P1,679,155.

00
Taxable
===========
sale/receipt
=
10% tax due
167,915.50
thereon
25% surcharge 41,978.88
FIRST DIVISION
20% interest per
125,936.63
G.R. No. 125355 March 30, 2000 annum
Compromise
COMMISSIONER OF INTERNAL REVENUE, penalty for late 16,000.00
petitioner, payment
vs.
COURT OF APPEALS and TOTAL AMOUNT
COMMONWEALTH MANAGEMENT AND DUE AND P351,831.01 3
SERVICES CORPORATION, respondents. COLLECTIBLE ============

PARDO, J.: COMASERCO's annual corporate income tax

What is before the Court is a petition for review
on certiorari of the decision of the Court of
Appeals,1 reversing that of the Court of Tax
Appeals,2 which affirmed with modification the
decision of the Commissioner of Internal
Revenue ruling that Commonwealth
Management and Services Corporation, is liable
for value added tax for services to clients during
taxable year 1988.
return ending December 31, 1988 indicated a
net loss in its operations in the amount of
P6,077.00.
On February 10, 1992, COMASERCO filed with
the BIR, a letter-protest objecting to the latter's
finding of deficiency VAT. On August 20, 1992,
the Commissioner of Internal Revenue sent a
collection letter to COMASERCO demanding
payment of the deficiency VAT.

Commonwealth Management and Services On September 29, 1992, COMASERCO filed

Corporation (COMASERCO, for brevity), is a
corporation duly organized and existing under
the laws of the Philippines. It is an affiliate of
Philippine American Life Insurance Co.
(Philamlife), organized by the letter to perform
collection, consultative and other technical
services, including functioning as an internal
auditor, of Philamlife and its other
affiliates.1âwphi1.nêt
On January 24, 1992, the Bureau of Internal
Revenue (BIR) issued an assessment to private
respondent COMASERCO for deficiency value-
added tax (VAT) amounting to P351,851.01, for
taxable year 1988, computed as follows:
with the Court of Tax Appeals4 a petition for
review contesting the Commissioner's
assessment. COMASERCO asserted that the
services it rendered to Philamlife and its
affiliates, relating to collections, consultative and
other technical assistance, including functioning
as an internal auditor, were on a "no-profit,
reimbursement-of-cost-only" basis. It averred
that it was not engaged in the business of
providing services to Philamlife and its affiliates.
COMASERCO was established to ensure
operational orderliness and administrative
efficiency of Philamlife and its affiliates, and not
in the sale of services. COMASERCO stressed
that it was not profit-motivated, thus not
engaged in business. In fact, it did not generate
profit but suffered a net loss in taxable year
1988. COMASERCO averred that since it was
1
not engaged in business, it was not liable to pay
VAT.
On June 22, 1995, the Court of Tax Appeals
rendered decision in favor of the Commissioner
of Internal Revenue, the dispositive portion of
which reads:
WHEREFORE, the decision of the
Commissioner of Internal Revenue
assessing petitioner deficiency value-
added tax for the taxable year 1988 is
AFFIRMED with slight modifications.
Accordingly, petitioner is ordered to pay
respondent Commissioner of Internal
Revenue the amount of P335,831.01
inclusive of the 25% surcharge and
interest plus 20% interest from January
24, 1992 until fully paid pursuant to
Section 248 and 249 of the Tax Code.
The compromise penalty of P16,000.00
imposed by the respondent in her
assessment letter shall not be included in
the payment as there was no
compromise agreement entered into
between petitioner and respondent with
respect to the value-added tax
deficiency.5
On July 26, 1995, respondent filed with the
Court of Appeals, a petition for review of the
decision of the Court of Appeals.
After due proceedings, on May 13, 1996, the
Court of Appeals rendered decision reversing
that of the Court of Tax Appeals, the dispositive
portion of which reads:
WHEREFORE, in view of the foregoing,
judgment is hereby rendered
REVERSING and SETTING ASIDE the
questioned Decision promulgated on 22
June 1995. The assessment for
deficiency value-added tax for the
taxable year 1988 inclusive of surcharge,
interest and penalty charges are ordered
CANCELLED for lack of legal and factual
basis. 6
The Court of Appeals anchored its decision on
the ratiocination in another tax case involving
the same parties,7 where it was held that
COMASERCO was not liable to pay fixed and
contractor's tax for services rendered to
Philamlife and its affiliates. The Court of
Appeals, in that case, reasoned that
COMASERCO was not engaged in business of
providing services to Philamlife and its affiliates.
In the same manner, the Court of Appeals held
that COMASERCO was not liable to pay VAT for
it was not engaged in the business of selling
services.
On July 16, 1996, the Commissioner of Internal
Revenue filed with this Court a petition for
review on certiorari assailing the decision of the
Court of Appeals.
On August 7, 1996, we required respondent
COMASERCO to file comment on the petition,
and on September 26, 1996, COMASERCO
complied with the resolution.8
We give due course to the petition.
At issue in this case is whether COMASERCO
was engaged in the sale of services, and thus
liable to pay VAT thereon.
Petitioner avers that to "engage in business"
and to "engage in the sale of services" are two
different things. Petitioner maintains that the
services rendered by COMASERCO to
Philamlife and its affiliates, for a fee or
consideration, are subject to VAT. VAT is a tax
on the value added by the performance of the
service. It is immaterial whether profit is derived
from rendering the service.
We agree with the Commissioner.
Sec. 99 of the National Internal Revenue Code
of 1986, as amended by Executive Order (E. O.)
No. 273 in 1988, provides that:
Sec. 99. Persons liable. — Any person
who, in the course of trade or business,
sells, barters or exchanges goods,
renders services, or engages in similar
2
 transactions and any person who,
imports goods shall be subject to the
value-added tax (VAT) imposed in
Sections 100 to 102 of this Code. 9
COMASERCO contends that the term "in the
course of trade or business" requires that the
"business" is carried on with a view to profit or
livelihood. It avers that the activities of the entity
must be profit-oriented. COMASERCO submits
that it is not motivated by profit, as defined by its
primary purpose in the articles of incorporation,
stating that it is operating "only on
reimbursement-of-cost basis, without any
profit." Private respondent argues that profit
motive is material in ascertaining who to tax for
purposes of determining liability for VAT.
We disagree.
On May 28, 1994, Congress enacted Republic
Act No. 7716, the Expanded VAT Law (EVAT),
amending among other sections, Section 99 of
the Tax Code. On January 1, 1998, Republic Act
8424, the National Internal Revenue Code of
1997, took effect. The amended law provides
that:
Sec. 105. Persons Liable. — Any person
who, in the course of trade or business,
sells, barters, exchanges, leases goods
or properties, renders services, and any
person who imports goods shall be
subject to the value-added tax (VAT)
imposed in Sections 106 and 108 of this
Code.
The value-added tax is an indirect tax
and the amount of tax may be shifted or
passed on to the buyer, transferee or
lessee of the goods, properties or
services. This rule shall likewise apply to
existing sale or lease of goods,
properties or services at the time of the
effectivity of Republic Act No. 7716.
The phrase "in the course of trade or
business" means the regular conduct or
pursuit of a commercial or an economic
activity, including transactions incidental
thereto, by any person regardless of
whether or not the person engaged
therein is a nonstock, nonprofit
organization (irrespective of the
disposition of its net income and whether
or not it sells exclusively to members of
their guests), or government entity.
The rule of regularity, to the contrary
notwithstanding, services as defined in
this Code rendered in the Philippines by
nonresident foreign persons shall be
considered as being rendered in the
course of trade or business.
Contrary to COMASERCO's contention the
above provision clarifies that even a non-stock,
non-profit, organization or government entity, is
liable to pay VAT on the sale of goods or
services. VAT is a tax on transactions, imposed
at every stage of the distribution process on the
sale, barter, exchange of goods or property, and
on the performance of services, even in the
absence of profit attributable thereto. The term
"in the course of trade or business" requires the
regular conduct or pursuit of a commercial or an
economic activity regardless of whether or not
the entity is profit-oriented.
The definition of the term "in the course of trade
or business" present law applies to all
transactions even to those made prior to its
enactment. Executive Order No. 273 stated that
any person who, in the course of trade or
business, sells, barters or exchanges goods and
services, was already liable to pay VAT. The
present law merely stresses that even a
nonstock, nonprofit organization or government
entity is liable to pay VAT for the sale of goods
and services.
Sec. 108 of the National Internal Revenue Code
of 1997 10 defines the phrase "sale of services"
as the "performance of all kinds of services for
others for a fee, remuneration or consideration."
It includes "the supply of technical advice,
assistance or services rendered in connection
with technical management or administration of
any scientific, industrial or commercial
undertaking or project." 11
3
On February 5, 1998, the Commissioner of
Internal Revenue issued BIR Ruling No. 010-98
12 emphasizing that a domestic corporation that
provided technical, research, management and
technical assistance to its affiliated companies
and received payments on a reimbursement-of-
cost basis, without any intention of realizing
profit, was subject to VAT on services rendered.
In fact, even if such corporation was organized
without any intention realizing profit, any income
or profit generated by the entity in the conduct
of its activities was subject to income tax.
Hence, it is immaterial whether the primary
purpose of a corporation indicates that it
receives payments for services rendered to its
affiliates on a reimbursement-on-cost basis
only, without realizing profit, for purposes of
determining liability for VAT on services
rendered. As long as the entity provides service
for a fee, remuneration or consideration, then
the service rendered is subject to
VAT.1awp++i1
At any rate, it is a rule that because taxes are
the lifeblood of the nation, statutes that allow
exemptions are construed strictly against the
grantee and liberally in favor of the government.
Otherwise stated, any exemption from the
payment of a tax must be clearly stated in the
language of the law; it cannot be merely implied
therefrom. 13 In the case of VAT, Section 109,
Republic Act 8424 clearly enumerates the
transactions exempted from VAT. The services
rendered by COMASERCO do not fall within the
exemptions.
the long standing policy and practice of this
Court to respect the conclusions of quasi-
judicial agencies, such as the Court of Tax
Appeals which, by the nature of its functions, is
dedicated exclusively to the study and
consideration of tax cases and has necessarily
developed an expertise on the subject, unless
there has been an abuse or improvident
exercise of its authority. 15
There is no merit to respondent's contention that
the Court of Appeals' decision in CA-G.R. No.
34042, declaring the COMASERCO as not
engaged in business and not liable for the
payment of fixed and percentage taxes, binds
petitioner. The issue in CA-G.R. No. 34042 is
different from the present case, which involves
COMASERCO's liability for VAT. As heretofore
stated, every person who sells, barters, or
exchanges goods and services, in the course of
trade or business, as defined by law, is subject
to VAT.
WHEREFORE, the Court GRANTS the petition
and REVERSES the decision of the Court of
Appeals in CA-G.R. SP No. 37930. The Court
hereby REINSTATES the decision of the Court
of Tax Appeals in C. T. A. Case No. 4853.
No costs.
SO ORDERED.

Both the Commissioner of Internal Revenue and

the Court of Tax Appeals correctly ruled that the
services rendered by COMASERCO to
Philamlife and its affiliates are subject to VAT.
As pointed out by the Commissioner, the
performance of all kinds of services for others
for a fee, remuneration or consideration is
considered as sale of services subject to VAT.
As the government agency charged with the
enforcement of the law, the opinion of the
Commissioner of Internal Revenue, in the
absence of any showing that it is plainly wrong,
is entitled to great weight. 14 Also, it has been
4
 The Facts

Quoting the CTA, the CA narrated the

undisputed facts as follows:

"[Respondent] is a Philippine branch of

THIRD DIVISION
G.R. No. 152609 June 29, 2005
COMMISSIONER OF INTERNAL REVENUE,
Petitioner,
vs.
AMERICAN EXPRESS INTERNATIONAL,
INC. (PHILIPPINE BRANCH), Respondent.
DECISION
PANGANIBAN, J.:
As a general rule, the value-added tax (VAT)
system uses the destination principle. However,
our VAT law itself provides for a clear exception,
under which the supply of service shall be zero-
rated when the following requirements are met:
(1) the service is performed in the Philippines;
(2) the service falls under any of the categories
provided in Section 102(b) of the Tax Code; and
(3) it is paid for in acceptable foreign currency
that is accounted for in accordance with the
regulations of the Bangko Sentral ng Pilipinas.
Since respondent’s services meet these
requirements, they are zero-rated. Petitioner’s
Revenue Regulations that alter or revoke the
above requirements are ultra vires and invalid.
The Case
Before us is a Petition for Review1 under Rule
45 of the Rules of Court, assailing the February
28, 2002 Decision2 of the Court of Appeals (CA)
in CA-GR SP No. 62727. The assailed Decision
disposed as follows:
American Express International, Inc., a
corporation duly organized and existing under
and by virtue of the laws of the State of
Delaware, U.S.A., with office in the Philippines
at the Ground Floor, ACE Building, corner Rada
and de la Rosa Streets, Legaspi Village, Makati
City. It is a servicing unit of American Express
International, Inc. - Hongkong Branch (Amex-
HK) and is engaged primarily to facilitate the
collections of Amex-HK receivables from card
members situated in the Philippines and
payment to service establishments in the
Philippines.
"Amex Philippines registered itself with the
Bureau of Internal Revenue (BIR), Revenue
District Office No. 47 (East Makati) as a value-
added tax (VAT) taxpayer effective March 1988
and was issued VAT Registration Certificate No.
088445 bearing VAT Registration No. 32A-3-
004868. For the period January 1, 1997 to
December 31, 1997, [respondent] filed with the
BIR its quarterly VAT returns as follows:
Exhibit Period Covered Date Filed
D 1997 1st Qtr. April 18, 1997
F 2nd Qtr. July 21, 1997
G 3rd Qtr. October 2, 1997
H 4th Qtr. January 20, 1998
"On March 23, 1999, however, [respondent]
amended the aforesaid returns and declared the
following:
Exh Taxable Output Zero-rated
1997 Sales VAT Sales

"WHEREFORE, premises considered, the I 1st qtr ₱59,597.20 ₱5,959.72 ₱17,513,801.11

petition is hereby DISMISSED for lack of merit. J 2nd qtr 67,517.20 6,751.72 17,937,361.51
The assailed decision of the Court of Tax
Appeals (CTA) is AFFIRMED in toto."3 K 3rd qtr 51,936.60 5,193.66 19,627,245.36
5
L 4th qtr 67,994.30 6,799.43 25,231,225.22
Total ₱247,045.30 ₱24,704.53 ₱80,309,633.20 ‘Section
"On April 13, 1999, [respondent] filed with the
BIR a letter-request for the refund of its 1997
excess input taxes in the amount of
₱3,751,067.04, which amount was arrived at
after deducting from its total input VAT paid of
₱3,763,060.43 its applied output VAT liabilities
only for the third and fourth quarters of 1997
amounting to ₱5,193.66 and ₱6,799.43,
respectively. [Respondent] cites as basis
therefor, Section 110 (B) of the 1997 Tax Code,
to state:
‘Section 110. Tax Credits. -
xxxxxxxxx
‘(B) Excess Output or Input Tax. - If at the end
of any taxable quarter the output tax exceeds
the input tax, the excess shall be paid by the
VAT-registered person. If the input tax exceeds
the output tax, the excess shall be carried over
to the succeeding quarter or quarters. Any input
tax attributable to the purchase of capital goods
or to zero-rated sales by a VAT-registered
person may at his option be refunded or credited
against other internal revenue taxes, subject to
the provisions of Section 112.’
"There being no immediate action on the part of
the [petitioner], [respondent’s] petition was filed
on April 15, 1999.
"In support of its Petition for Review, the
following arguments were raised by
[respondent]:
A. Export sales by a VAT-registered person, the
consideration for which is paid for in acceptable
foreign currency inwardly remitted to the
Philippines and accounted for in accordance
with existing regulations of the Bangko Sentral
ng Pilipinas, are subject to [VAT] at zero percent January 1, 1998. [Section 102(a)(2) of the Tax
(0%). According to [respondent], being a VAT-
registered entity, it 1,308,082.21
13,080,822.10 is subject to the VAT
imposed under Title IV of the Tax Code, to wit:
₱37,630,604.30 ₱3,763,060.43
102.(sic) Value-added tax on sale of
services.- (a) Rate and base of tax. - There
shall be levied, assessed and collected, a value-
added tax equivalent to 10% percent of gross
receipts derived by any person engaged in the
sale of services. The phrase "sale of services"
means the performance of all kinds of services
for others for a fee, remuneration or
consideration, including those performed or
rendered by construction and service
contractors: stock, real estate, commercial,
customs and immigration brokers; lessors of
personal property; lessors or distributors of
cinematographic films; persons engaged in
milling, processing, manufacturing or repacking
goods for others; and similar services
regardless of whether o[r] not the performance
thereof calls for the exercise or use of the
physical or mental faculties: Provided That the
following services performed in the Philippines
by VAT-registered persons shall be subject to
0%:
(1) x x x
(2) Services other than those mentioned
in the preceding subparagraph, the
consideration is paid for in acceptable
foreign currency which is remitted
inwardly to the Philippines and
accounted for in accordance with the
rules and regulations of the BSP. x x x.’
In addition, [respondent] relied on VAT Ruling
No. 080-89, dated April 3, 1989, the pertinent
portion of which reads as follows:
‘In Reply, please be informed that, as a VAT
registered entity whose service is paid for in
acceptable foreign currency which is remitted
inwardly to the Philippines and accounted for in
accordance with the rules and regulations of the
Central [B]ank of the Philippines, your service
income is automatically zero rated effective
Code as amended].4 For this, there is no need
to file an application for zero-rate.’
6
B. Input taxes on domestic purchases of taxable
goods and services related to zero-rated
revenues are available as tax refund in
accordance with Section 106 (now Section 112)
of the [Tax Code] and Section 8(a) of [Revenue]
Regulations [(RR)] No. 5-87, to state:
‘Section 106. Refunds or tax credits of input
tax. -
(A) Zero-rated or effectively Zero-rated Sales. -
Any VAT-registered person, except those
covered by paragraph (a) above, whose sales
are zero-rated or are effectively zero-rated,
may, within two (2) years after the close of the
taxable quarter when such sales were made,
apply for the issuance of tax credit certificate or
refund of the input taxes due or attributable to
such sales, to the extent that such input tax has
not been applied against output tax. x x x.
[Section 106(a) of the Tax Code]’5
‘Section 8. Zero-rating. - (a) In general. - A
zero-rated sale is a taxable transaction for
value-added tax purposes. A sale by a VAT-
registered person of goods and/or services
taxed at zero rate shall not result in any output
tax. The input tax on his purchases of goods or
services related to such zero-rated sale shall be
available as tax credit or refundable in
accordance with Section 16 of these
Regulations. x x x.’ [Section 8(a), [RR] 5-87].’6
"[Petitioner], in his Answer filed on May 6, 1999,
claimed by way of Special and Affirmative
Defenses that:
7. The claim for refund is subject to investigation
by the Bureau of Internal Revenue;
8. Taxes paid and collected are presumed to
have been made in accordance with laws and
regulations, hence, not refundable. Claims for
tax refund are construed strictly against the
claimant as they partake of the nature of tax
exemption from tax and it is incumbent upon the
[respondent] to prove that it is entitled thereto
under the law and he who claims exemption
must be able to justify his claim by the clearest
grant of organic or statu[t]e law. An exemption
from the common burden [cannot] be permitted
to exist upon vague implications;
9. Moreover, [respondent] must prove that it has
complied with the governing rules with reference
to tax recovery or refund, which are found in
Sections 204(c) and 229 of the Tax Code, as
amended, which are quoted as follows:
‘Section 204. Authority of the Commissioner to
Compromise, Abate and Refund or Credit
Taxes. - The Commissioner may - x x x.
(C) Credit or refund taxes erroneously or illegally
received or penalties imposed without authority,
refund the value of internal revenue stamps
when they are returned in good condition by the
purchaser, and, in his discretion, redeem or
change unused stamps that have been
rendered unfit for use and refund their value
upon proof of destruction. No credit or refund of
taxes or penalties shall be allowed unless the
taxpayer files in writing with the Commissioner
a claim for credit or refund within two (2) years
after payment of the tax or penalty: Provided,
however, That a return filed with an
overpayment shall be considered a written claim
for credit or refund.’
‘Section 229. Recovery of tax erroneously or
illegally collected.- No suit or proceeding shall
be maintained in any court for the recovery of
any national internal revenue tax hereafter
alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed
to have been collected without authority, or of
any sum alleged to have been excessively or in
any manner wrongfully collected, until a claim
for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may
be maintained, whether or not such tax, penalty
or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be
begun (sic) after the expiration of two (2) years
from the date of payment of the tax or penalty
regardless of any supervening cause that may
arise after payment: Provided, however, That
the Commissioner may, even without written
claim therefor, refund or credit any tax, where on
7
the face of the return upon which payment was
made, such payment appears clearly to have
been erroneously paid.’
"From the foregoing, the [CTA], through the
Presiding Judge Ernesto D. Acosta rendered a
decision7 in favor of the herein respondent
holding that its services are subject to zero-rate
pursuant to Section 108(b) of the Tax Reform
Act of 1997 and Section 4.102-2 (b)(2) of
Revenue Regulations 5-96, the decretal portion
of which reads as follows:
‘WHEREFORE, in view of all the foregoing, this
Court finds the [petition] meritorious and in
accordance with law. Accordingly, [petitioner] is
hereby ORDERED to REFUND to [respondent]
the amount of ₱3,352,406.59 representing the
latter’s excess input VAT paid for the year
1997.’"8
Ruling of the Court of Appeals
In affirming the CTA, the CA held that
respondent’s services fell under the first type
enumerated in Section 4.102-2(b)(2) of RR 7-
95, as amended by RR 5-96. More particularly,
its "services were not of the same class or of the
same nature as project studies, information, or
engineering and architectural designs" for non-
resident foreign clients; rather, they were
"services other than the processing,
manufacturing or repacking of goods for
persons doing business outside the
Philippines." The consideration in both types of
service, however, was paid for in acceptable
foreign currency and accounted for in
accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas.
Furthermore, the CA reasoned that reliance on
VAT Ruling No. 040-98 was unwarranted. By
requiring that respondent’s services be
consumed abroad in order to be zero-rated,
petitioner went beyond the sphere of
interpretation and into that of legislation. Even
granting that it is valid, the ruling cannot be
given retroactive effect, for it will be harsh and
oppressive to respondent, which has already
relied upon VAT Ruling No. 080-89 for zero
rating.
Hence, this Petition.9
The Issue
Petitioner raises this sole issue for our
consideration:
"Whether or not the Court of Appeals committed
reversible error in holding that respondent is
entitled to the refund of the amount of
₱3,352,406.59 allegedly representing excess
input VAT for the year 1997."10
The Court’s Ruling
The Petition is unmeritorious.
Sole Issue:
Entitlement to Tax Refund
Section 102 of the Tax Code11 provides:
"Sec. 102. Value-added tax on sale of services
and use or lease of properties. -- (a) Rate and
base of tax. -- There shall be levied, assessed
and collected, a value-added tax equivalent to
ten percent (10%) of gross receipts derived from
the sale or exchange of services x x x.
"The phrase 'sale or exchange of services'
means the performance of all kinds of services
in the Philippines for others for a fee,
remuneration or consideration, including those
performed or rendered by x x x persons
engaged in milling, processing, manufacturing
or repacking goods for others; x x x services of
banks, non-bank financial intermediaries and
finance companies; x x x and similar services
regardless of whether or not the performance
thereof calls for the exercise or use of the
physical or mental faculties. The phrase 'sale or
exchange of services' shall likewise include:
xxxxxxxxx
8
‘(3) The supply of x x x commercial knowledge
or information;
‘(4) The supply of any assistance that is ancillary
and subsidiary to and is furnished as a means
of enabling the application or enjoyment of x x x
any such knowledge or information as is
mentioned in subparagraph (3);
xxxxxxxxx
‘(6) The supply of technical advice, assistance
or services rendered in connection with
technical management or administration of any
x x x commercial undertaking, venture, project
or scheme;
xxxxxxxxx
"The term 'gross receipts’ means the total
amount of money or its equivalent representing
the contract price, compensation, service fee,
rental or royalty, including the amount charged
for materials supplied with the services and
deposits and advanced payments actually or
constructively received during the taxable
quarter for the services performed or to be
performed for another person, excluding value-
added tax.
"(b) Transactions subject to zero percent (0%)
rate. -- The following services performed in the
Philippines by VAT-registered persons shall be
subject to zero percent (0%) rate[:]
‘(1) Processing, manufacturing or repacking
goods for other persons doing business outside
the Philippines which goods are subsequently
exported, where the services are paid for in
acceptable foreign currency and accounted for
in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP);
‘(2) Services other than those mentioned in the
preceding subparagraph, the consideration for
which is paid for in acceptable foreign currency
and accounted for in accordance with the rules
and regulations of the [BSP];’"
xxxxxxxxx
Zero Rating of "Other" Services
The law is very clear. Under the last paragraph
quoted above, services performed by VAT-
registered persons in the Philippines (other than
the processing, manufacturing or repacking of
goods for persons doing business outside the
Philippines), when paid in acceptable foreign
currency and accounted for in accordance with
the rules and regulations of the BSP, are zero-
rated.
Respondent is a VAT-registered person that
facilitates the collection and payment of
receivables belonging to its non-resident foreign
client, for which it gets paid in acceptable foreign
currency inwardly remitted and accounted for in
conformity with BSP rules and regulations.
Certainly, the service it renders in the
Philippines is not in the same category as
"processing, manufacturing or repacking of
goods" and should, therefore, be zero-rated. In
reply to a query of respondent, the BIR opined
in VAT Ruling No. 080-89 that the income
respondent earned from its parent company’s
regional operating centers (ROCs) was
automatically zero-rated effective January 1,
1988.12
Service has been defined as "the art of doing
something useful for a person or company for a
fee"13 or "useful labor or work rendered or to be
rendered by one person to another."14 For
facilitating in the Philippines the collection and
payment of receivables belonging to its Hong
Kong-based foreign client, and getting paid for it
in duly accounted acceptable foreign currency,
respondent renders service falling under the
category of zero rating. Pursuant to the Tax
Code, a VAT of zero percent should, therefore,
be levied upon the supply of that service. 15
The Credit Card System and Its Components
For sure, the ancillary business of facilitating the
said collection is different from the main
business of issuing credit cards.16 Under the
credit card system, the credit card company
extends credit accommodations to its card
holders for the purchase of goods and services
9
from its member establishments, to be
reimbursed by them later on upon proper billing.
Given the complexities of present-day business
transactions, the components of this system can
certainly function as separate billable services.
Under RA 8484,17 the credit card that is issued
by banks18 in general, or by non-banks in
particular, refers to "any card x x x or other credit
device existing for the purpose of obtaining x x
x goods x x x or services x x x on credit;"19 and
is being used "usually on a revolving basis."20
This means that the consumer-credit
arrangement that exists between the issuer and
the holder of the credit card enables the latter to
procure goods or services "on a continuing
basis as long as the outstanding balance does
not exceed a specified limit."21 The card holder
is, therefore, given "the power to obtain present
control of goods or service on a promise to pay
for them in the future."22
Business establishments may extend credit
sales through the use of the credit card facilities
of a non-bank credit card company to avoid the
risk of uncollectible accounts from their
customers. Under this system, the
establishments do not deposit in their bank
accounts the credit card drafts23 that arise from
the credit sales. Instead, they merely record
their receivables from the credit card company
and periodically send the drafts evidencing
those receivables to the latter.
The credit card company, in turn, sends checks
as payment to these business establishments,
but it does not redeem the drafts at full price.
The agreement between them usually provides
for discounts to be taken by the company upon
its redemption of the drafts.24 At the end of each
month, it then bills its credit card holders for their
respective drafts redeemed during the previous
month. If the holders fail to pay the amounts
owed, the company sustains the loss.25
In the present case, respondent’s role in the
consumer credit26 process described above
primarily consists of gathering the bills and
credit card drafts of different service
establishments located in the Philippines and
forwarding them to the ROCs outside the
country. Servicing the bill is not the same as
billing. For the former type of service alone,
respondent already gets paid.
The parent company -- to which the ROCs and
respondent belong -- takes charge not only of
redeeming the drafts from the ROCs and
sending the checks to the service
establishments, but also of billing the credit card
holders for their respective drafts that it has
redeemed. While it usually imposes finance
charges27 upon the holders, none may be
exacted by respondent upon either the ROCs or
the card holders.
Branch and Home Office
By designation alone, respondent and the
ROCs are operated as branches. This means
that each of them is a unit, "an offshoot, lateral
extension, or division"28 located at some
distance from the home office29 of the parent
company; carrying separate inventories;
incurring their own expenses; and generating
their respective incomes. Each may conduct
sales operations in any locality as an extension
of the principal office.30
The extent of accounting activity at any of these
branches depends upon company policy,31 but
the financial reports of the entire business
enterprise -- the credit card company to which
they all belong -- must always show its financial
position, results of operation, and changes in its
financial position as a single unit.32 Reciprocal
accounts are reconciled or eliminated, because
they lose all significance when the branches and
home office are viewed as a single entity.33 In
like manner, intra-company profits or losses
must be offset against each other for accounting
purposes.
Contrary to petitioner’s assertion,34 respondent
can sell its services to another branch of the
same parent company.35 In fact, the business
concept of a transfer price allows goods and
services to be sold between and among intra-
company units at cost or above cost.36 A branch
may be operated as a revenue center, cost
10
center, profit center or investment center,
depending upon the policies and accounting
system of its parent company.37 Furthermore,
the latter may choose not to make any sale
itself, but merely to function as a control center,
where most or all of its expenses are allocated
to any of its branches.38
Gratia argumenti that the sending of drafts and
bills by service establishments to respondent is
equivalent to the act of sending them directly to
its parent company abroad, and that the parent
company’s subsequent redemption of these
drafts and billings of credit card holders is also
attributable to respondent, then with greater
reason should the service rendered by
respondent be zero-rated under our VAT
system. The service partakes of the nature of
export sales as applied to goods,39 especially
when rendered in the Philippines by a VAT-
registered person40 that gets paid in acceptable
foreign currency accounted for in accordance
with BSP rules and regulations.
VAT Requirements for the Supply of Service
The VAT is a tax on consumption41 "expressed
as a percentage of the value added to goods or
services"42 purchased by the producer or
taxpayer.43 As an indirect tax44 on services,45 its
main object is the transaction46 itself or, more
concretely, the performance of all kinds of
services47 conducted in the course of trade or
business in the Philippines.48 These services
must be regularly conducted in this country;
undertaken in "pursuit of a commercial or an
economic activity;"49 for a valuable
consideration; and not exempt under the Tax
Code, other special laws, or any international
agreement.50
Without doubt, the transactions respondent
entered into with its Hong Kong-based client
meet all these requirements.
First, respondent regularly renders in the
Philippines the service of facilitating the
collection and payment of receivables
belonging to a foreign company that is a
clearly separate and distinct entity.
Second, such service is commercial in
nature; carried on over a sustained
period of time; on a significant scale; with
a reasonable degree of frequency; and
not at random, fortuitous or attenuated.
Third, for this service, respondent
definitely receives consideration in
foreign currency that is accounted for in
conformity with law.
Finally, respondent is not an entity
exempt under any of our laws or
international agreements.
Services Subject to Zero VAT
As a general rule, the VAT system uses the
destination principle as a basis for the
jurisdictional reach of the tax.51 Goods and
services are taxed only in the country where
they are consumed. Thus, exports are zero-
rated, while imports are taxed.
Confusion in zero rating arises because
petitioner equates the performance of a
particular type of service with the consumption
of its output abroad. In the present case, the
facilitation of the collection of receivables is
different from the utilization or consumption of
the outcome of such service. While the
facilitation is done in the Philippines, the
consumption is not. Respondent renders
assistance to its foreign clients -- the ROCs
outside the country -- by receiving the bills of
service establishments located here in the
country and forwarding them to the ROCs
abroad. The consumption contemplated by law,
contrary to petitioner’s administrative
interpretation,52 does not imply that the service
be done abroad in order to be zero-rated.
Consumption is "the use of a thing in a way that
thereby exhausts it."53 Applied to services, the
term means the performance or "successful
completion of a contractual duty, usually
resulting in the performer’s release from any
past or future liability x x x."54 The services
rendered by respondent are performed or
successfully completed upon its sending to its
11
foreign client the drafts and bills it has gathered
from service establishments here. Its services,
having been performed in the Philippines, are
therefore also consumed in the Philippines.
Unlike goods, services cannot be physically
used in or bound for a specific place when their
destination is determined. Instead, there can
only be a "predetermined end of a course" 55
when determining the service "location or
position x x x for legal purposes."56
Respondent’s facilitation service has no
physical existence, yet takes place upon
rendition, and therefore upon consumption, in
the Philippines. Under the destination principle,
as petitioner asserts, such service is subject to
VAT at the rate of 10 percent.
Respondent’s Services Exempt from the
Destination Principle
However, the law clearly provides for an
exception to the destination principle; that is, for
a zero percent VAT rate for services that are
performed in the Philippines, "paid for in
acceptable foreign currency and accounted for
in accordance with the rules and regulations of
the [BSP]."57 Thus, for the supply of service to
be zero-rated as an exception, the law merely
requires that first, the service be performed in
the Philippines; second, the service fall under
any of the categories in Section 102(b) of the
Tax Code; and, third, it be paid in acceptable
foreign currency accounted for in accordance
with BSP rules and regulations.
Indeed, these three requirements for exemption
from the destination principle are met by
respondent. Its facilitation service is performed
in the Philippines. It falls under the second
category found in Section 102(b) of the Tax
Code, because it is a service other than
"processing, manufacturing or repacking of
goods" as mentioned in the provision.
Undisputed is the fact that such service meets
the statutory condition that it be paid in
acceptable foreign currency duly accounted for
in accordance with BSP rules. Thus, it should be
zero-rated.
Performance of Service versus Product
Arising from Performance
Again, contrary to petitioner’s stand, for the cost
of respondent’s service to be zero-rated, it need
not be tacked in as part of the cost of goods
exported.58 The law neither imposes such
requirement nor associates services with
exported goods. It simply states that the
services performed by VAT-registered persons
in the Philippines -- services other than the
processing, manufacturing or repacking of
goods for persons doing business outside this
country -- if paid in acceptable foreign currency
and accounted for in accordance with the rules
and regulations of the BSP, are zero-rated. The
service rendered by respondent is clearly
different from the product that arises from the
rendition of such service. The activity that
creates the income must not be confused with
the main business in the course of which that
income is realized.59
Tax Situs of a Zero-Rated Service
The law neither makes a qualification nor adds
a condition in determining the tax situs of a zero-
rated service. Under this criterion, the place
where the service is rendered determines the
jurisdiction60 to impose the VAT.61 Performed in
the Philippines, such service is necessarily
subject to its jurisdiction,62 for the State
necessarily has to have "a substantial
connection"63 to it, in order to enforce a zero
rate.64 The place of payment is immaterial;65
much less is the place where the output of the
service will be further or ultimately used.
Statutory Construction or Interpretation
Unnecessary
As mentioned at the outset, Section 102(b)(2) of
the Tax Code is very clear. Therefore, no
statutory construction or interpretation is
needed. Neither can conditions or limitations be
introduced where none is provided for.
Rewriting the law is a forbidden ground that only
Congress may tread upon.
12
The Court may not construe a statute that is free
from doubt.66 "[W]here the law speaks in clear
and categorical language, there is no room for
interpretation. There is only room for
application."67 The Court has no choice but to
"see to it that its mandate is obeyed."68
No Qualifications Under RR 5-87
In implementing the VAT provisions of the Tax
Code, RR 5-87 provides for the zero rating of
services other than the processing,
manufacturing or repacking of goods -- in
general and without qualifications -- when paid
for by the person to whom such services are
rendered in acceptable foreign currency
inwardly remitted and duly accounted for in
accordance with the BSP (then Central Bank)
regulations. Section 8 of RR 5-87 states:
"SECTION 8. Zero-rating. -- (a) In general. -- A
zero-rated sale is a taxable transaction for
value-added tax purposes. A sale by a VAT-
registered person of goods and/or services
taxed at zero rate shall not result in any output
tax. The input tax on his purchases of goods or
services related to such zero-rated sale shall be
available as tax credit or refundable in
accordance with Section 16 of these
Regulations.
xxxxxxxxx
" (c) Zero-rated sales of services. -- The
following services rendered by VAT-registered
persons are zero-rated:
‘(1) Services in connection with the processing,
manufacturing or repacking of goods for
persons doing business outside the Philippines,
where such goods are actually shipped out of
the Philippines to said persons or their
assignees and the services are paid for in
acceptable foreign currency inwardly remitted
and duly accounted for under the regulations of
the Central Bank of the Philippines.
xxxxxxxxx
‘(3) Services performed in the Philippines other
than those mentioned in subparagraph (1)
above which are paid for by the person or entity
to whom the service is rendered in acceptable
foreign currency inwardly remitted and duly
accounted for in accordance with Central Bank
regulations. Where the contract involves
payment in both foreign and local currency, only
the service corresponding to that paid in foreign
currency shall enjoy zero-rating. The portion
paid for in local currency shall be subject to VAT
at the rate of 10%.’"
RR 7-95 Broad Enough
RR 7-95, otherwise known as the "Consolidated
VAT Regulations,"69 reiterates the above-
quoted provision and further presents as
examples only the services performed in the
Philippines by VAT-registered hotels and other
service establishments. Again, the condition
remains that these services must be paid in
acceptable foreign currency inwardly remitted
and accounted for in accordance with the rules
and regulations of the BSP. The term "other
service establishments" is obviously broad
enough to cover respondent’s facilitation
service. Section 4.102-2 of RR 7-95 provides
thus:
"SECTION 4.102-2. Zero-Rating. -- (a) In
general. -- A zero-rated sale by a VAT registered
person, which is a taxable transaction for VAT
purposes, shall not result in any output tax.
However, the input tax on his purchases of
goods, properties or services related to such
zero-rated sale shall be available as tax credit
or refund in accordance with these regulations.
"(b) Transaction subject to zero-rate. -- The
following services performed in the Philippines
by VAT-registered persons shall be subject to
0%:
‘(1) Processing, manufacturing or
repacking goods for other persons doing
business outside the Philippines which
goods are subsequently exported, where
the services are paid for in acceptable
foreign currency and accounted for in
13
 accordance with the rules and
regulations of the BSP;
‘(2) Services other than those mentioned
in the preceding subparagraph, e.g.
those rendered by hotels and other
service establishments, the
consideration for which is paid for in
acceptable foreign currency and
accounted for in accordance with the
rules and regulations of the BSP;’"
xxxxxxxxx
Meaning of "as well as" in RR 5-96
Section 4.102-2(b)(2) of RR 7-95 was
subsequently amended by RR 5-96 to read as
follows:
"Section 4.102-2(b)(2) -- ‘Services other than
processing, manufacturing or repacking for
other persons doing business outside the
Philippines for goods which are subsequently
exported, as well as services by a resident to a
non-resident foreign client such as project
studies, information services, engineering and
architectural designs and other similar services,
the consideration for which is paid for in
acceptable foreign currency and accounted for
in accordance with the rules and regulations of
the BSP.’"
Aside from the already scopious coverage of
services in Section 4.102-2(b)(2) of RR 7-95, the
amendment introduced by RR 5-96 further
enumerates specific services entitled to zero
rating. Although superfluous, these sample
services are meant to be merely illustrative. In
this provision, the use of the term "as well as" is
not restrictive. As a prepositional phrase with an
adverbial relation to some other word, it simply
means "in addition to, besides, also or too."70
Neither the law nor any of the implementing
revenue regulations aforequoted categorically
defines or limits the services that may be sold or
exchanged for a fee, remuneration or
consideration. Rather, both merely enumerate
the items of service that fall under the term "sale
or exchange of services."71
Ejusdem Generis
Inapplicable
The canon of statutory construction known as
ejusdem generis or "of the same kind or specie"
does not apply to Section 4.102-2(b)(2) of RR 7-
95 as amended by RR 5-96.
First, although the regulatory provision
contains an enumeration of particular or
specific words, followed by the general
phrase "and other similar services," such
words do not constitute a readily
discernible class and are patently not of
the same kind.72 Project studies involve
investments or marketing; information
services focus on data technology;
engineering and architectural designs
require creativity. Aside from calling for
the exercise or use of mental faculties or
perhaps producing written technical
outputs, no common denominator to the
exclusion of all others characterizes
these three services. Nothing sets them
apart from other and similar general
services that may involve advertising,
computers, consultancy, health care,
management, messengerial work -- to
name only a few.
Second, there is the regulatory intent to
give the general phrase "and other
similar services" a broader meaning.73
Clearly, the preceding phrase "as well as"
is not meant to limit the effect of "and
other similar services."
Third, and most important, the statutory
provision upon which this regulation is
based is by itself not restrictive. The
scope of the word "services" in Section
102(b)(2) of the Tax Code is broad; it is
not susceptible of narrow
interpretation.741avvphi1.zw+
VAT Ruling Nos. 040-98 and 080-89
14
VAT Ruling No. 040-98 relied upon by petitioner
is a less general interpretation at the
administrative level,75 rendered by the BIR
commissioner upon request of a taxpayer to
clarify certain provisions of the VAT law. As
correctly held by the CA, when this ruling states
that the service must be "destined for
consumption outside of the Philippines"76 in
order to qualify for zero rating, it contravenes
both the law and the regulations issued
pursuant to it.77 This portion of VAT Ruling No.
040-98 is clearly ultra vires and invalid.78
Although "[i]t is widely accepted that the
interpretation placed upon a statute by the
executive officers, whose duty is to enforce it, is
entitled to great respect by the courts,"79 this
interpretation is not conclusive and will have to
be "ignored if judicially found to be erroneous"80
and "clearly absurd x x x or improper."81 An
administrative issuance that overrides the law it
merely seeks to interpret, instead of remaining
consistent and in harmony with it, will not be
countenanced by this Court.82
In the present case, respondent has relied upon
VAT Ruling No. 080-89, which clearly
recognizes its zero rating. Changing this status
will certainly deprive respondent of a refund of
the substantial amount of excess input taxes to
which it is entitled.
Again, assuming arguendo that VAT Ruling No.
040-98 revoked VAT Ruling No. 080-89, such
revocation could not be given retroactive effect
if the application of the latter ruling would only
be prejudicial to respondent.83 Section 246 of
the Tax Code categorically declares that "[a]ny
revocation x x x of x x x any of the rulings x x x
promulgated by the Commissioner shall not be
given retroactive application if the revocation x x
x will be prejudicial to the taxpayers."84
It is also basic in law that "no x x x rule x x x shall
be given retrospective effect85 unless explicitly
stated."86 No indication of such retroactive
application to respondent does the Court find in
VAT Ruling No. 040-98. Neither do the
exceptions enumerated in Section 24687 of the
Tax Code apply.
Though vested with the power to interpret the
provisions of the Tax Code88 and not bound by
predecessors’ acts or rulings, the BIR
commissioner may render a different
construction to a statute89 only if the new
interpretation is in congruence with the law.
Otherwise, no amount of interpretation can ever
revoke, repeal or modify what the law says.
"Consumed Abroad" Not Required by
Legislature
Interpellations on the subject in the halls of the
Senate also reveal a clear intent on the part of
the legislators not to impose the condition of
being "consumed abroad" in order for services
performed in the Philippines by a VAT-
registered person to be zero-rated. We quote
the relevant portions of the proceedings:
"Senator Maceda: Going back to Section 102
just for the moment. Will the Gentleman kindly
explain to me - I am referring to the lower part of
the first paragraph with the ‘Provided’. Section
102. ‘Provided that the following services
performed in the Philippines by VAT registered
persons shall be subject to zero percent.’ There
are three here. What is the difference between
the three here which is subject to zero percent
and Section 103 which is exempt transactions,
to being with?
"Senator Herrera: Mr. President, in the case of
processing and manufacturing or repacking
goods for persons doing business outside the
Philippines which are subsequently exported,
and where the services are paid for in
acceptable foreign currencies inwardly remitted,
this is considered as subject to 0%. But if these
conditions are not complied with, they are
subject to the VAT.
"In the case of No. 2, again, as the Gentleman
pointed out, these three are zero-rated and the
other one that he indicated are exempted from
the very beginning. These three enumerations
under Section 102 are zero-rated provided that
these conditions indicated in these three
paragraphs are also complied with. If they are
not complied with, then they are not entitled to
15
the zero ratings. Just like in the export of
minerals, if these are not exported, then they
cannot qualify under this provision of zero
rating.
"Senator Maceda: Mr. President, just one small
item so we can leave this. Under the proviso, it
is required that the following services be
performed in the Philippines.
"Under No. 2, services other than those
mentioned above includes, let us say,
manufacturing computers and computer chips
or repacking goods for persons doing business
outside the Philippines. Meaning to say, we ship
the goods to them in Chicago or Washington
and they send the payment inwardly to the
Philippines in foreign currency, and that is, of
course, zero-rated.lawphil.net
"Now, when we say ‘services other than those
mentioned in the preceding subsection[,’] may I
have some examples of these?
"Senator Herrera: Which portion is the
Gentleman referring to?
"Senator Maceda: I am referring to the second
paragraph, in the same Section 102. The first
paragraph is when one manufactures or
packages something here and he sends it
abroad and they pay him, that is covered. That
is clear to me. The second paragraph says
‘Services other than those mentioned in the
preceding subparagraph, the consideration of
which is paid for in acceptable foreign
currency…’
"One example I could immediately think of -- I
do not know why this comes to my mind tonight
-- is for tourism or escort services. For example,
the services of the tour operator or tour escort -
- just a good name for all kinds of activities -- is
made here at the Midtown Ramada Hotel or at
the Philippine Plaza, but the payment is made
from outside and remitted into the country.
"Senator Herrera: What is important here is that
these services are paid in acceptable foreign
currency remitted inwardly to the Philippines.
"Senator Maceda: Yes, Mr. President. Like
those Japanese tours which include $50 for the
services of a woman or a tourist guide, it is zero-
rated when it is remitted here.
"Senator Herrera: I guess it can be interpreted
that way, although this tourist guide should also
be considered as among the professionals. If
they earn more than ₱200,000, they should be
covered.
xxxxxxxxx
Senator Maceda: So, the services by Filipino
citizens outside the Philippines are subject to
VAT, and I am talking of all services. Do big
contractual engineers in Saudi Arabia pay VAT?
"Senator Herrera: This provision applies to a
VAT-registered person. When he performs
services in the Philippines, that is zero-rated.
"Senator Maceda: That is right."90
Legislative Approval By Reenactment
Finally, upon the enactment of RA 8424, which
substantially carries over the particular
provisions on zero rating of services under
Section 102(b) of the Tax Code, the principle of
legislative approval of administrative
interpretation by reenactment clearly obtains.
This principle means that "the reenactment of a
statute substantially unchanged is persuasive
indication of the adoption by Congress of a prior
executive construction."91
The legislature is presumed to have reenacted
the law with full knowledge of the contents of the
revenue regulations then in force regarding the
VAT, and to have approved or confirmed them
because they would carry out the legislative
purpose. The particular provisions of the
regulations we have mentioned earlier are,
therefore, re-enforced. "When a statute is
susceptible of the meaning placed upon it by a
ruling of the government agency charged with
its enforcement and the [l]egislature thereafter
[reenacts] the provisions [without] substantial
change, such action is to some extent
16
confirmatory that the ruling carries out the
legislative purpose."92

In sum, having resolved that transactions of

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

Furthermore, under a zero-rating scheme, the

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

WHEREFORE, the Petition is hereby DENIED,

and the assailed Decision AFFIRMED. No
pronouncement as to costs.

SO ORDERED.

17
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 153205 January 22, 2007
COMMISSIONER OF INTERNAL REVENUE,
Petitioner,
vs.
BURMEISTER AND WAIN SCANDINAVIAN
CONTRACTOR MINDANAO, INC.,
Respondent.
DECISION
CARPIO, J.:
The Case
This petition for review1 seeks to set aside the
16 April 2002 Decision2 of the Court of Appeals
in CA-G.R. SP No. 66341 affirming the 8 August
2001 Decision3 of the Court of Tax Appeals
(CTA). The CTA ordered the Commissioner of
Internal Revenue (petitioner) to issue a tax
credit certificate for P6,994,659.67 in favor of
Burmeister and Wain Scandinavian Contractor
Mindanao, Inc. (respondent).
The Antecedents
The CTA summarized the facts, which the Court
of Appeals adopted, as follows:
[Respondent] is a domestic corporation duly
organized and existing under and by virtue of
the laws of the Philippines with principal address
located at Daruma Building, Jose P. Laurel
Avenue, Lanang, Davao City.
It is represented that a foreign consortium
composed of Burmeister and Wain
Scandinavian Contractor A/S (BWSC-
Denmark), Mitsui Engineering and Shipbuilding,
Ltd., and Mitsui and Co., Ltd. entered into a
contract with the National Power Corporation
(NAPOCOR) for the operation and maintenance
of [NAPOCOR’s] two power barges. The
Consortium appointed BWSC-Denmark as its
coordination manager.
BWSC-Denmark established [respondent]
which subcontracted the actual operation and
maintenance of NAPOCOR’s two power barges
as well as the performance of other duties and
acts which necessarily have to be done in the
Philippines.
NAPOCOR paid capacity and energy fees to the
Consortium in a mixture of currencies (Mark,
Yen, and Peso). The freely convertible non-
Peso component is deposited directly to the
Consortium’s bank accounts in Denmark and
Japan, while the Peso-denominated component
is deposited in a separate and special
designated bank account in the Philippines. On
the other hand, the Consortium pays
[respondent] in foreign currency inwardly
remitted to the Philippines through the banking
system.
In order to ascertain the tax implications of the
above transactions, [respondent] sought a ruling
from the BIR which responded with BIR Ruling
No. 023-95 dated February 14, 1995, declaring
therein that if [respondent] chooses to register
as a VAT person and the consideration for its
services is paid for in acceptable foreign
currency and accounted for in accordance with
the rules and regulations of the Bangko Sentral
ng Pilipinas, the aforesaid services shall be
subject to VAT at zero-rate.
[Respondent] chose to register as a VAT
taxpayer. On May 26, 1995, the Certificate of
Registration bearing RDO Control No. 95-113-
007556 was issued in favor of [respondent] by
the Revenue District Office No. 113 of Davao
City.
For the year 1996, [respondent] seasonably
filed its quarterly Value-Added Tax Returns
reflecting, among others, a total zero-rated
sales of P147,317,189.62 with VAT input taxes
of P3,361,174.14, detailed as follows:
18
 Dat x x x x x x x x x x.
Qt Ex e Zero-Rated VAT Input
r. h. File Sales Tax In [conformity] with the aforecited Revenue
d Regulations, [respondent] subjected its sale of
services to the Consortium to the 10% VAT in
the total amount of P103,558,338.11
representing April to December 1996 sales
04- P since said Revenue Regulations No. 5-96
1s P608,953
E 18- 33,019,651 became effective only on April 1996. The sum of
t .48
96 .07 P43,893,951.07, representing January to March
07- 1996 sales was subjected to zero rate.
2n 37,108,863 756,802.6 Consequently, [respondent] filed its 1996
F 16-
d .33 6 amended VAT return consolidating therein the
96
VAT output and input taxes for the four calendar
10- quarters of 1996. It paid the amount of
3r 34,196,372 930,279.1
G 14- P6,994,659.67 through BIR’s collecting agent,
d .35 4
96 PCIBank, as its output tax liability for the year
1996, computed as follows:
01-
4t 42,992,302 1,065,138
H 20- Amount subject to 10% VAT
h .87 .86
97 P103,558,338.11

Tot P147,317,1 P3,361,1 Multiply by 10%

als 89.62 74.14
VAT Output Tax P 10,355,833.81

Less: 1996 Input VAT P 3,361,174.14

On December 29, 1997, [respondent] availed of
the Voluntary Assessment Program (VAP) of
the BIR. It allegedly misinterpreted Revenue
Regulations No. 5-96 dated February 20, 1996
to be applicable to its case. Revenue
Regulations No. 5-96 provides in part thus:
SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of
Revenue Regulations No. 7-95 are hereby
amended to read as follows:
Section 4.102-2(b)(2) – "Services other than
processing, manufacturing or repacking for
other persons doing business outside the
Philippines for goods which are subsequently
exported, as well as services by a resident to a
non-resident foreign client such as project
studies, information services, engineering and
architectural designs and other similar services,
the consideration for which is paid for in
acceptable foreign currency and accounted for
in accordance with the rules and regulations of
the BSP."
VAT Output Tax Payable P 6,994,659.67
On January 7,1999, [respondent] was able to
secure VAT Ruling No. 003-99 from the VAT
Review Committee which reconfirmed BIR
Ruling No. 023-95 "insofar as it held that the
services being rendered by BWSCMI is subject
to VAT at zero percent (0%)."
On the strength of the aforementioned rulings,
[respondent] on April 22,1999, filed a claim for
the issuance of a tax credit certificate with
Revenue District No. 113 of the BIR.
[Respondent] believed that it erroneously paid
the output VAT for 1996 due to its availment of
the Voluntary Assessment Program (VAP) of
the BIR.4
On 27 December 1999, respondent filed a
petition for review with the CTA in order to toll
the running of the two-year prescriptive period
under the Tax Code.
19
The Ruling of the Court of Tax Appeals
In its 8 August 2001 Decision, the CTA ordered
petitioner to issue a tax credit certificate for
P6,994,659.67 in favor of respondent. The
CTA’s ruling stated:
[Respondent’s] sale of services to the
Consortium [was] paid for in acceptable foreign
currency inwardly remitted to the Philippines
and accounted for in accordance with the rules
and regulations of Bangko Sentral ng Pilipinas.
These were established by various BPI Credit
Memos showing remittances in Danish Kroner
(DKK) and US dollars (US$) as payments for the
specific invoices billed by [respondent] to the
consortium. These remittances were further
certified by the Branch Manager x x x of BPI-
Davao Lanang Branch to represent payments
for sub-contract fees that came from Den
Danske Aktieselskab Bank-Denmark for the
account of [respondent]. Clearly, [respondent’s]
sale of services to the Consortium is subject to
VAT at 0% pursuant to Section 108(B)(2) of the
Tax Code.
xxxx
The zero-rating of [respondent’s] sale of
services to the Consortium was even confirmed
by the [petitioner] in BIR Ruling No. 023-95
dated February 15, 1995, and later by VAT
Ruling No. 003-99 dated January 7,1999, x x x.
Since it is apparent that the payments for the
services rendered by [respondent] were indeed
subject to VAT at zero percent, it follows that it
mistakenly availed of the Voluntary Assessment
Program by paying output tax for its sale of
services. x x x
x x x Considering the principle of solutio indebiti
which requires the return of what has been
delivered by mistake, the [petitioner] is obligated
to issue the tax credit certificate prayed for by
[respondent]. x x x5
Petitioner filed a petition for review with the
Court of Appeals, which dismissed the petition
for lack of merit and affirmed the CTA decision. 6
Hence, this petition.
The Court of Appeals’ Ruling
In affirming the CTA, the Court of Appeals
rejected petitioner’s view that since
respondent’s services are not destined for
consumption abroad, they are not of the same
nature as project studies, information services,
engineering and architectural designs, and
other similar services mentioned in Section
4.102-2(b)(2) of Revenue Regulations No. 5-967
as subject to 0% VAT. Thus, according to
petitioner, respondent’s services cannot legally
qualify for 0% VAT but are subject to the regular
10% VAT.8
The Court of Appeals found untenable
petitioner’s contention that under VAT Ruling
No. 040-98, respondent’s services should be
destined for consumption abroad to enjoy zero-
rating. Contrary to petitioner’s interpretation,
there are two kinds of transactions or services
subject to zero percent VAT under VAT Ruling
No. 040-98. These are (a) services other than
repacking goods for other persons doing
business outside the Philippines which goods
are subsequently exported; and (b) services by
a resident to a non-resident foreign client, such
as project studies, information services,
engineering and architectural designs and other
similar services, the consideration for which is
paid for in acceptable foreign currency and
accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas
(BSP).9
The Court of Appeals stated that "only the first
classification is required by the provision to be
consumed abroad in order to be taxed at zero
rate. In x x x the absence of such express or
implied stipulation in the statute, the second
classification need not be consumed abroad." 10
The Court of Appeals further held that assuming
petitioner’s interpretation of Section 4.102-
2(b)(2) of Revenue Regulations No. 5-96 is
correct, such administrative provision is void
being an amendment to the Tax Code.
Petitioner went beyond merely providing the
20
implementing details by adding another
requirement to zero-rating. "This is indicated by
the additional phrase ‘as well as services by a
resident to a non-resident foreign client, such as
project studies, information services and
engineering and architectural designs and other
similar services.’ In effect, this phrase adds not
just one but two requisites: (a) services must be
rendered by a resident to a non-resident; and (b)
these must be in the nature of project studies,
information services, etc."11
The Court of Appeals explained that under
Section 108(b)(2) of the Tax Code,12 for
services which were performed in the
Philippines to enjoy zero-rating, these must
comply only with two requisites, to wit: (1)
payment in acceptable foreign currency and (2)
accounted for in accordance with the rules of the
BSP. Section 108(b)(2) of the Tax Code does
not provide that services must be "destined for
consumption abroad" in order to be VAT zero-
rated.13
The Court of Appeals disagreed with petitioner’s
argument that our VAT law generally follows the
destination principle (i.e., exports exempt,
imports taxable).14 The Court of Appeals stated
that "if indeed the ‘destination principle’
underlies and is the basis of the VAT laws, then
petitioner’s proper remedy would be to
recommend an amendment of Section 108(b)(2)
to Congress. Without such amendment,
however, petitioner should apply the terms of
the basic law. Petitioner could not resort to
administrative legislation, as what [he] had done
in this case."15
The Issue
The lone issue for resolution is whether
respondent is entitled to the refund of
P6,994,659.67 as erroneously paid output VAT
for the year 1996.16
The Ruling of the Court
We deny the petition.
At the outset, the Court declares that the denial
of the instant petition is not on the ground that
respondent’s services are subject to 0% VAT.
Rather, it is based on the non-retroactivity of the
prejudicial revocation of BIR Ruling No. 023-
9517 and VAT Ruling No. 003-99,18 which held
that respondent’s services are subject to 0%
VAT and which respondent invoked in applying
for refund of the output VAT.
Section 102(b) of the Tax Code,19 the applicable
provision in 1996 when respondent rendered
the services and paid the VAT in question,
enumerates which services are zero-rated, thus:
(b) Transactions subject to zero-rate. ― The
following services performed in the Philippines
by VAT-registered persons shall be subject to
0%:
(1) Processing, manufacturing or
repacking goods for other persons
doing business outside the
Philippines which goods are
subsequently exported, where the
services are paid for in acceptable
foreign currency and accounted for in
accordance with the rules and
regulations of the Bangko Sentral ng
Pilipinas (BSP);
(2) Services other than those
mentioned in the preceding sub-
paragraph, the consideration for which is
paid for in acceptable foreign currency
and accounted for in accordance with the
rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
(3) Services rendered to persons or
entities whose exemption under special
laws or international agreements to
which the Philippines is a signatory
effectively subjects the supply of such
services to zero rate;
(4) Services rendered to vessels
engaged exclusively in international
shipping; and
21
 (5) Services performed by
subcontractors and/or contractors in
processing, converting, or manufacturing
goods for an enterprise whose export
sales exceed seventy percent (70%) of
total annual production. (Emphasis
supplied)
In insisting that its services should be zero-
rated, respondent claims that it complied with
the requirements of the Tax Code for zero rating
under the second paragraph of Section 102(b).
Respondent asserts that (1) the payment of its
service fees was in acceptable foreign currency,
(2) there was inward remittance of the foreign
currency into the Philippines, and (3) accounting
of such remittance was in accordance with BSP
rules. Moreover, respondent contends that its
services which "constitute the actual operation
and management of two (2) power barges in
Mindanao" are not "even remotely similar to
project studies, information services and
engineering and architectural designs under
Section 4.102-2(b)(2) of Revenue Regulations
No. 5-96." As such, respondent’s services need
not be "destined to be consumed abroad in
order to be VAT zero-rated."
Respondent is mistaken.
The Tax Code not only requires that the services
be other than "processing, manufacturing or
repacking of goods" and that payment for such
services be in acceptable foreign currency
accounted for in accordance with BSP rules.
Another essential condition for qualification to
zero-rating under Section 102(b)(2) is that the
recipient of such services is doing business
outside the Philippines. While this requirement
is not expressly stated in the second paragraph
of Section 102(b), this is clearly provided in the
first paragraph of Section 102(b) where the
listed services must be "for other persons doing
business outside the Philippines." The phrase
"for other persons doing business outside the
Philippines" not only refers to the services
enumerated in the first paragraph of Section
102(b), but also pertains to the general term
"services" appearing in the second paragraph of
Section 102(b). In short, services other than
processing, manufacturing, or repacking of
goods must likewise be performed for persons
doing business outside the Philippines.
This can only be the logical interpretation of
Section 102(b)(2). If the provider and recipient
of the "other services" are both doing business
in the Philippines, the payment of foreign
currency is irrelevant. Otherwise, those subject
to the regular VAT under Section 102(a) can
avoid paying the VAT by simply stipulating
payment in foreign currency inwardly remitted
by the recipient of services. To interpret Section
102(b)(2) to apply to a payer-recipient of
services doing business in the Philippines is to
make the payment of the regular VAT under
Section 102(a) dependent on the generosity of
the taxpayer. The provider of services can
choose to pay the regular VAT or avoid it by
stipulating payment in foreign currency inwardly
remitted by the payer-recipient. Such
interpretation removes Section 102(a) as a tax
measure in the Tax Code, an interpretation this
Court cannot sanction. A tax is a mandatory
exaction, not a voluntary contribution.
When Section 102(b)(2) stipulates payment in
"acceptable foreign currency" under BSP rules,
the law clearly envisions the payer-recipient of
services to be doing business outside the
Philippines. Only those not doing business in
the Philippines can be required under BSP
rules20 to pay in acceptable foreign currency for
their purchase of goods or services from the
Philippines. In a domestic transaction, where
the provider and recipient of services are both
doing business in the Philippines, the BSP
cannot require any party to make payment in
foreign currency.
Services covered by Section 102(b) (1) and (2)
are in the nature of export sales since the payer-
recipient of services is doing business outside
the Philippines. Under BSP rules,21 the
proceeds of export sales must be reported to the
Bangko Sentral ng Pilipinas. Thus, there is
reason to require the provider of services under
Section 102(b) (1) and (2) to account for the
foreign currency proceeds to the BSP. The
same rationale does not apply if the provider
22
and recipient of the services are both doing
business in the Philippines since their
transaction is not in the nature of an export sale
even if payment is denominated in foreign
currency.
Further, when the provider and recipient of
services are both doing business in the
Philippines, their transaction falls squarely
under Section 102(a) governing domestic sale
or exchange of services. Indeed, this is a purely
local sale or exchange of services subject to the
regular VAT, unless of course the transaction
falls under the other provisions of Section
102(b).
Thus, when Section 102(b)(2) speaks of
"[s]ervices other than those mentioned in the
preceding subparagraph," the legislative
intent is that only the services are different
between subparagraphs 1 and 2. The
requirements for zero-rating, including the
essential condition that the recipient of services
is doing business outside the Philippines,
remain the same under both subparagraphs.
Significantly, the amended Section 108(b)22
[previously Section 102(b)] of the present Tax
Code clarifies this legislative intent. Expressly
included among the transactions subject to 0%
VAT are "[s]ervices other than those mentioned
in the [first] paragraph [of Section 108(b)]
rendered to a person engaged in business
conducted outside the Philippines or to a
nonresident person not engaged in business
who is outside the Philippines when the services
are performed, the consideration for which is
paid for in acceptable foreign currency and
accounted for in accordance with the rules and
regulations of the BSP."
In this case, the payer-recipient of respondent’s
services is the Consortium which is a joint-
venture doing business in the Philippines. While
the Consortium’s principal members are non-
resident foreign corporations, the Consortium
itself is doing business in the Philippines. This is
shown clearly in BIR Ruling No. 023-95 which
states that the contract between the Consortium
and NAPOCOR is for a 15-year term, thus:
This refers to your letter dated January 14, 1994
requesting for a clarification of the tax
implications of a contract between a consortium
composed of Burmeister & Wain Scandinavian
Contractor A/S ("BWSC"), Mitsui Engineering &
Shipbuilding, Ltd. (MES), and Mitsui & Co., Ltd.
("MITSUI"), all referred to hereinafter as the
"Consortium", and the National Power
Corporation ("NAPOCOR") for the operation
and maintenance of two 100-Megawatt
power barges ("Power Barges") acquired by
NAPOCOR for a 15-year term.23 (Emphasis
supplied)
Considering this length of time, the
Consortium’s operation and maintenance of
NAPOCOR’s power barges cannot be classified
as a single or isolated transaction. The
Consortium does not fall under Section
102(b)(2) which requires that the recipient of the
services must be a person doing business
outside the Philippines. Therefore, respondent’s
services to the Consortium, not being supplied
to a person doing business outside the
Philippines, cannot legally qualify for 0% VAT.
Respondent, as subcontractor of the
Consortium, operates and maintains
NAPOCOR’s power barges in the Philippines.
NAPOCOR pays the Consortium, through its
non-resident partners, partly in foreign currency
outwardly remitted. In turn, the Consortium pays
respondent also in foreign currency inwardly
remitted and accounted for in accordance with
BSP rules. This payment scheme does not
entitle respondent to 0% VAT. As the Court held
in Commissioner of Internal Revenue v.
American Express International, Inc. (Philippine
Branch),24 the place of payment is immaterial,
much less is the place where the output of the
service is ultimately used. An essential condition
for entitlement to 0% VAT under Section
102(b)(1) and (2) is that the recipient of the
services is a person doing business outside the
Philippines. In this case, the recipient of the
services is the Consortium, which is doing
business not outside, but within the Philippines
because it has a 15-year contract to operate and
maintain NAPOCOR’s two 100-megawatt power
barges in Mindanao.
23
The Court recognizes the rule that the VAT
system generally follows the "destination
principle" (exports are zero-rated whereas
imports are taxed). However, as the Court
stated in American Express, there is an
exception to this rule.25 This exception refers to
the 0% VAT on services enumerated in Section
102 and performed in the Philippines. For
services covered by Section 102(b)(1) and (2),
the recipient of the services must be a person
doing business outside the Philippines. Thus, to
be exempt from the destination principle under
Section 102(b)(1) and (2), the services must be
(a) performed in the Philippines; (b) for a person
doing business outside the Philippines; and (c)
paid in acceptable foreign currency accounted
for in accordance with BSP rules.
Petitioner’s filing of his Answer before the CTA
challenging respondent’s claim for refund
effectively serves as a revocation of VAT Ruling
No. 003-99 and BIR Ruling No. 023-95.
However, such revocation cannot be given
retroactive effect since it will prejudice
respondent. Changing respondent’s status will
deprive respondent of a refund of a substantial
amount representing excess output tax.30
Section 246 of the Tax Code provides that any
revocation of a ruling by the Commissioner of
Internal Revenue shall not be given retroactive
application if the revocation will prejudice the
taxpayer. Further, there is no showing of the
existence of any of the exceptions enumerated
in Section 246 of the Tax Code for the
retroactive application of such revocation.

Respondent’s reliance on the ruling in American However, upon the filing of petitioner’s Answer
Express26 is misplaced. That case involved a dated 2 March 2000 before the CTA contesting
recipient of services, specifically American respondent’s claim for refund, respondent’s
Express International, Inc. (Hongkong Branch), services shall be subject to the regular 10%
doing business outside the Philippines. There, VAT.31 Such filing is deemed a revocation of
the Court stated: VAT Ruling No. 003-99 and BIR Ruling No. 023-
95.
Respondent [American Express International,
Inc. (Philippine Branch)] is a VAT-registered WHEREFORE, the Court DENIES the petition.
person that facilitates the collection and
payment of receivables belonging to its non- SO ORDERED.
resident foreign client [American Express
International, Inc. (Hongkong Branch)], for
which it gets paid in acceptable foreign currency
inwardly remitted and accounted for in
accordance with BSP rules and regulations. x x
x x27 (Emphasis supplied)

In contrast, this case involves a recipient of

services – the Consortium – which is doing
business in the Philippines. Hence, American
Express’ services were subject to 0% VAT,
while respondent’s services should be subject to
10% VAT.

Nevertheless, in seeking a refund of its excess

output tax, respondent relied on VAT Ruling No.
003-99,28 which reconfirmed BIR Ruling No.
023-9529 "insofar as it held that the services
being rendered by BWSCMI is subject to VAT at
zero percent (0%)." Respondent’s reliance on
these BIR rulings binds petitioner.
24

THIRD DIVISION
G.R. No. 146984 July 28, 2006
COMMISSIONER OF INTERNAL REVENUE,
petitioner,
vs.
MAGSAYSAY LINES, INC., BALIWAG
NAVIGATION, INC., FIM LIMITED OF THE
MARDEN GROUP (HK) and NATIONAL
DEVELOPMENT COMPANY, respondents.
DECISION
TINGA, J.:
The issue in this present petition is whether the
sale by the National Development Company
(NDC) of five (5) of its vessels to the private
respondents is subject to value-added tax (VAT)
under the National Internal Revenue Code of
1986 (Tax Code) then prevailing at the time of
the sale. The Court of Tax Appeals (CTA) and
the Court of Appeals commonly ruled that the
sale is not subject to VAT. We affirm, though on
a more unequivocal rationale than that utilized
by the rulings under review. The fact that the
sale was not in the course of the trade or
business of NDC is sufficient in itself to declare
the sale as outside the coverage of VAT.
The facts are culled primarily from the ruling of
the CTA.
Pursuant to a government program of
privatization, NDC decided to sell to private
enterprise all of its shares in its wholly-owned
subsidiary the National Marine Corporation
(NMC). The NDC decided to sell in one lot its
NMC shares and five (5) of its ships, which are
3,700 DWT Tween-Decker, "Kloeckner" type
vessels.1 The vessels were constructed for the
NDC between 1981 and 1984, then initially
leased to Luzon Stevedoring Company, also its
wholly-owned subsidiary. Subsequently, the
vessels were transferred and leased, on a
bareboat basis, to the NMC.2
The NMC shares and the vessels were offered
for public bidding. Among the stipulated terms
and conditions for the public auction was that
the winning bidder was to pay "a value added
tax of 10% on the value of the vessels."3 On 3
June 1988, private respondent Magsaysay
Lines, Inc. (Magsaysay Lines) offered to buy the
shares and the vessels for P168,000,000.00.
The bid was made by Magsaysay Lines,
purportedly for a new company still to be formed
composed of itself, Baliwag Navigation, Inc.,
and FIM Limited of the Marden Group based in
Hongkong (collectively, private respondents).4
The bid was approved by the Committee on
Privatization, and a Notice of Award dated 1 July
1988 was issued to Magsaysay Lines.
On 28 September 1988, the implementing
Contract of Sale was executed between NDC,
on one hand, and Magsaysay Lines, Baliwag
Navigation, and FIM Limited, on the other.
Paragraph 11.02 of the contract stipulated that
"[v]alue-added tax, if any, shall be for the
account of the PURCHASER."5 Per
arrangement, an irrevocable confirmed Letter of
Credit previously filed as bidders bond was
accepted by NDC as security for the payment of
VAT, if any. By this time, a formal request for a
ruling on whether or not the sale of the vessels
was subject to VAT had already been filed with
the Bureau of Internal Revenue (BIR) by the law
firm of Sycip Salazar Hernandez & Gatmaitan,
presumably in behalf of private respondents.
Thus, the parties agreed that should no
favorable ruling be received from the BIR, NDC
was authorized to draw on the Letter of Credit
upon written demand the amount needed for the
payment of the VAT on the stipulated due date,
20 December 1988.6
In January of 1989, private respondents through
counsel received VAT Ruling No. 568-88 dated
14 December 1988 from the BIR, holding that
the sale of the vessels was subject to the 10%
25
VAT. The ruling cited the fact that NDC was a
VAT-registered enterprise, and thus its
"transactions incident to its normal VAT
registered activity of leasing out personal
property including sale of its own assets that are
movable, tangible objects which are
appropriable or transferable are subject to the
10% [VAT]."7
Private respondents moved for the
reconsideration of VAT Ruling No. 568-88, as
well as VAT Ruling No. 395-88 (dated 18 August
1988), which made a similar ruling on the sale
of the same vessels in response to an inquiry
from the Chairman of the Senate Blue Ribbon
Committee. Their motion was denied when the
BIR issued VAT Ruling Nos. 007-89 dated 24
February 1989, reiterating the earlier VAT
rulings. At this point, NDC drew on the Letter of
Credit to pay for the VAT, and the amount of
P15,120,000.00 in taxes was paid on 16 March
1989.
On 10 April 1989, private respondents filed an
Appeal and Petition for Refund with the CTA,
followed by a Supplemental Petition for Review
on 14 July 1989. They prayed for the reversal of
VAT Rulings No. 395-88, 568-88 and 007-89, as
well as the refund of the VAT payment made
amounting to P15,120,000.00.8 The
Commissioner of Internal Revenue (CIR)
opposed the petition, first arguing that private
respondents were not the real parties in interest
as they were not the transferors or sellers as
contemplated in Sections 99 and 100 of the then
Tax Code. The CIR also squarely defended the
VAT rulings holding the sale of the vessels liable
for VAT, especially citing Section 3 of Revenue
Regulation No. 5-87 (R.R. No. 5-87), which
provided that "[VAT] is imposed on any sale or
transactions ‘deemed sale’ of taxable goods
(including capital goods, irrespective of the date
of acquisition)." The CIR argued that the sale of
the vessels were among those transactions
"deemed sale," as enumerated in Section 4 of
R.R. No. 5-87. It seems that the CIR particularly
emphasized Section 4(E)(i) of the Regulation,
which classified "change of ownership of
business" as a circumstance that gave rise to a
transaction "deemed sale."
In a Decision dated 27 April 1992, the CTA
rejected the CIR’s arguments and granted the
petition.9 The CTA ruled that the sale of a vessel
was an "isolated transaction," not done in the
ordinary course of NDC’s business, and was
thus not subject to VAT, which under Section 99
of the Tax Code, was applied only to sales in
the course of trade or business. The CTA
further held that the sale of the vessels could not
be "deemed sale," and thus subject to VAT, as
the transaction did not fall under the
enumeration of transactions deemed sale as
listed either in Section 100(b) of the Tax Code,
or Section 4 of R.R. No. 5-87. Finally, the CTA
ruled that any case of doubt should be resolved
in favor of private respondents since Section 99
of the Tax Code which implemented VAT is not
an exemption provision, but a classification
provision which warranted the resolution of
doubts in favor of the taxpayer.
The CIR appealed the CTA Decision to the
Court of Appeals,10 which on 11 March 1997,
rendered a Decision reversing the CTA.11 While
the appellate court agreed that the sale was an
isolated transaction, not made in the course of
NDC’s regular trade or business, it nonetheless
found that the transaction fell within the
classification of those "deemed sale" under R.R.
No. 5-87, since the sale of the vessels together
with the NMC shares brought about a change of
ownership in NMC. The Court of Appeals also
applied the principle governing tax exemptions
that such should be strictly construed against
the taxpayer, and liberally in favor of the
government.12
However, the Court of Appeals reversed itself
upon reconsidering the case, through a
Resolution dated 5 February 2001.13 This time,
the appellate court ruled that the "change of
ownership of business" as contemplated in R.R.
No. 5-87 must be a consequence of the
"retirement from or cessation of business" by the
owner of the goods, as provided for in Section
100 of the Tax Code. The Court of Appeals also
agreed with the CTA that the classification of
transactions "deemed sale" was a classification
statute, and not an exemption statute, thus
26
warranting the resolution of any doubt in favor of
the taxpayer.14
To the mind of the Court, the arguments raised
in the present petition have already been
adequately discussed and refuted in the rulings
assailed before us. Evidently, the petition should
be denied. Yet the Court finds that Section 99 of
the Tax Code is sufficient reason for upholding
the refund of VAT payments, and the
subsequent disquisitions by the lower courts on
the applicability of Section 100 of the Tax Code
and Section 4 of R.R. No. 5-87 are ultimately
irrelevant.
A brief reiteration of the basic principles
governing VAT is in order. VAT is ultimately a
tax on consumption, even though it is assessed
on many levels of transactions on the basis of a
fixed percentage.15 It is the end user of
consumer goods or services which ultimately
shoulders the tax, as the liability therefrom is
passed on to the end users by the providers of
these goods or services16 who in turn may credit
their own VAT liability (or input VAT) from the
VAT payments they receive from the final
consumer (or output VAT).17 The final purchase
by the end consumer represents the final link in
a production chain that itself involves several
transactions and several acts of consumption.
The VAT system assures fiscal adequacy
through the collection of taxes on every level of
consumption,18 yet assuages the manufacturers
or providers of goods and services by enabling
them to pass on their respective VAT liabilities
to the next link of the chain until finally the end
consumer shoulders the entire tax liability.
Yet VAT is not a singular-minded tax on every
transactional level. Its assessment bears direct
relevance to the taxpayer’s role or link in the
production chain. Hence, as affirmed by Section
99 of the Tax Code and its subsequent
incarnations,19 the tax is levied only on the sale,
barter or exchange of goods or services by
persons who engage in such activities, in the
course of trade or business. These
transactions outside the course of trade or
business may invariably contribute to the
production chain, but they do so only as a matter
of accident or incident. As the sales of goods or
services do not occur within the course of trade
or business, the providers of such goods or
services would hardly, if at all, have the
opportunity to appropriately credit any VAT
liability as against their own accumulated VAT
collections since the accumulation of output
VAT arises in the first place only through the
ordinary course of trade or business.
That the sale of the vessels was not in the
ordinary course of trade or business of NDC was
appreciated by both the CTA and the Court of
Appeals, the latter doing so even in its first
decision which it eventually reconsidered.20 We
cite with approval the CTA’s explanation on this
point:
In Imperial v. Collector of Internal
Revenue, G.R. No. L-7924, September
30, 1955 (97 Phil. 992), the term
"carrying on business" does not mean
the performance of a single disconnected
act, but means conducting, prosecuting
and continuing business by performing
progressively all the acts normally
incident thereof; while "doing business"
conveys the idea of business being done,
not from time to time, but all the time. [J.
Aranas, UPDATED NATIONAL
INTERNAL REVENUE CODE (WITH
ANNOTATIONS), p. 608-9 (1988)].
"Course of business" is what is usually
done in the management of trade or
business. [Idmi v. Weeks & Russel, 99
So. 761, 764, 135 Miss. 65, cited in
Words & Phrases, Vol. 10, (1984)].
What is clear therefore, based on the
aforecited jurisprudence, is that "course
of business" or "doing business"
connotes regularity of activity. In the
instant case, the sale was an isolated
transaction. The sale which was
involuntary and made pursuant to the
declared policy of Government for
privatization could no longer be repeated
or carried on with regularity. It should be
emphasized that the normal VAT-
27
 registered activity of NDC is leasing
personal property.21
This finding is confirmed by the Revised
Charter22 of the NDC which bears no indication
that the NDC was created for the primary
purpose of selling real property.23
The conclusion that the sale was not in the
course of trade or business, which the CIR does
not dispute before this Court,24 should have
definitively settled the matter. Any sale, barter or
exchange of goods or services not in the
course of trade or business is not subject to
VAT.
Section 100 of the Tax Code, which is
implemented by Section 4(E)(i) of R.R. No. 5-87
now relied upon by the CIR, is captioned "Value-
added tax on sale of goods," and it expressly
states that "[t]here shall be levied, assessed and
collected on every sale, barter or exchange of
goods, a value added tax x x x." Section 100
should be read in light of Section 99, which lays
down the general rule on which persons are
liable for VAT in the first place and on what
transaction if at all. It may even be noted that
Section 99 is the very first provision in Title IV of
the Tax Code, the Title that covers VAT in the
law. Before any portion of Section 100, or the
rest of the law for that matter, may be applied in
order to subject a transaction to VAT, it must first
be satisfied that the taxpayer and transaction
involved is liable for VAT in the first place under
Section 99.
It would have been a different matter if Section
100 purported to define the phrase "in the
course of trade or business" as expressed in
Section 99. If that were so, reference to Section
100 would have been necessary as a means of
ascertaining whether the sale of the vessels was
"in the course of trade or business," and thus
subject to
VAT. But that is not the case. What Section 100
and Section 4(E)(i) of R.R. No. 5-87 elaborate
on is not the meaning of "in the course of trade
or business," but instead the identification of the
transactions which may be deemed as sale. It
would become necessary to ascertain whether
under those two provisions the transaction may
be deemed a sale, only if it is settled that the
transaction occurred in the course of trade or
business in the first place. If the transaction
transpired outside the course of trade or
business, it would be irrelevant for the purpose
of determining VAT liability whether the
transaction may be deemed sale, since it
anyway is not subject to VAT.
Accordingly, the Court rules that given the
undisputed finding that the transaction in
question was not made in the course of trade or
business of the seller, NDC that is, the sale is
not subject to VAT pursuant to Section 99 of the
Tax Code, no matter how the said sale may hew
to those transactions deemed sale as defined
under Section 100.
In any event, even if Section 100 or Section 4 of
R.R. No. 5-87 were to find application in this
case, the Court finds the discussions offered on
this point by the CTA and the Court of Appeals
(in its subsequent Resolution) essentially
correct. Section 4 (E)(i) of R.R. No. 5-87 does
classify as among the transactions deemed sale
those involving "change of ownership of
business." However, Section 4(E) of R.R. No. 5-
87, reflecting Section 100 of the Tax Code,
clarifies that such "change of ownership" is only
an attending circumstance to "retirement from or
cessation of business[, ] with respect to all
goods on hand [as] of the date of such
retirement or cessation."25 Indeed, Section 4(E)
of R.R. No. 5-87 expressly characterizes the
"change of ownership of business" as only a
"circumstance" that attends those transactions
"deemed sale," which are otherwise stated in
the same section.26
WHEREFORE, the petition is DENIED. No
costs.
SO ORDERED.
28

THIRD DIVISION
G.R. No. 153866 February 11, 2005
COMMISSIONER OF INTERNAL REVENUE,
petitioner,
vs.
SEAGATE TECHNOLOGY (PHILIPPINES),
respondent.
DECISION
PANGANIBAN, J.:
Business companies registered in and operating
from the Special Economic Zone in Naga, Cebu
-- like herein respondent -- are entities exempt
from all internal revenue taxes and the
implementing rules relevant thereto, including
the value-added taxes or VAT. Although export
sales are not deemed exempt transactions, they
are nonetheless zero-rated. Hence, in the
present case, the distinction between exempt
entities and exempt transactions has little
significance, because the net result is that the
taxpayer is not liable for the VAT. Respondent,
a VAT-registered enterprise, has complied with
all requisites for claiming a tax refund of or credit
for the input VAT it paid on capital goods it
purchased. Thus, the Court of Tax Appeals and
the Court of Appeals did not err in ruling that it
is entitled to such refund or credit.
The Case
Before us is a Petition for Review1 under Rule
45 of the Rules of Court, seeking to set aside
the May 27, 2002 Decision2 of the Court of
Appeals (CA) in CA-GR SP No. 66093. The
decretal portion of the Decision reads as
follows:
"WHEREFORE, foregoing premises
considered, the petition for review is DENIED for
lack of merit."3
The Facts
The CA quoted the facts narrated by the Court
of Tax Appeals (CTA), as follows:
"As jointly stipulated by the parties, the pertinent
facts x x x involved in this case are as follows:
1. [Respondent] is a resident foreign corporation
duly registered with the Securities and
Exchange Commission to do business in the
Philippines, with principal office address at the
new Cebu Township One, Special Economic
Zone, Barangay Cantao-an, Naga, Cebu;
2. [Petitioner] is sued in his official capacity,
having been duly appointed and empowered to
perform the duties of his office, including,
among others, the duty to act and approve
claims for refund or tax credit;
3. [Respondent] is registered with the Philippine
Export Zone Authority (PEZA) and has been
issued PEZA Certificate No. 97-044 pursuant to
Presidential Decree No. 66, as amended, to
engage in the manufacture of recording
components primarily used in computers for
export. Such registration was made on 6 June
1997;
4. [Respondent] is VAT [(Value Added Tax)]-
registered entity as evidenced by VAT
Registration Certification No. 97-083-000600-V
issued on 2 April 1997;
5. VAT returns for the period 1 April 1998 to 30
June 1999 have been filed by [respondent];
6. An administrative claim for refund of VAT
input taxes in the amount of P28,369,226.38
with supporting documents (inclusive of the
P12,267,981.04 VAT input taxes subject of this
Petition for Review), was filed on 4 October
1999 with Revenue District Office No. 83,
Talisay Cebu;
29
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.
30
Moreover, the CA held that neither Section 109
of the Tax Code nor Sections 4.106-1 and
4.103-1 of RR 7-95 were applicable. Having
paid the input VAT on the capital goods it
purchased, respondent correctly filed the
administrative and judicial claims for its refund
within the two-year prescriptive period. Such
payments were -- to the extent of the refundable
value -- duly supported by VAT invoices or
official receipts, and were not yet offset against
any output VAT liability.
Hence this Petition.5
Sole Issue
Petitioner submits this sole issue for our
consideration:
"Whether or not respondent is entitled to the
refund or issuance of Tax Credit Certificate in
the amount of P12,122,922.66 representing
alleged unutilized input VAT paid on capital
goods purchased for the period April 1, 1998 to
June 30, 1999."6
The Court’s Ruling
The Petition is unmeritorious.
Sole Issue:
Entitlement of a VAT-Registered PEZA
Enterprise to a Refund of or Credit for Input VAT
No doubt, as a PEZA-registered enterprise
within a special economic zone,7 respondent is
entitled to the fiscal incentives and benefits8
provided for in either PD 669 or EO 226.10 It
shall, moreover, enjoy all privileges, benefits,
advantages or exemptions under both Republic
Act Nos. (RA) 722711 and 7844.12
Preferential Tax Treatment Under Special Laws
If it avails itself of PD 66, notwithstanding the
provisions of other laws to the contrary,
respondent shall not be subject to internal
revenue laws and regulations for raw materials,
supplies, articles, equipment, machineries,
spare parts and wares, except those prohibited
by law, brought into the zone to be stored,
broken up, repacked, assembled, installed,
sorted, cleaned, graded or otherwise
processed, manipulated, manufactured, mixed
or used directly or indirectly in such activities.13
Even so, respondent would enjoy a net-
operating loss carry over; accelerated
depreciation; foreign exchange and financial
assistance; and exemption from export taxes,
local taxes and licenses.14
Comparatively, the same exemption from
internal revenue laws and regulations applies if
EO 22615 is chosen. Under this law, respondent
shall further be entitled to an income tax holiday;
additional deduction for labor expense;
simplification of customs procedure;
unrestricted use of consigned equipment;
access to a bonded manufacturing warehouse
system; privileges for foreign nationals
employed; tax credits on domestic capital
equipment, as well as for taxes and duties on
raw materials; and exemption from contractors’
taxes, wharfage dues, taxes and duties on
imported capital equipment and spare parts,
export taxes, duties, imposts and fees,16 local
taxes and licenses, and real property taxes.17
A privilege available to respondent under the
provision in RA 7227 on tax and duty-free
importation of raw materials, capital and
equipment18 -- is, ipso facto, also accorded to
the 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 from negotiable tax credits24 for locally-
31
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
32
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-
33
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
34
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
35
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.
36
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
37
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
38
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.

39
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 180173 April 6, 2011
MICROSOFT PHILIPPINES, INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.
DECISION
CARPIO, J.:
The Case
Before the Court is a petition1 for review on
certiorari assailing the Decision2 dated 24
October 2007 of the Court of Tax Appeals (CTA)
En Banc in CTA EB No. 258, which affirmed the
Decision3 dated 31 August 2006 and
Resolution4 dated 8 January 2007 of the CTA
Second Division in CTA Case No. 6681.
The Facts
Petitioner Microsoft Philippines, Inc. (Microsoft)
is a value-added tax (VAT) taxpayer duly
registered with the Bureau of Internal Revenue
(BIR). Microsoft renders marketing services to
Microsoft Operations Pte Ltd. (MOP) and
Microsoft Licensing, Inc. (MLI), both affiliated
non-resident foreign corporations. The services
are paid for in acceptable foreign currency and
qualify as zero-rated sales for VAT purposes
under Section 108(B)(2) of the National Internal
Revenue Code (NIRC) of 1997,5 as amended.
Section 108(B)(2) states:
SEC. 108. Value-added Tax on Sale of Services
and Use or Lease of Properties. –
(B) Transactions Subject to Zero Percent (0%)
Rate. – The following services performed in the
Philippines by VAT-registered persons shall be
subject to zero percent (0%) rate:
(1) Processing, manufacturing or
repacking goods for other persons doing
business outside the Philippines which
goods are subsequently exported x x x;
(2) Services other than those mentioned
in the preceding paragraph, the
consideration for which is paid for in
acceptable foreign currency and
accounted for in accordance with the
rules and regulations of the Bangko
Sentral ng Pilipinas (BSP); x x x
For the year 2001, Microsoft yielded total sales
in the amount of ₱261,901,858.99. Of this
amount, ₱235,724,614.68 pertain to sales
derived from services rendered to MOP and MLI
while ₱26,177,244.31 refer to sales to various
local customers. Microsoft paid VAT input taxes
in the amount of ₱11,449,814.99 on its domestic
purchases of taxable goods and services.
On 27 December 2002, Microsoft filed an
administrative claim for tax credit of VAT input
taxes in the amount of ₱11,449,814.99 with the
BIR. The administrative claim for tax credit was
filed within two years from the close of the
taxable quarters when the zero-rated sales were
made.
On 23 April 2003, due to the BIR's inaction,
Microsoft filed a petition for review with the
CTA.6 Microsoft claimed to be entitled to a
refund of unutilized input VAT attributable to its
zero-rated sales and prayed that judgment be
rendered directing the claim for tax credit or
refund of VAT input taxes for taxable year 2001.
On 16 June 2003, respondent Commissioner of
Internal Revenue (CIR) filed his answer and
prayed for the dismissal of the petition for
review.
In a Decision dated 31 August 2006, the CTA
Second Division denied the claim for tax credit
of VAT input taxes. The CTA explained that
Microsoft failed to comply with the invoicing
requirements of Sections 113 and 237 of the
NIRC as well as Section 4.108-1 of Revenue
Regulations No. 7-957 (RR 7-95). The CTA
40
stated that Microsoft's official receipts do not
bear the imprinted word "zero-rated" on its face,
thus, the official receipts cannot be considered
as valid evidence to prove zero-rated sales for
VAT purposes.
Microsoft filed a motion for reconsideration
which was denied by the CTA Second Division
in a Resolution dated 8 January 2007.
Microsoft then filed a petition for review with the
CTA En Banc.8 In a Decision dated 24 October
2007, the CTA En Banc denied the petition for
review and affirmed in toto the Decision dated
31 August 2006 and Resolution dated 8 January
2007 of the CTA Second Division. The CTA En
Banc found no new matters that have not been
considered and passed upon by the CTA
Second Division and stated that the petition had
only been a mere rehash of the arguments
earlier raised.
Hence, this petition.
The Issue
The main issue is whether Microsoft is entitled
to a claim for a tax credit or refund of VAT input
taxes on domestic purchases of goods or
services attributable to zero-rated sales for the
year 2001 even if the word "zero-rated" is not
imprinted on Microsoft's official receipts.
The Court’s Ruling
The petition lacks merit.
Microsoft insists that Sections 113 and 237 of
the NIRC and Section 4.108-1 of RR 7-95 do not
provide that failure to indicate the word "zero-
rated" in the invoices or receipts would result in
the outright invalidation of these invoices or
receipts and the disallowance of a claim for tax
credit or refund.
At the outset, a tax credit or refund, like tax
exemption, is strictly construed against the
taxpayer.9 The taxpayer claiming the tax credit
or refund has the burden of proving that he is
entitled to the refund or credit, in this case VAT
input tax, by submitting evidence that he has
complied with the requirements laid down in the
tax code and the BIR's revenue regulations
under which such privilege of credit or refund is
accorded.
Sections 113(A) and 237 of the NIRC which
provide for the invoicing requirements for VAT-
registered persons state:
SEC. 113. Invoicing and Accounting
Requirements for VAT-Registered Persons.
–
(A) Invoicing Requirements. – A VAT-
registered person shall, for every sale, issue
an invoice or receipt. In addition to the
information required under Section 237, the
following information shall be indicated in the
invoice or receipt:
(1) A statement that the seller is a VAT-
registered person, followed by his
taxpayer's identification number (TIN);
and
(2) The total amount which the purchaser
pays or is obligated to pay to the seller
with the indication that such amount
includes the value-added tax. x x x
SEC. 237. Issuance of Receipts or Sales or
Commercial Invoices. – All persons subject to
an internal revenue tax shall, for each sale or
transfer of merchandise or for services rendered
valued at Twenty-five pesos (P25.00) or more,
issue duly registered receipts or sales or
commercial invoices, prepared at least in
duplicate, showing the date of transaction,
quantity, unit cost and description of
merchandise or nature of service: Provided,
however, That in the case of sales, receipts or
transfers in the amount of One hundred pesos
(₱100.00) or more, or regardless of the amount,
where the sale or transfer is made by a person
liable to value-added tax to another person also
liable to value-added tax; or where the receipt is
issued to cover payment made as rentals,
commissions, compensations or fees, receipts
or invoices shall be issued which shall show the
41
name, business style, if any, and address of the
purchaser, customer or client: Provided, further,
That where the purchaser is a VAT-registered
person, in addition to the information herein
required, the invoice or receipt shall further
show the Taxpayer Identification Number (TIN)
of the purchaser.
The original of each receipt or invoice shall be
issued to the purchaser, customer or client at
the time the transaction is effected, who, if
engaged in business or in the exercise of
profession, shall keep and preserve the same in
his place of business for a period of three (3)
years from the close of the taxable year in which
such invoice or receipt was issued, while the
duplicate shall be kept and preserved by the
issuer, also in his place of business, for a like
period.
The Commissioner may, in meritorious cases,
exempt any person subject to internal revenue
tax from compliance with the provisions of this
Section.
Related to these provisions, Section 4.108-1 of
RR 7-95 enumerates the information which
must appear on the face of the official receipts
or invoices for every sale of goods by VAT-
registered persons. At the time Microsoft filed its
claim for credit of VAT input tax, RR 7-95 was
already in effect. The provision states:
Sec. 4.108-1. Invoicing Requirements. – All
VAT-registered persons shall, for every sale or
lease of goods or properties or services, issue
duly registered receipts or sales or commercial
invoices which must show:
1. the name, TIN and address of seller;
2. date of transaction;
3. quantity, unit cost and description of
merchandise or nature of service;
4. the name, TIN, business style, if any,
and address of the VAT-registered
purchaser, customer or client;
5. the word "zero-rated" imprinted on
the invoice covering zero-rated sales;
and
6. the invoice value or consideration.
xxx
Only VAT-registered persons are required to
print their TIN followed by the word "VAT" in
their invoices or receipts and this shall be
considered as a "VAT invoice." All
purchases covered by invoices other than a
"VAT invoice" shall not give rise to any input
tax. (Emphasis supplied)
The invoicing requirements for a VAT-registered
taxpayer as provided in the NIRC and revenue
regulations are clear. A VAT-registered
taxpayer is required to comply with all the VAT
invoicing requirements to be able to file a claim
for input taxes on domestic purchases for goods
or services attributable to zero-rated sales. A
"VAT invoice" is an invoice that meets the
requirements of Section 4.108-1 of RR 7-95.
Contrary to Microsoft's claim, RR 7-95 expressly
states that "[A]ll purchases covered by invoices
other than a VAT invoice shall not give rise
to any input tax." Microsoft's invoice, lacking
the word "zero-rated," is not a "VAT invoice,"
and thus cannot give rise to any input tax.
The subsequent enactment of Republic Act No.
933710 on 1 November 2005 elevating
provisions of RR 7-95 into law merely codified
into law administrative regulations that already
had the force and effect of law. Such codification
does not mean that prior to the codification the
administrative regulations were not enforceable.
We have ruled in several cases11 that the
printing of the word "zero-rated" is required to be
placed on VAT invoices or receipts covering
zero-rated sales in order to be entitled to claim
for tax credit or refund. In Panasonic v.
Commissioner of Internal Revenue,12 we held
that the appearance of the word "zero-rated" on
the face of invoices covering zero-rated sales
prevents buyers from falsely claiming input VAT
from their purchases when no VAT is actually
42
paid. Absent such word, the government may be
refunding taxes it did not collect.

Here, both the CTA Second Division and CTA

En Banc found that Microsoft's receipts did not
indicate the word "zero-rated" on its official
receipts. The findings of fact of the CTA are not
to be disturbed unless clearly shown to be
unsupported by substantial evidence.13 We see
no reason to disturb the CTA's findings.
Indisputably, Microsoft failed to comply with the
invoicing requirements of the NIRC and its
implementing revenue regulation to claim a tax
credit or refund of VAT input tax for taxable year
2001.

WHEREFORE, we DENY the petition. We

AFFIRM the Decision dated 24 October 2007 of
the Court of Tax Appeals En Banc in CTA EB
No. 258.

SO ORDERED.

43
 Republic of the Philippines late remittance of internal revenue taxes are as
SUPREME COURT follows:
Manila
DEFICIENCY VALUE -ADDED TAX (VAT)
SECOND DIVISION
(Assessment No. ST-VAT-97-0124-2000)
G.R. No. 178697 November 17, 2010 Basic Tax Due
COMMISSIONER OF INTERNAL REVENUE, Add: Penalties
Petitioner, Interest up to 3-31-2000
vs.
SONY PHILIPPINES, INC., Respondent. Compromise
Deficiency VAT Due
DECISION

MENDOZA, J.:
DEFICIENCY EXPANDED WITHHOLDING TAX
(EWT)
This petition for review on certiorari seeks to set
aside the May 17, 2007 Decision and the July 5, (Assessment No. ST-EWT-97-0125-2000)
2007 Resolution of the Court of Tax Appeals –
En Banc1 (CTA-EB), in C.T.A. EB No. 90, Basic Tax Due
affirming the October 26, 2004 Decision of the Add: Penalties
CTA-First Division2 which, in turn, partially
granted the petition for review of respondent Interest up to 3-31-2000
Sony Philippines, Inc. (Sony). The CTA-First Compromise
Division decision cancelled the deficiency
assessment issued by petitioner Commissioner Deficiency EWT Due
of Internal Revenue (CIR) against Sony for
Value Added Tax (VAT) but upheld the
deficiency assessment for expanded DEFICIENCY OF VAT ON ROYALTY PAYMENTS
withholding tax (EWT) in the amount of (Assessment No. ST-LR1-97-0126-2000)
₱1,035,879.70 and the penalties for late
remittance of internal revenue taxes in the Basic Tax Due
amount of ₱1,269, 593.90.3
Add: Penalties
THE FACTS: Surcharge

On November 24, 1998, the CIR issued Letter Interest up to 3-31-2000

of Authority No. 000019734 (LOA 19734) Compromise
authorizing certain revenue officers to examine
Sony’s books of accounts and other accounting Penalties Due
records regarding revenue taxes for "the period
1997 and unverified prior years." On
December 6, 1999, a preliminary assessment LATE REMITTANCE OF FINAL WITHHOLDING TAX
for 1997 deficiency taxes and penalties was (Assessment No. ST-LR2-97-0127-2000)
issued by the CIR which Sony protested.
Thereafter, acting on the protest, the CIR issued Basic Tax Due
final assessment notices, the formal letter of Add: Penalties
demand and the details of discrepancies.4 Said
details of the deficiency taxes and penalties for
44
Surcharge pursuant to Section 1(g) of Revenue
P 1,729,690.71
Regulations No. 6-85. The CTA-First Division,
Interest up to 3-31-2000 508,783.07
however, disallowed the EWT assessment on
Compromise rental expense since it2,288,473.78
50,000.00 found that the total rental
deposit of ₱10,523,821.99 was incurred from
Penalties Due P 2,288,473.78
January to March 1998 which was again beyond
the coverage of LOA 19734. Except for the
compromise penalties, the CTA-First Division
LATE REMITTANCE OF INCOME PAYMENTS also upheld the penalties for the late payment of
VAT on royalties, for late remittance of final
(Assessment No. ST-LR3-97-0128-2000)
withholding tax on royalty as of December 1997
Basic Tax Due and for the late remittance
P of EWT by some of
Sony’s branches. In sum, the CTA-First
8
Add: Penalties Division partly granted Sony’s petition by
25 % Surcharge cancelling
P 8,865.34 the deficiency VAT assessment but
upheld a modified deficiency EWT assessment
Interest up to 3-31-2000 58.29
as well as the penalties. Thus, the dispositive
Compromise portion reads:
2,000.00 10,923.60
Penalties Due WHEREFORE, thePpetition
10,923.60
for review is hereby
PARTIALLY GRANTED. Respondent is
ORDERED to CANCEL and WITHDRAW the
deficiency assessment for value-added tax for
GRAND TOTAL 1997 for lack of merit. However, the5 deficiency
P 15,895,632.65
assessments for expanded withholding tax and
penalties for late remittance of internal revenue
taxes are UPHELD.
Sony sought re-evaluation of the
aforementioned assessment by filing a protest Accordingly, petitioner is DIRECTED to PAY the
on February 2, 2000. Sony submitted relevant respondent the deficiency expanded
documents in support of its protest on the 16th withholding tax in the amount of ₱1,035,879.70
of that same month.6 and the following penalties for late remittance of
internal revenue taxes in the sum of
On October 24, 2000, within 30 days after the ₱1,269,593.90:
lapse of 180 days from submission of the said
supporting documents to the CIR, Sony filed a 1. VAT on Royalty P 429,242.07
petition for review before the CTA.7
2. Withholding Tax on 831,428.20
After trial, the CTA-First Division disallowed the Royalty
deficiency VAT assessment because the
3. EWT of Petitioner's 8,923.63
subsidized advertising expense paid by Sony
Branches
which was duly covered by a VAT invoice
resulted in an input VAT credit. As regards the Total P
EWT, the CTA-First Division maintained the 1,269,593.90
deficiency EWT assessment on Sony’s motor
vehicles and on professional fees paid to
Plus 20% delinquency interest from January 17,
general professional partnerships. It also
2000 until fully paid pursuant to Section
assessed the amounts paid to sales agents as
249(C)(3) of the 1997 Tax Code.
commissions with five percent (5%) EWT

45
SO ORDERED.9
The CIR sought a reconsideration of the above
decision and submitted the following grounds in
support thereof:
A. The Honorable Court
committed reversible error in
holding that petitioner is not liable
for the deficiency VAT in the
amount of ₱11,141,014.41;
B. The Honorable court committed
reversible error in holding that the
commission expense in the
amount of P2,894,797.00 should
be subjected to 5% withholding
tax instead of the 10% tax rate;
C. The Honorable Court
committed a reversible error in
holding that the withholding tax
assessment with respect to the
5% withholding tax on rental
deposit in the amount of
₱10,523,821.99 should be
cancelled; and
D. The Honorable Court
committed reversible error in
holding that the remittance of final
withholding tax on royalties
covering the period January to
March 1998 was filed on time.10
On April 28, 2005, the CTA-First Division denied
the motion for reconsideration.1avvphi1
Unfazed, the CIR filed a petition for review with
the CTA-EB raising identical issues:
1. Whether or not respondent
(Sony) is liable for the deficiency
VAT in the amount of
P11,141,014.41;
2. Whether or not the commission
expense in the amount of
₱2,894,797.00 should be
subjected to 10% withholding tax
instead of the 5% tax rate;
3. Whether or not the withholding
assessment with respect to the
5% withholding tax on rental
deposit in the amount of
₱10,523,821.99 is proper; and
4. Whether or not the remittance
of final withholding tax on royalties
covering the period January to
March 1998 was filed outside of
time.11
Finding no cogent reason to reverse the
decision of the CTA-First Division, the CTA-EB
dismissed CIR’s petition on May 17, 2007. CIR’s
motion for reconsideration was denied by the
CTA-EB on July 5, 2007.
The CIR is now before this Court via this petition
for review relying on the very same grounds it
raised before the CTA-First Division and the
CTA-EB. The said grounds are reproduced
below:
GROUNDS FOR THE ALLOWANCE OF THE
PETITION
I
THE CTA EN BANC ERRED IN RULING THAT
RESPONDENT IS NOT LIABLE FOR
DEFICIENCY VAT IN THE AMOUNT OF
PHP11,141,014.41.
II
AS TO RESPONDENT’S DEFICIENCY
EXPANDED WITHHOLDING TAX IN THE
AMOUNT OF PHP1,992,462.72:
A. THE CTA EN BANC
ERRED IN RULING THAT
THE COMMISSION
EXPENSE IN THE
AMOUNT OF
PHP2,894,797.00
SHOULD BE
SUBJECTED TO A
WITHHOLDING TAX OF
46
 5% INSTEAD OF THE
10% TAX RATE.
B. THE CTA EN BANC
ERRED IN RULING THAT
THE ASSESSMENT WITH
RESPECT TO THE 5%
WITHHOLDING TAX ON
RENTAL DEPOSIT IN
THE AMOUNT OF
PHP10,523,821.99 IS NOT
PROPER.
III
THE CTA EN BANC ERRED IN RULING THAT
THE FINAL WITHHOLDING TAX ON
ROYALTIES COVERING THE PERIOD
JANUARY TO MARCH 1998 WAS FILED ON
TIME.12
Upon filing of Sony’s comment, the Court
ordered the CIR to file its reply thereto. The CIR
subsequently filed a manifestation informing the
Court that it would no longer file a reply. Thus,
on December 3, 2008, the Court resolved to give
due course to the petition and to decide the case
on the basis of the pleadings filed.13
The Court finds no merit in the petition.
The CIR insists that LOA 19734, although it
states "the period 1997 and unverified prior
years," should be understood to mean the fiscal
year ending in March 31, 1998.14 The Court
cannot agree.
Based on Section 13 of the Tax Code, a Letter
of Authority or LOA is the authority given to the
appropriate revenue officer assigned to perform
assessment functions. It empowers or enables
said revenue officer to examine the books of
account and other accounting records of a
taxpayer for the purpose of collecting the correct
amount of tax.15 The very provision of the Tax
Code that the CIR relies on is unequivocal with
regard to its power to grant authority to examine
and assess a taxpayer.
SEC. 6. Power of the Commissioner to Make
Assessments and Prescribe Additional
Requirements for Tax Administration and
Enforcement. –
(A)Examination of Returns and Determination of
tax Due. – After a return has been filed as
required under the provisions of this Code, the
Commissioner or his duly authorized
representative may authorize the examination of
any taxpayer and the assessment of the correct
amount of tax: Provided, however, That failure
to file a return shall not prevent the
Commissioner from authorizing the examination
of any taxpayer. x x x [Emphases supplied]
Clearly, there must be a grant of authority before
any revenue officer can conduct an examination
or assessment. Equally important is that the
revenue officer so authorized must not go
beyond the authority given. In the absence of
such an authority, the assessment or
examination is a nullity.
As earlier stated, LOA 19734 covered "the
period 1997 and unverified prior years." For said
reason, the CIR acting through its revenue
officers went beyond the scope of their authority
because the deficiency VAT assessment they
arrived at was based on records from January
to March 1998 or using the fiscal year which
ended in March 31, 1998. As pointed out by the
CTA-First Division in its April 28, 2005
Resolution, the CIR knew which period should
be covered by the investigation. Thus, if CIR
wanted or intended the investigation to include
the year 1998, it should have done so by
including it in the LOA or issuing another LOA.
Upon review, the CTA-EB even added that the
coverage of LOA 19734, particularly the phrase
"and unverified prior years," violated Section C
of Revenue Memorandum Order No. 43-90
dated September 20, 1990, the pertinent portion
of which reads:
3. A Letter of Authority should cover a taxable
period not exceeding one taxable year. The
practice of issuing L/As covering audit of
"unverified prior years is hereby prohibited. If the
47
audit of a taxpayer shall include more than one
taxable period, the other periods or years shall
be specifically indicated in the L/A.16 [Emphasis
supplied]
On this point alone, the deficiency VAT
assessment should have been disallowed. Be
that as it may, the CIR’s argument, that Sony’s
advertising expense could not be considered as
an input VAT credit because the same was
eventually reimbursed by Sony International
Singapore (SIS), is also erroneous.
The CIR contends that since Sony’s advertising
expense was reimbursed by SIS, the former
never incurred any advertising expense. As a
result, Sony is not entitled to a tax credit. At
most, the CIR continues, the said advertising
expense should be for the account of SIS, and
not Sony.17
The Court is not persuaded. As aptly found by
the CTA-First Division and later affirmed by the
CTA-EB, Sony’s deficiency VAT assessment
stemmed from the CIR’s disallowance of the
input VAT credits that should have been
realized from the advertising expense of the
latter.18 It is evident under Section 11019 of the
1997 Tax Code that an advertising expense duly
covered by a VAT invoice is a legitimate
business expense. This is confirmed by no less
than CIR’s own witness, Revenue Officer
Antonio Aluquin.20 There is also no denying that
Sony incurred advertising expense. Aluquin
testified that advertising companies issued
invoices in the name of Sony and the latter paid
for the same.21 Indubitably, Sony incurred and
paid for advertising expense/ services. Where
the money came from is another matter all
together but will definitely not change said fact.
The CIR further argues that Sony itself admitted
that the reimbursement from SIS was income
and, thus, taxable. In support of this, the CIR
cited a portion of Sony’s protest filed before it:
The fact that due to adverse economic
conditions, Sony-Singapore has granted to our
client a subsidy equivalent to the latter’s
advertising expenses will not affect the validity
of the input taxes from such expenses. Thus, at
the most, this is an additional income of our
client subject to income tax. We submit further
that our client is not subject to VAT on the
subsidy income as this was not derived from the
sale of goods or services.22
Insofar as the above-mentioned subsidy may be
considered as income and, therefore, subject to
income tax, the Court agrees. However, the
Court does not agree that the same subsidy
should be subject to the 10% VAT. To begin
with, the said subsidy termed by the CIR as
reimbursement was not even exclusively
earmarked for Sony’s advertising expense for it
was but an assistance or aid in view of Sony’s
dire or adverse economic conditions, and was
only "equivalent to the latter’s (Sony’s)
advertising expenses."
Section 106 of the Tax Code explains when VAT
may be imposed or exacted. Thus:
SEC. 106. Value-added Tax on Sale of Goods
or Properties. –
(A) Rate and Base of Tax. – There shall be
levied, assessed and collected on every sale,
barter or exchange of goods or properties,
value-added tax equivalent to ten percent (10%)
of the gross selling price or gross value in
money of the goods or properties sold, bartered
or exchanged, such tax to be paid by the seller
or transferor.
Thus, there must be a sale, barter or exchange
of goods or properties before any VAT may be
levied. Certainly, there was no such sale, barter
or exchange in the subsidy given by SIS to
Sony. It was but a dole out by SIS and not in
payment for goods or properties sold, bartered
or exchanged by Sony.
In the case of CIR v. Court of Appeals (CA),23
the Court had the occasion to rule that services
rendered for a fee even on reimbursement-on-
cost basis only and without realizing profit are
also subject to VAT. The case, however, is not
applicable to the present case. In that case,
COMASERCO rendered service to its affiliates
48
and, in turn, the affiliates paid the former
reimbursement-on-cost which means that it was
paid the cost or expense that it incurred
although without profit. This is not true in the
present case. Sony did not render any service
to SIS at all. The services rendered by the
advertising companies, paid for by Sony using
SIS dole-out, were for Sony and not SIS. SIS
just gave assistance to Sony in the amount
equivalent to the latter’s advertising expense but
never received any goods, properties or service
from Sony.
Regarding the deficiency EWT assessment,
more particularly Sony’s commission expense,
the CIR insists that said deficiency EWT
assessment is subject to the ten percent (10%)
rate instead of the five percent (5%) citing
Revenue Regulation No. 2-98 dated April 17,
1998.24 The said revenue regulation provides
that the 10% rate is applied when the recipient
of the commission income is a natural person.
According to the CIR, Sony’s schedule of
Selling, General and Administrative expenses
shows the commission expense as
"commission/dealer salesman incentive,"
emphasizing the word salesman.
On the other hand, the application of the five
percent (5%) rate by the CTA-First Division is
based on Section 1(g) of Revenue Regulations
No. 6-85 which provides:
(g) Amounts paid to certain Brokers and Agents.
– On gross payments to customs, insurance,
real estate and commercial brokers and agents
of professional entertainers – five per centum
(5%).25
In denying the very same argument of the CIR
in its motion for reconsideration, the CTA-First
Division, held:
x x x, commission expense is indeed subject to
10% withholding tax but payments made to
broker is subject to 5% withholding tax pursuant
to Section 1(g) of Revenue Regulations No. 6-
85. While the commission expense in the
schedule of Selling, General and Administrative
expenses submitted by petitioner (SPI) to the
BIR is captioned as "commission/dealer
salesman incentive" the same does not justify
the automatic imposition of flat 10% rate. As
itemized by petitioner, such expense is
composed of "Commission Expense" in the
amount of P10,200.00 and ‘Broker Dealer’ of
P2,894,797.00.26
The Court agrees with the CTA-EB when it
affirmed the CTA-First Division decision.
Indeed, the applicable rule is Revenue
Regulations No. 6-85, as amended by Revenue
Regulations No. 12-94, which was the
applicable rule during the subject period of
examination and assessment as specified in the
LOA. Revenue Regulations No. 2-98, cited by
the CIR, was only adopted in April 1998 and,
therefore, cannot be applied in the present case.
Besides, the withholding tax on brokers and
agents was only increased to 10% much later or
by the end of July 2001 under Revenue
Regulations No. 6-2001.27 Until then, the rate
was only 5%.
The Court also affirms the findings of both the
CTA-First Division and the CTA-EB on the
deficiency EWT assessment on the rental
deposit. According to their findings, Sony
incurred the subject rental deposit in the amount
of ₱10,523,821.99 only from January to March
1998. As stated earlier, in the absence of the
appropriate LOA specifying the coverage, the
CIR’s deficiency EWT assessment from
January to March 1998, is not valid and must be
disallowed.
Finally, the Court now proceeds to the third
ground relied upon by the CIR.
The CIR initially assessed Sony to be liable for
penalties for belated remittance of its FWT on
royalties (i) as of December 1997; and (ii) for the
period from January to March 1998. Again, the
Court agrees with the CTA-First Division when it
upheld the CIR with respect to the royalties for
December 1997 but cancelled that from January
to March 1998.
The CIR insists that under Section 328 of
Revenue Regulations No. 5-82 and Sections
49
2.57.4 and 2.58(A)(2)(a)29 of Revenue within the semi-annual period ending June 30,
Regulations No. 2-98, Sony should also be which meant that the royalty may be payable
made liable for the FWT on royalties from until August 1998 pursuant to the MLA, the FWT
January to March of 1998. At the same time, it for said royalty had to be paid on or before July
downplays the relevance of the Manufacturing 10, 1998 or 10 days from its accrual at the end
License Agreement (MLA) between Sony and of June 1998. Thus, when Sony remitted the
Sony-Japan, particularly in the payment of same on July 8, 1998, it was not yet late.
royalties.
In view of the foregoing, the Court finds no
The above revenue regulations provide the reason to disturb the findings of the CTA-EB.
manner of withholding remittance as well as the
payment of final tax on royalty. Based on the WHEREFORE, the petition is DENIED.
same, Sony is required to deduct and withhold
final taxes on royalty payments when the royalty SO ORDERED.
is paid or is payable. After which, the
corresponding return and remittance must be
made within 10 days after the end of each
month. The question now is when does the
royalty become payable?

Under Article X(5) of the MLA between Sony

and Sony-Japan, the following terms of royalty
payments were agreed upon:

(5)Within two (2) months following each semi-

annual period ending June 30 and December
31, the LICENSEE shall furnish to the
LICENSOR a statement, certified by an officer
of the LICENSEE, showing quantities of the
MODELS sold, leased or otherwise disposed of
by the LICENSEE during such respective semi-
annual period and amount of royalty due
pursuant this ARTICLE X therefore, and the
LICENSEE shall pay the royalty hereunder to
the LICENSOR concurrently with the furnishing
of the above statement.30

Withal, Sony was to pay Sony-Japan royalty

within two (2) months after every semi-annual
period which ends in June 30 and December 31.
However, the CTA-First Division found that
there was accrual of royalty by the end of
December 1997 as well as by the end of June
1998. Given this, the FWTs should have been
paid or remitted by Sony to the CIR on January
10, 1998 and July 10, 1998. Thus, it was correct
for the CTA-First Division and the CTA-EB in
ruling that the FWT for the royalty from January
to March 1998 was seasonably filed. Although
the royalty from January to March 1998 was well
50
 Republic of the Philippines Exhibit Quarter Zero-Rated Sales
SUPREME COURT Involved
Manila
B 1st Quarter ₱651,672,672.47
SECOND DIVISION C 2nd Quarter 725,104,468.99
G.R. No. 181858 November 24, 2010 D 3rd Quarter 952,053,527.29
E 4th Quarter 956,477,387.10
KEPCO PHILIPPINES CORPORATION,
Petitioner,
vs. Total ₱3,285,308,055.854
COMMISSIONER OF INTERNAL REVENUE,
Respondent. In the course of doing business with NPC,
Kepco claimed expenses reportedly sustained
DECISION in connection with the production and sale of
electricity with NPC. Based on Kepco’s
MENDOZA, J.: calculation, it paid input VAT amounting to
₱11,710,868.86 attributing the same to its zero-
This is a petition for review on certiorari1 under rated sales of electricity with NPC. The table
Rule 45 of the Rules of Court seeking reversal shows the purchases and corresponding input
of the February 20, 2008 Decision2 of the Court VAT it paid.
of Tax Appeals En Banc (CTA) in C.T.A. EB No.
299, which ruled that "in order for petitioner to
Quarte
be entitled to its claim for refund/issuance of tax
Exhib r
credit certificate representing unutilized input Purchases Input VAT
it Involv
VAT attributable to its zero-rated sales for
ed
taxable year 2002, it must comply with the
substantiation requirements under the 1st
₱6,063,184.9
appropriate Revenue Regulations." B Quarte ₱606,318.49
0
r
Petitioner KEPCO Philippines Corporation
2nd
(Kepco) is a VAT-registered independent power
C Quarte 18,410,193.20 1,841,019.32
producer engaged in the business of generating
r
electricity. It exclusively sells electricity to
National Power Corporation (NPC), an entity 3rd
exempt from taxes under Section 13 of Republic D Quarte 16,811,819.21 1,681,181.93
Act No. 6395 (RA No. 6395).3 r

Records show that on December 4, 2001, 4th

Kepco filed an application for zero-rated sales
with the Revenue District Office (RDO) No. 54
of the Bureau of Internal Revenue (BIR).
Kepco’s application was approved under VAT
Ruling 64-01. Accordingly, for taxable year
2002, it filed four Quarterly VAT Returns
declaring zero-rated sales in the aggregate
amount of ₱3,285,308,055.85 itemized as
follows:
E Quarte 75,823,491.20 7,582,349.12
r
₱117,108,688 ₱11,710,868.
.51 865
Thus, on April 20, 2004, Kepco filed before the
Commissioner of Internal Revenue (CIR) a
claim for tax refund covering unutilized input
VAT payments attributable to its zero-rated
51
sales transactions for taxable year 2002.6 Two
days later, on April 22, 2004, it filed a petition for
review before the CTA. The case was docketed
as C.T.A. Case No. 6965.7
In its Answer,8 respondent CIR averred that
claims for refund were strictly construed against
the taxpayer as it was similar to a tax exemption.
It asserted that the burden to show that the
taxes were erroneous or illegal lay upon the
taxpayer. Thus, failure on the part of Kepco to
prove the same was fatal to its cause of action
because it was its duty to prove the legal basis
of the amount being claimed as a tax refund.
During the hearing, Kepco presented court-
commissioned Independent Certified Public
Accountant, Victor O. Machacon, who audited
their bulky documentary evidence consisting of
official receipts, invoices and vouchers, to prove
its claim for refund of unutilized input VAT. 9
On February 26, 2007, the CTA Second Division
ruled that out of the total declared zero-rated
sales of ₱3,285,308,055.85, Kepco was only
able to properly substantiate ₱1,451,788,865.52
as its zero-rated sales. After factoring, only
44.19% of the validly supported input VAT
payments being claimed could be considered.10
The CTA Division used the following
computation in determining Kepco’s total
allowable input VAT:
Substantiated zero-rated sales to NPC
Divided by the total declared zero-rated sales
Rate of substantiated zero-rated sales
Total Input VAT Claimed
Less:Disallowance
(a) Per verification of the independent CPA
(b) Per Court’s verification
Validly Supported Input VAT
Multiply by Rate of Substantiated Ze
Rated Sales
Total Allowed Input VAT
The CTA Second Division likewise disallowed
the ₱5,170,914.20 of Kepco’s claimed input
VAT due to its failure to comply with the
substantiation requirement. Specifically, the
CTA Second Division wrote:
[i]nput VAT on purchases supported by invoices
or official receipts stamped with TIN-VAT shall
be disallowed because these purchases are not
supported by "VAT Invoices" under the
contemplation of the aforequoted invoicing
requirement. To be considered a "VAT Invoice,"
the TIN-VAT must be printed, and not merely
stamped. Consequently, purchases supported
by invoices or official receipts, wherein the TIN-
VAT are not printed thereon, shall not give rise
to any input VAT. Likewise, input VAT on
purchases supported by invoices or official
receipts which are not NON-VAT are disallowed
because these invoices or official receipts are
not considered as "VAT Invoices." Hence, the
claims for input VAT on purchases referred to in
item (e) are properly disallowed.13
Accordingly, the CTA Second Division partially
granted Kepco’s claim for refund of unutilized
input VAT for taxable year 2002. The dispositive
portion of the decision14 of the CTA Second
₱1,451,788,865.52
Division reads:
÷ 3,285,308,055.85
WHEREFORE, petitioner’s claim for refund is
hereby PARTIALLY
44.19%11 GRANTED. Accordingly,
respondent is ORDERED to REFUND petitioner
the reduced amount of TWO MILLION EIGHT
HUNDRED NINETY₱11,710,868.86
THOUSAND FIVE PESOS
AND 96/100 (₱2,890,005.96) representing
unutilized input value-added tax for taxable year
2002.₱125,556.40
SO ORDERED. 15
5,045,357.80 5,170,914.20
₱6,539,954.66
Kepco moved for partial reconsideration, but the
CTA Second Division denied it in its June 28,
2007 Resolution.16
52
On appeal to the CTA En Banc,17 Kepco argued
that the CTA Second Division erred in not
considering ₱8,691,873.81 in addition to
₱2,890,005.96 as refundable tax credit for
Kepco’s zero-rated sales to NPC for taxable
year 2002.
On February 20, 2008, the CTA En Banc
dismissed the petition18 and ruled that "in order
for Kepco to be entitled to its claim for
refund/issuance of tax credit certificate
representing unutilized input VAT attributable to
its zero-rated sales for taxable year 2002, it
must comply with the substantiation
requirements under the appropriate Revenue
Regulations, i.e. Revenue Regulations 7-95."19
Thus, it concluded that "the Court in Division
was correct in disallowing a portion of Kepco’s
claim for refund on the ground that input taxes
on Kepco’s purchase of goods and services
were not supported by invoices and receipts
printed with "TIN-VAT."20
CTA Presiding Justice Ernesto Acosta
concurred with the majority in finding that
Kepco’s claim could not be allowed for lack of
proper substantiation but expressed his dissent
on the denial of certain claims,21 to wit:
[I] dissent with regard to the denial of the amount
₱4,720,725.63 for nothing in the law allows the
automatic invalidation of official
receipts/invoices which were not imprinted with
"TIN-VAT;" and further reduction of petitioner’s
claim representing input VAT on purchase of
goods not supported by invoices in the amount
of ₱64,509.50 and input VAT on purchase of
services not supported by official receipts in the
amount of ₱256,689.98, because the law makes
use of invoices and official receipts
interchangeably. Both can validly substantiate
petitioner’s claim.22
Hence, this petition alleging the following errors:
ASSIGNMENT OF ERRORS
I.
THE COURT OF TAX APPEALS EN BANC
GRAVELY ABUSED ITS DISCRETION
AMOUNTING TO LACK OR EXCESS OF
JURISDICTION WHEN IT HELD THAT NON-
COMPLIANCE WITH THE INVOICING
REQUIREMENT SHALL RESULT IN THE
AUTOMATIC DENIAL OF THE CLAIM.
II.
THE COURT OF TAX APPEALS EN BANC
GRAVELY ABUSED ITS DISCRETION
AMOUNTING TO LACK OF EXCESS OF
JURISDICTION WHEN IT DISALLOWED
PETITIONER’S CLAIM ON THE GROUND
THAT ‘TIN-VAT’ IS NOT IMPRINTED ON THE
INVOICES AND OFFICIAL RECEIPTS.
III.
THE COURT OF TAX APPEALS EN BANC
GRAVELY ABUSED ITS DISCRETION WHEN
IT MADE A DISTINCTION BETWEEN
INVOICES AND OFFICIAL RECEIPTS AS
SUPPORTING DOCUMENTS TO CLAIM FOR
AN INPUT VAT REFUND.23
At the outset, the Court has noticed that
although this petition is denominated as Petition
for Review on Certiorari under Rule 45 of the
Rules of Court, Kepco, in its assignment of
errors, impugns against the CTA En Banc grave
abuse of discretion amounting to lack or excess
of jurisdiction, which are grounds in a petition for
certiorari under Rule 65 of the Rules of Court.
Time and again, the Court has emphasized that
there is a whale of difference between a Rule 45
petition (Petition for Review on Certiorari) and a
Rule 65 petition (Petition for Certiorari.) A Rule
65 petition is an original action that dwells on
jurisdictional errors of whether a lower court
acted without or in excess of its jurisdiction or
with grave abuse of discretion.24 A Rule 45
petition, on the other hand, is a mode of appeal
which centers on the review on the merits of a
judgment, final order or award rendered by a
lower court involving purely questions of law.25
Thus, imputing jurisdictional errors against the
CTA is not proper in this Rule 45 petition. Kepco
failed to follow the correct procedure. On this
53
point alone, the Court can deny the subject
petition outright.
At any rate, even if the Court would disregard
this procedural flaw, the petition would still fail.
Kepco argues that the 1997 National Internal
Revenue Code (NIRC) does not require the
imprinting of the word zero-rated on invoices
and/or official receipts covering zero-rated
sales.26 It claims that Section 113 in relation to
Section 237 of the 1997 NIRC "does not
mention the requirement of imprinting the words
‘zero-rated’ to purchases covering zero-rated
transactions."27 Only Section 4.108-1 of
Revenue Regulation No. 7-95 (RR No. 7-95)
"required the imprinting of the word ‘zero-rated’
on the VAT invoice or receipt."28 "Thus, Section
4.108-1 of RR No. 7-95 cannot be considered
as a valid legislation considering the long settled
rule that administrative rules and regulations
cannot expand the letter and spirit of the law
they seek to enforce."29
The Court does not agree.
The issue of whether the word "zero-rated"
should be imprinted on invoices and/or official
receipts as part of the invoicing requirement has
been settled in the case of Panasonic
Communications Imaging Corporation of the
Philippines vs. Commissioner of Internal
Revenue30 and restated in the later case of
J.R.A. Philippines, Inc. v. Commissioner.31 In
the first case, Panasonic Communications
Imaging Corporation (Panasonic), a VAT-
registered entity, was engaged in the production
and exportation of plain paper copiers and their
parts and accessories. From April 1998 to
March 31, 1999, Panasonic generated export
sales amounting to US$12,819,475.15 and
US$11,859,489.78 totaling US$24,678,964.93.
Thus, it paid input VAT of ₱9,368,482.40 that it
attributed to its zero-rated sales. It filed
applications for refund or tax credit on what it
had paid. The CTA denied its application.
Panasonic’s export sales were subject to 0%
VAT under Section 106(A)(2)(a)(1) of the 1997
NIRC but it did not qualify for zero-rating
because the word "zero-rated" was not printed
on Panasonic’s export invoices. This omission,
according to the CTA, violated the invoicing
requirements of Section 4.108-1 of RR No. 7-95.
Panasonic argued, however, that "in requiring
the printing on its sales invoices of the word
‘zero-rated,’ the Secretary of Finance unduly
expanded, amended, and modified by a mere
regulation (Section 4.108-1 of RR No. 7-95) the
letter and spirit of Sections 113 and 237 of the
1997 NIRC, prior to their amendment by R.A.
9337."32 Panasonic stressed that Sections 113
and 237 did not necessitate the imprinting of the
word "zero-rated" for its zero-rated sales
receipts or invoices. The BIR integrated this
requirement only after the enactment of R.A. No.
9337 on November 1, 2005, a law that was still
inexistent at the time of the transactions.
Denying Panasonic’s claim for refund, the Court
stated:
Section 4.108-1 of RR 7-95 proceeds from the
rule-making authority granted to the Secretary
of Finance under Section 245 of the 1977 NIRC
(Presidential Decree 1158) for the efficient
enforcement of the tax code and of course its
amendments. The requirement is reasonable
and is in accord with the efficient collection of
VAT from the covered sales of goods and
services. As aptly explained by the CTA’s First
Division, the appearance of the word "zero-
rated" on the face of invoices covering zero-
rated sales prevents buyers from falsely
claiming input VAT from their purchases when
no VAT was actually paid. If, absent such word,
a successful claim for input VAT is made, the
government would be refunding money it did not
collect.1avvphi1
Further, the printing of the word "zero-rated" on
the invoice helps segregate sales that are
subject to 10% (now 12%) VAT from those sales
that are zero-rated. Unable to submit the proper
invoices, petitioner Panasonic has been unable
to substantiate its claim for refund.33
Following said ruling, Section 4.108-1 of RR 7-
9534 neither expanded nor supplanted the tax
code but merely supplemented what the tax
code already defined and discussed. In fact, the
necessity of indicating "zero-rated" into VAT
54
invoices/receipts became more apparent when
the provisions of this revenue regulation was
later integrated into RA No. 9337,35 the
amendatory law of the 1997 NIRC. Section 113,
in relation to Section 237 of the 1997 NIRC, as
amended by RA No. 9337, now reads:
SEC. 113. Invoicing and Accounting
Requirements for VAT-Registered Persons. -
(A) Invoicing Requirements. - A VAT-
registered person shall issue:
(1) A VAT invoice for every sale,
barter or exchange of goods or
properties; and
(2) A VAT official receipt for every
lease of goods or properties, and
for every sale, barter or exchange
of services.
(B) Information Contained in the VAT
Invoice or VAT Official Receipt. - The
following information shall be indicated in
the VAT invoice or VAT official receipt:
(1) A statement that the seller is a
VAT-registered person, followed
by his taxpayer's identification
number (TIN);
(2) The total amount which the
purchaser pays or is obligated to
pay to the seller with the indication
that such amount includes the
value-added tax: Provided, That:
(a) The amount of the tax
shall be shown as a
separate item in the invoice
or receipt;
(b) If the sale is exempt
from value-added tax, the
term "VAT-exempt sale"
shall be written or printed
prominently on the invoice
or receipt;
(c) If the sale is subject to
zero percent (0%) value-
added tax, the term "zero-
rated sale" shall be written
or printed prominently on
the invoice or receipt;
(d) If the sale involves
goods, properties or
services some of which are
subject to and some of
which are VAT zero-rated
or VAT-exempt, the invoice
or receipt shall clearly
indicate the breakdown of
the sale price between its
taxable, exempt and zero-
rated components, and the
calculation of the value-
added tax on each portion
of the sale shall be shown
on the invoice or receipt:
Provided, That the seller
may issue separate
invoices or receipts for the
taxable, exempt, and zero-
rated components of the
sale.
(3) The date of transaction,
quantity, unit cost and description
of the goods or properties or
nature of the service; and
(4) In the case of sales in the
amount of one thousand pesos
(P1,000) or more where the sale
or transfer is made to a VAT-
registered person, the name,
business style, if any, address and
taxpayer identification number
(TIN) of the purchaser, customer
or client.
(C) Accounting Requirements. -
Notwithstanding the provisions of Section
233, all persons subject to the value-
added tax under Sections 106 and 108
shall, in addition to the regular
accounting records required, maintain a
55
 subsidiary sales journal and subsidiary
purchase journal on which the daily sales
and purchases are recorded. The
subsidiary journals shall contain such
information as may be required by the
Secretary of Finance.
xxxx
SEC. 237. Issuance of Receipts or Sales or
Commercial Invoices. - All persons subject to an
internal revenue tax shall, for each sale and
transfer of merchandise or for services rendered
valued at Twenty-five pesos (₱25.00) or more,
issue duly registered receipts or sale or
commercial invoices, prepared at least in
duplicate, showing the date of transaction,
quantity, unit cost and description of
merchandise or nature of service: Provided,
however, That where the receipt is issued to
cover payment made as rentals, commissions,
compensation or fees, receipts or invoices shall
be issued which shall show the name, business
style, if any, and address of the purchaser,
customer or client.
The original of each receipt or invoice shall be
issued to the purchaser, customer or client at
the time the transaction is effected, who, if
engaged in business or in the exercise of
profession, shall keep and preserve the same in
his place of business for a period of three (3)
years from the close of the taxable year in which
such invoice or receipt was issued, while the
duplicate shall be kept and preserved by the
issuer, also in his place of business, for a like
period.
The Commissioner may, in meritorious cases,
exempt any person subject to an internal
revenue tax from compliance with the provisions
of this Section. [Emphases supplied]
Evidently, as it failed to indicate in its VAT
invoices and receipts that the transactions were
zero-rated, Kepco failed to comply with the
correct substantiation requirement for zero-
rated transactions.
Kepco then argues that non-compliance of
invoicing requirements should not result in the
denial of the taxpayer’s refund claim. Citing
Atlas Consolidated Mining & Development
Corporation vs. Commissioner of Internal
Revenue,36 it claims that a party who fails to
issue VAT official receipts/invoices for its sales
should only be imposed penalties as provided
under Section 264 of the 1997 NIRC.37
The Court has read the Atlas decision, and has
not come across any categorical ruling that
refund should be allowed for those who had not
complied with the substantiation requirements.
It merely recited "Section 263" which provided
for penalties in case of "Failure or refusal to
Issue Receipts or Sales or Commercial
Invoices, Violations related to the Printing of
such Receipts or Invoices and Other Violations."
It does not categorically say that the claimant
should be refunded. At any rate, Section 264
(formerly Section 263)38 of the 1997 NIRC was
not intended to excuse the compliance of the
substantive invoicing requirement needed to
justify a claim for refund on input VAT payments.
Furthermore, Kepco insists that Section 4.108.1
of Revenue Regulation 07-95 does not require
the word "TIN-VAT" to be imprinted on a VAT-
registered person’s supporting invoices and
official receipts39 and so there is no reason for
the denial of its ₱4,720,725.63 claim of input
tax.40
In this regard, Internal Revenue Regulation 7-95
(Consolidated Value-Added Tax Regulations) is
clear. Section 4.108-1 thereof reads:
Only VAT registered persons are required to
print their TIN followed by the word "VAT" in
their invoice or receipts and this shall be
considered as a "VAT" Invoice. All purchases
covered by invoices other than ‘VAT Invoice’
shall not give rise to any input tax.
Contrary to Kepco’s allegation, the regulation
specifically requires the VAT registered person
to imprint TIN-VAT on its invoices or receipts.
Thus, the Court agrees with the CTA when it
wrote: "[T]o be considered a ‘VAT invoice,’ the
56
TIN-VAT must be printed, and not merely
stamped. Consequently, purchases supported
by invoices or official receipts, wherein the TIN-
VAT is not printed thereon, shall not give rise to
any input VAT. Likewise, input VAT on
purchases supported by invoices or official
receipts which are NON-VAT are disallowed
because these invoices or official receipts are
not considered as ‘VAT Invoices.’"41
Kepco further argues that under Section 113(A)
of the 1997 NIRC, invoices and official receipts
are used interchangeably for purposes of
substantiating input VAT.42 Hence, it claims that
the CTA should have accepted its substantiation
of input VAT on (1) ₱64,509.50 on purchases of
goods with official receipts and (2) ₱256,689.98
on purchases of services with invoices.43
The Court is not persuaded.
Under the law, a VAT invoice is necessary for
every sale, barter or exchange of goods or
properties while a VAT official receipt properly
pertains to every lease of goods or properties,
and for every sale, barter or exchange of
services.44 In Commissioner of Internal
Revenue v. Manila Mining Corporation,45 the
Court distinguished an invoice from a receipt,
thus:
A "sales or commercial invoice" is a written
account of goods sold or services rendered
indicating the prices charged therefor or a list by
whatever name it is known which is used in the
ordinary course of business evidencing sale and
transfer or agreement to sell or transfer goods
and services.
A "receipt" on the other hand is a written
acknowledgment of the fact of payment in
money or other settlement between seller and
buyer of goods, debtor or creditor, or person
rendering services and client or customer.
In other words, the VAT invoice is the seller’s
best proof of the sale of the goods or services to
the buyer while the VAT receipt is the buyer’s
best evidence of the payment of goods or
services received from the seller. Even though
VAT invoices and receipts are normally issued
by the supplier/seller alone, the said invoices
and receipts, taken collectively, are necessary
to substantiate the actual amount or quantity of
goods sold and their selling price (proof of
transaction), and the best means to prove the
input VAT payments (proof of payment).46
Hence, VAT invoice and VAT receipt should not
be confused as referring to one and the same
thing. Certainly, neither does the law intend the
two to be used alternatively.
Although it is true that the CTA is not strictly
governed by technical rules of evidence,47 the
invoicing and substantiation requirements must,
nevertheless, be followed because it is the only
way to determine the veracity of Kepco’s claims.
Verily, the CTA En Banc correctly disallowed the
input VAT that did not meet the required
standard of substantiation.
The CTA is devoted exclusively to the resolution
of tax-related issues and has unmistakably
acquired an expertise on the subject matter. In
the absence of abuse or reckless exercise of
authority,48 the CTA En Banc’s decision should
be upheld.
The Court has always decreed that tax refunds
are in the nature of tax exemptions which
represent a loss of revenue to the government.
These exemptions, therefore, must not rest on
vague, uncertain or indefinite inference, but
should be granted only by a clear and
unequivocal provision of law on the basis of
language too plain to be mistaken. Such
exemptions must be strictly construed against
the taxpayer, as taxes are the lifeblood of the
government.49
WHEREFORE, the petition is DENIED.
SO ORDERED.
57
 Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 182364 August 3, 2010
AT&T COMMUNICATIONS SERVICES
PHILIPPINES, INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.
DECISION
CARPIO MORALES, J.:
AT&T Communications Services Philippines,
Inc. (petitioner) is a domestic corporation
primarily engaged in the business of providing
information, promotional, supportive and liaison
services to foreign corporations such as AT&T
Communications Services International Inc.,
AT&T Solutions, Inc., AT&T Singapore, Pte.
Ltd.,, AT&T Global Communications Services,
Inc. and Acer, Inc., an enterprise registered with
the Philippine Economic Zone Authority (PEZA).
Under Service Agreements forged by petitioner
with the above-named corporations,
remuneration is paid in U.S. Dollars and
inwardly remitted in accordance with the rules
and regulations of the Bangko Sentral ng
Pilipinas (BSP).
For the calendar year 2002, petitioner incurred
input VAT when it generated and recorded zero-
rated sales in connection with its Service
Agreements in the peso equivalent of
₱56,898,744.05. Petitioner also incurred input
VAT from purchases of capital goods and other
taxable goods and services, and importation of
capital goods.
Despite the application of petitioner’s input VAT
against its output VAT, an excess of unutilized
input VAT in the amount of ₱2,050,736.69
remained. As petitioner’s unutilized input VAT
could not be directly and exclusively attributed
to either of its zero-rated sales or its domestic
sales, an allocation of the input VAT was made
which resulted in the amount of ₱1,801,826.82
as petitioner’s claim attributable to its zero-rated
sales.
On March 26, 2004, petitioner filed with the
Commissioner of Internal Revenue
(respondent) an application for tax refund and/or
tax credit of its excess/unutilized input VAT from
zero-rated sales in the said amount of
₱1,801,826.82.1
To prevent the running of the prescriptive
period, petitioner subsequently filed a petition
for review with the Court of Tax Appeals (CTA)
which was docketed as CTA Case No. 6907 and
lodged before its First Division.
In support of its claim, petitioner presented
documents including its Summary of Zero-
Rated Sales (Exhibit "DD") with corresponding
supporting documents; VAT invoices on which
were stamped "zero-rated" and bank credit
advices (Exhibits "EE-1" to "EE-56"); copies of
Service Agreements (Exhibits "N" to "Q"); and
report of the commissioned certified public
accountant (Exhibit "AA" to "AA-22").
After petitioner presented its evidence,
respondent did not, despite notice, proffer any
opposition to it. He was eventually declared to
have waived his right to present
evidence.1avvphi1
By Decision of February 23, 2007,2 the CTA
First Division, conceding that petitioner’s
transactions fall under the classification of zero-
rated sales, nevertheless denied petitioner’s
claim "for lack of substantiation," disposing as
follows:
In reiteration, considering that the subject
revenues pertain to gross receipts from services
rendered by petitioner, valid VAT official
receipts and not mere sales invoices should
have been submitted in support thereof. Without
proper VAT official receipts, the foreign currency
payments received by petitioner from services
rendered for the four (4) quarters of taxable year
58
2002 in the sum of US$1,102,315.48 with the
peso equivalent of ₱56,898,744.05 cannot
qualify for zero-rating for VAT purposes.
Consequently, the claimed input VAT payments
allegedly attributable thereto in the amount of
₱1,801,826.82 cannot be granted. It is clear
from the provisions of Section 112 (A) of the
NIRC of 1997 that there must be zero-rated or
effectively zero-rated sales in order that a refund
of input VAT could prosper.
x x x x3 (emphasis and underscoring supplied)
The CTA First Division, relying on Sections 1064
and 1085 of the Tax Code, held that since
petitioner is engaged in sale of services, VAT
Official Receipts should have been presented in
order to substantiate its claim of zero-rated
sales, not VAT invoices which pertain to sale of
goods or properties.
On petition for review, the CTA En Banc, by
Decision of February 18, 2008,6 affirmed that of
the CTA First Division. Petitioner’s motion for
reconsideration having been denied by
Resolution of April 2, 2008, the present petition
for review was filed.
The petition is impressed with merit.
A taxpayer engaged in zero-rated transactions
may apply for tax refund or issuance of tax credit
certificate for unutilized input VAT, subject to the
following requirements: (1) the taxpayer is
engaged in sales which are zero-rated (i.e.,
export sales) or effectively zero-rated; (2) the
taxpayer is VAT-registered; (3) the claim must
be filed within two years after the close of the
taxable quarter when such sales were made; (4)
the creditable input tax due or paid must be
attributable to such sales, except the transitional
input tax, to the extent that such input tax has
not been applied against the output tax; and (5)
in case of zero-rated sales under Section 106
(A) (2) (a) (1) and (2), Section 106 (B) and
Section 108 (B) (1) and (2), the acceptable
foreign currency exchange proceeds thereof
have been duly accounted for in accordance
with BSP rules and regulations.7
Commissioner of Internal Revenue v. Seagate
Technology (Philippines)8 teaches that
petitioner, as zero-rated seller, hence, directly
and legally liable for VAT, can claim a refund or
tax credit certificate.
Zero-rated transactions generally refer to the
export sale of goods and supply of services. The
tax rate is set at zero. When applied to the tax
base, such rate obviously results in no tax
chargeable against the purchaser. The seller of
such transactions charges no output tax but can
claim a refund or a tax credit certificate for the
VAT previously charged by suppliers. x x x
Applying the destination principle to the
exportation of goods, automatic zero rating is
primarily intended to be enjoyed by the seller
who is directly and legally liable for the VAT,
making such seller internationally competitive
by allowing the refund or credit of input taxes
that are attributable to export sales. (emphasis
and underscoring supplied)
Revenue Regulation No. 3-88 amending
Revenue Regulation No. 5-87 provides the
requirements in claiming tax credits/refunds:
Sec. 2. Section 16 of Revenue Regulations 5-87
is hereby amended to read as follows: x x x
(c) Claims for tax credits/refunds – Application
for Tax Credit/Refund of Value-Added Tax Paid
(BIR Form No. 2552) shall be filed with the
Revenue District Office of the city or municipality
where the principal place of business of the
applicant is located or directly with the
Commissioner, Attention: VAT Division.
A photocopy of the purchase invoice or
receipt evidencing the value added tax paid
shall be submitted together with the application.
The original copy of the said invoice/receipt,
however shall be presented for cancellation
prior to the issuance of the Tax Credit Certificate
or refund. x x x (emphasis and underscoring
supplied)
59
Section 113 of the Tax Code does not create a invoice would suffice provided the requirements
distinction between a sales invoice and an under Sections 113 and 237 of the Tax Code are
official receipt. met.1avvphi1

Sec. 113. Invoicing and Accounting
Requirements for VAT-Registered Persons. –
(A) Invoicing Requirements. – A
VAT-registered person shall, for
every sale, issue an invoice or
receipt. In addition to the
information required under
Section 237, the following
information shall be indicated in
the invoice or receipt:
(1) A statement that the
seller is a VAT-registered
person, followed by his
taxpayer’s identification
number (TIN); and
(2) The total amount which
the purchaser pays or is
obligated to pay to the
seller with the indication
that such amount includes
the value-added tax.
(emphasis, italics and
underscoring supplied)
Sales invoices are recognized commercial
documents to facilitate trade or credit
transactions. They are proofs that a business
transaction has been concluded, hence, should
not be considered bereft of probative value.9
Only the preponderance of evidence threshold
as applied in ordinary civil cases is needed to
substantiate a claim for tax refund proper.10
IN FINE, the Court finds that petitioner has
complied with the substantiation requirements
to prove entitlement to refund/tax credit. The
Court is not a trier of facts, however, hence the
need to remand the case to the CTA for
determination and computation of petitioner’s
refund/tax credit.
WHEREFORE, the petition is GRANTED. The
Decision of February 18, 2008 of the Court of
Tax Appeals En Banc is REVERSED and SET
ASIDE. Let the case be REMANDED to the
Court of Tax Appeals First Division for the
determination of petitioner’s tax credit/refund.
SO ORDERED.

Section 110 of the 1997 Tax Code in fact

provides:

Section 110. Tax Credits –

A. Creditable Input Tax. –

(1) Any input tax evidenced by a VAT invoice

or official receipt issued in accordance with
Section 113 hereof on the following
transactions shall be creditable against the
output tax:

(b) Purchase of services on which a value-

added tax has actually been paid. (emphasis,
italics and underscoring supplied)

Parenthetically, to determine the validity of

petitioner’s claim as to unutilized input VAT, an
60