Escape From Taxation

G.R. No.
147188 September 14, 2004
COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-administrators Lorna
Kapunan and Mario Luza Bautista, respondents.
DECISION
DAVIDE, JR., C.J.:
This Court is called upon to determine in this case whether the tax planning scheme adopted by a
corporation constitutes tax evasion that would justify an assessment of deficiency income tax.
The petitioner seeks the reversal of the Decision1 of the Court of Appeals of 31 January 2001 in CA-
G.R. SP No. 57799 affirming the 3 January 2000 Decision2 of the Court of Tax Appeals (CTA) in
C.T.A. Case No. 5328,3 which held that the respondent Estate of Benigno P. Toda, Jr. is not liable
for the deficiency income tax of Cibeles Insurance Corporation (CIC) in the amount of
₱79,099,999.22 for the year 1989, and ordered the cancellation and setting aside of the assessment
issued by Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9 January 1995.
The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of Internal
Revenue for deficiency income tax arising from an alleged simulated sale of a 16-storey commercial
building known as Cibeles Building, situated on two parcels of land on Ayala Avenue, Makati City.
On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its
issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of land on
which the building stands for an amount of not less than ₱90 million.4
On 30 August 1989, Toda purportedly sold the property for ₱100 million to Rafael A. Altonaga, who,
in turn, sold the same property on the same day to Royal Match Inc. (RMI) for ₱200 million. These
two transactions were evidenced by Deeds of Absolute Sale notarized on the same day by the same
notary public.5
For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of ₱10 million.6
On 16 April 1990, CIC filed its corporate annual income tax return7 for the year 1989, declaring,
among other things, its gain from the sale of real property in the amount of ₱75,728.021. After
crediting withholding taxes of ₱254,497.00, it paid ₱26,341,2078 for its net taxable income of
₱75,987,725.
On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for ₱12.5 million,
as evidenced by a Deed of Sale of Shares of Stocks.9 Three and a half years later, or on 16 January
1994, Toda died.
On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice10 and demand
letter to the CIC for deficiency income tax for the year 1989 in the amount of ₱79,099,999.22.
The new CIC asked for a reconsideration, asserting that the assessment should be directed against
the old CIC, and not against the new CIC, which is owned by an entirely different set of stockholders;
moreover, Toda had undertaken to hold the buyer of his stockholdings and the CIC free from all tax
liabilities for the fiscal years 1987-1989.11
On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators
Lorna Kapunan and Mario Luza Bautista, received a Notice of Assessment12 dated 9 January 1995
from the Commissioner of Internal Revenue for deficiency income tax for the year 1989 in the
amount of ₱79,099,999.22, computed as follows:
Income Tax – 1989

Net Income per return ₱75,987,725.00
Add: Additional gain on sale of real property taxable
under ordinary corporate income but were
substituted with individual capital gains(₱200M – 100,000,000.00
100M)
Total Net Taxable Income per investigation ₱175,987,725.00
Tax Due thereof at 35% ₱ 61,595,703.75
Less: Payment already made
1. Per return ₱26,595,704.00
2. Thru Capital Gains Tax made
by R.A. Altonaga 10,000,000.00 36,595,704.00 Balance of tax due
₱ 24,999,999.75
Add: 50% Surcharge 12,499,999.88
25% Surcharge 6,249,999.94
Total ₱ 43,749,999.57
Add: Interest 20% from
4/16/90-4/30/94 (.808) 35,349,999.65
TOTAL AMT. DUE & COLLECTIBLE ₱ 79,099,999.22

==============
The Estate thereafter filed a letter of protest.13
In the letter dated 19 October 1995,14 the Commissioner dismissed the protest, stating that a
fraudulent scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda by
covering up the additional gain of ₱100 million, which resulted in the change in the income structure
of the proceeds of the sale of the two parcels of land and the building thereon to an individual capital
gains, thus evading the higher corporate income tax rate of 35%.
On 15 February 1996, the Estate filed a petition for review15 with the CTA alleging that the
Commissioner erred in holding the Estate liable for income tax deficiency; that the inference of fraud
of the sale of the properties is unreasonable and unsupported; and that the right of the
Commissioner to assess CIC had already prescribed.
In his Answer16 and Amended Answer,17 the Commissioner argued that the two transactions actually
constituted a single sale of the property by CIC to RMI, and that Altonaga was neither the buyer of
the property from CIC nor the seller of the same property to RMI. The additional gain of ₱100 million
(the difference between the second simulated sale for ₱200 million and the first simulated sale for
₱100 million) realized by CIC was taxed at the rate of only 5% purportedly as capital gains tax of
Altonaga, instead of at the rate of 35% as corporate income tax of CIC. The income tax return filed
by CIC for 1989 with intent to evade payment of the tax was thus false or fraudulent. Since such
falsity or fraud was discovered by the BIR only on 8 March 1991, the assessment issued on 9
January 1995 was well within the prescriptive period prescribed by Section 223 (a) of the National
Internal Revenue Code of 1986, which provides that tax may be assessed within ten years from the
discovery of the falsity or fraud. With the sale being tainted with fraud, the separate corporate
personality of CIC should be disregarded. Toda, being the registered owner of the 99.991% shares
of stock of CIC and the beneficial owner of the remaining 0.009% shares registered in the name of
the individual directors of CIC, should be held liable for the deficiency income tax, especially
because the gains realized from the sale were withdrawn by him as cash advances or paid to him as
cash dividends. Since he is already dead, his estate shall answer for his liability.
In its decision18 of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC
committed fraud to deprive the government of the taxes due it. It ruled that even assuming that a
pre-conceived scheme was adopted by CIC, the same constituted mere tax avoidance, and not tax
evasion. There being no proof of fraudulent transaction, the applicable period for the BIR to assess
CIC is that prescribed in Section 203 of the NIRC of 1986, which is three years after the last day
prescribed by law for the filing of the return. Thus, the government’s right to assess CIC prescribed
on 15 April 1993. The assessment issued on 9 January 1995 was, therefore, no longer valid. The
CTA also ruled that the mere ownership by Toda of 99.991% of the capital stock of CIC was not in
itself sufficient ground for piercing the separate corporate personality of CIC. Hence, the CTA
declared that the Estate is not liable for deficiency income tax of ₱79,099,999.22 and, accordingly,
cancelled and set aside the assessment issued by the Commissioner on 9 January 1995.
In its motion for reconsideration,19 the Commissioner insisted that the sale of the property owned by
CIC was the result of the connivance between Toda and Altonaga. She further alleged that the latter
was a representative, dummy, and a close business associate of the former, having held his office in
a property owned by CIC and derived his salary from a foreign corporation (Aerobin, Inc.) duly
owned by Toda for representation services rendered. The CTA denied20 the motion for
reconsideration, prompting the Commissioner to file a petition for review21 with the Court of Appeals.
In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the
CTA, reasoning that the CTA, being more advantageously situated and having the necessary
expertise in matters of taxation, is "better situated to determine the correctness, propriety, and
legality of the income tax assessments assailed by the Toda Estate."22
Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition
invoking the following grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED

NO FRAUD WITH INTENT TO EVADE THE TAX ON THE SALE OF THE PROPERTIES OF
CIBELES INSURANCE CORPORATION.
II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE

CORPORATE PERSONALITY OF CIBELES INSURANCE CORPORATION.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER
TO ASSESS RESPONDENT FOR DEFICIENCY INCOME TAX FOR THE YEAR 1989 HAD
PRESCRIBED.
The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by
CIC of the Cibeles property was in connivance with its dummy Rafael Altonaga, who was financially
incapable of purchasing it. She further points out that the documents themselves prove the fact of
fraud in that (1) the two sales were done simultaneously on the same date, 30 August 1989; (2) the
Deed of Absolute Sale between Altonaga and RMI was notarized ahead of the alleged sale between
CIC and Altonaga, with the former registered in the Notarial Register of Jocelyn H. Arreza Pabelana
as Doc. 91, Page 20, Book I, Series of 1989; and the latter, as Doc. No. 92, Page 20, Book I, Series
of 1989, of the same Notary Public; (3) as early as 4 May 1989, CIC received ₱40 million from RMI,
and not from Altonaga. The said amount was debited by RMI in its trial balance as of 30 June 1989
as investment in Cibeles Building. The substantial portion of ₱40 million was withdrawn by Toda
through the declaration of cash dividends to all its stockholders.
For its part, respondent Estate asserts that the Commissioner failed to present the income tax return
of Altonaga to prove that the latter is financially incapable of purchasing the Cibeles property.
To resolve the grounds raised by the Commissioner, the following questions are pertinent:
1. Is this a case of tax evasion or tax avoidance?
2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and
3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year
1989, if any?
We shall discuss these questions in seriatim.
Is this a case of tax evasion or tax avoidance?
Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from
taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method
should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is
a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer
to further or additional civil or criminal liabilities.23
Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of
less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown
that a tax is due; (2) an accompanying state of mind which is described as being "evil," in "bad faith,"
"willfull," or "deliberate and not accidental"; and (3) a course of action or failure of action which is
unlawful.24
All these factors are present in the instant case. It is significant to note that as early as 4 May 1989,
prior to the purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC
received ₱40 million from RMI,25 and not from Altonaga. That ₱40 million was debited by RMI and
reflected in its trial balance26 as "other inv. – Cibeles Bldg." Also, as of 31 July 1989, another ₱40
million was debited and reflected in RMI’s trial balance as "other inv. – Cibeles Bldg." This would
show that the real buyer of the properties was RMI, and not the intermediary Altonaga. lavvphi1.net
The investigation conducted by the BIR disclosed that Altonaga was a close business associate and
one of the many trusted corporate executives of Toda. This information was revealed by Mr. Boy
Prieto, the assistant accountant of CIC and an old timer in the company.27 But Mr. Prieto did not
testify on this matter, hence, that information remains to be hearsay and is thus inadmissible in
evidence. It was not verified either, since the letter-request for investigation of Altonaga was
unserved,28 Altonaga having left for the United States of America in January 1990. Nevertheless, that
Altonaga was a mere conduit finds support in the admission of respondent Estate that the sale to
him was part of the tax planning scheme of CIC. That admission is borne by the records. In its
Memorandum, respondent Estate declared:
Petitioner, however, claims there was a "change of structure" of the proceeds of sale.
Admitted one hundred percent. But isn’t this precisely the definition of tax planning? Change
the structure of the funds and pay a lower tax. Precisely, Sec. 40 (2) of the Tax Code exists,
allowing tax free transfers of property for stock, changing the structure of the property and
the tax to be paid. As long as it is done legally, changing the structure of a transaction to
achieve a lower tax is not against the law. It is absolutely allowed.
Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [sic]
cannot be faulted for wanting to reduce the tax from 35% to 5%.29 [Underscoring
supplied].
The scheme resorted to by CIC in making it appear that there were two sales of the subject
properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a
legitimate tax planning. Such scheme is tainted with fraud.
Fraud in its general sense, "is deemed to comprise anything calculated to deceive, including all acts,
omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly
reposed, resulting in the damage to another, or by which an undue and unconscionable advantage is
taken of another."30
Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be
paid especially that the transfer from him to RMI would then subject the income to only 5% individual
capital gains tax, and not the 35% corporate income tax. Altonaga’s sole purpose of acquiring and
transferring title of the subject properties on the same day was to create a tax shelter. Altonaga
never controlled the property and did not enjoy the normal benefits and burdens of ownership. The
sale to him was merely a tax ploy, a sham, and without business purpose and economic substance.
Doubtless, the execution of the two sales was calculated to mislead the BIR with the end in view of
reducing the consequent income tax liability. lavvphi 1.net
In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on
the mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion.31
Generally, a sale or exchange of assets will have an income tax incidence only when it is
consummated.32 The incidence of taxation depends upon the substance of a transaction. The tax
consequences arising from gains from a sale of property are not finally to be determined solely by
the means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and
each step from the commencement of negotiations to the consummation of the sale is relevant. A
sale by one person cannot be transformed for tax purposes into a sale by another by using the latter
as a conduit through which to pass title. To permit the true nature of the transaction to be disguised
by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective
administration of the tax policies of Congress.33
To allow a taxpayer to deny tax liability on the ground that the sale was made through another and
distinct entity when it is proved that the latter was merely a conduit is to sanction a circumvention of
our tax laws. Hence, the sale to Altonaga should be disregarded for income tax purposes.34 The two
sale transactions should be treated as a single direct sale by CIC to RMI.
Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended
(now 27 (A) of the Tax Reform Act of 1997), which stated as follows:
Sec. 24. Rates of tax on corporations. – (a) Tax on domestic corporations.- A tax is hereby
imposed upon the taxable net income received during each taxable year from all sources by
every corporation organized in, or existing under the laws of the Philippines, and
partnerships, no matter how created or organized but not including general professional
partnerships, in accordance with the following:
Twenty-five percent upon the amount by which the taxable net income does not
exceed one hundred thousand pesos; and
Thirty-five percent upon the amount by which the taxable net income exceeds one
hundred thousand pesos.
CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5%
individual capital gains tax provided for in Section 34 (h) of the NIRC of 198635 (now 6% under
Section 24 (D) (1) of the Tax Reform Act of 1997) is inapplicable. Hence, the assessment for the
deficiency income tax issued by the BIR must be upheld.
Has the period of assessment prescribed?
No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:
Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In

the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the
tax may be assessed, or a proceeding in court after the collection of such tax may be begun
without assessment, at any time within ten years after the discovery of the falsity, fraud or
omission: Provided, That in a fraud assessment which has become final and executory, the
fact of fraud shall be judicially taken cognizance of in the civil or criminal action for collection
thereof… .
Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3)
failure to file a return, the period within which to assess tax is ten years from discovery of the fraud,
falsification or omission, as the case may be.
It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion of
the BIR on the tax consequence of the two sale transactions.36 Thus, the BIR was amply informed of
the transactions even prior to the execution of the necessary documents to effect the transfer.
Subsequently, the two sales were openly made with the execution of public documents and the
declaration of taxes for 1989. However, these circumstances do not negate the existence of fraud.
As earlier discussed those two transactions were tainted with fraud. And even
assuming arguendo that there was no fraud, we find that the income tax return filed by CIC for the
year 1989 was false. It did not reflect the true or actual amount gained from the sale of the Cibeles
property. Obviously, such was done with intent to evade or reduce tax liability.
As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten
years from the discovery of the falsity. The false return was filed on 15 April 1990, and the falsity
thereof was claimed to have been discovered only on 8 March 1991.37 The assessment for the 1989
deficiency income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the correct
assessment for deficiency income tax was well within the prescriptive period.
Is respondent Estate liable for the 1989 deficiency income tax of Cibeles Insurance Corporation?
A corporation has a juridical personality distinct and separate from the persons owning or composing
it. Thus, the owners or stockholders of a corporation may not generally be made to answer for the
liabilities of a corporation and vice versa. There are, however, certain instances in which personal
liability may arise. It has been held in a number of cases that personal liability of a corporate director,
trustee, or officer along, albeit not necessarily, with the corporation may validly attach when:
1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross
negligence in directing its affairs, or (c) conflict of interest, resulting in damages to the
corporation, its stockholders, or other persons;
2. He consents to the issuance of watered down stocks or, having knowledge thereof, does
not forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by specific provision of law, to personally answer for his corporate action.38
It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly
and voluntarily held himself personally liable for all the tax liabilities of CIC and the buyer for the
years 1987, 1988, and 1989. Paragraph g of the Deed of Sale of Shares of Stocks specifically
provides:
g. Except for transactions occurring in the ordinary course of business, Cibeles has no
liabilities or obligations, contingent or otherwise, for taxes, sums of money or insurance
claims other than those reported in its audited financial statement as of December 31, 1989,
attached hereto as "Annex B" and made a part hereof. The business of Cibeles has at all
times been conducted in full compliance with all applicable laws, rules and
regulations. SELLER undertakes and agrees to hold the BUYER and Cibeles free from
any and all income tax liabilities of Cibeles for the fiscal years 1987, 1988 and
1989.39 [Underscoring Supplied].
When the late Toda undertook and agreed "to hold the BUYER and Cibeles free from any all income
tax liabilities of Cibeles for the fiscal years 1987, 1988, and 1989," he thereby voluntarily held himself
personally liable therefor. Respondent estate cannot, therefore, deny liability for CIC’s deficiency
income tax for the year 1989 by invoking the separate corporate personality of CIC, since its
obligation arose from Toda’s contractual undertaking, as contained in the Deed of Sale of Shares of
Stock.
WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of the
Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE, and
another one is hereby rendered ordering respondent Estate of Benigno P. Toda Jr. to pay
₱79,099,999.22 as deficiency income tax of Cibeles Insurance Corporation for the year 1989, plus
legal interest from 1 May 1994 until the amount is fully paid.
Costs against respondent.
SO ORDERED
G.R. No. 153866 February 11, 2005

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:
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 yes
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
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 CREATING THE EXPORT PROCESSING ZONE AUTHORITY AND

REVISING REPUBLIC ACT NO. 5490, 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
22615THE OMNIBUS INVESTMENTS CODE OF 1987 is chosen. Under this law, respondent shall
further be entitled to an income tax holiday( tax holiday is a government incentive program that
offers a tax reduction or elimination to businesses.); 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 zone19 under RA 7916.
Furthermore, the latter law -- notwithstanding other existing laws, rules and regulations to the
contrary -- extends20 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 EXPORT DEVELOPMENT ACT from
negotiable tax credits24 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
facilities25 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 business29 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.
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.
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 area87 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.97 In case of doubt, conflicts with respect to such tax exemption privilege shall be
resolved in favor of the ecozone.98
And seventh, the tax credits under RA 7844 -- given for imported raw materials primarily used in the
production of export goods,99 and for locally produced raw materials, capital equipment and spare
parts used by exporters of non-traditional products100 -- shall also be continuously enjoyed by similar
exporters within the ecozone.101 Indeed, the latter exporters are likewise entitled to such tax
exemptions and credits.
Tax Refund as Tax Exemption
To be sure, statutes that grant tax exemptions are construed strictissimi 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.
The PEZA law, which carried over the provisions of the EPZA law, is clear in exempting from internal
revenue laws and regulations the equipment -- including capital goods -- that registered enterprises
will use, directly or indirectly, in manufacturing.132 EO 226 even reiterates this privilege among the
incentives it gives to such enterprises.133 Petitioner merely asserts that by virtue of the PEZA
registration alone of respondent, the latter is not subject to the VAT. Consequently, the capital goods
and services respondent has purchased are not considered used in the VAT business, and no VAT
refund or credit is due.134 This is a non sequitur. By the 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
rating140 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
obeyed146 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.
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 226152 -- 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
COMMISSIONER OF INTERNAL G.R. No. 140230
REVENUE,
Petitioner, Present :
' PANGANIBAN, J., Chairman,
- versus' - ' SANDOVAL-GUTIERREZ,
' CORONA,
' CARPIO MORALES and
GARCIA, JJ.
PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY,
Respondent. ' Promulgated:
December 15, 2005
x-----------------------------------------x
DECISION
GARCIA, J.:
In this petition for review on certiorari, the Commissioner of Internal Revenue (Commissioner)
seeks the review and reversal of the September 17, 1999 Decision [1] of the Court of Appeals
(CA) in CA-G.R. No. SP 47895, affirming, in effect, the February 18, 1998 decision [2] of the Court
of Tax Appeals (CTA) in C.T.A. Case No. 5178, a claim for tax refund/credit instituted by
respondent Philippine Long Distance Company (PLDT) against petitioner for taxes it paid to the
Bureau of Internal Revenue (BIR) in connection with its importation in 1992 to 1994 of equipment,
machineries and spare parts.
The facts:
PLDT is a grantee of a franchise under Republic Act (R.A.) No. 7082 to install, operate and
maintain a telecommunications system throughout the Philippines.
For equipment, machineries and spare parts it imported for its business' on different dates from
October 1, 1992 to May 31, 1994, PLDT paid the BIR the amount of P164,510,953.00, broken
down as follows: (a) compensating tax of P126,713,037.00; advance sales tax of P12,460,219.00
and other internal revenue taxes of P25,337,697.00. For similar importations made between
March 1994 to May 31, 1994, PLDT paid P116,041,333.00 value-added tax (VAT).
On March 15, 1994, PLDT addressed a letter to the BIR seeking a confirmatory ruling on its tax
exemption privilege under Section 12 of R.A. 7082, which reads:
Sec. 12. The grantee ' shall be liable to pay the same taxes
on their real estate, buildings, and personal property,
exclusive of this franchise, as other persons or
corporations are now or hereafter may be required by law
to pay. In addition thereto, the grantee, ' shall pay a
franchise tax equivalent to three percent (3%) of all gross
receipts of the telephone or other telecommunications
businesses transacted under this franchise by the grantee,
its successors or assigns, and the said percentage shall
be in lieu of all taxes on this franchise or earnings
thereof: Provided, That the grantee ' shall continue to be
liable for income taxes payable under Title II of the
National Internal Revenue Code pursuant to Sec. 2 of
Executive Order No. 72 unless the latter enactment is
amended or repealed, in which case the amendment or
repeal shall be applicable thereto. (Emphasis supplied).
Responding, the BIR issued on April 19, 1994 Ruling No. UN-140-94, [3] pertinently reading, as
follows:
PLDT shall be subject only to the following taxes, to wit:
xxx xxx xxx
7. The 3% franchise tax on gross receipts which shall be in lieu of

all taxes on its franchise or earnings thereof.
xxx xxx xxx
The 'in lieu of all taxes' provision under Section 12 of RA 7082

clearly exempts PLDT from all taxes including the 10% value-added
tax (VAT) prescribed by Section 101 (a) of the same Code on its
importations of equipment, machineries and spare parts necessary
in the conduct of its business covered by the franchise, except the
aforementioned enumerated taxes for which PLDT is expressly made
liable.
xxx xxx xxx
In view thereof, this Office ' hereby holds that PLDT, is
exempt from VAT on its importation of equipment,
machineries and spare parts ' needed in its franchise
operations.
Armed with the foregoing BIR ruling, PLDT filed on December 2, 1994 a claim [4] for tax
credit/refund of the VAT, compensating taxes, advance sales taxes and other taxes it had been
paying 'in connection with its importation of various equipment, machineries and spare parts
needed for its operations' . With its claim not having been acted upon by the BIR, and obviously
to forestall the running of the prescriptive period therefor, PLDT filed with the CTA a petition for
review, [5] therein seeking a refund of, or the issuance of a tax credit certificate in, the amount
of P280,552,286.00, representing compensating taxes, advance sales taxes, VAT and other
internal revenue taxes alleged to have been erroneously paid on its importations from October
1992 to May 1994. The petition was docketed in said court as CTA Case No. 5178.
On February 18, 1998, the CTA rendered a decision [6] granting PLDT's petition, pertinently
saying:
This Court has noted that petitioner has included in its

claim receipts covering the period prior to December 16,
1992, thus, prescribed and barred from recovery. In
conclusion, We find that the petitioner is' entitled to the
reduced amount of P223,265,276.00 after excluding from
the final computation those taxes' that were paid prior to
December 16, 1992 as they fall outside the two-year
prescriptive period for claiming for a refund as provided by
law. The computation of the refundable amount is
summarized as follows:
COMPENSATING TAX
Total amount claimed ' P126,713.037.00

Less:
a) Amount already prescribed: xxx
Total P 38,015,132.00
b) Waived by petitioner
(Exh. B-216) P 1,440,874.00 P 39,456,006.00
Amount refundable P 87,257,031.00
ADVANCE SALES TAX
Total amount claimed P12,460.219.00

Less amount already prescribed: P 5,043,828.00
OTHER BIR TAXES
Total amount claimed P 25,337,697.00
Less amount already prescribed: 11,187,740.00
VALUE ADDED TAX
Total amount claimed P 116.041,333.00

Less amount waived by petitioner
(unaccounted receipts) 1,599,436.00
Amount refundable ' P 114,441,897.00
TOTAL AMOUNT REFUNDABLE P223,265,276.00,

'============
(Breakdown omitted)
and accordingly disposed, as follows:
WHEREFORE, in view of all the foregoing, this Court finds the instant
petition meritorious and in accordance with law. Accordingly,
respondent is hereby ordered to REFUND or to ISSUE in favor of
petitioner a Tax Credit Certificate in the reduced amount
of P223,265,276.00 representing erroneously paid value-added taxes,
compensating taxes, advance sales taxes and other BIR taxes on its
importation of equipments (sic), machineries and spare parts for the
period covering the taxable years 1992 to 1994.
Noticeably, the CTA decision, penned by then Associate Justice Ramon O. de Veyra, with then
CTA Presiding Judge Ernesto D. Acosta, concurring, is punctuated by a dissenting opinion [7] of
Associate Judge Amancio Q. Saga who maintained that the phrase 'in lieu of all taxes found in
Section 12 of R.A. No. 7082, supra, refers to exemption from 'direct taxes only and does not cover
'indirect taxes', such as VAT, compensating tax and advance sales tax.
In time, the BIR Commissioner moved for a reconsideration but the CTA, in its Resolution [8] of
May 7, 1998, denied the motion, with Judge Amancio Q. Saga reiterating his dissent. [9]
Unable to accept the CTA decision, the BIR Commissioner elevated the matter to the Court of
Appeals (CA) by way of petition for review, thereat docketed as CA-G.R. No. 47895 .
As stated at the outset hereof, the appellate court, in the herein challenged Decision [10] dated
September 17, 1999, dismissed the BIR's petition, thereby effectively affirming the CTA's
judgment.
Relying on its ruling in an earlier case between the same parties and involving the same issue
' CA-G.R. SP No. 40811, decided 16 February 1998 ' the appellate court partly wrote in its assailed
decision:
This Court has already spoken on the issue of what taxes are referred
to in the phrase 'in lieu of all taxes' found in Section 12 of R.A. 7082.
There are no reasons to deviate from the ruling and the same must be
followed pursuant to the doctrine of stare decisis. xxx. 'Stare decisis et
non quieta movere. Stand by the decision and disturb not what is
settled.
Hence, this recourse by the BIR Commissioner on the lone assigned error that:
THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT IS

EXEMPT FROM THE PAYMENT OF VALUE-ADDED TAXES,
COMPENSATING TAXES, ADVANCE SALES TAXES AND OTHER BIR
TAXES ON ITS IMPORTATIONS, BY VIRTUE OF THE PROVISION IN ITS
FRANCHISE THAT THE 3% FRANCHISE TAX ON ITS GROSS' RECEIPTS'
SHALL BE IN LIEU OF ALL TAXES ON ITS FRANCHISE OR EARNINGS
THEREOF.
There is no doubt that, insofar as the Court of Appeals is concerned, the issue petitioner presently
raises had been resolved by that court in CA-G.R. SP No. 40811, entitled Commissioner of Internal
Revenue vs. Philippine Long Distance Company. 'There, the Sixteenth Division of the appellate
court declared that under the express provision of Section 12 of R.A. 7082, supra, 'the payment
[by PLDT] of the 3% franchise tax of [its] gross receipts shall be in lieu of all taxes' exempts PLDT
from payment of compensating tax, advance sales tax, VAT and other internal revenue taxes on
its importation of various equipment, machinery and spare parts for the use of its
telecommunications system.
Dissatisfied with the CA decision in that case, the BIR Commissioner initially filed with this Court
a motion for time to file a petition for review, docketed in this Court as G.R. No. 134386. However,
on the last day for the filing of the intended petition, the then BIR Commissioner had a change
of heart and instead manifested [11] that he will no longer pursue G.R. No. 134386, there being
no compelling grounds to disagree with the Court of Appeals' decision in CA-G.R. 40811.
Consequently, on September 28, 1998, the Court issued a Resolution [12] in G.R. No. 134386
notifying the parties that 'no petition was filed in said case and that the CA judgment sought to
be reviewed therein 'has now become final and executory. Pursuant to said Resolution, an Entry
of Judgment [13] was issued by the Court of Appeals in CA-G.R. SP No. 40811. Hence, the CA's
dismissal of CA-G.R. No. 47895 on the additional ground of stare decisis.
Under the doctrine of stare decisis et non quieta movere, a point of law already established will,
generally, be followed by the same determining court and by all courts of lower rank in
subsequent cases where the same legal issue is raised. [14] For reasons needing no belaboring,
however, the Court is not at all concluded by the ruling of the Court of Appeals in its earlier CA-
G.R. SP No. 47895.
The Court has time and again stated that the rule on stare decisis promotes stability in the law
and should, therefore, be accorded respect. However, blind adherence to precedents, simply as
precedent, no longer rules. More important than anything else is that the court is right, [15] thus
its duty to abandon any doctrine found to be in violation of the law in force. [16]
As it were, the former BIR Commissioner's decision not to pursue his petition in G.R. No. 134386
denied the BIR, at least as early as in that case, the opportunity to obtain from the Court an
authoritative interpretation of Section 12 of R.A. 7082. All is, however, not lost. For, the
government is not estopped by acts or errors of its agents, particularly on matters involving taxes.
Corollarily, the erroneous application of tax laws by public officers does not preclude the
subsequent correct application thereof. [17] Withal, the errors of certain administrative officers,
if that be the case, should never be allowed to jeopardize the government's financial position. [18]
Hence, the need to address the main issue tendered herein.
According to the Court of Appeals, the 'in lieu of all taxes clause found in Section 12 of PLDT's
franchise (R.A. 7082) covers all taxes, whether direct or indirect; and that said section states, in
no uncertain terms, that PLDT's payment of the 3% franchise tax on all its gross receipts from
businesses transacted by it under its franchise is in lieu of all taxes on the franchise or earnings
thereof. In fine, the appellate court, agreeing with PLDT, posits the view that the word
'all encompasses any and all taxes collectible under the National Internal Revenue Code (NIRC),
save those specifically mentioned in PLDT's franchise, such as income and real property taxes.
The BIR Commissioner excepts. He submits that the exempting 'in lieu of all taxes' clause covers
direct taxes only, adding that for indirect taxes to be included in the exemption, the intention to
include must be specific and unmistakable. He thus faults the Court of Appeals for erroneously
declaring PLDT exempt from payment of VAT and other indirect taxes on its importations. To the
Commissioner, PLDT's claimed entitlement to tax refund/credit is without basis inasmuch as the
3% franchise tax being imposed on PLDT is not a substitute for or in lieu of indirect taxes.
The sole issue at hand is whether or not PLDT, given the tax component of its franchise, is exempt
from paying VAT, compensating taxes, advance sales taxes and internal revenue taxes on its
importations.
Based on the possibility of shifting the incidence of taxation, or as to who shall bear the burden
of taxation, taxes may be classified into either direct tax or indirect tax.
In context, direct taxes are those that are exacted from the very person who, it is intended or
desired, should pay them; [19] they are impositions for which a taxpayer is directly liable on the
transaction or business he is engaged in. [20]
On the other hand, indirect taxes are those that are demanded, in the first instance, from, or are
paid by, one person in the expectation and intention that he can shift the burden to someone
else. [21] Stated elsewise, indirect taxes are taxes wherein the liability for the payment of the tax
falls on one person but the burden thereof can be shifted or passed on to another person, such
as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it.
When the seller passes on the tax to his buyer, he, in effect, shifts the tax burden, not the liability
to pay it, to the purchaser as part of the price of goods sold or services rendered.
To put the situation in graphic terms, by tacking 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. [22] 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 end-user of such goods or services who, although not directly
and legally liable for the payment thereof, ultimately bears the burden of the tax. [23]
There can be no serious argument that PLDT, vis--vis its payment of internal revenue taxes on
its importations in question, is effectively claiming exemption from taxes not falling under the
category of direct taxes. The claim covers VAT, advance sales tax and compensating tax.
The NIRC classifies VAT as 'an indirect tax ' the amount of [which] may be shifted or passed on
to the buyer, transferee or lessee of the goods' . [24] As aptly pointed out by Judge Amancio Q.
Saga in his dissent in C.T.A. Case No. 5178, the 10% VAT on importation of goods partakes of
an excise tax levied on the privilege of importing articles. It is not a tax on the franchise of a
business enterprise or on its earnings. It is imposed on all taxpayers who import goods (unless
such importation falls under the category of an exempt transaction under Sec. 109 of the Revenue
Code) whether or not the goods will eventually be sold, bartered, exchanged or utilized for
personal consumption. The VAT on importation replaces the advance sales tax payable by regular
importers who import articles for sale or as raw materials in the manufacture of finished articles
for sale. [25]
Advance sales tax has the attributes of an indirect tax because the tax-paying importer of goods
for sale or of raw materials to be processed into merchandise can shift the tax or, to borrow
from Philippine Acetylene Co, Inc. vs. Commissioner of Internal Revenue, [26] lay the 'economic
burden of the tax', on the purchaser, by subsequently adding the tax to the selling price of the
imported article or finished product.
Compensating tax also partakes of the nature of an excise tax payable by all persons who import
articles, whether in the course of business or not. [27] The rationale for compensating tax is to
place, for tax purposes, persons purchasing from merchants in the Philippines on a more or less
equal basis with those who buy directly from foreign countries. [28]
It bears to stress that the liability for the payment of the indirect taxes lies only with the seller of
the goods or services, not in the buyer thereof. Thus, one cannot invoke one's exemption privilege
to avoid the passing on or the shifting of the VAT to him by the manufacturers/suppliers of the
goods he purchased. [29] Hence, it is important to determine if the tax exemption granted to a
taxpayer specifically includes the indirect tax which is shifted to him as part of the purchase price,
otherwise it is presumed that the tax exemption embraces only those taxes for which the buyer
is directly liable. [30]
Time and again, the Court has stated that taxation is the rule, exemption is the exception.
Accordingly, statutes granting tax exemptions must be construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority. [31] To him, therefore, who claims a refund
or exemption from tax payments rests the burden of justifying the exemption by words too plain
to be mistaken and too categorical to be misinterpreted. [32]
As may be noted, the clause 'in lieu of all taxes' in Section 12 of RA 7082 is immediately followed
by the limiting or qualifying clause 'on this franchise or earnings thereof, suggesting that the
exemption is limited to taxes imposed directly on PLDT since taxes' pertaining to PLDT's franchise
or earnings are its direct liability. Accordingly, indirect taxes, not being taxes on PLDT's franchise
or earnings, are outside the purview of the 'in lieu provision.
If we were to adhere to the appellate court's interpretation of the law that the 'in lieu of all
taxes' clause encompasses the totality of all taxes collectible under the Revenue Code, then, the
immediately following limiting clause 'on this franchise and its earnings' would be nothing more
than a pure jargon bereft of effect and meaning whatsoever. Needless to stress, this kind of
interpretation cannot be accorded a governing sway following the familiar legal maxim redendo
singula singulis meaning, take the words distributively and apply the reference. Under this
principle, each word or phrase must be given its proper connection in order to give it proper force
and effect, rendering none of them useless or superfluous. [33]
Significantly, in Electric Company [Meralco] vs. Vera, [34] the Court declared the relatively
broader exempting clause 'shall be in lieu of all taxes and assessments of whatsoever nature '
upon the privileges earnings, income franchise ... of the grantee written in par. # 9 of Meralco's
franchise as not so all encompassing as to embrace indirect tax, like compensating tax. There,
the Court said:
It is a well-settled rule or principle in taxation that a compensating tax ' is an excise

tax ' one that is imposed on the performance of an act, the engaging in an
occupation, or the enjoyment of a privilege. A tax levied upon property because
of its ownership is a direct tax, whereas one levied upon property because of its
use is an excise duty. '.
The compensating tax being imposed upon ' MERALCO, is an impost on

its use of imported articles and is not in the nature of a direct tax on the
articles themselves, the latter tax falling within the exemption. Thus,
in International Business Machine Corporation vs. Collector of Internal
Revenue, ' which involved the collection of a compensating tax from the
plaintiff-petitioner on business machines imported by it, this Court
stated in unequivocal terms that 'it is not the act of importation that is
taxed under section 190 but the uses of imported goods not subjected
to a sales tax because the 'compensating tax was expressly designated
as a substitute to make up or compensate for the revenue lost to the
government through the avoidance of sales taxes by means of direct
purchases abroad.
xxx xxx xxx

xxx If it had been the legislative intent to exempt MERALCO from paying
a tax on the use of imported equipments, the legislative body could have
easily done so by expanding the provision of paragraph 9 and adding to
the exemption such words as 'compensating tax or 'purchases from
abroad for use in its business, and the like.
It may be so that in Maceda vs. Macaraig, Jr. [35] the Court held that an exemption from 'all
taxes granted to the National Power Corporation (NPC) under its charter [36] includes both direct
and indirect taxes. But far from providing PLDT comfort, Maceda in fact supports the case of
herein petitioner, the correct lesson of Maceda being that an exemption from 'all taxes excludes
indirect taxes, unless the exempting statute, like NPC's charter, is so couched as to include indirect
tax from the exemption. Wrote the Court:
xxx However, the amendment under Republic Act No. 6395 enumerated the details
covered by the exemption. Subsequently, P.D. 380, made even more specific the
details of the exemption of NPC to cover, among others, both direct and indirect
taxes on all petroleum products used in its operation. Presidential Decree No. 938
[NPC's amended charter) amended the tax exemption by simplifying the same law
in general terms. It succinctly exempts NPC from 'all forms of taxes, duties fees '.
The use of the phrase 'all forms' of taxes demonstrate the intention of
the law to give NPC all the tax exemptions it has been enjoying before.
'.
xxx xxx xxx
'It is evident from the provisions of P.D. No. 938 that its purpose is to
maintain the tax exemption of NPC from all forms of taxes including
indirect taxes as provided under R.A. No. 6395 and P.D. 380 if it is to
attain its goals. (Italics in the original; words in bracket added)
Of similar import is what we said in Borja vs. Collector of Internal Revenue. [37] There, the Court
upheld the decision of the CTA denying a claim for refund of the compensating taxes paid on the
importation of materials and equipment by a grantee of a heat and power legislative franchise
containing an 'in lieu provision, rationalizing as follows:
xxx Moreover, the petitioner's alleged exemption from the payment of

compensating tax in the present case is not clear or expressed; unlike
the exemption from the payment of income tax which was clear and
expressed in the Carcar case. Unless it appears clearly and manifestly
that an exemption is intended, the provision is to be construed strictly
against the party claiming exemption. xxx.
Jurisprudence thus teaches that imparting the 'in lieu of all taxes' clause a literal meaning, as did
the Court of Appeals and the CTA before it, is fallacious. It is basic that in construing a statute, it
is the duty of courts to seek the real intent of the legislature, even if, by so doing, they may limit
the literal meaning of the broad language. [38]
It cannot be over-emphasized that tax exemption represents a loss of revenue to the government
and must, therefore, not rest on vague inference. When claimed, it must be strictly construed
against the taxpayer who must prove that he falls under the exception. And, if an exemption is
found to exist, it must not be enlarged by construction, since the reasonable presumption is that
the state has granted in express terms all it intended to grant at all, and that, unless the privilege
is limited to the very terms of the statute the favor would be extended beyond dispute in ordinary
cases. [39]
All told, we fail to see how Section 12 of RA 7082 operates as granting PLDT blanket exemption
from payment of indirect taxes, which, in the ultimate analysis, are not taxes on its franchise or
earnings. 'PLDT has not shown its eligibility for the desired exemption. None should be granted.
'As a final consideration, the Court takes particular stock, as the CTA earlier did, of PLDT's
allegation that the Bureau of Customs assessed the company for advance sales tax and
compensating tax for importations entered between October 1, 1992 and May 31, 1994 when the
value-added tax system already replaced, if not totally eliminated, advance sales and
compensating taxes. [40] Indeed, pursuant to Executive Order No. 273 [41] which took effect on
January 1, 1988, a multi-stage value-added tax was put into place to replace the tax on original
and subsequent sales tax. [42] It stands to reason then, as urged by PLDT, that compensating
tax and advance sales tax were no longer collectible internal revenue taxes under the NILRC
when the Bureau of Customs made the assessments in question and collected the corresponding
tax. Stated a bit differently, PLDT was no longer under legal obligation to pay compensating tax
and advance sales tax on its importation from 1992 to 1994.
Parenthetically, petitioner has not made an issue about PLDT's allegations concerning the
abolition of the provisions of the Tax Code imposing the payment of compensating and advance
sales tax on importations and the non-existence of these taxes during the period under review.
On the contrary, petitioner admits that the VAT on importation of goods has 'replace[d] the
compensating tax and advance sales tax under the old Tax Code. [43]
Given the above perspective, the amount PLDT paid in the concept of advance sales tax and
compensating tax on the 1992 to 1994 importations were, in context, erroneous tax payments
and would theoretically be refundable. It should be emphasized, however, that, such importations
were, when made, already subject to VAT.
' Factoring in the fact that a portion of the claim was barred by prescription, the CTA had
determined that PLDT is entitled to a total refundable amount of P94,673,422.00 (P87,257,031.00
of compensating tax + P7,416,391.00 = P94,673,422.00). Accordingly, it behooves the BIR to
grant a refund of the advance sales tax and compensating tax in the total amount
of P94,673,422.00, subject to the condition that PLDT present proof of payment of the
corresponding VAT on said transactions.
WHEREFORE , the petition is partially GRANTED. The Decision of the Court of Appeals in CA-
G.R. No. 47895 dated September 17, 1999 is MODIFIED. The Commissioner of Internal Revenue
is ORDERED to issue a Tax Credit Certificate or to refund to PLDT only the of P94,673,422.00
advance sales tax and compensating tax erroneously collected by the Bureau of Customs from
October 1, 1992 to May 31, 1994, less the VAT which may have been due on the importations in
question, but have otherwise remained uncollected.
SO ORDERED
[G.R. NO. 151135 : July 2, 2004]
CONTEX CORPORATION, Petitioner, v. 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
courts 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.Petitioners 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 ςrνll
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:ςηαñrοb lεš νι r† υαl lαω l ιb rαrÿ
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 ςrνll
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 petitioners 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 CIRs arguments, the appellate court decided

CA-G.R. SP No. 62823 in his favor, thus: ςηαñrοblε š νιr†υαl lαω lιb rα rÿ
WHEREFORE, premises considered, the appealed decision is hereby

REVERSED AND SET ASIDE.Contexs claim for refund of erroneously
paid taxes is DENIED accordingly.
SO ORDERED.13 ςrνll
In reversing the CTA, the Court of Appeals held that the exemption
from duties and taxes on the importation of raw materials, capital,
and equipment of SBFZ-registered enterprises under Rep. Act No.
7227 and its implementing rules covers only the VAT imposable
under Section 107 of the [Tax Code], which is a direct liability of the
importer, and in no way includes the value-added tax of the seller-
exporter the burden of which was passed on to the importer as an
additional costs of the goods.14 This was because the exemption
granted by Rep. Act No. 7227 relates to the act of importation and
Section 10715 of the Tax Code specifically imposes the VAT on
importations.The appellate court applied the principle that tax
exemptions are strictly construed against the taxpayer. The Court of
Appeals pointed out that under the implementing rules of Rep. Act
No. 7227, the exemption of SBFZ-registered enterprises from
internal revenue taxes is qualified as pertaining only to those for
which they may be directly liable.It then stated that apparently, the
legislative intent behind Rep. Act No. 7227 was to grant exemptions
only to direct taxes, which SBFZ-registered enterprise may be liable
for and only in connection with their importation of raw materials,
capital, and equipment as well as the sale of their goods and
services.
Petitioner timely moved for reconsideration of the Court of Appeals

decision, but the motion was denied.
Hence, the instant petition raising as issues for our resolution the
following:ςηαñ rοbl εš νι r†υα l lαω lι brα rÿ
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 ςrνll
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 courts

restrictive interpretation of petitioners 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 individuals 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 ςrνll
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:ςηαñrοblεš ν ιr† υαl l αω lιb rαrÿ
(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 ςrνll
(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.22ςrνll
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 firms 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 ςrνll
Apropos, the petitioners 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 ςrνll
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.
Petitioners 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 BIRs Revenue Regulations 7-95, as amended, or

the Consolidated Value-Added Tax Regulations provide: ςηαñ rοbl εš νι r†υα l lαω lι brα rÿ
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%: ςηαñrοblεš ν ιr† υαl l αω lιb rαrÿ
(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, petitioners

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 petitioners
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 petitioners 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 petitioners 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 DENIEDfor 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
G.R. No. L-17725 February 28, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
MAMBULAO LUMBER COMPANY, ET AL., defendants-appellants.
Office of the Solicitor General for plaintiff-appellee.

Arthur Tordesillas for defendants-appellants.
BARRERA, J.:
From the decision of the Court of First Instance of Manila (in Civil Case No. 34100) ordering it to pay
to plaintiff Republic of the Philippines the sum of P4,802.37 with 6% interest thereon from the date of
the filing of the complaint until fully paid, plus costs, defendant Mambulao Lumber Company
interposed the present appeal.1
The facts of the case are briefly stated in the decision of the trial court, to wit: .
The facts of this case are not contested and may be briefly summarized as follows: (a) under
the first cause of action, for forest charges covering the period from September 10, 1952 to
May 24, 1953, defendants admitted that they have a liability of P587.37, which liability is
covered by a bond executed by defendant General Insurance & Surety Corporation for
Mambulao Lumber Company, jointly and severally in character, on July 29, 1953, in favor of
herein plaintiff; (b) under the second cause of action, both defendants admitted a joint and
several liability in favor of plaintiff in the sum of P296.70, also covered by a bond dated
November 27, 1953; and (c) under the third cause of action, both defendants admitted a joint
and several liability in favor of plaintiff for P3,928.30, also covered by a bond dated July 20,
1954. These three liabilities aggregate to P4,802.37. If the liability of defendants in favor of
plaintiff in the amount already mentioned is admitted, then what is the defense interposed by
the defendants? The defense presented by the defendants is quite unusual in more ways
than one. It appears from Exh. 3 that from July 31, 1948 to December 29, 1956, defendant
Mambulao Lumber Company paid to the Republic of the Philippines P8,200.52 for
'reforestation charges' and for the period commencing from April 30, 1947 to June 24, 1948,
said defendant paid P927.08 to the Republic of the Philippines for 'reforestation charges'.
These reforestation were paid to the plaintiff in pursuance of Section 1 of Republic Act 115
which provides that there shall be collected, in addition to the regular forest charges provided
under Section 264 of Commonwealth Act 466 known as the National Internal Revenue Code,
the amount of P0.50 on each cubic meter of timber... cut out and removed from any public
forest for commercial purposes. The amount collected shall be expended by the director of
forestry, with the approval of the secretary of agriculture and commerce, for reforestation and
afforestation of watersheds, denuded areas ... and other public forest lands, which upon
investigation, are found needing reforestation or afforestation .... The total amount of the
reforestation charges paid by Mambulao Lumber Company is P9,127.50, and it is the
contention of the defendant Mambulao Lumber Company that since the Republic of the
Philippines has not made use of those reforestation charges collected from it for reforesting
the denuded area of the land covered by its license, the Republic of the Philippines should
refund said amount, or, if it cannot be refunded, at least it should be compensated with what
Mambulao Lumber Company owed the Republic of the Philippines for reforestation charges.
In line with this thought, defendant Mambulao Lumber Company wrote the director of
forestry, on February 21, 1957 letter Exh. 1, in paragraph 4 of which said defendant
requested "that our account with your bureau be credited with all the reforestation charges
that you have imposed on us from July 1, 1947 to June 14, 1956, amounting to around
P2,988.62 ...". This letter of defendant Mambulao Lumber Company was answered by the
director of forestry on March 12, 1957, marked Exh. 2, in which the director of forestry
quoted an opinion of the secretary of justice, to the effect that he has no discretion to extend
the time for paying the reforestation charges and also explained why not all denuded areas
are being reforested.
The only issue to be resolved in this appeal is whether the sum of P9,127.50 paid by defendant-
appellant company to plaintiff-appellee as reforestation charges from 1947 to 1956 may be set off or
applied to the payment of the sum of P4,802.37 as forest charges due and owing from appellant to
appellee. It is appellant's contention that said sum of P9,127.50, not having been used in the
reforestation of the area covered by its license, the same is refundable to it or may be applied in
compensation of said sum of P4,802.37 due from it as forest charges. 1äwphï1.ñët
We find appellant's claim devoid of any merit. Section 1 of Republic Act No. 115, provides:
SECTION 1. There shall be collected, in addition to the regular forest charges provided for
under Section two hundred and sixty-four of Commonwealth Act Numbered Four Hundred
Sixty-six, known as the National Internal Revenue Code, the amount of fifty centavos on
each cubic meter of timber for the first and second groups and forty centavos for the third
and fourth groups cut out and removed from any public forest for commercial purposes. The
amount collected shall be expended by the Director of Forestry, with the approval of the
Secretary of Agriculture and Natural Resources (commerce), for reforestation and
afforestation of watersheds, denuded areas and cogon and open lands within forest
reserves, communal forest, national parks, timber lands, sand dunes, and other public forest
lands, which upon investigation, are found needing reforestation or afforestation, or needing
to be under forest cover for the growing of economic trees for timber, tanning, oils, gums,
and other minor forest products or medicinal plants, or for watersheds protection, or for
prevention of erosion and floods and preparation of necessary plans and estimate of costs
and for reconnaisance survey of public forest lands and for such other expenses as may be
deemed necessary for the proper carrying out of the purposes of this Act.
All revenues collected by virtue of, and pursuant to, the provisions of the preceding
paragraph and from the sale of barks, medical plants and other products derived from
plantations as herein provided shall constitute a fund to be known as Reforestation Fund, to
be expended exclusively in carrying out the purposes provided for under this Act. All
provincial or city treasurers and their deputies shall act as agents of the Director of Forestry
for the collection of the revenues or incomes derived from the provisions of this Act.
(Emphasis supplied.)
Under this provision, it seems quite clear that the amount collected as reforestation charges from a
timber licenses or concessionaire shall constitute a fund to be known as the Reforestation Fund, and
that the same shall be expended by the Director of Forestry, with the approval of the Secretary of
Agriculture and Natural Resources for the reforestation or afforestation, among others, of denuded
areas which, upon investigation, are found to be needing reforestation or afforestation. Note that
there is nothing in the law which requires that the amount collected as reforestation charges should
be used exclusively for the reforestation of the area covered by the license of a licensee or
concessionaire, and that if not so used, the same should be refunded to him. Observe too, that the
licensee's area may or may not be reforested at all, depending on whether the investigation thereof
by the Director of Forestry shows that said area needs reforestation. The conclusion seems to be
that the amount paid by a licensee as reforestation charges is in the nature of a tax which forms a
part of the Reforestation Fund, payable by him irrespective of whether the area covered by his
license is reforested or not. Said fund, as the law expressly provides, shall be expended in carrying
out the purposes provided for thereunder, namely, the reforestation or afforestation, among others,
of denuded areas needing reforestation or afforestation.
Appellant maintains that the principle of a compensation in Article 1278 of the new Civil Code2 is
applicable, such that the sum of P9,127.50 paid by it as reforestation charges may compensate its
indebtedness to appellee in the sum of P4,802.37 as forest charges. But in the view we take of this
case, appellant and appellee are not mutually creditors and debtors of each other. Consequently, the
law on compensation is inapplicable. On this point, the trial court correctly observed: .
Under Article 1278, NCC, compensation should take place when two persons in their own
right are creditors and debtors of each other. With respect to the forest charges which the
defendant Mambulao Lumber Company has paid to the government, they are in the coffers
of the government as taxes collected, and the government does not owe anything, crystal
clear that the Republic of the Philippines and the Mambulao Lumber Company are not
creditors and debtors of each other, because compensation refers to mutual debts. ..
And the weight of authority is to the effect that internal revenue taxes, such as the forest charges in
question, can be the subject of set-off or compensation.
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off
under the statutes of set-off, which are construed uniformly, in the light of public policy, to
exclude the remedy in an action or any indebtedness of the state or municipality to one who
is liable to the state or municipality for taxes. Neither are they a proper subject of recoupment
since they do not arise out of the contract or transaction sued on. ... (80 C.J.S. 73-74. ) .
The general rule, based on grounds of public policy is well-settled that no set-off is
admissible against demands for taxes levied for general or local governmental purposes.
The reason on which the general rule is based, is that taxes are not in the nature of contracts
between the party and party but grow out of a duty to, and are the positive acts of the
government, to the making and enforcing of which, the personal consent of individual
taxpayers is not required. ... If the taxpayer can properly refuse to pay his tax when called
upon by the Collector, because he has a claim against the governmental body which is not
included in the tax levy, it is plain that some legitimate and necessary expenditure must be
curtailed. If the taxpayer's claim is disputed, the collection of the tax must await and abide
the result of a lawsuit, and meanwhile the financial affairs of the government will be thrown
into great confusion. (47 Am. Jur. 766-767.)
WHEREFORE, the judgment of the trial court appealed from is hereby affirmed in all respects, with
costs against the defendant-appellant. So ordered.
G.R. No. L-67649 June 28, 1988
ENGRACIO FRANCIA, petitioner,

vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.
GUTIERREZ, JR., J.:
The petitioner invokes legal and equitable grounds to reverse the questioned decision of the Intermediate Appellate Court, to set aside the
auction sale of his property which took place on December 5, 1977, and to allow him to recover a 203 square meter lot which was, sold at
public auction to Ho Fernandez and ordered titled in the latter's name.
The antecedent facts are as follows:
Engracio Francia is the registered owner of a residential lot and a two-story house built upon it
situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The lot, with an
area of about 328 square meters, is described and covered by Transfer Certificate of Title No. 4739
(37795) of the Registry of Deeds of Pasay City.
On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the
Republic of the Philippines for the sum of P4,116.00 representing the estimated amount equivalent
to the assessed value of the aforesaid portion.
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5,
1977, his property was sold at public auction by the City Treasurer of Pasay City pursuant to Section
73 of Presidential Decree No. 464 known as the Real Property Tax Code in order to satisfy a tax
delinquency of P2,400.00. Ho Fernandez was the highest bidder for the property.
Francia was not present during the auction sale since he was in Iligan City at that time helping his
uncle ship bananas.
On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re: Petition for
Entry of New Certificate of Title" filed by Ho Fernandez, seeking the cancellation of TCT No. 4739
(37795) and the issuance in his name of a new certificate of title. Upon verification through his
lawyer, Francia discovered that a Final Bill of Sale had been issued in favor of Ho Fernandez by the
City Treasurer on December 11, 1978. The auction sale and the final bill of sale were both annotated
at the back of TCT No. 4739 (37795) by the Register of Deeds.
On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his
complaint on January 24, 1980.
On April 23, 1981, the lower court rendered a decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the

amended complaint and ordering:
(a) The Register of Deeds of Pasay City to issue a new Transfer
Certificate of Title in favor of the defendant Ho Fernandez over the
parcel of land including the improvements thereon, subject to
whatever encumbrances appearing at the back of TCT No. 4739
(37795) and ordering the same TCT No. 4739 (37795) cancelled.
(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00

as attorney's fees. (p. 30, Record on Appeal)
The Intermediate Appellate Court affirmed the decision of the lower court in toto.
Hence, this petition for review.
Francia prefaced his arguments with the following assignments of grave errors of law:
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF LAW

IN NOT HOLDING PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR SUPPOSED TAX
DELINQUENCY WAS SET-OFF BY THE AMOUNT OF P4,116.00 WHICH THE GOVERNMENT IS
INDEBTED TO THE FORMER.
II
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND SERIOUS

ERROR IN NOT HOLDING THAT PETITIONER WAS NOT PROPERLY AND DULY NOTIFIED
THAT AN AUCTION SALE OF HIS PROPERTY WAS TO TAKE PLACE ON DECEMBER 5, 1977
TO SATISFY AN ALLEGED TAX DELINQUENCY OF P2,400.00.
III
RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS

ERROR AND GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT THE PRICE OF
P2,400.00 PAID BY RESPONTDENT HO FERNANDEZ WAS GROSSLY INADEQUATE AS TO
SHOCK ONE'S CONSCIENCE AMOUNTING TO FRAUD AND A DEPRIVATION OF PROPERTY
WITHOUT DUE PROCESS OF LAW, AND CONSEQUENTLY, THE AUCTION SALE MADE
THEREOF IS VOID. (pp. 10, 17, 20-21, Rollo)
We gave due course to the petition for a more thorough inquiry into the petitioner's allegations that
his property was sold at public auction without notice to him and that the price paid for the property
was shockingly inadequate, amounting to fraud and deprivation without due process of law.
A careful review of the case, however, discloses that Mr. Francia brought the problems raised in his
petition upon himself. While we commiserate with him at the loss of his property, the law and the
facts militate against the grant of his petition. We are constrained to dismiss it.
Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal
compensation. He claims that the government owed him P4,116.00 when a portion of his land was
expropriated on October 15, 1977. Hence, his tax obligation had been set-off by operation of law as
of October 15, 1977.
There is no legal basis for the contention. By legal compensation, obligations of persons, who in
their own right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil
Code). The circumstances of the case do not satisfy the requirements provided by Article 1279, to
wit:
(1) that each one of the obligors be bound principally and that he be at the same time
a principal creditor of the other;
xxx xxx xxx
(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no merit. We have consistently ruled that there can be
no off-setting of taxes against the claims that the taxpayer may have against the government. A
person cannot refuse to pay a tax on the ground that the government owes him an amount equal to
or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit
against the government.
In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal
Revenue Taxes can not be the subject of set-off or compensation. We stated that:
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to
be set-off under the statutes of set-off, which are construed uniformly, in the light of
public policy, to exclude the remedy in an action or any indebtedness of the state or
municipality to one who is liable to the state or municipality for taxes. Neither are they
a proper subject of recoupment since they do not arise out of the contract or
transaction sued on. ... (80 C.J.S., 7374). "The general rule based on grounds of
public policy is well-settled that no set-off admissible against demands for taxes
levied for general or local governmental purposes. The reason on which the general
rule is based, is that taxes are not in the nature of contracts between the party and
party but grow out of duty to, and are the positive acts of the government to the
making and enforcing of which, the personal consent of individual taxpayers is not
required. ..."
We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because he
has a claim against the governmental body not included in the tax levy.
This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated that: "...
internal revenue taxes can not be the subject of compensation: Reason: government and taxpayer
are not mutually creditors and debtors of each other' under Article 1278 of the Civil Code and a
"claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off."
There are other factors which compel us to rule against the petitioner. The tax was due to the city
government while the expropriation was effected by the national government. Moreover, the amount
of P4,116.00 paid by the national government for the 125 square meter portion of his lot was
deposited with the Philippine National Bank long before the sale at public auction of his remaining
property. Notice of the deposit dated September 28, 1977 was received by the petitioner on
September 30, 1977. The petitioner admitted in his testimony that he knew about the P4,116.00
deposited with the bank but he did not withdraw it. It would have been an easy matter to withdraw
P2,400.00 from the deposit so that he could pay the tax obligation thus aborting the sale at public
auction.
Petitioner had one year within which to redeem his property although, as well be shown later, he
claimed that he pocketed the notice of the auction sale without reading it.
Petitioner contends that "the auction sale in question was made without complying with the
mandatory provisions of the statute governing tax sale. No evidence, oral or otherwise, was
presented that the procedure outlined by law on sales of property for tax delinquency was followed.
... Since defendant Ho Fernandez has the affirmative of this issue, the burden of proof therefore
rests upon him to show that plaintiff was duly and properly notified ... .(Petition for Review, Rollo p.
18; emphasis supplied)
We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction sale, has the
burden of proof to show that there was compliance with all the prescribed requisites for a tax sale.
The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:
xxx xxx xxx
... [D]ue process of law to be followed in tax proceedings must be established by

proof and the general rule is that the purchaser of a tax title is bound to take upon
himself the burden of showing the regularity of all proceedings leading up to the
sale. (emphasis supplied)
There is no presumption of the regularity of any administrative action which results in depriving a
taxpayer of his property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. 437); Denoga v. Insular
Government, 19 Phil. 261). This is actually an exception to the rule that administrative proceedings
are presumed to be regular.
But even if the burden of proof lies with the purchaser to show that all legal prerequisites have been
complied with, the petitioner can not, however, deny that he did receive the notice for the auction
sale. The records sustain the lower court's finding that:
[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not
properly notified of the auction sale. Surprisingly, however, he admitted in his
testimony that he received the letter dated November 21, 1977 (Exhibit "I") as shown
by his signature (Exhibit "I-A") thereof. He claimed further that he was not present on
December 5, 1977 the date of the auction sale because he went to Iligan City. As
long as there was substantial compliance with the requirements of the notice, the
validity of the auction sale can not be assailed ... .
We quote the following testimony of the petitioner on cross-examination, to wit:
Q. My question to you is this letter marked as Exhibit I for Ho

Fernandez notified you that the property in question shall be sold at
public auction to the highest bidder on December 5, 1977 pursuant to
Sec. 74 of PD 464. Will you tell the Court whether you received the
original of this letter?
A. I just signed it because I was not able to read the same. It was just
sent by mail carrier.
Q. So you admit that you received the original of Exhibit I and you
signed upon receipt thereof but you did not read the contents of it?
A. Yes, sir, as I was in a hurry.
Q. After you received that original where did you place it?
A. I placed it in the usual place where I place my mails.
Petitioner, therefore, was notified about the auction sale. It was negligence on his part when he
ignored such notice. By his very own admission that he received the notice, his now coming to court
assailing the validity of the auction sale loses its force.
Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross inadequacy
of price is not material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v. Rehabilitation
Finance Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917 Unrep.). See also Barrozo
Vda. de Gordon v. Court of Appeals (109 SCRA 388) we held that "alleged gross inadequacy of
price is not material when the law gives the owner the right to redeem as when a sale is made at
public auction, upon the theory that the lesser the price, the easier it is for the owner to effect
redemption." In Velasquez v. Coronel (5 SCRA 985), this Court held:
... [R]espondent treasurer now claims that the prices for which the lands were sold
are unconscionable considering the wide divergence between their assessed values
and the amounts for which they had been actually sold. However, while in ordinary
sales for reasons of equity a transaction may be invalidated on the ground of
inadequacy of price, or when such inadequacy shocks one's conscience as to justify
the courts to interfere, such does not follow when the law gives to the owner the right
to redeem, as when a sale is made at public auction, upon the theory that the lesser
the price the easier it is for the owner to effect the redemption. And so it was aptly
said: "When there is the right to redeem, inadequacy of price should not be material,
because the judgment debtor may reacquire the property or also sell his right to
redeem and thus recover the loss he claims to have suffered by reason of the price
obtained at the auction sale."
The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De Long, et
al. (188 Wash. 162, 61 P. 2d, 1290):
If mere inadequacy of price is held to be a valid objection to a sale for taxes, the
collection of taxes in this manner would be greatly embarrassed, if not rendered
altogether impracticable. In Black on Tax Titles (2nd Ed.) 238, the correct rule is
stated as follows: "where land is sold for taxes, the inadequacy of the price given is
not a valid objection to the sale." This rule arises from necessity, for, if a fair price for
the land were essential to the sale, it would be useless to offer the property. Indeed,
it is notorious that the prices habitually paid by purchasers at tax sales are grossly
out of proportion to the value of the land. (Rothchild Bros. v. Rollinger, 32 Wash. 307,
73 P. 367, 369).
In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et al. (267 P.
555):
Like most cases of this character there is here a certain element of hardship from
which we would be glad to relieve, but do so would unsettle long-established rules
and lead to uncertainty and difficulty in the collection of taxes which are the life blood
of the state. We are convinced that the present rules are just, and that they bring
hardship only to those who have invited it by their own neglect.
We are inclined to believe the petitioner's claim that the value of the lot has greatly appreciated in
value. Precisely because of the widening of Buendia Avenue in Pasay City, which necessitated the
expropriation of adjoining areas, real estate values have gone up in the area. However, the price
quoted by the petitioner for a 203 square meter lot appears quite exaggerated. At any rate, the
foregoing reasons which answer the petitioner's claims lead us to deny the petition.
And finally, even if we are inclined to give relief to the petitioner on equitable grounds, there are no
strong considerations of substantial justice in his favor. Mr. Francia failed to pay his taxes for 14
years from 1963 up to the date of the auction sale. He claims to have pocketed the notice of sale
without reading it which, if true, is still an act of inexplicable negligence. He did not withdraw from the
expropriation payment deposited with the Philippine National Bank an amount sufficient to pay for
the back taxes. The petitioner did not pay attention to another notice sent by the City Treasurer on
November 3, 1978, during the period of redemption, regarding his tax delinquency. There is
furthermore no showing of bad faith or collusion in the purchase of the property by Mr. Fernandez.
The petitioner has no standing to invoke equity in his attempt to regain the property by belatedly
asking for the annulment of the sale.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED. The decision
of the respondent court is affirmed.
SO ORDERED
G.R. No. L-19495 November 24, 1966

vs.
LILIA YUSAY GONZALES and THE COURT OF TAX APPEALS, respondents.
Office of the Solicitor General for the petitioner.

Ramon A. Gonzales for respondent Lilia Yusay Gonzales.
BENGZON, J.P., J.:
Matias Yusay, a resident of Pototan, Iloilo, died intestate on May 13, 1948, leaving two heirs,
namely, Jose S. Yusay, a legitimate child, and Lilia Yusay Gonzales, an acknowledged natural child.
Intestate proceedings for the settlement of his estate were instituted in the Court of First Instance of
Iloilo (Special Proceedings No. 459). Jose S. Yusay was therein appointed administrator.
On May 11, 1949 Jose S. Yusay filed with the Bureau of Internal Revenue an estate and inheritance
tax return declaring therein the following properties:
Personal properties
Palay P6,444.00
Carabaos 1,000.00 P7,444.00
Real properties:
Capital, 74 parcels )
Conjugal 19 parcels) assessed at P179,760.00
Total gross estate P187,204.00
The return mentioned no heir.
Upon investigation however the Bureau of Internal Revenue found the following properties:
Personal properties:
Palay P6,444.00
Carabaos 1,500.00
Packard Automobile 2,000.00
2 Aparadors 500.00 P10,444.00
Real properties:
Capital, 25 parcels assessed at P87,715.32
1/2 of Conjugal, 130 parcels
assessed at P121,425.00 P209,140.32
Total P219,584.32
The fair market value of the real properties was computed by increasing the assessed value by forty
percent.
Based on the above findings, the Bureau of Internal Revenue assessed on October 29, 1953 estate
and inheritance taxes in the sums of P6,849.78 and P16,970.63, respectively.
On January 25, 1955 the Bureau of Internal Revenue increased the assessment to P8,225.89 as
estate tax and P22,117.10 as inheritance tax plus delinquency interest and demanded payment
thereof on or before February 28, 1955. Meanwhile, on February 16, 1955, the Court of First
Instance of Iloilo required Jose S. Yusay to show proof of payment of said estate and inheritance
taxes.
On March 3, 1955 Jose S. Yusay requested an extension of time within which to pay the tax. He
posted a surety bond to guarantee payment of the taxes in question within one year. The
Commissioner of Internal Revenue however denied the request. Then he issued a warrant of
distraint and levy which he transmitted to the Municipal Treasurer of Pototan for execution. This
warrant was not enforced because all the personal properties subject to distraint were located in
Iloilo City.
On May 20, 1955 the Provincial Treasurer of Iloilo requested the BIR Provincial Revenue Officer to
furnish him copies of the assessment notices to support a motion for payment of taxes which the
Provincial Fiscal would file in Special Proceedings No. 459 before the Court of First Instance of Iloilo.
The papers requested were sent by the Commissioner of Internal Revenue to the Provincial
Revenue Officer of Iloilo to be transmitted to the Provincial Treasurer. The records do not however
show whether the Provincial Fiscal filed a claim with the Court of First Instance for the taxes due.
On May 30, 1956 the commissioner appointed by the Court of First Instance for the purpose,
submitted a reamended project of partition which listed the following properties:
Personal properties:
Buick Sedan P8,100.00
Packard car 2,000.00
Aparadors 500.00
Cash in Bank (PNB) 8,858.46
Palay 6,444.00
Carabaos 1,500.00 P27,402.46
Real properties:
Land, 174 parcels
assessed at P324,797.21
Buildings 4,500.00 P329,297.21
Total P356,699.67
More than a year later, particularly on July 12, 1957, an agent of the Bureau of Internal Revenue
apprised the Commissioner of Internal Revenue of the existence of said reamended project of
partition. Whereupon, the Internal Revenue Commissioner caused the estate of Matias Yusay to be
reinvestigated for estate and inheritance tax liability. Accordingly, on February 13, 1958 he issued
the following assessment:
Estate tax P16,246.04

5% surcharge 411.29
Delinquency interest 11,868.90
Compromise
No notice of death P15.00
Late payment 40.00 55.00
Total P28,581.23
Inheritance Tax P38,178.12
5% surcharge 1,105.86
Delinquency interest 28,808.75
Compromise for late payment 50.00
Total P69,142.73
Total estate and inheritance taxes P97,723.96
Like in previous assessments, the fair market value of the real properties was arrived at by adding
40% to the assessed value.
In view of the demise of Jose S. Yusay, said assessment was sent to his widow, Mrs. Florencia
Piccio Vda. de Yusay, who succeeded him in the administration of the estate of Matias Yusay.
No payment having been made despite repeated demands, the Commissioner of Internal Revenue
filed a proof of claim for the estate and inheritance taxes due and a motion for its allowance with the
settlement court in voting priority of lien pursuant to Section 315 of the Tax Code.
On June 1, 1959, Lilia Yusay, through her counsel, Ramon Gonzales, filed an answer to the proof of
claim alleging non-receipt of the assessment of February 13, 1958, the existence of two
administrators, namely Florencia Piccio Vda. de Yusay who administered two-thirds of the estate,
and Lilia Yusay, who administered the remaining one-third, and her willingness to pay the taxes
corresponding to her share, and praying for deferment of the resolution on the motion for the
payment of taxes until after a new assessment corresponding to her share was issued.
On November 17, 1959 Lilia Yusay disputed the legality of the assessment dated February 13, 1958.
She claimed that the right to make the same had prescribed inasmuch as more than five years had
elapsed since the filing of the estate and inheritance tax return on May 11, 1949. She therefore
requested that the assessment be declared invalid and without force and effect. This request was
rejected by the Commissioner in his letter dates January 20, 1960, received by Lilia Yusay on March
14, 1960, for the reasons, namely, (1) that the right to assess the taxes in question has not been lost
by prescription since the return which did not name the heirs cannot be considered a true and
complete return sufficient to start the running of the period of limitations of five years under Section
331 of the Tax Code and pursuant to Section 332 of the same Code he has ten years within which to
make the assessment counted from the discovery on September 24, 1953 of the identity of the heirs;
and (2) that the estate's administrator waived the defense of prescription when he filed a surety bond
on March 3, 1955 to guarantee payment of the taxes in question and when he requested
postponement of the payment of the taxes pending determination of who the heirs are by the
settlement court.
On April 13, 1960 Lilia Yusay filed a petition for review in the Court of Tax Appeals assailing the
legality of the assessment dated February 13, 1958. After hearing the parties, said Court declared
the right of the Commissioner of Internal Revenue to assess the estate and inheritance taxes in
question to have prescribed and rendered the following judgment:
WHEREFORE, the decision of respondent assessing against the estate of the late Matias
Yusay estate and inheritance taxes is hereby reversed. No costs.
The Commissioner of Internal Revenue appealed to this Court and raises the following issues:
1. Was the petition for review in the Court of Tax Appeals within the 30-day period provided for in
Section 11 of Republic Act 1125?
2. Could the Court of Tax Appeals take cognizance of Lilia Yusay's appeal despite the pendency of
the "Proof of Claim" and "Motion for Allowance of Claim and for an Order of Payment of Taxes" filed
by the Commissioner of Internal Revenue in Special Proceedings No. 459 before the Court of First
Instance of Iloilo?
3. Has the right of the Commissioner of Internal Revenue to assess the estate and inheritance taxes
in question prescribed?
On November 17, 1959 Lilia Yusay disputed the legality of the assessment of February 13, 1958. On
March 14, 1960 she received the decision of the Commissioner of Internal Revenue on the disputed
assessment. On April 13, 1960 she filed her petition for review in the Court of Tax Appeals. Said
Court correctly held that the appeal was seasonably interposed pursuant to Section 11 of Republic
Act 1125. We already ruled in St. Stephen's Association v. Collector of Internal Revenue,1 that the
counting of the thirty days within which to institute an appeal in the Court of Tax Appeals should
commence from the date of receipt of the decision of the Commissioner on the disputed
assessment, not from the date the assessment was issued.
Accordingly, the thirty-day period should begin running from March 14, 1960, the date Lilia Yusay
received the appealable decision. From said date to April 13, 1960, when she filed her appeal in the
Court of Tax Appeals, is exactly thirty days. Hence, the appeal was timely.
Next, the Commissioner attacks the jurisdiction of the Court of Tax Appeals to take cognizance of
Lilia Yusay's appeal on the ground of lis pendens. He maintains that the pendency of his motion for
allowance of claim and for order of payment of taxes in the Court of First Instance of Iloilo would
preclude the Court of Tax Appeals from acquiring jurisdiction over Lilia Yusay's appeal. This
contention lacks merit.
Lilia Yusay's cause seeks to resist the legality of the assessment in question. Should she maintain it
in the settlement court or should she elevate her cause to the Court of Tax Appeals? We say, she
acted correctly by appealing to the latter court. An action involving a disputed assessment for
internal revenue taxes falls within the exclusive jurisdiction of the Court of Tax Appeals.2 It is in that
forum, to the exclusion of the Court of First Instance,3 where she could ventilate her defenses
against the assessment.
Moreover, the settlement court, where the Commissioner would wish Lilia Yusay to contest the
assessment, is of limited jurisdiction. And under the Rules,4 its authority relates only to matters
having to do with the settlement of estates and probate of wills of deceased persons.5 Said court has
no jurisdiction to adjudicate the contentions in question, which — assuming they do not come
exclusively under the Tax Court's cognizance — must be submitted to the Court of First Instance in
the exercise of its general jurisdiction.6
We now come to the issue of prescription. Lilia Yusay claims that since the latest assessment was
issued only on February 13, 1958 or eight years, nine months and two days from the filing of the
estate and inheritance tax return, the Commissioner's right to make it has expired. She would rest
her stand on Section 331 of the Tax Code which limits the right of the Commissioner to assess the
tax within five years from the filing of the return.
The Commissioner claims that fraud attended the filing of the return; that this being so, Section
332(a) of the Tax Code would apply.7 It may be well to note that the assessment letter itself (Exhibit
22) did not impute fraud in the return with intent to evade payment of tax. Precisely, no surcharge for
fraud was imposed. In his answer to the petition for review filed by Lilia Yusay in the Court of Tax
Appeals, the Commissioner alleged no fraud. Instead, he broached the insufficiency of the return as
barring the commencement of the running of the statute of limitations. He raised the point of fraud for
the first time in the proceedings, only in his memorandum filed with the Tax Court subsequent to
resting his case. Said Court rejected the plea of fraud for lack of allegation and proof, and ruled that
the return, although not accurate, was sufficient to start the period of prescription.
Fraud is a question of fact.8 The circumstances constituting it must be alleged and proved in the
court below.9 And the finding of said court as to its existence and non-existence is final unless clearly
shown to be erroneous.10 As the court a quo found that no fraud was alleged and proved therein, We
see no reason to entertain the Commissioner's assertion that the return was fraudulent.
The conclusion, however, that the return filed by Jose S. Yusay was sufficient to commence the
running of the prescriptive period under Section 331 of the Tax Code rests on no solid ground.
Paragraph (a) of Section 93 of the Tax Code lists the requirements of a valid return. It states:
(a) Requirements.—In all cases of inheritance or transfers subject to either the estate tax or
the inheritance tax, or both, or where, though exempt from both taxes, the gross value of the
estate exceeds three thousand pesos, the executor, administrator, or anyone of the heirs, as
the case may be, shall file a return under oath in duplicate, setting forth (1) the value of the
gross estate of the decedent at the time of his death, or, in case of a nonresident not a
citizen of the Philippines ; (2) the deductions allowed from gross estate in determining net
estate as defined in section eighty-nine; (3) such part of such information as may at the time
be ascertainable and such supplemental data as may be necessary to establish the correct
taxes.
A return need not be complete in all particulars. It is sufficient if it complies substantially with the law.
There is substantial compliance (1) when the return is made in good faith and is not false or
fraudulent; (2) when it covers the entire period involved; and (3) when it contains information as to
the various items of income, deduction and credit with such definiteness as to permit the
computation and assessment of the tax.11
There is no question that the state and inheritance tax return filed by Jose S. Yusay was
substantially defective.
First, it was incomplete. It declared only ninety-three parcels of land representing about 400 hectares
and left out ninety-two parcels covering 503 hectares. Said huge under declaration could not have
been the result of an over-sight or mistake. As found in L-11378, supra note 7, Jose S. Yusay very
well knew of the existence of the ommited properties. Perhaps his motive in under declaring the
inventory of properties attached to the return was to deprive Lilia Yusay from inheriting her legal
share in the hereditary estate, but certainly not because he honestly believed that they did not form
part of the gross estate.
Second, the return mentioned no heir. Thus, no inheritance tax could be assessed. As a matter of
law, on the basis of the return, there would be no occasion for the imposition of estate and
inheritance taxes. When there is no heir - the return showed none - the intestate estate is escheated
to the State.12 The State taxes not itself.
In a case where the return was made on the wrong form, the Supreme Court of the United States
held that the filing thereof did not start the running of the period of limitations.13 The reason is that the
return submitted did not contain the necessary information required in the correct form. In this
jurisdiction, however, the Supreme Court refrained from applying the said ruling of the United States
Supreme Court in Collector of Internal Revenue v. Central Azucarera de Tarlac, L-11760-61, July
31, 1958, on the ground that the return was complete in itself although inaccurate. To our mind, it
would not make much difference where a return is made on the correct form prescribed by the
Bureau of Internal Revenue if the data therein required are not supplied by the taxpayer. Just the
same, the necessary information for the assessment of the tax would be missing.
The return filed in this case was so deficient that it prevented the Commissioner from computing the
taxes due on the estate. It was as though no return was made. The Commissioner had to determine
and assess the taxes on data obtained, not from the return, but from other sources. We therefore
hold the view that the return in question was no return at all as required in Section 93 of the Tax
Code.
The law imposes upon the taxpayer the burden of supplying by the return the information upon
which an assessment would be based.14 His duty complied with, the taxpayer is not bound to do
anything more than to wait for the Commissioner to assess the tax. However, he is not required to
wait forever. Section 331 of the Tax Code gives the Commissioner five years within which to make
his assessment.15 Except, of course, if the taxpayer failed to observe the law, in which case Section
332 of the same Code grants the Commissioner a longer period. Non-observance consists in filing a
false or fraudulent return with intent to evade the tax or in filing no return at all.
Accordingly, for purposes of determining whether or not the Commissioner's assessment of

February 13, 1958 is barred by prescription, Section 332(a) which is an exception to Section 331 of
the Tax Code finds application.16 We quote Section 332(a):
SEC. 332. Exceptions as to period of limitation of assessment and collection of taxes.— (a)
In the case of a false or fraudulent return with intent to evade tax or of a failure to file a
return, the tax may be assessed, or a proceeding in court for the collection of such tax may
be begun without assessment, at any time within ten years after the discovery of the falsity,
fraud or omission.
As stated, the Commissioner came to know of the identity of the heirs on September 24, 1953 and
the huge underdeclaration in the gross estate on July 12, 1957. From the latter date, Section 94 of
the Tax Code obligated him to make a return or amend one already filed based on his own
knowledge and information obtained through testimony or otherwise, and subsequently to assess
thereon the taxes due. The running of the period of limitations under Section 332(a) of the Tax Code
should therefore be reckoned from said date for, as aforesaid, it is from that time that the
Commissioner was expected by law to make his return and assess the tax due thereon. From July
12, 1957 to February 13, 1958, the date of the assessment now in dispute, less than ten years have
elapsed. Hence, prescription did not abate the Commissioner's right to issue said assessment.
Anent the Commissioner's contention that Lilia Yusay is estopped from raising the defense of
prescription because she failed to raise the same in her answer to the motion for allowance of claim
and for the payment of taxes filed in the settlement court (Court of First Instance of Iloilo), suffice it to
state that it would be unjust to the taxpayer if We were to sustain such a view. The Court of First
Instance acting as a settlement court is not the proper tribunal to pass upon such defense, therefore
it would be but futile to raise it therein. Moreover, the Tax Code does not bar the right to contest the
legality of the tax after a taxpayer pays it. Under Section 306 thereof, he can pay the tax and claim a
refund therefor. A fortiori his willingness to pay the tax is no waiver to raise defenses against the
tax's legality.
WHEREFORE, the judgment appealed from is set aside and another entered affirming the
assessment of the Commissioner of Internal Revenue dated February 13, 1958. Lilia Yusay
Gonzales, as administratrix of the intestate estate of Matias Yusay, is hereby ordered to pay the
sums of P16,246.04 and P39,178.12 as estate and inheritance taxes, respectively, plus interest and
surcharge for delinquency in accordance with Section 101 of the National Internal Revenue Code,
without prejudice to reimbursement from her co-administratrix, Florencia Piccio Vda. de Yusay for
the latter's corresponding tax liability. No costs. So ordered.

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G.R. No.

147188 September 14, 2004

COMMISSIONER OF INTERNAL REVENUE, petitioner,

DAVIDE, JR., C.J.:

Income Tax – 1989

TOTAL AMT. DUE & COLLECTIBLE ₱ 79,099,999.22

The Estate thereafter filed a letter of protest.13

I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED

II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE

1. Is this a case of tax evasion or tax avoidance?

We shall discuss these questions in seriatim.

Is this a case of tax evasion or tax avoidance?

Has the period of assessment prescribed?

Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In

G.R. No. 153866 February 11, 2005

COMMISSIONER OF INTERNAL REVENUE, petitioner,

4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT Registration

1. [Respondent’s] alleged claim for tax refund/credit is subject to administrative routinary

Ruling of the Court of Appeals

Hence this Petition.5

Petitioner submits this sole issue for our consideration:

The Court’s Ruling

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

No doubt, as a PEZA-registered enterprise within a special economic zone,7 respondent is entitled to

Preferential Tax Treatment Under Special Laws

If it avails itself of PD 66 CREATING THE EXPORT PROCESSING ZONE AUTHORITY AND

Zero-Rated and Effectively Zero-Rated Transactions

Zero Rating and Exemption

Exempt Transaction >and Exempt Party

Tax Exemptions Broad and Express

Tax Refund as Tax Exemption

Tax Refund or Credit in Order

Compliance with All Requisites for VAT Refund or Credit

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

' PANGANIBAN, J., Chairman,

- versus' - ' SANDOVAL-GUTIERREZ,

' CARPIO MORALES and

PHILIPPINE LONG DISTANCE

Respondent. ' Promulgated:

December 15, 2005

PLDT shall be subject only to the following taxes, to wit:

xxx xxx xxx

7. The 3% franchise tax on gross receipts which shall be in lieu of

xxx xxx xxx

The 'in lieu of all taxes' provision under Section 12 of RA 7082

This Court has noted that petitioner has included in its

Total amount claimed ' P126,713.037.00

a) Amount already prescribed: xxx

(Exh. B-216) P 1,440,874.00 P 39,456,006.00

Amount refundable P 87,257,031.00

ADVANCE SALES TAX

Total amount claimed P12,460.219.00

Amount refundable P 7,416,391.00

OTHER BIR TAXES

Total amount claimed P 25,337,697.00

Less amount already prescribed: 11,187,740.00

Amount refundable P 14,149,957.00

VALUE ADDED TAX

Total amount claimed P 116.041,333.00

Amount refundable ' P 114,441,897.00

TOTAL AMOUNT REFUNDABLE P223,265,276.00,

and accordingly disposed, as follows:

THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT IS

Hence, the need to address the main issue tendered herein.