Section 12(b) 9 and (c) of Rep. Act No. 7227 would show that it was not liable in
any way for any value-added tax.

In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply the rule that claims for refund are strictly construed
against the taxpayer. Since petitioner failed to establish both its right to a tax refund or tax credit and its compliance with the rules on
tax refund as provided for in Sections 20410 and 22911 of the Tax Code, its claim should be denied, according to the BIR.

On October 13, 2000, the CTA decided CTA Case No. 5895 as follows:

WHEREFORE, in view of the foregoing, the Petition for Review is hereby PARTIALLY GRANTED. Respondent is hereby
ORDERED to REFUND or in the alternative to ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner the sum
of P683,061.90, representing erroneously paid input VAT.

SO ORDERED.12
I. VAT IN GENERAL

In granting a partial refund, the CTA ruled that petitioner misread Sections 106(A)(2)(a) and 112(A) of the Tax Code. The tax court
stressed that these provisions apply only to those entities registered as VAT taxpayers whose sales are zero-rated. Petitioner does not
fall under this category, since it is a non-VAT taxpayer as evidenced by the Certificate of Registration RDO Control No. 95-180-000133
issued by RDO Rosemarie Ragasa of BIR RDO No. 18 of the Subic Bay Freeport Zone and thus it is exempt from VAT, pursuant to
Rep. Act No. 7227, said the CTA.

Nonetheless, the CTA held that the petitioner is exempt from the imposition of input VAT on its purchases of supplies and materials. It
pointed out that under Section 12(c) of Rep. Act No. 7227 and the Implementing Rules and Regulations of the Bases Conversion and
Development Act of 1992, all that petitioner is required to pay as a SBFZ-registered enterprise is a 5% preferential tax.

The CTA also disallowed all refunds of input VAT paid by the petitioner prior to June 29, 1997 for being barred by the two-year
prescriptive period under Section 229 of the Tax Code. The tax court also limited the refund only to the input VAT paid by the petitioner
on the supplies and materials directly used by the petitioner in the manufacture of its goods. It struck down all claims for input VAT paid
on maintenance, office supplies, freight charges, and all materials and supplies shipped or delivered to the petitioner’s Makati and
Pasay City offices.

Respondent CIR then filed a petition, docketed as CA-G.R. SP No. 62823, for review of the CTA decision by the Court of Appeals.
Respondent maintained that the exemption of Contex Corp. under Rep. Act No. 7227 was limited only to direct taxes and not to indirect
taxes such as the input component of the VAT. The Commissioner pointed out that from its very nature, the value-added tax is a burden
passed on by a VAT registered person to the end users; hence, the direct liability for the tax lies with the suppliers and not Contex.

Finding merit in the CIR’s arguments, the appellate court decided CA-G.R. SP No. 62823 in his favor, thus:

WHEREFORE, premises considered, the appealed decision is hereby REVERSED AND SET ASIDE. Contex’s claim for
refund of erroneously paid taxes is DENIED accordingly.

SO ORDERED.13

In reversing the CTA, the Court of Appeals held that the exemption from duties and taxes on the importation of raw materials, capital,
and equipment of SBFZ-registered enterprises under Rep. Act No. 7227 and its implementing rules covers only "the VAT imposable
under Section 107 of the [Tax Code], which is a direct liability of the importer, and in no way includes the value-added tax of the seller-
exporter the burden of which was passed on to the importer as an additional costs of the goods." 14 This was because the exemption
granted by Rep. Act No. 7227 relates to the act of importation and Section 107 15 of the Tax Code specifically imposes the VAT on
importations. The appellate court applied the principle that tax exemptions are strictly construed against the taxpayer. The Court of
Appeals pointed out that under the implementing rules of Rep. Act No. 7227, the exemption of SBFZ-registered enterprises from
internal revenue taxes is qualified as pertaining only to those for which they may be directly liable. It then stated that apparently, the
legislative intent behind Rep. Act No. 7227 was to grant exemptions only to direct taxes, which SBFZ-registered enterprise may be
liable for and only in connection with their importation of raw materials, capital, and equipment as well as the sale of their goods and
services.

Petitioner timely moved for reconsideration of the Court of Appeals decision, but the motion was denied.

Hence, the instant petition raising as issues for our resolution the following:

A. WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL AND NATIONAL INTERNAL REVENUE TAXES PROVIDED IN
REPUBLIC ACT NO. 7227 COVERS THE VALUE ADDED TAX PAID BY PETITIONER, A SUBIC BAY FREEPORT
ENTERPRISE ON ITS PURCHASES OF SUPPLIES AND MATERIALS.

B. WHETHER OR NOT THE COURT OF TAX APPEALS CORRECTLY HELD THAT PETITIONER IS ENTITLED TO A TAX
CREDIT OR REFUND OF THE VAT PAID ON ITS PURCHASES OF SUPPLIES AND RAW MATERIALS FOR THE YEARS
1997 AND 1998.16

Simply stated, we shall resolve now the issues concerning: (1) the correctness of the finding of the Court of Appeals that the VAT
exemption embodied in Rep. Act No. 7227 does not apply to petitioner as a purchaser; and (2) the entitlement of the petitioner to a tax
refund on its purchases of supplies and raw materials for 1997 and 1998.

On the first issue, petitioner argues that the appellate court’s restrictive interpretation of petitioner’s VAT exemption as limited to those
covered by Section 107 of the Tax Code is erroneous and devoid of legal basis. It contends that the provisions of Rep. Act No. 7227
clearly and unambiguously mandate that no local and national taxes shall be imposed upon SBFZ-registered firms and hence, said law
should govern the case. Petitioner calls our attention to regulations issued by both the SBMA and BIR clearly and categorically
providing that the tax exemption provided for by Rep. Act No. 7227 includes exemption from the imposition of VAT on purchases of
supplies and materials.
I. VAT IN GENERAL

The respondent takes the diametrically opposite view that while Rep. Act No. 7227 does grant tax exemptions, such grant is not all-
encompassing but is limited only to those taxes for which a SBFZ-registered business may be directly liable. Hence, SBFZ locators are
not relieved from the indirect taxes that may be shifted to them by a VAT-registered seller.

At this juncture, it must be stressed that the VAT is an indirect tax. As such, the amount of tax paid on the goods, properties or services
bought, transferred, or leased may be shifted or passed on by the seller, transferor, or lessor to the buyer, transferee or lessee. 17 Unlike
a direct tax, such as the income tax, which primarily taxes an individual’s ability to pay based on his income or net wealth, an indirect
tax, such as the VAT, is a tax on consumption of goods, services, or certain transactions involving the same. The VAT, thus, forms a
substantial portion of consumer expenditures.

Further, in indirect taxation, there is a need to distinguish between the liability for the tax and the burden of the tax. As earlier pointed
out, the amount of tax paid may be shifted or passed on by the seller to the buyer. What is transferred in such instances is not the
liability for the tax, but the tax burden. In adding or including the VAT due to the selling price, the seller remains the person primarily and
legally liable for the payment of the tax. What is shifted only to the intermediate buyer and ultimately to the final purchaser is the burden
of the tax.18 Stated differently, a seller who is directly and legally liable for payment of an indirect tax, such as the VAT on goods or
services is not necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser or consumer of such
goods or services who, although not directly and legally liable for the payment thereof, ultimately bears the burden of the tax.19

Exemptions from VAT are granted by express provision of the Tax Code or special laws. Under VAT, the transaction can have
preferential treatment in the following ways:

(a) VAT Exemption. An exemption means that the sale of goods or properties and/or services and the use or lease of
properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax) previously
paid.20 This is a case wherein the VAT is removed at the exempt stage (i.e., at the point of the sale, barter or exchange of the
goods or properties).

The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the
said transaction is not subject to VAT. On the other hand, a VAT-registered purchaser of VAT-exempt goods/properties or
services which are exempt from VAT is not entitled to any input tax on such purchase despite the issuance of a VAT invoice or
receipt.21

(b) Zero-rated Sales. These are sales by VAT-registered persons which are subject to 0% rate, meaning the tax burden is not
passed on to the purchaser. A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT purposes,
shall not result in any output tax. However, the input tax on his purchases of goods, properties or services related to such zero-
rated sale shall be available as tax credit or refund in accordance with these regulations.22

Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm. In contrast, exemption only removes the VAT at the
exempt stage, and it will actually increase, rather than reduce the total taxes paid by the exempt firm’s business or non-retail
customers. It is for this reason that a sharp distinction must be made between zero-rating and exemption in designating a value-added
tax.23

Apropos, the petitioner’s claim to VAT exemption in the instant case for its purchases of supplies and raw materials is founded mainly
on Section 12 (b) and (c) of Rep. Act No. 7227, which basically exempts them from all national and local internal revenue taxes,
including VAT and Section 4 (A)(a) of BIR Revenue Regulations No. 1-95.24

On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is not controverted by the respondent. In fact, petitioner
is registered as a NON-VAT taxpayer per Certificate of Registration 25 issued by the BIR. As such, it is exempt from VAT on all its sales
and importations of goods and services.

Petitioner’s claim, however, for exemption from VAT for its purchases of supplies and raw materials is incongruous with its claim that it
is VAT-Exempt, for only VAT-Registered entities can claim Input VAT Credit/Refund.

The point of contention here is whether or not the petitioner may claim a refund on the Input VAT erroneously passed on to it by its
suppliers.

While it is true that the petitioner should not have been liable for the VAT inadvertently passed on to it by its supplier since such is a
zero-rated sale on the part of the supplier, the petitioner is not the proper party to claim such VAT refund.

Section 4.100-2 of BIR’s Revenue Regulations 7-95, as amended, or the "Consolidated Value-Added Tax Regulations" provide:
I. VAT IN GENERAL

Sec. 4.100-2. Zero-rated Sales. A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT purposes,
shall not result in any output tax. However, the input tax on his purchases of goods, properties or services related to such zero-
rated sale shall be available as tax credit or refund in accordance with these regulations.

The following sales by VAT-registered persons shall be subject to 0%:

(a) Export Sales

"Export Sales" shall mean

...

(5) Those considered export sales under Articles 23 and 77 of Executive Order No. 226, otherwise known as the
Omnibus Investments Code of 1987, and other special laws, e.g. Republic Act No. 7227, otherwise known as the
Bases Conversion and Development Act of 1992.

...

(c) Sales to persons or entities whose exemption under special laws, e.g. R.A. No. 7227 duly registered and accredited
enterprises with Subic Bay Metropolitan Authority (SBMA) and Clark Development Authority (CDA), R. A. No. 7916, Philippine
Economic Zone Authority (PEZA), or international agreements, e.g. Asian Development Bank (ADB), International Rice
Research Institute (IRRI), etc. to which the Philippines is a signatory effectively subject such sales to zero-rate."

Since the transaction is deemed a zero-rated sale, petitioner’s supplier may claim an Input VAT credit with no corresponding Output
VAT liability. Congruently, no Output VAT may be passed on to the petitioner.

On the second issue, it may not be amiss to re-emphasize that the petitioner is registered as a NON-VAT taxpayer and thus, is exempt
from VAT. As an exempt VAT taxpayer, it is not allowed any tax credit on VAT (input tax) previously paid. In fine, even if we are to
assume that exemption from the burden of VAT on petitioner’s purchases did exist, petitioner is still not entitled to any tax credit or
refund on the input tax previously paid as petitioner is an exempt VAT taxpayer.

Rather, it is the petitioner’s suppliers who are the proper parties to claim the tax credit and accordingly refund the petitioner of the VAT
erroneously passed on to the latter.

Accordingly, we find that the Court of Appeals did not commit any reversible error of law in holding that petitioner’s VAT exemption
under Rep. Act No. 7227 is limited to the VAT on which it is directly liable as a seller and hence, it cannot claim any refund or exemption
for any input VAT it paid, if any, on its purchases of raw materials and supplies.

WHEREFORE, the petition is DENIED for lack of merit. The Decision dated September 3, 2001, of the Court of Appeals in CA-G.R. SP
No. 62823, as well as its Resolution of December 19, 2001 are AFFIRMED. No pronouncement as to costs.

SO ORDERED.
I. VAT IN GENERAL

G.R. No. 125355 March 30, 2000

COMMISSIONER OF INTERNAL REVENUE, petitioner,


vs.
COURT OF APPEALS and COMMONWEALTH MANAGEMENT AND SERVICES CORPORATION, respondents.

PARDO, J.:

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

Commonwealth Management and Services Corporation (COMASERCO, for brevity), is a corporation duly organized and existing under
the laws of the Philippines. It is an affiliate of Philippine American Life Insurance Co. (Philamlife), organized by the letter to perform
collection, consultative and other technical services, including functioning as an internal auditor, of Philamlife and its other
affiliates.1âwphi1.nêt

On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an assessment to private respondent COMASERCO for deficiency
value-added tax (VAT) amounting to P351,851.01, for taxable year 1988, computed as follows:

P1,679,155.00
Taxable sale/receipt
============

10% tax due thereon 167,915.50

25% surcharge 41,978.88

20% interest per annum 125,936.63

Compromise penalty for late payment 16,000.00

3
TOTAL AMOUNT DUE AND COLLECTIBLE P351,831.01
============

COMASERCO's annual corporate income tax return ending December 31, 1988 indicated a net loss in its operations in the amount of
P6,077.00.

On February 10, 1992, COMASERCO filed with the BIR, a letter-protest objecting to the latter's finding of deficiency VAT. On August 20,
1992, the Commissioner of Internal Revenue sent a collection letter to COMASERCO demanding payment of the deficiency VAT.

On September 29, 1992, COMASERCO filed with the Court of Tax Appeals 4 a petition for review contesting the Commissioner's
assessment. COMASERCO asserted that the services it rendered to Philamlife and its affiliates, relating to collections, consultative and
other technical assistance, including functioning as an internal auditor, were on a "no-profit, reimbursement-of-cost-only" basis. It
averred that it was not engaged in the business of providing services to Philamlife and its affiliates. COMASERCO was established to
ensure operational orderliness and administrative efficiency of Philamlife and its affiliates, and not in the sale of services.
COMASERCO stressed that it was not profit-motivated, thus not engaged in business. In fact, it did not generate profit but suffered a
net loss in taxable year 1988. COMASERCO averred that since it was not engaged in business, it was not liable to pay VAT.

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

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

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

On July 26, 1995, respondent filed with the Court of Appeals, a petition for review of the decision of the Court of Appeals.

After due proceedings, on May 13, 1996, the Court of Appeals rendered decision reversing that of the Court of Tax Appeals, the
dispositive portion of which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered REVERSING and SETTING ASIDE the questioned
Decision promulgated on 22 June 1995. The assessment for deficiency value-added tax for the taxable year 1988 inclusive of
surcharge, interest and penalty charges are ordered CANCELLED for lack of legal and factual basis. 6

The Court of Appeals anchored its decision on the ratiocination in another tax case involving the same parties, 7where it was held that
COMASERCO was not liable to pay fixed and contractor's tax for services rendered to Philamlife and its affiliates. The Court of
Appeals, in that case, reasoned that COMASERCO was not engaged in business of providing services to Philamlife and its affiliates. In
the same manner, the Court of Appeals held that COMASERCO was not liable to pay VAT for it was not engaged in the business of
selling services.

On July 16, 1996, the Commissioner of Internal Revenue filed with this Court a petition for review on certiorariassailing the decision of
the Court of Appeals.

On August 7, 1996, we required respondent COMASERCO to file comment on the petition, and on September 26, 1996, COMASERCO
complied with the resolution.8

We give due course to the petition.

At issue in this case is whether COMASERCO was engaged in the sale of services, and thus liable to pay VAT thereon.

Petitioner avers that to "engage in business" and to "engage in the sale of services" are two different things. Petitioner maintains that
the services rendered by COMASERCO to Philamlife and its affiliates, for a fee or consideration, are subject to VAT. VAT is a tax on the
value added by the performance of the service. It is immaterial whether profit is derived from rendering the service.

We agree with the Commissioner.

Sec. 99 of the National Internal Revenue Code of 1986, as amended by Executive Order (E. O.) No. 273 in 1988, provides that:

Sec. 99. Persons liable. — Any person who, in the course of trade or business, sells, barters or exchanges goods, renders
services, or engages in similar transactions and any person who, imports goods shall be subject to the value-added tax (VAT)
imposed in Sections 100 to 102 of this Code. 9

COMASERCO contends that the term "in the course of trade or business" requires that the "business" is carried on with a view to profit
or livelihood. It avers that the activities of the entity must be profit-oriented. COMASERCO submits that it is not motivated by profit, as
defined by its primary purpose in the articles of incorporation, stating that it is operating "only on reimbursement-of-cost basis, without
any profit." Private respondent argues that profit motive is material in ascertaining who to tax for purposes of determining liability for
VAT.

We disagree.

On May 28, 1994, Congress enacted Republic Act No. 7716, the Expanded VAT Law (EVAT), amending among other sections, Section
99 of the Tax Code. On January 1, 1998, Republic Act 8424, the National Internal Revenue Code of 1997, took effect. The amended
law provides that:

Sec. 105. Persons Liable. — Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or
properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in
Sections 106 and 108 of this Code.

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of
the goods, properties or services. This rule shall likewise apply to existing sale or lease of goods, properties or services at the
time of the effectivity of Republic Act No. 7716.
I. VAT IN GENERAL

The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity,
including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a
nonstock, nonprofit organization (irrespective of the disposition of its net income and whether or not it sells exclusively to
members of their guests), or government entity.

The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by
nonresident foreign persons shall be considered as being rendered in the course of trade or business.

Contrary to COMASERCO's contention the above provision clarifies that even a non-stock, non-profit, organization or government
entity, is liable to pay VAT on the sale of goods or services. VAT is a tax on transactions, imposed at every stage of the distribution
process on the sale, barter, exchange of goods or property, and on the performance of services, even in the absence of profit
attributable thereto. The term "in the course of trade or business" requires the regular conduct or pursuit of a commercial or an
economic activity regardless of whether or not the entity is profit-oriented.

The definition of the term "in the course of trade or business" present law applies to all transactions even to those made prior to its
enactment. Executive Order No. 273 stated that any person who, in the course of trade or business, sells, barters or exchanges goods
and services, was already liable to pay VAT. The present law merely stresses that even a nonstock, nonprofit organization or
government entity is liable to pay VAT for the sale of goods and services.

Sec. 108 of the National Internal Revenue Code of 1997 10 defines the phrase "sale of services" as the "performance of all kinds of
services for others for a fee, remuneration or consideration." It includes "the supply of technical advice, assistance or services rendered
in connection with technical management or administration of any scientific, industrial or commercial undertaking or project." 11

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

Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments for services rendered to its
affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of determining liability for VAT on services
rendered. As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to
VAT.1awp++i1

At any rate, it is a rule that because taxes are the lifeblood of the nation, statutes that allow exemptions are construed strictly against
the grantee and liberally in favor of the government. Otherwise stated, any exemption from the payment of a tax must be clearly stated
in the language of the law; it cannot be merely implied therefrom. 13 In the case of VAT, Section 109, Republic Act 8424 clearly
enumerates the transactions exempted from VAT. The services rendered by COMASERCO do not fall within the exemptions.

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

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

WHEREFORE, the Court GRANTS the petition and REVERSES the decision of the Court of Appeals in CA-G.R. SP No. 37930. The
Court hereby REINSTATES the decision of the Court of Tax Appeals in C. T. A. Case No. 4853.

No costs.

SO ORDERED.1âwphi1.nêt
I. VAT IN GENERAL
II. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

G.R. No. 152609 June 29, 2005

COMMISSIONER OF INTERNAL REVENUE vs.


AMERICAN EXPRESS INTERNATIONAL, INC. (PHILIPPINE BRANCH), Respondent.

DECISION

PANGANIBAN, J.:

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

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the February 28, 2002 Decision 2of the Court of
Appeals (CA) in CA-GR SP No. 62727. The assailed Decision disposed as follows:

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

The Facts

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

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

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

Exhibit Period Covered Date Filed


D 1997 1st Qtr. April 18, 1997
F 2nd Qtr. July 21, 1997
G 3rd Qtr. October 2, 1997
H 4th Qtr. January 20, 1998

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

Exh 1997 Taxable Sales Output Zero-rated Domestic Input


VAT Sales Purchases VAT
I 1st qtr ₱59,597.20 ₱5,959.72 ₱17,513,801.11 ₱6,778,182.30 ₱677,818.23
J 2nd qtr 67,517.20 6,751.72 17,937,361.51 9,333,242.90 933,324.29
K 3rd qtr 51,936.60 5,193.66 19,627,245.36 8,438,357.00 843,835.70
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

L 4th qtr 67,994.30 6,799.43 25,231,225.22 13,080,822.10 1,308,082.21

Total ₱247,045.30 ₱24,704.53 ₱80,309,633.20 ₱37,630,604.30 ₱3,763,060.43

"On April 13, 1999, [respondent] filed with the BIR a letter-request for the refund of its 1997 excess input taxes in the amount of
₱3,751,067.04, which amount was arrived at after deducting from its total input VAT paid of ₱3,763,060.43 its applied output VAT
liabilities only for the third and fourth quarters of 1997 amounting to ₱5,193.66 and ₱6,799.43, respectively. [Respondent] cites as basis
therefor, Section 110 (B) of the 1997 Tax Code, to state:

‘Section 110. Tax Credits. -

xxxxxxxxx

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

"There being no immediate action on the part of the [petitioner], [respondent’s] petition was filed on April 15, 1999.

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

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

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

(1) x x x

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"From the foregoing, the [CTA], through the Presiding Judge Ernesto D. Acosta rendered a decision 7 in favor of the herein respondent
holding that its services are subject to zero-rate pursuant to Section 108(b) of the Tax Reform Act of 1997 and Section 4.102-2 (b)(2) of
Revenue Regulations 5-96, the decretal portion of which reads as follows:

‘WHEREFORE, in view of all the foregoing, this Court finds the [petition] meritorious and in accordance with law.
Accordingly, [petitioner] is hereby ORDERED to REFUND to [respondent] the amount of ₱3,352,406.59 representing
the latter’s excess input VAT paid for the year 1997.’"8

Ruling of the Court of Appeals

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

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

Hence, this Petition.9


III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

The Issue

Petitioner raises this sole issue for our consideration:

"Whether or not the Court of Appeals committed reversible error in holding that respondent is entitled to the refund of the amount of
₱3,352,406.59 allegedly representing excess input VAT for the year 1997."10

The Court’s Ruling

The Petition is unmeritorious.

Sole Issue:

Entitlement to Tax Refund

Section 102 of the Tax Code11 provides:

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

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

xxxxxxxxx

‘(3) The supply of x x x commercial knowledge or information;

‘(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or
enjoyment of x x x any such knowledge or information as is mentioned in subparagraph (3);

xxxxxxxxx

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

xxxxxxxxx

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

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

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

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

xxxxxxxxx

Zero Rating of "Other" Services


III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

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

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

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

The Credit Card System and Its Components

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

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

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

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

In the present case, respondent’s role in the consumer credit 26 process described above primarily consists of gathering the bills and
credit card drafts of different service establishments located in the Philippines and forwarding them to the ROCs outside the country.
Servicing the bill is not the same as billing. For the former type of service alone, respondent already gets paid.

The parent company -- to which the ROCs and respondent belong -- takes charge not only of redeeming the drafts from the ROCs and
sending the checks to the service establishments, but also of billing the credit card holders for their respective drafts that it has
redeemed. While it usually imposes finance charges 27 upon the holders, none may be exacted by respondent upon either the ROCs or
the card holders.

Branch and Home Office

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

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

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

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

VAT Requirements for the Supply of Service

The VAT is a tax on consumption41 "expressed as a percentage of the value added to goods or services" 42purchased by the producer or
taxpayer.43 As an indirect tax44 on services,45 its main object is the transaction 46itself or, more concretely, the performance of all kinds of
services47 conducted in the course of trade or business in the Philippines. 48 These services must be regularly conducted in this country;
undertaken in "pursuit of a commercial or an economic activity;"49 for a valuable consideration; and not exempt under the Tax Code,
other special laws, or any international agreement.50

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

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

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

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

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

Services Subject to Zero VAT

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

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

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

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

Respondent’s Services Exempt from the Destination Principle

However, the law clearly provides for an exception to the destination principle; that is, for a zero percent VAT rate for services that
are performed in the Philippines, "paid for in acceptable foreign currency and accounted for in accordance with the rules and
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

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

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

Performance of Service versus Product Arising from Performance

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

Tax Situs of a Zero-Rated Service

The law neither makes a qualification nor adds a condition in determining the tax situs of a zero-rated service. Under this criterion, the
place where the service is rendered determines the jurisdiction 60 to impose the VAT.61 Performed in the Philippines, such service is
necessarily subject to its jurisdiction,62 for the State necessarily has to have "a substantial connection"63 to it, in order to enforce a zero
rate.64 The place of payment is immaterial;65 much less is the place where the output of the service will be further or ultimately used.

Statutory Construction or Interpretation Unnecessary

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

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

No Qualifications Under RR 5-87

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

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

xxxxxxxxx

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

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

xxxxxxxxx

‘(3) Services performed in the Philippines other than those mentioned in subparagraph (1) above which are paid for by the person or
entity to whom the service is rendered in acceptable foreign currency inwardly remitted and duly accounted for in accordance with
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

Central Bank regulations. Where the contract involves payment in both foreign and local currency, only the service corresponding to
that paid in foreign currency shall enjoy zero-rating. The portion paid for in local currency shall be subject to VAT at the rate of 10%.’"

RR 7-95 Broad Enough

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

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

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

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

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

xxxxxxxxx

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

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

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

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

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

Ejusdem Generis Inapplicable

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

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

Second, there is the regulatory intent to give the general phrase "and other similar services" a broader meaning. 73 Clearly, the
preceding phrase "as well as" is not meant to limit the effect of "and other similar services."
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

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

VAT Ruling Nos. 040-98 and 080-89

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

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

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

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

It is also basic in law that "no x x x rule x x x shall be given retrospective effect 85 unless explicitly stated."86 No indication of such
retroactive application to respondent does the Court find in VAT Ruling No. 040-98. Neither do the exceptions enumerated in Section
24687 of the Tax Code apply.

Though vested with the power to interpret the provisions of the Tax Code 88 and not bound by predecessors’ acts or rulings, the BIR
commissioner may render a different construction to a statute89 only if the new interpretation is in congruence with the law. Otherwise,
no amount of interpretation can ever revoke, repeal or modify what the law says.

"Consumed Abroad" Not Required by Legislature

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

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

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

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

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

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

"Now, when we say ‘services other than those mentioned in the preceding subsection[,’] may I have some examples of these?

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


III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

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

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

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

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

"Senator Herrera: I guess it can be interpreted that way, although this tourist guide should also be considered as among the
professionals. If they earn more than ₱200,000, they should be covered.

xxxxxxxxx

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

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

"Senator Maceda: That is right."90

Legislative Approval By Reenactment

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

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

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

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

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

SO ORDERED.
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

G.R. No. 153205 January 22, 2007

COMMISSIONER OF INTERNAL REVENUE vs.


BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR MINDANAO, INC.

DECISION

CARPIO, J.:

The Case

This petition for review1 seeks to set aside the 16 April 2002 Decision2 of the Court of Appeals in CA-G.R. SP No. 66341 affirming the 8
August 2001 Decision3 of the Court of Tax Appeals (CTA). The CTA ordered the Commissioner of Internal Revenue (petitioner) to issue
a tax credit certificate for P6,994,659.67 in favor of Burmeister and Wain Scandinavian Contractor Mindanao, Inc. (respondent).

The Antecedents

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

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

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

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

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

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

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

For the year 1996, [respondent] seasonably filed its quarterly Value-Added Tax Returns reflecting, among others, a total zero-rated
sales of P147,317,189.62 with VAT input taxes of P3,361,174.14, detailed as follows:

Qtr. Exh. Date Filed Zero-Rated Sales VAT Input Tax

1st E 04-18-96 P 33,019,651.07 P608,953.48


2nd F 07-16-96 37,108,863.33 756,802.66
3rd G 10-14-96 34,196,372.35 930,279.14
4th H 01-20-97 42,992,302.87 1,065,138.86
Totals
P147,317,189.62 P3,361,174.14
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

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

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

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

x x x x x x x x x x.

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

Amount subject to 10% VAT P103,558,338.11

Multiply by 10%

VAT Output Tax P 10,355,833.81

Less: 1996 Input VAT P 3,361,174.14

VAT Output Tax Payable P 6,994,659.67

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

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

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

The Ruling of the Court of Tax Appeals

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

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

xxxx

The zero-rating of [respondent’s] sale of services to the Consortium was even confirmed by the [petitioner] in BIR Ruling No. 023-95
dated February 15, 1995, and later by VAT Ruling No. 003-99 dated January 7,1999, x x x.
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

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

x x x Considering the principle of solutio indebiti which requires the return of what has been delivered by mistake, the [petitioner] is
obligated to issue the tax credit certificate prayed for by [respondent]. x x x5

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

Hence, this petition.

The Court of Appeals’ Ruling

In affirming the CTA, the Court of Appeals rejected petitioner’s view that since respondent’s services are not destined for consumption
abroad, they are not of the same nature as project studies, information services, engineering and architectural designs, and other
similar services mentioned in Section 4.102-2(b)(2) of Revenue Regulations No. 5-967 as subject to 0% VAT. Thus, according to
petitioner, respondent’s services cannot legally qualify for 0% VAT but are subject to the regular 10% VAT.8

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

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

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

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

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

The Issue

The lone issue for resolution is whether respondent is entitled to the refund of P6,994,659.67 as erroneously paid output VAT for the
year 1996.16

The Ruling of the Court

We deny the petition.

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

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

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

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

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

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

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

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

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

Respondent is mistaken.

The Tax Code not only requires that the services be other than "processing, manufacturing or repacking of goods" and that payment for
such services be in acceptable foreign currency accounted for in accordance with BSP rules. Another essential condition for
qualification to zero-rating under Section 102(b)(2) is that the recipient of such services is doing business outside the Philippines. While
this requirement is not expressly stated in the second paragraph of Section 102(b), this is clearly provided in the first paragraph of
Section 102(b) where the listed services must be "for other persons doing business outside the Philippines." The phrase "for other
persons doing business outside the Philippines" not only refers to the services enumerated in the first paragraph of Section 102(b), but
also pertains to the general term "services" appearing in the second paragraph of Section 102(b). In short, services other than
processing, manufacturing, or repacking of goods must likewise be performed for persons doing business outside the Philippines.

This can only be the logical interpretation of Section 102(b)(2). If the provider and recipient of the "other services" are both doing
business in the Philippines, the payment of foreign currency is irrelevant. Otherwise, those subject to the regular VAT under Section
102(a) can avoid paying the VAT by simply stipulating payment in foreign currency inwardly remitted by the recipient of services. To
interpret Section 102(b)(2) to apply to a payer-recipient of services doing business in the Philippines is to make the payment of the
regular VAT under Section 102(a) dependent on the generosity of the taxpayer. The provider of services can choose to pay the regular
VAT or avoid it by stipulating payment in foreign currency inwardly remitted by the payer-recipient. Such interpretation removes Section
102(a) as a tax measure in the Tax Code, an interpretation this Court cannot sanction. A tax is a mandatory exaction, not a voluntary
contribution.

When Section 102(b)(2) stipulates payment in "acceptable foreign currency" under BSP rules, the law clearly envisions the payer-
recipient of services to be doing business outside the Philippines. Only those not doing business in the Philippines can be required
under BSP rules20 to pay in acceptable foreign currency for their purchase of goods or services from the Philippines. In a domestic
transaction, where the provider and recipient of services are both doing business in the Philippines, the BSP cannot require any party to
make payment in foreign currency.

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

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

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

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

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

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

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

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

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

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

Respondent [American Express International, Inc. (Philippine Branch)] is a VAT-registered person that facilitates the collection and
payment of receivables belonging to its non-resident foreign client [American Express International, Inc. (Hongkong Branch)], for which
it gets paid in acceptable foreign currency inwardly remitted and accounted for in accordance with BSP rules and regulations. x x x
x27 (Emphasis supplied)

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

Nevertheless, in seeking a refund of its excess output tax, respondent relied on VAT Ruling No. 003-99, 28 which reconfirmed BIR Ruling
No. 023-9529 "insofar as it held that the services being rendered by BWSCMI is subject to VAT at zero percent (0%)." Respondent’s
reliance on these BIR rulings binds petitioner.
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

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

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

WHEREFORE, the Court DENIES the petition.

SO ORDERED.
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

G.R. No. 147295 February 16, 2007

THE COMMISIONER OF INTERNAL REVENUE, vs.


ACESITE (PHILIPPINES) HOTEL CORPORATION

DECISION

VELASCO, JR., J.:

The Case

Before us is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, assailing the November 17, 2000 Decision2 of the
Court of Appeals (CA) in CA-G.R. SP No. 56816, which affirmed the January 3, 2000 Decision 3 of the Court of Tax Appeals (CTA) in
CTA Case No. 5645 entitled Acesite (Philippines) Hotel Corporation v. The Commissioner of Internal Revenue for Refund of VAT
Payments.

The Facts

The facts as found by the appellate court are undisputed, thus:

Acesite is the owner and operator of the Holiday Inn Manila Pavilion Hotel along United Nations Avenue in Manila. It leases 6,768.53
square meters of the hotel’s premises to the Philippine Amusement and Gaming Corporation [hereafter, PAGCOR] for casino
operations. It also caters food and beverages to PAGCOR’s casino patrons through the hotel’s restaurant outlets. For the period
January (sic) 96 to April 1997, Acesite incurred VAT amounting to P30,152,892.02 from its rental income and sale of food and
beverages to PAGCOR during said period. Acesite tried to shift the said taxes to PAGCOR by incorporating it in the amount assessed
to PAGCOR but the latter refused to pay the taxes on account of its tax exempt status.1awphi1.net

Thus, PAGCOR paid the amount due to Acesite minus the P30,152,892.02 VAT while the latter paid the VAT to the Commissioner of
Internal Revenue [hereafter, CIR] as it feared the legal consequences of non-payment of the tax. However, Acesite belatedly arrived at
the conclusion that its transaction with PAGCOR was subject to zero rate as it was rendered to a tax-exempt entity. On 21 May 1998,
Acesite filed an administrative claim for refund with the CIR but the latter failed to resolve the same. Thus on 29 May 1998, Acesite filed
a petition with the Court of Tax Appeals [hereafter, CTA] which was decided in this wise:

As earlier stated, Petitioner is subject to zero percent tax pursuant to Section 102 (b)(3) [now 106(A)(C)] insofar as its gross income
from rentals and sales to PAGCOR, a tax exempt entity by virtue of a special law. Accordingly, the amounts of P21,413,026.78 and
P8,739,865.24, representing the 10% EVAT on its sales of food and services and gross rentals, respectively from PAGCOR shall, as a
matter of course, be refunded to the petitioner for having been inadvertently remitted to the respondent.

Thus, taking into consideration the prescribed portion of Petitioner’s claim for refund of P98,743.40, and considering further the
principle of ‘solutio indebiti’ which requires the return of what has been delivered through mistake, Respondent must refund to the
Petitioner the amount of P30,054,148.64 computed as follows:

Total amount per claim 30,152,892.02


Less Prescribed amount (Exhs A, X, & X-20)
January 1996 P 2,199.94
February 1996 26,205.04
March 1996 70,338.42 98,743.40

P30,054,148.64
vvvvvvvvvvvvvv

WHEREFORE, in view of all the foregoing, the instant Petition for Review is partially GRANTED. The Respondent is hereby ORDERED
to REFUND to the petitioner the amount of THIRTY MILLION FIFTY FOUR THOUSAND ONE HUNDRED FORTY EIGHT PESOS AND
SIXTY FOUR CENTAVOS (P30,054,148.64) immediately.
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

SO ORDERED.4

The Ruling of the Court of Appeals

Upon appeal by petitioner, the CA affirmed in toto the decision of the CTA holding that PAGCOR was not only exempt from direct taxes
but was also exempt from indirect taxes like the VAT and consequently, the transactions between respondent Acesite and PAGCOR
were "effectively zero-rated" because they involved the rendition of services to an entity exempt from indirect taxes. Thus, the CA
affirmed the CTA’s determination by ruling that respondent Acesite was entitled to a refund of PhP 30,054,148.64 from petitioner.

The Issues

Hence, we have the instant petition with the following issues: (1) whether PAGCOR’s tax exemption privilege includes the indirect tax of
VAT to entitle Acesite to zero percent (0%) VAT rate; and (2) whether the zero percent (0%) VAT rate under then Section 102 (b)(3) of
the Tax Code (now Section 108 (B)(3) of the Tax Code of 1997) legally applies to Acesite.

The petition is devoid of merit.

In resolving the first issue on whether PAGCOR’s tax exemption privilege includes the indirect tax of VAT to entitle Acesite to zero
percent (0%) VAT rate, we answer in the affirmative. We will however discuss both issues together.

PAGCOR is exempt from payment of indirect taxes

It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter an exemption from the payment of taxes. Section 13 of
P.D. 1869 pertinently provides:

Sec. 13. Exemptions. –

xxxx

(2) Income and other taxes. – (a) Franchise Holder: No tax of any kind or form, income or otherwise, as well as fees, charges or
levies of whatever nature, whether National or Local, shall be assessed and collected under this Franchise from the
Corporation; nor shall any form of tax or charge attach in any way to the earnings of the Corporation, except a Franchise Tax of
five (5%) percent of the gross revenue or earnings derived by the Corporation from its operation under this Franchise. Such tax shall be
due and payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind,
nature or description, levied, established or collected by any municipal, provincial, or national government authority.

xxxx

(b) Others: The exemptions herein granted for earnings derived from the operations conducted under the franchise specifically
from the payment of any tax, income or otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of
and extend to corporation(s), association(s), agency(ies), or individual(s) with whom the Corporation or operator has any
contractual relationship in connection with the operations of the casino(s) authorized to be conducted under this
Franchise and to those receiving compensation or other remuneration from the Corporation or operator as a result of essential facilities
furnished and/or technical services rendered to the Corporation or operator. (Emphasis supplied.)

Petitioner contends that the above tax exemption refers only to PAGCOR’s direct tax liability and not to indirect taxes, like the VAT.

We disagree.

A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes with no distinction on whether the taxes are
direct or indirect. We are one with the CA ruling that PAGCOR is also exempt from indirect taxes, like VAT, as follows:

Under the above provision [Section 13 (2) (b) of P.D. 1869], the term "Corporation" or operator refers to PAGCOR. Although the law
does not specifically mention PAGCOR’s exemption from indirect taxes, PAGCOR is undoubtedly exempt from such taxes because
the law exempts from taxes persons or entities contracting with PAGCOR in casino operations. Although, differently worded, the
provision clearly exempts PAGCOR from indirect taxes. In fact, it goes one step further by granting tax exempt status to persons
dealing with PAGCOR in casino operations. The unmistakable conclusion is that PAGCOR is not liable for the P30,152,892.02 VAT
and neither is Acesite as the latter is effectively subject to zero percent rate under Sec. 108 B (3). R.A. 8424. (Emphasis supplied.)
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

Indeed, by extending the exemption to entities or individuals dealing with PAGCOR, the legislature clearly granted exemption also from
indirect taxes. It must be noted that the indirect tax of VAT, as in the instant case, can be shifted or passed to the buyer, transferee, or
lessee of the goods, properties, or services subject to VAT. Thus, by extending the tax exemption to entities or individuals dealing with
PAGCOR in casino operations, it is exempting PAGCOR from being liable to indirect taxes.

The manner of charging VAT does not make PAGCOR liable to said tax

It is true that VAT can either be incorporated in the value of the goods, properties, or services sold or leased, in which case it is
computed as 1/11 of such value, or charged as an additional 10% to the value. Verily, the seller or lessor has the option to follow either
way in charging its clients and customer. In the instant case, Acesite followed the latter method, that is, charging an additional 10% of
the gross sales and rentals. Be that as it may, the use of either method, and in particular, the first method, does not denigrate the fact
that PAGCOR is exempt from an indirect tax, like VAT.

VAT exemption extends to Acesite

Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by Acesite, the latter is not liable for the payment of it as it is
exempt in this particular transaction by operation of law to pay the indirect tax. Such exemption falls within the former Section 102 (b)
(3) of the 1977 Tax Code, as amended (now Sec. 108 [b] [3] of R.A. 8424), which provides:

Section 102. Value-added tax on sale of services – (a) Rate and base of tax – There shall be levied, assessed and collected, a value-
added tax equivalent to 10% of gross receipts derived by any person engaged in the sale of services x x x; Provided, that the following
services performed in the Philippines by VAT-registered persons shall be subject to 0%.

xxxx

(b) Transactions subject to zero percent (0%) rated.—

xxxx

(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the
Philippines is a signatory effectively subjects the supply of such services to zero (0%) rate (emphasis supplied).

The rationale for the exemption from indirect taxes provided for in P.D. 1869 and the extension of such exemption to entities or
individuals dealing with PAGCOR in casino operations are best elucidated from the 1987 case of Commissioner of Internal Revenue v.
John Gotamco & Sons, Inc.,5 where the absolute tax exemption of the World Health Organization (WHO) upon an international
agreement was upheld. We held in said case that the exemption of contractee WHO should be implemented to mean that the entity or
person exempt is the contractor itself who constructed the building owned by contractee WHO, and such does not violate the rule that
tax exemptions are personal because the manifest intention of the agreement is to exempt the contractor so that no contractor’s
tax may be shifted to the contractee WHO. Thus, the proviso in P.D. 1869, extending the exemption to entities or individuals dealing
with PAGCOR in casino operations, is clearly to proscribe any indirect tax, like VAT, that may be shifted to PAGCOR.

Acesite paid VAT by mistake

Considering the foregoing discussion, there are undoubtedly erroneous payments of the VAT pertaining to the effectively zero-rate
transactions between Acesite and PAGCOR. Verily, Acesite has clearly shown that it paid the subject taxes under a mistake of fact, that
is, when it was not aware that the transactions it had with PAGCOR were zero-rated at the time it made the payments. In UST
Cooperative Store v. City of Manila,6 we explained that "there is erroneous payment of taxes when a taxpayer pays under a mistake of
fact, as for the instance in a case where he is not aware of an existing exemption in his favor at the time the payment was made." 7 Such
payment is held to be not voluntary and, therefore, can be recovered or refunded.8

Moreover, it must be noted that aside from not raising the issue of Acesite’s compliance with pertinent Revenue Regulations on
exemptions during the proceedings in the CTA, it cannot be gainsaid that Acesite should have done so as it paid the VAT under a
mistake of fact. Hence, petitioner’s argument on this point is utterly tenuous.

Solutio indebiti applies to the Government

Tax refunds are based on the principle of quasi-contract or solutio indebiti and the pertinent laws governing this principle are found in
Arts. 2142 and 2154 of the Civil Code, which provide, thus:

Art. 2142. Certain lawful, voluntary, and unilateral acts give rise to the juridical relation of quasi-contract to the end that no one shall be
unjustly enriched or benefited at the expense of another.
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

Art. 2154. If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to
return it arises.

When money is paid to another under the influence of a mistake of fact, that is to say, on the mistaken supposition of the existence of a
specific fact, where it would not have been known that the fact was otherwise, it may be recovered. The ground upon which the right of
recovery rests is that money paid through misapprehension of facts belongs in equity and in good conscience to the person who paid
it.9

The Government comes within the scope of solutio indebiti principle as elucidated in Commissioner of Internal Revenue v. Fireman’s
Fund Insurance Company, where we held that: "Enshrined in the basic legal principles is the time-honored doctrine that no person shall
unjustly enrich himself at the expense of another. It goes without saying that the Government is not exempted from the application of
this doctrine."10

Action for refund strictly construed; Acesite discharged the burden of proof

Since an action for a tax refund partakes of the nature of an exemption, which cannot be allowed unless granted in the most explicit
and categorical language, it is strictly construed against the claimant who must discharge such burden convincingly. 11 In the instant
case, respondent Acesite had discharged this burden as found by the CTA and the CA. Indeed, the records show that Acesite proved its
actual VAT payments subject to refund, as attested to by an independent Certified Public Accountant who was duly commissioned by
the CTA. On the other hand, petitioner never disputed nor contested respondent’s testimonial and documentary evidence. In fact,
petitioner never presented any evidence on its behalf.

One final word. The BIR must release the refund to respondent without any unreasonable delay. Indeed, fair dealing is expected by our
taxpayers from the BIR and this duty demands that the BIR should refund without any unreasonable delay what it has erroneously
collected.12

WHEREFORE, the petition is DENIED for lack of merit and the November 17, 2000 Decision of the CA is hereby AFFIRMED. No costs.

SO ORDERED.
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

G.R. No. 153866 February 11, 2005

COMMISSIONER OF INTERNAL REVENUE, petitioner,


vs.
SEAGATE TECHNOLOGY (PHILIPPINES), respondent.

DECISION

PANGANIBAN, J.:

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

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to set aside the May 27, 2002 Decision2 of the Court of
Appeals (CA) in CA-GR SP No. 66093. The decretal portion of the Decision reads as follows:

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

The Facts

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

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

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

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

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

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

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

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

7. No final action has been received by [respondent] from [petitioner] on [respondent’s] claim for VAT refund.

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

"For his part, [petitioner] x x x raised the following Special and Affirmative Defenses, to wit:
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

1. [Respondent’s] alleged claim for tax refund/credit is subject to administrative routinary investigation/examination by [petitioner’s]
Bureau;

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

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

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

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

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

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

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

Ruling of the Court of Appeals

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

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

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

Hence this Petition.5

Sole Issue

Petitioner submits this sole issue for our consideration:

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

The Court’s Ruling

The Petition is unmeritorious.

Sole Issue:

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


III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

No doubt, as a PEZA-registered enterprise within a special economic zone, 7 respondent is entitled to the fiscal incentives and
benefits8 provided for in either PD 669 or EO 226.10 It shall, moreover, enjoy all privileges, benefits, advantages or exemptions under
both Republic Act Nos. (RA) 722711 and 7844.12

Preferential Tax Treatment Under Special Laws

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

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

A privilege available to respondent under the provision in RA 7227 on tax and duty-free importation of raw materials, capital and
equipment18 -- is, ipso facto, also accorded to the zone 19 under RA 7916. Furthermore, the latter law -- notwithstanding other existing
laws, rules and regulations to the contrary -- extends 20 to that zone the provision stating that no local or national taxes shall be imposed
therein.21 No exchange control policy shall be applied; and free markets for foreign exchange, gold, securities and future shall be
allowed and maintained.22 Banking and finance shall also be liberalized under minimum Bangko Sentral regulation with the
establishment of foreign currency depository units of local commercial banks and offshore banking units of foreign banks.23

In the same vein, respondent benefits under RA 7844 from negotiable tax credits 24 for locally-produced materials used as inputs. Aside
from the other incentives possibly already granted to it by the Board of Investments, it also enjoys preferential credit facilities 25 and
exemption from PD 1853.26

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

Nature of the VAT and the Tax Credit Method

Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent levied on every importation of goods,
whether or not in the course of trade or business, or imposed on each sale, barter, exchange or lease of goods or properties or on each
rendition of services in the course of trade or business 29 as they pass along the production and distribution chain, the tax being limited
only to the value added30 to such goods, properties or services by the seller, transferor or lessor. 31 It is an indirect tax that may be shifted
or passed on to the buyer, transferee or lessee of the goods, properties or services.32 As such, it should be understood not in the
context of the person or entity that is primarily, directly and legally liable for its payment, but in terms of its nature as a tax on
consumption.33 In either case, though, the same conclusion is arrived at.

The law34 that originally imposed the VAT in the country, as well as the subsequent amendments of that law, has been drawn from
the tax credit method.35 Such method adopted the mechanics and self-enforcement features of the VAT as first implemented and
practiced in Europe and subsequently adopted in New Zealand and Canada. 36 Under the present method that relies on invoices, an
entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports.37

If at the end of a taxable quarter the output taxes38 charged by a seller39 are equal to the input taxes40 passed on by the suppliers, no
payment is required. It is when the output taxes exceed the input taxes that the excess has to be paid. 41 If, however, the input taxes
exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters. 42 Should the input taxes result from
zero-rated or effectively zero-rated transactions or from the acquisition of capital goods,43 any excess over the output taxes shall instead
be refunded44 to the taxpayer or credited45 against other internal revenue taxes.46

Zero-Rated and Effectively Zero-Rated Transactions

Although both are taxable and similar in effect, zero-rated transactions differ from effectively zero-rated transactions as to their source.
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

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

Effectively zero-rated transactions, however, refer to the sale of goods50 or supply of services51 to persons or entities whose exemption
under special laws or international agreements to which the Philippines is a signatory effectively subjects such transactions to a zero
rate.52 Again, as applied to the tax base, such rate does not yield any tax chargeable against the purchaser. The seller who charges
zero output tax on such transactions can also claim a refund of or a tax credit certificate for the VAT previously charged by suppliers.

Zero Rating and Exemption

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

Applying the destination principle53 to the exportation of goods, automatic zero rating54 is primarily intended to be enjoyed by the seller
who is directly and legally liable for the VAT, making such seller internationally competitive by allowing the refund or credit of input taxes
that are attributable to export sales.55 Effective zero rating, on the contrary, is intended to benefit the purchaser who, not being directly
and legally liable for the payment of the VAT, will ultimately bear the burden of the tax shifted by the suppliers.

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

Exempt Transaction >and Exempt Party

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

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

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

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

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

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

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

Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero. Its exemption under both PD 66 and RA
7916 effectively subjects such transactions to a zero rate, 68 because the ecozone within which it is registered is managed and operated
by the PEZA as a separate customs territory.69 This means that in such zone is created the legal fiction of foreign territory. 70 Under
the cross-border principle71 of the VAT system being enforced by the Bureau of Internal Revenue (BIR), 72 no VAT shall be imposed to
form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. If exports of goods and
services from the Philippines to a foreign country are free of the VAT, 73 then the same rule holds for such exports from the national
territory -- except specifically declared areas -- to an ecozone.
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are considered exports to a foreign country;
conversely, sales by a PEZA-registered entity to a VAT-registered person in the customs territory are deemed imports from a foreign
country.74 An ecozone -- indubitably a geographical territory of the Philippines -- is, however, regarded in law as foreign soil. 75 This legal
fiction is necessary to give meaningful effect to the policies of the special law creating the zone.76 If respondent is located in an export
processing zone77 within that ecozone, sales to the export processing zone, even without being actually exported, shall in fact be
viewed as constructively exported under EO 226.78 Considered as export sales,79 such purchase transactions by respondent would
indeed be subject to a zero rate.80

Tax Exemptions Broad and Express

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

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

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

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

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

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

Third, foreign and domestic merchandise, raw materials, equipment and the like "shall not be subject to x x x internal revenue laws and
regulations" under PD 6683 -- the original charter of PEZA (then EPZA) that was later amended by RA 7916. 84 No provisions in the latter
law modify such exemption.

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

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

Fifth, export processing zone enterprises registered90 with the Board of Investments (BOI) under EO 226 patently enjoy exemption from
national internal revenue taxes on imported capital equipment reasonably needed and exclusively used for the manufacture of their
products;91 on required supplies and spare part for consigned equipment; 92 and on foreign and domestic merchandise, raw materials,
equipment and the like -- except those prohibited by law -- brought into the zone for manufacturing. 93 In addition, they are given credits
for the value of the national internal revenue taxes imposed on domestic capital equipment also reasonably needed and exclusively
used for the manufacture of their products,94 as well as for the value of such taxes imposed on domestic raw materials and supplies that
are used in the manufacture of their export products and that form part thereof.95

Sixth, the exemption from local and national taxes granted under RA 722796 are ipso facto accorded to ecozones.97In case of doubt,
conflicts with respect to such tax exemption privilege shall be resolved in favor of the ecozone.98

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

Tax Refund as Tax Exemption


III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

To be sure, statutes that grant tax exemptions are construed strictissimi juris102 against the taxpayer103 and liberally in favor of the taxing
authority.104

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

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

First, the contemporaneous construction of our tax laws by BIR authorities who are called upon to execute or administer such
laws109 will have to be adopted. Their prior tax issuances have held inconsistent positions brought about by their probable failure to
comprehend and fully appreciate the nature of the VAT as a tax on consumption and the application of the destination
principle.110 Revenue Memorandum Circular No. (RMC) 74-99, however, now clearly and correctly provides that any VAT-registered
supplier’s sale of goods, property or services from the customs territory to any registered enterprise operating in the ecozone --
regardless of the class or type of the latter’s PEZA registration -- is legally entitled to a zero rate.111

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

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

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

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

Wisely accorded to ecozones created under RA 7916117 was the government’s policy -- spelled out earlier in RA 7227 -- of converting
into alternative productive uses118 the former military reservations and their extensions,119 as well as of providing them incentives120 to
enhance the benefits that would be derived from them121 in promoting economic and social development.122

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

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

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

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

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

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

Moreover, the facts have already been determined by the lower courts. Having failed to present evidence to support its contentions
against the income tax holiday privilege of respondent,135 petitioner is deemed to have conceded. It is a cardinal rule that "issues and
arguments not adequately and seriously brought below cannot be raised for the first time on appeal." 136 This is a "matter of
procedure"137 and a "question of fairness."138 Failure to assert "within a reasonable time warrants a presumption that the party entitled to
assert it either has abandoned or declined to assert it."139

The BIR regulations additionally requiring an approved prior application for effective zero rating 140 cannot prevail over the clear VAT
nature of respondent’s transactions. The scope of such regulations is not "within the statutory authority x x x granted by the
legislature.141

First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the former cannot purport to do any more than
interpret the latter.142 The courts will not countenance one that overrides the statute it seeks to apply and implement.143

Other than the general registration of a taxpayer the VAT status of which is aptly determined, no provision under our VAT law requires
an additional application to be made for such taxpayer’s transactions to be considered effectively zero-rated. An effectively zero-rated
transaction does not and cannot become exempt simply because an application therefor was not made or, if made, was denied. To
allow the additional requirement is to give unfettered discretion to those officials or agents who, without fluid consideration, are bent on
denying a valid application. Moreover, the State can never be estopped by the omissions, mistakes or errors of its officials or agents.144

Second, grantia argumenti that such an application is required by law, there is still the presumption of regularity in the performance of
official duty.145 Respondent’s registration carries with it the presumption that, in the absence of contradictory evidence, an application for
effective zero rating was also filed and approval thereof given. Besides, it is also presumed that the law has been obeyed 146 by both the
administrative officials and the applicant.

Third, even though such an application was not made, all the special laws we have tackled exempt respondent not only from internal
revenue laws but also from the regulations issued pursuant thereto. Leniency in the implementation of the VAT in ecozones is an
imperative, precisely to spur economic growth in the country and attain global competitiveness as envisioned in those laws.

A VAT-registered status, as well as compliance with the invoicing requirements, 147 is sufficient for the effective zero rating of the
transactions of a taxpayer. The nature of its business and transactions can easily be perused from, as already clearly indicated in, its
VAT registration papers and photocopied documents attached thereto. Hence, its transactions cannot be exempted by its mere failure to
apply for their effective zero rating. Otherwise, their VAT exemption would be determined, not by their nature, but by the taxpayer’s
negligence -- a result not at all contemplated. Administrative convenience cannot thwart legislative mandate.

Tax Refund or Credit in Order

Having determined that respondent’s purchase transactions are subject to a zero VAT rate, the tax refund or credit is in order.

As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal incentives in EO 226 over those in RA 7916 and
PD 66. It opted for the income tax holiday regime instead of the 5 percent preferential tax regime.

The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA law, 148 for EO 226149 also has provisions to
contend with. These two regimes are in fact incompatible and cannot be availed of simultaneously by the same entity. While EO 226
merely exempts it from income taxes, the PEZA law exempts it from all taxes.

Therefore, respondent can be considered exempt, not from the VAT, but only from the payment of income tax for a certain number of
years, depending on its registration as a pioneer or a non-pioneer enterprise. Besides, the remittance of the aforesaid 5 percent of
gross income earned in lieu of local and national taxes imposable upon business establishments within the ecozone cannot outrightly
determine a VAT exemption. Being subject to VAT, payments erroneously collected thereon may then be refunded or credited.

Even if it is argued that respondent is subject to the 5 percent preferential tax regime in RA 7916, Section 24 thereof does not preclude
the VAT. One can, therefore, counterargue that such provision merely exempts respondent from taxes imposed on business. To repeat,
the VAT is a tax imposed on consumption, not on business. Although respondent as an entity is exempt, the transactions it enters into
are not necessarily so. The VAT payments made in excess of the zero rate that is imposable may certainly be refunded or credited.
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

Compliance with All Requisites for VAT Refund or Credit

As further enunciated by the Tax Court, respondent complied with all the requisites for claiming a VAT refund or credit.150

First, respondent is a VAT-registered entity. This fact alone distinguishes the present case from Contex, in which this Court held that the
petitioner therein was registered as a non-VAT taxpayer.151 Hence, for being merely VAT-exempt, the petitioner in that case cannot claim
any VAT refund or credit.

Second, the input taxes paid on the capital goods of respondent are duly supported by VAT invoices and have not been offset against
any output taxes. Although enterprises registered with the BOI after December 31, 1994 would no longer enjoy the tax credit incentives
on domestic capital equipment -- as provided for under Article 39(d), Title III, Book I of EO 226 152 -- starting January 1, 1996, respondent
would still have the same benefit under a general and express exemption contained in both Article 77(1), Book VI of EO 226; and
Section 12, paragraph 2 (c) of RA 7227, extended to the ecozones by RA 7916.

There was a very clear intent on the part of our legislators, not only to exempt investors in ecozones from national and local taxes, but
also to grant them tax credits. This fact was revealed by the sponsorship speeches in Congress during the second reading of House Bill
No. 14295, which later became RA 7916, as shown below:

"MR. RECTO. x x x Some of the incentives that this bill provides are exemption from national and local taxes; x x x tax credit for locally-
sourced inputs x x x."

xxxxxxxxx

"MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an environment conducive for investors, the bill
offers incentives such as the exemption from local and national taxes, x x x tax credits for locally sourced inputs x x x."153

And third, no question as to either the filing of such claims within the prescriptive period or the validity of the VAT returns has been
raised. Even if such a question were raised, the tax exemption under all the special laws cited above is broad enough to cover even the
enforcement of internal revenue laws, including prescription.154

Summary

To summarize, special laws expressly grant preferential tax treatment to business establishments registered and operating within an
ecozone, which by law is considered as a separate customs territory. As such, respondent is exempt from all internal revenue taxes,
including the VAT, and regulations pertaining thereto. It has opted for the income tax holiday regime, instead of the 5
percent preferential tax regime. As a matter of law and procedure, its registration status entitling it to such tax holiday can no longer be
questioned. Its sales transactions intended for export may not be exempt, but like its purchase transactions, they are zero-rated. No
prior application for the effective zero rating of its transactions is necessary. Being VAT-registered and having satisfactorily complied
with all the requisites for claiming a tax refund of or credit for the input VAT paid on capital goods purchased, respondent is entitled to
such VAT refund or credit.

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

SO ORDERED.
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

G.R. No. 150154. August 9, 2005

COMMISSIONER OF INTERNAL REVENUE, Petitioners,


vs.
TOSHIBA INFORMATION EQUIPMENT (PHILS.), INC., Respondent.

DECISION

CHICO-NAZARIO, J.:

In this Petition for Review under Rule 45 of the Rules of Court, petitioner Commissioner of Internal Revenue (CIR) prays for the reversal
of the decision of the Court of Appeals in CA-G.R. SP No. 59106, 1 affirming the order of the Court of Tax Appeals (CTA) in CTA Case
No. 5593,2 which ordered said petitioner CIR to refund or, in the alternative, to issue a tax credit certificate to respondent Toshiba
Information Equipment (Phils.), Inc. (Toshiba), in the amount of ₱16,188,045.44, representing unutilized input value-added tax (VAT)
payments for the first and second quarters of 1996.

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

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

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

Respondent Toshiba filed its VAT returns for the first and second quarters of taxable year 1996, reporting input VAT in the amount of
₱13,118,542.007 and ₱5,128,761.94,8 respectively, or a total of ₱18,247,303.94. It alleged that the said input VAT was from its
purchases of capital goods and services which remained unutilized since it had not yet engaged in any business activity or transaction
for which it may be liable for any output VAT. 9 Consequently, on 27 March 1998, respondent Toshiba filed with the One-Stop Shop Inter-
Agency Tax Credit and Duty Drawback Center of the Department of Finance (DOF) applications for tax credit/refund of its unutilized
input VAT for 01 January to 31 March 1996 in the amount of ₱14,176,601.28, 10 and for 01 April to 30 June 1996 in the amount of
₱5,161,820.79,11for a total of ₱19,338,422.07. To toll the running of the two-year prescriptive period for judicially claiming a tax
credit/refund, respondent Toshiba, on 31 March 1998, filed with the CTA a Petition for Review. It would subsequently file an Amended
Petition for Review on 10 November 1998 so as to conform to the evidence presented before the CTA during the hearings.

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

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

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

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

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

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

After evaluating the evidence submitted by respondent Toshiba,13 the CTA, in its Decision dated 10 March 2000, ordered petitioner CIR
to refund, or in the alternative, to issue a tax credit certificate to respondent Toshiba in the amount of ₱16,188,045.44.14

In a Resolution, dated 24 May 2000, the CTA denied petitioner CIR’s Motion for Reconsideration for lack of merit.15
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

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

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

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

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

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

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

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

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

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

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

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

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

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

...

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

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

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

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

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

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

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

It would seem that petitioner CIR failed to differentiate between VAT-exempt transactions from VAT-exempt entities. In the case
of Commissioner of Internal Revenue v. Seagate Technology (Philippines),19 this Court already made such distinction –

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

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

Section 103(q) of the Tax Code of 1977, as amended, relied upon by petitioner CIR, relates to VAT-exempt transactions. These are
transactions exempted from VAT by special laws or international agreements to which the Philippines is a signatory. Since such
transactions are not subject to VAT, the sellers cannot pass on any output VAT to the purchasers of goods, properties, or services, and
they may not claim tax credit/refund of the input VAT they had paid thereon.

Section 103(q) of the Tax Code of 1977, as amended, cannot apply to transactions of respondent Toshiba because although the said
section recognizes that transactions covered by special laws may be exempt from VAT, the very same section provides that those
falling under Presidential Decree No. 66 are not. Presidential Decree No. 66, creating the Export Processing Zone Authority (EPZA), is
the precursor of Rep. Act No. 7916, as amended,20 under which the EPZA evolved into the PEZA. Consequently, the exception of
Presidential Decree No. 66 from Section 103(q) of the Tax Code of 1977, as amended, extends likewise to Rep. Act No. 7916, as
amended.

This Court agrees, however, that PEZA-registered enterprises, which would necessarily be located within ECOZONES, are VAT-exempt
entities, not because of Section 24 of Rep. Act No. 7916, as amended, which imposes the five percent (5%) preferential tax rate on
gross income of PEZA-registered enterprises, in lieu of all taxes; but, rather, because of Section 8 of the same statute which
establishes the fiction that ECOZONES are foreign territory.

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

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

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

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

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

The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT shall be imposed to form part of the cost
of goods destined for consumption outside of the territorial border of the taxing authority. Hence, actual export of goods and services
from the Philippines to a foreign country must be free of VAT; while, those destined for use or consumption within the Philippines shall
be imposed with ten percent (10%) VAT.25

Applying said doctrine to the sale of goods, properties, and services to and from the ECOZONES, 26 the BIR issued Revenue
Memorandum Circular (RMC) No. 74-99, on 15 October 1999. Of particular interest to the present Petition is Section 3 thereof, which
reads –

SECTION 3. Tax Treatment Of Sales Made By a VAT Registered Supplier from The Customs Territory, To a PEZA Registered
Enterprise. –

(1) If the Buyer is a PEZA registered enterprise which is subject to the 5% special tax regime, in lieu of all taxes, except real property
tax, pursuant to R.A. No. 7916, as amended:

(a) Sale of goods (i.e., merchandise). – This shall be treated as indirect export hence, considered subject to zero percent (0%) VAT,
pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916, in relation to ART. 77(2) of the Omnibus Investments Code.

(b) Sale of service. – This shall be treated subject to zero percent (0%) VAT under the "cross border doctrine" of the VAT System,
pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998.

(2) If Buyer is a PEZA registered enterprise which is not embraced by the 5% special tax regime, hence, subject to taxes under the
NIRC, e.g., Service Establishments which are subject to taxes under the NIRC rather than the 5% special tax regime:

(a) Sale of goods (i.e., merchandise). – This shall be treated as indirect export hence, considered subject to zero percent (0%) VAT,
pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916 in relation to ART. 77(2) of the Omnibus Investments Code.

(b) Sale of Service. – This shall be treated subject to zero percent (0%) VAT under the "cross border doctrine" of the VAT System,
pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998.

(3) In the final analysis, any sale of goods, property or services made by a VAT registered supplier from the Customs Territory to any
registered enterprise operating in the ecozone, regardless of the class or type of the latter’s PEZA registration, is actually qualified and
thus legally entitled to the zero percent (0%) VAT. Accordingly, all sales of goods or property to such enterprise made by a VAT
registered supplier from the Customs Territory shall be treated subject to 0% VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC, in relation to
ART. 77(2) of the Omnibus Investments Code, while all sales of services to the said enterprises, made by VAT registered suppliers from
the Customs Territory, shall be treated effectively subject to the 0% VAT, pursuant to Section 108(B)(3), NIRC, in relation to the
provisions of R.A. No. 7916 and the "Cross Border Doctrine" of the VAT system.

This Circular shall serve as a sufficient basis to entitle such supplier of goods, property or services to the benefit of the zero percent
(0%) VAT for sales made to the aforementioned ECOZONE enterprises and shall serve as sufficient compliance to the requirement for
prior approval of zero-rating imposed by Revenue Regulations No. 7-95 effective as of the date of the issuance of this Circular.

Indubitably, no output VAT may be passed on to an ECOZONE enterprise since it is a VAT-exempt entity. The VAT treatment of sales to
it, however, varies depending on whether the supplier from the Customs Territory is VAT-registered or not.

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

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

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

II

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

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

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

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

"SEC. 4.100-2. Zero-rated sales. A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT purposes, shall
not result in any output tax. However, the input tax on his purchases of goods, properties or services related to such zero-rated sale
shall be available as tax credit or refund in accordance with these regulations."

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

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

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

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

According to the old rule, Section 23 of Rep. Act No. 7916, as amended, gives the PEZA-registered enterprise the option to choose
between two sets of fiscal incentives: (a) The five percent (5%) preferential tax rate on its gross income under Rep. Act No. 7916, as
amended; and (b) the income tax holiday provided under Executive Order No. 226, otherwise known as the Omnibus Investment Code
of 1987, as amended.31

The five percent (5%) preferential tax rate on gross income under Rep. Act No. 7916, as amended, is in lieu of all taxes. Except for real
property taxes, no other national or local tax may be imposed on a PEZA-registered enterprise availing of this particular fiscal incentive,
not even an indirect tax like VAT.

Alternatively, Book VI of Exec. Order No. 226, as amended, grants income tax holiday to registered pioneer and non-pioneer
enterprises for six-year and four-year periods, respectively.32 Those availing of this incentive are exempt only from income tax, but shall
be subject to all other taxes, including the ten percent (10%) VAT.

This old rule clearly did not take into consideration the Cross Border Doctrine essential to the VAT system or the fiction of the
ECOZONE as a foreign territory. It relied totally on the choice of fiscal incentives of the PEZA-registered enterprise. Again, for
emphasis, the old VAT rule for PEZA-registered enterprises was based on their choice of fiscal incentives: (1) If the PEZA-registered
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

enterprise chose the five percent (5%) preferential tax on its gross income, in lieu of all taxes, as provided by Rep. Act No. 7916, as
amended, then it would be VAT-exempt; (2) If the PEZA-registered enterprise availed of the income tax holiday under Exec. Order No.
226, as amended, it shall be subject to VAT at ten percent (10%). Such distinction was abolished by RMC No. 74-99, which
categorically declared that all sales of goods, properties, and services made by a VAT-registered supplier from the Customs Territory to
an ECOZONE enterprise shall be subject to VAT, at zero percent (0%) rate, regardless of the latter’s type or class of PEZA registration;
and, thus, affirming the nature of a PEZA-registered or an ECOZONE enterprise as a VAT-exempt entity.

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

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

Q-5: Under Revenue Memorandum Circular (RMC) No. 74-99, purchases by PEZA-registered firms automatically qualify as zero-rated
without seeking prior approval from the BIR effective October 1999.

1) Will the OSS-DOF Center still accept applications from PEZA-registered claimants who were allegedly billed VAT by their suppliers
before and during the effectivity of the RMC by issuing VAT invoices/receipts?

A-5(1): If the PEZA-registered enterprise is paying the 5% preferential tax in lieu of all other taxes, the said PEZA-registered taxpayer
cannot claim TCC or refund for the VAT paid on purchases. However, if the taxpayer is availing of the income tax holiday, it can claim
VAT credit provided:

a. The taxpayer-claimant is VAT-registered;

b. Purchases are evidenced by VAT invoices or receipts, whichever is applicable, with shifted VAT to the purchaser prior to the
implementation of RMC No. 74-99; and

c. The supplier issues a sworn statement under penalties of perjury that it shifted the VAT and declared the sales to the PEZA-
registered purchaser as taxable sales in its VAT returns.

For invoices/receipts issued upon the effectivity of RMC No. 74-99, the claims for input VAT by PEZA-registered companies, regardless
of the type or class of PEZA registration, should be denied.

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

III

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

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

of the CTA, affirmed by the Court of Appeals, that respondent Toshiba had indeed availed of the income tax holiday under Exec. Order
No. 226, as amended.

WHEREFORE, based on the foregoing, this Court AFFIRMS the decision of the Court of Appeals in CA-G.R. SP. No. 59106, and the
order of the CTA in CTA Case No. 5593, ordering said petitioner CIR to refund or, in the alternative, to issue a tax credit certificate to
respondent Toshiba, in the amount of ₱16,188,045.44, representing unutilized input VAT for the first and second quarters of 1996.

SO ORDERED.
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

G.R. No. 152609 June 29, 2005

COMMISSIONER OF INTERNAL REVENUE, Petitioner,


vs.
AMERICAN EXPRESS INTERNATIONAL, INC. (PHILIPPINE BRANCH), Respondent.

DECISION

PANGANIBAN, J.:

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

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the February 28, 2002 Decision 2of the Court of
Appeals (CA) in CA-GR SP No. 62727. The assailed Decision disposed as follows:

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

The Facts

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

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

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

Exhibit Period Covered Date Filed


D 1997 1st Qtr. April 18, 1997
F 2nd Qtr. July 21, 1997
G 3rd Qtr. October 2, 1997
H 4th Qtr. January 20, 1998

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

Exh 1997 Taxable Sales Output Zero-rated Domestic Input


VAT Sales Purchases VAT
I 1st qtr ₱59,597.20 ₱5,959.72 ₱17,513,801.11 ₱6,778,182.30 ₱677,818.23
J 2nd qtr 67,517.20 6,751.72 17,937,361.51 9,333,242.90 933,324.29
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

K 3rd qtr 51,936.60 5,193.66 19,627,245.36 8,438,357.00 843,835.70


L 4th qtr 67,994.30 6,799.43 25,231,225.22 13,080,822.10 1,308,082.21

Total ₱247,045.30 ₱24,704.53 ₱80,309,633.20 ₱37,630,604.30 ₱3,763,060.43

"On April 13, 1999, [respondent] filed with the BIR a letter-request for the refund of its 1997 excess input taxes in the amount of
₱3,751,067.04, which amount was arrived at after deducting from its total input VAT paid of ₱3,763,060.43 its applied output VAT
liabilities only for the third and fourth quarters of 1997 amounting to ₱5,193.66 and ₱6,799.43, respectively. [Respondent] cites as basis
therefor, Section 110 (B) of the 1997 Tax Code, to state:

‘Section 110. Tax Credits. -

xxxxxxxxx

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

"There being no immediate action on the part of the [petitioner], [respondent’s] petition was filed on April 15, 1999.

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

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

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

(1) x x x

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"From the foregoing, the [CTA], through the Presiding Judge Ernesto D. Acosta rendered a decision 7 in favor of the herein respondent
holding that its services are subject to zero-rate pursuant to Section 108(b) of the Tax Reform Act of 1997 and Section 4.102-2 (b)(2) of
Revenue Regulations 5-96, the decretal portion of which reads as follows:

‘WHEREFORE, in view of all the foregoing, this Court finds the [petition] meritorious and in accordance with law. Accordingly,
[petitioner] is hereby ORDERED to REFUND to [respondent] the amount of ₱3,352,406.59 representing the latter’s excess input VAT
paid for the year 1997.’"8

Ruling of the Court of Appeals

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

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

Hence, this Petition.9


III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

The Issue

Petitioner raises this sole issue for our consideration:

"Whether or not the Court of Appeals committed reversible error in holding that respondent is entitled to the refund of the amount of
₱3,352,406.59 allegedly representing excess input VAT for the year 1997."10

The Court’s Ruling

The Petition is unmeritorious.

Sole Issue:

Entitlement to Tax Refund

Section 102 of the Tax Code11 provides:

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

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

xxxxxxxxx

‘(3) The supply of x x x commercial knowledge or information;

‘(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or
enjoyment of x x x any such knowledge or information as is mentioned in subparagraph (3);

xxxxxxxxx

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

xxxxxxxxx

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

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

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

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

xxxxxxxxx

Zero Rating of "Other" Services


III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

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

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

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

The Credit Card System and Its Components

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

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

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

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

In the present case, respondent’s role in the consumer credit 26 process described above primarily consists of gathering the bills and
credit card drafts of different service establishments located in the Philippines and forwarding them to the ROCs outside the country.
Servicing the bill is not the same as billing. For the former type of service alone, respondent already gets paid.

The parent company -- to which the ROCs and respondent belong -- takes charge not only of redeeming the drafts from the ROCs and
sending the checks to the service establishments, but also of billing the credit card holders for their respective drafts that it has
redeemed. While it usually imposes finance charges 27 upon the holders, none may be exacted by respondent upon either the ROCs or
the card holders.

Branch and Home Office

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

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

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

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

VAT Requirements for the Supply of Service

The VAT is a tax on consumption41 "expressed as a percentage of the value added to goods or services" 42purchased by the producer or
taxpayer.43 As an indirect tax44 on services,45 its main object is the transaction 46itself or, more concretely, the performance of all kinds of
services47 conducted in the course of trade or business in the Philippines. 48 These services must be regularly conducted in this country;
undertaken in "pursuit of a commercial or an economic activity;"49 for a valuable consideration; and not exempt under the Tax Code,
other special laws, or any international agreement.50

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

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

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

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

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

Services Subject to Zero VAT

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

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

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

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

Respondent’s Services Exempt from the Destination Principle

However, the law clearly provides for an exception to the destination principle; that is, for a zero percent VAT rate for services that
are performed in the Philippines, "paid for in acceptable foreign currency and accounted for in accordance with the rules and
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

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

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

Performance of Service versus Product Arising from Performance

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

Tax Situs of a Zero-Rated Service

The law neither makes a qualification nor adds a condition in determining the tax situs of a zero-rated service. Under this criterion, the
place where the service is rendered determines the jurisdiction 60 to impose the VAT.61 Performed in the Philippines, such service is
necessarily subject to its jurisdiction,62 for the State necessarily has to have "a substantial connection"63 to it, in order to enforce a zero
rate.64 The place of payment is immaterial;65 much less is the place where the output of the service will be further or ultimately used.

Statutory Construction or Interpretation Unnecessary

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

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

No Qualifications Under RR 5-87

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

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

xxxxxxxxx

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

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

xxxxxxxxx

‘(3) Services performed in the Philippines other than those mentioned in subparagraph (1) above which are paid for by the person or
entity to whom the service is rendered in acceptable foreign currency inwardly remitted and duly accounted for in accordance with
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

Central Bank regulations. Where the contract involves payment in both foreign and local currency, only the service corresponding to
that paid in foreign currency shall enjoy zero-rating. The portion paid for in local currency shall be subject to VAT at the rate of 10%.’"

RR 7-95 Broad Enough

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

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

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

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

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

xxxxxxxxx

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

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

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

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

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

Ejusdem Generis
Inapplicable

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

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

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

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

VAT Ruling Nos. 040-98 and 080-89

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

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

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

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

It is also basic in law that "no x x x rule x x x shall be given retrospective effect 85 unless explicitly stated."86 No indication of such
retroactive application to respondent does the Court find in VAT Ruling No. 040-98. Neither do the exceptions enumerated in Section
24687 of the Tax Code apply.

Though vested with the power to interpret the provisions of the Tax Code 88 and not bound by predecessors’ acts or rulings, the BIR
commissioner may render a different construction to a statute89 only if the new interpretation is in congruence with the law. Otherwise,
no amount of interpretation can ever revoke, repeal or modify what the law says.

"Consumed Abroad" Not Required by Legislature

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

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

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

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

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

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

"Now, when we say ‘services other than those mentioned in the preceding subsection[,’] may I have some examples of these?

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

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

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

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

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

"Senator Herrera: I guess it can be interpreted that way, although this tourist guide should also be considered as among the
professionals. If they earn more than ₱200,000, they should be covered.

xxxxxxxxx

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

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

"Senator Maceda: That is right."90

Legislative Approval By Reenactment

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

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

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

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

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

SO ORDERED.
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

G.R. No. 150154. August 9, 2005

COMMISSIONER OF INTERNAL REVENUE, Petitioners,


vs.
TOSHIBA INFORMATION EQUIPMENT (PHILS.), INC., Respondent.

DECISION

CHICO-NAZARIO, J.:

In this Petition for Review under Rule 45 of the Rules of Court, petitioner Commissioner of Internal Revenue (CIR) prays for the reversal
of the decision of the Court of Appeals in CA-G.R. SP No. 59106, 1 affirming the order of the Court of Tax Appeals (CTA) in CTA Case
No. 5593,2 which ordered said petitioner CIR to refund or, in the alternative, to issue a tax credit certificate to respondent Toshiba
Information Equipment (Phils.), Inc. (Toshiba), in the amount of ₱16,188,045.44, representing unutilized input value-added tax (VAT)
payments for the first and second quarters of 1996.

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

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

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

Respondent Toshiba filed its VAT returns for the first and second quarters of taxable year 1996, reporting input VAT in the amount of
₱13,118,542.007 and ₱5,128,761.94,8 respectively, or a total of ₱18,247,303.94. It alleged that the said input VAT was from its
purchases of capital goods and services which remained unutilized since it had not yet engaged in any business activity or transaction
for which it may be liable for any output VAT. 9 Consequently, on 27 March 1998, respondent Toshiba filed with the One-Stop Shop Inter-
Agency Tax Credit and Duty Drawback Center of the Department of Finance (DOF) applications for tax credit/refund of its unutilized
input VAT for 01 January to 31 March 1996 in the amount of ₱14,176,601.28, 10 and for 01 April to 30 June 1996 in the amount of
₱5,161,820.79,11for a total of ₱19,338,422.07. To toll the running of the two-year prescriptive period for judicially claiming a tax
credit/refund, respondent Toshiba, on 31 March 1998, filed with the CTA a Petition for Review. It would subsequently file an Amended
Petition for Review on 10 November 1998 so as to conform to the evidence presented before the CTA during the hearings.

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

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

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

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

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

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

After evaluating the evidence submitted by respondent Toshiba,13 the CTA, in its Decision dated 10 March 2000, ordered petitioner CIR
to refund, or in the alternative, to issue a tax credit certificate to respondent Toshiba in the amount of ₱16,188,045.44.14
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

In a Resolution, dated 24 May 2000, the CTA denied petitioner CIR’s Motion for Reconsideration for lack of merit.15

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

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

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

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

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

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

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

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

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

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

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

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

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

...

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

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

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

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

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

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

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

It would seem that petitioner CIR failed to differentiate between VAT-exempt transactions from VAT-exempt entities. In the case
of Commissioner of Internal Revenue v. Seagate Technology (Philippines),19 this Court already made such distinction –

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

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

Section 103(q) of the Tax Code of 1977, as amended, relied upon by petitioner CIR, relates to VAT-exempt transactions. These are
transactions exempted from VAT by special laws or international agreements to which the Philippines is a signatory. Since such
transactions are not subject to VAT, the sellers cannot pass on any output VAT to the purchasers of goods, properties, or services, and
they may not claim tax credit/refund of the input VAT they had paid thereon.

Section 103(q) of the Tax Code of 1977, as amended, cannot apply to transactions of respondent Toshiba because although the said
section recognizes that transactions covered by special laws may be exempt from VAT, the very same section provides that those
falling under Presidential Decree No. 66 are not. Presidential Decree No. 66, creating the Export Processing Zone Authority (EPZA), is
the precursor of Rep. Act No. 7916, as amended,20 under which the EPZA evolved into the PEZA. Consequently, the exception of
Presidential Decree No. 66 from Section 103(q) of the Tax Code of 1977, as amended, extends likewise to Rep. Act No. 7916, as
amended.

This Court agrees, however, that PEZA-registered enterprises, which would necessarily be located within ECOZONES, are VAT-exempt
entities, not because of Section 24 of Rep. Act No. 7916, as amended, which imposes the five percent (5%) preferential tax rate on
gross income of PEZA-registered enterprises, in lieu of all taxes; but, rather, because of Section 8 of the same statute which
establishes the fiction that ECOZONES are foreign territory.

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

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

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

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

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

The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT shall be imposed to form part of the cost
of goods destined for consumption outside of the territorial border of the taxing authority. Hence, actual export of goods and services
from the Philippines to a foreign country must be free of VAT; while, those destined for use or consumption within the Philippines shall
be imposed with ten percent (10%) VAT.25

Applying said doctrine to the sale of goods, properties, and services to and from the ECOZONES, 26 the BIR issued Revenue
Memorandum Circular (RMC) No. 74-99, on 15 October 1999. Of particular interest to the present Petition is Section 3 thereof, which
reads –

SECTION 3. Tax Treatment Of Sales Made By a VAT Registered Supplier from The Customs Territory, To a PEZA Registered
Enterprise. –

(1) If the Buyer is a PEZA registered enterprise which is subject to the 5% special tax regime, in lieu of all taxes, except real property
tax, pursuant to R.A. No. 7916, as amended:

(a) Sale of goods (i.e., merchandise). – This shall be treated as indirect export hence, considered subject to zero percent (0%) VAT,
pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916, in relation to ART. 77(2) of the Omnibus Investments Code.

(b) Sale of service. – This shall be treated subject to zero percent (0%) VAT under the "cross border doctrine" of the VAT System,
pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998.

(2) If Buyer is a PEZA registered enterprise which is not embraced by the 5% special tax regime, hence, subject to taxes under the
NIRC, e.g., Service Establishments which are subject to taxes under the NIRC rather than the 5% special tax regime:

(a) Sale of goods (i.e., merchandise). – This shall be treated as indirect export hence, considered subject to zero percent (0%) VAT,
pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916 in relation to ART. 77(2) of the Omnibus Investments Code.

(b) Sale of Service. – This shall be treated subject to zero percent (0%) VAT under the "cross border doctrine" of the VAT System,
pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998.

(3) In the final analysis, any sale of goods, property or services made by a VAT registered supplier from the Customs Territory to any
registered enterprise operating in the ecozone, regardless of the class or type of the latter’s PEZA registration, is actually qualified and
thus legally entitled to the zero percent (0%) VAT. Accordingly, all sales of goods or property to such enterprise made by a VAT
registered supplier from the Customs Territory shall be treated subject to 0% VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC, in relation to
ART. 77(2) of the Omnibus Investments Code, while all sales of services to the said enterprises, made by VAT registered suppliers from
the Customs Territory, shall be treated effectively subject to the 0% VAT, pursuant to Section 108(B)(3), NIRC, in relation to the
provisions of R.A. No. 7916 and the "Cross Border Doctrine" of the VAT system.

This Circular shall serve as a sufficient basis to entitle such supplier of goods, property or services to the benefit of the zero percent
(0%) VAT for sales made to the aforementioned ECOZONE enterprises and shall serve as sufficient compliance to the requirement for
prior approval of zero-rating imposed by Revenue Regulations No. 7-95 effective as of the date of the issuance of this Circular.

Indubitably, no output VAT may be passed on to an ECOZONE enterprise since it is a VAT-exempt entity. The VAT treatment of sales to
it, however, varies depending on whether the supplier from the Customs Territory is VAT-registered or not.

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

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

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

II

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

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

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

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

"SEC. 4.100-2. Zero-rated sales. A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT purposes, shall
not result in any output tax. However, the input tax on his purchases of goods, properties or services related to such zero-rated sale
shall be available as tax credit or refund in accordance with these regulations."

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

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

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

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

According to the old rule, Section 23 of Rep. Act No. 7916, as amended, gives the PEZA-registered enterprise the option to choose
between two sets of fiscal incentives: (a) The five percent (5%) preferential tax rate on its gross income under Rep. Act No. 7916, as
amended; and (b) the income tax holiday provided under Executive Order No. 226, otherwise known as the Omnibus Investment Code
of 1987, as amended.31

The five percent (5%) preferential tax rate on gross income under Rep. Act No. 7916, as amended, is in lieu of all taxes. Except for real
property taxes, no other national or local tax may be imposed on a PEZA-registered enterprise availing of this particular fiscal incentive,
not even an indirect tax like VAT.

Alternatively, Book VI of Exec. Order No. 226, as amended, grants income tax holiday to registered pioneer and non-pioneer
enterprises for six-year and four-year periods, respectively.32 Those availing of this incentive are exempt only from income tax, but shall
be subject to all other taxes, including the ten percent (10%) VAT.

This old rule clearly did not take into consideration the Cross Border Doctrine essential to the VAT system or the fiction of the
ECOZONE as a foreign territory. It relied totally on the choice of fiscal incentives of the PEZA-registered enterprise. Again, for
emphasis, the old VAT rule for PEZA-registered enterprises was based on their choice of fiscal incentives: (1) If the PEZA-registered
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

enterprise chose the five percent (5%) preferential tax on its gross income, in lieu of all taxes, as provided by Rep. Act No. 7916, as
amended, then it would be VAT-exempt; (2) If the PEZA-registered enterprise availed of the income tax holiday under Exec. Order No.
226, as amended, it shall be subject to VAT at ten percent (10%). Such distinction was abolished by RMC No. 74-99, which
categorically declared that all sales of goods, properties, and services made by a VAT-registered supplier from the Customs Territory to
an ECOZONE enterprise shall be subject to VAT, at zero percent (0%) rate, regardless of the latter’s type or class of PEZA registration;
and, thus, affirming the nature of a PEZA-registered or an ECOZONE enterprise as a VAT-exempt entity.

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

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

Q-5: Under Revenue Memorandum Circular (RMC) No. 74-99, purchases by PEZA-registered firms automatically qualify as zero-rated
without seeking prior approval from the BIR effective October 1999.

1) Will the OSS-DOF Center still accept applications from PEZA-registered claimants who were allegedly billed VAT by their suppliers
before and during the effectivity of the RMC by issuing VAT invoices/receipts?

A-5(1): If the PEZA-registered enterprise is paying the 5% preferential tax in lieu of all other taxes, the said PEZA-registered taxpayer
cannot claim TCC or refund for the VAT paid on purchases. However, if the taxpayer is availing of the income tax holiday, it can claim
VAT credit provided:

a. The taxpayer-claimant is VAT-registered;

b. Purchases are evidenced by VAT invoices or receipts, whichever is applicable, with shifted VAT to the purchaser prior to the
implementation of RMC No. 74-99; and

c. The supplier issues a sworn statement under penalties of perjury that it shifted the VAT and declared the sales to the PEZA-
registered purchaser as taxable sales in its VAT returns.

For invoices/receipts issued upon the effectivity of RMC No. 74-99, the claims for input VAT by PEZA-registered companies, regardless
of the type or class of PEZA registration, should be denied.

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

III

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

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

of the CTA, affirmed by the Court of Appeals, that respondent Toshiba had indeed availed of the income tax holiday under Exec. Order
No. 226, as amended.

WHEREFORE, based on the foregoing, this Court AFFIRMS the decision of the Court of Appeals in CA-G.R. SP. No. 59106, and the
order of the CTA in CTA Case No. 5593, ordering said petitioner CIR to refund or, in the alternative, to issue a tax credit certificate to
respondent Toshiba, in the amount of ₱16,188,045.44, representing unutilized input VAT for the first and second quarters of 1996.

SO ORDERED.
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

G.R. No. 152609 June 29, 2005

COMMISSIONER OF INTERNAL REVENUE, Petitioner,


vs.
AMERICAN EXPRESS INTERNATIONAL, INC. (PHILIPPINE BRANCH), Respondent.

DECISION

PANGANIBAN, J.:

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

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the February 28, 2002 Decision 2of the Court of
Appeals (CA) in CA-GR SP No. 62727. The assailed Decision disposed as follows:

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

The Facts

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

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

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

Exhibit Period Covered Date Filed


D 1997 1st Qtr. April 18, 1997
F 2nd Qtr. July 21, 1997
G 3rd Qtr. October 2, 1997
H 4th Qtr. January 20, 1998

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

Exh 1997 Taxable Sales Output Zero-rated Domestic Input


VAT Sales Purchases VAT
I 1st qtr ₱59,597.20 ₱5,959.72 ₱17,513,801.11 ₱6,778,182.30 ₱677,818.23
J 2nd qtr 67,517.20 6,751.72 17,937,361.51 9,333,242.90 933,324.29
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

K 3rd qtr 51,936.60 5,193.66 19,627,245.36 8,438,357.00 843,835.70


L 4th qtr 67,994.30 6,799.43 25,231,225.22 13,080,822.10 1,308,082.21

Total ₱247,045.30 ₱24,704.53 ₱80,309,633.20 ₱37,630,604.30 ₱3,763,060.43

"On April 13, 1999, [respondent] filed with the BIR a letter-request for the refund of its 1997 excess input taxes in the amount of
₱3,751,067.04, which amount was arrived at after deducting from its total input VAT paid of ₱3,763,060.43 its applied output VAT
liabilities only for the third and fourth quarters of 1997 amounting to ₱5,193.66 and ₱6,799.43, respectively. [Respondent] cites as basis
therefor, Section 110 (B) of the 1997 Tax Code, to state:

‘Section 110. Tax Credits. -

xxxxxxxxx

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

"There being no immediate action on the part of the [petitioner], [respondent’s] petition was filed on April 15, 1999.

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

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

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

(1) x x x

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"From the foregoing, the [CTA], through the Presiding Judge Ernesto D. Acosta rendered a decision 7 in favor of the herein respondent
holding that its services are subject to zero-rate pursuant to Section 108(b) of the Tax Reform Act of 1997 and Section 4.102-2 (b)(2) of
Revenue Regulations 5-96, the decretal portion of which reads as follows:

‘WHEREFORE, in view of all the foregoing, this Court finds the [petition] meritorious and in accordance with law. Accordingly,
[petitioner] is hereby ORDERED to REFUND to [respondent] the amount of ₱3,352,406.59 representing the latter’s excess input VAT
paid for the year 1997.’"8

Ruling of the Court of Appeals

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

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

Hence, this Petition.9


III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

The Issue

Petitioner raises this sole issue for our consideration:

"Whether or not the Court of Appeals committed reversible error in holding that respondent is entitled to the refund of the amount of
₱3,352,406.59 allegedly representing excess input VAT for the year 1997."10

The Court’s Ruling

The Petition is unmeritorious.

Sole Issue:

Entitlement to Tax Refund

Section 102 of the Tax Code11 provides:

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

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

xxxxxxxxx

‘(3) The supply of x x x commercial knowledge or information;

‘(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or
enjoyment of x x x any such knowledge or information as is mentioned in subparagraph (3);

xxxxxxxxx

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

xxxxxxxxx

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

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

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

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

xxxxxxxxx

Zero Rating of "Other" Services


III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

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

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

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

The Credit Card System and Its Components

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

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

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

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

In the present case, respondent’s role in the consumer credit 26 process described above primarily consists of gathering the bills and
credit card drafts of different service establishments located in the Philippines and forwarding them to the ROCs outside the country.
Servicing the bill is not the same as billing. For the former type of service alone, respondent already gets paid.

The parent company -- to which the ROCs and respondent belong -- takes charge not only of redeeming the drafts from the ROCs and
sending the checks to the service establishments, but also of billing the credit card holders for their respective drafts that it has
redeemed. While it usually imposes finance charges 27 upon the holders, none may be exacted by respondent upon either the ROCs or
the card holders.

Branch and Home Office

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

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

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

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

VAT Requirements for the Supply of Service

The VAT is a tax on consumption41 "expressed as a percentage of the value added to goods or services" 42purchased by the producer or
taxpayer.43 As an indirect tax44 on services,45 its main object is the transaction 46itself or, more concretely, the performance of all kinds of
services47 conducted in the course of trade or business in the Philippines. 48 These services must be regularly conducted in this country;
undertaken in "pursuit of a commercial or an economic activity;"49 for a valuable consideration; and not exempt under the Tax Code,
other special laws, or any international agreement.50

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

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

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

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

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

Services Subject to Zero VAT

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

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

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

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

Respondent’s Services Exempt from the Destination Principle

However, the law clearly provides for an exception to the destination principle; that is, for a zero percent VAT rate for services that
are performed in the Philippines, "paid for in acceptable foreign currency and accounted for in accordance with the rules and
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

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

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

Performance of Service versus Product Arising from Performance

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

Tax Situs of a Zero-Rated Service

The law neither makes a qualification nor adds a condition in determining the tax situs of a zero-rated service. Under this criterion, the
place where the service is rendered determines the jurisdiction 60 to impose the VAT.61 Performed in the Philippines, such service is
necessarily subject to its jurisdiction,62 for the State necessarily has to have "a substantial connection"63 to it, in order to enforce a zero
rate.64 The place of payment is immaterial;65 much less is the place where the output of the service will be further or ultimately used.

Statutory Construction or Interpretation Unnecessary

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

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

No Qualifications Under RR 5-87

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

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

xxxxxxxxx

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

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

xxxxxxxxx

‘(3) Services performed in the Philippines other than those mentioned in subparagraph (1) above which are paid for by the person or
entity to whom the service is rendered in acceptable foreign currency inwardly remitted and duly accounted for in accordance with
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

Central Bank regulations. Where the contract involves payment in both foreign and local currency, only the service corresponding to
that paid in foreign currency shall enjoy zero-rating. The portion paid for in local currency shall be subject to VAT at the rate of 10%.’"

RR 7-95 Broad Enough

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

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

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

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

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

xxxxxxxxx

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

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

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

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

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

Ejusdem Generis
Inapplicable

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

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

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

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

VAT Ruling Nos. 040-98 and 080-89

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

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

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

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

It is also basic in law that "no x x x rule x x x shall be given retrospective effect 85 unless explicitly stated."86 No indication of such
retroactive application to respondent does the Court find in VAT Ruling No. 040-98. Neither do the exceptions enumerated in Section
24687 of the Tax Code apply.

Though vested with the power to interpret the provisions of the Tax Code 88 and not bound by predecessors’ acts or rulings, the BIR
commissioner may render a different construction to a statute89 only if the new interpretation is in congruence with the law. Otherwise,
no amount of interpretation can ever revoke, repeal or modify what the law says.

"Consumed Abroad" Not Required by Legislature

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

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

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

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

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

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

"Now, when we say ‘services other than those mentioned in the preceding subsection[,’] may I have some examples of these?

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

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

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

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

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

"Senator Herrera: I guess it can be interpreted that way, although this tourist guide should also be considered as among the
professionals. If they earn more than ₱200,000, they should be covered.

xxxxxxxxx

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

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

"Senator Maceda: That is right."90

Legislative Approval By Reenactment

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

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

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

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

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

SO ORDERED.
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

G.R. No. 153866 February 11, 2005

COMMISSIONER OF INTERNAL REVENUE, petitioner,


vs.
SEAGATE TECHNOLOGY (PHILIPPINES), respondent.

DECISION

PANGANIBAN, J.:

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

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to set aside the May 27, 2002 Decision2 of the Court of
Appeals (CA) in CA-GR SP No. 66093. The decretal portion of the Decision reads as follows:

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

The Facts

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

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

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

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

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

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

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

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

7. No final action has been received by [respondent] from [petitioner] on [respondent’s] claim for VAT refund.

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

"For his part, [petitioner] x x x raised the following Special and Affirmative Defenses, to wit:
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

1. [Respondent’s] alleged claim for tax refund/credit is subject to administrative routinary investigation/examination by [petitioner’s]
Bureau;

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

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

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

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

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

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

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

Ruling of the Court of Appeals

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

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

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

Hence this Petition.5

Sole Issue

Petitioner submits this sole issue for our consideration:

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

The Court’s Ruling

The Petition is unmeritorious.

Sole Issue:

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


III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

No doubt, as a PEZA-registered enterprise within a special economic zone, 7 respondent is entitled to the fiscal incentives and
benefits8 provided for in either PD 669 or EO 226.10 It shall, moreover, enjoy all privileges, benefits, advantages or exemptions under
both Republic Act Nos. (RA) 722711 and 7844.12

Preferential Tax Treatment Under Special Laws

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

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

A privilege available to respondent under the provision in RA 7227 on tax and duty-free importation of raw materials, capital and
equipment18 -- is, ipso facto, also accorded to the zone 19 under RA 7916. Furthermore, the latter law -- notwithstanding other existing
laws, rules and regulations to the contrary -- extends 20 to that zone the provision stating that no local or national taxes shall be imposed
therein.21 No exchange control policy shall be applied; and free markets for foreign exchange, gold, securities and future shall be
allowed and maintained.22 Banking and finance shall also be liberalized under minimum Bangko Sentral regulation with the
establishment of foreign currency depository units of local commercial banks and offshore banking units of foreign banks.23

In the same vein, respondent benefits under RA 7844 from negotiable tax credits 24 for locally-produced materials used as inputs. Aside
from the other incentives possibly already granted to it by the Board of Investments, it also enjoys preferential credit facilities 25 and
exemption from PD 1853.26

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

Nature of the VAT and the Tax Credit Method

Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent levied on every importation of goods,
whether or not in the course of trade or business, or imposed on each sale, barter, exchange or lease of goods or properties or on each
rendition of services in the course of trade or business 29 as they pass along the production and distribution chain, the tax being limited
only to the value added30 to such goods, properties or services by the seller, transferor or lessor. 31 It is an indirect tax that may be shifted
or passed on to the buyer, transferee or lessee of the goods, properties or services.32 As such, it should be understood not in the
context of the person or entity that is primarily, directly and legally liable for its payment, but in terms of its nature as a tax on
consumption.33 In either case, though, the same conclusion is arrived at.

The law34 that originally imposed the VAT in the country, as well as the subsequent amendments of that law, has been drawn from
the tax credit method.35 Such method adopted the mechanics and self-enforcement features of the VAT as first implemented and
practiced in Europe and subsequently adopted in New Zealand and Canada. 36 Under the present method that relies on invoices, an
entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports.37

If at the end of a taxable quarter the output taxes38 charged by a seller39 are equal to the input taxes40 passed on by the suppliers, no
payment is required. It is when the output taxes exceed the input taxes that the excess has to be paid. 41 If, however, the input taxes
exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters. 42 Should the input taxes result from
zero-rated or effectively zero-rated transactions or from the acquisition of capital goods,43 any excess over the output taxes shall instead
be refunded44 to the taxpayer or credited45 against other internal revenue taxes.46

Zero-Rated and Effectively Zero-Rated Transactions

Although both are taxable and similar in effect, zero-rated transactions differ from effectively zero-rated transactions as to their source.
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

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

Effectively zero-rated transactions, however, refer to the sale of goods50 or supply of services51 to persons or entities whose exemption
under special laws or international agreements to which the Philippines is a signatory effectively subjects such transactions to a zero
rate.52 Again, as applied to the tax base, such rate does not yield any tax chargeable against the purchaser. The seller who charges
zero output tax on such transactions can also claim a refund of or a tax credit certificate for the VAT previously charged by suppliers.

Zero Rating and Exemption

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

Applying the destination principle53 to the exportation of goods, automatic zero rating54 is primarily intended to be enjoyed by the seller
who is directly and legally liable for the VAT, making such seller internationally competitive by allowing the refund or credit of input taxes
that are attributable to export sales.55 Effective zero rating, on the contrary, is intended to benefit the purchaser who, not being directly
and legally liable for the payment of the VAT, will ultimately bear the burden of the tax shifted by the suppliers.

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

Exempt Transaction >and Exempt Party

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

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

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

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

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

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

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

Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero. Its exemption under both PD 66 and RA
7916 effectively subjects such transactions to a zero rate, 68 because the ecozone within which it is registered is managed and operated
by the PEZA as a separate customs territory.69 This means that in such zone is created the legal fiction of foreign territory. 70 Under
the cross-border principle71 of the VAT system being enforced by the Bureau of Internal Revenue (BIR), 72 no VAT shall be imposed to
form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. If exports of goods and
services from the Philippines to a foreign country are free of the VAT, 73 then the same rule holds for such exports from the national
territory -- except specifically declared areas -- to an ecozone.
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are considered exports to a foreign country;
conversely, sales by a PEZA-registered entity to a VAT-registered person in the customs territory are deemed imports from a foreign
country.74 An ecozone -- indubitably a geographical territory of the Philippines -- is, however, regarded in law as foreign soil. 75 This legal
fiction is necessary to give meaningful effect to the policies of the special law creating the zone.76 If respondent is located in an export
processing zone77 within that ecozone, sales to the export processing zone, even without being actually exported, shall in fact be
viewed as constructively exported under EO 226.78 Considered as export sales,79 such purchase transactions by respondent would
indeed be subject to a zero rate.80

Tax Exemptions Broad and Express

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

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

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

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

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

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

Third, foreign and domestic merchandise, raw materials, equipment and the like "shall not be subject to x x x internal revenue laws and
regulations" under PD 6683 -- the original charter of PEZA (then EPZA) that was later amended by RA 7916. 84 No provisions in the latter
law modify such exemption.

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

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

Fifth, export processing zone enterprises registered90 with the Board of Investments (BOI) under EO 226 patently enjoy exemption from
national internal revenue taxes on imported capital equipment reasonably needed and exclusively used for the manufacture of their
products;91 on required supplies and spare part for consigned equipment; 92 and on foreign and domestic merchandise, raw materials,
equipment and the like -- except those prohibited by law -- brought into the zone for manufacturing. 93 In addition, they are given credits
for the value of the national internal revenue taxes imposed on domestic capital equipment also reasonably needed and exclusively
used for the manufacture of their products,94 as well as for the value of such taxes imposed on domestic raw materials and supplies that
are used in the manufacture of their export products and that form part thereof.95

Sixth, the exemption from local and national taxes granted under RA 722796 are ipso facto accorded to ecozones.97In case of doubt,
conflicts with respect to such tax exemption privilege shall be resolved in favor of the ecozone.98

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

Tax Refund as Tax Exemption


III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

To be sure, statutes that grant tax exemptions are construed strictissimi juris102 against the taxpayer103 and liberally in favor of the taxing
authority.104

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

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

First, the contemporaneous construction of our tax laws by BIR authorities who are called upon to execute or administer such
laws109 will have to be adopted. Their prior tax issuances have held inconsistent positions brought about by their probable failure to
comprehend and fully appreciate the nature of the VAT as a tax on consumption and the application of the destination
principle.110 Revenue Memorandum Circular No. (RMC) 74-99, however, now clearly and correctly provides that any VAT-registered
supplier’s sale of goods, property or services from the customs territory to any registered enterprise operating in the ecozone --
regardless of the class or type of the latter’s PEZA registration -- is legally entitled to a zero rate.111

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

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

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

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

Wisely accorded to ecozones created under RA 7916117 was the government’s policy -- spelled out earlier in RA 7227 -- of converting
into alternative productive uses118 the former military reservations and their extensions,119 as well as of providing them incentives120 to
enhance the benefits that would be derived from them121 in promoting economic and social development.122

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

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

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

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

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

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

Moreover, the facts have already been determined by the lower courts. Having failed to present evidence to support its contentions
against the income tax holiday privilege of respondent,135 petitioner is deemed to have conceded. It is a cardinal rule that "issues and
arguments not adequately and seriously brought below cannot be raised for the first time on appeal." 136 This is a "matter of
procedure"137 and a "question of fairness."138 Failure to assert "within a reasonable time warrants a presumption that the party entitled to
assert it either has abandoned or declined to assert it."139

The BIR regulations additionally requiring an approved prior application for effective zero rating 140 cannot prevail over the clear VAT
nature of respondent’s transactions. The scope of such regulations is not "within the statutory authority x x x granted by the
legislature.141

First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the former cannot purport to do any more than
interpret the latter.142 The courts will not countenance one that overrides the statute it seeks to apply and implement.143

Other than the general registration of a taxpayer the VAT status of which is aptly determined, no provision under our VAT law requires
an additional application to be made for such taxpayer’s transactions to be considered effectively zero-rated. An effectively zero-rated
transaction does not and cannot become exempt simply because an application therefor was not made or, if made, was denied. To
allow the additional requirement is to give unfettered discretion to those officials or agents who, without fluid consideration, are bent on
denying a valid application. Moreover, the State can never be estopped by the omissions, mistakes or errors of its officials or agents.144

Second, grantia argumenti that such an application is required by law, there is still the presumption of regularity in the performance of
official duty.145 Respondent’s registration carries with it the presumption that, in the absence of contradictory evidence, an application for
effective zero rating was also filed and approval thereof given. Besides, it is also presumed that the law has been obeyed 146 by both the
administrative officials and the applicant.

Third, even though such an application was not made, all the special laws we have tackled exempt respondent not only from internal
revenue laws but also from the regulations issued pursuant thereto. Leniency in the implementation of the VAT in ecozones is an
imperative, precisely to spur economic growth in the country and attain global competitiveness as envisioned in those laws.

A VAT-registered status, as well as compliance with the invoicing requirements, 147 is sufficient for the effective zero rating of the
transactions of a taxpayer. The nature of its business and transactions can easily be perused from, as already clearly indicated in, its
VAT registration papers and photocopied documents attached thereto. Hence, its transactions cannot be exempted by its mere failure to
apply for their effective zero rating. Otherwise, their VAT exemption would be determined, not by their nature, but by the taxpayer’s
negligence -- a result not at all contemplated. Administrative convenience cannot thwart legislative mandate.

Tax Refund or Credit in Order

Having determined that respondent’s purchase transactions are subject to a zero VAT rate, the tax refund or credit is in order.

As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal incentives in EO 226 over those in RA 7916 and
PD 66. It opted for the income tax holiday regime instead of the 5 percent preferential tax regime.

The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA law, 148 for EO 226149 also has provisions to
contend with. These two regimes are in fact incompatible and cannot be availed of simultaneously by the same entity. While EO 226
merely exempts it from income taxes, the PEZA law exempts it from all taxes.

Therefore, respondent can be considered exempt, not from the VAT, but only from the payment of income tax for a certain number of
years, depending on its registration as a pioneer or a non-pioneer enterprise. Besides, the remittance of the aforesaid 5 percent of
gross income earned in lieu of local and national taxes imposable upon business establishments within the ecozone cannot outrightly
determine a VAT exemption. Being subject to VAT, payments erroneously collected thereon may then be refunded or credited.

Even if it is argued that respondent is subject to the 5 percent preferential tax regime in RA 7916, Section 24 thereof does not preclude
the VAT. One can, therefore, counterargue that such provision merely exempts respondent from taxes imposed on business. To repeat,
the VAT is a tax imposed on consumption, not on business. Although respondent as an entity is exempt, the transactions it enters into
are not necessarily so. The VAT payments made in excess of the zero rate that is imposable may certainly be refunded or credited.
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

Compliance with All Requisites for VAT Refund or Credit

As further enunciated by the Tax Court, respondent complied with all the requisites for claiming a VAT refund or credit.150

First, respondent is a VAT-registered entity. This fact alone distinguishes the present case from Contex, in which this Court held that the
petitioner therein was registered as a non-VAT taxpayer.151 Hence, for being merely VAT-exempt, the petitioner in that case cannot claim
any VAT refund or credit.

Second, the input taxes paid on the capital goods of respondent are duly supported by VAT invoices and have not been offset against
any output taxes. Although enterprises registered with the BOI after December 31, 1994 would no longer enjoy the tax credit incentives
on domestic capital equipment -- as provided for under Article 39(d), Title III, Book I of EO 226 152 -- starting January 1, 1996, respondent
would still have the same benefit under a general and express exemption contained in both Article 77(1), Book VI of EO 226; and
Section 12, paragraph 2 (c) of RA 7227, extended to the ecozones by RA 7916.

There was a very clear intent on the part of our legislators, not only to exempt investors in ecozones from national and local taxes, but
also to grant them tax credits. This fact was revealed by the sponsorship speeches in Congress during the second reading of House Bill
No. 14295, which later became RA 7916, as shown below:

"MR. RECTO. x x x Some of the incentives that this bill provides are exemption from national and local taxes; x x x tax credit for locally-
sourced inputs x x x."

xxxxxxxxx

"MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an environment conducive for investors, the bill
offers incentives such as the exemption from local and national taxes, x x x tax credits for locally sourced inputs x x x."153

And third, no question as to either the filing of such claims within the prescriptive period or the validity of the VAT returns has been
raised. Even if such a question were raised, the tax exemption under all the special laws cited above is broad enough to cover even the
enforcement of internal revenue laws, including prescription.154

Summary

To summarize, special laws expressly grant preferential tax treatment to business establishments registered and operating within an
ecozone, which by law is considered as a separate customs territory. As such, respondent is exempt from all internal revenue taxes,
including the VAT, and regulations pertaining thereto. It has opted for the income tax holiday regime, instead of the 5
percent preferential tax regime. As a matter of law and procedure, its registration status entitling it to such tax holiday can no longer be
questioned. Its sales transactions intended for export may not be exempt, but like its purchase transactions, they are zero-rated. No
prior application for the effective zero rating of its transactions is necessary. Being VAT-registered and having satisfactorily complied
with all the requisites for claiming a tax refund of or credit for the input VAT paid on capital goods purchased, respondent is entitled to
such VAT refund or credit.

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

SO ORDERED.

G.R. No. 158885 April 2, 2009

FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, REGIONAL DIRECTOR, REVENUE REGION NO. 8, CHIEF, ASSESSMENT DIVISION,
REVENUE REGION NO. 8, BIR, Respondents.

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

G.R. No. 170680 April 2, 2009

FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE and REVENUE DISTRICT OFFICER, REVENUE DISTRICT NO. 44, TAGUIG and
PATEROS, BUREAU OF INTERNAL REVENUE, Respondents.
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

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," 3and are found in Section 25 of E.O.
No. 273, the section entitled "Transitory Provisions." Said transitory provisions, which were never incorporated in the Old NIRC, read:

Sec. 25. Transitory provisions. (a) All VAT-registered persons shall be allowed transitional input taxes which can be credited against
output tax in the same manner as provided in Sections 104 of the National Internal Revenue Code as follows:

1) The balance of the deferred sales tax credit account as of December 31, 1987 which are accounted for in accordance with
regulations prescribed therefor;

2) A presumptive input tax equivalent to 8% of the value of the inventory as of December 31, 1987 of materials and supplies
which are not for sale, the tax on which was not taken up or claimed as deferred sales tax credit; and

3) A presumptive input tax equivalent to 8% of the value of the inventory as of December 31, 1987 as goods for sale, the tax
on which was not taken up or claimed as deferred sales tax credit.

Tax credit prescribed in paragraphs (2) and (3) above shall be allowed only to a VAT-registered person who files an inventory of the
goods referred to in said paragraphs as provided in regulations.

(b) Any unused tax credit certificate issued prior to January 1, 1988 for excess tax credits which are applicable against advance sales
tax shall be surrendered to, and replaced by the Commissioner with new tax credit certificates which can be used in payment for value-
added tax liabilities.

(c) Any person already engaged in business whose gross sales or receipts for a 12-month period from September 1, 1986 to August 1,
1987, exceed the amount of ₱200,000.00, or any person who has been in business for less than 12 months as of August 1, 1987 but
expects his gross sales or receipts to exceed P200,000 on or before December 31, 1987, shall apply for registration on or before
October 29, 1987.4

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

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

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

(1) The term 'goods or properties' shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall
include:

(A) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business; xxx6
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

The provisions of Section 105 of the NIRC, on the transitional input tax credit, had remained intact despite the enactment of Rep. Act
No. 7716. Said provisions would however be amended following the passage of the new National Internal Revenue Code of 1997 (New
NIRC), also officially known as Rep Act No. 8424. The section on the transitional input tax credit was renumbered from Section 105 of
the Old NIRC to Section 111(A) of the New NIRC. The new amendments on the transitional input tax credit are relatively minor, hardly
material to the case at bar. They are highlighted below for easy reference:

Section 111. Transitional/Presumptive Input Tax Credits. -

(A) Transitional Input Tax Credits. - A person who becomes liable to value-added tax or any person who elects to be a VAT-registered
person shall, subject to the filing of an inventory according to rules and regulations prescribed by the Secretary of finance, upon
recommendation of the Commissioner, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent for
eight percent (8%) of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever
is higher, which shall be creditable against the output tax.7 (Emphasis supplied).

Rep. Act No. 8424 also made part of the NIRC, for the first time, the concept of "presumptive input tax credits," with Section 111(b) of
the New NIRC providing as follows:

(B) Presumptive Input Tax Credits. -

(1) Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar and cooking oil,
shall be allowed a presumptive input tax, creditable against the output tax, equivalent to one and one-half percent (1 1/2%) of the gross
value in money of their purchases of primary agricultural products which are used as inputs to their production.

As used in this Subsection, the term 'processing' shall mean pasteurization, canning and activities which through physical or chemical
process alter the exterior texture or form or inner substance of a product in such manner as to prepare it for special use to which it
could not have been put in its original form or condition.

(2) Public works contractors shall be allowed a presumptive input tax equivalent to one and one-half percent (1 1/2%) of the contract
price with respect to government contracts only in lieu of actual input taxes therefrom.8

What we have explained above are the statutory antecedents that underlie the present petitions for review. We now turn to the factual
antecedents.

I.

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

Following the effectivity of Rep. Act No. 7716, real estate transactions such as those regularly engaged in by FBDC have since been
made subject to VAT. As the vendor, FBDC from thereon has become obliged to remit to the Bureau of Internal Revenue (BIR) output
VAT payments it received from the sale of its properties to the Bureau of Internal Revenue (BIR). FBDC likewise invoked its right to
avail of the transitional input tax credit and accordingly submitted an inventory list of real properties it owned, with a total book value of
₱71,227,503,200.00.11

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 ₱1,526,298,949.00 and ₱785,009,018.00, both payable
in installments.12 For the fourth quarter of 1996, FBDC earned a total of ₱3,498,888,713.60 from the sale of its lots, on which the output
VAT payable to the BIR was ₱318,080,792.14. In the context of remitting its output VAT payments to the BIR, FBDC paid a total of
₱269,340,469.45 and utilized (a) ₱28,413,783.00 representing a portion of its then total transitional/presumptive input tax credit of
₱5,698,200,256.00, which petitioner allocated for the two (2) lots sold to Metro Pacific; and (b) its regular input tax credit of
₱20,326,539.69 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 ₱28,413,783.00 in partial payment of its output VAT for the fourth quarter of
1996, was in order. After investigating the matter, the BIR recommended that the claimed presumptive input tax credit be
disallowed.14 Consequently, the BIR issued to FBDC a Pre-Assessment Notice (PAN) dated 23 December 1997 for deficiency VAT for
the 4th quarter of 1996. This was followed by a letter of respondent Commissioner of Internal Revenue (CIR), 15 addressed to and
received by FBDC on 5 March 1998, disallowing the presumptive input tax credit arising from the land inventory on the basis of
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

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 CIR’s 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 ₱500,000.00 or who voluntarily register even if their turnover does not exceed
₱500,000.00 shall be entitled to a presumptive input tax on the inventory on hand as of December 31, 1995 on the following: (a) goods
purchased for resale in their present condition; (b) materials purchased for further processing, but which have not yet undergone
processing; (c) goods which have been manufactured by the taxpayer; (d) goods in process and supplies, all of which are for sale or for
use in the course of the taxpayer’s trade or business as a VAT-registered person.

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

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

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 ₱45,188,708.08, representing deficiency VAT for the 4th quarter
of 1996, including surcharge, interest and penalty. After respondent Regional Director denied FBDC’s 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 ₱28,413,783.00.18 From said decision, FBDC filed a petition for review with this Court, the first of the two petitions now before us,
seeking the reversal of the CTA decision dated 11 August 2000 and a pronouncement that FBDC is entitled to the
transitional/presumptive input tax credit of P28,413,783.00. This petition has been docketed as G.R. No. 158885.

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

For the third quarter of 1997, FBDC derived the total amount of ₱3,591,726,328.11 from its sales and lease of lots, on which the output
VAT payable to the BIR was ₱359,172,632.81. 19 Accordingly, FBDC made cash payments totaling ₱347,741,695.74 and utilized its
regular input tax credit of ₱19,743,565.73 on purchases of goods and services.20 On 11 May 1999, FBDC filed with the BIR a claim for
refund of the amount of ₱347,741,695.74 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 ₱71,227,503,200.00) FBDC argued that its input tax credit was more
than enough to offset the VAT paid by it for the third quarter of 1997.23

On 17 October 2000, the CTA promulgated its decision24 in CTA Case No. 5926, denying the claim for refund. FBDC then filed a petition
for review with the Court of Appeals, docketed as CA-G.R. SP No. 61517. On 3 October 2003, the Court of Appeals rendered a
decision25 affirming the judgment of the CTA. As a result, FBDC filed its second petition, docketed as G.R. No. 170680.

II.

The two petitions were duly consolidated 26 and called for oral argument on 18 April 2006. During the oral arguments, the parties were
directed to discuss the following issues:
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

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 FBDC’s 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.
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

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 newly-VAT 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 donor’s tax under Section
98 instead.33 It is the donor who would be liable to pay the donor’s tax, 34 and the donation would be exempt if the donor’s total net gifts
during the calendar year does not exceed ₱100,000.00.35

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 ₱200,000.00, 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
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

NIRC) speaks of such a possibility or qualifies the previous payment of VAT or any other taxes on the goods, materials and supplies as
a pre-requisite for inclusion in the beginning inventory.

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

There is another point that weighs against the CTA’s interpretation. Under Section 105 of the Old NIRC, the rate of the transitional input
tax credit is "8% of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is
higher."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.
III. ZERO-RATED SALES & VAT-EXEMPT TRANSACTIONS

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 CTA’s 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
FBDC’s 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 ₱28,413,783.00
representing the transitional input tax credit due it for the fourth quarter of 1996; and (2) directed to refund to petitioner the amount of
₱347,741,695.74 paid as output VAT for the third quarter of 1997 in light of the persisting transitional input tax credit available to
petitioner for the said quarter, or to issue a tax credit corresponding to such amount. No pronouncement as to costs.

SO ORDERED.
V. VAT CLAIM FOR REFUND

G.R. No. 151135 July 2, 2004

CONTEX CORPORATION, petitioner,


vs.
HON. COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

QUISUMBING, J.:

For review is the Decision1 dated September 3, 2001, of the Court of Appeals, in CA-G.R. SP No. 62823, which reversed and set
aside the decision2 dated October 13, 2000, of the Court of Tax Appeals (CTA). The CTA had ordered the Commissioner of Internal
Revenue (CIR) to refund the sum of P683,061.90 to petitioner as erroneously paid input value-added tax (VAT) or in the alternative,
to issue a tax credit certificate for said amount. Petitioner also assails the appellate court’s Resolution, 3 dated December 19, 2001,
denying the motion for reconsideration.

Petitioner is a domestic corporation engaged in the business of manufacturing hospital textiles and garments and other hospital
supplies for export. Petitioner’s place of business is at the Subic Bay Freeport Zone (SBFZ). It is duly registered with the Subic Bay
Metropolitan Authority (SBMA) as a Subic Bay Freeport Enterprise, pursuant to the provisions of Republic Act No. 7227. 4 As an
SBMA-registered firm, petitioner is exempt from all local and national internal revenue taxes except for the preferential tax provided
for in Section 12 (c)5 of Rep. Act No. 7227. Petitioner also registered with the Bureau of Internal Revenue (BIR) as a non-VAT
taxpayer under Certificate of Registration RDO Control No. 95-180-000133.

From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and materials necessary in the conduct of its
manufacturing business. The suppliers of these goods shifted unto petitioner the 10% VAT on the purchased items, which led the
petitioner to pay input taxes in the amounts of P539,411.88 and P504,057.49 for 1997 and 1998, respectively.6

Acting on the belief that it was exempt from all national and local taxes, including VAT, pursuant to Rep. Act No. 7227, petitioner
filed two applications for tax refund or tax credit of the VAT it paid. Mr. Edilberto Carlos, revenue district officer of BIR RDO No. 19,
denied the first application letter, dated December 29, 1998.

Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax refund/credit, this time directly with Atty. Alberto
Pagabao, the regional director of BIR Revenue Region No. 4. The second letter sought a refund or issuance of a tax credit
certificate in the amount of P1,108,307.72, representing erroneously paid input VAT for the period January 1, 1997 to November 30,
1998.

When no response was forthcoming from the BIR Regional Director, petitioner then elevated the matter to the Court of Tax Appeals,
in a petition for review docketed as CTA Case No. 5895. Petitioner stressed that Section 112(A) 7 if read in relation to Section 106(A)
(2)(a)8 of the National Internal Revenue Code, as amended and Section 12(b) 9 and (c) of Rep. Act No. 7227 would show that it was
not liable in any way for any value-added tax.

In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply the rule that claims for refund are strictly
construed against the taxpayer. Since petitioner failed to establish both its right to a tax refund or tax credit and its compliance with
the rules on tax refund as provided for in Sections 20410 and 22911 of the Tax Code, its claim should be denied, according to the BIR.

On October 13, 2000, the CTA decided CTA Case No. 5895 as follows:

WHEREFORE, in view of the foregoing, the Petition for Review is hereby PARTIALLY GRANTED. Respondent is hereby
ORDERED to REFUND or in the alternative to ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner the sum
of P683,061.90, representing erroneously paid input VAT.

SO ORDERED.12

In granting a partial refund, the CTA ruled that petitioner misread Sections 106(A)(2)(a) and 112(A) of the Tax Code. The tax court
stressed that these provisions apply only to those entities registered as VAT taxpayers whose sales are zero-rated. Petitioner does
not fall under this category, since it is a non-VAT taxpayer as evidenced by the Certificate of Registration RDO Control No. 95-180-
000133 issued by RDO Rosemarie Ragasa of BIR RDO No. 18 of the Subic Bay Freeport Zone and thus it is exempt from VAT,
pursuant to Rep. Act No. 7227, said the CTA.

Nonetheless, the CTA held that the petitioner is exempt from the imposition of input VAT on its purchases of supplies and materials.
It pointed out that under Section 12(c) of Rep. Act No. 7227 and the Implementing Rules and Regulations of the Bases Conversion
and Development Act of 1992, all that petitioner is required to pay as a SBFZ-registered enterprise is a 5% preferential tax.
V. VAT CLAIM FOR REFUND

The CTA also disallowed all refunds of input VAT paid by the petitioner prior to June 29, 1997 for being barred by the two-year
prescriptive period under Section 229 of the Tax Code. The tax court also limited the refund only to the input VAT paid by the
petitioner on the supplies and materials directly used by the petitioner in the manufacture of its goods. It struck down all claims for
input VAT paid on maintenance, office supplies, freight charges, and all materials and supplies shipped or delivered to the
petitioner’s Makati and Pasay City offices.

Respondent CIR then filed a petition, docketed as CA-G.R. SP No. 62823, for review of the CTA decision by the Court of Appeals.
Respondent maintained that the exemption of Contex Corp. under Rep. Act No. 7227 was limited only to direct taxes and not to
indirect taxes such as the input component of the VAT. The Commissioner pointed out that from its very nature, the value-added tax
is a burden passed on by a VAT registered person to the end users; hence, the direct liability for the tax lies with the suppliers and
not Contex.

Finding merit in the CIR’s arguments, the appellate court decided CA-G.R. SP No. 62823 in his favor, thus:

WHEREFORE, premises considered, the appealed decision is hereby REVERSED AND SET ASIDE. Contex’s claim for
refund of erroneously paid taxes is DENIED accordingly.

SO ORDERED.13

In reversing the CTA, the Court of Appeals held that the exemption from duties and taxes on the importation of raw materials,
capital, and equipment of SBFZ-registered enterprises under Rep. Act No. 7227 and its implementing rules covers only "the VAT
imposable under Section 107 of the [Tax Code], which is a direct liability of the importer, and in no way includes the value-added
tax of the seller-exporter the burden of which was passed on to the importer as an additional costs of the goods." 14 This was
because the exemption granted by Rep. Act No. 7227 relates to the act of importation and Section 107 15 of the Tax Code
specifically imposes the VAT on importations. The appellate court applied the principle that tax exemptions are strictly construed
against the taxpayer. The Court of Appeals pointed out that under the implementing rules of Rep. Act No. 7227, the exemption of
SBFZ-registered enterprises from internal revenue taxes is qualified as pertaining only to those for which they may be directly
liable. It then stated that apparently, the legislative intent behind Rep. Act No. 7227 was to grant exemptions only to direct taxes,
which SBFZ-registered enterprise may be liable for and only in connection with their importation of raw materials, capital, and
equipment as well as the sale of their goods and services.

Petitioner timely moved for reconsideration of the Court of Appeals decision, but the motion was denied.

Hence, the instant petition raising as issues for our resolution the following:

A. WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL AND NATIONAL INTERNAL REVENUE TAXES
PROVIDED IN REPUBLIC ACT NO. 7227 COVERS THE VALUE ADDED TAX PAID BY PETITIONER, A SUBIC BAY
FREEPORT ENTERPRISE ON ITS PURCHASES OF SUPPLIES AND MATERIALS.

B. WHETHER OR NOT THE COURT OF TAX APPEALS CORRECTLY HELD THAT PETITIONER IS ENTITLED TO A
TAX CREDIT OR REFUND OF THE VAT PAID ON ITS PURCHASES OF SUPPLIES AND RAW MATERIALS FOR THE
YEARS 1997 AND 1998.16

Simply stated, we shall resolve now the issues concerning: (1) the correctness of the finding of the Court of Appeals that the VAT
exemption embodied in Rep. Act No. 7227 does not apply to petitioner as a purchaser; and (2) the entitlement of the petitioner to a
tax refund on its purchases of supplies and raw materials for 1997 and 1998.

On the first issue, petitioner argues that the appellate court’s restrictive interpretation of petitioner’s VAT exemption as limited to
those covered by Section 107 of the Tax Code is erroneous and devoid of legal basis. It contends that the provisions of Rep. Act
No. 7227 clearly and unambiguously mandate that no local and national taxes shall be imposed upon SBFZ-registered firms and
hence, said law should govern the case. Petitioner calls our attention to regulations issued by both the SBMA and BIR clearly and
categorically providing that the tax exemption provided for by Rep. Act No. 7227 includes exemption from the imposition of VAT on
purchases of supplies and materials.

The respondent takes the diametrically opposite view that while Rep. Act No. 7227 does grant tax exemptions, such grant is not all-
encompassing but is limited only to those taxes for which a SBFZ-registered business may be directly liable. Hence, SBFZ locators
are not relieved from the indirect taxes that may be shifted to them by a VAT-registered seller.

At this juncture, it must be stressed that the VAT is an indirect tax. As such, the amount of tax paid on the goods, properties or
services bought, transferred, or leased may be shifted or passed on by the seller, transferor, or lessor to the buyer, transferee or
lessee.17 Unlike a direct tax, such as the income tax, which primarily taxes an individual’s ability to pay based on his income or net
wealth, an indirect tax, such as the VAT, is a tax on consumption of goods, services, or certain transactions involving the same. The
VAT, thus, forms a substantial portion of consumer expenditures.

Further, in indirect taxation, there is a need to distinguish between the liability for the tax and the burden of the tax. As earlier
pointed out, the amount of tax paid may be shifted or passed on by the seller to the buyer. What is transferred in such instances is
V. VAT CLAIM FOR REFUND

not the liability for the tax, but the tax burden. In adding or including the VAT due to the selling price, the seller remains the person
primarily and legally liable for the payment of the tax. What is shifted only to the intermediate buyer and ultimately to the final
purchaser is the burden of the tax.18 Stated differently, a seller who is directly and legally liable for payment of an indirect tax, such
as the VAT on goods or services is not necessarily the person who ultimately bears the burden of the same tax. It is the final
purchaser or consumer of such goods or services who, although not directly and legally liable for the payment thereof, ultimately
bears the burden of the tax.19

Exemptions from VAT are granted by express provision of the Tax Code or special laws. Under VAT, the transaction can have
preferential treatment in the following ways:

(a) VAT Exemption. An exemption means that the sale of goods or properties and/or services and the use or lease of
properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax) previously
paid.20 This is a case wherein the VAT is removed at the exempt stage (i.e., at the point of the sale, barter or exchange of
the goods or properties).

The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because
the said transaction is not subject to VAT. On the other hand, a VAT-registered purchaser of VAT-exempt goods/properties
or services which are exempt from VAT is not entitled to any input tax on such purchase despite the issuance of a VAT
invoice or receipt.21

(b) Zero-rated Sales. These are sales by VAT-registered persons which are subject to 0% rate, meaning the tax burden is
not passed on to the purchaser. A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT
purposes, shall not result in any output tax. However, the input tax on his purchases of goods, properties or services
related to such zero-rated sale shall be available as tax credit or refund in accordance with these regulations.22

Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm. In contrast, exemption only removes the VAT at
the exempt stage, and it will actually increase, rather than reduce the total taxes paid by the exempt firm’s business or non-retail
customers. It is for this reason that a sharp distinction must be made between zero-rating and exemption in designating a value-
added tax.23

Apropos, the petitioner’s claim to VAT exemption in the instant case for its purchases of supplies and raw materials is founded
mainly on Section 12 (b) and (c) of Rep. Act No. 7227, which basically exempts them from all national and local internal revenue
taxes, including VAT and Section 4 (A)(a) of BIR Revenue Regulations No. 1-95.24

On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is not controverted by the respondent. In fact,
petitioner is registered as a NON-VAT taxpayer per Certificate of Registration25 issued by the BIR. As such, it is exempt from VAT on
all its sales and importations of goods and services.

Petitioner’s claim, however, for exemption from VAT for its purchases of supplies and raw materials is incongruous with its claim
that it is VAT-Exempt, for only VAT-Registered entities can claim Input VAT Credit/Refund.

The point of contention here is whether or not the petitioner may claim a refund on the Input VAT erroneously passed on to it by its
suppliers.

While it is true that the petitioner should not have been liable for the VAT inadvertently passed on to it by its supplier since such is a
zero-rated sale on the part of the supplier, the petitioner is not the proper party to claim such VAT refund.

Section 4.100-2 of BIR’s Revenue Regulations 7-95, as amended, or the "Consolidated Value-Added Tax Regulations" provide:

Sec. 4.100-2. Zero-rated Sales. A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT
purposes, shall not result in any output tax. However, the input tax on his purchases of goods, properties or services
related to such zero-rated sale shall be available as tax credit or refund in accordance with these regulations.

The following sales by VAT-registered persons shall be subject to 0%:

(a) Export Sales

"Export Sales" shall mean

...

(5) Those considered export sales under Articles 23 and 77 of Executive Order No. 226, otherwise known as the
Omnibus Investments Code of 1987, and other special laws, e.g. Republic Act No. 7227, otherwise known as the
Bases Conversion and Development Act of 1992.
V. VAT CLAIM FOR REFUND

...

(c) Sales to persons or entities whose exemption under special laws, e.g. R.A. No. 7227 duly registered and accredited
enterprises with Subic Bay Metropolitan Authority (SBMA) and Clark Development Authority (CDA), R. A. No. 7916,
Philippine Economic Zone Authority (PEZA), or international agreements, e.g. Asian Development Bank (ADB),
International Rice Research Institute (IRRI), etc. to which the Philippines is a signatory effectively subject such sales to
zero-rate."

Since the transaction is deemed a zero-rated sale, petitioner’s supplier may claim an Input VAT credit with no corresponding Output
VAT liability. Congruently, no Output VAT may be passed on to the petitioner.

On the second issue, it may not be amiss to re-emphasize that the petitioner is registered as a NON-VAT taxpayer and thus, is
exempt from VAT. As an exempt VAT taxpayer, it is not allowed any tax credit on VAT (input tax) previously paid. In fine, even if we
are to assume that exemption from the burden of VAT on petitioner’s purchases did exist, petitioner is still not entitled to any tax
credit or refund on the input tax previously paid as petitioner is an exempt VAT taxpayer.

Rather, it is the petitioner’s suppliers who are the proper parties to claim the tax credit and accordingly refund the petitioner of the
VAT erroneously passed on to the latter.

Accordingly, we find that the Court of Appeals did not commit any reversible error of law in holding that petitioner’s VAT exemption
under Rep. Act No. 7227 is limited to the VAT on which it is directly liable as a seller and hence, it cannot claim any refund or
exemption for any input VAT it paid, if any, on its purchases of raw materials and supplies.

WHEREFORE, the petition is DENIED for lack of merit. The Decision dated September 3, 2001, of the Court of Appeals in CA-G.R.
SP No. 62823, as well as its Resolution of December 19, 2001 are AFFIRMED. No pronouncement as to costs.

SO ORDERED.
V. VAT CLAIM FOR REFUND

G.R. Nos. 141104 & 148763 June 8, 2007

ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION, petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

CHICO-NAZARIO, J.:

Before this Court are the consolidated cases involving the unsuccessful claims of herein petitioner Atlas Consolidated Mining and
Development Corporation (petitioner corporation) for the refund/credit of the input Value Added Tax (VAT) on its purchases of
capital goods and on its zero-rated sales in the taxable quarters of the years 1990 and 1992, the denial of which by the Court of Tax
Appeals (CTA), was affirmed by the Court of Appeals.

Petitioner corporation is engaged in the business of mining, production, and sale of various mineral products, such as gold, pyrite,
and copper concentrates. It is a VAT-registered taxpayer. It was initially issued VAT Registration No. 32-A-6-002224, dated 1
January 1988, but it had to register anew with the appropriate revenue district office (RDO) of the Bureau of Internal Revenue (BIR)
when it moved its principal place of business, and it was re-issued VAT Registration No. 32-0-004622, dated 15 August 1990.1

G.R. No. 141104

Petitioner corporation filed with the BIR its VAT Return for the first quarter of 1992. 2 It alleged that it likewise filed with the BIR the
corresponding application for the refund/credit of its input VAT on its purchases of capital goods and on its zero-rated sales in the
amount of P26,030,460.00.3 When its application for refund/credit remained unresolved by the BIR, petitioner corporation filed on
20 April 1994 its Petition for Review with the CTA, docketed as CTA Case No. 5102. Asserting that it was a "zero-rated VAT
person," it prayed that the CTA order herein respondent Commissioner of Internal Revenue (respondent Commissioner) to
refund/credit petitioner corporation with the amount of P26,030,460.00, representing the input VAT it had paid for the first quarter of
1992. The respondent Commissioner opposed and sought the dismissal of the petition for review of petitioner corporation for failure
to state a cause of action. After due trial, the CTA promulgated its Decision4 on 24 November 1997 with the following disposition –

WHEREFORE, in view of the foregoing, the instant claim for refund is hereby DENIED on the ground of prescription,
insufficiency of evidence and failure to comply with Section 230 of the Tax Code, as amended. Accordingly, the petition at
bar is hereby DISMISSED for lack of merit.

The CTA denied the motion for reconsideration of petitioner corporation in a Resolution5 dated 15 April 1998.

When the case was elevated to the Court of Appeals as CA-G.R. SP No. 47607, the appellate court, in its Decision, 6 dated 6 July
1999, dismissed the appeal of petitioner corporation, finding no reversible error in the CTA Decision, dated 24 November 1997. The
subsequent motion for reconsideration of petitioner corporation was also denied by the Court of Appeals in its Resolution,7 dated 14
December 1999.

Thus, petitioner corporation comes before this Court, via a Petition for Review on Certiorari under Rule 45 of the Revised Rules of
Court, assigning the following errors committed by the Court of Appeals –

THE COURT OF APPEALS ERRED IN AFFIRMING THE REQUIREMENT OF REVENUE REGULATIONS NO. 2-88
THAT AT LEAST 70% OF THE SALES OF THE [BOARD OF INVESTMENTS (BOI)]-REGISTERED FIRM MUST
CONSIST OF EXPORTS FOR ZERO-RATING TO APPLY.

II

THE COURT OF APPEALS ERRED IN AFFIRMING THAT PETITIONER FAILED TO SUBMIT SUFFICIENT EVIDENCE
SINCE FAILURE TO SUBMIT PHOTOCOPIES OF VAT INVOICES AND RECEIPTS IS NOT A FATAL DEFECT.

III

THE COURT OF APPEALS ERRED IN RULING THAT THE JUDICIAL CLAIM WAS FILED BEYOND THE
PRESCRIPTIVE PERIOD SINCE THE JUDICIAL CLAIM WAS FILED WITHIN TWO (2) YEARS FROM THE FILING OF
THE VAT RETURN.

IV
V. VAT CLAIM FOR REFUND

THE COURT OF APPEALS ERRED IN NOT ORDERING CTA TO ALLOW THE RE-OPENING OF THE CASE FOR
PETITIONER TO PRESENT ADDITIONAL EVIDENCE.8

G.R. No. 148763

G.R. No. 148763 involves almost the same set of facts as in G.R. No. 141104 presented above, except that it relates to the claims
of petitioner corporation for refund/credit of input VAT on its purchases of capital goods and on its zero-rated sales made in the last
three taxable quarters of 1990.

Petitioner corporation filed with the BIR its VAT Returns for the second, third, and fourth quarters of 1990, on 20 July
1990, 18 October 1990, and 20 January 1991, respectively. It submitted separate applications to the BIR for the
refund/credit of the input VAT paid on its purchases of capital goods and on its zero-rated sales, the details of which
are presented as follows –

Date of Application Period Covered Amount Applied For

21 August 1990 2nd Quarter, 1990 P 54,014,722.04

21 November 1990 3rd Quarter, 1990 75,304,774.77

19 February 1991 4th Quarter, 1990 43,829,766.10

When the BIR failed to act on its applications for refund/credit, petitioner corporation filed with the CTA the
following petitions for review –

Date Filed Period Covered CTA Case No.

20 July 1992 2nd Quarter, 1990 4831

9 October 1992 3rd Quarter, 1990 4859

14 January 1993 4th Quarter, 1990 4944

which were eventually consolidated. The respondent Commissioner contested the foregoing Petitions and prayed for the dismissal
thereof. The CTA ruled in favor of respondent Commissioner and in its Decision,9 dated 30 October 1997, dismissed the Petitions
mainly on the ground that the prescriptive periods for filing the same had expired. In a Resolution, 10 dated 15 January 1998, the
CTA denied the motion for reconsideration of petitioner corporation since the latter presented no new matter not already discussed
in the court's prior Decision. In the same Resolution, the CTA also denied the alternative prayer of petitioner corporation for a new
trial since it did not fall under any of the grounds cited under Section 1, Rule 37 of the Revised Rules of Court, and it was not
supported by affidavits of merits required by Section 2 of the same Rule.

Petitioner corporation appealed its case to the Court of Appeals, where it was docketed as CA-G.R. SP No. 46718. On 15
September 2000, the Court of Appeals rendered its Decision, 11 finding that although petitioner corporation timely filed its Petitions
for Review with the CTA, it still failed to substantiate its claims for the refund/credit of its input VAT for the last three quarters of
1990. In its Resolution,12 dated 27 June 2001, the appellate court denied the motion for reconsideration of petitioner corporation,
finding no cogent reason to reverse its previous Decision.

Aggrieved, petitioner corporation filed with this Court another Petition for Review on Certiorari under Rule 45 of the Revised Rules
of Court, docketed as G.R. No. 148763, raising the following issues –

A.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER'S CLAIM IS BARRED
UNDER REVENUE REGULATIONS NOS. 2-88 AND 3-88 I.E., FOR FAILURE TO PTOVE [sic] THE 70% THRESHOLD
FOR ZERO-RATING TO APPLY AND FOR FAILURE TO ESTABLISH THE FACTUAL BASIS FOR THE INSTANT CLAIM.

B.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN FINDING THAT THERE IS NO BASIS TO GRANT
PETITIONER'S MOTION FOR NEW TRIAL.
V. VAT CLAIM FOR REFUND

There being similarity of parties, subject matter, and issues, G.R. Nos. 141104 and 148763 were consolidated pursuant to a
Resolution, dated 4 September 2006, issued by this Court. The ruling of this Court in these cases hinges on how it will resolve the
following key issues: (1) prescription of the claims of petitioner corporation for input VAT refund/credit; (2) validity and applicability
of Revenue Regulations No. 2-88 imposing upon petitioner corporation, as a requirement for the VAT zero-rating of its sales, the
burden of proving that the buyer companies were not just BOI-registered but also exporting 70% of their total annual production; (3)
sufficiency of evidence presented by petitioner corporation to establish that it is indeed entitled to input VAT refund/credit; and (4)
legal ground for granting the motion of petitioner corporation for re-opening of its cases or holding of new trial before the CTA so it
could be given the opportunity to present the required evidence.

Prescription

The prescriptive period for filing an application for tax refund/credit of input VAT on zero-rated sales made in 1990 and 1992 was
governed by Section 106(b) and (c) of the Tax Code of 1977, as amended, which provided that –

SEC. 106. Refunds or tax credits of input tax. – x x x.

(b) Zero-rated or effectively zero-rated sales. – Any person, except those covered by paragraph (a) above, whose sales
are zero-rated may, within two years after the close of the quarter when such sales were made, apply for the issuance of a
tax credit certificate or refund of the input taxes attributable to such sales to the extent that such input tax has not been
applied against output tax.

xxxx

(e) Period within which refund of input taxes may be made by the Commissioner. – The Commissioner shall refund input
taxes within 60 days from the date the application for refund was filed with him or his duly authorized representative. No
refund of input taxes shall be allowed unless the VAT-registered person files an application for refund within the period
prescribed in paragraphs (a), (b) and (c) as the case may be.

By a plain reading of the foregoing provision, the two-year prescriptive period for filing the application for refund/credit of input VAT
on zero-rated sales shall be determined from the close of the quarter when such sales were made.

Petitioner contends, however, that the said two-year prescriptive period should be counted, not from the close of the quarter when
the zero-rated sales were made, but from the date of filing of the quarterly VAT return and payment of the tax due 20 days
thereafter, in accordance with Section 110(b) of the Tax Code of 1977, as amended, quoted as follows –

SEC. 110. Return and payment of value-added tax. – x x x.

(b) Time for filing of return and payment of tax. – The return shall be filed and the tax paid within 20 days following the end
of each quarter specifically prescribed for a VAT-registered person under regulations to be promulgated by the Secretary
of Finance: Provided, however, That any person whose registration is cancelled in accordance with paragraph (e) of
Section 107 shall file a return within 20 days from the cancellation of such registration.

It is already well-settled that the two-year prescriptive period for instituting a suit or proceeding for recovery of corporate income tax
erroneously or illegally paid under Section 23013 of the Tax Code of 1977, as amended, was to be counted from the filing of the final
adjustment return. This Court already set out in ACCRA Investments Corporation v. Court of Appeals,14 the rationale for such a rule,
thus –

Clearly, there is the need to file a return first before a claim for refund can prosper inasmuch as the respondent
Commissioner by his own rules and regulations mandates that the corporate taxpayer opting to ask for a refund must
show in its final adjustment return the income it received from all sources and the amount of withholding taxes remitted by
its withholding agents to the Bureau of Internal Revenue. The petitioner corporation filed its final adjustment return for its
1981 taxable year on April 15, 1982. In our Resolution dated April 10, 1989 in the case of Commissioner of Internal
Revenue v. Asia Australia Express, Ltd. (G.R. No. 85956), we ruled that the two-year prescriptive period within which to
claim a refund commences to run, at the earliest, on the date of the filing of the adjusted final tax return. Hence, the
petitioner corporation had until April 15, 1984 within which to file its claim for refund.

Considering that ACCRAIN filed its claim for refund as early as December 29, 1983 with the respondent Commissioner
who failed to take any action thereon and considering further that the non-resolution of its claim for refund with the said
Commissioner prompted ACCRAIN to reiterate its claim before the Court of Tax Appeals through a petition for review on
April 13, 1984, the respondent appellate court manifestly committed a reversible error in affirming the holding of the tax
court that ACCRAIN's claim for refund was barred by prescription.

It bears emphasis at this point that the rationale in computing the two-year prescriptive period with respect to the petitioner
corporation's claim for refund from the time it filed its final adjustment return is the fact that it was only then that ACCRAIN
could ascertain whether it made profits or incurred losses in its business operations. The "date of payment", therefore, in
ACCRAIN's case was when its tax liability, if any, fell due upon its filing of its final adjustment return on April 15, 1982.
V. VAT CLAIM FOR REFUND

In another case, Commissioner of Internal Revenue v. TMX Sales, Inc.,15 this Court further expounded on the same matter –

A re-examination of the aforesaid minute resolution of the Court in the Pacific Procon case is warranted under the
circumstances to lay down a categorical pronouncement on the question as to when the two-year prescriptive period in
cases of quarterly corporate income tax commences to run. A full-blown decision in this regard is rendered more
imperative in the light of the reversal by the Court of Tax Appeals in the instant case of its previous ruling in the Pacific
Procon case.

Section 292 (now Section 230) of the National Internal Revenue Code should be interpreted in relation to the other
provisions of the Tax Code in order to give effect the legislative intent and to avoid an application of the law which may
lead to inconvenience and absurdity. In the case of People vs. Rivera (59 Phil. 236 [1933]), this Court stated that statutes
should receive a sensible construction, such as will give effect to the legislative intention and so as to avoid an unjust or
an absurd conclusion. INTERPRETATIO TALIS IN AMBIGUIS SEMPER FRIENDA EST, UT EVITATUR INCONVENIENS
ET ABSURDUM. Where there is ambiguity, such interpretation as will avoid inconvenience and absurdity is to be adopted.
Furthermore, courts must give effect to the general legislative intent that can be discovered from or is unraveled by the
four corners of the statute, and in order to discover said intent, the whole statute, and not only a particular provision
thereof, should be considered. (Manila Lodge No. 761, et al. vs. Court of Appeals, et al. 73 SCRA 162 [1976) Every
section, provision or clause of the statute must be expounded by reference to each other in order to arrive at the effect
contemplated by the legislature. The intention of the legislator must be ascertained from the whole text of the law and
every part of the act is to be taken into view. (Chartered Bank vs. Imperial, 48 Phil. 931 [1921]; Lopez vs. El Hoger Filipino,
47 Phil. 249, cited in Aboitiz Shipping Corporation vs. City of Cebu, 13 SCRA 449 [1965]).

Thus, in resolving the instant case, it is necessary that we consider not only Section 292 (now Section 230) of the National
Internal Revenue Code but also the other provisions of the Tax Code, particularly Sections 84, 85 (now both incorporated
as Section 68), Section 86 (now Section 70) and Section 87 (now Section 69) on Quarterly Corporate Income Tax
Payment and Section 321 (now Section 232) on keeping of books of accounts. All these provisions of the Tax Code should
be harmonized with each other.

xxxx

Therefore, the filing of a quarterly income tax returns required in Section 85 (now Section 68) and implemented per BIR
Form 1702-Q and payment of quarterly income tax should only be considered mere installments of the annual tax due.
These quarterly tax payments which are computed based on the cumulative figures of gross receipts and deductions in
order to arrive at a net taxable income, should be treated as advances or portions of the annual income tax due, to be
adjusted at the end of the calendar or fiscal year. This is reinforced by Section 87 (now Section 69) which provides for the
filing of adjustment returns and final payment of income tax. Consequently, the two-year prescriptive period provided in
Section 292 (now Section 230) of the Tax Code should be computed from the time of filing the Adjustment Return or
Annual Income Tax Return and final payment of income tax.

In the case of Collector of Internal Revenue vs. Antonio Prieto (2 SCRA 1007 [1961]), this Court held that when a tax is
paid in installments, the prescriptive period of two years provided in Section 306 (Section 292) of the National Internal
Revenue Code should be counted from the date of the final payment. This ruling is reiterated in Commissioner of Internal
Revenue vs. Carlos Palanca (18 SCRA 496 [1966]), wherein this Court stated that where the tax account was paid on
installment, the computation of the two-year prescriptive period under Section 306 (Section 292) of the Tax Code, should
be from the date of the last installment.

In the instant case, TMX Sales, Inc. filed a suit for a refund on March 14, 1984. Since the two-year prescriptive period
should be counted from the filing of the Adjustment Return on April 15,1982, TMX Sales, Inc. is not yet barred by
prescription.

The very same reasons set forth in the afore-cited cases concerning the two-year prescriptive period for claims for refund of
illegally or erroneously collected income tax may also apply to the Petitions at bar involving the same prescriptive period for claims
for refund/credit of input VAT on zero-rated sales.

It is true that unlike corporate income tax, which is reported and paid on installment every quarter, but is eventually subjected to a
final adjustment at the end of the taxable year, VAT is computed and paid on a purely quarterly basis without need for a final
adjustment at the end of the taxable year. However, it is also equally true that until and unless the VAT-registered taxpayer prepares
and submits to the BIR its quarterly VAT return, there is no way of knowing with certainty just how much input VAT 16 the taxpayer
may apply against its output VAT; 17 how much output VAT it is due to pay for the quarter or how much excess input VAT it may
carry-over to the following quarter; or how much of its input VAT it may claim as refund/credit. It should be recalled that not only
may a VAT-registered taxpayer directly apply against his output VAT due the input VAT it had paid on its importation or local
purchases of goods and services during the quarter; the taxpayer is also given the option to either (1) carry over any excess input
VAT to the succeeding quarters for application against its future output VAT liabilities, or (2) file an application for refund or issuance
of a tax credit certificate covering the amount of such input VAT. 18 Hence, even in the absence of a final adjustment return, the
determination of any output VAT payable necessarily requires that the VAT-registered taxpayer make adjustments in its VAT return
every quarter, taking into consideration the input VAT which are creditable for the present quarter or had been carried over from the
previous quarters.
V. VAT CLAIM FOR REFUND

Moreover, when claiming refund/credit, the VAT-registered taxpayer must be able to establish that it does have refundable or
creditable input VAT, and the same has not been applied against its output VAT liabilities – information which are supposed to be
reflected in the taxpayer's VAT returns. Thus, an application for refund/credit must be accompanied by copies of the taxpayer's VAT
return/s for the taxable quarter/s concerned.

Lastly, although the taxpayer's refundable or creditable input VAT may not be considered as illegally or erroneously collected, its
refund/credit is a privilege extended to qualified and registered taxpayers by the very VAT system adopted by the Legislature. Such
input VAT, the same as any illegally or erroneously collected national internal revenue tax, consists of monetary amounts which are
currently in the hands of the government but must rightfully be returned to the taxpayer. Therefore, whether claiming refund/credit
of illegally or erroneously collected national internal revenue tax, or input VAT, the taxpayer must be given equal opportunity for
filing and pursuing its claim.

For the foregoing reasons, it is more practical and reasonable to count the two-year prescriptive period for filing a
claim for refund/credit of input VAT on zero-rated sales from the date of filing of the return and payment of the tax
due which, according to the law then existing, should be made within 20 days from the end of each quarter. Having
established thus, the relevant dates in the instant cases are summarized and reproduced below –

Period Covered Date of Date of Filing (Application Date of Filing (Case w/


Filing (Return w/ w/ BIR) CTA)
BIR)

2nd Quarter, 1990 20 July 1990 21 August 1990 20 July 1992

3rd Quarter, 1990 18 October 1990 21 November 1990 9 October 1992

4th Quarter, 1990 20 January 1991 19 February 1991 14 January 1993

1st Quarter, 1992 20 April 1992 -- 20 April 1994

The above table readily shows that the administrative and judicial claims of petitioner corporation for refund of its input VAT on its
zero-rated sales for the last three quarters of 1990 were all filed within the prescriptive period.

However, the same cannot be said for the claim of petitioner corporation for refund of its input VAT on its zero-rated sales for the
first quarter of 1992. Even though it may seem that petitioner corporation filed in time its judicial claim with the CTA, there is no
showing that it had previously filed an administrative claim with the BIR. Section 106(e) of the Tax Code of 1977, as amended,
explicitly provided that no refund of input VAT shall be allowed unless the VAT-registered taxpayer filed an application for refund
with respondent Commissioner within the two-year prescriptive period. The application of petitioner corporation for refund/credit of
its input VAT for the first quarter of 1992 was not only unsigned by its supposed authorized representative, Ma. Paz R. Semilla,
Manager-Finance and Treasury, but it was not dated, stamped, and initialed by the BIR official who purportedly received the same.
The CTA, in its Decision,19 dated 24 November 1997, in CTA Case No. 5102, made the following observations –

This Court, likewise, rejects any probative value of the Application for Tax Credit/Refund of VAT Paid (BIR Form No. 2552)
[Exhibit "B'] formally offered in evidence by the petitioner on account of the fact that it does not bear the BIR stamp
showing the date when such application was filed together with the signature or initial of the receiving officer of
respondent's Bureau. Worse still, it does not show the date of application and the signature of a certain Ma. Paz R.
Semilla indicated in the form who appears to be petitioner's authorized filer.

A review of the records reveal that the original of the aforecited application was lost during the time petitioner transferred
its office (TSN, p. 6, Hearing of December 9, 1994). Attempt was made to prove that petitioner exerted efforts to recover
the original copy, but to no avail. Despite this, however, We observe that petitioner completely failed to establish the
missing dates and signatures abovementioned. On this score, said application has no probative value in demonstrating
the fact of its filing within two years after the [filing of the VAT return for the quarter] when petitioner's sales of goods were
made as prescribed under Section 106(b) of the Tax Code. We believe thus that petitioner failed to file an application for
refund in due form and within the legal period set by law at the administrative level. Hence, the case at bar has failed to
satisfy the requirement on the prior filing of an application for refund with the respondent before the commencement of a
judicial claim for refund, as prescribed under Section 230 of the Tax Code. This fact constitutes another one of the many
reasons for not granting petitioner's judicial claim.

As pointed out by the CTA, in serious doubt is not only the fact of whether petitioner corporation timely filed its administrative claim
for refund of its input VAT for the first quarter of 1992, but also whether petitioner corporation actually filed such administrative claim
in the first place. For failing to prove that it had earlier filed with the BIR an application for refund/credit of its input VAT for the first
quarter of 1992, within the period prescribed by law, then the case instituted by petitioner corporation with the CTA for the
refund/credit of the very same tax cannot prosper.

Revenue Regulations No. 2-88 and the 70% export requirement


V. VAT CLAIM FOR REFUND

Under Section 100(a) of the Tax Code of 1977, as amended, a 10% VAT was imposed on the gross selling price or gross value in
money of goods sold, bartered or exchanged. Yet, the same provision subjected the following sales made by VAT-registered
persons to 0% VAT –

(1) Export sales; and

(2) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines
is a signatory effectively subjects such sales to zero-rate.

"Export Sales" means the sale and shipment or exportation of goods from the Philippines to a foreign country, irrespective
of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the
goods so exported, or foreign currency denominated sales. "Foreign currency denominated sales", means sales to
nonresidents of goods assembled or manufactured in the Philippines, for delivery to residents in the Philippines and paid
for in convertible foreign currency remitted through the banking system in the Philippines.

These are termed zero-rated sales. A zero-rated sale is still considered a taxable transaction for VAT purposes, although the VAT
rate applied is 0%. A sale by a VAT-registered taxpayer of goods and/or services taxed at 0% shall not result in any output VAT,
while the input VAT on its purchases of goods or services related to such zero-rated sale shall be available as tax credit or refund.20

Petitioner corporation questions the validity of Revenue Regulations No. 2-88 averring that the said regulations imposed additional
requirements, not found in the law itself, for the zero-rating of its sales to Philippine Smelting and Refining Corporation (PASAR)
and Philippine Phosphate, Inc. (PHILPHOS), both of which are registered not only with the BOI, but also with the then Export
Processing Zone Authority (EPZA).21

The contentious provisions of Revenue Regulations No. 2-88 read –

SEC. 2. Zero-rating. – (a) Sales of raw materials to BOI-registered exporters. – Sales of raw materials to export-oriented
BOI-registered enterprises whose export sales, under rules and regulations of the Board of Investments, exceed seventy
percent (70%) of total annual production, shall be subject to zero-rate under the following conditions:

"(1) The seller shall file an application with the BIR, ATTN.: Division, applying for zero-rating for each and every
separate buyer, in accordance with Section 8(d) of Revenue Regulations No. 5-87. The application should be
accompanied with a favorable recommendation from the Board of Investments."

"(2) The raw materials sold are to be used exclusively by the buyer in the manufacture, processing or repacking
of his own registered export product;

"(3) The words "Zero-Rated Sales" shall be prominently indicated in the sales invoice. The exporter (buyer) can
no longer claim from the Bureau of Internal Revenue or any other government office tax credits on their zero-
rated purchases;

(b) Sales of raw materials to foreign buyer. – Sales of raw materials to a nonresident foreign buyer for delivery to a
resident local export-oriented BOI-registered enterprise to be used in manufacturing, processing or repacking of the said
buyer's goods and paid for in foreign currency, inwardly remitted in accordance with Central Bank rules and regulations
shall be subject to zero-rate.

It is the position of the respondent Commissioner, affirmed by the CTA and the Court of Appeals, that Section 2 of Revenue
Regulations No. 2-88 should be applied in the cases at bar; and to be entitled to the zero-rating of its sales to PASAR and
PHILPHOS, petitioner corporation, as a VAT-registered seller, must be able to prove not only that PASAR and PHILPHOS are BOI-
registered corporations, but also that more than 70% of the total annual production of these corporations are actually exported.
Revenue Regulations No. 2-88 merely echoed the requirement imposed by the BOI on export-oriented corporations registered with
it.

While this Court is not prepared to strike down the validity of Revenue Regulations No. 2-88, it finds that its application must be
limited and placed in the proper context. Note that Section 2 of Revenue Regulations No. 2-88 referred only to the zero-rated sales
of raw materials to export-oriented BOI-registered enterprises whose export sales, under BOI rules and regulations, should exceed
seventy percent (70%) of their total annual production.

Section 2 of Revenue Regulations No. 2-88, should not have been applied to the zero-rating of the sales made by petitioner
corporation to PASAR and PHILPHOS. At the onset, it must be emphasized that PASAR and PHILPHOS, in addition to being
registered with the BOI, were also registered with the EPZA and located within an export-processing zone. Petitioner corporation
does not claim that its sales to PASAR and PHILPHOS are zero-rated on the basis that said sales were made to export-oriented
BOI-registered corporations, but rather, on the basis that the sales were made to EPZA-registered enterprises operating within
export processing zones. Although sales to export-oriented BOI-registered enterprises and sales to EPZA-registered enterprises
located within export processing zones were both deemed export sales, which, under Section 100(a) of the Tax Code of 1977, as
V. VAT CLAIM FOR REFUND

amended, shall be subject to 0% VAT distinction must be made between these two types of sales because each may have different
substantiation requirements.

The Tax Code of 1977, as amended, gave a limited definition of export sales, to wit: "The sale and shipment or exportation of goods
from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or
determine the transfer of ownership of the goods so exported, or foreign currency denominated sales." Executive Order No. 226,
otherwise known as the Omnibus Investments Code of 1987 - which, in the years concerned (i.e., 1990 and 1992), governed
enterprises registered with both the BOI and EPZA, provided a more comprehensive definition of export sales, as quoted below:

"ART. 23. "Export sales" shall mean the Philippine port F.O.B. value, determined from invoices, bills of lading, inward
letters of credit, landing certificates, and other commercial documents, of export products exported directly by a registered
export producer or the net selling price of export product sold by a registered export producer or to an export trader that
subsequently exports the same: Provided, That sales of export products to another producer or to an export trader shall
only be deemed export sales when actually exported by the latter, as evidenced by landing certificates of similar
commercial documents: Provided, further, That without actual exportation the following shall be considered constructively
exported for purposes of this provision: (1) sales to bonded manufacturing warehouses of export-oriented manufacturers;
(2) sales to export processing zones; (3) sales to registered export traders operating bonded trading warehouses
supplying raw materials used in the manufacture of export products under guidelines to be set by the Board in consultation
with the Bureau of Internal Revenue and the Bureau of Customs; (4) sales to foreign military bases, diplomatic missions
and other agencies and/or instrumentalities granted tax immunities, of locally manufactured, assembled or repacked
products whether paid for in foreign currency or not: Provided, further, That export sales of registered export trader may
include commission income; and Provided, finally, That exportation of goods on consignment shall not be deemed export
sales until the export products consigned are in fact sold by the consignee.

Sales of locally manufactured or assembled goods for household and personal use to Filipinos abroad and other non-
residents of the Philippines as well as returning Overseas Filipinos under the Internal Export Program of the government
and paid for in convertible foreign currency inwardly remitted through the Philippine banking systems shall also be
considered export sales. (Underscoring ours.)

The afore-cited provision of the Omnibus Investments Code of 1987 recognizes as export sales the sales of export products to
another producer or to an export trader, provided that the export products are actually exported. For purposes of VAT zero-rating,
such producer or export trader must be registered with the BOI and is required to actually export more than 70% of its annual
production.

Without actual exportation, Article 23 of the Omnibus Investments Code of 1987 also considers constructive exportation as export
sales. Among other types of constructive exportation specifically identified by the said provision are sales to export processing
zones. Sales to export processing zones are subjected to special tax treatment. Article 77 of the same Code establishes the tax
treatment of goods or merchandise brought into the export processing zones. Of particular relevance herein is paragraph 2, which
provides that "Merchandise purchased by a registered zone enterprise from the customs territory and subsequently brought into the
zone, shall be considered as export sales and the exporter thereof shall be entitled to the benefits allowed by law for such
transaction."

Such tax treatment of goods brought into the export processing zones are only consistent with the Destination Principle and Cross
Border Doctrine to which the Philippine VAT system adheres. According to the Destination Principle, 22 goods and services are taxed
only in the country where these are consumed. In connection with the said principle, the Cross Border Doctrine 23 mandates that no
VAT shall be imposed to form part of the cost of the goods destined for consumption outside the territorial border of the taxing
authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT, while those
destined for use or consumption within the Philippines shall be imposed with 10% VAT. 24 Export processing zones25 are to be
managed as a separate customs territory from the rest of the Philippines and, thus, for tax purposes, are effectively considered as
foreign territory. For this reason, sales by persons from the Philippine customs territory to those inside the export processing zones
are already taxed as exports.

Plainly, sales to enterprises operating within the export processing zones are export sales, which, under the Tax Code of 1977, as
amended, were subject to 0% VAT. It is on this ground that petitioner corporation is claiming refund/credit of the input VAT on its
zero-rated sales to PASAR and PHILPHOS.

The distinction made by this Court in the preceding paragraphs between the zero-rated sales to export-oriented BOI-registered
enterprises and zero-rated sales to EPZA-registered enterprises operating within export processing zones is actually supported by
subsequent development in tax laws and regulations. In Revenue Regulations No. 7-95, the Consolidated VAT Regulations, as
amended,26 the BIR defined with more precision what are zero-rated export sales –

(1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping
arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so
exported paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance
with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

(2) The sale of raw materials or packaging materials to a non-resident buyer for delivery to a resident local export-oriented
enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer's goods and
V. VAT CLAIM FOR REFUND

paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);

(3) The sale of raw materials or packaging materials to an export-oriented enterprise whose export sales exceed seventy
percent (70%) of total annual production;

Any enterprise whose export sales exceed 70% of the total annual production of the preceding taxable year shall be
considered an export-oriented enterprise upon accreditation as such under the provisions of the Export Development Act
(R.A. 7844) and its implementing rules and regulations;

(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and

(5) Those considered export sales under Articles 23 and 77 of Executive Order No. 226, otherwise known as the Omnibus
Investments Code of 1987, and other special laws, e.g. Republic Act No. 7227, otherwise known as the Bases Conversion
and Development Act of 1992.

The Tax Code of 1997, as amended,27 later adopted the foregoing definition of export sales, which are subject to 0% VAT.

This Court then reiterates its conclusion that Section 2 of Revenue Regulations No. 2-88, which applied to zero-rated export sales
to export-oriented BOI-registered enterprises, should not be applied to the applications for refund/credit of input VAT filed by
petitioner corporation since it based its applications on the zero-rating of export sales to enterprises registered with the EPZA and
located within export processing zones.

Sufficiency of evidence

There can be no dispute that the taxpayer-claimant has the burden of proving the legal and factual bases of its claim for tax credit
or refund, but once it has submitted all the required documents, it is the function of the BIR to assess these documents with
purposeful dispatch.28 It therefore falls upon herein petitioner corporation to first establish that its sales qualify for VAT zero-rating
under the existing laws (legal basis), and then to present sufficient evidence that said sales were actually made and resulted in
refundable or creditable input VAT in the amount being claimed (factual basis).

It would initially appear that the applications for refund/credit filed by petitioner corporation cover only input VAT on its purportedly
zero-rated sales to PASAR and PHILPHOS; however, a more thorough perusal of its applications, VAT returns, pleadings, and
other records of these cases would reveal that it is also claiming refund/credit of its input VAT on purchases of capital goods and
sales of gold to the Central Bank of the Philippines (CBP).

This Court finds that the claims for refund/credit of input VAT of petitioner corporation have sufficient legal bases.

As has been extensively discussed herein, Section 106(b)(2), in relation to Section 100(a)(2) of the Tax Code of 1977, as amended,
allowed the refund/credit of input VAT on export sales to enterprises operating within export processing zones and registered with
the EPZA, since such export sales were deemed to be effectively zero-rated sales. 29 The fact that PASAR and PHILPHOS, to
whom petitioner corporation sold its products, were operating inside an export processing zone and duly registered with EPZA, was
never raised as an issue herein. Moreover, the same fact was already judicially recognized in the case Atlas Consolidated Mining &
Development Corporation v. Commissioner of Internal Revenue.30 Section 106(c) of the same Code likewise permitted a VAT-
registered taxpayer to apply for refund/credit of the input VAT paid on capital goods imported or locally purchased to the extent that
such input VAT has not been applied against its output VAT. Meanwhile, the effective zero-rating of sales of gold to the CBP from
1989 to 199131 was already affirmed by this Court in Commissioner of Internal Revenue v. Benguet Corporation,32 wherein it ruled
that –

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

This Court now comes to the question of whether petitioner corporation has sufficiently established the factual bases for its
applications for refund/credit of input VAT. It is in this regard that petitioner corporation has failed, both in the administrative and
judicial level.

Applications for refund/credit of input VAT with the BIR must comply with the appropriate revenue regulations. As this Court has
already ruled, Revenue Regulations No. 2-88 is not relevant to the applications for refund/credit of input VAT filed by petitioner
corporation; nonetheless, the said applications must have been in accordance with Revenue Regulations No. 3-88, amending
Section 16 of Revenue Regulations No. 5-87, which provided as follows –

SECTION 16. Refunds or tax credits of input tax. –


V. VAT CLAIM FOR REFUND

xxxx

(c) Claims for tax credits/refunds. – Application for Tax Credit/Refund of Value-Added Tax Paid (BIR Form No. 2552) shall
be filed with the Revenue District Office of the city or municipality where the principal place of business of the applicant is
located or directly with the Commissioner, Attention: VAT Division.

A photocopy of the purchase invoice or receipt evidencing the value added tax paid shall be submitted together with the
application. The original copy of the said invoice/receipt, however, shall be presented for cancellation prior to the issuance
of the Tax Credit Certificate or refund. In addition, the following documents shall be attached whenever applicable:

xxxx

"3. Effectively zero-rated sale of goods and services.

"i) photo copy of approved application for zero-rate if filing for the first time.

"ii) sales invoice or receipt showing name of the person or entity to whom the sale of goods or services
were delivered, date of delivery, amount of consideration, and description of goods or services
delivered.

"iii) evidence of actual receipt of goods or services.

"4. Purchase of capital goods.

"i) original copy of invoice or receipt showing the date of purchase, purchase price, amount of value-
added tax paid and description of the capital equipment locally purchased.

"ii) with respect to capital equipment imported, the photo copy of import entry document for internal
revenue tax purposes and the confirmation receipt issued by the Bureau of Customs for the payment of
the value-added tax.

"5. In applicable cases,

where the applicant's zero-rated transactions are regulated by certain government agencies, a statement therefrom
showing the amount and description of sale of goods and services, name of persons or entities (except in case of exports)
to whom the goods or services were sold, and date of transaction shall also be submitted.

In all cases, the amount of refund or tax credit that may be granted shall be limited to the amount of the value-added tax
(VAT) paid directly and entirely attributable to the zero-rated transaction during the period covered by the application for
credit or refund.

Where the applicant is engaged in zero-rated and other taxable and exempt sales of goods and services, and the VAT
paid (inputs) on purchases of goods and services cannot be directly attributed to any of the aforementioned transactions,
the following formula shall be used to determine the creditable or refundable input tax for zero-rated sale:

Amount of Zero-rated Sale


Total Sales

X
Total Amount of Input Taxes
=
Amount Creditable/Refundable

In case the application for refund/credit of input VAT was denied or remained unacted upon by the BIR, and before the lapse of the
two-year prescriptive period, the taxpayer-applicant may already file a Petition for Review before the CTA. If the taxpayer's claim is
supported by voluminous documents, such as receipts, invoices, vouchers or long accounts, their presentation before the CTA shall
be governed by CTA Circular No. 1-95, as amended, reproduced in full below –

In the interest of speedy administration of justice, the Court hereby promulgates the following rules governing the
presentation of voluminous documents and/or long accounts, such as receipts, invoices and vouchers, as evidence to
establish certain facts pursuant to Section 3(c), Rule 130 of the Rules of Court and the doctrine enunciated in Compania
Maritima vs. Allied Free Workers Union (77 SCRA 24), as well as Section 8 of Republic Act No. 1125:

1. The party who desires to introduce as evidence such voluminous documents must, after motion and approval by the
Court, present:
V. VAT CLAIM FOR REFUND

(a) a Summary containing, among others, a chronological listing of the numbers, dates and amounts covered by
the invoices or receipts and the amount/s of tax paid; and (b) a Certification of an independent Certified Public
Accountant attesting to the correctness of the contents of the summary after making an examination, evaluation
and audit of the voluminous receipts and invoices. The name of the accountant or partner of the firm in charge
must be stated in the motion so that he/she can be commissioned by the Court to conduct the audit and,
thereafter, testify in Court relative to such summary and certification pursuant to Rule 32 of the Rules of Court.

2. The method of individual presentation of each and every receipt, invoice or account for marking, identification and
comparison with the originals thereof need not be done before the Court or Clerk of Court anymore after the introduction
of the summary and CPA certification. It is enough that the receipts, invoices, vouchers or other documents covering the
said accounts or payments to be introduced in evidence must be pre-marked by the party concerned and submitted to the
Court in order to be made accessible to the adverse party who desires to check and verify the correctness of the summary
and CPA certification. Likewise, the originals of the voluminous receipts, invoices or accounts must be ready for
verification and comparison in case doubt on the authenticity thereof is raised during the hearing or resolution of the
formal offer of evidence.

Since CTA Cases No. 4831, 4859, 4944,33 and 5102,34 were still pending before the CTA when the said Circular was issued, then
petitioner corporation must have complied therewith during the course of the trial of the said cases.

In Commissioner of Internal Revenue v. Manila Mining Corporation,35 this Court denied the claim of therein respondent, Manila
Mining Corporation, for refund of the input VAT on its supposed zero-rated sales of gold to the CBP because it was unable to
substantiate its claim. In the same case, this Court emphasized the importance of complying with the substantiation requirements
for claiming refund/credit of input VAT on zero-rated sales, to wit –

For a judicial claim for refund to prosper, however, respondent must not only prove that it is a VAT registered entity and
that it filed its claims within the prescriptive period. It must substantiate the input VAT paid by
purchase invoices or official receipts.

This respondent failed to do.

Revenue Regulations No. 3-88 amending Revenue Regulations No. 5-87 provides the requirements in claiming tax
credits/refunds.

xxxx

Under Section 8 of RA1125, the CTA is described as a court of record. As cases filed before it are litigated de novo, party
litigants should prove every minute aspect of their cases. No evidentiary value can be given the purchase invoices or
receipts submitted to the BIR as the rules on documentary evidence require that these documents must be formally
offered before the CTA.

This Court thus notes with approval the following findings of the CTA:

x x x [S]ale of gold to the Central Bank should not be subject to the 10% VAT-output tax but this does not ipso
fact mean that [the seller] is entitled to the amount of refund sought as it is required by law to present evidence
showing the input taxes it paid during the year in question. What is being claimed in the instant petition is the
refund of the input taxes paid by the herein petitioner on its purchase of goods and services. Hence, it is
necessary for the Petitioner to show proof that it had indeed paid the input taxes during the year 1991. In the
case at bar, Petitioner failed to discharge this duty. It did not adduce in evidence the sales invoice, receipts or
other documents showing the input value added tax on the purchase of goods and services.

xxx

Section 8 of Republic Act 1125 (An Act Creating the Court of Tax Appeals) provides categorically that the Court of Tax
Appeals shall be a court of record and as such it is required to conduct a formal trial (trial de novo) where the
parties must present their evidence accordingly if they desire the Court to take such evidence into
consideration. (Emphasis and italics supplied)

A "sales or commercial invoice" is a written account of goods sold or services rendered indicating the prices charged
therefor or a list by whatever name it is known which is used in the ordinary course of business evidencing sale and
transfer or agreement to sell or transfer goods and services.

A "receipt" on the other hand is a written acknowledgment of the fact of payment in money or other settlement between
seller and buyer of goods, debtor or creditor, or person rendering services and client or customer.

These sales invoices or receipts issued by the supplier are necessary to substantiate the actual amount or quantity of
goods sold and their selling price, and taken collectively are the best means to prove the input VAT payments.36
V. VAT CLAIM FOR REFUND

Although the foregoing decision focused only on the proof required for the applicant for refund/credit to establish the input VAT
payments it had made on its purchases from suppliers, Revenue Regulations No. 3-88 also required it to present evidence proving
actual zero-rated VAT sales to qualified buyers, such as (1) photocopy of the approved application for zero-rate if filing for the first
time; (2) sales invoice or receipt showing the name of the person or entity to whom the goods or services were delivered, date of
delivery, amount of consideration, and description of goods or services delivered; and (3) the evidence of actual receipt of goods or
services.

Also worth noting in the same decision is the weight given by this Court to the certification by the independent certified public
accountant (CPA), thus –

Respondent contends, however, that the certification of the independent CPA attesting to the correctness of the contents
of the summary of suppliers' invoices or receipts which were examined, evaluated and audited by said CPA in accordance
with CTA Circular No. 1-95 as amended by CTA Circular No. 10-97 should substantiate its claims.

There is nothing, however, in CTA Circular No. 1-95, as amended by CTA Circular No. 10-97, which either expressly or
impliedly suggests that summaries and schedules of input VAT payments, even if certified by an independent CPA, suffice
as evidence of input VAT payments.

xxxx

The circular, in the interest of speedy administration of justice, was promulgated to avoid the time-consuming procedure of
presenting, identifying and marking of documents before the Court. It does not relieve respondent of its imperative task
of pre-marking photocopies of sales receipts and invoices and submitting the same to the court after the independent CPA
shall have examined and compared them with the originals. Without presenting these pre-marked documents as evidence
– from which the summary and schedules were based, the court cannot verify the authenticity and veracity of the
independent auditor's conclusions.

There is, moreover, a need to subject these invoices or receipts to examination by the CTA in order to confirm whether
they are VAT invoices. Under Section 21 of Revenue Regulation, No. 5-87, all purchases covered by invoices other than a
VAT invoice shall not be entitled to a refund of input VAT.

xxxx

While the CTA is not governed strictly by technical rules of evidence, as rules of procedure are not ends in themselves but
are primarily intended as tools in the administration of justice, the presentation of the purchase receipts and/or invoices is
not 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 the respondent's claims.

The records further show that respondent miserably failed to substantiate its claims for input VAT refund for the first
semester of 1991. Except for the summary and schedules of input VAT payments prepared by respondent itself, no other
evidence was adduced in support of its claim.

As for respondent's claim for input VAT refund for the second semester of 1991, it employed the services of Joaquin
Cunanan & Co. on account of which it (Joaquin Cunanan & Co.) executed a certification that:

We have examined the information shown below concerning the input tax payments made by the Makati Office of
Manila Mining Corporation for the period from July 1 to December 31, 1991. Our examination included inspection
of the pertinent suppliers' invoices and official receipts and such other auditing procedures as we considered
necessary in the circumstances. x x x

As the certification merely stated that it used "auditing procedures considered necessary" and not auditing procedures
which are in accordance with generally accepted auditing principles and standards, and that the examination was made
on "input tax payments by the Manila Mining Corporation," without specifying that the said input tax payments are
attributable to the sales of gold to the Central Bank, this Court cannot rely thereon and regard it as sufficient proof of the
respondent's input VAT payments for the second semester.37

As for the Petition in G.R. No. 141104, involving the input VAT of petitioner corporation on its zero-rated sales in the first quarter of
1992, this Court already found that the petitioner corporation failed to comply with Section 106(b) of the Tax Code of 1977, as
amended, imposing the two-year prescriptive period for the filing of the application for refund/credit thereof. This bars the grant of
the application for refund/credit, whether administratively or judicially, by express mandate of Section 106(e) of the same Code.

Granting arguendo that the application of petitioner corporation for the refund/credit of the input VAT on its zero-rated sales in the
first quarter of 1992 was actually and timely filed, petitioner corporation still failed to present together with its application the
required supporting documents, whether before the BIR or the CTA. As the Court of Appeals ruled –
V. VAT CLAIM FOR REFUND

In actions involving claims for refund of taxes assessed and collected, the burden of proof rests on the taxpayer. As clearly
discussed in the CTA's decision, petitioner failed to substantiate its claim for tax refunds. Thus:

"We note, however, that in the cases at bar, petitioner has relied totally on Revenue Regulations No. 2-88 in
determining compliance with the documentary requirements for a successful refund or issuance of tax credit.
Unmentioned is the applicable and specific amendment later introduced by Revenue Regulations No. 3-88 dated
April 7, 1988 (issued barely after two months from the promulgation of Revenue Regulations No. 2-88 on
February 15, 1988), which amended Section 16 of Revenue Regulations No. 5-87 on refunds or tax credits of
input tax. x x x.

xxxx

"A thorough examination of the evidence submitted by the petitioner before this court reveals outright the failure
to satisfy documentary requirements laid down under the above-cited regulations. Specifically, petitioner was not
able to present the following documents, to wit:

"a) sales invoices or receipts;

"b) purchase invoices or receipts;

"c) evidence of actual receipt of goods;

"d) BOI statement showing the amount and description of sale of goods, etc.

"e) original or attested copies of invoice or receipt on capital equipment locally purchased; and

"f) photocopy of import entry document and confirmation receipt on imported capital equipment.

"There is the need to examine the sales invoices or receipts in order to ascertain the actual amount or quantity of
goods sold and their selling price. Without them, this Court cannot verify the correctness of petitioner's claim
inasmuch as the regulations require that the input taxes being sought for refund should be limited to the portion
that is directly and entirely attributable to the particular zero-rated transaction. In this instance, the best evidence
of such transaction are the said sales invoices or receipts.

"Also, even if sales invoices are produced, there is the further need to submit evidence that such goods were
actually received by the buyer, in this case, by CBP, Philp[h]os and PASAR.

xxxx

"Lastly, this Court cannot determine whether there were actual local and imported purchase of capital goods as
well as domestic purchase of non-capital goods without the required purchase invoice or receipt, as the case
may be, and confirmation receipts.

"There is, thus, the imperative need to submit before this Court the original or attested photocopies of petitioner's
invoices or receipts, confirmation receipts and import entry documents in order that a full ascertainment of the
claimed amount may be achieved.

"Petitioner should have taken the foresight to introduce in evidence all of the missing
documentsabovementioned. Cases filed before this Court are litigated de novo. This means that party litigants
should endeavor to prove at the first instance every minute aspect of their cases strictly in accordance with the
Rules of Court, most especially on documentary evidence." (pp. 37-42, Rollo)

Tax refunds are in the nature of tax exemptions. It is regarded as in derogation of the sovereign authority, and should be
construed in strictissimi juris against the person or entity claiming the exemption. The taxpayer who claims for exemption
must justify his claim by the clearest grant of organic or statute law and should not be permitted to stand on vague
implications (Asiatic Petroleum Co. v. Llanes, 49 Phil. 466; Northern Phil. Tobacco Corp. v. Mun. of Agoo, La Union, 31
SCRA 304; Reagan v. Commissioner, 30 SCRA 968; Asturias Sugar Central, Inc. v. Commissioner of Customs, 29 SCRA
617; Davao Light and Power Co., Inc. v. Commissioner of Customs, 44 SCRA 122).

There is no cogent reason to fault the CTA's conclusion that the SGV's certificate is "self-destructive", as it finds comfort in
the very SGV's stand, as follows:

"It is our understanding that the above procedure are sufficient for the purpose of the Company. We make no
presentation regarding the sufficiency of these procedures for such purpose. We did not compare the total of the
input tax claimed each quarter against the pertinent VAT returns and books of accounts. The above procedures
V. VAT CLAIM FOR REFUND

do not constitute an audit made in accordance with generally accepted auditing standards. Accordingly, we do not
express an opinion on the company's claim for input VAT refund or credit. Had we performed additional
procedures, or had we made an audit in accordance with generally accepted auditing standards, other matters
might have come to our attention that we would have accordingly reported on."

The SGV's "disclaimer of opinion" carries much weight as it is petitioner's independent auditor. Indeed, SGV expressed
that it "did not compare the total of the input tax claimed each quarter against the VAT returns and books of accounts."38

Moving on to the Petition in G.R. No. 148763, concerning the input VAT of petitioner corporation on its zero-rated sales in the
second, third, and fourth quarters of 1990, the appellate court likewise found that petitioner corporation failed to sufficiently
establish its claims. Already disregarding the declarations made by the Court of Appeals on its erroneous application of Revenue
Regulations No. 2-88, quoted hereunder is the rest of the findings of the appellate court after evaluating the evidence submitted in
accordance with the requirements under Revenue Regulations No. 3-88 –

The Secretary of Finance validly adopted Revenue Regulations [No.] x x x 3-98 pursuant to Sec. 245 of the National
Internal Revenue Code, which recognized his power to "promulgate all needful rules and regulations for the effective
enforcement of the provisions of this Code." Thus, it is incumbent upon a taxpayer intending to file a claim for refund of
input VATs or the issuance of a tax credit certificate with the BIR x x x to prove sales to such buyers as required by
Revenue Regulations No. 3-98. Logically, the same evidence should be presented in support of an action to recover taxes
which have been paid.

x x x Neither has [herein petitioner corporation] presented sales invoices or receipts showing sales of gold, copper
concentrates, and pyrite to the CBP, [PASAR], and [PHILPHOS], respectively, and the dates and amounts of the same,
nor any evidence of actual receipt by the said buyers of the mineral products. It merely presented receipts of purchases
from suppliers on which input VATs were allegedly paid. Thus, the Court of Tax Appeals correctly denied the claims for
refund of input VATs or the issuance of tax credit certificates of petitioner [corporation]. Significantly, in the resolution,
dated 7 June 2000, this Court directed the parties to file memoranda discussing, among others, the submission of proof
for "its [petitioner's] sales of gold, copper concentrates, and pyrite to buyers." Nevertheless, the parties, including the
petitioner, failed to address this issue, thereby necessitating the affirmance of the ruling of the Court of Tax Appeals on this
point.39

This Court is, therefore, bound by the foregoing facts, as found by the appellate court, for well-settled is the general rule that the
jurisdiction of this Court in cases brought before it from the Court of Appeals, by way of a Petition for Review on Certiorari under
Rule 45 of the Revised Rules of Court, is limited to reviewing or revising errors of law; findings of fact of the latter are
conclusive.40 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.41

The distinction between a question of law and a question of fact is clear-cut. It has been held that "[t]here is a question of law in a
given case when the doubt or difference arises as to what the law is on a certain state of facts; there is a question of fact when the
doubt or difference arises as to the truth or falsehood of alleged facts."42

Whether petitioner corporation actually made zero-rated sales; whether it paid input VAT on these sales in the amount it had
declared in its returns; whether all the input VAT subject of its applications for refund/credit can be attributed to its zero-rated sales;
and whether it had not previously applied the input VAT against its output VAT liabilities, are all questions of fact which could only
be answered after reviewing, examining, evaluating, or weighing the probative value of the evidence it presented, and which this
Court does not have the jurisdiction to do in the present Petitions for Review on Certiorari under Rule 45 of the revised Rules of
Court.

Granting that there are exceptions to the general rule, when this Court looked into questions of fact under particular
circumstances,43 none of these exist in the instant cases. The Court of Appeals, in both cases, found a dearth of evidence to
support the claims for refund/credit of the input VAT of petitioner corporation, and the records bear out this finding. Petitioner
corporation itself cannot dispute its non-compliance with the requirements set forth in Revenue Regulations No. 3-88 and CTA
Circular No. 1-95, as amended. It concentrated its arguments on its assertion that the substantiation requirements under Revenue
Regulations No. 2-88 should not have applied to it, while being conspicuously silent on the evidentiary requirements mandated by
other relevant regulations.

Re-opening of cases/holding of new trial before the CTA

This Court now faces the final issue of whether the prayer of petitioner corporation for the re-opening of its cases or holding of new
trial before the CTA for the reception of additional evidence, may be granted. Petitioner corporation prays that the Court exercise its
discretion on the matter in its favor, consistent with the policy that rules of procedure be liberally construed in pursuance of
substantive justice.

This Court, however, cannot grant the prayer of petitioner corporation.

An aggrieved party may file a motion for new trial or reconsideration of a judgment already rendered in accordance with Section 1,
Rule 37 of the revised Rules of Court, which provides –
V. VAT CLAIM FOR REFUND

SECTION 1. Grounds of and period for filing motion for new trial or reconsideration. – Within the period for taking an
appeal, the aggrieved party may move the trial court to set aside the judgment or final order and grant a new trial for one
or more of the following causes materially affecting the substantial rights of said party:

(a) Fraud, accident, mistake or excusable negligence which ordinary prudence could not have guarded against and by
reason of which such aggrieved party has probably been impaired in his rights; or

(b) Newly discovered evidence, which he could not, with reasonable diligence, have discovered and produced at the trial,
and which if presented would probably alter the result.

Within the same period, the aggrieved party may also move fore reconsideration upon the grounds that the damages
awarded are excessive, that the evidence is insufficient to justify the decision or final order, or that the decision or final
order is contrary to law.

In G.R. No. 148763, petitioner corporation attempts to justify its motion for the re-opening of its cases and/or holding of new trial
before the CTA by contending that the "[f]ailure of its counsel to adduce the necessary evidence should be construed as excusable
negligence or mistake which should constitute basis for such re-opening of trial as for a new trial, as counsel was of the belief that
such evidence was rendered unnecessary by the presentation of unrebutted evidence indicating that respondent [Commissioner]
has acknowledged the sale of [sic] PASAR and [PHILPHOS] to be zero-rated." 44 The CTA denied such motion on the ground that it
was not accompanied by an affidavit of merit as required by Section 2, Rule 37 of the revised Rules of Court. The Court of Appeals
affirmed the denial of the motion, but apart from this technical defect, it also found that there was no justification to grant the same.

On the matter of the denial of the motion of the petitioner corporation for the re-opening of its cases and/or holding of new trial
based on the technicality that said motion was unaccompanied by an affidavit of merit, this Court rules in favor of the petitioner
corporation. The facts which should otherwise be set forth in a separate affidavit of merit may, with equal effect, be alleged and
incorporated in the motion itself; and this will be deemed a substantial compliance with the formal requirements of the law,
provided, of course, that the movant, or other individual with personal knowledge of the facts, take oath as to the truth thereof, in
effect converting the entire motion for new trial into an affidavit. 45 The motion of petitioner corporation was prepared and verified by
its counsel, and since the ground for the motion was premised on said counsel's excusable negligence or mistake, then the obvious
conclusion is that he had personal knowledge of the facts relating to such negligence or mistake. Hence, it can be said that the
motion of petitioner corporation for the re-opening of its cases and/or holding of new trial was in substantial compliance with the
formal requirements of the revised Rules of Court.

Even so, this Court finds no sufficient ground for granting the motion of petitioner corporation for the re-opening of its cases and/or
holding of new trial.

In G.R. No. 141104, petitioner corporation invokes the Resolution,46 dated 20 July 1998, by the CTA in another case, CTA Case No.
5296, involving the claim of petitioner corporation for refund/credit of input VAT for the third quarter of 1993. The said Resolution
allowed the re-opening of CTA Case No. 5296, earlier dismissed by the CTA, to give the petitioner corporation the opportunity to
present the missing export documents.

The rule that the grant or denial of motions for new trial rests on the discretion of the trial court, 47 may likewise be extended to the
CTA. When the denial of the motion rests upon the discretion of a lower court, this Court will not interfere with its exercise, unless
there is proof of grave abuse thereof.48

That the CTA granted the motion for re-opening of one case for the presentation of additional evidence and, yet, deny a similar
motion in another case filed by the same party, does not necessarily demonstrate grave abuse of discretion or arbitrariness on the
part of the CTA. Although the cases involve identical parties, the causes of action and the evidence to support the same can very
well be different. As can be gleaned from the Resolution, dated 20 July 1998, in CTA Case No. 5296, petitioner corporation was
claiming refund/credit of the input VAT on its zero-rated sales, consisting of actual export sales, to Mitsubishi Metal Corporation in
Tokyo, Japan. The CTA took into account the presentation by petitioner corporation of inward remittances of its export sales for the
quarter involved, its Supply Contract with Mitsubishi Metal Corporation, its 1993 Annual Report showing its sales to the said foreign
corporation, and its application for refund. In contrast, the present Petitions involve the claims of petitioner corporation for
refund/credit of the input VAT on its purchases of capital goods and on its effectively zero-rated sales to CBP and EPZA-registered
enterprises PASAR and PHILPHOS for the second, third, and fourth quarters of 1990 and first quarter of 1992. There being a
difference as to the bases of the claims of petitioner corporation for refund/credit of input VAT in CTA Case No. 5926 and in the
Petitions at bar, then, there are resulting variances as to the evidence required to support them.

Moreover, the very same Resolution, dated 20 July 1998, in CTA Case No. 5296, invoked by petitioner corporation, emphasizes
that the decision of the CTA to allow petitioner corporation to present evidence "is applicable pro hac vice or in this occasion only as
it is the finding of [the CTA] that petitioner [corporation] has established a few of the aforementioned material points regarding the
possible existence of the export documents together with the prior and succeeding returns for the quarters involved, x x x"
[Emphasis supplied.] Therefore, the CTA, in the present cases, cannot be bound by its ruling in CTA Case No. 5296, when these
cases do not involve the exact same circumstances that compelled it to grant the motion of petitioner corporation for re-opening of
CTA Case No. 5296.
V. VAT CLAIM FOR REFUND

Finally, assuming for the sake of argument that the non-presentation of the required documents was due to the fault of the counsel
of petitioner corporation, this Court finds that it does not constitute excusable negligence or mistake which would warrant the re-
opening of the cases and/or holding of new trial.

Under Section 1, Rule 37 of the Revised Rules of Court, the "negligence" must be excusable and generally imputable to the party
because if it is imputable to the counsel, it is binding on the client. To follow a contrary rule and allow a party to disown his counsel's
conduct would render proceedings indefinite, tentative, and subject to re-opening by the mere subterfuge of replacing the counsel.
What the aggrieved litigant should do is seek administrative sanctions against the erring counsel and not ask for the reversal of the
court's ruling.49

As elucidated by this Court in another case,50 the general rule is that the client is bound by the action of his counsel in the conduct
of his case and he cannot therefore complain that the result of the litigation might have been otherwise had his counsel proceeded
differently. It has been held time and again that blunders and mistakes made in the conduct of the proceedings in the trial court as a
result of the ignorance, inexperience or incompetence of counsel do not qualify as a ground for new trial. If such were to be
admitted as valid reasons for re-opening cases, there would never be an end to litigation so long as a new counsel could be
employed to allege and show that the prior counsel had not been sufficiently diligent, experienced or learned.

Moreover, negligence, to be "excusable," must be one which ordinary diligence and prudence could not have guarded
against.51 Revenue Regulations No. 3-88, which was issued on 15 February 1988, had been in effect more than two years prior to
the filing by petitioner corporation of its earliest application for refund/credit of input VAT involved herein on 21 August 1990. CTA
Circular No. 1-95 was issued only on 25 January 1995, after petitioner corporation had filed its Petitions before the CTA, but still
during the pendency of the cases of petitioner corporation before the tax court. The counsel of petitioner corporation does not
allege ignorance of the foregoing administrative regulation and tax court circular, only that he no longer deemed it necessary to
present the documents required therein because of the presentation of alleged unrebutted evidence of the zero-rated sales of
petitioner corporation. It was a judgment call made by the counsel as to which evidence to present in support of his client's cause,
later proved to be unwise, but not necessarily negligent.

Neither is there any merit in the contention of petitioner corporation that the non-presentation of the required documentary evidence
was due to the excusable mistake of its counsel, a ground under Section 1, Rule 37 of the revised Rules of Court for the grant of a
new trial. "Mistake," as it is referred to in the said rule, must be a mistake of fact, not of law, which relates to the case. 52 In the
present case, the supposed mistake made by the counsel of petitioner corporation is one of law, for it was grounded on his
interpretation and evaluation that Revenue Regulations No. 3-88 and CTA Circular No. 1-95, as amended, did not apply to his
client's cases and that there was no need to comply with the documentary requirements set forth therein. And although the counsel
of petitioner corporation advocated an erroneous legal position, the effects thereof, which did not amount to a deprivation of his
client's right to be heard, must bind petitioner corporation. The question is not whether petitioner corporation succeeded in
establishing its interests, but whether it had the opportunity to present its side.53

Besides, litigation is a not a "trial and error" proceeding. A party who moves for a new trial on the ground of mistake must show that
ordinary prudence could not have guarded against it. A new trial is not a refuge for the obstinate.54Ordinary prudence in these
cases would have dictated the presentation of all available evidence that would have supported the claims for refund/credit of input
VAT of petitioner corporation. Without sound legal basis, counsel for petitioner corporation concluded that Revenue Regulations No.
3-88, and later on, CTA Circular No. 1-95, as amended, did not apply to its client's claims. The obstinacy of petitioner corporation
and its counsel is demonstrated in their failure, nay, refusal, to comply with the appropriate administrative regulations and tax court
circular in pursuing the claims for refund/credit, now subject of G.R. Nos. 141104 and 148763, even though these were separately
instituted in a span of more than two years. It is also evident in the failure of petitioner corporation to address the issue and to
present additional evidence despite being given the opportunity to do so by the Court of Appeals. As pointed out by the appellate
court, in its Decision, dated 15 September 2000, in CA-G.R. SP No. 46718 –

x x x Significantly, in the resolution, dated 7 June 2000, this Court directed the parties to file memoranda discussing,
among others, the submission of proof for "its [petitioner's] sales of gold, copper concentrates, and pyrite to buyers."
Nevertheless, the parties, including the petitioner, failed to address this issue, thereby necessitating the affirmance of the
ruling of the Court of Tax Appeals on this point.55

Summary

Hence, although this Court agreed with the petitioner corporation that the two-year prescriptive period for the filing of claims for
refund/credit of input VAT must be counted from the date of filing of the quarterly VAT return, and that sales to EPZA-registered
enterprises operating within economic processing zones were effectively zero-rated and were not covered by Revenue Regulations
No. 2-88, it still denies the claims of petitioner corporation for refund of its input VAT on its purchases of capital goods and
effectively zero-rated sales during the second, third, and fourth quarters of 1990 and the first quarter of 1992, for not being
established and substantiated by appropriate and sufficient evidence. Petitioner corporation is also not entitled to the re-opening of
its cases and/or holding of new trial since the non-presentation of the required documentary evidence before the BIR and the CTA
by its counsel does not constitute excusable negligence or mistake as contemplated in Section 1, Rule 37 of the revised Rules of
Court.

WHEREFORE, premises considered, the instant Petitions for Review are hereby DENIED, and the Decisions, dated 6 July 1999
and 15 September 2000, of the Court of Appeals in CA-G.R. SP Nos. 47607 and 46718, respectively, are hereby AFFIRMED.
Costs against petitioner.
V. VAT CLAIM FOR REFUND

COMMISSIONER OF INTERNAL REVENUE, G.R. No. 172129

Petitioner, Present:

- versus - QUISUMBING, J., Chairperson,

MIRANT PAGBILAO CORPORATION (Formerly CARPIO MORALES,


SOUTHERN ENERGY QUEZON, INC.),
TINGA,
Respondent.
VELASCO, JR., and

BRION, JJ.

Promulgated:

September 12, 2008

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

DECISION

VELASCO, JR., J.:

Before us is a Petition for Review on Certiorari under Rule 45 assailing and seeking to set aside the Decision 1 dated December 22, 2005 of the
Court of Appeals (CA) in CA-G.R. SP No. 78280 which modified the March 18, 2003 Decision 2 of the Court of Tax Appeals (CTA) in CTA Case
No. 6133 entitled Mirant Pagbilao Corporation (Formerly Southern Energy Quezon, Inc.) v. Commissioner of Internal Revenueand ordered the
Bureau of Internal Revenue (BIR) to refund or issue a tax credit certificate (TCC) in favor of respondent Mirant Pagbilao Corporation (MPC) in
the amount representing its unutilized input value added tax (VAT) for the second quarter of 1998. Also assailed is the CA’s Resolution 3 of March
31, 2006 denying petitioner’s motion for reconsideration.

The Facts

MPC, formerly Southern Energy Quezon, Inc., and also formerly known as Hopewell (Phil.) Corporation, is a domestic firm engaged in the
generation of power which it sells to the National Power Corporation (NPC). For the construction of the electrical and mechanical equipment
portion of its Pagbilao, Quezon plant, which appears to have been undertaken from 1993 to 1996, MPC secured the services of Mitsubishi
Corporation (Mitsubishi) of Japan.

Under Section 134 of Republic Act No. (RA) 6395, the NPC’s revised charter, NPC is exempt from all taxes. In Maceda v. Macaraig,5 the Court
construed the exemption as covering both direct and indirect taxes.

In the light of the NPC’s tax exempt status, MPC, on the belief that its sale of power generation services to NPC is, pursuant to Sec. 108(B)(3) of
the Tax Code,6 zero-rated for VAT purposes, filed on December 1, 1997 with Revenue District Office (RDO) No. 60 in Lucena City an
Application for Effective Zero Rating. The application covered the construction and operation of its Pagbilao power station under a Build,
Operate, and Transfer scheme.

Not getting any response from the BIR district office, MPC refiled its application in the form of a "request for ruling" with the VAT Review
Committee at the BIR national office on January 28, 1999. On May 13, 1999, the Commissioner of Internal Revenue issued VAT Ruling No. 052-
99, stating that "the supply of electricity by Hopewell Phil. to the NPC, shall be subject to the zero percent (0%) VAT, pursuant to Section 108 (B)
(3) of the National Internal Revenue Code of 1997."

It must be noted at this juncture that consistent with its belief to be zero-rated, MPC opted not to pay the VAT component of the progress billings
from Mitsubishi for the period covering April 1993 to September 1996—for the E & M Equipment Erection Portion of MPC’s contract with
Mitsubishi. This prompted Mitsubishi to advance the VAT component as this serves as its output VAT which is essential for the determination of
its VAT payment. Apparently, it was only on April 14, 1998 that MPC paid Mitsubishi the VAT component for the progress billings from April
1993 to September 1996, and for which Mitsubishi issued Official Receipt (OR) No. 0189 in the aggregate amount of PhP 135,993,570.

On August 25, 1998, MPC, while awaiting approval of its application aforestated, filed its quarterly VAT return for the second quarter of 1998
where it reflected an input VAT of PhP 148,003,047.62, which included PhP 135,993,570 supported by OR No. 0189. Pursuant to the procedure
prescribed in Revenue Regulations No. 7-95, MPC filed on December 20, 1999 an administrative claim for refund of unutilized input VAT in the
amount of PhP 148,003,047.62.
V. VAT CLAIM FOR REFUND

Since the BIR Commissioner failed to act on its claim for refund and obviously to forestall the running of the two-year prescriptive period under
Sec. 229 of the National Internal Revenue Code (NIRC), MPC went to the CTA via a petition for review, docketed as CTA Case No. 6133.

Answering the petition, the BIR Commissioner, citing Kumagai-Gumi Co. Ltd. v. CIR,7 asserted that MPC’s claim for refund cannot be granted
for this main reason: MPC’s sale of electricity to NPC is not zero-rated for its failure to secure an approved application for zero-rating.

Before the CTA, among the issues stipulated by the parties for resolution were, in gist, the following:

1. Whether or not [MPC] has unapplied or unutilized creditable input VAT for the 2nd quarter of 1998 attributable to zero-rated sales to NPC
which are proper subject for refund pursuant to relevant provisions of the NIRC;

2. Whether the creditable input VAT of MPC for said period, if any, is substantiated by documents; and

3. Whether the unutilized creditable input VAT for said quarter, if any, was applied against any of the VAT output tax of MPC in the subsequent
quarter.

To provide support to the CTA in verifying and analyzing documents and figures and entries contained therein, the Sycip Gorres & Velayo (SGV),
an independent auditing firm, was commissioned.

The Ruling of the CTA

On the basis of its affirmative resolution of the first issue, the CTA, by its Decision dated March 18, 2003, granted MPC’s claim for input VAT
refund or credit, but only for the amount of PhP 10,766,939.48. The fallo of the CTA’s decision reads:

In view of all the foregoing, the instant petition is PARTIALLY GRANTED. Accordingly, respondent is hereby ORDERED to REFUND or in the
alternative, ISSUE A TAX CREDIT CERTIFICATE in favor of the petitioner its unutilized input VAT payments directly attributable to its
effectively zero-rated sales for the second quarter of 1998 in the reduced amount of P10,766,939.48, computed as follows:

Claimed Input VAT P148,003,047.62

Less: Disallowances

a.) As summarized by SGV & Co. in its initial report (Exh. P)

I. Input Taxes on Purchases of Services:

1. Supported by documents

other than VAT Ors P 10,629.46

2. Supported by photocopied VAT OR 879.09

II. Input Taxes on Purchases of Goods:

1. Supported by documents other than

VAT invoices 165,795.70

2. Supported by Invoices with TIN only 1,781.82

3. Supported by photocopied VAT

invoices 3,153.62

III. Input Taxes on Importation of Goods:

1. Supported by photocopied documents

[IEDs and/or Bureau of Customs


V. VAT CLAIM FOR REFUND

(BOC) Ors] 716,250.00

2. Supported by broker’s computations 91,601.00 990,090.69

b.) Input taxes without supporting documents as

summarized in Annex A of SGV & Co.’s

supplementary report (CTA records, page 134) 252,447.45

c.) Claimed input taxes on purchases of services from

Mitsubishi Corp. for being substantiated by dubious OR 135,996,570.008

Refundable Input P10,766,939.48

SO ORDERED.9

Explaining the disallowance of over PhP 137 million claimed input VAT, the CTA stated that most of MPC’s purchases upon which it anchored its
claims for refund or tax credit have not been amply substantiated by pertinent documents, such as but not limited to VAT ORs, invoices, and other
supporting documents. Wrote the CTA:

We agree with the above SGV findings that out of the remaining taxes of P136,246,017.45, the amount of P252,477.45 was not supported by any
document and should therefore be outrightly disallowed.

As to the claimed input tax of P135,993,570.00 (P136,246,017.45 less P252,477.45 ) on purchases of services from Mitsubishi Corporation,
Japan, the same is found to be of doubtful veracity. While it is true that said amount is substantiated by a VAT official receipt with Serial No.
0189 dated April 14, 1998 x x x, it must be observed, however, that said VAT allegedly paid pertains to the services which were rendered for the
period 1993 to 1996. x x x

The Ruling of the CA

Aggrieved, MPC appealed the CTA’s Decision to the CA via a petition for review under Rule 43, docketed as CA-G.R. SP No. 78280. On
December 22, 2005, the CA rendered its assailed decision modifying that of the CTA decision by granting most of MPC’s claims for tax refund or
credit. And in a Resolution of March 31, 2006, the CA denied the BIR Commissioner’s motion for reconsideration. The decretal portion of the CA
decision reads:

WHEREFORE, premises considered, the instant petition is GRANTED. The assailed Decision of the Court of Tax Appeals dated March 18, 2003
is hereby MODIFIED. Accordingly, respondent Commissioner of Internal Revenue is ordered to refund or issue a tax credit certificate in favor of
petitioner Mirant Pagbilao Corporation its unutilized input VAT payments directly attributable to its effectively zero-rated sales for the second
quarter of 1998 in the total amount of P146,760,509.48.

SO ORDERED.10

The CA agreed with the CTA on MPC’s entitlement to (1) a zero-rating for VAT purposes for its sales and services to tax-exempt NPC; and (2) a
refund or tax credit for its unutilized input VAT for the second quarter of 1998. Their disagreement, however, centered on the issue of proper
documentation, particularly the evidentiary value of OR No. 0189.

The CA upheld the disallowance of PhP 1,242,538.14 representing zero-rated input VAT claims supported only by photocopies of VAT
OR/Invoice, documents other than VAT Invoice/OR, and mere broker’s computations. But the CA allowed MPC’s refund claim of PhP
135,993,570 representing input VAT payments for purchases of goods and/or services from Mitsubishi supported by OR No. 0189. The appellate
court ratiocinated that the CTA erred in disallowing said claim since the OR from Mitsubishi was the best evidence for the payment of input VAT
by MPC to Mitsubishi as required under Sec. 110(A)(1)(b) of the NIRC. The CA ruled that the legal requirement of a VAT Invoice/OR to
substantiate creditable input VAT was complied with through OR No. 0189 which must be viewed as conclusive proof of the payment of input
VAT. To the CA, OR No. 0189 represented an undisputable acknowledgment and receipt by Mitsubishi of the input VAT payment of MPC.

The CA brushed aside the CTA’s ruling and disquisition casting doubt on the veracity and genuineness of the Mitsubishi-issued OR No. 0189. It
reasoned that the issuance date of the said receipt, April 14, 1998, must be taken conclusively to represent the input VAT payments made by MPC
to Mitsubishi as MPC had no real control on the issuance of the OR. The CA held that the use of a different exchange rate reflected in the OR is
of no consequence as what the OR undeniably attests and acknowledges was Mitsubishi’s receipt of MPC’s input VAT payment.

The Issue
V. VAT CLAIM FOR REFUND

Hence, the instant petition on the sole issue of "whether or not respondent [MPC] is entitled to the refund of its input VAT payments made from
1993 to 1996 amounting to [PhP] 146,760,509.48."11

The Court’s Ruling

As a preliminary matter, it should be stressed that the BIR Commissioner, while making reference to the figure PhP 146,760,509.48, joins the CA
and the CTA on their disposition on the propriety of the refund of or the issuance of a TCC for the amount of PhP 10,766,939.48. In fine, the BIR
Commissioner trains his sight and focuses his arguments on the core issue of whether or not MPC is entitled to a refund for PhP 135,993,570
(PhP 146,760,509.48 - PhP 10,766,939.48 = PhP 135,993,570) it allegedly paid as creditable input VAT for services and goods purchased from
Mitsubishi during the 1993 to 1996 stretch.

The divergent factual findings and rulings of the CTA and CA impel us to evaluate the evidence adduced below, particularly the April 14, 1998
OR 0189 in the amount of PhP 135,996,570 [for US$ 5,190,000 at US$1: PhP 26.203 rate of exchange]. Verily, a claim for tax refund may be
based on a statute granting tax exemption, or, as Commissioner of Internal Revenue v. Fortune Tobacco Corporation 12 would have it, the result of
legislative grace. In such case, the claim is to be construed strictissimi juris against the taxpayer,13 meaning that the claim cannot be made to rest
on vague inference. Where the rule of strict interpretation against the taxpayer is applicable as the claim for refund partakes of the nature of an
exemption, the claimant must show that he clearly falls under the exempting statute. On the other hand, a tax refund may be, as usually it is,
predicated on tax refund provisions allowing a refund of erroneous or excess payment of tax. The return of what was erroneously paid is founded
on the principle of solutio indebiti, a basic postulate that no one should unjustly enrich himself at the expense of another. The caveat against
unjust enrichment covers the government.14 And as decisional law teaches, a claim for tax refund proper, as here, necessitates only the
preponderance-of-evidence threshold like in any ordinary civil case. 15

We apply the foregoing elementary principles in our evaluation on whether OR 0189, in the backdrop of the factual antecedents surrounding its
issuance, sufficiently proves the alleged unutilized input VAT claimed by MPC.

The Court can review issues of fact where there are

divergent findings by the trial and appellate courts

As a matter of sound practice, the Court refrains from reviewing the factual determinations of the CA or reevaluate the evidence upon which its
decision is founded. One exception to this rule is when the CA and the trial court diametrically differ in their findings, 16 as here. In such a case, it
is incumbent upon the Court to review and determine if the CA might have overlooked, misunderstood, or misinterpreted certain facts or
circumstances of weight, which, if properly considered, would justify a different conclusion. 17 In the instant case, the CTA, unlike the CA,
doubted the veracity of OR No. 0189 and did not appreciate the same to support MPC’s claim for tax refund or credit.

Petitioner BIR Commissioner, echoing the CTA’s stand, argues against the sufficiency of OR No. 0189 to prove unutilized input VAT payment by
MPC. He states in this regard that the BIR can require additional evidence to prove and ascertain payment of creditable input VAT, or that the
claim for refund or tax credit was filed within the prescriptive period, or had not previously been refunded to the taxpayer.

To bolster his position on the dubious character of OR No. 0189, or its insufficiency to prove input VAT payment by MPC, petitioner proffers the
following arguments:

(1) The input tax covered by OR No. 0189 pertains to purchases by MPC from Mitsubishi covering the period from 1993 to 1996; however,
MPC’s claim for tax refund or credit was filed on December 20, 1999, clearly way beyond the two-year prescriptive period set in Sec. 112 of the
NIRC;

(2) MPC failed to explain why OR No. 0189 was issued by Mitsubishi (Manila) when the invoices which the VAT were originally billed came
from the Mitsubishi’s head office in Japan;

(3) The exchange rate used in OR No. 0189 was pegged at PhP 26.203: USD 1 or the exchange rate prevailing in 1993 to 1996, when, on April
14, 1998, the date OR No. 0189 was issued, the exchange rate was already PhP 38.01 to a US dollar;

(4) OR No. 0189 does not show or include payment of accrued interest which Mitsubishi was charging and demanded from MPC for having
advanced a considerable amount of VAT. The demand, per records, is embodied in the May 12, 1995 letter of Mitsubishi to MPC;

(5) MPC failed to present to the CTA its VAT returns for the second and third quarters of 1995, when the bulk of the VAT payment covered by OR
No. 0189—specifically PhP 109,329,135.17 of the total amount of PhP 135,993,570—was billed by Mitsubishi, when such return is necessary to
ascertain that the total amount covered by the receipt or a large portion thereof was not previously refunded or credited; and

(6) No other documents proving said input VAT payment were presented except OR No. 0189 which, considering the fact that OR No. 0188 was
likewise issued by Mitsubishi and presented before the CTA but admittedly for payments made by MPC on progress billings covering service
purchases from 1993 to 1996, does not clearly show if such input VAT payment was also paid for the period 1993 to 1996 and would be beyond
the two-year prescriptive period.
V. VAT CLAIM FOR REFUND

The petition is partly meritorious.

Belated payment by MPC of its obligation for creditable input VAT

As no less found by the CTA, citing the SGV’s report, the payments covered by OR No. 0189 were for goods and service purchases made by
MPC through the progress billings from Mitsubishi for the period covering April 1993 to September 1996—for the E & M Equipment Erection
Portion of MPC’s contract with Mitsubishi. 18 It is likewise undisputed that said payments did not include payments for the creditable input VAT of
MPC. This fact is shown by the May 12, 1995 letter 19 from Mitsubishi where, as earlier indicated, it apprised MPC of the advances Mitsubishi
made for the VAT payments, i.e., MPC’s creditable input VAT, and for which it was holding MPC accountable for interest therefor.

In net effect, MPC did not, for the VATable MPC-Mitsubishi 1993 to 1996 transactions adverted to, immediately pay the corresponding input
VAT. OR No. 0189 issued on April 14, 1998 clearly reflects the belated payment of input VAT corresponding to the payment of the progress
billings from Mitsubishi for the period covering April 7, 1993 to September 6, 1996. SGV found that OR No. 0189 in the amount of PhP
135,993,570 (USD 5,190,000) was duly supported by bank statement evidencing payment to Mitsubishi (Japan). 20 Undoubtedly, OR No. 0189
proves payment by MPC of its creditable input VAT relative to its purchases from Mitsubishi.

OR No. 0189 by itself sufficiently proves payment of VAT

The CA, citing Sec. 110(A)(1)(B) of the NIRC, held that OR No. 0189 constituted sufficient proof of payment of creditable input VAT for the
progress billings from Mitsubishi for the period covering April 7, 1993 to September 6, 1996. Sec. 110(A)(1)(B) of the NIRC pertinently
provides:

Section 110. Tax Credits. –

A. Creditable Input Tax. –

(1) Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 113 hereof on the following transactions
shall be creditable against the output tax:

(a) Purchase or importation of goods:

xxxx

(b) Purchase of services on which a value-added tax has been actually paid. (Emphasis ours.)

Without necessarily saying that the BIR is precluded from requiring additional evidence to prove that input tax had indeed paid or, in fine, that the
taxpayer is indeed entitled to a tax refund or credit for input VAT, we agree with the CA’s above disposition. As the Court distinctly notes, the law
considers a duly-executed VAT invoice or OR referred to in the above provision as sufficient evidence to support a claim for input tax credit. And
any doubt as to what OR No. 0189 was for or tended to prove should reasonably be put to rest by the SGV report on which the CTA notably
placed much reliance. The SGV report stated that "[OR] No. 0189 dated April 14, 1998 is for the payment of the VAT on the progress billings"
from Mitsubishi Japan "for the period April 7, 1993 to September 6, 1996 for the E & M Equipment Erection Portion of the Company’s contract
with Mitsubishi Corporation (Japan)."21

VAT presumably paid on April 14, 1998

While available records do not clearly indicate when MPC actually paid the creditable input VAT amounting to PhP 135,993,570 (USD
5,190,000) for the aforesaid 1993 to 1996 service purchases, the presumption is that payment was made on the date appearing on OR No. 0189,
i.e., April 14, 1998. In fact, said creditable input VAT was reflected in MPC’s VAT return for the second quarter of 1998.

The aforementioned May 12, 1995 letter from Mitsubishi to MPC provides collaborating proof of the belated payment of the creditable input VAT
angle. To reiterate, Mitsubishi, via said letter, apprised MPC of the VAT component of the service purchases MPC made and reminded MPC that
Mitsubishi had advanced VAT payments to which Mitsubishi was entitled and from which it was demanding interest payment. Given the scenario
depicted in said letter, it is understandable why Mitsubishi, in its effort to recover the amount it advanced, used the PhP 26.203: USD 1 exchange
formula in OR No. 0189 for USD 5,190,000.

No showing of interest payment not fatal to claim for refund

Contrary to petitioner’s posture, the matter of nonpayment by MPC of the interests demanded by Mitsubishi is not an argument against the fact of
payment by MPC of its creditable input VAT or of the authenticity or genuineness of OR No. 0189; for at the end of the day, the matter of interest
payment was between Mitsubishi and MPC and may very well be covered by another receipt. But the more important consideration is the fact
that MPC, as confirmed by the SGV, paid its obligation to Mitsubishi, and the latter issued to MPC OR No. 0189, for the VAT component of its
1993 to 1996 service purchases.
V. VAT CLAIM FOR REFUND

The next question is, whether or not MPC is entitled to a refund or a TCC for the alleged unutilized input VAT of PhP 135,993,570 covered by
OR No. 0189 which sufficiently proves payment of the input VAT.

We answer the query in the negative.

Claim for refund or tax credit filed out of time

The claim for refund or tax credit for the creditable input VAT payment made by MPC embodied in OR No. 0189 was filed beyond the period
provided by law for such claim. Sec. 112(A) of the NIRC pertinently reads:

(A) Zero-rated or Effectively Zero-rated Sales. – Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two
(2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of
creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied
against output tax: x x x. (Emphasis ours.)

The above proviso clearly provides in no uncertain terms that unutilized input VAT payments not otherwise used for any internal revenue tax due
the taxpayer must be claimed within two years reckoned from the close of the taxable quarter when the relevant sales were made pertaining
to the input VAT regardless of whether said tax was paid or not. As the CA aptly puts it, albeit it erroneously applied the aforequoted Sec.
112(A), "[P]rescriptive period commences from the close of the taxable quarter when the sales were made and not from the time the input VAT
was paid nor from the time the official receipt was issued." 22 Thus, when a zero-rated VAT taxpayer pays its input VAT a year after the pertinent
transaction, said taxpayer only has a year to file a claim for refund or tax credit of the unutilized creditable input VAT. The reckoning frame would
always be the end of the quarter when the pertinent sales or transaction was made, regardless when the input VAT was paid. Be that as it may, and
given that the last creditable input VAT due for the period covering the progress billing of September 6, 1996 is the third quarter of 1996 ending
on September 30, 1996, any claim for unutilized creditable input VAT refund or tax credit for said quarter prescribed two years after September
30, 1996 or, to be precise, on September 30, 1998. Consequently, MPC’s claim for refund or tax credit filed on December 10, 1999 had already
prescribed.

Reckoning for prescriptive period under

Secs. 204(C) and 229 of the NIRC inapplicable

To be sure, MPC cannot avail itself of the provisions of either Sec. 204(C) or 229 of the NIRC which, for the purpose of refund, prescribes a
different starting point for the two-year prescriptive limit for the filing of a claim therefor. Secs. 204(C) and 229 respectively provide:

Sec. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes.— The Commissioner may –

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

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

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

Notably, the above provisions also set a two-year prescriptive period, reckoned from date of payment of the tax or penalty, for the filing of a
claim of refund or tax credit. Notably too, both provisions apply only to instances of erroneous payment or illegal collection of internal revenue
taxes.

MPC’s creditable input VAT not erroneously paid

For perspective, under Sec. 105 of the NIRC, creditable input VAT is an indirect tax which can be shifted or passed on to the buyer, transferee, or
V. VAT CLAIM FOR REFUND

lessee of the goods, properties, or services of the taxpayer. The fact that the subsequent sale or transaction involves a wholly-tax exempt client,
resulting in a zero-rated or effectively zero-rated transaction, does not, standing alone, deprive the taxpayer of its right to a refund for any
unutilized creditable input VAT, albeit the erroneous, illegal, or wrongful payment angle does not enter the equation.

In Commissioner of Internal Revenue v. Seagate Technology (Philippines), the Court explained the nature of the VAT and the entitlement to tax
refund or credit of a zero-rated taxpayer:

Viewed broadly, the VAT is a uniform tax x x x 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 as they
pass along the production and distribution chain, the tax being limited only to the value added to such goods, properties or services by the seller,
transferor or lessor. It is an indirect tax that may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. As
such, it should be understood not in the context of the person or entity that is primarily, directly and legally liable for its payment, but in terms of
its nature as a tax on consumption. In either case, though, the same conclusion is arrived at.

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

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

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Zero-rated transactions generally refer to the export sale of goods and supply of services. The tax rate is set at zero. When applied to the tax base,
such rate obviously results in no tax chargeable against the purchaser. The seller of such transactions charges no output tax, but can claim a refund
of or a tax credit certificate for the VAT previously charged by suppliers. 23 (Emphasis added.)

Considering the foregoing discussion, it is clear that Sec. 112(A) of the NIRC, providing a two-year prescriptive period reckoned from the close
of the taxable quarter when the relevant sales or transactions were made pertaining to the creditable input VAT, applies to the instant case, and not
to the other actions which refer to erroneous payment of taxes.

As a final consideration, the Court wishes to remind the BIR and other tax agencies of their duty to treat claims for refunds and tax credits with
proper attention and urgency. Had RDO No. 60 and, later, the BIR proper acted, instead of sitting, on MPC’s underlying application for effective
zero rating, the matter of addressing MPC’s right, or lack of it, to tax credit or refund could have plausibly been addressed at their level and
perchance freed the taxpayer and the government from the rigors of a tedious litigation.

The all too familiar complaint is that the government acts with dispatch when it comes to tax collection, but pays little, if any, attention to tax
claims for refund or exemption. It is high time our tax collectors prove the cynics wrong.

WHEREFORE, the petition is PARTLY GRANTED. The Decision dated December 22, 2005 and the Resolution dated March 31, 2006 of the CA
in CA-G.R. SP No. 78280 are AFFIRMED with the MODIFICATION that the claim of respondent MPC for tax refund or credit to the extent of
PhP 135,993,570, representing its input VAT payments for service purchases from Mitsubishi Corporation of Japan for the construction of a
portion of its Pagbilao, Quezon power station, is DENIED on the ground that the claim had prescribed. Accordingly, petitioner Commissioner of
Internal Revenue is ordered to refund or, in the alternative, issue a tax credit certificate in favor of MPC, its unutilized input VAT payments
directly attributable to its effectively zero-rated sales for the second quarter in the total amount of PhP 10,766,939.48.

No pronouncement as to costs.

SO ORDERED.