TAXATION - VALUE ADDED TAX
G.R. No. 151135 July 2, 2004
CONTEX CORPORATION, petitioner,
vs.
HON. COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
QUISUMBING, J.:
For review is the Decision1 dated September 3, 2001, of the Court of Appeals, in
CA-G.R. SP No. 62823, which reversed and set aside the decision2 dated October
13, 2000, of the Court of Tax Appeals (CTA). The CTA had ordered the
Commissioner of Internal Revenue (CIR) to refund the sum of P683,061.90 to
petitioner as erroneously paid input value-added tax (VAT) or in the alternative, to
issue a tax credit certificate for said amount. Petitioner also assails the appellate
court’s Resolution,3 dated December 19, 2001, denying the motion for
reconsideration.
Petitioner is a domestic corporation engaged in the business of manufacturing
hospital textiles and garments and other hospital supplies for export. Petitioner’s
place of business is at the Subic Bay Freeport Zone (SBFZ). It is duly registered
with the Subic Bay Metropolitan Authority (SBMA) as a Subic Bay Freeport
Enterprise, pursuant to the provisions of Republic Act No. 7227. 4 As an SBMA-
registered firm, petitioner is exempt from all local and national internal revenue
taxes except for the preferential tax provided for in Section 12 (c) 5 of Rep. Act No.
7227. Petitioner also registered with the Bureau of Internal Revenue (BIR) as a
non-VAT taxpayer under Certificate of Registration RDO Control No. 95-180-
000133.
From January 1, 1997 to December 31, 1998, petitioner purchased various
supplies and materials necessary in the conduct of its manufacturing
business. The suppliers of these goods shifted unto petitioner the 10% VAT on the
purchased items, which led the petitioner to pay input taxes in the amounts
of P539,411.88 and P504,057.49 for 1997 and 1998, respectively.6
1
Acting on the belief that it was exempt from all national and local taxes, including
VAT, pursuant to Rep. Act No. 7227, petitioner filed two applications for tax refund
or tax credit of the VAT it paid. Mr. Edilberto Carlos, revenue district officer of BIR
RDO No. 19, denied the first application letter, dated December 29, 1998.
Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax
refund/credit, this time directly with Atty. Alberto Pagabao, the regional director of
BIR Revenue Region No. 4. The second letter sought a refund or issuance of a tax
credit certificate in the amount of P1,108,307.72, representing erroneously paid
input VAT for the period January 1, 1997 to November 30, 1998.
When no response was forthcoming from the BIR Regional Director, petitioner
then elevated the matter to the Court of Tax Appeals, in a petition for review
docketed as CTA Case No. 5895. Petitioner stressed that Section 112(A) 7 if read in
relation to Section 106(A)(2)(a)8 of the National Internal Revenue Code, as
amended and Section 12(b)9 and (c) of Rep. Act No. 7227 would show that it was
not liable in any way for any value-added tax.
In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply
the rule that claims for refund are strictly construed against the taxpayer. Since
petitioner failed to establish both its right to a tax refund or tax credit and its
compliance with the rules on tax refund as provided for in Sections 204 10 and
22911 of the Tax Code, its claim should be denied, according to the BIR.
On October 13, 2000, the CTA decided CTA Case No. 5895 as follows:
WHEREFORE, in view of the foregoing, the Petition for Review is hereby
PARTIALLY GRANTED. Respondent is hereby ORDERED to REFUND or
in the alternative to ISSUE A TAX CREDIT CERTIFICATE in favor of
Petitioner the sum of P683,061.90, representing erroneously paid input
VAT.
SO ORDERED.12
In granting a partial refund, the CTA ruled that petitioner misread Sections
106(A)(2)(a) and 112(A) of the Tax Code. The tax court stressed that these
provisions apply only to those entities registered as VAT taxpayers whose sales
are zero-rated. Petitioner does not fall under this category, since it is a non-VAT
taxpayer as evidenced by the Certificate of Registration RDO Control No. 95-180-
000133 issued by RDO Rosemarie Ragasa of BIR RDO No. 18 of the Subic Bay
 TAXATION - VALUE ADDED TAX
Freeport Zone and thus it is exempt from VAT, pursuant to Rep. Act No. 7227, said
the CTA.
Nonetheless, the CTA held that the petitioner is exempt from the imposition of
input VAT on its purchases of supplies and materials. It pointed out that under
Section 12(c) of Rep. Act No. 7227 and the Implementing Rules and Regulations
of the Bases Conversion and Development Act of 1992, all that petitioner is
required to pay as a SBFZ-registered enterprise is a 5% preferential tax.
The CTA also disallowed all refunds of input VAT paid by the petitioner prior to
June 29, 1997 for being barred by the two-year prescriptive period under Section
229 of the Tax Code. The tax court also limited the refund only to the input VAT
paid by the petitioner on the supplies and materials directly used by the petitioner
in the manufacture of its goods. It struck down all claims for input VAT paid on
maintenance, office supplies, freight charges, and all materials and supplies
shipped or delivered to the petitioner’s Makati and Pasay City offices.
Respondent CIR then filed a petition, docketed as CA-G.R. SP No. 62823, for
review of the CTA decision by the Court of Appeals. Respondent maintained that
the exemption of Contex Corp. under Rep. Act No. 7227 was limited only to direct
taxes and not to indirect taxes such as the input component of the VAT. The
Commissioner pointed out that from its very nature, the value-added tax is a
burden passed on by a VAT registered person to the end users; hence, the direct
liability for the tax lies with the suppliers and not Contex.
Finding merit in the CIR’s arguments, the appellate court decided CA-G.R. SP No.
62823 in his favor, thus:
WHEREFORE, premises considered, the appealed decision is hereby
REVERSED AND SET ASIDE. Contex’s claim for refund of erroneously
paid taxes is DENIED accordingly.
SO ORDERED.13
In reversing the CTA, the Court of Appeals held that the exemption from duties and
taxes on the importation of raw materials, capital, and equipment of SBFZ-
registered enterprises under Rep. Act No. 7227 and its implementing rules covers
only "the VAT imposable under Section 107 of the [Tax Code], which is a direct
liability of the importer, and in no way includes the value-added tax of the seller-
exporter the burden of which was passed on to the importer as an additional costs
of the goods."14 This was because the exemption granted by Rep. Act No. 7227
2
relates to the act of importation and Section 10715 of the Tax Code specifically
imposes the VAT on importations. The appellate court applied the principle that tax
exemptions are strictly construed against the taxpayer. The Court of Appeals
pointed out that under the implementing rules of Rep. Act No. 7227, the exemption
of SBFZ-registered enterprises from internal revenue taxes is qualified as
pertaining only to those for which they may be directly liable. It then stated that
apparently, the legislative intent behind Rep. Act No. 7227 was to grant
exemptions only to direct taxes, which SBFZ-registered enterprise may be liable
for and only in connection with their importation of raw materials, capital, and
equipment as well as the sale of their goods and services.
Petitioner timely moved for reconsideration of the Court of Appeals decision, but
the motion was denied.
Hence, the instant petition raising as issues for our resolution the following:
A. WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL AND
NATIONAL INTERNAL REVENUE TAXES PROVIDED IN REPUBLIC
ACT NO. 7227 COVERS THE VALUE ADDED TAX PAID BY
PETITIONER, A SUBIC BAY FREEPORT ENTERPRISE ON ITS
PURCHASES OF SUPPLIES AND MATERIALS.
B. WHETHER OR NOT THE COURT OF TAX APPEALS CORRECTLY
HELD THAT PETITIONER IS ENTITLED TO A TAX CREDIT OR
REFUND OF THE VAT PAID ON ITS PURCHASES OF SUPPLIES AND
RAW MATERIALS FOR THE YEARS 1997 AND 1998.16
Simply stated, we shall resolve now the issues concerning: (1) the correctness of
the finding of the Court of Appeals that the VAT exemption embodied in Rep. Act
No. 7227 does not apply to petitioner as a purchaser; and (2) the entitlement of the
petitioner to a tax refund on its purchases of supplies and raw materials for 1997
and 1998.
On the first issue, petitioner argues that the appellate court’s restrictive
interpretation of petitioner’s VAT exemption as limited to those covered by Section
107 of the Tax Code is erroneous and devoid of legal basis. It contends that the
provisions of Rep. Act No. 7227 clearly and unambiguously mandate that no local
and national taxes shall be imposed upon SBFZ-registered firms and hence, said
law should govern the case. Petitioner calls our attention to regulations issued by
both the SBMA and BIR clearly and categorically providing that the tax exemption
provided for by Rep. Act No. 7227 includes exemption from the imposition of VAT
on purchases of supplies and materials.
 TAXATION - VALUE ADDED TAX
The respondent takes the diametrically opposite view that while Rep. Act No. 7227
does grant tax exemptions, such grant is not all-encompassing but is limited only
to those taxes for which a SBFZ-registered business may be directly liable. Hence,
SBFZ locators are not relieved from the indirect taxes that may be shifted to them
by a VAT-registered seller.
At this juncture, it must be stressed that the VAT is an indirect tax. As such, the
amount of tax paid on the goods, properties or services bought, transferred, or
leased may be shifted or passed on by the seller, transferor, or lessor to the buyer,
transferee or lessee.17 Unlike a direct tax, such as the income tax, which primarily
taxes an individual’s ability to pay based on his income or net wealth, an indirect
tax, such as the VAT, is a tax on consumption of goods, services, or certain
transactions involving the same. The VAT, thus, forms a substantial portion of
consumer expenditures.
Further, in indirect taxation, there is a need to distinguish between the liability for
the tax and the burden of the tax. As earlier pointed out, the amount of tax paid
may be shifted or passed on by the seller to the buyer. What is transferred in such
instances is not the liability for the tax, but the tax burden. In adding or including
the VAT due to the selling price, the seller remains the person primarily and legally
liable for the payment of the tax. What is shifted only to the intermediate buyer and
ultimately to the final purchaser is the burden of the tax.18 Stated differently, a
seller who is directly and legally liable for payment of an indirect tax, such as the
VAT on goods or services is not necessarily the person who ultimately bears the
burden of the same tax. It is the final purchaser or consumer of such goods or
services who, although not directly and legally liable for the payment thereof,
ultimately bears the burden of the tax.19
Exemptions from VAT are granted by express provision of the Tax Code or special
laws. Under VAT, the transaction can have preferential treatment in the following
ways:
(a) VAT Exemption. An exemption means that the sale of goods or
properties and/or services and the use or lease of properties is not subject
to VAT (output tax) and the seller is not allowed any tax credit on VAT
(input tax) previously paid.20 This is a case wherein the VAT is removed at
the exempt stage (i.e., at the point of the sale, barter or exchange of the
goods or properties).
The person making the exempt sale of goods, properties or services shall
not bill any output tax to his customers because the said transaction is not
subject to VAT. On the other hand, a VAT-registered purchaser of VAT-
3
exempt goods/properties or services which are exempt from VAT is not
entitled to any input tax on such purchase despite the issuance of a VAT
invoice or receipt.21
(b) Zero-rated Sales. These are sales by VAT-registered persons which
are subject to 0% rate, meaning the tax burden is not passed on to the
purchaser. A zero-rated sale by a VAT-registered person, which is a
taxable transaction for VAT purposes, shall not result in any output tax.
However, the input tax on his purchases of goods, properties or services
related to such zero-rated sale shall be available as tax credit or refund in
accordance with these regulations.22
Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm.
In contrast, exemption only removes the VAT at the exempt stage, and it will
actually increase, rather than reduce the total taxes paid by the exempt firm’s
business or non-retail customers. It is for this reason that a sharp distinction must
be made between zero-rating and exemption in designating a value-added tax.23
Apropos, the petitioner’s claim to VAT exemption in the instant case for its
purchases of supplies and raw materials is founded mainly on Section 12 (b) and
(c) of Rep. Act No. 7227, which basically exempts them from all national and local
internal revenue taxes, including VAT and Section 4 (A)(a) of BIR Revenue
Regulations No. 1-95.24
On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is
not controverted by the respondent. In fact, petitioner is registered as a NON-VAT
taxpayer per Certificate of Registration25 issued by the BIR. As such, it is exempt
from VAT on all its sales and importations of goods and services.
Petitioner’s claim, however, for exemption from VAT for its purchases of supplies
and raw materials is incongruous with its claim that it is VAT-Exempt, for only VAT-
Registered entities can claim Input VAT Credit/Refund.
The point of contention here is whether or not the petitioner may claim a refund on
the Input VAT erroneously passed on to it by its suppliers.
While it is true that the petitioner should not have been liable for the VAT
inadvertently passed on to it by its supplier since such is a zero-rated sale on the
part of the supplier, the petitioner is not the proper party to claim such VAT refund.
 TAXATION - VALUE ADDED TAX

Section 4.100-2 of BIR’s Revenue Regulations 7-95, as amended, or the petitioner’s purchases did exist, petitioner is still not entitled to any tax credit or
"Consolidated Value-Added Tax Regulations" provide: refund on the input tax previously paid as petitioner is an exempt VAT taxpayer.

Sec. 4.100-2. Zero-rated Sales. A zero-rated sale by a VAT-registered
person, which is a taxable transaction for VAT purposes, shall not result in
any output tax. However, the input tax on his purchases of goods,
properties or services related to such zero-rated sale shall be available as
tax credit or refund in accordance with these regulations.
The following sales by VAT-registered persons shall be subject to 0%:
(a) Export Sales
Rather, it is the petitioner’s suppliers who are the proper parties to claim the tax
credit and accordingly refund the petitioner of the VAT erroneously passed on to
the latter.
Accordingly, we find that the Court of Appeals did not commit any reversible error
of law in holding that petitioner’s VAT exemption under Rep. Act No. 7227 is
limited to the VAT on which it is directly liable as a seller and hence, it cannot claim
any refund or exemption for any input VAT it paid, if any, on its purchases of raw
materials and supplies.

"Export Sales" shall mean WHEREFORE, the petition is DENIED for lack of merit. The Decision dated
September 3, 2001, of the Court of Appeals in CA-G.R. SP No. 62823, as well as
... its Resolution of December 19, 2001 are AFFIRMED. No pronouncement as to
costs.
(5) Those considered export sales under Articles 23 and 77 of
SO ORDERED.
Executive Order No. 226, otherwise known as the Omnibus
Investments Code of 1987, and other special laws, e.g. Republic
Act No. 7227, otherwise known as the Bases Conversion and
Development Act of 1992.

...

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

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

On the second issue, it may not be amiss to re-emphasize that the petitioner is G.R. No. 125355 March 30, 2000
registered as a NON-VAT taxpayer and thus, is exempt from VAT. As an exempt
VAT taxpayer, it is not allowed any tax credit on VAT (input tax) previously paid. In COMMISSIONER OF INTERNAL REVENUE, petitioner,
fine, even if we are to assume that exemption from the burden of VAT on vs.
4
 TAXATION - VALUE ADDED TAX

COURT OF APPEALS and COMMONWEALTH MANAGEMENT AND On February 10, 1992, COMASERCO filed with the BIR, a letter-protest objecting
SERVICES CORPORATION, respondents. 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
PARDO, J.: the deficiency VAT.

What is before the Court is a petition for review on certiorari of the decision of the
Court of Appeals,1 reversing that of the Court of Tax Appeals,2 which affirmed with
modification the decision of the Commissioner of Internal Revenue ruling that
Commonwealth Management and Services Corporation, is liable for value added
tax for services to clients during taxable year 1988.
Commonwealth Management and Services Corporation (COMASERCO, for
brevity), is a corporation duly organized and existing under the laws of the
Philippines. It is an affiliate of Philippine American Life Insurance Co. (Philamlife),
organized by the letter to perform collection, consultative and other technical
services, including functioning as an internal auditor, of Philamlife and its other
affiliates.1âwphi1.nêt
On September 29, 1992, COMASERCO filed 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 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
On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an assessment
Commissioner of Internal Revenue, the dispositive portion of which reads:
to private respondent COMASERCO for deficiency value-added tax (VAT)
amounting to P351,851.01, for taxable year 1988, computed as follows:
WHEREFORE, the decision of the Commissioner of Internal Revenue
assessing petitioner deficiency value-added tax for the taxable year 1988
P1,679,155.00 is AFFIRMED with slight modifications. Accordingly, petitioner is ordered to
Taxable sale/receipt =========== 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
10% tax due thereon 167,915.50 the Tax Code.
25% surcharge 41,978.88
The compromise penalty of P16,000.00 imposed by the respondent in her
20% interest per annum 125,936.63 assessment letter shall not be included in the payment as there was no
compromise agreement entered into between petitioner and respondent
Compromise penalty for late payment 16,000.00 with respect to the value-added tax deficiency.5

TOTAL AMOUNT DUE AND COLLECTIBLE P351,831.01 3 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
COMASERCO's annual corporate income tax return ending December 31, 1988 reversing that of the Court of Tax Appeals, the dispositive portion of which reads:
indicated a net loss in its operations in the amount of P6,077.00.

5
 TAXATION - VALUE ADDED TAX
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 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
6
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
 TAXATION - VALUE ADDED TAX
on the performance of services, even in the absence of profit attributable thereto.
The term "in the course of trade or business" requires the regular conduct or
pursuit of a commercial or an economic activity regardless of whether or not the
entity is profit-oriented.
The definition of the term "in the course of trade or business" present law applies
to all transactions even to those made prior to its enactment. Executive Order No.
273 stated that any person who, in the course of trade or business, sells, barters or
exchanges goods and services, was already liable to pay VAT. The present law
merely stresses that even a nonstock, nonprofit organization or government entity
is liable to pay VAT for the sale of goods and services.
Sec. 108 of the National Internal Revenue Code of 1997 10 defines the phrase
"sale of services" as the "performance of all kinds of services for others for a fee,
remuneration or consideration." It includes "the supply of technical advice,
assistance or services rendered in connection with technical management or
administration of any scientific, industrial or commercial undertaking or project." 11
On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling
No. 010-98 12 emphasizing that a domestic corporation that provided technical,
research, management and technical assistance to its affiliated companies and
received payments on a reimbursement-of-cost basis, without any intention of
realizing profit, was subject to VAT on services rendered. In fact, even if such
corporation was organized without any intention realizing profit, any income or
profit generated by the entity in the conduct of its activities was subject to income
tax.
Hence, it is immaterial whether the primary purpose of a corporation indicates that
it receives payments for services rendered to its affiliates on a reimbursement-on-
cost basis only, without realizing profit, for purposes of determining liability for VAT
on services rendered. As long as the entity provides service for a fee,
remuneration or consideration, then the service rendered is subject to
VAT.1awp++i1
At any rate, it is a rule that because taxes are the lifeblood of the nation, statutes
that allow exemptions are construed strictly against the grantee and liberally in
favor of the government. Otherwise stated, any exemption from the payment of a
tax must be clearly stated in the language of the law; it cannot be merely implied
therefrom. 13 In the case of VAT, Section 109, Republic Act 8424 clearly
enumerates the transactions exempted from VAT. The services rendered by
COMASERCO do not fall within the exemptions.
7
Both the Commissioner of Internal Revenue and the Court of Tax Appeals
correctly ruled that the services rendered by COMASERCO to Philamlife and its
affiliates are subject to VAT. As pointed out by the Commissioner, the performance
of all kinds of services for others for a fee, remuneration or consideration is
considered as sale of services subject to VAT. As the government agency charged
with the enforcement of the law, the opinion of the Commissioner of Internal
Revenue, in the absence of any showing that it is plainly wrong, is entitled to great
weight. 14 Also, it has been the long standing policy and practice of this Court to
respect the conclusions of quasi-judicial agencies, such as the Court of Tax
Appeals which, by the nature of its functions, is dedicated exclusively to the study
and consideration of tax cases and has necessarily developed an expertise on the
subject, unless there has been an abuse or improvident exercise of its authority. 15
There is no merit to respondent's contention that the Court of Appeals' decision in
CA-G.R. No. 34042, declaring the COMASERCO as not engaged in business and
not liable for the payment of fixed and percentage taxes, binds petitioner. The
issue in CA-G.R. No. 34042 is different from the present case, which involves
COMASERCO's liability for VAT. As heretofore stated, every person who sells,
barters, or exchanges goods and services, in the course of trade or business, as
defined by law, is subject to VAT.
WHEREFORE, the Court GRANTS the petition and REVERSES the decision of
the Court of Appeals in CA-G.R. SP No. 37930. The Court hereby REINSTATES
the decision of the Court of Tax Appeals in C. T. A. Case No. 4853.
No costs.
SO ORDERED.1âwphi1.nêt
G.R. No. 178697 : November 17, 2010
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. SONY PHILIPPINES,
INC., Respondent.
DECISION
MENDOZA, J.:
 TAXATION - VALUE ADDED TAX

This petition for review on Certiorari seeks to set aside the May 17, 2007 Decision Add: Penalties
and the July 5, 2007 Resolution of the Court of Tax Appeals – En Banc[1] (CTA-
EB), in C.T.A. EB No. 90, affirming the October 26, 2004 Decision of the CTA-First Interest up to 3-31-2000 P 550,485.82
Division[2] which, in turn, partially granted the petition for review of respondent
Sony Philippines, Inc. (Sony).cra The CTA-First Division decision cancelled the Compromise 25,000.00 575,485.82
deficiency assessment issued by petitioner Commissioner of Internal Revenue
(CIR) against Sony for Value Added Tax (VAT) but upheld the deficiency Deficiency EWT Due P 1,992,462.72
assessment for expanded withholding tax (EWT) in the amount of P1,035,879.70
and the penalties for late remittance of internal revenue taxes in the amount of
P1,269, 593.90.[3]cralaw DEFICIENCY OF VAT ON
ROYALTY PAYMENTS
THE FACTS:chanroblesvirtuallawlibrary (Assessment No. ST-LR1-97-0126-
2000)
On November 24, 1998, the CIR issued Letter of Authority No. 000019734 (LOA
19734) authorizing certain revenue officers to examine Sony’s books of accounts Basic Tax Due P
and other accounting records regarding revenue taxes for “the period 1997 and
unverified prior years.” On December 6, 1999, a preliminary assessment for 1997 Add: Penalties
deficiency taxes and penalties was issued by the CIR which Sony protested. Surcharge P 359,177.80
Thereafter, acting on the protest, the CIR issued final assessment notices, the
formal letter of demand and the details of discrepancies.[4] Said details of the Interest up to 3-31-2000 87,580.34
deficiency taxes and penalties for late remittance of internal revenue taxes are as
follows:chanroblesvirtuallawlibrary Compromise 16,000.00 462,758.14

DEFICIENCY VALUE -ADDED TAX Penalties Due P 462,758.14

(VAT)
(Assessment No. ST-VAT-97-0124-
2000) LATE REMITTANCE OF FINAL
Basic Tax Due P 7,958,700.00 WITHHOLDING TAX
(Assessment No. ST-LR2-97-0127-
Add: Penalties 2000)
Basic Tax Due P
Interest up to 3-31-2000 P 3,157,314.41
Add: Penalties
Compromise 25,000.00 3,182,314.41
Surcharge P 1,729,690.71
Deficiency VAT Due P 11,141,014.41
Interest up to 3-31-2000 508,783.07

DEFICIENCY EXPANDED Compromise 50,000.00 2,288,473.78

WITHHOLDING TAX (EWT)
(Assessment No. ST-EWT-97-0125- Penalties Due P 2,288,473.78
2000)
Basic Tax Due P 1,416,976.90

8
 TAXATION - VALUE ADDED TAX

LATE REMITTANCE OF INCOME assessment as well as the penalties. Thus, the dispositive portion
PAYMENTS reads:chanroblesvirtuallawlibrary
(Assessment No. ST-LR3-97-0128-
2000) WHEREFORE, the petition for review is hereby PARTIALLY GRANTED.
Respondent is ORDERED to CANCEL and WITHDRAW the deficiency
Basic Tax Due P assessment for value-added tax for 1997 for lack of merit. However, the
Add: Penalties deficiency assessments for expanded withholding tax and penalties for
late remittance of internal revenue taxes are UPHELD.
25 % Surcharge P 8,865.34
Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency
Interest up to 3-31-2000 58.29 expanded withholding tax in the amount of P1,035,879.70 and the
following penalties for late remittance of internal revenue taxes in the sum
Compromise 2,000.00 10,923.60 of P1,269,593.90:chanroblesvirtuallawlibrary
Penalties Due P 10,923.60 1. VAT on Royalty P 429,242.07

2. Withholding Tax on Royalty 831,428.20

GRAND TOTAL P 15,895,632.65[5] 3. EWT of Petitioner’s Branches 8,923.63

Sony sought re-evaluation of the aforementioned assessment by filing a protest on
February 2, 2000. Sony submitted relevant documents in support of its protest on
the 16th of that same month.[6]cralaw
On October 24, 2000, within 30 days after the lapse of 180 days from submission
of the said supporting documents to the CIR, Sony filed a petition for review before
the CTA.[7]cralaw
After trial, the CTA-First Division disallowed the deficiency VAT assessment
because the subsidized advertising expense paid by Sony which was duly covered
by a VAT invoice resulted in an input VAT credit. As regards the EWT, the CTA-
First Division maintained the deficiency EWT assessment on Sony’s motor
vehicles and on professional fees paid to general professional partnerships. It also
assessed the amounts paid to sales agents as commissions with five percent (5%)
EWT pursuant to Section 1(g) of Revenue Regulations No. 6-85. The CTA-First
Division, however, disallowed the EWT assessment on rental expense since it
found that the total rental deposit of P10,523,821.99 was incurred from January to
March 1998 which was again beyond the coverage of LOA 19734. Except for the
compromise penalties, the CTA-First Division also upheld the penalties for the late
payment of VAT on royalties, for late remittance of final withholding tax on royalty
as of December 1997 and for the late remittance of EWT by some of Sony’s
branches.[8] In sum, the CTA-First Division partly granted Sony’s petition by
cancelling the deficiency VAT assessment but upheld a modified deficiency EWT
Total P 1,269,593.90
Plus 20% delinquency interest from January 17, 2000 until fully paid
pursuant to Section 249(C)(3) of the 1997 Tax Code.
SO ORDERED.[9]cralaw
The CIR sought a reconsideration of the above decision and submitted the
following grounds in support thereof:chanroblesvirtuallawlibrary
A. The Honorable Court committed reversible error in holding that
petitioner is not liable for the deficiency VAT in the amount of
P11,141,014.41;
B. The Honorable court committed reversible error in holding that the
commission expense in the amount of P2,894,797.00 should be subjected
to 5% withholding tax instead of the 10% tax rate;
C. The Honorable Court committed a reversible error in holding that the
withholding tax assessment with respect to the 5% withholding tax on
rental deposit in the amount of P10,523,821.99 should be cancelled; and
D. The Honorable Court committed reversible error in holding that the
remittance of final withholding tax on royalties covering the period January
to March 1998 was filed on time.[10]cralaw

9
 TAXATION - VALUE ADDED TAX

On April 28, 2005, the CTA-First Division denied the motion for reconsideration. B. THE CTA EN BANC ERRED IN RULING THAT THE
Unfazed, the CIR filed a petition for review with the CTA-EB raising identical ASSESSMENT WITH RESPECT TO THE 5% WITHHOLDING
issues:chanroblesvirtuallawlibrary TAX ON RENTAL DEPOSIT IN THE AMOUNT OF
PHP10,523,821.99 IS NOT PROPER.
1. Whether or not respondent (Sony) is liable for the deficiency VAT in the
amount of P11,141,014.41; III

2. Whether or not the commission expense in the amount of THE CTA EN BANC ERRED IN RULING THAT THE FINAL
P2,894,797.00 should be subjected to 10% withholding tax instead of the WITHHOLDING TAX ON ROYALTIES COVERING THE PERIOD
5% tax rate; JANUARY TO MARCH 1998 WAS FILED ON TIME.[12]cralaw

3. Whether or not the withholding assessment with respect to the 5%
withholding tax on rental deposit in the amount of P10,523,821.99 is
proper; and
4. Whether or not the remittance of final withholding tax on royalties
covering the period January to March 1998 was filed outside of
time.[11]cralaw
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]cralaw
The Court finds no merit in the petition.

Finding no cogent reason to reverse the decision of the CTA-First Division, the The CIR insists that LOA 19734, although it states “the period 1997 and unverified
CTA-EB dismissed CIR’s petition on May 17, 2007. CIR’s motion for prior years,” should be understood to mean the fiscal year ending in March 31,
reconsideration was denied by the CTA-EB on July 5, 2007. 1998.[14] The Court cannot agree.

The CIR is now before this Court via this petition for review relying on the very Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the authority
same grounds it raised before the CTA-First Division and the CTA-EB. The said given to the appropriate revenue officer assigned to perform assessment functions.
grounds are reproduced below:chanroblesvirtuallawlibrary 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
GROUNDS FOR THE ALLOWANCE OF THE PETITION 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
I
taxpayer.
THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS NOT SEC. 6. Power of the Commissioner to Make Assessments and Prescribe
LIABLE FOR DEFICIENCY VAT IN THE AMOUNT OF Additional Requirements for Tax Administration and Enforcement. –
PHP11,141,014.41.
(A)Examination of Returns and Determination of tax Due. – After a return
II
has been filed as required under the provisions of this Code, the
AS TO RESPONDENT’S DEFICIENCY EXPANDED WITHHOLDING TAX Commissioner or his duly authorized representative may authorize the
IN THE AMOUNT OF PHP1,992,462.72:chanroblesvirtuallawlibrary 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
A. THE CTA EN BANC ERRED IN RULING THAT THE Commissioner from authorizing the examination of any taxpayer. x x x
COMMISSION EXPENSE IN THE AMOUNT OF [Emphases supplied]cralaw
PHP2,894,797.00 SHOULD BE SUBJECTED TO A
WITHHOLDING TAX OF 5% INSTEAD OF THE 10% TAX RATE. 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

10
 TAXATION - VALUE ADDED TAX
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:chanroblesvirtuallawlibrary
3. A Letter of Authority should cover a taxable period not exceeding one
taxable year. The practice of issuing L/As covering audit of “unverified
prior years is hereby prohibited. If the audit of a taxpayer shall include
more than one taxable period, the other periods or years shall be
specifically indicated in the L/A.[16] [Emphasis supplied]cralaw
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]cralaw
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 110[19] of the
1997 Tax Code that an advertising expense duly covered by a VAT invoice is a
legitimate business expense. This is confirmed by no less than 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.
11
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:chanroblesvirtuallawlibrary
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]cralaw
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:chanroblesvirtuallawlibrary
SEC. 106. Value-added Tax on Sale of Goods or Properties. –
(A) Rate and Base of Tax. – There shall be levied, assessed and
collected on every sale, barter or exchange of goods or properties,
value-added tax equivalent to ten percent (10%) of the gross
selling price or gross value in money of the goods or properties
sold, bartered or exchanged, such tax to be paid by the seller or
transferor.
Thus, there must be a sale, barter or exchange of goods or properties before any
VAT may be levied. Certainly, there was no such sale, barter or exchange in the
subsidy given by SIS to Sony. It was but a dole out by SIS and not in payment for
goods or properties sold, bartered or exchanged by Sony.
In the case of CIR v. Court of Appeals (CA),[23] the Court had the occasion to rule
that services rendered for a fee even on reimbursement-on-cost basis only and
without realizing profit are also subject to VAT. The case, however, is not
applicable to the present case. In that case, COMASERCO rendered service to its
affiliates and, in turn, the affiliates paid the former reimbursement-on-cost which
means that it was paid the cost or expense that it incurred although without profit.
This is not true in the present case. Sony did not render any service to SIS at all.
 TAXATION - VALUE ADDED TAX
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 RegulationsNo. 6-85 which
provides:chanroblesvirtuallawlibrary
(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%).cra[25]cralaw
In denying the very same argument of the CIR in its motion for reconsideration, the
CTA-First Division, held:chanroblesvirtuallawlibrary
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]cralaw
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%.
12
The Court also affirms the findings of both the CTA-First Division and the CTA-EB
on the deficiency EWT assessment on the rental deposit. According to their
findings, Sony incurred the subject rental deposit in the amount of P10,523,821.99
only from January to March 1998. As stated earlier, in the absence of the
appropriate LOA specifying the coverage, the 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 3[28] of Revenue RegulationsNo. 5-82 and
Sections 2.57.4 and 2.58(A)(2)(a)[29] of Revenue Regulations No. 2-98, Sony
should also be made liable for the FWT on royalties from January to March of
1998. At the same time, it downplays the relevance of the Manufacturing License
Agreement (MLA) between Sony and Sony-Japan, particularly in the payment of
royalties.
The above revenue regulations provide the manner of withholding remittance as
well as the payment of final tax on royalty. Based on the same, Sony is required to
deduct and withhold final taxes on royalty payments when the royalty is paid or is
payable. After which, the corresponding return and remittance must be made
within 10 days after the end of each month. The question now is when does the
royalty become payable?
Under Article X(5) of the MLA between Sony and Sony-Japan, the following terms
of royalty payments were agreed upon:chanroblesvirtuallawlibrary
(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]cralaw
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
 TAXATION - VALUE ADDED TAX
as well as by the end of June 1998. Given this, the FWTs should have been paid
or remitted by Sony to the CIR on January 10, 1998 and July 10, 1998. Thus, it
was correct for the CTA-First Division and the CTA-EB in ruling that the FWT for
the royalty from January to March 1998 was seasonably filed. Although the royalty
from January to March 1998 was well within the semi-annual period ending June
30, which meant that the royalty may be payable until August 1998 pursuant to the
MLA, the FWT for said royalty had to be paid on or before July 10, 1998 or 10 days
from its accrual at the end of June 1998. Thus, when Sony remitted the same on
July 8, 1998, it was not yet late.
In view of the foregoing, the Court finds no reason to disturb the findings of the
CTA-EB.
WHEREFORE, the petition is DENIED.
SO ORDERED.
G.R. No. 193301 March 11, 2013
MINDANAO II GEOTHERMAL PARTNERSHIP, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
x-----------------------x
G.R. No. 194637
MINDANAO I GEOTHERMAL PARTNERSHIP, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
CARPIO, J.:
G.R. No. 193301 is a petition for review1 assailing the Decision2 promulgated on
10 March 2010 as well as the Resolution3 promulgated on 28 July 2010 by the
Court of Tax Appeals En Banc (CTA En Banc) in CTA EB No. 513. The CTA En
Banc affirmed the 22 September 2008 Decision4 as well as the 26 June 2009
Amended Decision5 of the First Division of the Court of Tax Appeals (CTA First
Division) in CTA Case Nos. 7227, 7287, and 7317. The CTA First Division denied
13
Mindanao II Geothermal Partnership’s (Mindanao II) claims for refund or tax credit
for the first and second quarters of taxable year 2003 for being filed out of time
(CTA Case Nos. 7227 and 7287). The CTA First Division, however, ordered the
Commissioner of Internal Revenue (CIR) to refund or credit to Mindanao II
unutilized input value-added tax (VAT) for the third and fourth quarters of taxable
year 2003 (CTA Case No. 7317).
G.R. No. 194637 is a petition for review6 assailing the Decision7 promulgated on
31 May 2010 as well as the Amended Decision8 promulgated on 24 November
2010 by the CTA En Banc in CTA EB Nos. 476 and 483. In its Amended Decision,
the CTA En Banc reversed its 31 May 2010 Decision and granted the CIR’s
petition for review in CTA Case No. 476. The CTA En Banc denied Mindanao I
Geothermal Partnership’s (Mindanao I) claims for refund or tax credit for the first
(CTA Case No. 7228), second (CTA Case No. 7286), third, and fourth quarters
(CTA Case No. 7318) of 2003.
Both Mindanao I and II are partnerships registered with the Securities and
Exchange Commission, value added taxpayers registered with the Bureau of
Internal Revenue (BIR), and Block Power Production Facilities accredited by the
Department of Energy. Republic Act No. 9136, or the Electric Power Industry
Reform Act of 2000 (EPIRA), effectively amended Republic Act No. 8424, or the
Tax Reform Act of 1997 (1997 Tax Code),9 when it decreed that sales of power by
generation companies shall be subjected to a zero rate of VAT.10 Pursuant to
EPIRA, Mindanao I and II filed with the CIR claims for refund or tax credit of
accumulated unutilized and/or excess input taxes due to VAT zero-rated sales in
2003. Mindanao I and II filed their claims in 2005.
G.R. No. 193301
Mindanao II v. CIR
The Facts
G.R. No. 193301 covers three CTA First Division cases, CTA Case Nos. 7227,
7287, and 7317, which were consolidated as CTA EB No. 513. CTA Case Nos.
7227, 7287, and 7317 claim a tax refund or credit of Mindanao II’s alleged excess
or unutilized input taxes due to VAT zero-rated sales. In CTA Case No. 7227,
Mindanao II claims a tax refund or credit of ₱3,160,984.69 for the first quarter of
2003. In CTA Case No. 7287, Mindanao II claims a tax refund or credit of
₱1,562,085.33 for the second quarter of 2003. In CTA Case No. 7317, Mindanao II
claims a tax refund or credit of ₱3,521,129.50 for the third and fourth quarters of
2003.
 TAXATION - VALUE ADDED TAX
The CTA First Division’s narration of the pertinent facts is as follows:
xxxx
On March 11, 1997, [Mindanao II] allegedly entered into a Built (sic)-Operate-
Transfer (BOT) contract with the Philippine National Oil Corporation – Energy
Development Company (PNOC-EDC) for finance, engineering, supply, installation,
testing, commissioning, operation, and maintenance of a 48.25 megawatt
geothermal power plant, provided that PNOC-EDC shall supply and deliver steam
to Mindanao II at no cost. In turn, Mindanao II shall convert the steam into electric
capacity and energy for PNOC-EDC and shall deliver the same to the National
Power Corporation (NPC) for and in behalf of PNOC-EDC. Mindanao II alleges
that its sale of generated power and delivery of electric capacity and energy of
Mindanao II to NPC for and in behalf of PNOC-EDC is its only revenue-generating
activity which is in the ambit of VAT zero-rated sales under the EPIRA Law, x x x.
xxxx
Hence, the amendment of the NIRC of 1997 modified the VAT rate applicable to
sales of generated power by generation companies from ten (10%) percent to zero
(0%) percent.
In the course of its operation, Mindanao II makes domestic purchases of goods
and services and accumulates therefrom creditable input taxes. Pursuant to the
provisions of the National Internal Revenue Code (NIRC), Mindanao II alleges that
it can use its accumulated input tax credits to offset its output tax liability.
Considering, however that its only revenue-generating activity is VAT zero-rated
under RA No. 9136, Mindanao II’s input tax credits remain unutilized.
Thus, on the belief that its sales qualify for VAT zero-rating, Mindanao II adopted
the VAT zero-rating of the EPIRA in computing for its VAT payable when it filed its
Quarterly VAT Returns on the following dates:
CTA Case No. Period Covered Date of Filing
(2003)
Original Return Amended Return
7227 1st Quarter April 23, 2003 July 3, 2002 (sic),
April 1, 2004 &
October 22, 2004
7287 2nd Quarter July 22, 2003 April 1, 2004
14
7317 3rd Quarter Oct. 27, 2003 April 1, 2004
7317 4th Quarter Jan. 26, 2004 April 1, 2204
Considering that it has accumulated unutilized creditable input taxes from its only
income-generating activity, Mindanao II filed an application for refund and/or
issuance of tax credit certificate with the BIR’s Revenue District Office at
Kidapawan City on April 13, 2005 for the four quarters of 2003.
To date (September 22, 2008), the application for refund by Mindanao II remains
unacted upon by the CIR. Hence, these three petitions filed on April 22, 2005
covering the 1st quarter of 2003; July 7, 2005 for the 2nd quarter of 2003; and
September 9, 2005 for the 3rd and 4th quarters of 2003. At the instance of
Mindanao II, these petitions were consolidated on March 15, 2006 as they involve
the same parties and the same subject matter. The only difference lies with the
taxable periods involved in each petition.11
The Court of Tax Appeals’ Ruling: Division
In its 22 September 2008 Decision,12 the CTA First Division found that Mindanao II
satisfied the twin requirements for VAT zero rating under EPIRA: (1) it is a
generation company, and (2) it derived sales from power generation. The CTA
First Division also stated that Mindanao II complied with five requirements to be
entitled to a refund:
1. There must be zero-rated or effectively zero-rated sales;
2. That input taxes were incurred or paid;
3. That such input VAT payments are directly attributable to zero-rated
sales or effectively zero-rated sales;
4. That the input VAT payments were not applied against any output VAT
liability; and
5. That the claim for refund was filed within the two-year prescriptive
period.13
With respect to the fifth requirement, the CTA First Division tabulated the dates of
filing of Mindanao II’s return as well as its administrative and judicial claims, and
 TAXATION - VALUE ADDED TAX

concluded that Mindanao II’s administrative and judicial claims were timely filed in CREDIT CERTIFICATE in the modified amount of SEVEN MILLION SEVEN
compliance with this Court’s ruling in Atlas Consolidated Mining and Development HUNDRED THREE THOUSAND NINE HUNDRED FIFTY SEVEN AND 79/100
Corporation v. Commissioner of Internal Revenue (Atlas).14 The CTA First Division PESOS (₱7,703,957.79) representing its unutilized input VAT for the four (4)
declared that the two-year prescriptive period for filing a VAT refund claim should quarters of the taxable year 2003.
not be counted from the close of the quarter but from the date of the filing of the
VAT return. As ruled in Atlas, VAT liability or entitlement to a refund can only be SO ORDERED.17
determined upon the filing of the quarterly VAT return.
Mindanao II filed a motion for partial reconsideration. 18 It stated that the sale of the
CTA Period Date Filing fully depreciated Nissan Patrol is a one-time transaction and is not incidental to its
Case Covered VAT zero-rated operations. Moreover, the disallowed input taxes substantially
No. (2003) Original Amended Administrative Judicial Claim complied with the requirements for refund or tax credit.
Return Return Return
7227 1st Quarter 23 April 1 April 13 April 2005 22 April 2005 The CIR also filed a motion for partial reconsideration. It argued that the judicial
2003 2004 claims for the first and second quarters of 2003 were filed beyond the period
allowed by law, as stated in Section 112(A) of the 1997 Tax Code. The CIR further
7287 2nd 22 July 2003 1 April 13 April 2005 7 July 2005 stated that Section 229 is a general provision, and governs cases not covered by
Quarter 2004 Section 112(A). The CIR countered the CTA First Division’s 22 September 2008
decision by citing this Court’s ruling in Commisioner of Internal Revenue v. Mirant
7317 3rd Quarter 25 Oct. 2003 1 April 13 April 2005 9 Sept. 2005
Pagbilao Corporation (Mirant),19 which stated that unutilized input VAT payments
2004
must be claimed within two years reckoned from the close of the taxable quarter
7317 4th Quarter 26 Jan. 2004 1 April 13 April 2005 9 Sept. when the relevant sales were made regardless of whether said tax was paid.
2004 200515
The CTA First Division denied Mindanao II’s motion for partial reconsideration,
found the CIR’s motion for partial reconsideration partly meritorious, and rendered
Thus, counting from 23 April 2003, 22 July 2003, 25 October 2003, and 26 January
an Amended Decision20 on 26 June 2009. The CTA First Division stated that the
2004, when Mindanao II filed its VAT returns, its administrative claim filed on 13
claim for refund or credit with the BIR and the subsequent appeal to the CTA must
April 2005 and judicial claims filed on 22 April 2005, 7 July 2005, and 9 September
be filed within the two-year period prescribed under Section 229. The two-year
2005 were timely filed in accordance with Atlas.
prescriptive period in Section 229 was denominated as a mandatory statute of
limitations. Therefore, Mindanao II’s claims for refund for the first and second
The CTA First Division found that Mindanao II is entitled to a refund in the modified quarters of 2003 had already prescribed.
amount of ₱7,703,957.79, after disallowing ₱522,059.91 from input VAT 16 and
deducting ₱18,181.82 from Mindanao II’s sale of a fully depreciated ₱200,000.00
The CTA First Division found that the records of Mindanao II’s case are bereft of
Nissan Patrol. The input taxes amounting to ₱522,059.91 were disallowed for
evidence that the sale of the Nissan Patrol is not incidental to Mindanao II’s VAT
failure to meet invoicing requirements, while the input VAT on the sale of the
zero-rated operations. Moreover, Mindanao II’s submitted documents failed to
Nissan Patrol was reduced by ₱18,181.82 because the output VAT for the sale
substantiate the requisites for the refund or credit claims.
was not included in the VAT declarations.

The CTA First Division modified its 22 September 2008 Decision to read as
The dispositive portion of the CTA First Division’s 22 September 2008 Decision
follows:
reads:

WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED.

WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED.
Accordingly, the CIR is hereby ORDERED to REFUND or to ISSUE A TAX
Accordingly, the CIR is hereby ORDERED to REFUND or to ISSUE A TAX
15
 TAXATION - VALUE ADDED TAX
CREDIT CERTIFICATE to Mindanao II Geothermal Partnership in the modified
amount of TWO MILLION NINE HUNDRED EIGHTY THOUSAND EIGHT
HUNDRED EIGHTY SEVEN AND 77/100 PESOS (₱2,980,887.77) representing its
unutilized input VAT for the third and fourth quarters of the taxable year 2003.
SO ORDERED.21
Mindanao II filed a Petition for Review,22 docketed as CTA EB No. 513, before the
CTA En Banc.
The Court of Tax Appeals’ Ruling: En Banc
On 10 March 2010, the CTA En Banc rendered its Decision23 in CTA EB No. 513
and denied Mindanao II’s petition. The CTA En Banc ruled that (1) Section 112(A)
clearly provides that the reckoning of the two-year prescriptive period for filing the
application for refund or credit of input VAT attributable to zero-rated sales or
effectively zero-rated sales shall be counted from the close of the taxable quarter
when the sales were made; (2) the Atlas and Mirant cases applied different tax
codes: Atlas applied the 1977 Tax Code while Mirant applied the 1997 Tax Code;
(3) the sale of the fully-depreciated Nissan Patrol is incidental to Mindanao II’s VAT
zero-rated transactions pursuant to Section 105; (4) Mindanao II failed to comply
with the substantiation requirements provided under Section 113(A) in relation to
Section 237 of the 1997 Tax Code as implemented by Section 4.104-1, 4.104-5,
and 4.108-1 of Revenue Regulation No. 7-95; and (5) the doctrine of strictissimi
juris on tax exemptions cannot be relaxed in the present case.
The dispositive portion of the CTA En Banc’s 10 March 2010 Decision reads:
WHEREFORE, on the basis of the foregoing considerations, the Petition for
Review en banc is DISMISSED for lack of merit. Accordingly, the Decision dated
September 22, 2008 and the Amended Decision dated June 26, 2009 issued by
the First Division are AFFIRMED.
SO ORDERED.24
The CTA En Banc issued a Resolution25 on 28 July 2010 denying for lack of merit
Mindanao II’s Motion for Reconsideration.26 The CTA En Banc highlighted the
following bases of their previous ruling:
16
1. The Supreme Court has long decided that the claim for refund of
unutilized input VAT must be filed within two (2) years after the close of the
taxable quarter when such sales were made.
2. The Supreme Court is the ultimate arbiter whose decisions all other
courts should take bearings.
3. The words of the law are clear, plain, and free from ambiguity; hence, it
must be given its literal meaning and applied without any interpretation.27
G.R. No. 194637
Mindanao I v. CIR
The Facts
G.R. No. 194637 covers two cases consolidated by the CTA EB: CTA EB Case
Nos. 476 and 483. Both CTA EB cases consolidate three cases from the CTA
Second Division: CTA Case Nos. 7228, 7286, and 7318. CTA Case Nos. 7228,
7286, and 7318 claim a tax refund or credit of Mindanao I’s accumulated unutilized
and/or excess input taxes due to VAT zero-rated sales. In CTA Case No. 7228,
Mindanao I claims a tax refund or credit of ₱3,893,566.14 for the first quarter of
2003. In CTA Case No. 7286, Mindanao I claims a tax refund or credit of
₱2,351,000.83 for the second quarter of 2003. In CTA Case No. 7318, Mindanao I
claims a tax refund or credit of ₱7,940,727.83 for the third and fourth quarters of
2003.
Mindanao I is similarly situated as Mindanao II. The CTA Second Division’s
narration of the pertinent facts is as follows:
xxxx
In December 1994, Mindanao I entered into a contract of Build-Operate-Transfer
(BOT) with the Philippine National Oil Corporation – Energy Development
Corporation (PNOC-EDC) for the finance, design, construction, testing,
commissioning, operation, maintenance and repair of a 47-megawatt geothermal
power plant. Under the said BOT contract, PNOC-EDC shall supply and deliver
steam to Mindanao I at no cost. In turn, Mindanao I will convert the steam into
electric capacity and energy for PNOC-EDC and shall subsequently supply and
deliver the same to the National Power Corporation (NPC), for and in behalf of
PNOC-EDC.
 TAXATION - VALUE ADDED TAX
Mindanao I’s 47-megawatt geothermal power plant project has been accredited by
the Department of Energy (DOE) as a Private Sector Generation Facility, pursuant
to the provision of Executive Order No. 215, wherein Certificate of Accreditation
No. 95-037 was issued.
On June 26, 2001, Republic Act (R.A.) No. 9136 took effect, and the relevant
provisions of the National Internal Revenue Code (NIRC) of 1997 were deemed
modified. R.A. No. 9136, also known as the "Electric Power Industry Reform Act of
2001 (EPIRA), was enacted by Congress to ordain reforms in the electric power
industry, highlighting, among others, the importance of ensuring the reliability,
security and affordability of the supply of electric power to end users. Under the
provisions of this Republic Act and its implementing rules and regulations, the
delivery and supply of electric energy by generation companies became VAT zero-
rated, which previously were subject to ten percent (10%) VAT.
xxxx
The amendment of the NIRC of 1997 modified the VAT rate applicable to sales of
generated power by generation companies from ten (10%) percent to zero percent
(0%). Thus, Mindanao I adopted the VAT zero-rating of the EPIRA in computing for
its VAT payable when it filed its VAT Returns, on the belief that its sales qualify for
VAT zero-rating.
Mindanao I reported its unutilized or excess creditable input taxes in its Quarterly
VAT Returns for the first, second, third, and fourth quarters of taxable year 2003,
which were subsequently amended and filed with the BIR.
On April 4, 2005, Mindanao I filed with the BIR separate administrative claims for
the issuance of tax credit certificate on its alleged unutilized or excess input taxes
for taxable year 2003, in the accumulated amount of ₱14,185, 294.80.
Alleging inaction on the part of CIR, Mindanao I elevated its claims before this
Court on April 22, 2005, July 7, 2005, and September 9, 2005 docketed as CTA
Case Nos. 7228, 7286, and 7318, respectively. However, on October 10, 2005,
Mindanao I received a copy of the letter dated September 30, 2003 (sic) of the BIR
denying its application for tax credit/refund.28
The Court of Tax Appeals’ Ruling: Division
On 24 October 2008, the CTA Second Division rendered its Decision29 in CTA
Case Nos. 7228, 7286, and 7318. The CTA Second Division found that (1)
17
pursuant to Section 112(A), Mindanao I can only claim 90.27% of the amount of
substantiated excess input VAT because a portion was not reported in its quarterly
VAT returns; (2) out of the ₱14,185,294.80 excess input VAT applied for refund,
only ₱11,657,447.14 can be considered substantiated excess input VAT due to
disallowances by the Independent Certified Public Accountant, adjustment on the
disallowances per the CTA Second Division’s further verification, and additional
disallowances per the CTA Second Division’s further verification;
(3) Mindanao I’s accumulated excess input VAT for the second quarter of 2003
that was carried over to the third quarter of 2003 is net of the claimed input VAT for
the first quarter of 2003, and the same procedure was done for the second, third,
and fourth quarters of 2003; and (4) Mindanao I’s administrative claims were filed
within the two-year prescriptive period reckoned from the respective dates of filing
of the quarterly VAT returns.
The dispositive portion of the CTA Second Division’s 24 October 2008 Decision
reads:
WHEREFORE, premises considered, the consolidated Petitions for Review are
hereby PARTIALLY GRANTED. Accordingly, the CIR is hereby ORDERED TO
ISSUE A TAX CREDIT CERTIFICATE in favor of Mindanao I in the reduced
amount of TEN MILLION FIVE HUNDRED TWENTY THREE THOUSAND ONE
HUNDRED SEVENTY SEVEN PESOS AND 53/100 (₱10,523,177.53)
representing Mindanao I’s unutilized input VAT for the four quarters of the taxable
year 2003.
SO ORDERED.30
Mindanao I filed a motion for partial reconsideration with motion for
Clarification31 on 11 November 2008. It claimed that the CTA Second Division
should not have allocated proportionately Mindanao I’s unutilized creditable input
taxes for the taxable year 2003, because the proportionate allocation of the
amount of creditable taxes in Section 112(A) applies only when the creditable input
taxes due cannot be directly and entirely attributed to any of the zero-rated or
effectively zero-rated sales. Mindanao I claims that its unreported collection is
directly attributable to its VAT zero-rated sales. The CTA Second Division denied
Mindanao I’s motion and maintained the proportionate allocation because there
was a portion of the gross receipts that was undeclared in Mindanao I’s gross
receipts.
The CIR also filed a motion for partial reconsideration32 on 11 November 2008. It
claimed that Mindanao I failed to exhaust administrative remedies before it filed its
 TAXATION - VALUE ADDED TAX
petition for review. The CTA Second Division denied the CIR’s motion, and cited
Atlas33 as the basis for ruling that it is more practical and reasonable to count the
two-year prescriptive period for filing a claim for refund or credit of input VAT on
zero-rated sales from the date of filing of the return and payment of the tax due.
The dispositive portion of the CTA Second Division’s 10 March 2009 Resolution
reads:
WHEREFORE, premises considered, the CIR’s Motion for Partial Reconsideration
and Mindanao I’s Motion for Partial Reconsideration with Motion for Clarification
are hereby DENIED for lack of merit.
SO ORDERED.34
The Ruling of the Court of Tax Appeals: En Banc
On 31 May 2010, the CTA En Banc rendered its Decision35 in CTA EB Case Nos.
476 and 483 and denied the petitions filed by the CIR and Mindanao I. The CTA
En Banc found no new matters which have not yet been considered and passed
upon by the CTA Second Division in its assailed decision and resolution.
The dispositive portion of the CTA En Banc’s 31 May 2010 Decision reads:
WHEREFORE, premises considered, the Petitions for Review are hereby
DISMISSED for lack of merit. Accordingly, the October 24, 2008 Decision and
March 10, 2009 Resolution of the CTA Former Second Division in CTA Case Nos.
7228, 7286, and 7318, entitled "Mindanao I Geothermal Partnership vs.
Commissioner of Internal Revenue" are hereby AFFIRMED in toto.
SO ORDERED.36
Both the CIR and Mindanao I filed Motions for Reconsideration of the CTA En
Banc’s 31 May 2010 Decision. In an Amended Decision promulgated on 24
November 2010, the CTA En Banc agreed with the CIR’s claim that Section 229 of
the NIRC of 1997 is inapplicable in light of this Court’s ruling in Mirant. The CTA
En Banc also ruled that the procedure prescribed under Section 112(D) now
112(C)37 of the 1997 Tax Code should be followed first before the CTA En Banc
can act on Mindanao I’s claim. The CTA En Banc reconsidered its 31 May 2010
Decision in light of this Court’s ruling in Commissioner of Internal Revenue v. Aichi
Forging Company of Asia, Inc. (Aichi).38
18
The pertinent portions of the CTA En Banc’s 24 November 2010 Amended
Decision read:
C.T.A. Case No. 7228:
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT
Returns for the First Quarter of 2003. Pursuant to Section 112(A) of the
NIRC of 1997, as amended, Mindanao I has two years from March 31,
2003 or until March 31, 2005 within which to file its administrative claim for
refund;
(2) On April 4, 2005, Mindanao I applied for an administrative claim for
refund of unutilized input VAT for the first quarter of taxable year 2003 with
the BIR, which is beyond the two-year prescriptive period mentioned
above.
C.T.A. Case No. 7286:
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT
Returns for the second quarter of 2003. Pursuant to
Section 112(A) of the NIRC of 1997, as amended, Mindanao I has two
years from June 30, 2003, within which to file its administrative claim for
refund for the second quarter of 2003, or until June 30, 2005;
(2) On April 4, 2005, Mindanao I applied an administrative claim for refund
of unutilized input VAT for the second quarter of taxable year 2003 with
the BIR, which is within the two-year prescriptive period, provided under
Section 112 (A) of the NIRC of 1997, as amended;
(3) The CIR has 120 days from April 4, 2005 (presumably the date
Mindanao I submitted the supporting documents together with the
application for refund) or until August 2, 2005, to decide the administrative
claim for refund;
(4) Within 30 days from the lapse of the 120-day period or from August 3,
2005 to September 1, 2005, Mindanao I should have elevated its claim for
refund to the CTA in Division;
(5) However, on July 7, 2005, Mindanao I filed its Petition for Review with
this Court, docketed as CTA Case No. 7286, even before the 120-day
 TAXATION - VALUE ADDED TAX

period for the CIR to decide the claim for refund had lapsed on August 2,
2005. The Petition for Review was, therefore, prematurely filed and there
was failure to exhaust administrative remedies;
xxxx
C.T.A. Case No. 7318:
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT
Returns for the third and fourth quarters of 2003. Pursuant to Section
112(A) of the NIRC of 1997, as amended, Mindanao I therefore, has two
years from September 30, 2003 and December 31, 2003, or until
September 30, 2005 and December 31, 2005, respectively, within which to
file its administrative claim for the third and fourth quarters of 2003;
Claim for the first quarter of 2003 had already prescribed for having been
filed beyond the two-year prescriptive period;
(2) C.T.A. Case No. 7286
Claim for the second quarter of 2003 should be dismissed for Mindanao I’s
failure to comply with a condition precedent when it failed to exhaust
administrative remedies by filing its Petition for Review even before the
lapse of the 120-day period for the CIR to decide the administrative claim;
(3) C.T.A. Case No. 7318
Petition for Review was filed beyond the 30-day prescribed period to
appeal to the CTA.

(2) On April 4, 2005, Mindanao I applied an administrative claim for refund xxxx
of unutilized input VAT for the third and fourth quarters of taxable year
2003 with the BIR, which is well within the two-year prescriptive period,
IN VIEW OF THE FOREGOING, the Commissioner of Internal Revenue’s Motion
provided under Section 112(A) of the NIRC of 1997, as amended;
for Reconsideration is hereby GRANTED; Mindanao I’s Motion for Partial
Reconsideration is hereby DENIED for lack of merit.
(3) From April 4, 2005, which is also presumably the date Mindanao I
submitted supporting documents, together with the aforesaid application
The May 31, 2010 Decision of this Court En Banc is hereby REVERSED.
for refund, the CIR has 120 days or until August 2, 2005, to decide the
claim;
Accordingly, the Petition for Review of the Commissioner of Internal Revenue in
CTA EB No. 476 is hereby GRANTED and the entire claim of Mindanao I
(4) Within thirty (30) days from the lapse of the 120-day period or from
Geothermal Partnership for the first, second, third and fourth quarters of 2003 is
August 3, 2005 until September 1, 2005 Mindanao I should have elevated
hereby DENIED.
its claim for refund to the CTA;
SO ORDERED.39
(5) However, Mindanao I filed its Petition for Review with the CTA in
Division only on September 9, 2005, which is 8 days beyond the 30-day
period to appeal to the CTA. The Issues

Evidently, the Petition for Review was filed way beyond the 30-day prescribed G.R. No. 193301
period. Thus, the Petition for Review should have been dismissed for being filed Mindanao II v. CIR
late. Mindanao II raised the following grounds in its Petition for Review:

In recapitulation: I. The Honorable Court of Tax Appeals erred in holding that the claim of
Mindanao II for the 1st and 2nd quarters of year 2003 has already
prescribed pursuant to the Mirant case.
(1) C.T.A. Case No. 7228

19
 TAXATION - VALUE ADDED TAX
A. The Atlas case and Mirant case have conflicting interpretations
of the law as to the reckoning date of the two year prescriptive
period for filing claims for VAT refund.
B. The Atlas case was not and cannot be superseded by the
Mirant case in light of Section 4(3), Article VIII of the 1987
Constitution.
C. The ruling of the Mirant case, which uses the close of the
taxable quarter when the sales were made as the reckoning date
in counting the two-year prescriptive period cannot be applied
retroactively in the case of Mindanao II.
II. The Honorable Court of Tax Appeals erred in interpreting Section 105 of
the 1997 Tax Code, as amended in that the sale of the fully depreciated
Nissan Patrol is a one-time transaction and is not incidental to the VAT
zero-rated operation of Mindanao II.
III. The Honorable Court of Tax Appeals erred in denying the amount
disallowed by the Independent Certified Public Accountant as Mindanao II
substantially complied with the requisites of the 1997 Tax Code, as
amended, for refund/tax credit.
A. The amount of ₱2,090.16 was brought about by the timing
difference in the recording of the foreign currency deposit
transaction.
B. The amount of ₱2,752.00 arose from the out-of-pocket
expenses reimbursed to SGV & Company which is substantially
suppoerted [sic] by an official receipt.
C. The amount of ₱487,355.93 was unapplied and/or was not
included in Mindanao II’s claim for refund or tax credit for the year
2004 subject matter of CTA Case No. 7507.
IV. The doctrine of strictissimi juris on tax exemptions should be relaxed in
the present case.40
G.R. No. 194637
Mindanao I v. CIR
20
Mindanao I raised the following grounds in its Petition for Review:
I. The administrative claim and judicial claim in CTA Case No. 7228 were
timely filed pursuant to the case of Atlas Consolidated Mining and
Development Corporation vs. Commissioner of Internal Revenue, which
was then the controlling ruling at the time of filing.
A. The recent ruling in the Commissioner of Internal Revenue vs.
Mirant Pagbilao Corporation, which uses the end of the taxable
quarter when the sales were made as the reckoning date in
counting the two-year prescriptive period, cannot be applied
retroactively in the case of Mindanao I.
B. The Atlas case promulgated by the Third Division of this
Honorable Court on June 8, 2007 was not and cannot be
superseded by the Mirant Pagbilao case promulgated by the
Second Division of this Honorable Court on September 12, 2008 in
light of the explicit provision of Section 4(3), Article VIII of the 1987
Constitution.
II. Likewise, the recent ruling of this Honorable Court in Commissioner of
Internal Revenue vs. Aichi Forging Company of Asia, Inc., cannot be
applied retroactively to Mindanao I in the present case.41
In a Resolution dated 14 December 2011,42 this Court resolved to consolidate G.R.
Nos. 193301 and 194637 to avoid conflicting rulings in related cases.
The Court’s Ruling
Determination of Prescriptive Period
G.R. Nos. 193301 and 194637 both raise the question of the determination of the
prescriptive period, or the interpretation of Section 112 of the 1997 Tax Code, in
light of our rulings in Atlas and Mirant.
Mindanao II’s unutilized input VAT tax credit for the first and second quarters of
2003, in the amounts of ₱3,160,984.69 and ₱1,562,085.33, respectively, are
covered by G.R. No. 193301, while Mindanao I’s unutilized input VAT tax credit for
the first, second, third, and fourth quarters of 2003, in the amounts of
₱3,893,566.14, ₱2,351,000.83, and ₱7,940,727.83, respectively, are covered by
G.R. No. 194637.
 TAXATION - VALUE ADDED TAX

Section 112 of the 1997 Tax Code CTA Period Close of Last day Actual date of Last day for Actual Date
Case No. covered by quarter for filing filing filing case of filing case
The pertinent sections of the 1997 Tax Code, the law applicable at the time of VAT Sales in when sales application application for with CTA45 with CTA
Mindanao II’s and Mindanao I’s administrative and judicial claims, provide: 2003 and were of tax tax refund/ (judicial
amount made refund/tax credit with the claim)
SEC. 112. Refunds or Tax Credits of Input Tax. -(A) Zero-rated or Effectively Zero- credit CIR
rated Sales. - Any VAT-registered person, whose sales are zero-rated or certificate (administrative
effectively zero-rated may, within two (2) years after the close of the taxable with the claim)44
quarter when the sales were made, apply for the issuance of a tax credit certificate CIR
or refund of creditable input tax due or paid attributable to such sales, except
7227 1st Quarter, 31 March 31 March 13 April 2005 12 September 22 April 2005
transitional input tax, to the extent that such input tax has not been applied against
₱3,160,984.69 2003 2005 2005
output tax: Provided, however, That in the case of zero-rated sales under Section
106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign 7287 2nd Quarter, 30 June 30 June 13 April 2005 12 September 7 July 2005
currency exchange proceeds thereof had been duly accounted for in accordance ₱1,562,085.33 2003 2005 2005
with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided,
further, That where the taxpayer is engaged in zero-rated or effectively zero-rated 7317 3rd and 4th 30 30 13 April 2005 12 September 9 September
sale and also in taxable or exempt sale of goods or properties or services, and the Quarters, September September 2005 2005
amount of creditable input tax due or paid cannot be directly and entirely attributed ₱3,521,129.50 2003 2005
to any one of the transactions, it shall be allocated proportionately on the basis of
31 2 January
the volume of sales.
December 2006
2003 (31
xxxx December
2005 being
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In a Saturday)
proper cases, the Commissioner shall grant a refund or issue the tax credit
certificate for creditable input taxes within one hundred twenty (120) days from the
date of submission of complete documents in support of the application filed in The relevant dates for G.R. No. 194637 (Minadanao I) are:
accordance with Subsections (A) and (B) hereof.
CTA Period Close of Last day Actual date of Last day for Actual Date
In case of full or partial denial of the claim for tax refund or tax credit, or the failure Case covered by quarter for filing filing filing case of filing case
on the part of the Commissioner to act on the application within the period No. VAT Sales in when sales application application for with CTA47 with CTA
prescribed above, the taxpayer affected may, within thirty (30) days from the 2003 and were of tax tax refund/ (judicial
receipt of the decision denying the claim or after the expiration of the one hundred amount made refund/tax credit with the claim)
twenty day-period, appeal the decision or the unacted claim with the Court of Tax credit CIR
Appeals. certificate (administrative
with the claim)46
x x x x 43 (Underscoring supplied) CIR
7227 1st Quarter, 31 March 31 March 4 April 2005 1 September 22 April 2005
The relevant dates for G.R. No. 193301 (Mindanao II) are: ₱3,893,566.14 2003 2005 2005
7287 2nd Quarter, 30 June 30 June 4 April 2005 1 September 7 July 2005

21
 TAXATION - VALUE ADDED TAX

₱2,351,000.83 2003 2005 2005 The charter of the CTA expressly provides that its jurisdiction is to review on
appeal "decisions of the Commissioner of Internal Revenue in cases involving x x x
7317 3rd 30 30 4 April 2005 1 September 9 September refunds of internal revenue taxes." When a taxpayer prematurely files a judicial
and 4th September September 2005 2005 claim for tax refund or credit with the CTA without waiting for the decision of the
Quarters, 2003 2005 Commissioner, there is no "decision" of the Commissioner to review and thus the
₱7,940,727.83 CTA as a court of special jurisdiction has no jurisdiction over the appeal. The
31 2 January charter of the CTA also expressly provides that if the Commissioner fails to decide
December 2006 within "a specific period" required by law, such "inaction shall be deemed a denial"
2003 (31 of the application for tax refund or credit. It is the Commissioner’s decision, or
December inaction "deemed a denial," that the taxpayer can take to the CTA for review.
2005 being Without a decision or an "inaction x x x deemed a denial" of the Commissioner, the
a Saturday) CTA has no jurisdiction over a petition for review.

When Mindanao II and Mindanao I filed their respective administrative and judicial
claims in 2005, neither Atlas nor Mirant has been promulgated. Atlas was
promulgated on 8 June 2007, while Mirant was promulgated on 12 September
2008. It is therefore misleading to state that Atlas was the controlling doctrine at
the time of filing of the claims. The 1997 Tax Code, which took effect on 1 January
1998, was the applicable law at the time of filing of the claims in issue. As this
Court explained in the recent consolidated cases of Commissioner of Internal
Revenue v. San Roque Power Corporation, Taganito Mining Corporation v.
Commissioner of Internal Revenue, and Philex Mining Corporation v.
Commissioner of Internal Revenue (San Roque):48
Clearly, San Roque failed to comply with the 120-day waiting period, the time
expressly given by law to the Commissioner to decide whether to grant or deny
San Roque’s application for tax refund or credit. It is indisputable that compliance
with the 120-day waiting period is mandatory and jurisdictional. The waiting period,
originally fixed at 60 days only, was part of the provisions of the first VAT law,
Executive Order No. 273, which took effect on 1 January 1988. The waiting period
was extended to 120 days effective 1 January 1998 under RA 8424 or the Tax
Reform Act of 1997. Thus, the waiting period has been in our statute books for
more than fifteen (15) years before San Roque filed its judicial claim.
Failure to comply with the 120-day waiting period violates a mandatory provision of
law. It violates the doctrine of exhaustion of administrative remedies and renders
the petition premature and thus without a cause of action, with the effect that the
CTA does not acquire jurisdiction over the taxpayer’s petition. Philippine
jurisprudence is replete with cases upholding and reiterating these doctrinal
principles.
San Roque’s failure to comply with the 120-day mandatory period renders its
petition for review with the CTA void. Article 5 of the Civil Code provides, "Acts
executed against provisions of mandatory or prohibitory laws shall be void, except
when the law itself authorizes their validity." San Roque’s void petition for review
cannot be legitimized by the CTA or this Court because Article 5 of the Civil Code
states that such void petition cannot be legitimized "except when the law itself
authorizes its validity." There is no law authorizing the petition’s validity.
It is hornbook doctrine that a person committing a void act contrary to a mandatory
provision of law cannot claim or acquire any right from his void act. A right cannot
spring in favor of a person from his own void or illegal act. This doctrine is
repeated in Article 2254 of the Civil Code, which states, "No vested or acquired
right can arise from acts or omissions which are against the law or which infringe
upon the rights of others." For violating a mandatory provision of law in filing its
petition with the CTA, San Roque cannot claim any right arising from such void
petition. Thus, San Roque’s petition with the CTA is a mere scrap of paper.
This Court cannot brush aside the grave issue of the mandatory and jurisdictional
nature of the 120-day period just because the Commissioner merely asserts that
the case was prematurely filed with the CTA and does not question the entitlement
of San Roque to the refund. The mere fact that a taxpayer has undisputed excess
input VAT, or that the tax was admittedly illegally, erroneously or excessively
collected from him, does not entitle him as a matter of right to a tax refund or
credit. Strict compliance with the mandatory and jurisdictional conditions
prescribed by law to claim such tax refund or credit is essential and necessary for
such claim to prosper. Well-settled is the rule that tax refunds or credits, just like
tax exemptions, are strictly construed against the taxpayer.

22
 TAXATION - VALUE ADDED TAX
The burden is on the taxpayer to show that he has strictly complied with the
conditions for the grant of the tax refund or credit.
This Court cannot disregard mandatory and jurisdictional conditions mandated by
law simply because the Commissioner chose not to contest the numerical
correctness of the claim for tax refund or credit of the taxpayer. Non-compliance
with mandatory periods, non-observance of prescriptive periods, and non-
adherence to exhaustion of administrative remedies bar a taxpayer’s claim for tax
refund or credit, whether or not the Commissioner questions the numerical
correctness of the claim of the taxpayer. This Court should not establish the
precedent that non-compliance with mandatory and jurisdictional conditions can be
excused if the claim is otherwise meritorious, particularly in claims for tax refunds
or credit. Such precedent will render meaningless compliance with mandatory and
jurisdictional requirements, for then every tax refund case will have to be decided
on the numerical correctness of the amounts claimed, regardless of non-
compliance with mandatory and jurisdictional conditions.
San Roque cannot also claim being misled, misguided or confused by the Atlas
doctrine because San Roque filed its petition for review with the CTA more than
four years before Atlas was promulgated. The Atlas doctrine did not exist at the
time San Roque failed to comply with the 120-day period. Thus, San Roque cannot
invoke the Atlas doctrine as an excuse for its failure to wait for the 120-day period
to lapse. In any event, the Atlas doctrine merely stated that the two-year
prescriptive period should be counted from the date of payment of the output VAT,
not from the close of the taxable quarter when the sales involving the input VAT
were made. The Atlas doctrine does not interpret, expressly or impliedly, the
120+30 day periods.49 (Emphases in the original; citations omitted)
Prescriptive Period for
the Filing of Administrative Claims
In determining whether the administrative claims of Mindanao I and Mindanao II for
2003 have prescribed, we see no need to rely on either Atlas or Mirant. Section
112(A) of the 1997 Tax Code is clear: "Any VAT-registered person, whose sales
are zero-rated or effectively zero-rated may, within two (2) years after the close of
the taxable quarter when the sales were made, apply for the issuance of a tax
credit certificate or refund of creditable input tax due or paid attributable to such
sales x x x."
We rule on Mindanao I and II’s administrative claims for the first, second, third, and
fourth quarters of 2003 as follows:
23
(1) The last day for filing an application for tax refund or credit with the CIR
for the first quarter of 2003 was on 31 March 2005. Mindanao II filed its
administrative claim before the CIR on 13 April 2005, while Mindanao I
filed its administrative claim before the CIR on 4 April 2005. Both claims
have prescribed, pursuant to Section 112(A) of the 1997 Tax Code.
(2) The last day for filing an application for tax refund or credit with the CIR
for the second quarter of 2003 was on 30 June 2005. Mindanao II filed its
administrative claim before the CIR on 13 April 2005, while Mindanao I
filed its administrative claim before the CIR on 4 April 2005. Both claims
were filed on time, pursuant to Section 112(A) of the 1997 Tax Code.
(3) The last day for filing an application for tax refund or credit with the CIR
for the third quarter of 2003 was on 30 September 2005. Mindanao II filed
its administrative claim before the CIR on 13 April 2005, while Mindanao I
filed its administrative claim before the CIR on 4 April 2005. Both claims
were filed on time, pursuant to Section 112(A) of the 1997 Tax Code.
(4) The last day for filing an application for tax refund or credit with the CIR
for the fourth quarter of 2003 was on 2 January 2006. Mindanao II filed its
administrative claim before the CIR on 13 April 2005, while Mindanao I
filed its administrative claim before the CIR on 4 April 2005. Both claims
were filed on time, pursuant to Section 112(A) of the 1997 Tax Code.
Prescriptive Period for
the Filing of Judicial Claims
In determining whether the claims for the second, third and fourth quarters of 2003
have been properly appealed, we still see no need to refer to either Atlas or Mirant,
or even to Section 229 of the 1997 Tax Code. The second paragraph of Section
112(C) of the 1997 Tax Code is clear: "In case of full or partial denial of the claim
for tax refund or tax credit, or the failure on the part of the Commissioner to act on
the application within the period prescribed above, the taxpayer affected may,
within thirty (30) days from the receipt of the decision denying the claim or after the
expiration of the one hundred twenty day-period, appeal the decision or the
unacted claim with the Court of Tax Appeals."
The mandatory and jurisdictional nature of the 120+30 day periods was explained
in San Roque:
 TAXATION - VALUE ADDED TAX
At the time San Roque filed its petition for review with the CTA, the 120+30 day
mandatory periods were already in the law. Section 112(C) expressly grants the
Commissioner 120 days within which to decide the taxpayer’s claim. The law is
clear, plain, and unequivocal: "x x x the Commissioner shall grant a refund or issue
the tax credit certificate for creditable input taxes within one hundred twenty (120)
days from the date of submission of complete documents." Following the verba
legis doctrine, this law must be applied exactly as worded since it is clear, plain,
and unequivocal. The taxpayer cannot simply file a petition with the CTA without
waiting for the Commissioner’s decision within the 120-day mandatory and
jurisdictional period. The CTA will have no jurisdiction because there will be no
"decision" or "deemed a denial" decision of the Commissioner for the CTA to
review. In San Roque’s case, it filed its petition with the CTA a mere 13 days after
it filed its administrative claim with the Commissioner. Indisputably, San Roque
knowingly violated the mandatory 120-day period, and it cannot blame anyone but
itself.
Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to the
CTA the decision or inaction of the Commissioner, thus:
x x x the taxpayer affected may, within thirty (30) days from the receipt of the
decision denying the claim or after the expiration of the one hundred twenty day-
period, appeal the decision or the unacted claim with the Court of Tax Appeals.
(Emphasis supplied)
This law is clear, plain, and unequivocal. Following the well-settled verba legis
doctrine, this law should be applied exactly as worded since it is clear, plain, and
unequivocal. As this law states, the taxpayer may, if he wishes, appeal the
decision of the Commissioner to the CTA within 30 days from receipt of the
Commissioner’s decision, or if the Commissioner does not act on the taxpayer’s
claim within the 120-day period, the taxpayer may appeal to the CTA within 30
days from the expiration of the 120-day period.
xxxx
There are three compelling reasons why the 30-day period need not necessarily
fall within the two-year prescriptive period, as long as the administrative claim is
filed within the two-year prescriptive period.
First, Section 112(A) clearly, plainly, and unequivocally provides that the taxpayer
"may, within two (2) years after the close of the taxable quarter when the sales
were made, apply for the issuance of a tax credit certificate or refund of the
creditable input tax due or paid to such sales." In short, the law states that the
24
taxpayer may apply with the Commissioner for a refund or credit "within two (2)
years," which means at anytime within two years. Thus, the application for refund
or credit may be filed by the taxpayer with the Commissioner on the last day of the
two-year prescriptive period and it will still strictly comply with the law. The two-
year prescriptive period is a grace period in favor of the taxpayer and he can avail
of the full period before his right to apply for a tax refund or credit is barred by
prescription.
Second, Section 112(C) provides that the Commissioner shall decide the
application for refund or credit "within one hundred twenty (120) days from the date
of submission of complete documents in support of the application filed in
accordance with Subsection (A)." The reference in Section 112(C) of the
submission of documents "in support of the application filed in accordance with
Subsection A" means that the application in Section 112(A) is the administrative
claim that the Commissioner must decide within the 120-day period. In short, the
two-year prescriptive period in Section 112(A) refers to the period within which the
taxpayer can file an administrative claim for tax refund or credit. Stated otherwise,
the two-year prescriptive period does not refer to the filing of the judicial claim with
the CTA but to the filing of the administrative claim with the Commissioner. As held
in Aichi, the "phrase ‘within two years x x x apply for the issuance of a tax credit or
refund’ refers to applications for refund/credit with the CIR and not to appeals
made to the CTA."
Third, if the 30-day period, or any part of it, is required to fall within the two-year
prescriptive period (equivalent to 730 days), then the taxpayer must file his
administrative claim for refund or credit within the first 610 days of the two-year
prescriptive period. Otherwise, the filing of the administrative claim beyond the first
610 days will result in the appeal to the CTA being filed beyond the two-year
prescriptive period. Thus, if the taxpayer files his administrative claim on the 611th
day, the Commissioner, with his 120-day period, will have until the 731st day to
decide the claim. If the Commissioner decides only on the 731st day, or does not
decide at all, the taxpayer can no longer file his judicial claim with the CTA
because the two-year prescriptive period (equivalent to 730 days) has lapsed. The
30-day period granted by law to the taxpayer to file an appeal before the CTA
becomes utterly useless, even if the taxpayer complied with the law by filing his
administrative claim within the two-year prescriptive period.
The theory that the 30-day period must fall within the two-year prescriptive period
adds a condition that is not found in the law. It results in truncating 120 days from
the 730 days that the law grants the taxpayer for filing his administrative claim with
the Commissioner. This Court cannot interpret a law to defeat, wholly or even
 TAXATION - VALUE ADDED TAX
partly, a remedy that the law expressly grants in clear, plain, and unequivocal
language.
Section 112(A) and (C) must be interpreted according to its clear, plain, and
unequivocal language. The taxpayer can file his administrative claim for refund or
credit at anytime within the two-year prescriptive period. If he files his claim on the
last day of the two-year prescriptive
period, his claim is still filed on time. The Commissioner will have 120 days from
such filing to decide the claim. If the Commissioner decides the claim on the 120th
day, or does not decide it on that day, the taxpayer still has 30 days to file his
judicial claim with the CTA. This is not only the plain meaning but also the only
logical interpretation of Section 112(A) and (C).50 (Emphases in the original;
citations omitted)
In San Roque, this Court ruled that "all taxpayers can rely on BIR Ruling No. DA-
489-03 from the time of its issuance on 10 December 2003 up to its reversal in
Aichi on 6 October 2010, where this Court held that the 120+30 day periods are
mandatory and jurisdictional."51 We shall discuss later the effect of San Roque’s
recognition of BIR Ruling No. DA-489-03 on claims filed between 10 December
2003 and 6 October 2010. Mindanao I and II filed their claims within this period.
We rule on Mindanao I and II’s judicial claims for the second, third, and fourth
quarters of 2003 as follows:
G.R. No. 193301
Mindanao II v. CIR
Mindanao II filed its administrative claims for the second, third, and fourth quarters
of 2003 on 13 April 2005. Counting 120 days after filing of the administrative claim
with the CIR (11 August 2005) and 30 days after the CIR’s denial by inaction, the
last day for filing a judicial claim with the CTA for the second, third, and fourth
quarters of 2003 was on 12 September 2005. However, the judicial claim cannot
be filed earlier than 11 August 2005, which is the expiration of the 120-day period
for the Commissioner to act on the claim.
(1) Mindanao II filed its judicial claim for the second quarter of 2003 before
the CTA on 7 July 2005, before the expiration of the 120-day period.
Pursuant to Section 112(C) of the 1997 Tax Code, Mindanao II’s judicial
claim for the second quarter of 2003 was prematurely filed.
25
However, pursuant to San Roque’s recognition of the effect of BIR Ruling
No. DA-489-03, we rule that Mindanao II’s judicial claim for the second
quarter of 2003 qualifies under the exception to the strict application of the
120+30 day periods.
(2) Mindanao II filed its judicial claim for the third quarter of 2003 before
the CTA on 9 September 2005. Mindanao II’s judicial claim for the third
quarter of 2003 was thus filed on time, pursuant to Section 112(C) of the
1997 Tax Code.
(3) Mindanao II filed its judicial claim for the fourth quarter of 2003 before
the CTA on 9 September 2005. Mindanao II’s judicial claim for the fourth
quarter of 2003 was thus filed on time, pursuant to Section 112(C) of the
1997 Tax Code.
G.R. No. 194637
Mindanao I v. CIR
Mindanao I filed its administrative claims for the second, third, and fourth quarters
of 2003 on 4 April 2005. Counting 120 days after filing of the administrative claim
with the CIR (2 August 2005) and 30 days after the CIR’s denial by inaction,52 the
last day for filing a judicial claim with the CTA for the second, third, and fourth
quarters of 2003 was on 1 September 2005. However, the judicial claim cannot be
filed earlier than 2 August 2005, which is the expiration of the 120-day period for
the Commissioner to act on the claim.
(1) Mindanao I filed its judicial claim for the second quarter of 2003 before
the CTA on 7 July 2005, before the expiration of the 120-day period.
Pursuant to Section 112(C) of the 1997 Tax Code, Mindanao I’s judicial
claim for the second quarter of 2003 was prematurely filed. However,
pursuant to San Roque’s recognition of the effect of BIR Ruling No. DA-
489-03, we rule that Mindanao I’s judicial claim for the second quarter of
2003 qualifies under the exception to the strict application of the 120+30
day periods.
(2) Mindanao I filed its judicial claim for the third quarter of 2003 before the
CTA on 9 September 2005. Mindanao I’s judicial claim for the third quarter
of 2003 was thus filed after the prescriptive period, pursuant to Section
112(C) of the 1997 Tax Code.
 TAXATION - VALUE ADDED TAX

(3) Mindanao I filed its judicial claim for the fourth quarter of 2003 before BIR Ruling No. DA-489-03 is a general interpretative rule because it was a
the CTA on 9 September 2005. Mindanao I’s judicial claim for the fourth response to a query made, not by a particular taxpayer, but by a government
quarter of 2003 was thus filed after the prescriptive period, pursuant to agency tasked with processing tax refunds and credits, that is, the One Stop Shop
Section 112(C) of the 1997 Tax Code. Inter-Agency Tax Credit and Drawback Center of the Department of Finance. This
government agency is also the addressee, or the entity responded to, in BIR
San Roque: Recognition of BIR Ruling No. DA-489-03 Ruling No. DA-489-03. Thus, while this government agency mentions in its query
to the Commissioner the administrative claim of Lazi Bay Resources Development,
Inc., the agency was in fact asking the Commissioner what to do in cases like the
In the consolidated cases of San Roque, the Court En Banc 53 examined and ruled
tax claim of Lazi Bay Resources Development, Inc., where the taxpayer did not
on the different claims for tax refund or credit of three different companies. In San
wait for the lapse of the 120-day period.
Roque, we reiterated that "following the verba legis doctrine, Section 112(C) must
be applied exactly as worded since it is clear, plain, and unequivocal. The taxpayer
cannot simply file a petition with the CTA without waiting for the Commissioner’s Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all
decision within the 120-day mandatory and jurisdictional period. The CTA will have taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its issuance on
no jurisdiction because there will be no ‘decision’ or ‘deemed a denial decision’ of 10 December 2003 up to its reversal by this Court in Aichi on 6 October 2010,
the Commissioner for the CTA to review." where this Court held that the 120+30 day periods are mandatory and
jurisdictional.
Notwithstanding a strict construction of any claim for tax exemption or refund, the
Court in San Roque recognized that BIR Ruling No. DA-489-03 constitutes xxxx
equitable estoppel54 in favor of taxpayers. BIR Ruling No. DA-489-03 expressly
states that the "taxpayer-claimant need not wait for the lapse of the 120-day period Taganito, however, filed its judicial claim with the CTA on 14 February 2007, after
before it could seek judicial relief with the CTA by way of Petition for Review." This the issuance of BIR Ruling No. DA-489-03 on 10 December 2003. Truly, Taganito
Court discussed BIR Ruling No. DA-489-03 and its effect on taxpayers, thus: can claim that in filing its judicial claim prematurely without waiting for the 120-day
period to expire, it was misled by BIR Ruling No. DA-489-03. Thus, Taganito can
Taxpayers should not be prejudiced by an erroneous interpretation by the claim the benefit of BIR Ruling No. DA-489-03, which shields the filing of its judicial
Commissioner, particularly on a difficult question of law. The abandonment of the claim from the vice of prematurity. (Emphasis in the original)
Atlas doctrine by Mirant and Aichi is proof that the reckoning of the prescriptive
periods for input VAT tax refund or credit is a difficult question of law. The Summary of Administrative and Judicial Claims
abandonment of the Atlas doctrine did not result in Atlas, or other taxpayers
similarly situated, being made to return the tax refund or credit they received or G.R. No. 193301
could have received under Atlas prior to its abandonment. This Court is applying Mindanao II v. CIR
Mirant and Aichi prospectively. Absent fraud, bad faith or misrepresentation, the
reversal by this Court of a general interpretative rule issued by the Commissioner,
like the reversal of a specific BIR ruling under Section 246, should also apply Administrative Judicial Claim Action on Claim
prospectively. x x x. Claim
1st Quarter, 2003 Filed late -- Deny, pursuant to
xxxx Section 112(A) of the
1997 Tax Code
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general
interpretative rule applicable to all taxpayers or a specific ruling applicable only to a2nd Quarter, 2003 Filed on time Prematurely filed Grant, pursuant to
particular taxpayer. BIR Ruling No. DA-489-03
3rd Quarter, 2003 Filed on time Filed on time Grant, pursuant to

26
 TAXATION - VALUE ADDED TAX

Section 112(C) of the administrative claim if the claim is filed in the later part of the two-year
1997 Tax Code period. If the 120-day period expires without any decision from the CIR,
then the administrative claim may be considered to be denied by inaction.
4th Quarter, 2003 Filed on time Filed on time Grant, pursuant to
Section 112(C) of the (3) A judicial claim must be filed with the CTA within 30 days from the
1997 Tax Code receipt of the CIR’s decision denying the administrative claim or from the
expiration of the 120-day period without any action from the CIR.
G.R. No. 194637
Mindanao I v. CIR (4) All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from the
time of its issuance on 10 December 2003 up to its reversal by this Court
in Aichi on 6 October 2010, as an exception to the mandatory and
Administrative Judicial Claim Action on Claim jurisdictional 120+30 day periods.
Claim
1st Quarter, 2003 Filed late -- Deny, pursuant to "Incidental" Transaction
Section 112(A) of the
1997 Tax Code Mindanao II asserts that the sale of a fully depreciated Nissan Patrol is not an
incidental transaction in the course of its business; hence, it is an isolated
2nd Quarter, 2003 Filed on time Prematurely filed Grant, pursuant to
transaction that should not have been subject to 10% VAT.
BIR Ruling No. DA-489-03
3rd Quarter, 2003 Filed on time Filed late Grant, pursuant to Section 105 of the 1997 Tax Code does not support Mindanao II’s position:
Section 112(C) of the
1997 Tax Code SEC. 105. Persons Liable. - Any person who, in the course of trade or business,
4th Quarter, 2003 Filed on time Filed late Grant, pursuant to sells barters, exchanges, leases goods or properties, renders services, and any
Section 112(C) of the person who imports goods shall be subject to the value-added tax (VAT) imposed
1997 Tax Code in Sections 106 to 108 of this Code.

Summary of Rules on Prescriptive Periods Involving VAT
We summarize the rules on the determination of the prescriptive period for filing a
tax refund or credit of unutilized input VAT as provided in Section 112 of the 1997
Tax Code, as follows:
(1) An administrative claim must be filed with the CIR within two years after
the close of the taxable quarter when the zero-rated or effectively zero-
rated sales were made.
(2) The CIR has 120 days from the date of submission of complete
documents in support of the administrative claim within which to decide
whether to grant a refund or issue a tax credit certificate. The 120-day
period may extend beyond the two-year period from the filing of the
27
The value-added tax is an indirect tax and the amount of tax may be shifted or
passed on to the buyer, transferee or lessee of the goods, properties or services.
This rule shall likewise apply to existing contracts of sale or lease of goods,
properties or services at the time of the effectivity of Republic Act No. 7716.
The phrase "in the course of trade or business" means the regular conduct or
pursuit of a commercial or an economic activity, including transactions incidental
thereto, by any person regardless of whether or not the person engaged therein is
a nonstock, nonprofit private organization (irrespective of the disposition of its net
income and whether or not it sells exclusively to members or their guests), or
government entity.
The rule of regularity, to the contrary notwithstanding, services as defined in this
Code rendered in the Philippines by nonresident foreign persons shall be
 TAXATION - VALUE ADDED TAX
considered as being rendered in the course of trade or business. (Emphasis
supplied)
Mindanao II relies on Commissioner of Internal Revenue v. Magsaysay Lines, Inc.
(Magsaysay)55 and Imperial v. Collector of Internal Revenue (Imperial)56 to justify
its position. Magsaysay, decided under the NIRC of 1986, involved the sale of
vessels of the National Development Company (NDC) to Magsaysay Lines, Inc.
We ruled that the sale of vessels was not in the course of NDC’s trade or business
as it was involuntary and made pursuant to the Government’s policy for
privatization. Magsaysay, in quoting from the CTA’s decision, imputed upon
Imperial the definition of "carrying on business." Imperial, however, is an
unreported case that merely stated that "‘to engage’ is to embark in a business or
to employ oneself therein."57
Mindanao II’s sale of the Nissan Patrol is said to be an isolated
transaction.1âwphi1 However, it does not follow that an isolated transaction cannot
be an incidental transaction for purposes of VAT liability. Indeed, a reading of
Section 105 of the 1997 Tax Code would show that a transaction "in the course of
trade or business" includes "transactions incidental thereto."
Mindanao II’s business is to convert the steam supplied to it by PNOC-EDC into
electricity and to deliver the electricity to NPC. In the course of its business,
Mindanao II bought and eventually sold a Nissan Patrol. Prior to the sale, the
Nissan Patrol was part of Mindanao II’s property, plant, and equipment. Therefore,
the sale of the Nissan Patrol is an incidental transaction made in the course of
Mindanao II’s business which should be liable for VAT.
Substantiation Requirements
Mindanao II claims that the CTA’s disallowance of a total amount of ₱492,198.09
is improper as it has substantially complied with the substantiation requirements of
Section 113(A)58 in relation to Section 23759 of the 1997 Tax Code, as
implemented by Section 4.104-1, 4.104-5 and 4.108-1 of Revenue Regulation No.
7-95.60
We are constrained to state that Mindanao II’s compliance with the substantiation
requirements is a finding of fact. The CTA En Banc evaluated the records of the
case and found that the transactions in question are purchases for services and
that Mindanao II failed to comply with the substantiation requirements. We affirm
the CTA En Banc’s finding of fact, which in turn affirmed the finding of the CTA
First Division. We see no reason to overturn their findings.
28
WHEREFORE, we PARTIALLY GRANT the petitions. The Decision of the Court of
Tax Appeals En Bane in CT A EB No. 513 promulgated on 10 March 2010, as well
as the Resolution promulgated on 28 July 2010, and the Decision of the Court of
Tax Appeals En Bane in CTA EB Nos. 476 and 483 promulgated on 31 May 2010,
as well as the Amended Decision promulgated on 24 November 2010, are
AFFIRMED with MODIFICATION.
For G.R. No. 193301, the claim of Mindanao II Geothermal Partnership for the first
quarter of 2003 is DENIED while its claims for the second, third, and fourth
quarters of 2003 are GRANTED. For G.R. No. 19463 7, the claims of Mindanao I
Geothermal Partnership for the first, third, and fourth quarters of 2003 are DENIED
while its claim for the second quarter of 2003 is GRANTED.
SO ORDERED.
August 8, 2017
G.R. No. 198146
POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT
CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent
DECISION
CARPIO, J.:
The Case
This petition for review1 assails the 27 September 2010 Decision2 and the 3
August 2011 Resolution3 of the Court of Appeals in CA-G.R. SP No. 108156. The
Court of Appeals nullified the Decisions dated 13 March 2008 and 14 January
2009 of the Secretary of Justice in OSJ Case No. 2007- 3 for lack of jurisdiction.
The Facts
Petitioner Power Sector Assets and Liabilities Management Corporation (PSALM)
is a government-owned and controlled corporation created under Republic Act No.
9136 (RA 9136), also known as the Electric Power Industry Reform Act of 2001
 TAXATION - VALUE ADDED TAX
(EPIRA).4 Section 50 of RA 9136 states that the principal purpose of PSALM is to
manage the orderly sale, disposition, and privatization of the National Power
Corporation (NPC) generation assets, real estate and other disposable assets, and
Independent Power Producer (IPP) contracts with the objective of liquidating all
NPC financial obligations and stranded contract costs in an optimal manner.
PSALM conducted public biddings for the privatization of the Pantabangan-
Masiway Hydroelectric Power Plant (Pantabangan-Masiway Plant) and Magat
Hydroelectric Power Plant (Magat Plant) on 8 September 2006 and 14 December
2006, respectively. First Gen Hydropower Corporation with its $129 Million bid and
SN Aboitiz Power Corporation with its $530 Million bid were the winning bidders for
the PantabanganMasiway Plant and Magat Plant, respectively.
On 28 August 2007, the NPC received a letter5 dated 14 August 2007 from the
Bureau of Internal Revenue (BIR) demanding immediate payment of
₱3,813,080,4726 deficiency value-added tax (VAT) for the sale of the
Pantabangan-Masiway Plant and Magat Plant. The NPC indorsed BIR's demand
letter to PSALM.
On 30 August 2007, the BIR, NPC, and PSALM executed a Memorandum of
Agreement (MOA),7 wherein they agreed that:
A) NPC/PSALM shall remit under protest to the BIR the amount of Php
3,813,080,472.00, representing basic VAT as shown in the BIR letter dated August
14, 2007, upon execution of this Memorandum of Agreement (MOA).
B) This remittance shall be without prejudice to the outcome of the resolution of the
Issues before the appropriate courts or body.
C) NPC/PSALM and BIR mutually undertake to seek final resolution of the Issues
by the appropriate courts or body.
D) BIR shall waive any and all interests and surcharges on the aforesaid BIR letter,
except when the case is elevated by the BIR before an appellate court.
E) Nothing contained in this MOA shall be claimed or construed to be an
admission against interest as to any party or evidence of any liability or
wrongdoing whatsoever nor an abandonment of any position taken by
NPC/PSALM in connection with the Issues.
29
F) Each Party to this MOA hereto expressly represents that the authorized
signatory hereto has the legal authority to bind [the] party to all the terms of this
MOA.
G) Any resolution by the appropriate courts or body in favor of the BIR, other than
a decision by the Supreme Court, shall not constitute as precedent and sufficient
legal basis as to the taxability of NPC/PSALM's transactions pursuant to the
privatization of NPC's assets as mandated by the EPIRA Law.
H) Any resolution in favor of NPC/PSALM by any appropriate court or body shall
be immediately executory without necessity of notice or demand from
NPC/PSALM. A ruling from the Department of Justice (DOJ) that is favorable to
NPC/PSALM shall be tantamount to the filing of an application for refund (in
cash)/tax credit certificate (TCC), at the option of NPC/PSALM. BIR undertakes to
immediately process and approve the application, and release the tax refund/TCC
within fifteen (15) working days from issuance of the DOJ ruling that is favorable to
NPC/PSALM.
I) Either party has the right to appeal any adverse decision against it before any
appropriate court or body.
J) In the event of failure by the BIR to fulfill the undertaking referred to in (H)
above, NPC/PSALM shall assign to DOF its right to the refund of the subject
remittance, and the DOF shall offset such amount against any liability of
NPC/PSALM to the National Government pursuant to the objectives of the EPIRA
on the application of the privatization proceeds.8
In compliance with the MOA, PSALM remitted under protest to the BIR the amount
of ₱3, 813, 080, 472, representing the total basic VAT due.
On 21 September 2007, PSALM filed with the Department of Justice (DOJ) a
petition for the adjudication of the dispute with the BIR to resolve the issue of
whether the sale of the power plants should be subject to VAT. The case was
docketed as OSJ Case No. 2007-3.
On 13 March 2008, the DOJ ruled in favor of PSALM, thus:
In cases involving purely question[s] of law, such as in the instant case, between
and among the government-owned and controlled corporation and government
bureau, the issue is best settled in this Department. In the final analysis, there is
but one party in interest, the Government itself in this litigation.
 TAXATION - VALUE ADDED TAX
xxxx
The instant petition is an original petition involving only [a] question of law on
whether or not the sale of the Pantabangan-Masiway and Magat Power Plants to
private entities under the mandate of the EPIRA is subject to VAT. It is to be
stressed that this is not an appeal from the decision of the Commissioner of
Internal Revenue involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, or other matters arising under the National Internal
Revenue Code or other law.
xxxx
Moreover, it must be noted that respondent already invoked this Office's
jurisdiction over it by praying in respondent's Motion for Extension of Time to File
Comment (On Petitioner's Petition dated 21 September 2007) and later, Omnibus
Motion To Lift Order dated 22 October 2007 and To Admit Attached Comment.
The Court has held that the filing of motions seeking affirmative relief, such as, to
admit answer, for additional time to answer, for reconsideration of a default
judgment, and to lift order of default with motion for reconsideration, are
considered voluntary submission to the jurisdiction of the court. Having sought this
Office to grant extension of time to file answer or comment to the instant petition,
thereby submitting to the jurisdiction of this Court [sic], respondent cannot now
repudiate the very same authority it sought.
xxxx
When petitioner was created under Section 49 of R.A. No. 9136, for the principal
purpose to manage the orderly sale, disposition, and privatization of NPC
generation assets, real estate and other disposable assets, IPP contracts with the
objective of liquidating all NPC financial obligations and stranded contract costs in
an optimal manner, there was, by operation of law, the transfer of ownership of
NPC assets. Such transfer of ownership was not carried out in the ordinary course
of transfer which must be accorded with the required elements present for a valid
transfer, but in this case, in accordance with the mandate of the law, that
is, EPIRA. Thus, respondent cannot assert that it was NPC who was the actual
seller of the Pantabangan-Masiway :md Magat Power Plants, because at the time
of selling the aforesaid power plants, the owner then was already the petitioner
and not the NPC. Consequently, petitioner cannot also be considered a successor-
in-· interest of NPC.
Since it was petitioner who sold the Pantabangan-Masiway and Magat Power
Plants and not the NPC, through a competitive and public bidding to the private
30
entities, Section 24(A) of R.A. No. 9337 cannot be applied to the instant case.
Neither the grant of exemption and revocation of the tax exemption accorded to
the NPC, be also affected to petitioner.
xxxx
Clearly, the disposition of Pantabangan-Masiway and Magat Power Plants was not
in the regular conduct or pursuit of a commercial or an economic activity, but was
effected by the mandate of the EPIRA upon petitioner to direct the orderly sale,
disposition, and privatization of NPC generation assets, real estate and other
disposable assets, and IPP contracts, and afterward, to liquidate the outstanding
obligations of the NPC.
xxxx
Verily, to subject the sale of generation assets in accordance with a privatization
plan submitted to and approved by the President, which is a one time sale, to VAT
would run counter to the purpose of obtaining optimal proceeds since potential
bidders would necessarily have to take into account such extra cost of VAT.
WHEREFORE, premises considered, the imposition by respondent Bureau of
lnternal Revenue of deficiency Value-Added Tax in the amount of
₱3,813,080,472.00 on the privatization sale of the Pantabangan Masiway and
Magat Power Plants, done in accordance with the mandate of the Electric Power
Industry Reform Act of 2001, is hereby declared NULL and VOID. Respondent is
directed to refund the amount of ₱3,813,080,472.00 remitted under protest by
petitioner to respondent.9
The BIR moved for reconsideration, alleging that the DOJ had no jurisdiction since
the dispute involved tax laws administered by the BIR and therefore within the
jurisdiction of the Court of Tax Appeals (CTA). Furthermore, the BIR stated that the
sale of the subject power plants by PSALM to private entities is in the course of
trade or business, as contemplated under Section 105 of the National Internal
Revenue Code (NIRC) of 1997, which covers incidental transactions. Thus, the
sale is subject to VAT. On 14 January 2009, the DOJ denied BIR's Motion for
Reconsideration.10
On 7 April 2009,11 the BIR Commissioner (Commissioner of Internal Revenue) filed
with the Court of Appeals a petition for certiorari, seeking to set aside the DOJ's
decision for lack of jurisdiction. In a Resolution dated 23 April 2009, the Court of
Appeals dismissed the petition for failure to attach the relevant pleadings and
 TAXATION - VALUE ADDED TAX

documents.12 Upon motion for reconsideration, the Court of Appeals reinstated the No costs.
petition in its Resolution dated 10 July 2009.13
SO ORDERED.20
The Ruling of the Court of Appeals
PSALM moved for reconsideration, which the Court of Appeals denied in its 3
The Court of Appeals held that the petition filed by PSALM with the DOJ was really August 2011 Resolution. Hence, this petition.
a protest against the assessment of deficiency VAT, which under Section 204 14 of
the NIRC of 1997 is within the authority of the Commissioner of Internal Revenue The Issues
(CIR) to resolve. In fact, PSALM's objective in filing the petition was to recover the
₱3,813,080,472 VAT which was allegedly assessed erroneously and which Petitioner PSALM raises the following issues:
PSALM paid under protest to the BIR.
I. DID THE COURT OF APPEALS MISAPPLY THE LAW IN GIVING DUE
Quoting paragraph H15 of the MOA among the BIR, NPC, and PSALM, the Court of
COURSE TO THE PETITION FOR CERTIORARI IN CA-G.R. SP NO. 108156?
Appeals stated that the parties in effect agreed to consider a DOJ ruling favorable
to PSALM as the latter's application for refund.
II. DID THE SECRETARY OF JUSTICE ACT IN ACCORDANCE WITH THE LAW
IN ASSUMING JURISDICTION AND SETTLING THE DISPUTE BY AND
Citing Section 416 of the NIRC of 1997, as amended by Section 3 of Republic Act
BETWEEN THE BIR AND PSALM?
No. 8424 (RA 8424)17 and Section 718 of Republic Act No. 9282 (RA 9282),19 the
Court of Appeals ruled that the CIR is the proper body to resolve cases involving
disputed assessments, refunds of internal revenue taxes, fees or other charges, III. DID THE SECRETARY OF JUSTICE ACT IN ACCORDANCE WITH THE LAW
penalties imposed in relation thereto, or other matters arising under the NIRC or AND JURISPRUDENCE IN RENDERING JUDGMENT THAT THERE SHOULD
other laws administered by the BIR. The Court of Appeals stressed that jurisdiction BE·NO VAT ON THE PRIVATIZATION, SALE OR DISPOSAL OF GENERATION
is conferred by law or by the Constitution; the parties, such as in this case, cannot ASSETS?
agree or stipulate on it by conferring jurisdiction in a body that has none.
Jurisdiction over the person can be waived but not the jurisdiction over the subject IV. DOES PUBLIC RESPONDENT DESERVE THE RELIEF OF CERTIORARI?21
matter which is neither subject to agreement nor conferred by consent of the
parties. The Court of Appeals held that the DOJ Secretary erred in ruling that the The Ruling of the Court
CIR is estopped from assailing the jurisdiction of the DOJ after having agreed to
submit to its jurisdiction. As a general rule, estoppel does not confer jurisdiction We find the petition meritorious.
over a cause of action to a tribunal where none, by law, exists.
I. Whether the Secretary of Justice has jurisdiction over the case.
In conclusion, the Court of Appeals found that the DOJ Secretary gravely abused
his discretion amounting to lack of jurisdiction when he assumed jurisdiction over
The primary issue in this case is whether the DOJ Secretary has jurisdiction over
OSJ Case No. 2007-3. The dispositive portion of the Court of Appeals' 27
OSJ Case No. 2007-3 which involves the resolution of whether the sale of the
September 2010 Decision reads:
Pantabangan-Masiway Plant and Magat Plant is subject to VAT.
WHEREFORE, premises considered, we hereby GRANT the petition. Accordingly:
We agree with the Court of Appeals that jurisdiction over the subject matter is
(1) the [D]ecision dated March 13, 2008, and the Decision dated January 14, 2009
vested by the Constitution or by law, and not by the parties to an
both issued by the public respondent Secretary of Justice in [OSJ Case No.] 2007-
action.22 Jurisdiction cannot be conferred by consent or acquiescence of the
3 are declared NULL and VOID for having been issued without jurisdiction.
parties23 or by erroneous belief of the court, quasi-judicial office or government
agency that it exists.
31
 TAXATION - VALUE ADDED TAX
However, contrary to the ruling of the Court of Appeals, we find that the DOJ is
vested by law with jurisdiction over this case. This case involves a dispute between
PSALM and NPC, which are both wholly government owned corporations, and the
BIR, a government office, over the imposition of VAT on the sale of the two power
plants. There is no question that original jurisdiction is with the CIR, who issues
the preliminary and the final tax assessments. However, if the government entity
disputes the tax assessment, the dispute is already between the BIR (represented
by the CIR) and another government entity, in this case, the petitioner
PSALM. Under Presidential Decree No. 24224 (PD 242), all disputes and
claims solely between government agencies and offices, including
government-owned or controlled· corporations, shall be administratively
settled or adjudicated by the Secretary of Justice, the Solicitor General, or
the Government Corporate Counsel, depending on the issues and
government agencies involved. As regards cases involving only questions of
law, it is the Secretary of Justice who has jurisdiction. Sections 1, 2, and 3 of PD
242 read:
Section 1. Provisions of law to the contrary notwithstanding, all disputes,
claims and controversies solely between or among the departments,
bureaus, offices, agencies and instrumentalities of the National Government,
including constitutional offices or agencies, arising from the interpretation
and application of statutes, contracts or agreements, shall henceforth be
administratively settled or adjudicated as provided hereinafter: Provided,
That, this shall not apply to cases already pending in court at the time of the
effectivity of this decree.
Section 2. In all cases involving only questions of law, the same shall be
submitted to and settled or adjudicated by the Secretary of Justice, as
Attorney General and ex officio adviser of all government owned or controlled
corporations and entities, in consonance with Section 83 of the Revised
Administrative Code. His ruling or determination of the question in each case
shall be conclusive and binding upon all the parties concerned.
Section 3. Cases involving mixed questions of law and of fact or only factual
issues shall be submitted to and settled or adjudicated by:
(a) The Solicitor General, with respect to disputes or claims [or]
controversies between or among the departments, bureaus, offices and
other agencies of the National Government;
(b) The Government Corporate Counsel, with respect to disputes or claims
or controversies between or among the government-owned or controlled
32
corporations or entities being served by the Office of the Government
Corporate Counsel; and
(c) The Secretary of Justice, with respect to all other disputes or claims or
controversies which do not fall under the categories mentioned in
paragraphs (a) and (b). (Emphasis supplied)
The use of the word "shall" in a statute connotes a mandatory order or an
imperative obligation.25 Its use rendered the provisions mandatory and not merely
permissive, and unless PD 242 is declared unconstitutional, its provisions must be
followed. The use of the word "shall" means that administrative settlement or
adjudication of disputes and claims between government agencies and offices,
including government-owned or controlled corporations, is not merely permissive
but mandatory and imperative. Thus, under PD 242, it is mandatory that disputes
and claims "solely" between government agencies and offices, including
government-owned or controlled corporations, involving only questions of law, be
submitted to and settled or adjudicated by the Secretary of Justice.
The law is clear and covers "all disputes, claims and controversies
solely between or among the departments, bureaus, offices, agencies and
instrumentalities of the National Government, including constitutional
offices or agencies arising from the interpretation and application of
statutes, contracts or agreements." When the law says "all disputes, claims and
controversies solely" among government agencies, the law means all, without
exception. Only those cases already pending in court at the time of the effectivity
of PD 242 are not covered by the law.
The purpose of PD 242 is to provide for a speedy and efficient administrative
settlement or adjudication of disputes between government offices or
agencies under the Executive branch, as well as to filter cases to lessen the
clogged dockets of the courts. As explained by the Court in Philippine Veterans
Investment Development Corp. (PHIVIDEC) v. Judge Velez:26
Contrary to the opinion of the lower court, P.D. No. 242 is not unconstitutional. It
does not diminish the jurisdiction of [the] courts but only prescribes an
administrative procedure for the settlement of certain types of disputes between or
among departments, bureaus, offices, agencies, and instrumentalities of the
National Government, including government-owned or controlled corporations, so
that they need not always repair to the courts for the settlement of controversies
arising from the interpretation and application of statutes, contracts or agreements.
The procedure is not much different, and no less desirable, than the arbitration
procedures provided in Republic Act No. 876 (Arbitration Law) and in Section 26,
 TAXATION - VALUE ADDED TAX
R.A. 6715 (The Labor Code). It is an alternative to, or a substitute for, traditional
litigation in court with the added advantage of avoiding the delays, vexations and
expense of court proceedings. Or, as P.D. No. 242 itself explains, its purpose is
"the elimination of needless clogging of court dockets to prevent the waste of time
and energies not only of the government lawyers but also of the courts, and
eliminates expenses incurred in the filing and prosecution of judicial actions." 27
PD 242 is only applicable to disputes, claims, and controversies solely between or
among the departments, bureaus, offices, agencies and instrumentalities of the
National Government, including government-owned or controlled corporations, and
where no private party is involved. In other words, PD 242 will only apply when
all the parties involved are purely government offices and government-
owned or controlled corporations.28 Since this case is a dispute between
PSALM arid NPC, both government owned and controlled corporations, and the
BIR, a National Government office, PD 242 clearly applies and the Secretary of
Justice has jurisdiction over this case. In fact, the MOA executed by the BIR, NPC,
and PSALM explicitly provides that "[a] ruling from the Department of Justice
(DOJ) that is favorable to NPC/PSALM shall be tantamount to the filing of an
application for refund (in cash)/tax credit certificate (TCC), at the option of
NPC/PSALM."29 Such provision indicates that the BIR and petitioner PSALM and
the NPC acknowledged that the Secretary of Justice indeed has jurisdiction to
resolve their dispute.
This case is different from the case of Philippine National Oil Company v. Court of
Appeals,30 (PNOC v. CA) which involves not only the BIR (a government bureau)
and the PNOC and PNB (both government-owned or controlled corporations), but
also respondent Tirso Savellano, a private citizen. Clearly, PD 242 is not
applicable to the case of PNOCv.CA. Even the ponencia in PNOC v. CA stated
that the dispute in that case is not covered by PD 242, thus:
Even if, for the sake of argument, that P.D. No. 242 should prevail over Rep. Act
No. 1125, the present dispute would still not be covered by P.D. No. 242. Section 1
of P.D. No. 242 explicitly provides that only disputes, claims and controversies
solely between or among departments, bureaus, offices, agencies, and
instrumentalities of the National Government, including constitutional offices or
agencies, as well as government-owned and controlled corporations, shall be
administratively settled or adjudicated. While the BIR is obviously a government
bureau, and both PNOC and PNB are government-owned and controlled
corporations, respondent Savellano is a private. citizen. His standing in the
controversy could not be lightly brushed aside. It was private respondent Savellano
who gave the BIR the information that resulted in the investigation of PNOC and
PNB; who requested the BIR Commissioner to reconsider the compromise
33
agreement in question; and who initiated the CTA Case No. 4249 by filing a
Petition for Review.31 (Emphasis supplied)
In contrast, since this case is a dispute solely between PSALM and NPC, both
government-owned and controlled corporations, and the BIR, a National
Government office, PD 242 clearly applies and the Secretary of Justice has
jurisdiction over this case.
It is only proper that intra-governmental disputes be settled administratively since
the opposing government offices, agencies and instrumentalities are all
under the President's executive control and supervision. Section 17, Article
VII of the Constitution states unequivocally that: "The President shall have
control of all the executive departments, bureaus and offices. He shall ensure
that the laws be faithfully executed." In Carpio v. Executive Secretary,32 the Court
expounded on the President's control over all the executive departments, bureaus
and offices, thus:
This presidential power of control over the executive branch of government
extends over all executive officers from Cabinet Secretary to the lowliest clerk and
has been held by us, in the landmark case of Mondano vs. Silvosa, to mean "the
power of [the President] to alter or modify or nullify or set aside what a subordinate
officer had done in the performance of his duties and to substitute the judgment of
the former with that of the latter." It is said to be at the very "heart of the meaning
of Chief Executive."
Equally well accepted, as a corollary rule to the control powers of the President, is
the "Doctrine of Qualified Political Agency." As the President cannot be expected
to exercise his control powers all at the same time and in person, he will have to
delegate some of them to his Cabinet members.
Under this doctrine, which recognizes the establishment of a single executive, "all
executive and administrative organizations are adjuncts of the Executive
Department, the heads of the various executive departments are assistants and
agents of the Chief Executive, and, except in cases where the Chief Executive is
required by the Constitution or law to act in person on the exigencies of the
situation demand that he act personally, the multifarious executive and
administrative functions of the Chief Executive are performed by and through the
executive departments, and the acts of the Secretaries of such departments,
performed and promulgated in the regular course of business, are, unless
disapproved or reprobated by the Chief Executive presumptively the acts of the
Chief Executive."
 TAXATION - VALUE ADDED TAX
Thus, and in short, "the President's power of control is directly exercised by him
over the members of the Cabinet who, in turn, and by his authority, control the
bureaus and other offices under their respective jurisdictions in the executive
department. "33
This power of control vested by the Constitution in the President cannot be
diminished by law. As held in Rufino v. Endriga,34 Congress cannot by law deprive
the President of his power of control, thus:
The Legislature cannot validly enact a law· that puts a government office in the
Executive branch outside the control of the President in the guise of insulating that
office from politics or making it independent. If the office is part of the Executive
branch, it must remain subject to the control of the President. Otherwise, the
Legislature can deprive the President of his constitutional power of control
over "all the executive x x x offices." If the Legislature can do this with the
Executive branch, then the Legislature can also deal a similar blow to the
Judicial branch by enacting a law putting decisions of certain lower courts
beyond the review power of the Supreme Court. This will destroy the system of
checks and balances finely structured in the 1987 Constitution among the
Executive, Legislative, and Judicial branches.35 (Emphasis supplied)
Clearly, the President's constitutional power of control over all the executive
departments, bureaus and offices cannot be curtailed or diminished by law. "Since
the Constitution has given the President the power of control, with all its awesome
implications, it is the Constitution alone which can curtail such power."36 This.
constitutional power of control of the President cannot be diminished by the
CTA. Thus, if two executive offices or agencies cannot agree, it is only
proper and logical that the President, as the sole Executive who under the
Constitution has control over both offices or agencies in dispute, should
resolve the dispute instead of the courts. The judiciary should not intrude in
this executive function of determining which is correct between the
opposing government offices or agencies, which are both under the sole
control of the President. Under his constitutional power of control, the
President decides the dispute between the two executive offices. The
judiciary cannot substitute its decision over that of the President. Only after
the President has decided or settled the dispute can the courts' jurisdiction be
invoked. Until such time, the judiciary should not interfere since the issue is not yet
ripe for judicial adjudication. Otherwise, the judiciary would infringe on the
President's exercise of his constitutional power of control over all the executive
departments, bureaus, and offices.
34
Furthermore, under the doctrine of exhaustion of administrative remedies, it
is mandated that where a remedy before an administrative body is provided
by statute, relief must be sought by exhausting this remedy prior to bringing
an action in court in order to give the administrative body every opportunity
to decide a matter that comes within its jurisdiction.37 A litigant cannot go to
court without first pursuing his administrative remedies; otherwise, his action is
premature and his case is not ripe for judicial determination.38 PD 242 (now
Chapter 14, Book IV of Executive Order No. 292), provides for such administrative
remedy. Thus, only after the President has decided the dispute between
government offices and agencies can the losing party resort to the courts, if it so
desires. Otherwise, a resort to the courts would be premature for failure to exhaust
administrative remedies. Non-observance of the doctrine of exhaustion of
administrative remedies would result in lack of cause of action,39 which is one of
the grounds for the dismissal of a complaint.
The rationale of the doctrine of exhaustion. of administrative remedies was aptly
explained by the Court in Universal Robina Corp. (Corn Division) v. Laguna Lake
Development Authority:40
The doctrine of exhaustion of administrative remedies is a cornerstone of our
judicial system. The thrust of the rule is that courts must allow administrative
agencies to carry out their functions and discharge their responsibilities within the
specialized areas of their respective competence. The rationale for this doctrine is
obvious. It entails lesser expenses and provides for the speedier resolution of the
controversies. Comity and convenience also impel courts of justice to shy away
from a dispute until the system of administrative redress has been completed. 41
In requiring parties to exhaust administrative remedies before pursuing action in a
court, the doctrine prevents overworked courts from considering issues when
remedies are available through administrative channels.42 Furthermore, the
doctrine endorses a more economical and less formal means of resolving
disputes,43 and promotes efficiency since disputes and claims are generally
resolved more quickly and economically through administrative proceedings rather
than through court litigations.44
The Court of Appeals ruled that under the 1997 NIRC, the dispute between the
parties is within the authority of the CIR to resolve. Section 4 of the 1997 NIRC
reads:
SEC 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax
Cases. - The power to interpret the provisions of this Code and other tax laws shall
 TAXATION - VALUE ADDED TAX
be under the exclusive and original jurisdiction of the Commissioner, subject to
review by the Secretary of Finance.
The power to decide disputed assessments, refunds in internal revenue taxes,
fees or other charges. penalties imposed in relation thereto, or other matters
arising under this Code or other laws or portions thereof administered by the
Bureau of Internal Revenue is vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals. (Emphasis supplied)
The first paragraph of Section 4 of the 1997 NIRC provides that the power of the
CIR to interpret the NIRC provisions and other tax laws is subject to review by
the Secretary of Finance, who is the alter ego of the President. Thus, the
constitutional power of control of the President over all the executive departments,
bureaus, and offices45 is still preserved. The President's power of control, which
cannot be limited or withdrawn by Congress, means the power of the President to
alter, modify, nullify, or set aside the judgment or action of a subordinate in the
performance of his duties.46
The second paragraph of Section 4 of the 1997 NIRC, providing for the exclusive
appellate jurisdiction of the CTA as regards the CIR's decisions on matters
involving disputed assessments, refunds in internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other matters arising under
NIRC, is in conflict with PD 242. Under PD 242, all disputes and
claims solely between government agencies and offices, including government-
owned or controlled corporations, shall be administratively settled or adjudicated
by the Secretary of Justice, the Solicitor General, or the Government Corporate
Counsel, depending on the issues and government agencies involved.
To harmonize Section 4 of the 1997 NIRC with PD 242, the following interpretation
should be adopted: (1) As regards private entities and the BIR, the power to
decide disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the NIRC or
other laws administered by the. BIR is vested in the CIR subject to the exclusive
appellate jurisdiction of the CTA, in accordance with Section 4 of the NIRC; and (2)
Where the disputing parties are all public entities (covers disputes between the
BIR and other government entities), the case shall be governed by PD 242.
Furthermore, it should be noted that the 1997 NIRC is a general law governing the
imposition of national internal revenue taxes, fees, and charges. 47 On the other
hand, PD 242 is a special law that applies only to disputes involving solely
government offices, agencies, or instrumentalities. The difference between a
35
special law and a general law was clarified in Vinzons-Chato v. Fortune Tobacco
Corporation:48
A general statute is one which embraces a class of subjects or places and does
not omit any subject or place naturally belonging to such class. A special statute,
as the term is generally understood, is one which relates to particular persons or
things of a class or to a particular portion or section of the state only.
A general law and a special law on the same subject are statutes in pari
materia and should, accordingly, be read together and harmonized, if possible,
with a view to giving effect to both. The rule is that where there are two acts, one of
which is special and particular and the other general which, if standing alone,
would include the same matter and thus conflict with the special act, the special
law must prevail since it evinces the legislative intent more clearly than that of a
general statute and must not be taken as intended to affect the more particular and
specific provisions of the earlier act, unless it is absolutely necessary so to
construe it in order to give its words any meaning at all.
The circumstance that the special law is passed before or after the general act
does not change the principle. Where the special law is later, it will be regarded as
an exception to, or a qualification of, the prior general act; and where the general
act is later, the special statute will be construed as remaining an exception to its
terms, unless repealed expressly or by necessary implication. 49
Thus, even if the 1997 NIRC, a general statute, is a later act, PD 242, which is
a special law, will still prevail and is treated as an exception to the terms of
the 1997 NIRC with regard solely to intragovernmental disputes. PD 242 is a
special law while the 1997 NIRC is a general law, insofar as disputes solely
between or among government agencies are concerned. Necessarily, such
disputes must be resolved under PD 242 and not under the NIRC, precisely
because PD 242 specifically mandates the settlement of such disputes in
accordance with PD 242. PD 242 is a valid law prescribing the procedure for
administrative settlement or adjudication of disputes among government offices,
agencies, and instrumentalities under the executive control and supervision of the
President.50
Even the BIR, through its authorized representative, then OIC-Commissioner of
Internal Revenue Lilian B. Hefti, acknowledged in the MOA executed by the BIR,
NPC, and PSALM, that the Secretary of Justice has jurisdiction to resolve its
dispute with petitioner PSALM and the NPC. This is clear from the provision in the
MOA which states:
 TAXATION - VALUE ADDED TAX
H) Any resolution in favor of NPC/PSALM by any appropriate court or body shall
be immediately executory without necessity of notice or demand from
NPC/PSALM. A ruling from the Department of Justice (DOJ) that is favorable
to NPC/PSALM shall be tantamount to the filing of an application for refund
(in cash)/tax credit certificate (TCC), at the option of NPC/PSALM. BIR
undertakes to immediately process and approve the application, and release
the tax refund/TCC within fifteen (15) working days from issuance of the DOJ
ruling that is favorable to NPC/PSALM. (Emphasis supplied)
PD 242 is now embodied in Chapter 14, Book IV of Executive Order No. 292 (EO
292), otherwise known as the Administrative Code of 1987, which took effect on 24
November 1989.51 The pertinent provisions read:
Chapter 14- Controversies Among Government
Offices and Corporations
SEC. 66. How Settled. - All disputes, claims and controversies, solely between or
among the departments, bureaus, offices, agencies and instrumentalities of the
National Government, including government-owned or controlled corporations,
such as those arising from the interpretation and application of statutes, contracts
or agreements, shall be administratively settled or adjudicated in the manner
provided in this Chapter. This Chapter shall, however, not apply to disputes
involving the Congress, the Supreme Court, the Constitutional Commissions, and
local governments.
SEC. 67. Disputes Involving Questions of Law. - All cases involving only questions
of law shall be submitted to and settled or adjudicated by the Secretary of Justice
as Attorney-General of the National Government and as ex officio legal adviser of
all government-owned or controlled corporations. His ruling or decision thereon
shall be conclusive and binding on all the parties concerned.
SEC. 68. Disputes Involving Questions of Fact and Law. - Cases involving mixed
questions of law and of fact or only factual issues shall be submitted to and settled
or adjudicated by:
(1) The Solicitor General, if the dispute, claim or controversy involves only
departments, bureaus, offices and other agencies of the National
Government as well as government-owned or controlled corporations or
entities of whom he is the principal law officer or general counsel; and
36
(2) The Secretary of Justice, in all other cases not falling under paragraph
(1).
SEC. 69. Arbitration. - The determination of factual issues may be referred to an
arbitration panel composed of one representative each of the parties involved and
presided over by a representative of the Secretary of Justice or the Solicitor
General, as the case may be.
SEC. 70. Appeals. - The decision of the Secretary of Justice as well as that of the
Solicitor General, when approved by the Secretary of Justice, shall be final and
binding upon the parties involved. Appeals may, however, be taken to the
President where the amount of the claim or the value of the property exceeds one
million pesos. The decision of the President shall be final.
SEC. 71. Rules and Regulations. - The Secretary of Justice shall promulgate the
rules and regulations necessary to carry out the provisions of this Chapter.
Since the amount involved in this case is more than one million pesos, the DOJ
Secretary's decision may be appealed to the Office of the President in accordance
with Section 70, Chapter 14, Book IV of EO 292 and Section 552 of PD 242. If the
appeal to the Office of the President is denied, the aggrieved party can still appeal
to the Court of Appeals under Section 1, Rule 43 of the 1997 Rules of Civil
Procedure.53 However, in order not to further delay the disposition of this case, the
Court resolves to decide the substantive issue raised in the petition. 54
II. Whether the sale of the power plants is subject to VAT.
To resolve the issue of whether the sale of the Pantabangan-Masiway and Magat
Power Plants by petitioner PSALM to private entities is subject to VAT, the Court
must determine whether the sale is "in the course of trade or business" as
contemplated under Section 105 of the NIRC, which reads:
SEC 105. Persons Liable. - Any person who, in the course of trade or
business, sells, barters, exchanges, leases goods or properties, renders
services, and any person who imports .goods shall be subject to the value-
added tax (VAT) imposed in Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted or
passed on to the buyer, transferee or lessee of the goods, properties or services.
This rule shall likewise apply to existing contracts of sale or lease of goods,
properties or services at the time of the effectivity of Republic Act 7716.
 TAXATION - VALUE ADDED TAX
The phrase 'in the course of trade or business' means the regular conduct or
pursuit of a commercial or an economic activity, including transactions
incidental thereto, by any person regardless of whether or not the person
engaged therein is a nonstock, nonprofit private organization (irrespective of
the disposition of its net income and whether or not it sells exclusively to
members or their guests), or government entity.
The rule of regularity, to the contrary notwithstanding, services as defined in this
Code rendered in the Philippines by nonresident foreign persons shall be
considered as being rendered in the course of trade or business. (Emphasis
supplied)
Under Section 50 of the EPIRA law, PSALM's principal purpose is to manage the
orderly sale, disposition, and privatization of the NPC generation assets, real
estate and other disposable assets, and IPP contracts with the objective of
liquidating all NPC financial obligations and stranded contract costs in an optimal
manner.
PSALM asserts that the privatization of NPC assets, such as the sale of the
Pantabangan-Masiway and Magat Power Plants, is pursuant to PSALM's mandate
under the EPIRA law and is not conducted in the course of trade or business.
PSALM cited the 13 May 2002 BIR Ruling No. 020- 02, that PSALM' s sale of
assets is not conducted in pursuit of any commercial or profitable activity as to fall
within the ambit of a VAT-able transaction under Sections 105 and 106 of the
NIRC. The pertinent portion of the ruling adverted to states:
2. Privatization of assets by PSALM is not subject to VAT
Pursuant to Section 105 in relation to Section 106, both of the Tax Code of 1997, a
value-added tax equivalent to ten percent (10%) of the gross selling price or gross
value in money of the goods, is collected from any person, who, in the course of
trade or business, sells, barters, exchanges, leases goods or properties, which tax
shall be paid by the seller or transferor.
The phrase "in the course of trade or business" means the regular conduct or
pursuit of a commercial activity, including transactions incidental thereto.
Since the disposition or sale of the assets is a consequence of PSALM's mandate
to ensure the orderly sale or disposition of' the property and thereafter to liquidate
the outstanding loans and obligations of NPC, utilizing the proceeds from sales
and other property contributed to it, including the proceeds from the Universal
37
Charge, and not conducted in pursuit of any commercial or profitable activity,
including transactions incidental thereto, the same will be considered an
isolated ,transaction, which will therefore not be subject to VAT. (BIR Ruling
No. 113-98 dated July 23, 1998)55 (Emphasis supplied)
On the other hand, the CIR argues that the previous exemption of NPC from VAT
under Section 13 of Republic Act No. 639556 (RA 6395) was expressly repealed by
Section 24 of Republic Act No. 933757 (RA 9337), which reads:
SEC. 24. Repealing Clause. - The following laws or provisions of laws are hereby
repealed and the persons and/or transactions affected herein are made subject to
the value-added tax subject to the provisions of Title IV of the National Internal
Revenue Code of 1997, as amended:
(A) Section 13 of R.A. No. 6395 on the exemption from value-added tax of
National Power Corporation (NPC);
(B) Section 6, fifth paragraph of R.A. No. 9136 on the zero VAT rate
imposed on the sale of generated power by generation companies; and
(C) All other laws, acts, decrees, executive orders, issuances and rules
and regulations or parts thereof which are contrary to and inconsistent with
any provisions of this Act are hereby repealed, amended or modified
accordingly.
As a consequence, the CIR posits that the VAT exemption accorded to PSALM
under BIR Ruling No. 020-02 is also deemed revoked since PSALM is a
successor-in-interest of NPC. Furthermore, the CIR avers that prior to the sale,
NPC still owned the power plants and not PSALM, which is just considered as the
trustee of the NPC properties. Thus, the sale made by NPC or its successors-in-
interest of its power plants should be subject to the 10% VAT beginning 1
November 2005 and 12% VAT beginning 1 February 2007.
We do not agree with the CIR's position, which is anchored on the wrong premise
that PSALM is a successor-in-interest of NPC. PSALM is not a successor-in-
interest of NPC. Under its charter, NPC is mandated to "undertake the
development of hydroelectric generation of power and the production of electricity
from nuclear, geothermal and other sources, as well as the transmission of electric
power on a nationwide basis."58 With the passage of the EPIRA law which
restructured the electric power industry into generation, transmission, distribution,
and supply sectors, the NPC is now primarily mandated to perform missionary
 TAXATION - VALUE ADDED TAX
electrification function through the Small Power Utilities Group (SPUG) and is
responsible for providing power generation and associated power delivery systems
in areas that are not connected to the transmission system.59 On the other hand,
PSALM, a government-owned and controlled corporation, was created under the
EPIRA law to manage the orderly sale and privatization of NPC assets with the
objective of liquidating all of NPC's financial obligations in an optimal manner.
Clearly, NPC and PSALM have different functions. Since PSALM is not a
successor-in-interest of NPC, the repeal by RA 9337 of NPC's VAT exemption
does not affect PSALM.
In any event, even if PSALM is deemed a successor-in-interest of NPC, still the
sale of the power plants is not "in the course of trade or business" as contemplated
under Section 105 of the NIRC, and thus, not subject to VAT. The sale of the
power plants is not in pursuit of a commercial or economic activity but a
governmental function mandated by law to privatize NPC generation
assets. PSALM was created primarily to liquidate all NPC financial obligations and
stranded contract costs in an optimal manner. The purpose and objective of
PSALM are explicitly stated in Section 50 of the EPIRA law, thus:
SEC. 50. Purpose and Objective, Domicile and Term of Existence. - The principal
purpose of the PSALM Corp. is to manage the orderly sale, disposition, and
privatization of NPC generation assets, real estate and other disposable
assets, and IPP contracts with the objective of liquidating all NPC financial
obligations and stranded contract costs in an optimal manner.
The PSALM Corp. shall have its principal office and place of business within Metro
Manila.
The PSALM Corp. shall exist for a period of twenty-five (25) years from the
effectivity of this Act, unless otherwise provided by law, and all assets held by it, all
moneys and properties belonging to it, and all its liabilities outstanding upon the
expiration of its term of existence shall revert to and be assumed by the National
Government. (Emphasis supplied)
PSALM is limited to selling only NPC assets and IPP contracts of NPC. The sale of
NPC assets by PSALM is not "in the course of trade or business" but purely for the
specific purpose of privatizing NPC assets in order to liquidate all NPC financial
obligations. PSALM is tasked to sell and privatize the NPC assets within the term
of its existence.60 The EPIRA law even requires PSALM to submit a plan for the
endorsement by the Joint Congressional Power Commission and the approval of
the President of the total privatization of the NPC assets and IPP contracts.
Section 47 of the EPIRA law provides:
38
SEC 47. NPC Privatization. - Except for the assets of SPUG, the generation
assets, real estate, and other disposable assets as well as IPP contracts of NPC
shall be privatized in accordance with this Act. Within six (6) months from the
effectivity of this Act, the PSALM Corp. shall submit a plan for the endorsement by
the Joint Congressional Power Commission and the approval of the President of
the Philippines, on the total privatization of the generation assets, real estate, other
disposable assets as well as existing IPP contracts of NPC and thereafter,
implement the same, in accordance with the following guidelines, except as
provided for in Paragraph (f) herein:
(a) The privatization value to the National Government of the NPC
generation assets, real estate, other disposable assets as well as IPP
contracts shall be optimized;
(b) The participation by Filipino citizens and corporations in the purchase
of NPC assets shall be encouraged. In the case of foreign investors, at
least seventy-five percent (75%) of the funds used to acquire NPC-
generation assets and IPP contracts shall be inwardly remitted and
registered with the Bangko Sentral ng Pilipinas;
(c) The NPC plants and/or its IPP contracts assigned to IPP
Administrators, its related assets and assigned liabilities, if any, shall be
grouped in a manner which shall promote the viability of the resulting
generation companies (gencos), ensure economic efficiency, encourage
competition, foster reasonable electricity rates and create market appeal to
optimize returns to the government from the sale and disposition of such
assets in a manner consistent with the objectives of this Act. In the
grouping of the generation assets and IPP contracts of NPC, the following
criteria shall be considered:
(1) A sufficient scale of operations and balance sheet strength to
promote the financial viability of the restructured units;
(2) Broad geographical groupings to ensure efficiency of
operations but without the formation of regional companies or
consolidation of market power;
(3) Portfolio of plants and IPP contracts to achieve management
and operational synergy without dominating any part of the market
or the load curve; and
 TAXATION - VALUE ADDED TAX
(4) Such other factors as may be deemed beneficial to the best
interest of the National Government while ensuring attractiveness
to potential investors.
(d) All assets of NPC shall be sold in open and transparent manner
through public bidding, and the same shall apply to the disposition of IPP
contracts;
(e) In cases of transfer of possession, control, operation or privatization of
multi-purpose hydro facilities, safeguards shall be prescribed to ensure
that the national government may direct water usage in cases of shortage
to protect potable water, irrigation, and all other requirements imbued with
public interest;
(f) The Agus and Pulangi complexes in Mindanao shall be excluded from
an1ong the generation companies that will be initially privatized. Their
ownership shall be transferred to the PSALM Corp. and both shall
continue to be operated by the NPC. Said complexes may be privatized
not earlier than ten (10) years from the effectivity of this Act, and, except
for Agus Ill, shall not be subject to BuildOperate-Transfer (B-0-T), Build-
Rehabilitate-OperateTransfer (B-R-0-T) and other variations thereof
pursuant to Republic Act No. 6957. as amended by Republic Act No.
7718. The privatization of Agus and Pulangi complexes hall be left to the
discretion of PSALM Corp. in consultation with Congress;
(g) The steamfield assets and generating plants of each geothermal
complex shall not be sold separately. They shall be combined and each
geothermal complex shall be sold as one package through public bidding.
The geothermal complexes covered by this requirement include, but are
not limited to, Tiwi-Makban, Leyte A and B (Tongonan), Palinpinon, and
Mt. Apo;
(h) The ownership of the Caliraya-Botokan-Kalayaan (CBK) pump storage
complex shall be transferred to the PSALM Corporation;
(i) Not later than three (3) years from the effectivity of this Act, and in no
case later than the initial implementation of open access, at least seventy
percent (70%) of the total capacity of generating assets of NPC and of the
total capacity of the power plants under contract with NPC located in
Luzon and Visayas spall have been privatized: Provided, That any unsold
capacity shall be privatized not later than eight (8) years from the
effectivity of this Act; and
39
(j) NPC may generate and sell electricity only from the undisposed
generating assets and IPP contracts of PSALM Corp. and shall not incur
any new obligations to purchase power through bilateral contracts with
generation companies or other suppliers.
Thus, it is very clear that the sale of the power plants was an exercise of a
governmental function mandated by law for the primary purpose of
privatizing NPC assets in accordance with the guidelines imposed by the
EPIRA law.
In the 2006 case of Commissioner of Internal Revenue v. Magsaysay Lines, Inc.
(Magsaysay),61 the Court ruled that the sale of the vessels of the National
Development Company (NDC) to Magsaysay Lines, Inc. is not subject to VAT
since it was not in the course of trade or business, as it was involuntary and made
pursuant to the government's policy of privatization. The Court cited the CT A
ruling that the phrase "course of business" or "doing business" connotes regularity
of activity. Thus, since the sale of the vessels was an isolated transaction, made
pursuant to the government's privatization policy, and which transaction could no
longer be repeated or carried on with regularity, such sale was not in the course of
trade or business and was not subject to VAT.
Similarly, the sale of the power plants in this case is not subject to VAT since the
sale was made pursuant to PSALM' s mandate to privatize NPC assets, and was
not undertaken in the course of trade or business. In selling the power plants,
PSALM was merely exercising a governmental function for which it was created
under the EPIRA law.
The CIR argues that the Magsaysay case, which involved the sale in 1988 of NDC
vessels, is not applicable in this case since it was decided under the 1986 NIRC.
The CIR maintains that under Section 105 of the 1997 NIRC, which amended
Section 9962 of the 1986 NIRC, the phrase "in the course of trade or business" was
expanded, and now covers incidental transactions. Since NPC still owns the power
plants and PSALM may only be considered as trustee of the NPC assets, the sale
of the power plants is considered an incidental transaction which is subject to VAT.
We disagree with the CIR's position. PSALM owned the power plants which were
sold. PSALM's ownership of the NPC assets is clearly stated under Sections 49,
51, and 55 of the EPIRA law. The pertinent provisions read:
SEC. 49. Creation of Power Sector Assets and Liabilities Management
Corporation. - There is hereby created a government-owned and -controlled
corporation to be known as the "Power Sector Assets and Liabilities
 TAXATION - VALUE ADDED TAX
Management Corporation," hereinafter referred to as "PSALM Corp.," which
shall take ownership of all existing NPC generation assets, liabilities, IPP
contracts, real estate and all other disposable assets. All outstanding
obligations of the NPC arising from loans, issuances of bonds, securities and other
instruments of indebtedness shall be transferred to and assumed by the PSALM
Corp. within one hundred eighty (180) days from the approval of this Act.
SEC 51. Powers. - The Corporation shall, in the performance of its functions and
for the attainment of its objectives, have the following powers:
(a) To formulate and implement a program for the sale and privatization of
the NPC assets and IPP contracts and the liquidation of the NPC debts
and stranded costs, such liquidation to be completed within the term of
existence of the PSALM Corp.;
(b) To take title to and possession of, administer and conserve the
assets transferred to it; to sell or dispose of the same at such price and
under such terms and conditions as it may deem necessary or proper,
subject to applicable laws, rules and regulations;
xxxx
SEC. 55. Property of PSALM Corp. -The following funds, assets, contributions
and other property shall constitute the property of PSALM Corp.:
(a) The generation assets, real estate, IPP contracts, other disposable
assets of NPC, proceeds from the sale or disposition of such assets and
residual assets from B-0-T, R-0-T, and other variations thereof;
(b) Transfers from the National Government;
(c) Proceeds from loans incurred to restructure or refinance NPC's
transferred liabilities: Provided, however, That all borrowings shall be fully
paid for by the end of the life of the PSALM Corp.;
(d) Proceeds from the universal charge allocated for stranded contract
costs and the stranded debts of the NPC;
(e) Net profit of NPC;
40
(f) Net profit of TRANSCO;
(g) Official assistance, grants, and donations from external sources; and
(h) Other sources of funds as may be determined by PSALM Corp.
necessary for the above-mentioned purposes. (Emphasis supplied)
Under the EPIRA law, the ownership of the generation assets, real estate, IPP
contracts, and other disposable assets of the NPC was transferred to PSALM.
Clearly, PSALM is not a mere trustee of the NPC assets but is the owner thereof.
Precisely, PSALM, as the owner of the NPC assets, is the government entity
tasked under the EPIRA law to privatize such NPC assets.
In the more recent case of Mindanao II Geothermal Partnership v. Commissioner
of Internal Revenue (Mindanao 11),63 which was decided under the 1997 NIRC,
the Court held that the sale of a fully depreciated vehicle that had been used in
Mindanao II's business was subject to VAT, even if such sale may be considered
isolated. The Court ruled that it does not follow that an isolated transaction cannot
be an incidental transaction for VAT purposes. The Court then cited Section 105 of
the 1997 NIRC which shows that a transaction "in the course of trade or business"
includes "transactions incidental thereto." Thus, the Court held that the sale of the
vehicle is an incidental transaction made in the course of Mindanao II's business
which should be subject to VAT.
The CIR alleges that the sale made by NPC and/or its successors-in-interest of the
power plants is an incidental transaction which should be subject to VAT. This is
erroneous. As previously discussed, the power plants are already owned by
PSALM, not NPC. Under the EPIRA law, the ownership of these power plants was
transferred to PSALM for sale, disposition, and privatization in order to liquidate all
NPC financial obligations. Unlike the Mindanao II case, the power plants in this
case were not previously used in PSALM's business. The power plants, which
were previously owned by NPC were transferred to PSALM for the specific
purpose of privatizing such assets. The sale of the power plants cannot be
considered as an incidental transaction made in the course of NPC's or PSALM's
business. Therefore, the sale of the power plants should not be subject to VAT.
Hence, we agree with the Decisions dated 13 March 2008 and 14 January 2009 of
the Secretary of Justice in OSJ Case No. 2007-3 that it was erroneous for the BIR
to hold PSALM liable for deficiency VAT in the amount of ₱3,813,080,472 for the
sale of the Pantabangan-Masiway and Magat Power Plants. The ₱3,813,080,472
deficiency VAT remitted by PSALM under protest should therefore be refunded to
PSALM.
 TAXATION - VALUE ADDED TAX
However, to give effect to Section 70, Chapter 14, Book IV of the Administrative
Code of 1987 on appeals from decisions of the Secretary of Justice, the BIR is
given an opportunity to appeal the Decisions dated 13 March 2008 and 14 January
2009 of the Secretary of Justice to the Office of the President within 10 days from
finality of this Decision.64
WHEREFORE, we GRANT the petition. We SETASIDE the 27 September 2010
Decision and the 3 August 2011 Resolution of the Court of Appeals in CA-G.R. SP
No. 108156. The Decisions dated 13 March 2008 and 14 January 2009 of the
Secretary of Justice in OSJ Case No. 2007- 3 are REINSTATED. No costs.
SO ORDERED.
G.R. No. 222743
MEDICARD PHILIPPINES, INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
REYES,, J.:
This appeal by Petition for Review1 seeks to reverse and set aside the
Decision2 dated September 2, 2015 and Resolution3 dated January 29, 2016 of the
Court of Tax Appeals (CTA) en bane in CTA EB No. 1224, affirming with
modification the Decision4 dated June 5, 2014 and the Resolution5 dated
September 15, 2014.in CTA Case No. 7948 of the CTA Third Division, ordering
petitioner Medicard Philippines, Inc. (MEDICARD), to pay respondent
Commissioner of Internal Revenue (CIR) the deficiency
Value-Added Tax. (VAT) assessment in the aggregate amount of
₱220,234,609.48, plus 20% interest per annum starting January 25, 2007, until
fully paid, pursuant to Section 249(c)6 of the National Internal Revenue Code
(NIRC) of 1997.
The Facts
MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid
health and medical insurance coverage to its clients. Individuals enrolled in its
health care programs pay an annual membership fee and are entitled to various
41
preventive, diagnostic and curative medical services provided by duly licensed
physicians, specialists and other professional technical staff participating in the
group practice health delivery system at a hospital or clinic owned, operated or
accredited by it.7
MEDICARD filed its First, Second, and Third Quarterly VAT Returns through
Electronic Filing and Payment System (EFPS) on April 20, 2006, July 25, 2006 and
October 20, 2006, respectively, and its Fourth Quarterly VAT Return on January
25, 2007.8
Upon finding some discrepancies between MEDICARD's Income Tax Returns
(ITR) and VAT Returns, the CIR informed MEDICARD and issued a Letter Notice
(LN) No. 122-VT-06-00-00020 dated
September 20, 2007. Subsequently, the CIR also issued a Preliminary
Assessment Notice (PAN) against MEDICARD for deficiency VAT. A
Memorandum dated December 10, 2007 was likewise issued recommending the
issuance of a Formal Assessment Notice (FAN) against MEDICARD.9 On. January
4, 2008, MEDICARD received CIR's FAN dated December' 10, 2007 for alleged
deficiency VAT for taxable year 2006 in the total amount of Pl 96,614,476.69,10
inclusive of penalties. 11
According to the CIR, the taxable base of HMOs for VAT purposes is its gross
receipts without any deduction under Section 4.108.3(k) of Revenue Regulation
(RR) No. 16-2005. Citing Commissioner of Internal Revenue v. Philippine Health
Care Providers, Inc., 12 the CIR argued that since MEDICARD. does not actually
provide medical and/or hospital services, but merely arranges for the same, its
services are not VAT exempt.13
MEDICARD argued that: (1) the services it render is not limited merely to
arranging for the provision of medical and/or hospital services by hospitals and/or
clinics but include actual and direct rendition of medical and laboratory services; in
fact, its 2006 audited balance sheet shows that it owns x-ray and laboratory
facilities which it used in providing medical and laboratory services to its members;
(2) out of the ₱l .9 Billion membership fees, ₱319 Million was received from clients
that are registered with the Philippine Export Zone Authority (PEZA) and/or Bureau
of Investments; (3) the processing fees amounting to ₱l 1.5 Million should be
excluded from gross receipts because P5.6 Million of which represent advances
for professional fees due from clients which were paid by MEDICARD while the
remainder was already previously subjected to VAT; (4) the professional fees in
the amount of Pl 1 Million should also be excluded because it represents the
amount of medical services actually and directly rendered by MEDICARD and/or
 TAXATION - VALUE ADDED TAX
its subsidiary company; and (5) even assuming that it is liable to pay for the VAT,
the 12% VAT rate should not be applied on the entire amount but only for the
period when the 12% VAT rate was already in effect, i.e., on February 1, 2006. It
should not also be held liable for surcharge and deficiency interest because it did
not pass on the VAT to its members.14
On February 14, 2008, the CIR issued a Tax Verification Notice authorizing
Revenue Officer Romualdo Plocios to verify the supporting documents of
MEDICARD's Protest. MEDICARD also submitted additional supporting
documentary evidence in aid of its Protest thru a letter dated March 18, 2008. 15
On June 19, 2009, MEDICARD received CIR's Final Decision on Disputed
Assessment dated May 15, 2009, denying MEDICARD's protest, to wit:
IN VIEW HEREOF, we deny your letter protest and hereby reiterate in
toto assessment of deficiency [VAT] in total sum of ₱196,614,476.99. It is
requested that you pay said deficiency taxes immediately. Should payment be
made later, adjustment has to be made to impose interest until date of payment.
This is olir final decision. If you disagree, you may take an appeal to the [CTA]
within the period provided by law, otherwise, said assessment shall become final,
executory and demandable. 16
On July 20, 2009, MEDICARD proceeded to file a petition for review before the CT
A, reiterating its position before the tax authorities. 17
On June 5, 2014, the CTA Division rendered a Decision18 affirming with
modifications the CIR's deficiency VAT assessment covering taxable year 2006,
viz.:
WHEREFORE, premises considered, the deficiency VAT assessment issued by
[CIR] against [MEDICARD] covering taxable year 2006 ·is hereby AFFIRMED
WITH MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR] the
amount of P223,l 73,208.35, inclusive of the twenty-five percent (25%) surcharge
imposed under -Section 248(A)(3) of the NIRC of 1997, as amended, computed as
follows:
Basic Deficiency VAT ₱l78,538,566.68
Add: 25% Surcharge 44,634,641.67
Total ₱223.173.208.35
42
In addition, [MEDICARD] is ordered to pay:
a. Deficiency interest at the rate of twenty percent (20%) per annum on the
basis deficiency VAT of Pl 78,538,566.68 computed from January 25,
2007 until full payment thereof pursuant to Section 249(B) of the NIRC of
1997, as amended; and
b. Delinquency interest at the rate of twenty percent (20%) per annum on
the total amount of ₱223,173,208.35 representing basic deficiency VAT of
₱l78,538,566.68 and· 25% surcharge of ₱44,634,64 l .67 and on the 20%
deficiency interest which have accrued as afore-stated in (a), computed
from June 19, 2009 until full payment thereof pursuant to Section 249(C)
of the NIRC of 1997.
SO ORDERED.19
The CTA Division held that: (1) the determination of deficiency VAT is not limited to
the issuance of Letter of Authority (LOA) alone as the CIR is granted vast powers
to perform examination and assessment functions; (2) in lieu of an LOA, an LN
was issued to MEDICARD informing it· of the discrepancies between its ITRs and
VAT Returns and this procedure is authorized under Revenue Memorandum Order
(RMO) No. 30-2003 and 42-2003; (3) MEDICARD is estopped from questioning
the validity of the assessment on the ground of lack of LOA since the assessment
issued against MEDICARD contained the requisite legal and factual bases that put
MEDICARD on notice of the deficiencies and it in fact availed of the remedies
provided by law without questioning the nullity of the assessment; (4) the amounts
that MEDICARD earmarked , and eventually paid to doctors, hospitals and clinics
cannot be excluded from · the computation of its gross receipts under the
provisions of RR No. 4-2007 because the act of earmarking or allocation is by itself
an act of ownership and management over the funds by MEDICARD which is
beyond the contemplation of RR No. 4-2007; (5) MEDICARD's earnings from its
clinics and laboratory facilities cannot be excluded from its gross receipts because
the operation of these clinics and laboratory is merely an incident to MEDICARD's
main line of business as HMO and there is no evidence that MEDICARD
segregated the amounts pertaining to this at the time it received the premium from
its members; and (6) MEDICARD was not able to substantiate the amount
pertaining to its January 2006 income and therefore has no basis to impose a 10%
VAT rate.20
 TAXATION - VALUE ADDED TAX
Undaunted, MEDICARD filed a Motion for Reconsideration but it was denied.
Hence, MEDICARD elevated the matter to the CTA en banc.
In a Decision21 dated September 2, 2015, the CTA en banc partially granted the
petition only insofar as the 10% VAT rate for January 2006 is concerned but
sustained the findings of the CTA Division in all other matters, thus:
WHEREFORE, in view thereof, the instant Petition for Review is
hereby PARTIALLY GRANTED. Accordingly, the Decision date June 5, 2014 is
hereby MODIFIED, as follows:
"WHEREFORE, premises considered, the deficiency VAT assessment issued by
[CIR] against
[MEDICARD] covering taxable year 2006 is hereby AFFIRMED WITH
MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR] the amount
of ₱220,234,609.48, inclusive of the 25% surcharge imposed under Section
248(A)(3) of the NIRC of 1997, as amended, computed as follows:
Basic Deficiency VAT ₱76,187,687.58
Add: 25% Surcharge 44,046,921.90
Total ₱220,234.609.48
In addition, [MEDICARD] is ordered to pay:
(a) Deficiency interest at the rate of 20% per annum on the basic
deficiency VAT of ₱l 76,187,687.58 computed from January 25, 2007 until
full payment thereof pursuant to Section 249(B) of the NIRC of 1997, as
amended; and
(b) Delinquency interest at the rate of 20% per annum on the total amount
of ₱220,234,609.48 (representing basic deficiency VAT of
₱l76,187,687.58 and 25% surcharge of ₱44,046,921.90) and on the
deficiency interest which have accrued as afore-stated in (a), computed
from June 19, 2009 until full payment thereof pursuant to Section 249(C)
of the NIRC of 1997, as amended."
SO ORDERED.22
43
Disagreeing with the CTA en bane's decision, MEDICARD filed a motion for
reconsideration but it was denied.23 Hence, MEDICARD now seeks recourse to
this Court via a petition for review on certiorari.
The Issues
l. WHETHER THE ABSENCE OF THE LOA IS FATAL; and
2. WHETHER THE AMOUNTS THAT MEDICARD EARMARKED AND
EVENTUALLY PAID TO THE MEDICAL SERVICE PROVIDERS SHOULD
STILL FORM PART OF ITS GROSS RECEIPTS FOR VAT PURPOSES.24
Ruling of the Court
The petition is meritorious.
The absence of an LOA violated
MEDICARD's right to due process
An 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. 25 An LOA is premised on the fact
that the examination of a taxpayer who has already filed his tax returns is a power
that statutorily belongs only to the CIR himself or his duly authorized
representatives. Section 6 of the NIRC clearly provides as follows:
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe
Additional Requirements for Tax Administration and Enforcement. –
(A) Examination of Return 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 examinationof 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 x (Emphasis and underlining ours)
 TAXATION - VALUE ADDED TAX
Based on the afore-quoted provision, it is clear that unless authorized by the CIR
himself or by his duly authorized representative, through an LOA, an examination
of the taxpayer cannot ordinarily be undertaken. The circumstances contemplated
under Section 6 where the taxpayer may be assessed through best-evidence
obtainable, inventory-taking, or surveillance among others has nothing to do with
the LOA. These are simply methods of examining the taxpayer in order to arrive at
.the correct amount of taxes. Hence, unless undertaken by the CIR himself or his
duly authorized representatives, other tax agents may not validly conduct any of
these kinds of examinations without prior authority.
With the advances in information and communication technology, the Bureau of
Internal Revenue (BIR) promulgated RMO No. 30-2003 to lay down the policies
and guidelines once its then incipient centralized Data Warehouse (DW) becomes
fully operational in conjunction with its Reconciliation of Listing for Enforcement
System (RELIEF System).26 This system can detect tax leaks by matching the data
available under the BIR's Integrated Tax System (ITS) with data gathered from
third-party sources. Through the consolidation and cross-referencing of third-party
information, discrepancy reports on sales and purchases can be generated to
uncover under declared income and over claimed purchases of Goods and
services.
Under this RMO, several offices of the BIR are tasked with specific functions
relative to the RELIEF System, particularly with regard to LNs. Thus, the Systems
Operations Division (SOD) under the Information Systems Group (ISG) is
responsible for: (1) coming up with the List of Taxpayers with discrepancies within
the threshold amount set by management for the issuance of LN and for the
system-generated LNs; and (2) sending the same to the taxpayer and to the Audit
Information, Tax Exemption and Incentives Division (AITEID). After receiving the
LNs, the AITEID under the Assessment
Service (AS), in coordination with the concerned offices under the ISG, shall be
responsible for transmitting the LNs to the investigating offices [Revenue District
Office (RDO)/Large Taxpayers District Office (LTDO)/Large Taxpayers Audit and
Investigation Division (LTAID)]. At the level of these investigating offices, the
appropriate action on the LN s issued to taxpayers with RELIEF data discrepancy
would be determined.
RMO No. 30-2003 was supplemented by RMO No. 42-2003, which laid down
the "no-contact-audit approach" in the CIR's exercise of its ·power to authorize
any examination of taxpayer arid the assessment of the correct amount of tax.
The no-contact-audit approach includes the process of computerized matching of
sales and purchases data contained in the Schedules of Sales and Domestic
44
Purchases and Schedule of Importation submitted by VAT taxpayers under the
RELIEF System pursuant to RR No. 7-95, as amended by RR Nos. 13-97, 7-99
and 8-2002. This may also include the matching of data from other information or
returns filed by the taxpayers with the BIR such as Alphalist of Payees subject to
Final or Creditable Withholding Taxes.
Under this policy, even without conducting a detailed examination of taxpayer's
books and records, if the computerized/manual matching of sales and
purchases/expenses appears to reveal discrepancies, the same shall be
communicated to the concerned taxpayer through the issuance of LN. The LN
shall serve as a discrepancy notice to taxpayer similar to a Notice for Informal
Conference to the concerned taxpayer. Thus, under the RELIEF System, a
revenue officer may begin an examination of the taxpayer even prior to the
issuance of an LN or even in the absence of an LOA with the aid of a
computerized/manual matching of taxpayers': documents/records. Accordingly,
under the RELIEF System, the presumption that the tax returns are in accordance
with law and are presumed correct since these are filed under the penalty of
perjury27 are easily rebutted and the taxpayer becomes instantly burdened to
explain a purported discrepancy.
Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are silent on the
statutory requirement of an LOA before any investigation or examination of the
taxpayer may be conducted. As provided in the RMO No. 42-2003, the LN is
merely similar to a Notice for Informal Conference. However, for a Notice of
Informal Conference, which generally precedes the issuance of an assessment
notice to be valid, the same presupposes that the revenue officer who issued the
same is properly authorized in the first place.
With this apparent lacuna in the RMOs, in November 2005, RMO No. 30-2003, as
supplemented by RMO No. 42-2003, was amended by RMO No. 32-2005 to fine
tune existing procedures in handing assessments against taxpayers'· issued LNs
by reconciling various revenue issuances which conflict with the NIRC. Among the
objectives in the issuance of RMO No. 32-2005 is to prescribe procedure in the
resolution of LN discrepancies, conversion of LNs to LOAs and assessment and
collection of deficiency taxes.
IV. POLICIES AND GUIDELINES
xxxx
 TAXATION - VALUE ADDED TAX
8. In the event a taxpayer who has been issued an LN refutes the
discrepancy shown in the LN, the concerned taxpayer will be given an
opportunity to reconcile its records with those of the BIR within
One Hundred and Twenty (120) days from the date of the issuance of the LN.
However, the subject taxpayer shall no longer be entitled to the abatement of
interest and penalties after the lapse of the sixty (60)-day period from the LN
issuance.
9. In case the above discrepancies remained unresolved at the end of the
One Hundred and Twenty (120)-day period, the revenue officer (RO) assigned
to handle the LN shall recommend the issuance of [LOA) to replace the LN.
The head of the concerned investigating office shall submit a summary list of LNs
for conversion to LAs (using the herein prescribed format in Annex "E" hereof) to
the OACIR-LTS I ORD for the preparation of the corresponding LAs with the
notation "This LA cancels LN_________ No. "
xxxx
V. PROCEDURES
xxxx
B. At the Regional Office/Large Taxpayers Service
xxxx
7. Evaluate the Summary List of LNs for Conversion to LAs submitted by the RDO
x x x prior to approval.
8. Upon approval of the above list, prepare/accomplish and sign the corresponding
LAs.
xxxx
Decision 11 G.R. No. 222743
xxxx
45
10. Transmit the approved/signed LAs, together with the duly
accomplished/approved Summary List of LNs for conversion to LAs, to the
concerned investigating offices for the encoding of the required information x x x
and for service to the concerned taxpayers.
xxxx
C. At the RDO x x x
xxxx
11. If the LN discrepancies remained unresolved within One Hundred and Twenty
(120) days from issuance thereof, prepare a summary list of said LN s for
conversion to LAs x x x.
xxxx
16. Effect the service of the above LAs to the concerned taxpayers.28
In this case, there is no dispute that no LOA was issued prior to the issuance of a
PAN and FAN against MED ICARD. Therefore no LOA was also served on
MEDICARD. The LN that was issued earlier was also not converted into an LOA
contrary to the above quoted provision. Surprisingly, the CIR did not even dispute
the applicability of the above provision of RMO 32-2005 in the present case which
is clear and unequivocal on the necessity of an LOA for the· assessment
proceeding to be valid. Hence, the CTA's disregard of MEDICARD's right to due
process warrant the reversal of the assailed decision and resolution.
In the case of Commissioner of Internal Revenue v. Sony Philippines, Inc. ,29 the
Court said that:
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.30 (Emphasis and
underlining ours)
The Court cannot convert the LN into the LOA required under the law even if the
same was issued by the CIR himself. Under RR No. 12-2002, LN is issued to a
person found to have underreported sales/receipts per data generated under the
RELIEF system. Upon receipt of the LN, a taxpayer may avail of the BIR's
 TAXATION - VALUE ADDED TAX
Voluntary Assessment and Abatement Program. If a taxpayer fails or refuses to
avail of the said program, the BIR may avail of administrative and criminal
.remedies, particularly closure, criminal action, or audit and investigation. Since the
law specifically requires an LOA and RMO No. 32-2005 requires the conversion of
the previously issued LN to an LOA, the absence thereof cannot be simply swept
under the rug, as the CIR would have it. In fact Revenue Memorandum Circular
No. 40-2003 considers an LN as a notice of audit or investigation only for the
purpose of disqualifying the taxpayer from amending his returns.
The following differences between an LOA and LN are crucial. First, an LOA
addressed to a revenue officer is specifically required under the NIRC before an
examination of a taxpayer may be had while an LN is not found in the NIRC and is
only for the purpose of notifying the taxpayer that a discrepancy is found based on
the BIR's RELIEF System. Second, an LOA is valid only for 30 days from date of
issue while an LN has no such limitation. Third, an LOA gives the revenue officer
only a period of 10days from receipt of LOA to conduct his examination of the
taxpayer whereas an LN does not contain such a limitation.31 Simply put, LN is
entirely different and serves a different purpose than an LOA. Due process
demands, as recognized under RMO No. 32-2005, that after an LN has serve its
purpose, the revenue officer should have properly secured an LOA before
proceeding with the further examination and assessment of the petitioner.
Unfortunarely, this was not done in this case.
Contrary to the ruling of the CTA en banc, an LOA cannot be dispensed with just
because none of the financial books or records being physically kept by
MEDICARD was examined. To begin with, Section 6 of the NIRC requires an
authority from the CIR or from his duly authorized representatives before an
examination "of a taxpayer" may be made. The requirement of authorization is
therefore not dependent on whether the taxpayer may be required to physically
open his books and financial records but only on whether a taxpayer is being
subject to examination.
The BIR's RELIEF System has admittedly made the BIR's assessment and
collection efforts much easier and faster. The ease by which the BIR's revenue
generating objectives is achieved is no excuse however for its non-compliance
with the statutory requirement under Section 6 and with its own administrative
issuance. In fact, apart from being a statutory requirement, an LOA is equally
needed even under the BIR's RELIEF System because the rationale of
requirement is the same whether or not the CIR conducts a physical examination
of the taxpayer's records: to prevent undue harassment of a taxpayer and level the
playing field between the government' s vast resources for tax assessment,
collection and enforcement, on one hand, and the solitary taxpayer's dual need to
46
prosecute its business while at the same time responding to the BIR exercise of its
statutory powers. The balance between these is achieved by ensuring that any
examination of the taxpayer by the BIR' s revenue officers is properly authorized in
the first place by those to whom the discretion to exercise the power of
examination is given by the statute.
That the BIR officials herein were not shown to have acted unreasonably is beside
the point because the issue of their lack of authority was only brought up during
the trial of the case. What is crucial is whether the proceedings that led to the
issuance of VAT deficiency assessment against MEDICARD had the prior
approval and authorization from the CIR or her duly authorized representatives.
Not having authority to examine MEDICARD in the first place, the assessment
issued by the CIR is inescapably void.
At any rate, even if it is assumed that the absence of an LOA is not fatal, the Court
still partially finds merit in MEDICARD's substantive arguments.
The amounts earmarked and
eventually paid by MEDICARD to
the medical service providers do not
form part of gross receipts.for VAT
purposes
MEDICARD argues that the CTA en banc seriously erred in affirming the ruling of
the CT A Division that the gross receipts of an HMO for VAT purposes shall be the
total amount of money or its equivalent actually received from members
undiminished by any amount paid or payable to the owners/operators of hospitals,
clinics and medical and dental practitioners. MEDICARD explains that its business
as an HMO involves two different although interrelated contracts. One is between
a corporate client and MEDICARD, with the corporate client's employees being
considered as MEDICARD members; and the other is between the health care
institutions/healthcare professionals and MED ICARD.
Under the first, MEDICARD undertakes to make arrangements with healthcare
institutions/healthcare professionals for the coverage of MEDICARD members
under specific health related services for a specified period of time in exchange for
payment of a more or less fixed membership fee. Under its contract with its
corporate clients, MEDICARD expressly provides that 20% of the membership
fees per individual, regardless of the amount involved, already includes the VAT of
10%/20% excluding the remaining 80o/o because MED ICARD would earmark this
latter portion for medical utilization of its members. Lastly, MEDICARD also assails
 TAXATION - VALUE ADDED TAX
CIR's inclusion in its gross receipts of its earnings from medical services which it
actually and directly rendered to its members.
Since an HMO like MEDICARD is primarily engaged m arranging for coverage or
designated managed care services that are needed by plan holders/members for
fixed prepaid membership fees and for a specified period of time, then MEDICARD
is principally engaged in the sale of services. Its VAT base and corresponding
liability is, thus, determined under Section 108(A)32 of the Tax Code, as amended
by Republic Act No. 9337.
Prior to RR No. 16-2005, an HMO, like a pre-need company, is treated for VAT
purposes as a dealer in securities whose gross receipts is the amount actually
received as contract price without allowing any deduction from the gross
receipts.33 This restrictive tenor changed under RR No. 16-2005. Under this RR,
an HMO's gross receipts and gross receipts in general were defined, thus:
Section 4.108-3. xxx
xxxx
HMO's gross receipts shall be the total amount of money or its equivalent
representing the service fee actually or constructively received during the taxable
period for the services performed or to be performed for another person, excluding
the value-added tax. The compensation for their services representing their
service fee, is presumed to be the total amount received as enrollment fee
from their members plus other charges received.
Section 4.108-4. x x x. "Gross receipts" refers to 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 applied as payments for services rendered, and advance payments
actually or constructively received during the taxable period for the services
performed or to be performed for another person, excluding the VAT. 34
In 2007, the BIR issued RR No. 4-2007 amending portions of RR No. 16-2005,
including the definition of gross receipts in general.35
According to the CTA en banc, the entire amount of membership fees should form
part of MEDICARD's gross receipts because the exclusions to the gross receipts
under RR No. 4-2007 does not apply to MEDICARD. What applies to MEDICARD
47
is the definition of gross receipts of an HMO under RR No. 16-2005 and not the
modified definition of gross receipts in general under the RR No. 4-2007.
The CTA en banc overlooked that the definition of gross receipts under. RR No.
16-2005 merely presumed that the amount received by an HMO as membership
fee is the HMO's compensation for their services. As a mere presumption, an HMO
is, thus, allowed to establish that a portion of the amount it received as
membership fee does NOT actually compensate it but some other person, which in
this case are the medical service providers themselves. It is a well-settled principle
of legal hermeneutics that words of a statute will be interpreted in their natural,
plain and ordinary acceptation and signification, unless it is evident that the
legislature intended a technical or special legal meaning to those words. The Court
cannot read the word "presumed" in any other way.
It is notable in this regard that the term gross receipts as elsewhere mentioned as
the tax base under the NIRC does not contain any specific definition. 36 Therefore,
absent a statutory definition, this Court has construed the term gross receipts in its
plain and ordinary meaning, that is, gross receipts is understood as comprising the
entire receipts without any deduction.37 Congress, under Section 108, could have
simply left the term gross receipts similarly undefined and its interpretation
subjected to ordinary acceptation,. Instead of doing so, Congress limited the scope
of the term gross receipts for VAT purposes only to the amount that the taxpayer
received for the services it performed or to the amount it received as advance
payment for the services it will render in the future for another person.
In the proceedings ·below, the nature of MEDICARD's business and the extent of
the services it rendered are not seriously disputed. As an HMO, MEDICARD
primarily acts as an intermediary between the purchaser of healthcare services (its
members) and the healthcare providers (the doctors, hospitals and clinics) for a
fee. By enrolling membership with MED ICARD, its members will be able to avail of
the pre-arranged medical services from its accredited healthcare providers without
the necessary protocol of posting cash bonds or deposits prior to being attended to
or admitted to hospitals or clinics, especially during emergencies, at any given
time. Apart from this, MEDICARD may also directly provide medical, hospital and
laboratory services, which depends upon its member's choice.
Thus, in the course of its business as such, MED ICARD members can either avail
of medical services from MEDICARD's accredited healthcare providers or directly
from MEDICARD. In the former, MEDICARD members obviously knew that
beyond the agreement to pre-arrange the healthcare needs of its ·members,
MEDICARD would not actually be providing the actual healthcare service. Thus,
based on industry practice, MEDICARD informs its would-be member beforehand
 TAXATION - VALUE ADDED TAX
that 80% of the amount would be earmarked for medical utilization and only the
remaining 20% comprises its service fee. In the latter case, MEDICARD's sale of
its services is exempt from VAT under Section 109(G).
The CTA's ruling and CIR's Comment have not pointed to any portion of Section
108 of the NIRC that would extend the definition of gross receipts even to amounts
that do not only pertain to the services to be performed: by another person, other
than the taxpayer, but even to amounts that were indisputably utilized not by MED
ICARD itself but by the medical service providers.
It is a cardinal rule in statutory construction that no word, clause, sentence,
provision or part of a statute shall be considered surplusage or superfluous,
meaningless, void and insignificant. To this end, a construction which renders
every word operative is preferred over that which makes some words idle and
nugatory. This principle is expressed in the maxim Ut magisvaleat quam pereat,
that is, we choose the interpretation which gives effect to the whole of the statute –
it’s every word.
In Philippine Health Care Providers, Inc. v. Commissioner of Internal
Revenue,38the Court adopted the principal object and purpose object in
determining whether the MEDICARD therein is engaged in the business of
insurance and therefore liable for documentary stamp tax. The Court held therein
that an HMO engaged in preventive, diagnostic and curative medical services is
not engaged in the business of an insurance, thus:
To summarize, the distinctive features of the cooperative are the rendering of
service, its extension, the bringing of physician and patient together, the
preventive features, the regularization of service as well as payment, the
substantial reduction in cost by quantity purchasing in short, getting the
medical job done and paid for; not, except incidentally to these features, the
indemnification for cost after .the services is rendered. Except the last, these
are not distinctive or generally characteristic of the insurance
arrangement. There is, therefore, a substantial difference between contracting in
this way for the rendering of service, even on the contingency that it be needed,
and contracting merely to stand its cost when or after it is rendered.39 (Emphasis
ours)
In sum, the Court said that the main difference between an HMO arid an insurance
company is that HMOs undertake to provide or arrange for the provision of medical
services through participating physicians while insurance companies simply
undertake to indemnify the insured for medical expenses incurred up to a pre-
agreed limit. In the present case, the VAT is a tax on the value added by the
48
performance of the service by the taxpayer. It is, thus, this service and the value
charged thereof by the taxpayer that is taxable under the NIRC.
To be sure, there are pros and cons in subjecting the entire amount of membership
fees to VAT.40 But the Court's task however is not to weigh these policy
considerations but to determine if these considerations in favor of taxation can
even be implied from the statute where the CIR purports to derive her authority.
This Court rules that they cannot because the language of the NIRC is pretty
straightforward and clear. As this Court previously ruled:
What is controlling in this case is the well-settled doctrine of strict interpretation in
the imposition of taxes, not the similar doctrine as applied to tax exemptions. The
rule in the interpretation of tax laws is that a statute will not be construed as
imposing a tax unless it does so clearly, expressly, and unambiguously. A tax
cannot be imposed without clear and express words for that purpose.
Accordingly, the general rule of requiring adherence to the letter in
construing statutes applies with peculiar strictness to tax laws and the
provisions of a taxing act are not to be extended by implication. In answering
the question of who is subject to tax statutes, it is basic that in case of doubt, such
statutes are to be construed most strongly against the government and in favor of
the subjects or citizens because burdens are not to be imposed nor presumed to
be imposed beyond what statutes expressly and clearly import. As burdens, taxes
should not be unduly exacted nor assumed beyond the plain meaning of the tax
laws. 41 (Citation omitted and emphasis and underlining ours)
For this Court to subject the entire amount of MEDICARD's gross receipts without
exclusion, the authority should have been reasonably founded from the language
of the statute. That language is wanting in this case. In the scheme of judicial tax
administration, the need for certainty and predictability in the implementation of tax
laws is crucial. Our tax authorities fill in the details that Congress may not have the
opportunity or competence to provide. The regulations these authorities issue are
relied upon by taxpayers, who are certain that these will be followed by the courts.
Courts, however, will not uphold these authorities' interpretations when dearly
absurd, erroneous or improper.42 The CIR's interpretation of gross receipts in the
present case is patently erroneous for lack of both textual and non-textual support.
As to the CIR's argument that the act of earmarking or allocation is by itself an act
of ownership and management over the funds, the Court does not
agree.1âwphi1 On the contrary, it is MEDICARD's act of earmarking or allocating
80% of the amount it received as membership fee at the time of payment that
weakens the ownership imputed to it. By earmarking or allocating 80% of the
amount, MEDICARD unequivocally recognizes that its possession of the funds is
 TAXATION - VALUE ADDED TAX
not in the concept of owner but as a mere administrator of the same. For this
reason, at most, MEDICARD's right in relation to these amounts is a mere inchoate
owner which would ripen into actual ownership if, and only if, there is
underutilization of the membership fees at the end of the fiscal year. Prior to that,
MEDI CARD is bound to pay from the amounts it had allocated as an administrator
once its members avail of the medical services of MEDICARD's healthcare
providers.
Before the Court, the parties were one in submitting the legal issue of whether the
amounts MEDICARD earmarked, corresponding to 80% of its enrollment fees, and
paid to the medical service providers should form part of its gross receipt for VAT
purposes, after having paid the VAT on the amount comprising the 20%. It is
significant to note in this regard that MEDICARD established that upon receipt of
payment of membership fee it actually issued two official receipts, one pertaining
to the VAT able portion, representing compensation for its services, and the other
represents the non-vatable portion pertaining to the amount earmarked for medical
utilization.: Therefore, the absence of an actual and physical segregation of the
amounts pertaining to two different kinds · of fees cannot arbitrarily disqualify
MEDICARD from rebutting the presumption under the law and from proving that
indeed services were rendered by its healthcare providers for which it paid the
amount it sought to be excluded from its gross receipts.
With the foregoing discussions on the nullity of the assessment on due process
grounds and violation of the NIRC, on one hand, and the utter lack of legal basis of
the CIR's position on the computation of MEDICARD's gross receipts, the Court
finds it unnecessary, nay useless, to discuss the rest of the parties' arguments and
counter-arguments.
In fine, the foregoing discussion suffices for the reversal of the assailed decision
and resolution of the CTA en banc grounded as it is on due process violation. The
Court likewise rules that for purposes of determining the VAT liability of an HMO,
the amounts earmarked and actually spent for medical utilization of its members
should not be included in the computation of its gross receipts.
WHEREFORE, in consideration of the foregoing disquisitions, the petition is
hereby GRANTED. The Decision dated September 2, 2015 and Resolution dated
January 29, 2016 issued by the Court of Tax Appeals en bane in CTA EB No.
1224 are REVERSED and SET ASIDE. The definition of gross receipts under
Revenue Regulations Nos. 16-2005 and 4-2007, in relation to Section 108(A) of
the National Internal Revenue Code, as amended by Republic Act No. 9337, for
purposes of determining its Value-Added Tax liability, is hereby declared
to EXCLUDE the eighty percent (80%) of the amount of the contract price
49
earmarked as fiduciary funds for the medical utilization of its members. Further, the
Value-Added Tax deficiency assessment issued against Medicard Philippines, Inc.
is hereby declared unauthorized for having been issued without a Letter of
Authority by the Commissioner of Internal Revenue or his duly authorized
representatives.
SO ORDERED.
G.R. No. 183505 February 26, 2010
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
SM PRIME HOLDINGS, INC. and FIRST ASIA REALTY DEVELOPMENT
CORPORATION, Respondents.
DECISION
DEL CASTILLO, J.:
When the intent of the law is not apparent as worded, or when the application of
the law would lead to absurdity or injustice, legislative history is all important. In
such cases, courts may take judicial notice of the origin and history of the law, 1 the
deliberations during the enactment,2 as well as prior laws on the same subject
matter3 to ascertain the true intent or spirit of the law.
This Petition for Review on Certiorari under Rule 45 of the Rules of Court, in
relation to Republic Act (RA) No. 9282,4 seeks to set aside the April 30, 2008
Decision5 and the June 24, 2008 Resolution6 of the Court of Tax Appeals (CTA).
Factual Antecedents
Respondents SM Prime Holdings, Inc. (SM Prime) and First Asia Realty
Development Corporation (First Asia) are domestic corporations duly organized
and existing under the laws of the Republic of the Philippines. Both are engaged in
the business of operating cinema houses, among others.7
CTA Case No. 7079
On September 26, 2003, the Bureau of Internal Revenue (BIR) sent SM Prime a
Preliminary Assessment Notice (PAN) for value added tax (VAT) deficiency on
 TAXATION - VALUE ADDED TAX
cinema ticket sales in the amount of ₱119,276,047.40 for taxable year 2000.8 In
response, SM Prime filed a letter-protest dated December 15, 2003.9
On December 12, 2003, the BIR sent SM Prime a Formal Letter of Demand for the
alleged VAT deficiency, which the latter protested in a letter dated January 14,
2004.10
On September 6, 2004, the BIR denied the protest filed by SM Prime and ordered
it to pay the VAT deficiency for taxable year 2000 in the amount of
₱124,035,874.12.11
On October 15, 2004, SM Prime filed a Petition for Review before the CTA
docketed as CTA Case No. 7079.12
CTA Case No. 7085
On May 15, 2002, the BIR sent First Asia a PAN for VAT deficiency on
cinema ticket sales for taxable year 1999 in the total amount of
₱35,823,680.93.13 First Asia protested the PAN in a letter dated July 9, 2002.14
Subsequently, the BIR issued a Formal Letter of Demand for the alleged VAT
deficiency which was protested by First Asia in a letter dated December 12,
2002.15
On September 6, 2004, the BIR rendered a Decision denying the protest and
ordering First Asia to pay the amount of ₱35,823,680.93 for VAT deficiency for
taxable year 1999.16
Accordingly, on October 20, 2004, First Asia filed a Petition for Review before the
CTA, docketed as CTA Case No. 7085.17
CTA Case No. 7111
On April 16, 2004, the BIR sent a PAN to First Asia for VAT deficiency on cinema
ticket sales for taxable year 2000 in the amount of ₱35,840,895.78. First Asia
protested the PAN through a letter dated April 22, 2004.18
Thereafter, the BIR issued a Formal Letter of Demand for alleged VAT
deficiency.19 First Asia protested the same in a letter dated July 9, 2004.20
50
On October 5, 2004, the BIR denied the protest and ordered First Asia to pay the
VAT deficiency in the amount of ₱35,840,895.78 for taxable year 2000.21
This prompted First Asia to file a Petition for Review before the CTA on December
16, 2004. The case was docketed as CTA Case No. 7111.22
CTA Case No. 7272
Re: Assessment Notice No. 008-02
A PAN for VAT deficiency on cinema ticket sales for the taxable year 2002 in the
total amount of ₱32,802,912.21 was issued against First Asia by the BIR. In
response, First Asia filed a protest-letter dated November 11, 2004. The BIR then
sent a Formal Letter of Demand, which was protested by First Asia on December
14, 2004.23
Re: Assessment Notice No. 003-03
A PAN for VAT deficiency on cinema ticket sales in the total amount of
₱28,196,376.46 for the taxable year 2003 was issued by the BIR against First
Asia. In a letter dated September 23, 2004, First Asia protested the PAN. A Formal
Letter of Demand was thereafter issued by the BIR to First Asia, which the latter
protested through a letter dated November 11, 2004. 24
On May 11, 2005, the BIR rendered a Decision denying the protests. It ordered
First Asia to pay the amounts of ₱33,610,202.91 and ₱28,590,826.50 for VAT
deficiency for taxable years 2002 and 2003, respectively.25
Thus, on June 22, 2005, First Asia filed a Petition for Review before the CTA,
docketed as CTA Case No. 7272.26
Consolidated Petitions
The Commissioner of Internal Revenue (CIR) filed his Answers to the Petitions
filed by SM Prime and First Asia.27
On July 1, 2005, SM Prime filed a Motion to Consolidate CTA Case Nos. 7085,
7111 and 7272 with CTA Case No. 7079 on the grounds that the issues raised
therein are identical and that SM Prime is a majority shareholder of First Asia. The
motion was granted.28
 TAXATION - VALUE ADDED TAX
Upon submission of the parties’ respective memoranda, the consolidated cases
were submitted for decision on the sole issue of whether gross receipts derived
from admission tickets by cinema/theater operators or proprietors are subject to
VAT.29
Ruling of the CTA First Division
On September 22, 2006, the First Division of the CTA rendered a Decision
granting the Petition for Review. Resorting to the language used and the legislative
history of the law, it ruled that the activity of showing cinematographic films is not a
service covered by VAT under the National Internal Revenue Code (NIRC) of
1997, as amended, but an activity subject to amusement tax under RA 7160,
otherwise known as the Local Government Code (LGC) of 1991. Citing House
Joint Resolution No. 13, entitled "Joint Resolution Expressing the True Intent of
Congress with Respect to the Prevailing Tax Regime in the Theater and Local Film
Industry Consistent with the State’s Policy to Have a Viable, Sustainable and
Competitive Theater and Film Industry as One of its Partners in National
Development,"30 the CTA First Division held that the House of Representatives
resolved that there should only be one business tax applicable to theaters and
movie houses, which is the 30% amusement tax imposed by cities and provinces
under the LGC of 1991. Further, it held that consistent with the State’s policy to
have a viable, sustainable and competitive theater and film industry, the national
government should be precluded from imposing its own business tax in addition to
that already imposed and collected by local government units. The CTA First
Division likewise found that Revenue Memorandum Circular (RMC) No. 28-2001,
which imposes VAT on gross receipts from admission to cinema houses, cannot
be given force and effect because it failed to comply with the procedural due
process for tax issuances under RMC No. 20-86.31 Thus, it disposed of the case as
follows:
IN VIEW OF ALL THE FOREGOING, this Court hereby GRANTS the Petitions for
Review. Respondent’s Decisions denying petitioners’ protests against deficiency
value-added taxes are hereby REVERSED. Accordingly, Assessment Notices Nos.
VT-00-000098, VT-99-000057, VT-00-000122, 003-03 and 008-02
are ORDERED cancelled and set aside.
SO ORDERED.32
Aggrieved, the CIR moved for reconsideration which was denied by the First
Division in its Resolution dated December 14, 2006.33
Ruling of the CTA En Banc
51
Thus, the CIR appealed to the CTA En Banc.34 The case was docketed as CTA EB
No. 244.35 The CTA En Banc however denied36 the Petition for Review and
dismissed37 as well petitioner’s Motion for Reconsideration.
The CTA En Banc held that Section 108 of the NIRC actually sets forth an
exhaustive enumeration of what services are intended to be subject to VAT. And
since the showing or exhibition of motion pictures, films or movies by cinema
operators or proprietors is not among the enumerated activities contemplated in
the phrase "sale or exchange of services," then gross receipts derived by cinema/
theater operators or proprietors from admission tickets in showing motion pictures,
film or movie are not subject to VAT. It reiterated that the exhibition or showing of
motion pictures, films, or movies is instead subject to amusement tax under the
LGC of 1991. As regards the validity of RMC No. 28-2001, the CTA En Banc
agreed with its First Division that the same cannot be given force and effect for
failure to comply with RMC No. 20-86.
Issue
Hence, the present recourse, where petitioner alleges that the CTA En Banc
seriously erred:
(1) In not finding/holding that the gross receipts derived by operators/proprietors of
cinema houses from admission tickets [are] subject to the 10% VAT because:
(a) THE EXHIBITION OF MOVIES BY CINEMA
OPERATORS/PROPRIETORS TO THE PAYING PUBLIC IS A SALE OF
SERVICE;
(b) UNLESS EXEMPTED BY LAW, ALL SALES OF SERVICES ARE
EXPRESSLY SUBJECT TO VAT UNDER SECTION 108 OF THE NIRC
OF 1997;
(c) SECTION 108 OF THE NIRC OF 1997 IS A CLEAR PROVISION OF
LAW AND THE APPLICATION OF RULES OF STATUTORY
CONSTRUCTION AND EXTRINSIC AIDS IS UNWARRANTED;
(d) GRANTING WITHOUT CONCEDING THAT RULES OF
CONSTRUCTION ARE APPLICABLE HEREIN, STILL THE HONORABLE
COURT ERRONEOUSLY APPLIED THE SAME AND PROMULGATED
DANGEROUS PRECEDENTS;
 TAXATION - VALUE ADDED TAX
(e) THERE IS NO VALID, EXISTING PROVISION OF LAW EXEMPTING
RESPONDENTS’ SERVICES FROM THE VAT IMPOSED UNDER
SECTION 108 OF THE NIRC OF 1997;
(f) QUESTIONS ON THE WISDOM OF THE LAW ARE NOT PROPER
ISSUES TO BE TRIED BY THE HONORABLE COURT; and
(g) RESPONDENTS WERE TAXED BASED ON THE PROVISION OF
SECTION 108 OF THE NIRC.
(2) In ruling that the enumeration in Section 108 of the NIRC of 1997 is exhaustive
in coverage;
(3) In misconstruing the NIRC of 1997 to conclude that the showing of motion
pictures is merely subject to the amusement tax imposed by the Local Government
Code; and
(4) In invalidating Revenue Memorandum Circular (RMC) No. 28-2001.38
Simply put, the issue in this case is whether the gross receipts derived by
operators or proprietors of cinema/theater houses from admission tickets are
subject to VAT.
Petitioner’s Arguments
Petitioner argues that the enumeration of services subject to VAT in Section 108 of
the NIRC is not exhaustive because it covers all sales of services unless exempted
by law. He claims that the CTA erred in applying the rules on statutory construction
and in using extrinsic aids in interpreting Section 108 because the provision is
clear and unambiguous. Thus, he maintains that the exhibition of movies by
cinema operators or proprietors to the paying public, being a sale of service, is
subject to VAT.
Respondents’ Arguments
Respondents, on the other hand, argue that a plain reading of Section 108 of the
NIRC of 1997 shows that the gross receipts of proprietors or operators of
cinemas/theaters derived from public admission are not among the services
subject to VAT. Respondents insist that gross receipts from cinema/theater
admission tickets were never intended to be subject to any tax imposed by the
national government. According to them, the absence of gross receipts from
52
cinema/theater admission tickets from the list of services which are subject to the
national amusement tax under Section 125 of the NIRC of 1997 reinforces this
legislative intent. Respondents also highlight the fact that RMC No. 28-2001 on
which the deficiency assessments were based is an unpublished administrative
ruling.
Our Ruling
The petition is bereft of merit.
The enumeration of services subject to VAT under Section 108 of the NIRC is not
exhaustive
Section 108 of the NIRC of the 1997 reads:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties.
—
(A) Rate and Base of Tax. — There shall be levied, assessed and collected, a
value-added tax equivalent to ten percent (10%) of gross receipts derived from the
sale or exchange of services, including the use or lease of properties.
The phrase "sale or exchange of services" means the performance of all kinds of
services in the Philippines for others for a fee, remuneration or consideration,
including those performed or rendered by construction and service contractors;
stock, real estate, commercial, customs and immigration brokers; lessors of
property, whether personal or real; warehousing services; lessors or distributors of
cinematographic films; persons engaged in milling, processing, manufacturing or
repacking goods for others; proprietors, operators or keepers of hotels, motels,
rest houses, pension houses, inns, resorts; proprietors or operators of restaurants,
refreshment parlors, cafes and other eating places, including clubs and caterers;
dealers in securities; lending investors; transportation contractors on their transport
of goods or cargoes, including persons who transport goods or cargoes for hire
and other domestic common carriers by land, air and water relative to their
transport of goods or cargoes; services of franchise grantees of telephone and
telegraph, radio and television broadcasting and all other franchise grantees
except those under Section 119 of this Code; services of banks, non-bank financial
intermediaries and finance companies; and non-life insurance companies (except
their crop insurances), including surety, fidelity, indemnity and bonding companies;
and similar services regardless of whether or not the performance thereof calls for
 TAXATION - VALUE ADDED TAX
the exercise or use of the physical or mental faculties. The phrase "sale or
exchange of services" shall likewise include:
(1) The lease or the use of or the right or privilege to use any copyright, patent,
design or model, plan, secret formula or process, goodwill, trademark, trade brand
or other like property or right;
xxxx
(7) The lease of motion picture films, films, tapes and discs; and
(8) The lease or the use of or the right to use radio, television, satellite
transmission and cable television time.
x x x x (Emphasis supplied)
A cursory reading of the foregoing provision clearly shows that the enumeration of
the "sale or exchange of services" subject to VAT is not exhaustive. The words,
"including," "similar services," and "shall likewise include," indicate that the
enumeration is by way of example only.39
Among those included in the enumeration is the "lease of motion picture films,
films, tapes and discs." This, however, is not the same as the showing or exhibition
of motion pictures or films. As pointed out by the CTA En Banc:
"Exhibition" in Black’s Law Dictionary is defined as "To show or display. x x x To
produce anything in public so that it may be taken into possession" (6th ed., p.
573). While the word "lease" is defined as "a contract by which one owning such
property grants to another the right to possess, use and enjoy it on specified period
of time in exchange for periodic payment of a stipulated price, referred to as rent
(Black’s Law Dictionary, 6th ed., p. 889). x x x40
Since the activity of showing motion pictures, films or movies by cinema/ theater
operators or proprietors is not included in the enumeration, it is incumbent upon
the court to the determine whether such activity falls under the phrase "similar
services." The intent of the legislature must therefore be ascertained.
The legislature never intended operators
or proprietors of cinema/theater houses to be covered by VAT
53
Under the NIRC of 1939,41 the national government imposed amusement tax on
proprietors, lessees, or operators of theaters, cinematographs, concert halls,
circuses, boxing exhibitions, and other places of amusement, including cockpits,
race tracks, and cabaret.42 In the case of theaters or cinematographs, the taxes
were first deducted, withheld, and paid by the proprietors, lessees, or operators of
such theaters or cinematographs before the gross receipts were divided between
the proprietors, lessees, or operators of the theaters or cinematographs and the
distributors of the cinematographic films. Section 1143 of the Local Tax
Code,44 however, amended this provision by transferring the power to impose
amusement tax45 on admission from theaters, cinematographs, concert halls,
circuses and other places of amusements exclusively to the local government.
Thus, when the NIRC of 197746 was enacted, the national government imposed
amusement tax only on proprietors, lessees or operators of cabarets, day and
night clubs, Jai-Alai and race tracks.47
On January 1, 1988, the VAT Law48 was promulgated. It amended certain
provisions of the NIRC of 1977 by imposing a multi-stage VAT to replace the tax
on original and subsequent sales tax and percentage tax on certain services. It
imposed VAT on sales of services under Section 102 thereof, which provides:
SECTION 102. Value-added tax on sale of services. — (a) Rate and base of tax.
— There shall be levied, assessed and collected, a value-added tax equivalent to
10% 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 or 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) Processing manufacturing or repacking goods for other persons doing
business outside the Philippines which goods are subsequently exported,
xxx
xxxx
"Gross receipts" means the total amount of money or its
equivalent representing the contract price, compensation or
service fee, including the amount charged for materials supplied
 TAXATION - VALUE ADDED TAX
with the services and deposits or advance payments actually or
constructively received during the taxable quarter for the service
performed or to be performed for another person, excluding value-
added tax.
(b) Determination of the tax. — (1) Tax billed as a separate item in
the invoice. — If the tax is billed as a separate item in the invoice,
the tax shall be based on the gross receipts, excluding the tax.
(2) Tax not billed separately or is billed erroneously in the invoice. — If the
tax is not billed separately or is billed erroneously in the invoice, the tax
shall be determined by multiplying the gross receipts (including the amount
intended to cover the tax or the tax billed erroneously) by 1/11. (Emphasis
supplied)
Persons subject to amusement tax under the NIRC of 1977, as amended,
however, were exempted from the coverage of VAT.49
On February 19, 1988, then Commissioner Bienvenido A. Tan, Jr. issued RMC 8-
88, which clarified that the power to impose amusement tax on gross receipts
derived from admission tickets was exclusive with the local government units and
that only the gross receipts of amusement places derived from sources other than
from admission tickets were subject to amusement tax under the NIRC of 1977, as
amended. Pertinent portions of RMC 8-88 read:
Under the Local Tax Code (P.D. 231, as amended), the jurisdiction to levy
amusement tax on gross receipts arising from admission to places of amusement
has been transferred to the local governments to the exclusion of the national
government.
xxxx
Since the promulgation of the Local Tax Code which took effect on June 28, 1973
none of the amendatory laws which amended the National Internal Revenue Code,
including the value added tax law under Executive Order No. 273, has amended
the provisions of Section 11 of the Local Tax Code. Accordingly, the sole
jurisdiction for collection of amusement tax on admission receipts in places of
amusement rests exclusively on the local government, to the exclusion of the
national government. Since the Bureau of Internal Revenue is an agency of the
national government, then it follows that it has no legal mandate to levy
amusement tax on admission receipts in the said places of amusement.
54
Considering the foregoing legal background, the provisions under Section 123 of
the National Internal Revenue Code as renumbered by Executive Order No. 273
(Sec. 228, old NIRC) pertaining to amusement taxes on places of amusement shall
be implemented in accordance with BIR RULING, dated December 4, 1973 and
BIR RULING NO. 231-86 dated November 5, 1986 to wit:
"x x x Accordingly, only the gross receipts of the amusement places derived
from sources other than from admission tickets shall be subject to x x x
amusement tax prescribed under Section 228 of the Tax Code, as
amended (now Section 123, NIRC, as amended by E.O. 273). The tax on gross
receipts derived from admission tickets shall be levied and collected by the
city government pursuant to Section 23 of Presidential Decree No. 231, as
amended x x x" or by the provincial government, pursuant to Section 11 of
P.D. 231, otherwise known as the Local Tax Code. (Emphasis supplied)
On October 10, 1991, the LGC of 1991 was passed into law. The local government
retained the power to impose amusement tax on proprietors, lessees, or operators
of theaters, cinemas, concert halls, circuses, boxing stadia, and other places of
amusement at a rate of not more than thirty percent (30%) of the gross receipts
from admission fees under Section 140 thereof.50 In the case of theaters or
cinemas, the tax shall first be deducted and withheld by their proprietors, lessees,
or operators and paid to the local government before the gross receipts are divided
between said proprietors, lessees, or operators and the distributors of the
cinematographic films. However, the provision in the Local Tax Code expressly
excluding the national government from collecting tax from the proprietors,
lessees, or operators of theaters, cinematographs, concert halls, circuses and
other places of amusements was no longer included.
In 1994, RA 7716 restructured the VAT system by widening its tax base and
enhancing its administration. Three years later, RA 7716 was amended by RA
8241. Shortly thereafter, the NIRC of 199751 was signed into law. Several
amendments52 were made to expand the coverage of VAT. However, none pertain
to cinema/theater operators or proprietors. At present, only lessors or distributors
of cinematographic films are subject to VAT. While persons subject to amusement
tax53 under the NIRC of 1997 are exempt from the coverage of VAT.54
Based on the foregoing, the following facts can be established:
(1) Historically, the activity of showing motion pictures, films or movies by
cinema/theater operators or proprietors has always been considered as a
form of entertainment subject to amusement tax.
 TAXATION - VALUE ADDED TAX
(2) Prior to the Local Tax Code, all forms of amusement tax were imposed
by the national government.
(3) When the Local Tax Code was enacted, amusement tax on admission
tickets from theaters, cinematographs, concert halls, circuses and other
places of amusements were transferred to the local government.
(4) Under the NIRC of 1977, the national government imposed amusement
tax only on proprietors, lessees or operators of cabarets, day and night
clubs, Jai-Alai and race tracks.
(5) The VAT law was enacted to replace the tax on original and
subsequent sales tax and percentage tax on certain services.
(6) When the VAT law was implemented, it exempted persons subject to
amusement tax under the NIRC from the coverage of VAT.1auuphil
(7) When the Local Tax Code was repealed by the LGC of 1991, the local
government continued to impose amusement tax on admission tickets
from theaters, cinematographs, concert halls, circuses and other places of
amusements.
(8) Amendments to the VAT law have been consistent in exempting
persons subject to amusement tax under the NIRC from the coverage of
VAT.
(9) Only lessors or distributors of cinematographic films are included in the
coverage of VAT.
These reveal the legislative intent not to impose VAT on persons already covered
by the amusement tax. This holds true even in the case of cinema/theater
operators taxed under the LGC of 1991 precisely because the VAT law was
intended to replace the percentage tax on certain services. The mere fact that they
are taxed by the local government unit and not by the national government is
immaterial. The Local Tax Code, in transferring the power to tax gross receipts
derived by cinema/theater operators or proprietor from admission tickets to the
local government, did not intend to treat cinema/theater houses as a separate
class. No distinction must, therefore, be made between the places of amusement
taxed by the national government and those taxed by the local government.
55
To hold otherwise would impose an unreasonable burden on cinema/theater
houses operators or proprietors, who would be paying an additional 10% 55 VAT on
top of the 30% amusement tax imposed by Section 140 of the LGC of 1991, or a
total of 40% tax. Such imposition would result in injustice, as persons taxed under
the NIRC of 1997 would be in a better position than those taxed under the LGC of
1991. We need not belabor that a literal application of a law must be rejected if it
will operate unjustly or lead to absurd results.56 Thus, we are convinced that the
legislature never intended to include cinema/theater operators or proprietors in the
coverage of VAT.
On this point, it is apropos to quote the case of Roxas v. Court of Tax Appeals, 57 to
wit:
The power of taxation is sometimes called also the power to destroy. Therefore, it
should be exercised with caution to minimize injury to the proprietary rights of a
taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill
the "hen that lays the golden egg." And, in order to maintain the general public's
trust and confidence in the Government this power must be used justly and not
treacherously.
The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the
imposition of VAT
Petitioner, in issuing the assessment notices for deficiency VAT against
respondents, ratiocinated that:
Basically, it was acknowledged that a cinema/theater operator was then subject to
amusement tax under Section 260 of Commonwealth Act No. 466, otherwise
known as the National Internal Revenue Code of 1939, computed on the amount
paid for admission. With the enactment of the Local Tax Code under Presidential
Decree (PD) No. 231, dated June 28, 1973, the power of imposing taxes on gross
receipts from admission of persons to cinema/theater and other places of
amusement had, thereafter, been transferred to the provincial government, to the
exclusion of the national or municipal government (Sections 11 & 13, Local Tax
Code). However, the said provision containing the exclusive power of the
provincial government to impose amusement tax, had also been repealed and/or
deleted by Republic Act (RA) No. 7160, otherwise known as the Local Government
Code of 1991, enacted into law on October 10, 1991. Accordingly, the enactment
of RA No. 7160, thus, eliminating the statutory prohibition on the national
government to impose business tax on gross receipts from admission of persons
to places of amusement, led the way to the valid imposition of the VAT pursuant to
Section 102 (now Section 108) of the old Tax Code, as amended by the Expanded
 TAXATION - VALUE ADDED TAX
VAT Law (RA No. 7716) and which was implemented beginning January 1,
1996.58 (Emphasis supplied)
We disagree.
The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the
imposition of VAT on the gross receipts of cinema/theater operators or proprietors
derived from admission tickets. The removal of the prohibition under the Local Tax
Code did not grant nor restore to the national government the power to impose
amusement tax on cinema/theater operators or proprietors. Neither did it expand
the coverage of VAT. Since the imposition of a tax is a burden on the taxpayer, it
cannot be presumed nor can it be extended by implication. A law will not be
construed as imposing a tax unless it does so clearly, expressly, and
unambiguously.59 As it is, the power to impose amusement tax on cinema/theater
operators or proprietors remains with the local government.
Revenue Memorandum Circular No. 28-2001 is invalid
Considering that there is no provision of law imposing VAT on the gross receipts of
cinema/theater operators or proprietors derived from admission tickets, RMC No.
28-2001 which imposes VAT on the gross receipts from admission to cinema
houses must be struck down. We cannot overemphasize that RMCs must not
override, supplant, or modify the law, but must remain consistent and in harmony
with, the law they seek to apply and implement.60
In view of the foregoing, there is no need to discuss whether RMC No. 28-2001
complied with the procedural due process for tax issuances as prescribed under
RMC No. 20-86.
Rule on tax exemption does not apply
Moreover, contrary to the view of petitioner, respondents need not prove their
entitlement to an exemption from the coverage of VAT. The rule that tax
exemptions should be construed strictly against the taxpayer presupposes that the
taxpayer is clearly subject to the tax being levied against him.61 The reason is
obvious: it is both illogical and impractical to determine who are exempted without
first determining who are covered by the provision.62 Thus, unless a statute
imposes a tax clearly, expressly and unambiguously, what applies is the equally
well-settled rule that the imposition of a tax cannot be presumed.63 In fact, in case
of doubt, tax laws must be construed strictly against the government and in favor
of the taxpayer.64
56
WHEREFORE, the Petition is hereby DENIED. The assailed April 30, 2008
Decision of the Court of Tax Appeals En Banc holding that gross receipts derived
by respondents from admission tickets in showing motion pictures, films or movies
are not subject to value-added tax under Section 108 of the National Internal
Revenue Code of 1997, as amended, and its June 24, 2008 Resolution denying
the motion for reconsideration are AFFIRMED.
SO ORDERED.
G.R. No. 193007 July 19, 2011
RENATO V. DIAZ and AURORA MA. F. TIMBOL, Petitioners,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, Respondents.
DECISION
ABAD, J.:
May toll fees collected by tollway operators be subjected to value- added tax?
The Facts and the Case
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition
for declaratory relief1 assailing the validity of the impending imposition of value-
added tax (VAT) by the Bureau of Internal Revenue (BIR) on the collections of
tollway operators.
Petitioners claim that, since the VAT would result in increased toll fees, they have
an interest as regular users of tollways in stopping the BIR action. Additionally,
Diaz claims that he sponsored the approval of Republic Act 7716 (the 1994
Expanded VAT Law or EVAT Law) and Republic Act 8424 (the 1997 National
Internal Revenue Code or the NIRC) at the House of Representatives. Timbol, on
the other hand, claims that she served as Assistant Secretary of the Department of
Trade and Industry and consultant of the Toll Regulatory Board (TRB) in the past
administration.
Petitioners allege that the BIR attempted during the administration of President
Gloria Macapagal-Arroyo to impose VAT on toll fees. The imposition was deferred,
however, in view of the consistent opposition of Diaz and other sectors to such
 TAXATION - VALUE ADDED TAX
move. But, upon President Benigno C. Aquino III’s assumption of office in 2010,
the BIR revived the idea and would impose the challenged tax on toll fees
beginning August 16, 2010 unless judicially enjoined.
Petitioners hold the view that Congress did not, when it enacted the NIRC, intend
to include toll fees within the meaning of "sale of services" that are subject to VAT;
that a toll fee is a "user’s tax," not a sale of services; that to impose VAT on toll
fees would amount to a tax on public service; and that, since VAT was never
factored into the formula for computing toll fees, its imposition would violate the
non-impairment clause of the constitution.
On August 13, 2010 the Court issued a temporary restraining order (TRO),
enjoining the implementation of the VAT. The Court required the government,
represented by respondents Cesar V. Purisima, Secretary of the Department of
Finance, and Kim S. Jacinto-Henares, Commissioner of Internal Revenue, to
comment on the petition within 10 days from notice.2 Later, the Court issued
another resolution treating the petition as one for prohibition. 3
On August 23, 2010 the Office of the Solicitor General filed the government’s
comment.4 The government avers that the NIRC imposes VAT on all kinds of
services of franchise grantees, including tollway operations, except where the law
provides otherwise; that the Court should seek the meaning and intent of the law
from the words used in the statute; and that the imposition of VAT on tollway
operations has been the subject as early as 2003 of several BIR rulings and
circulars.5
The government also argues that petitioners have no right to invoke the non-
impairment of contracts clause since they clearly have no personal interest in
existing toll operating agreements (TOAs) between the government and tollway
operators. At any rate, the non-impairment clause cannot limit the State’s
sovereign taxing power which is generally read into contracts.
Finally, the government contends that the non-inclusion of VAT in the parametric
formula for computing toll rates cannot exempt tollway operators from VAT. In any
event, it cannot be claimed that the rights of tollway operators to a reasonable rate
of return will be impaired by the VAT since this is imposed on top of the toll rate.
Further, the imposition of VAT on toll fees would have very minimal effect on
motorists using the tollways.
In their reply6 to the government’s comment, petitioners point out that tollway
operators cannot be regarded as franchise grantees under the NIRC since they do
not hold legislative franchises. Further, the BIR intends to collect the VAT by
57
rounding off the toll rate and putting any excess collection in an escrow account.
But this would be illegal since only the Congress can modify VAT rates and
authorize its disbursement. Finally, BIR Revenue Memorandum Circular 63-2010
(BIR RMC 63-2010), which directs toll companies to record an accumulated input
VAT of zero balance in their books as of August 16, 2010, contravenes Section
111 of the NIRC which grants entities that first become liable to VAT a transitional
input tax credit of 2% on beginning inventory. For this reason, the VAT on toll fees
cannot be implemented.
The Issues Presented
The case presents two procedural issues:
1. Whether or not the Court may treat the petition for declaratory relief as
one for prohibition; and
2. Whether or not petitioners Diaz and Timbol have legal standing to file
the action.
The case also presents two substantive issues:
1. Whether or not the government is unlawfully expanding VAT coverage
by including tollway operators and tollway operations in the terms
"franchise grantees" and "sale of services" under Section 108 of the Code;
and
2. Whether or not the imposition of VAT on tollway operators a) amounts
to a tax on tax and not a tax on services; b) will impair the tollway
operators’ right to a reasonable return of investment under their TOAs; and
c) is not administratively feasible and cannot be implemented.
The Court’s Rulings
A. On the Procedural Issues:
On August 24, 2010 the Court issued a resolution, treating the petition as one for
prohibition rather than one for declaratory relief, the characterization that
petitioners Diaz and Timbol gave their action. The government has sought
reconsideration of the Court’s resolution,7 however, arguing that petitioners’
allegations clearly made out a case for declaratory relief, an action over which the
Court has no original jurisdiction. The government adds, moreover, that the petition
 TAXATION - VALUE ADDED TAX
does not meet the requirements of Rule 65 for actions for prohibition since the BIR
did not exercise judicial, quasi-judicial, or ministerial functions when it sought to
impose VAT on toll fees. Besides, petitioners Diaz and Timbol has a plain, speedy,
and adequate remedy in the ordinary course of law against the BIR action in the
form of an appeal to the Secretary of Finance.
But there are precedents for treating a petition for declaratory relief as one for
prohibition if the case has far-reaching implications and raises questions that need
to be resolved for the public good.8 The Court has also held that a petition for
prohibition is a proper remedy to prohibit or nullify acts of executive officials that
amount to usurpation of legislative authority.9
Here, the imposition of VAT on toll fees has far-reaching implications. Its
imposition would impact, not only on the more than half a million motorists who use
the tollways everyday, but more so on the government’s effort to raise revenue for
funding various projects and for reducing budgetary deficits.
To dismiss the petition and resolve the issues later, after the challenged VAT has
been imposed, could cause more mischief both to the tax-paying public and the
government. A belated declaration of nullity of the BIR action would make any
attempt to refund to the motorists what they paid an administrative nightmare with
no solution. Consequently, it is not only the right, but the duty of the Court to take
cognizance of and resolve the issues that the petition raises.
Although the petition does not strictly comply with the requirements of Rule 65, the
Court has ample power to waive such technical requirements when the legal
questions to be resolved are of great importance to the public. The same may be
said of the requirement of locus standi which is a mere procedural requisite. 10
B. On the Substantive Issues:
One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT is
levied, assessed, and collected, according to Section 108, on the gross receipts
derived from the sale or exchange of services as well as from the use or lease of
properties. The third paragraph of Section 108 defines "sale or exchange of
services" as follows:
The phrase ‘sale or exchange of services’ means the performance of all kinds of
services in the Philippines for others for a fee, remuneration or consideration,
including those performed or rendered by construction and service contractors;
stock, real estate, commercial, customs and immigration brokers; lessors of
58
property, whether personal or real; warehousing services; lessors or distributors of
cinematographic films; persons engaged in milling, processing, manufacturing or
repacking goods for others; proprietors, operators or keepers of hotels, motels,
resthouses, pension houses, inns, resorts; proprietors or operators of restaurants,
refreshment parlors, cafes and other eating places, including clubs and caterers;
dealers in securities; lending investors; transportation contractors on their transport
of goods or cargoes, including persons who transport goods or cargoes for hire
and other domestic common carriers by land relative to their transport of goods or
cargoes; common carriers by air and sea relative to their transport of passengers,
goods or cargoes from one place in the Philippines to another place in the
Philippines; sales of electricity by generation companies, transmission, and
distribution companies; services of franchise grantees of electric utilities, telephone
and telegraph, radio and television broadcasting and all other franchise grantees
except those under Section 119 of this Code and non-life insurance companies
(except their crop insurances), including surety, fidelity, indemnity and bonding
companies; and similar services regardless of whether or not the performance
thereof calls for the exercise or use of the physical or mental faculties.
(Underscoring supplied)
It is plain from the above that the law imposes VAT on "all kinds of services"
rendered in the Philippines for a fee, including those specified in the list. The
enumeration of affected services is not exclusive.11 By qualifying "services" with
the words "all kinds," Congress has given the term "services" an all-encompassing
meaning. The listing of specific services are intended to illustrate how pervasive
and broad is the VAT’s reach rather than establish concrete limits to its application.
Thus, every activity that can be imagined as a form of "service" rendered for a fee
should be deemed included unless some provision of law especially excludes it.
Now, do tollway operators render services for a fee? Presidential Decree (P.D.)
1112 or the Toll Operation Decree establishes the legal basis for the services that
tollway operators render. Essentially, tollway operators construct, maintain, and
operate expressways, also called tollways, at the operators’ expense. Tollways
serve as alternatives to regular public highways that meander through populated
areas and branch out to local roads. Traffic in the regular public highways is for
this reason slow-moving. In consideration for constructing tollways at their
expense, the operators are allowed to collect government-approved fees from
motorists using the tollways until such operators could fully recover their expenses
and earn reasonable returns from their investments.
When a tollway operator takes a toll fee from a motorist, the fee is in effect for the
latter’s use of the tollway facilities over which the operator enjoys private
proprietary rights12 that its contract and the law recognize. In this sense, the
 TAXATION - VALUE ADDED TAX
tollway operator is no different from the following service providers under Section
108 who allow others to use their properties or facilities for a fee:
1. Lessors of property, whether personal or real;
2. Warehousing service operators;
3. Lessors or distributors of cinematographic films;
4. Proprietors, operators or keepers of hotels, motels, resthouses, pension
houses, inns, resorts;
5. Lending investors (for use of money);
6. Transportation contractors on their transport of goods or cargoes,
including persons who transport goods or cargoes for hire and other
domestic common carriers by land relative to their transport of goods or
cargoes; and
7. Common carriers by air and sea relative to their transport of
passengers, goods or cargoes from one place in the Philippines to another
place in the Philippines.
It does not help petitioners’ cause that Section 108 subjects to VAT "all kinds of
services" rendered for a fee "regardless of whether or not the performance thereof
calls for the exercise or use of the physical or mental faculties." This means that
"services" to be subject to VAT need not fall under the traditional concept of
services, the personal or professional kinds that require the use of human
knowledge and skills.
And not only do tollway operators come under the broad term "all kinds of
services," they also come under the specific class described in Section 108 as "all
other franchise grantees" who are subject to VAT, "except those under Section
119 of this Code."
Tollway operators are franchise grantees and they do not belong to exceptions
(the low-income radio and/or television broadcasting companies with gross annual
incomes of less than ₱10 million and gas and water utilities) that Section
11913 spares from the payment of VAT. The word "franchise" broadly covers
government grants of a special right to do an act or series of acts of public
concern.14
59
Petitioners of course contend that tollway operators cannot be considered
"franchise grantees" under Section 108 since they do not hold legislative
franchises. But nothing in Section 108 indicates that the "franchise grantees" it
speaks of are those who hold legislative franchises. Petitioners give no reason,
and the Court cannot surmise any, for making a distinction between franchises
granted by Congress and franchises granted by some other government agency.
The latter, properly constituted, may grant franchises. Indeed, franchises conferred
or granted by local authorities, as agents of the state, constitute as much a
legislative franchise as though the grant had been made by Congress itself. 15 The
term "franchise" has been broadly construed as referring, not only to authorizations
that Congress directly issues in the form of a special law, but also to those granted
by administrative agencies to which the power to grant franchises has been
delegated by Congress.16
Tollway operators are, owing to the nature and object of their business, "franchise
grantees." The construction, operation, and maintenance of toll facilities on public
improvements are activities of public consequence that necessarily require a
special grant of authority from the state. Indeed, Congress granted special
franchise for the operation of tollways to the Philippine National Construction
Company, the former tollway concessionaire for the North and South Luzon
Expressways. Apart from Congress, tollway franchises may also be granted by the
TRB, pursuant to the exercise of its delegated powers under P.D. 1112.17 The
franchise in this case is evidenced by a "Toll Operation Certificate." 18
Petitioners contend that the public nature of the services rendered by tollway
operators excludes such services from the term "sale of services" under Section
108 of the Code. But, again, nothing in Section 108 supports this contention. The
reverse is true. In specifically including by way of example electric utilities,
telephone, telegraph, and broadcasting companies in its list of VAT-covered
businesses, Section 108 opens other companies rendering public service for a fee
to the imposition of VAT. Businesses of a public nature such as public utilities and
the collection of tolls or charges for its use or service is a franchise. 19
Nor can petitioners cite as binding on the Court statements made by certain
lawmakers in the course of congressional deliberations of the would-be law. As the
Court said in South African Airways v. Commissioner of Internal
Revenue,20 "statements made by individual members of Congress in the
consideration of a bill do not necessarily reflect the sense of that body and are,
consequently, not controlling in the interpretation of law." The congressional will is
ultimately determined by the language of the law that the lawmakers voted on.
Consequently, the meaning and intention of the law must first be sought "in the
words of the statute itself, read and considered in their natural, ordinary, commonly
 TAXATION - VALUE ADDED TAX
accepted and most obvious significations, according to good and approved usage
and without resorting to forced or subtle construction."
Two. Petitioners argue that a toll fee is a "user’s tax" and to impose VAT on toll
fees is tantamount to taxing a tax.21 Actually, petitioners base this argument on the
following discussion in Manila International Airport Authority (MIAA) v. Court of
Appeals:22
No one can dispute that properties of public dominion mentioned in Article 420 of
the Civil Code, like "roads, canals, rivers, torrents, ports and bridges constructed
by the State," are owned by the State. The term "ports" includes seaports and
airports. The MIAA Airport Lands and Buildings constitute a "port" constructed by
the State. Under Article 420 of the Civil Code, the MIAA Airport Lands and
Buildings are properties of public dominion and thus owned by the State or the
Republic of the Philippines.
x x x The operation by the government of a tollway does not change the character
of the road as one for public use. Someone must pay for the maintenance of the
road, either the public indirectly through the taxes they pay the government, or only
those among the public who actually use the road through the toll fees they pay
upon using the road. The tollway system is even a more efficient and equitable
manner of taxing the public for the maintenance of public roads.
The charging of fees to the public does not determine the character of the property
whether it is for public dominion or not. Article 420 of the Civil Code defines
property of public dominion as "one intended for public use." Even if the
government collects toll fees, the road is still "intended for public use" if anyone
can use the road under the same terms and conditions as the rest of the
public. The charging of fees, the limitation on the kind of vehicles that can use the
road, the speed restrictions and other conditions for the use of the road do not
affect the public character of the road.
The terminal fees MIAA charges to passengers, as well as the landing fees MIAA
charges to airlines, constitute the bulk of the income that maintains the operations
of MIAA. The collection of such fees does not change the character of MIAA as an
airport for public use. Such fees are often termed user’s tax. This means taxing
those among the public who actually use a public facility instead of taxing all the
public including those who never use the particular public facility. A user’s tax is
more equitable – a principle of taxation mandated in the 1987
Constitution."23 (Underscoring supplied)
60
Petitioners assume that what the Court said above, equating terminal fees to a
"user’s tax" must also pertain to tollway fees. But the main issue in the MIAA case
was whether or not Parañaque City could sell airport lands and buildings under
MIAA administration at public auction to satisfy unpaid real estate taxes. Since
local governments have no power to tax the national government, the Court held
that the City could not proceed with the auction sale. MIAA forms part of the
national government although not integrated in the department framework."24 Thus,
its airport lands and buildings are properties of public dominion beyond the
commerce of man under Article 420(1)25 of the Civil Code and could not be sold at
public auction.
As can be seen, the discussion in the MIAA case on toll roads and toll fees was
made, not to establish a rule that tollway fees are user’s tax, but to make the point
that airport lands and buildings are properties of public dominion and that the
collection of terminal fees for their use does not make them private properties.
Tollway fees are not taxes. Indeed, they are not assessed and collected by the BIR
and do not go to the general coffers of the government.
It would of course be another matter if Congress enacts a law imposing a user’s
tax, collectible from motorists, for the construction and maintenance of certain
roadways. The tax in such a case goes directly to the government for the
replenishment of resources it spends for the roadways. This is not the case here.
What the government seeks to tax here are fees collected from tollways that are
constructed, maintained, and operated by private tollway operators at their own
expense under the build, operate, and transfer scheme that the government has
adopted for expressways.26 Except for a fraction given to the government, the toll
fees essentially end up as earnings of the tollway operators.
In sum, fees paid by the public to tollway operators for use of the tollways, are not
taxes in any sense. A tax is imposed under the taxing power of the government
principally for the purpose of raising revenues to fund public expenditures. 27 Toll
fees, on the other hand, are collected by private tollway operators as
reimbursement for the costs and expenses incurred in the construction,
maintenance and operation of the tollways, as well as to assure them a reasonable
margin of income. Although toll fees are charged for the use of public facilities,
therefore, they are not government exactions that can be properly treated as a tax.
Taxes may be imposed only by the government under its sovereign authority, toll
fees may be demanded by either the government or private individuals or entities,
as an attribute of ownership.28
Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to
the nature of VAT as an indirect tax. In indirect taxation, a distinction is made
 TAXATION - VALUE ADDED TAX
between the liability for the tax and burden of the tax. The seller who is liable for
the VAT may shift or pass on the amount of VAT it paid on goods, properties or
services to the buyer. In such a case, what is transferred is not the seller’s liability
but merely the burden of the VAT.29
Thus, the seller remains directly and legally liable for payment of the VAT, but the
buyer bears its burden since the amount of VAT paid by the former is added to the
selling price. Once shifted, the VAT ceases to be a tax 30 and simply becomes part
of the cost that the buyer must pay in order to purchase the good, property or
service.
Consequently, VAT on tollway operations is not really a tax on the tollway user, but
on the tollway operator. Under Section 105 of the Code, 31 VAT is imposed on any
person who, in the course of trade or business, sells or renders services for a fee.
In other words, the seller of services, who in this case is the tollway operator, is the
person liable for VAT. The latter merely shifts the burden of VAT to the tollway
user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees
were deemed as a "user’s tax." VAT is assessed against the tollway operator’s
gross receipts and not necessarily on the toll fees. Although the tollway operator
may shift the VAT burden to the tollway user, it will not make the latter directly
liable for the VAT. The shifted VAT burden simply becomes part of the toll fees that
one has to pay in order to use the tollways.32
Three. Petitioner Timbol has no personality to invoke the non-impairment of
contract clause on behalf of private investors in the tollway projects. She will
neither be prejudiced by nor be affected by the alleged diminution in return of
investments that may result from the VAT imposition. She has no interest at all in
the profits to be earned under the TOAs. The interest in and right to recover
investments solely belongs to the private tollway investors.
Besides, her allegation that the private investors’ rate of recovery will be adversely
affected by imposing VAT on tollway operations is purely speculative. Equally
presumptuous is her assertion that a stipulation in the TOAs known as the Material
Adverse Grantor Action will be activated if VAT is thus imposed. The Court cannot
rule on matters that are manifestly conjectural. Neither can it prohibit the State
from exercising its sovereign taxing power based on uncertain, prophetic grounds.
Four. Finally, petitioners assert that the substantiation requirements for claiming
input VAT make the VAT on tollway operations impractical and incapable of
implementation. They cite the fact that, in order to claim input VAT, the name,
61
address and tax identification number of the tollway user must be indicated in the
VAT receipt or invoice. The manner by which the BIR intends to implement the
VAT – by rounding off the toll rate and putting any excess collection in an escrow
account – is also illegal, while the alternative of giving "change" to thousands of
motorists in order to meet the exact toll rate would be a logistical nightmare. Thus,
according to them, the VAT on tollway operations is not administratively feasible.33
Administrative feasibility is one of the canons of a sound tax system. It simply
means that the tax system should be capable of being effectively administered and
enforced with the least inconvenience to the taxpayer. Non-observance of the
canon, however, will not render a tax imposition invalid "except to the extent that
specific constitutional or statutory limitations are impaired."34 Thus, even if the
imposition of VAT on tollway operations may seem burdensome to implement, it is
not necessarily invalid unless some aspect of it is shown to violate any law or the
Constitution.
Here, it remains to be seen how the taxing authority will actually implement the
VAT on tollway operations. Any declaration by the Court that the manner of its
implementation is illegal or unconstitutional would be premature. Although the
transcript of the August 12, 2010 Senate hearing provides some clue as to how the
BIR intends to go about it,35 the facts pertaining to the matter are not sufficiently
established for the Court to pass judgment on. Besides, any concern about how
the VAT on tollway operations will be enforced must first be addressed to the BIR
on whom the task of implementing tax laws primarily and exclusively rests. The
Court cannot preempt the BIR’s discretion on the matter, absent any clear violation
of law or the Constitution.
For the same reason, the Court cannot prematurely declare as illegal, BIR RMC
63-2010 which directs toll companies to record an accumulated input VAT of zero
balance in their books as of August 16, 2010, the date when the VAT imposition
was supposed to take effect. The issuance allegedly violates Section 111(A) 36 of
the Code which grants first time VAT payers a transitional input VAT of 2% on
beginning inventory.
In this connection, the BIR explained that BIR RMC 63-2010 is actually the product
of negotiations with tollway operators who have been assessed VAT as early as
2005, but failed to charge VAT-inclusive toll fees which by now can no longer be
collected. The tollway operators agreed to waive the 2% transitional input VAT, in
exchange for cancellation of their past due VAT liabilities. Notably, the right to
claim the 2% transitional input VAT belongs to the tollway operators who have not
questioned the circular’s validity. They are thus the ones who have a right to
challenge the circular in a direct and proper action brought for the purpose.
 TAXATION - VALUE ADDED TAX
Conclusion
In fine, the Commissioner of Internal Revenue did not usurp legislative prerogative
or expand the VAT law’s coverage when she sought to impose VAT on tollway
operations. Section 108(A) of the Code clearly states that services of all other
franchise grantees are subject to VAT, except as may be provided under Section
119 of the Code. Tollway operators are not among the franchise grantees subject
to franchise tax under the latter provision. Neither are their services among the
VAT-exempt transactions under Section 109 of the Code.
If the legislative intent was to exempt tollway operations from VAT, as petitioners
so strongly allege, then it would have been well for the law to clearly say so. Tax
exemptions must be justified by clear statutory grant and based on language in the
law too plain to be mistaken.37 But as the law is written, no such exemption obtains
for tollway operators. The Court is thus duty-bound to simply apply the law as it is
found.1avvphi1
Lastly, the grant of tax exemption is a matter of legislative policy that is within the
exclusive prerogative of Congress. The Court’s role is to merely uphold this
legislative policy, as reflected first and foremost in the language of the tax statute.
Thus, any unwarranted burden that may be perceived to result from enforcing such
policy must be properly referred to Congress. The Court has no discretion on the
matter but simply applies the law.
The VAT on franchise grantees has been in the statute books since 1994 when
R.A. 7716 or the Expanded Value-Added Tax law was passed. It is only now,
however, that the executive has earnestly pursued the VAT imposition against
tollway operators. The executive exercises exclusive discretion in matters
pertaining to the implementation and execution of tax laws. Consequently, the
executive is more properly suited to deal with the immediate and practical
consequences of the VAT imposition.
WHEREFORE, the Court DENIES respondents Secretary of Finance and
Commissioner of Internal Revenue’s motion for reconsideration of its August 24,
2010 resolution, DISMISSES the petitioners Renato V. Diaz and Aurora Ma. F.
Timbol’s petition for lack of merit, and SETS ASIDE the Court’s temporary
restraining order dated August 13, 2010.
SO ORDERED.
G.R. No. 209776, December 07, 2016
62
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. UNITED CADIZ
SUGAR FARMERS ASSOCIATION MULTI-PURPOSE
COOPERATIVE, Respondent.
DECISION
BRION, J.:
Before us is the petition for review on certiorari1 (under Rule 45 of the Rules of
Court) filed by the Commissioner of Internal Revenue (CIR) to assail the June 5,
2013 decision2 and the October 30, 2013 resolution3 of the Court of Tax Appeals
(CTA) en banc in CTA EB No. 846 (CTA Case No. 7995).
In the assailed decision and resolution, the CTA en banc affirmed the
decision4 and resolution5 of the CTA Second Division (CTA division).
The Facts
By law, the CIR is empowered, among others, to act on and approve claims for tax
refunds or credits.
The respondent United Cadiz Sugar Farmers Association Multi-purpose
Cooperative (UCSFA-MPC) is a multi-purpose cooperative with a Certificate of
Registration issued by the Cooperative Development Authority (CDA) dated
January 14, 2004.6
In accordance with Revenue Regulations (RR) No. 20-2001, the Bureau of Internal
Revenue (BIR) issued BIR Ruling No. RR12-08-2004,7 otherwise known as the
"Certificate of Tax Exemption" in favor of UCSFA-MPC.
In November 2007, BIR Regional Director Rodita B. Galanto of BIR Region 12 -
Bacolod City required UCSFA-MPC to pay in advance the value-added tax (VAT)
before her office could issue the Authorization Allowing Release of Refined Sugar
(AARRS) from the sugar refinery/mill. This was the first instance that the
Cooperative was required to do so. This prompted the cooperative to confirm with
the BIR8 whether it is exempt from the payment of VAT pursuant to Section 109(1)
of the National Internal Revenue Code (NIRC).9
The BIR responded favorably to UCSFA-MPC's query. In BIR Ruling No. ECCP-
015-08,10 the CIR11 ruled that the cooperative "is considered as the actual
producer of the members' sugarcane production, because it primarily provided the
 TAXATION - VALUE ADDED TAX
various inputs (fertilizers), capital, technology transfer, and farm management."
(emphasis supplied) The CIR thus confirmed that UCSFA-MPC's sale of produce
to members and non-members is exempt from the payment of VAT.
As a result, Regional Director Galanto no longer required the advance payment of
VAT from UCSFA-MPC and began issuing AARRS in its favor, thereby allowing
the cooperative to withdraw its refined sugar from the refinery. But, in November
2008, the administrative legal opinion notwithstanding, Regional Director Galanto,
again demanded the payment of advance VAT from UCSFA-MPC. Unable to
withdraw its refined sugar from the refinery/mill for its operations, UCSFA-MPC
was forced to pay advance VAT under protest.
On November 11, 2009, UCSFA-MPC filed an administrative claim for refund with
the BIR, asserting that it had been granted tax exemption under Article 61 of
Republic Act No. (RA) 6938, otherwise known as the Cooperative Code of the
Philippines (Cooperative Code),12 and Section 109(1) of the NIRC.13
On November 16, 2009, it likewise filed a judicial claim for refund before the CTA
division. During the trial, UCSFA-MPC presented, among other documents, its
Certificates of Registration14 and Good Standing15 issued by the CDA; Certificate
of Tax Exemption,16 and BIR Ruling No. ECCP-015-08 issued by the BIR,17 as well
as its Summary of VAT Payments Under Protest, Certificates of Advance
Payment, official receipts, and payment forms to substantiate its claim.
The CTA division ruled in UCSFA-MPC's favor,18 thus upholding the cooperative's
exemption from the payment of VAT; the division held that the amount of
P3,469,734.00 representing advance VAT on 34,017 LKG bags of refined sugar
withdrawn from the refinery, was illegally or erroneously collected by the BIR. The
CIR moved but failed to obtain reconsideration of the CTA division ruling.
The CIR then sought recourse before the CTA en banc. In its assailed
decision,19 the CTA en banc affirmed the CTA division's ruling and ruled that
UCSFA-MPC successfully proved its entitlement to tax exemption through its
Certificate of Tax Exemption and BIR Ruling No. ECCP-015-08 (which confirmed
its status as a tax-exempt cooperative). The CTA en banc also held that both its
administrative and judicial claims for refund were timely filed, having been filed
within the two-year prescriptive period,20 in accordance with the requirements of
Sections 204(C) and 229 of the NIRC.
In denying the CIR's motion for reconsideration,21 the CTA en banc further ruled
that the payment of VAT on sales necessarily includes the exemption from the
payment of advance VAT. It also struck down the argument questioning the validity
63
of UCSFA-MPC's Certificate of Good Standing for having been raised belatedly
and thus considered waived.
Finally, it also held that as a tax-exempt cooperative, UCSFA-MPC is not required
to file monthly VAT declarations. The presentation of these documents is therefore
not essential in proving its claim for refund.
These developments gave rise to the present petition.
The Court's Ruling
We find the petition unmeritorious.
We have consistently ruled that claims for tax refunds, when based on statutes
granting tax exemption, partake of the nature of an exemption.22 Tax refunds and
exemptions are exceptions rather than the rule and for this reason are highly
disfavored.23 Hence, in evaluating a claim for refund, the rule of strict interpretation
applies.
This rule requires the claimant to prove not only his entitlement to a refund, but
also his due observance of the reglementary periods within which he must file his
administrative and judicial claims for refund.24 Non-compliance with
these substantive and procedural due process requirements results in the denial of
the claim.25cralawred It is then essential for us to discuss each requirement and
evaluate whether these have been duly complied with in the present case.
Procedural requirements: Present
claim for refund was timely filed.
UCSFA-MPC s claim for refund - grounded as it is on payments of advance VAT
alleged to have been illegally and erroneously collected from November 15,
2007 to February 13, 2009 - is governed by Sections 204(C)26 and 22927 of the
NIRC. These provisions are clear: within two years from the date of payment of
tax, the claimant must first file an administrative claim with the CIR28 before filing
its judicial claim with the courts of law.29 Both claims must be filed within a two-
year reglementary period.30 Timeliness of the filing of the claim is mandatory and
jurisdictional. The court31 cannot take cognizance of a judicial claim for refund filed
either prematurely or out of time.
In the present case, the court a quo found that while the judicial claim was filed
merely five days after filing the administrative claim, both claims were filed within
 TAXATION - VALUE ADDED TAX
the two-year reglementary period. Thus, the CTA correctly exercised jurisdiction
over the judicial claim filed by UCSFA-MPC.
Substantive requirements: UCSFA
MPC proved its entitlement to refund
As mentioned, the rule on strict interpretation requires the claimant to sufficiently
establish his entitlement to a tax refund. If the claimant asserts that he should be
refunded the amount of tax he has previously paid because he is exempted from
paying the tax,32 he must point to the specific legal provision of law granting him
the exemption. His right cannot be based on mere implication.33
In this case, the cooperative claims that it is exempted — based on Section 61 of
R.A. 6938 and Section 109(1) of the NIRC — from paying advance VAT when it
withdraws refined sugar from the refinery/mill as required by RR. No. 6-2007.
UCSFA-MPC thus alleges that the amounts of advance VAT it paid under protest
from November 15, 2007 to February 13, 2009, were illegally arid erroneously
collected.
UCSFA-MPC 's sale of refined sugar
is VAT-exempt.
As a general rule under the NIRC, a seller shall be liable for VAT 34 on the sale of
goods or properties based on the gross selling price or gross value in money of the
thing sold.35 However, certain transactions are exempted from the imposition of
VAT.36 One exempted transaction is the sale of agricultural food products in their
original state.37 Agricultural food products that have undergone simple processes
of preparation or preservation for the market are nevertheless considered to be in
their original state.38
Sugar is an agricultural food product. Notably, tax regulations differentiate
between raw sugar and refined sugar.39
For internal revenue purposes, the sale of raw cane sugar is exempt from
VAT40 because it is considered to be in its original state.41 On the other
hand, refined sugar is an agricultural product that can no longer be considered to
be in its original state because it has undergone the refining process; its sale is
thus subject to VAT.
Although the sale of refined sugar is generally subject to VAT, such transaction
may nevertheless qualify as a VAT-exempt transaction if the sale is made by a
64
cooperative. Under Section 109(1) of the NIRC,42sales by agricultural
cooperatives are exempt from VAT provided the following conditions concur, viz:
First, the seller must be an agricultural cooperative duly registered with the
CDA.43 An agricultural cooperative is "duly registered" when it has been issued
a certificate of registration by the CDA. This certificate is conclusive evidence of
its registration.44
Second, the cooperative must sell either:
1) exclusively to its members; or
2) to both members and non-members, its produce, whether in its original state or
processed form.45
The second requisite differentiates cooperatives according to its customers. If the
cooperative transacts only with members, all its sales are VAT-exempt, regardless
of what it sells. On the other hand, if it transacts with both members and non-
members, the product sold must be the cooperative's own produce in order to be
VAT-exempt. Stated differently, if the cooperative only sells its produce or goods
that it manufactures on its own, its entire sales is VAT-exempt.46
A cooperative is the producer of the sugar if it owns or leases the land tilled, incurs
the cost of agricultural production of the sugar, and produces the sugar cane to be
refined.47 It should not have merely purchased the sugar cane from its planters-
members.48
UCSFA-MPC satisfies these requisites in the present case.
First, UCSFA-MPC presented its Certificate of Registration issued by the CDA. It
does not appear in the records that the CIR ever objected to the authenticity or
validity of this certificate. Thus, the certificate is conclusive proof that the
cooperative is duly registered with the CDA.49
While its certificate of registration is sufficient to establish the cooperative's due
registration, we note that it also presented the Certificate of Good Standing that the
CDA issued. This further corroborates its claim that it is duly registered with the
CDA.
Second, the cooperative also presented BIR Ruling No. ECCP-015-08, which
states that UCSFA-MPC "is considered as the actual producer of the members'
 TAXATION - VALUE ADDED TAX
sugar cane production because it primarily provided the various productions inputs
(fertilizers), capital, technology transfer, and farm management." It concluded that
the cooperative "has direct participation in the sugar cane production of its
farmers-members."
Thus, the BIR itself acknowledged and confirmed that UCSFA-MPC is the
producer of the refined sugar it sells. Under the principle of equitable
estoppel,50 the petitioner is now precluded from unilaterally revoking its own
pronouncement and unduly depriving the cooperative of an exemption clearly
granted by law.
With the UCSFA-MPC established as a duly registered cooperative and
the producer of sugar cane, its sale of refined sugar is exempt from VAT, whether
the sale is made to members or to non-members.
The VAT-exempt nature of the sales made by agricultural cooperatives under the
NIRC is consistent with the tax exemptions granted to qualified cooperatives under
the Cooperative Code which grants cooperatives exemption from sales tax 51 on
transactions with members and non-members.52
These conclusions reduce the issue in the case to whether the granted exemption
also covers the payment of advance VAT upon withdrawal of refined sugar from
the refinery or mill.
Exemption from VAT on sale of
refined sugar by an agricultural
cooperative includes the exemption
from the requirement of advance
payment thereof.
The CTA en banc ruled that the cooperative is exempted from the payment of
advance VAT.53 It also ruled that the exemption from the payment of VAT on sales
necessarily includes the exemption from the payment of advance VAT. 54
The CIR argues that the exemption granted by the Cooperative Code and NIRC,
on which the Certificate of Tax Exemption and BIR Ruling No. ECC-015-08 issued
in favor of UCSFA-MPC were based, only covers VAT on the sale of produced
sugar. It does not include the exemption from the payment of advance VAT in
the withdrawal of refined sugar from the sugar mill.55
The CIR's argument fails to persuade us.
65
As we discussed above, the sale of refined sugar by an agricultural cooperative is
exempt from VAT. To fully understand the difference between VAT on the sale of
refined sugar and the advance VAT upon withdrawal of refined sugar, we
distinguish between the tax liability that arises from the imposition of VAT and
the obligation of the taxpayer to pay the same.
Persons liable for VAT on the sale of goods shall pay the VAT due, in general, on
a monthly basis. VAT accruing from the sale of goods in the current month shall be
payable the following month.56 However, there are instances where VAT is
required to be paid in advance,57 such as in the sale of refined sugar.58
To specifically address the policies and procedures governing the advance
payment of VAT on the sale of refined sugar, RR Nos. 6-2007 and 13-2008 were
issued.
Under these regulations, VAT on the sale of refined sugar that, under regular
circumstances, is payable within the month following the actual sale of refined
sugar, shall nonetheless be paid in advance before the refined sugar can even be
withdrawn from the sugar refinery/mill by the sugar owner. Any advance VAT paid
by sellers of refined sugar shall be allowed as credit against their output tax on the
actual gross selling price of refined sugar.59
Recall in this regard that VAT is a transaction tax imposed at every stage of the
distribution process: on the sale, barter, exchange, or lease of goods or
services.60 Simply stated, VAT generally arises because an actual sale, barter, or
exchange has been consummated.
In the sugar industry, raw sugar is processed in a refinery/mill which thereafter
transforms the raw sugar into refined sugar. The refined sugar is then withdrawn or
taken out of the refinery/mill and sold to customers.61 Under this flow, the
withdrawal of refined sugar evidently takes place prior to its sale.
The VAT implications of the withdrawal of refined sugar from the sugar
refinery/mill and the actual sale of refined sugar are different. While the sale is the
actual transaction upon which VAT is imposed, the withdrawal gives rise to the
obligation to pay the VAT due, albeit in advance. Therefore, the requirement for
the advance payment of VAT for refined sugar creates a special situation: While
the transaction giving rise to the imposition of VAT — the actual sale of refined
sugar — has not yet taken place, the VAT that would be due from the subsequent
sale is, nonetheless, already required to be paid earlier, which is before the
withdrawal of the goods from the sugar refinery/mill.
 TAXATION - VALUE ADDED TAX
To be clear, the transaction subject to VAT is still the sale of refined sugar. The
withdrawal of sugar is not a separate transaction subject to VAT. It is only the
payment thereof that is required to be made in advance.
While the payment of advance VAT on the sale of refined sugar is, in general,
required before these goods may be withdrawn from the refinery/mill, cooperatives
are exempt from this requirement because they are cooperatives.
Revenue regulations specifically provide that such withdrawal shall not be subject
to the payment of advance VAT if the following requisites are present, viz:
First, the withdrawal is made by a duly accredited and registered agricultural
cooperative in good standing.62 It was later clarified that a cooperative is in good
standing if it is a holder of a certificate of good standing issued by the CDA.63
Second, the cooperative should also the producer of the sugar being withdrawn.64
Third, the cooperative withdrawing the refined sugar should subsequently sell the
same to either its members or another agricultural cooperative.65
In sum, the sale of refined sugar by an agricultural cooperative duly registered with
the CDA is exempt from VAT. A qualified cooperative also enjoys exemption from
the requirement of advance payment of VAT upon withdrawal from the
refinery/mill. The agricultural cooperative's exemption from the requirement of
advance payment is a logical consequence of the exemption from VAT of its sales
of refined sugar. We elaborate on this point as follows:
First, the VAT required to be paid in advance (upon withdrawal) is the same VAT
to be imposed on the subsequent sale of refined sugar. If the very transaction (sale
of refined sugar) is VAT-exempt, there is no VAT to be paid in advance because,
simply, there is no transaction upon which VAT is to be imposed.
Second, any advance VAT paid upon withdrawal shall be allowed as credit against
its output tax arising from its sales of refined sugar. If all sales by a cooperative are
VAT-exempt, no output tax shall materialize. It is simply absurd to require a
cooperative to make advance VAT payments if it will not have any output tax
against which it can use/credit its advance payments.
Thus, we sustain the CTA en banc's ruling that if the taxpayer is exempt from VAT
on the sale of refined sugar, necessarily, it is also exempt from the advance
payment of such tax.
66
Tax regulations cannot impose
additional requirements other than
what is required under the law as a
condition for tax exemption.
Insisting that UCSFA-MPC does not enjoy exemption from the payment of
advance VAT, the CIR questions the cooperative's compliance with tax regulations
that require cooperatives to make additional documentary submissions to the BIR
prior to the issuance of a certificate of tax exemption.
According to the CIR, RR No. 13-2008 requires an agricultural producer
cooperative duly registered with the CDA to be in good standing before it can avail
of the exemption from the advance payment of VAT. It claims that the cooperative
failed to present any certificate of good standing. While it did present a certificate
of good standing, the cooperative only acquired this certificate on August 25, 2009.
Hence, it was not exempt from advance payment of VAT during the period subject
of its refund, or between November 15, 2007 to February 15, 2009. 66
We disagree with this CIR submission.
First, the CTA observed that the petitioner questioned the cooperative's certificate
of good standing for the first time in its motion for reconsideration filed before the
CTA en banc. Thus, the CTA en banc was correct in ruling that under the Rules of
Court the argument is deemed waived, having been belatedly raised. No new
issue in a case can be raised in a pleading, which issue, by due diligence, could
have been raised in previous pleadings.67
Second, the certificate of good standing is one of the requirements for the
issuance of a certificate of tax exemption under RR No. 20-2001.
Article 2(d) of the Cooperative Code defines a certificate of tax exemption as "the
ruling granting exemption to the cooperative" issued by the BIR. In turn, under RR
No. 20-2001, the cooperative shall file a letter-application for the issuance of
certificate of tax exemption, attaching thereto its certificates of registration and
good standing duly issued by the CDA.68 The certificate of tax exemption shall
remain valid so long as the cooperative is "in good standing" as ascertained by the
CDA.69
In line with the presumption of regularity in the performance of duties of public
officers, the issuance of the certificate of tax exemption in favor of UCSFA-MPC
presupposes that the cooperative submitted to the BIR the complete documentary
 TAXATION - VALUE ADDED TAX
requirements for application, including its certificate of good standing. Simply
stated, when the cooperative's certificate of tax exemption was issued in 2004, it
had already obtained its certificate of good standing from the CDA.
The fact that its certificate of good standing was dated August 25, 2009, should not
be detrimental to UCSFA-MPC's case. As it correctly points out, a certificate of
good standing is renewed and issued annually by the CDA. Its renewal simply
shows that it has remained to be in good standing with the CDA since its original
registration. More importantly, no evidence was presented to show that either the
certificate of registration or certificate of good standing had been previously
revoked.
Third, as discussed earlier, the exemption from VAT on the sale of refined sugar
carries with it the exemption from the payment of advance VAT before the
withdrawal of refined sugar from the refinery/mill.
Section 109(1) of the NIRC clearly sets forth only two requisites for the exemption
of the sale of refined sugar from VAT. Tax regulations implementing Sections 61
and 62 of the Cooperative Code as well as Section 109(1) of the NIRC must be
read together, and read as well to be consistent with the laws from which they
have been derived. Thus, RR 20-2001 must be understood to implement the same
principle as the Cooperative Code and the NIRC and not add to the existing
requirements provided by these laws.
We must remember that regulations may not enlarge, alter, or restrict the
provisions of the law it administers; it cannot engraft additional requirements not
contemplated by the legislature.70 A taxpayer-claimant should not be required to
submit additional documents beyond what is required by the law; the taxpayer-
claimant should enjoy the exemption it has, by law, always been entitled to.
Hence, once the cooperative has sufficiently shown that it has satisfied the
requirements under Section 109(1) of the NIRC for the exemption from VAT on its
sale of refined sugar (i.e., that it is duly registered with the CDA and it is the
producer of the sugar cane from which refined sugar is derived), its exemption
from the advance payment of VAT should automatically be granted and
recognized.
On these bases, we reject the CIR's insistence that RR No. 13-2008 requires the
submission of a certificate of good standing as a condition to a cooperative's
exemption from the requirement of advance payment of VAT. In the same vein, the
petitioner's argument that the submission of monthly VAT declarations and
quarterly VAT returns is essential to a claim for tax refund must also fail.
67
The Certificate of Tax Exemption and
BIR Ruling No. ECCP-015-2008 have
not been revoked.
Finally, the CIR questions the validity of the certificate of exemption and BIR
Ruling No. ECCP-015-08 used by UCSFA-MPC to prove its exemption from tax.
Citing Commissioner of Internal Revenue v. Burmeister and Wain Scandinavian
Contractor Mindanao, Inc.,71 the CIR insists that the BIR rulings on which the
cooperative anchors its exemption were, in the first place, deemed revoked when it
filed an Answer to the cooperative's judicial claim for refund before the CTA
Division.72
On the other hand, UCSFA-MPC points out that, while the case cited held that the
filing of an answer by the CIR is a revocation of prior rulings issued in favor of the
taxpayer-claimant, it has a recognized exception: the principle of non-retroactivity
of rulings under Section 246 of the NIRC.73
We agree with UCSFA-MPC.
The basic rule is that if any BIR ruling or issuance promulgated by the CIR is
subsequently revoked or nullified by the CIR herself or by the court, the
revocation/nullification cannot be applied retroactively to the prejudice of the
taxpayers. Hence, even if we consider that the CIR had revoked the rulings
previously issued in favor of UCSFA-MPC upon the filing of her answer, it cannot
effectively deprive UCSFA-MPC of its rights under the rulings prior to their
revocation.
We note that, as pointed out by UCSFA-MPC, this principle was recognized as an
exception in the very case the CIR cited, although the CIR opted to omit this
portion of the cited case.
Being exempt from VAT on the sale of refined sugar and the requirement of
advance payment of VAT, the amounts that UCSFA-MPC had paid from
November 15, 2007 to February 13, 2009, were illegally and erroneously collected.
Accordingly, a refund is in order.
WHEREFORE, we DENY the petition and accordingly AFFIRM the June 5, 2013
decision and the October 30, 2013 resolution of the CTA en banc in CTA EB No.
846.
SO ORDERED.
 TAXATION - VALUE ADDED TAX
June 13, 2016
G.R. No. 190506
CORAL BAY NICKEL CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
BERSAMIN, J.:
This appeal is brought by a taxpayer whose claim for the refund or credit pertaining
to its alleged unutilized input tax for the third and fourth quarters of the year 2002
amounting to ₱50, 124,086.75 had been denied by the Commissioner of Internal
Revenue. The Court of Tax Appeals (CTA) En Banc and in Division denied its
appeal.
We sustain the denial of the appeal.
Antecedents
The petitioner, a domestic corporation engaged in the manufacture of nickel and/or
cobalt mixed sulphide, is a VAT entity registered with the Bureau of Internal
Revenue (BIR). It is also registered with the Philippine Economic Zone Authority
(PEZA) as an Ecozone Export Enterprise at the Rio Tuba Export Processing Zone
under PEZA Certificate of Registration dated December 27, 2002.1
On August 5, 2003,2 the petitioner filed its Amended VAT Return declaring
unutilized input tax from its domestic purchases of capital goods, other than capital
goods and services, for its third and fourth quarters of 2002 totalling
₱50,124,086.75. On June 14, 2004,3 it filed with Revenue District Office No. 36 in
Palawan its Application for Tax Credits/Refund (BIR Form 1914) together with
supporting documents.
Due to the alleged inaction of the respondent, the petitioner elevated its claim to
the CTA on July 8, 2004 by petition for review, praying for the refund of the
aforesaid input VAT (CTA Case No. 7022).4
68
After trial on the merits, the CTA in Division promulgated its decision on March 10,
20085 denying the petitioner's claim for refund on the ground that the petitioner
was not entitled to the refund of alleged unutilized input VAT following Section
106(A)(2)(a)(5) of the National Internal Revenue Code (NIRC) of 1997, as
amended, in relation to Article 77(2) of the Omnibus Investment Code and
conformably with the Cross Border Doctrine. In support of its ruling, the CTA in
Division cited Commissioner of Internal Revenue v. Toshiba Information
Equipment (Phils) Inc. (Toshiba)6and Revenue Memorandum Circular ("RMC") No.
42-03.7
After the CTA in Division denied its Motion for Reconsideration8 on July 2,
2008,9 the petitioner elevated the matter to the CTA En Banc (CTA EB Case No.
403), which also denied the petition through the assailed decision promulgated on
May 29, 2009. 10
The CTA En Banc denied the petitioner's Motion for Reconsideration through the
resolution dated December 10, 2009.11
Hence, this appeal, whereby the petitioner contends that Toshiba is not applicable
inasmuch as the unutilized input VAT subject of its claim was incurred from May 1,
2002 to December 31, 2002 as a VAT-registered taxpayer, not as a PEZA-
registered enterprise; that during the period subject of its claim, it was not yet
registered with PEZA because it was only on December 27, 2002 that its
Certificate of Registration was issued; 12 that until then, it could not have refused
the payment of VAT on its purchases because it could not present any valid proof
of zero-rating to its VAT-registered suppliers; and that it complied with all the
procedural and substantive requirements under the law and regulations for its
entitlement to the refund. 13
Issue
Was the petitioner, an entity located within an ECOZONE, entitled to the refund of
its unutilized input taxes incurred before it became a PEZA-registered entity?
Ruling of the Court
The appeal is bereft of merit.
We first explain why we have given due course to the petition for review
on certiorari despite the petitioner's premature filing of its judicial claim in the CTA.
 TAXATION - VALUE ADDED TAX
The petitioner filed with the BIR on June 10, 2004 its application for tax refund or
credit representing the unutilized input tax for the third and fourth quarters of 2002.
Barely 28 days later, it brought its appeal in the CTA contending that there was
inaction on the part of the petitioner despite its not having waited for the lapse of
the 120-day period mandated by Section 112 (D) of the 1997 NIRC. At the time of
the petitioner's appeal, however, the applicable rule was that provided under BIR
Ruling No. DA-489-03,14 issued on December 10, 2003, to wit:
It appears, therefore, that it is not necessary for the Commissioner of Internal
Revenue to first act unfavorably on the claim for refund before the Court of Tax
Appeals could validly take cognizance of the case. This is so because of the
positive mandate of Section 230 of the Tax Code and also by virtue of the doctrine
that the delay of the Commissioner in rendering his decision does not extend the
reglementary period prescribed by statute.
Incidentally, the taxpayer could not be faulted for taking advantage of the full two-
year period set by law for filing his claim for refund [with the Commissioner of
Internal Revenue]. Indeed, no provision in the tax code requires that the claim for
refund be filed at the earliest instance in order to give the Commissioner an
opportunity to rule on it and the court to review the ruling of the Commissioner of
Internal Revenue on appeal.
xxx
As pronounced in Silicon Philippines Inc. vs. Commissioner of Internal
Revenue, 15the exception to the mandatory and jurisdictional compliance with the
120+30 day-period is when the claim for the tax refund or credit was filed in the
period between December 10, 2003 and October 5, 2010 during which BIR Ruling
No. DA-489-03 was still in effect. Accordingly, the premature filing of the judicial
claim was allowed, giving to the CTA jurisdiction over the appeal.
As to the main issue, we sustain the assailed decision of the CTA En Banc.
The petitioner's insistence, that Toshiba is not applicable because Toshiba
Information Equipment (Phils) Inc., the taxpayer involved thereat, was a PEZA-
registered entity during the time subject of the claim for tax refund or credit, is
unwarranted. The most significant difference between Toshiba and this case is that
Revenue Memorandum Circular No. 74-9916 was not yet in effect at the time
Toshiba Information Equipment (Phils) Inc. brought its claim for refund. Regardless
of the distinction, however, Toshiba actually discussed the VAT implication of
PEZA-registered enterprises and ECOZONE-located enterprises in its entirety,
which renders Toshiba applicable to the petitioner's case.
69
Prior to the effectivity of RMC 74-99, the old VAT rule for PEZA-registered
enterprises was based on their choice of fiscal incentives, namely: (1) if the PEZA-
registered enterprise chose the 5% preferential tax on its gross income in lieu of all
taxes, as provided by Republic Act No. 7916, as amended, then it was VAT-
exempt; and (2) if the PEZA-registered enterprise availed itself of the income tax
holiday under Executive Order No. 226, as amended, it was subject to VAT at
10%17 (now, 12%). Based on this old rule, Toshiba allowed the claim for refund or
credit on the part of Toshiba Information Equipment (Phils) Inc.
This is not true with the petitioner. With the issuance of RMC 74-99, the distinction
under the old rule was disregarded and the new circular took into consideration the
two important principles of the Philippine VAT system: the Cross Border Doctrine
and the Destination Principle. Thus, Toshiba opined:
The rule that any sale by a VAT-registered supplier from the Customs Territory to a
PEZA-registered enterprise shall be considered an export sale and subject to zero
percent (0%) VAT was clearly established only on 15 October 1999, upon the
issuance of RMC No. 74-99. Prior to the said date, however, whether or not a
PEZA-registered enterprise was VAT-exempt depended on the type of fiscal
incentives availed of by the said enterprise. This old rule on VAT-exemption or
liability of PEZA-registered enterprises, followed by the BIR, also recognized and
affirmed by the CTA, the Court of Appeals, and even this Court, cannot be lightly
disregarded considering the great number of PEZA-registered enterprises which
did rely on it to determine its tax liabilities, as well as, its privileges.
According to the old rule, Section 23 of Rep. Act No. 7916, as amended, gives the
PEZA-registered enterprise the option to choose between two sets of fiscal
incentives: (a) The five percent (5%) preferential tax rate on its gross income under
Rep. Act No. 7916, as amended; and (b) the income tax holiday provided under
Executive Order No. 226, otherwise known as the Omnibus Investment Code of
1987, as amended.
xxxx
This old rule clearly did not take into consideration the Cross Border
Doctrine essential to the VAT system or the fiction of the ECOZONE as a
foreign territory. It relied totally on the choice of fiscal incentives of the PEZA-
registered enterprise. Again, for emphasis, the old VAT rule for PEZA-registered
enterprises was based on their choice of fiscal incentives: (1) If the PEZA-
registered enterprise chose the five percent (5%) preferential tax on its gross
income, in lieu of all taxes, as provided by Rep. Act No. 7916, as amended, then it
would be VAT-exempt; (2) If the PEZA-registered enterprise availed of the income
 TAXATION - VALUE ADDED TAX
tax holiday under Exec. Order No. 226, as amended, it shall be subject to VAT at
ten percent (10%). Such distinction was abolished by RMC No. 74-99, which
categorically declared that all sales of goods, properties, and services made
by a VAT-registered supplier from the Customs Territory to an ECOZONE
enterprise shall be subject to VAT, at zero percent (0%) rate, regardless of
the latter's type or class of PEZA registration; and, thus, affirming the nature
of a PEZA-registered or an ECOZONE enterprise as a VAT-exempt
entity. 18(underscoring and emphasis supplied)
Furthermore, Section 8 of Republic Act No. 7916 mandates that PEZA shall
manage and operate the ECOZONE as a separate customs territory.1âwphi1 The
provision thereby establishes the fiction that an ECOZONE is a foreign territory
separate and distinct from the customs territory. Accordingly, the sales made by
suppliers from a customs territory to a purchaser located within an ECOZONE will
be considered as exportations. Following the Philippine VAT system's adherence
to the Cross Border Doctrine and Destination Principle, the VAT implications are
that "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" 19 Thus, Toshiba has discussed that:
This Court agrees, however, that PEZA-registered enterprises, which would
necessarily be located within ECOZONES, are VAT-exempt entities, not
because of Section 24 of Rep. Act No. 7916, as amended, which imposes the five
percent (5%) preferential tax rate on gross income of PEZA-registered enterprises,
in lieu of all taxes; but, rather, because of Section 8 of the same statute which
establishes the fiction that ECOZONES are foreign territory.
It is important to note herein that respondent Toshiba is located within an
ECOZONE. An ECOZONE or a Special Economic Zone has been described as –
. . . [S]elected areas with highly developed or which have the -Q potential to be
developed into agro-industrial, industrial, tourist, recreational, commercial,
banking, investment and financial centers whose metes and bounds are fixed or
delimited by Presidential Proclamations. An ECOZONE may contain any or all of
the following: industrial estates (IEs), export processing zones (EPZs), free trade
zones and tourist/recreational centers.
The national territory of the Philippines outside of the proclaimed borders of the
ECO ZONE shall be referred to as the Customs Territory.1âwphi1
Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall
manage and operate the ECOZONES as a separate customs territory; thus,
70
creating the fiction that the ECOZONE is a foreign territory. As a result, sales
made by a supplier in the Customs Territory to a purchaser in the
ECOZONE shall be treated as an exportation from the Customs
Territory. Conversely, sales made by a supplier from the ECOZONE to a
purchaser in the Customs Territory shall be considered as an importation into the
Customs Territory.20 (underscoring and emphasis are supplied)
The petitioner's principal office was located in Barangay Rio Tuba, Bataraza,
Palawan.21 Its plant site was specifically located inside the Rio Tuba Export
Processing Zone - a special economic zone (ECOZONE) created by Proclamation
No. 304, Series of 2002, in relation to Republic Act No. 7916. As such, the
purchases of goods and services by the petitioner that were destined for
consumption within the ECOZONE should be free of VAT; hence, no input VAT
should then be paid on such purchases, rendering the petitioner not entitled to
claim a tax refund or credit. Verily, if the petitioner had paid the input VAT, the CTA
was correct in holding that the petitioner's proper recourse was not against the
Government but against the seller who had shifted to it the output VAT following
RMC No. 42-03,22 which provides:
In case the supplier alleges that it reported such sale as a taxable sale, the
substantiation of remittance of the output taxes of the seller (input taxes of the
exporter-buyer) can only be established upon the thorough audit of the suppliers'
VAT returns and corresponding books and records. It is, therefore, imperative that
the processing office recommends to the concerned BIR Office the audit of the
records of the seller.
In the meantime, the claim for input tax credit by the exporter-buyer should be
denied without prejudice to the claimant's right to seek reimbursement of the VAT
paid, if any, from its supplier.
We should also take into consideration the nature of VAT as an indirect tax.
Although the seller is statutorily liable for the payment of VAT, the amount of the
tax is allowed to be shifted or passed on to the buyer.23 However, reporting and
remittance of the VAT paid to the BIR remained to be the seller/supplier's
obligation. Hence, the proper party to seek the tax refund or credit should be the
suppliers, not the petitioner.
In view of the foregoing considerations, the Court must uphold the rejection of the
appeal of the petitioner. This Court has repeatedly pointed out that a claim for tax
refund or credit is similar to a tax exemption and should be strictly construed
against the taxpayer. The burden of proof to show that he is ultimately entitled to
 TAXATION - VALUE ADDED TAX
the grant of such tax refund or credit rests on the taxpayer. 24 Sadly, the petitioner
has not discharged its burden.
WHEREFORE, the Court AFFIRMS the decision promulgated on May 29, 2009 in
CTA EB Case No. 403; and ORDERS the petitioner to pay the costs of suit.
SO ORDERED.
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
71
The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as follows:
"As jointly stipulated by the parties, the pertinent facts x x x involved in this case
are as follows:
1. [Respondent] is a resident foreign corporation duly registered with the Securities
and Exchange Commission to do business in the Philippines, with principal office
address at the new Cebu Township One, Special Economic Zone, Barangay
Cantao-an, Naga, Cebu;
2. [Petitioner] is sued in his official capacity, having been duly appointed and
empowered to perform the duties of his office, including, among others, the duty to
act and approve claims for refund or tax credit;
3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and
has been issued PEZA Certificate No. 97-044 pursuant to Presidential Decree No.
66, as amended, to engage in the manufacture of recording components primarily
used in computers for export. Such registration was made on 6 June 1997;
4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT
Registration Certification No. 97-083-000600-V issued on 2 April 1997;
5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by
[respondent];
6. An administrative claim for refund of VAT input taxes in the amount
of P28,369,226.38 with supporting documents (inclusive of the P12,267,981.04
VAT input taxes subject of this Petition for Review), was filed on 4 October 1999
with Revenue District Office No. 83, Talisay Cebu;
7. No final action has been received by [respondent] from [petitioner] on
[respondent’s] claim for VAT refund.
"The administrative claim for refund by the [respondent] on October 4, 1999 was
not acted upon by the [petitioner] prompting the [respondent] to elevate the case to
[the CTA] on July 21, 2000 by way of Petition for Review in order to toll the running
of the two-year prescriptive period.
"For his part, [petitioner] x x x raised the following Special and Affirmative
Defenses, to wit:
 TAXATION - VALUE ADDED TAX
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
72
The CA affirmed the Decision of the CTA granting the claim for refund or issuance
of a tax credit certificate (TCC) in favor of respondent in the reduced amount
of P12,122,922.66. This sum represented the unutilized but substantiated input
VAT paid on capital goods purchased for the period covering April 1, 1998 to June
30, 1999.
The appellate court reasoned that respondent had availed itself only of the fiscal
incentives under Executive Order No. (EO) 226 (otherwise known as the Omnibus
Investment Code of 1987), not of those under both Presidential Decree No. (PD)
66, as amended, and Section 24 of RA 7916. Respondent was, therefore,
considered exempt only from the payment of income tax when it opted for the
income tax holiday in lieu of the 5 percent preferential tax on gross income earned.
As a VAT-registered entity, though, it was still subject to the payment of other
national internal revenue taxes, like the VAT.
Moreover, the CA held that neither Section 109 of the Tax Code nor Sections
4.106-1 and 4.103-1 of RR 7-95 were applicable. Having paid the input VAT on the
capital goods it purchased, respondent correctly filed the administrative and
judicial claims for its refund within the two-year prescriptive period. Such payments
were -- to the extent of the refundable value -- duly supported by VAT invoices or
official receipts, and were not yet offset against any output VAT liability.
Hence this Petition.5
Sole Issue
Petitioner submits this sole issue for our consideration:
"Whether or not respondent is entitled to the refund or issuance of Tax Credit
Certificate in the amount of P12,122,922.66 representing alleged unutilized input
VAT paid on capital goods purchased for the period April 1, 1998 to June 30,
1999."6
The Court’s Ruling
The Petition is unmeritorious.
Sole Issue:
Entitlement of a VAT-Registered PEZA Enterprise to a Refund of or Credit for Input
VAT
 TAXATION - VALUE ADDED TAX
No doubt, as a PEZA-registered enterprise within a special economic
zone,7 respondent is entitled to the fiscal incentives and benefits 8 provided for in
either PD 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-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
73
From the above-cited laws, it is immediately clear that petitioner enjoys preferential
tax treatment.27 It is not subject to internal revenue laws and regulations and is
even entitled to tax credits. The VAT on capital goods is an internal revenue tax
from which petitioner as an entity is exempt. Although the transactions involving
such tax are not exempt, petitioner as a VAT-registered person,28 however, is
entitled to their credits.
Nature of the VAT and the Tax Credit Method
Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10
percent levied on every importation of goods, whether or not in the course of trade
or business, or imposed on each sale, barter, exchange or lease of goods or
properties or on each rendition of services in the course of trade or business 29 as
they pass along the production and distribution chain, the tax being limited only to
the value added30 to such goods, properties or services by the seller, transferor or
lessor.31 It is an indirect tax that may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services.32 As such, it should be
understood not in the context of the person or entity that is primarily, directly and
legally liable for its payment, but in terms of its nature as a tax on consumption. 33 In
either case, though, the same conclusion is arrived at.
The law34 that originally imposed the VAT in the country, as well as the subsequent
amendments of that law, has been drawn from the tax credit method.35 Such
method adopted the mechanics and self-enforcement features of the VAT as first
implemented and practiced in Europe and subsequently adopted in New Zealand
and Canada.36 Under the present method that relies on invoices, an entity can
credit against or subtract from the VAT charged on its sales or outputs the VAT
paid on its purchases, inputs and imports.37
If at the end of a taxable quarter the output taxes38 charged by a seller39 are equal
to the input taxes40 passed on by the suppliers, no payment is required. It is when
the output taxes exceed the input taxes that the excess has to be paid.41 If,
however, the input taxes exceed the output taxes, the excess shall be carried over
to the succeeding quarter or quarters.42 Should the input taxes result from zero-
rated or effectively zero-rated transactions or from the acquisition of capital
goods,43 any excess over the output taxes shall instead be refunded44 to the
taxpayer or credited45 against other internal revenue taxes.46
Zero-Rated and Effectively Zero-Rated Transactions
Although both are taxable and similar in effect, zero-rated transactions differ from
effectively zero-rated transactions as to their source.
 TAXATION - VALUE ADDED TAX
Zero-rated transactions generally refer to the export sale of goods and supply of
services.47 The tax rate is set at zero.48 When applied to the tax base, such rate
obviously results in no tax chargeable against the purchaser. The seller of such
transactions charges no output tax,49 but can claim a refund of or a tax credit
certificate for the VAT previously charged by suppliers.
Effectively zero-rated transactions, however, refer to the sale of goods 50 or supply
of services51 to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects
such transactions to a zero rate.52 Again, as applied to the tax base, such rate
does not yield any tax chargeable against the purchaser. The seller who charges
zero output tax on such transactions can also claim a refund of or a tax credit
certificate for the VAT previously charged by suppliers.
Zero Rating and Exemption
In terms of the VAT computation, zero rating and exemption are the same, but
the extent of relief that results from either one of them is not.
Applying the destination principle53 to the exportation of goods, automatic zero
rating54 is primarily intended to be enjoyed by the seller who is directly and legally
liable for the VAT, making such seller internationally competitive by allowing the
refund or credit of input taxes that are attributable to export sales. 55 Effective zero
rating, on the contrary, is intended to benefit the purchaser who, not being directly
and legally liable for the payment of the VAT, will ultimately bear the burden of the
tax shifted by the suppliers.
In both instances of zero rating, there is total relief for the purchaser from the
burden of the tax.56 But in an exemption there is only partial relief,57 because the
purchaser is not allowed any tax refund of or credit for input taxes paid. 58
Exempt Transaction >and Exempt Party
The object of exemption from the VAT may either be the transaction itself or any of
the parties to the transaction.59
An exempt transaction, on the one hand, involves goods or services which, by their
nature, are specifically listed in and expressly exempted from the VAT under the
Tax Code, without regard to the tax status -- VAT-exempt or not -- of the party to
the transaction.60 Indeed, such transaction is not subject to the VAT, but the seller
is not allowed any tax refund of or credit for any input taxes paid.
74
An exempt party, on the other hand, is a person or entity granted VAT exemption
under the Tax Code, a special law or an international agreement to which the
Philippines is a signatory, and by virtue of which its taxable transactions become
exempt from the VAT.61 Such party is also not subject to the VAT, but may be
allowed a tax refund of or credit for input taxes paid, depending on its registration
as a VAT or non-VAT taxpayer.
As mentioned earlier, the VAT is a tax on consumption, the amount of which may
be shifted or passed on by the seller to the purchaser of the goods, properties or
services.62 While the liability is imposed on one person, the burden may be passed
on to another. Therefore, if a special law merely exempts a party as a seller from
its direct liability for payment of the VAT, but does not relieve the same party as a
purchaser from its indirect burden of the VAT shifted to it by its VAT-registered
suppliers, the purchase transaction is not exempt. Applying this principle to the
case at bar, the purchase transactions entered into by respondent are not VAT-
exempt.
Special laws may certainly exempt transactions from the VAT.63 However, the Tax
Code provides that those falling under PD 66 are not. PD 66 is the precursor of RA
7916 -- the special law under which respondent was registered. The
purchase transactions it entered into are, therefore, not VAT-exempt. These are
subject to the VAT; respondent is required to register.
Its sales transactions, however, will either be zero-rated or taxed at the standard
rate of 10 percent,64 depending again on the application of the destination
principle.65
If respondent enters into such sales transactions with a purchaser -- usually in a
foreign country -- for use or consumption outside the Philippines, these shall be
subject to 0 percent.66 If entered into with a purchaser for use or consumption in
the Philippines, then these shall be subject to 10 percent,67 unless the purchaser is
exempt from the indirect burden of the VAT, in which case it shall also be zero-
rated.
Since the purchases of respondent are not exempt from the VAT, the rate to be
applied is zero. Its exemption under both PD 66 and RA 7916 effectively subjects
such transactions to a zero rate,68 because the ecozone within which it is
registered is managed and operated by the PEZA as a separate customs
territory.69 This means that in such zone is created the legal fiction of foreign
territory.70 Under the cross-border principle71 of the VAT system being enforced by
the Bureau of Internal Revenue (BIR),72 no VAT shall be imposed to form part of
the cost of goods destined for consumption outside of the territorial border of the
 TAXATION - VALUE ADDED TAX
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
75
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 66 83 -
- the original charter of PEZA (then EPZA) that was later amended by RA
7916.84 No provisions in the latter law modify such exemption.
Although this exemption puts the government at an initial disadvantage, the
reduced tax collection ultimately redounds to the benefit of the national economy
by enticing more business investments and creating more employment
opportunities.85
Fourth, even the rules implementing the PEZA law clearly reiterate that
merchandise -- except those prohibited by law -- "shall not be subject to x x x
internal revenue laws and regulations x x x"86 if brought to the 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
 TAXATION - VALUE ADDED TAX
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
76
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
 TAXATION - VALUE ADDED TAX
cost of goods produced for export. State actions that affect global competition
need to be specific and selective in the pricing of particular goods or services. 127
All these statutory policies are congruent to the constitutional mandates of
providing incentives to needed investments,128 as well as of promoting the
preferential use of domestic materials and locally produced goods and adopting
measures to help make these competitive.129 Tax credits for domestic inputs
strengthen backward linkages. Rightly so, "the rule of law and the existence of
credible and efficient public institutions are essential prerequisites for sustainable
economic development."130
VAT Registration, Not Application for Effective Zero Rating, Indispensable to VAT
Refund
Registration is an indispensable requirement under our VAT law.131 Petitioner
alleges that respondent did register for VAT purposes with the appropriate
Revenue District Office. However, it is now too late in the day for petitioner to
challenge the VAT-registered status of respondent, given the latter’s prior
representation before the lower courts and the mode of appeal taken by petitioner
before this Court.
The PEZA law, which carried over the provisions of the EPZA law, is clear in
exempting from internal revenue laws and regulations the equipment -- including
capital goods -- that registered enterprises will use, directly or indirectly, in
manufacturing.132 EO 226 even reiterates this privilege among the incentives it
gives to such enterprises.133 Petitioner merely asserts that by virtue of the PEZA
registration alone of respondent, the latter is not subject to the VAT. Consequently,
the capital goods and services respondent has purchased are not considered used
in the VAT business, and no VAT refund or credit is due.134 This is a non sequitur.
By the VAT’s very nature as a tax on consumption, the capital goods and services
respondent has purchased are subject to the VAT, although at zero rate.
Registration does not determine taxability under the VAT law.
Moreover, the facts have already been determined by the lower courts. Having
failed to present evidence to support its contentions against the income tax
holiday privilege of respondent,135 petitioner is deemed to have conceded. It is a
cardinal rule that "issues and arguments not adequately and seriously brought
below cannot be raised for the first time on appeal."136 This is a "matter of
procedure"137 and a "question of fairness."138 Failure to assert "within a reasonable
time warrants a presumption that the party entitled to assert it either has
abandoned or declined to assert it."139
77
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 obeyed 146 by both
the administrative officials and the applicant.
Third, even though such an application was not made, all the special laws we have
tackled exempt respondent not only from internal revenue laws but also from
the regulations issued pursuant thereto. Leniency in the implementation of the VAT
in ecozones is an imperative, precisely to spur economic growth in the country and
attain global competitiveness as envisioned in those laws.
A VAT-registered status, as well as compliance with the invoicing
requirements,147 is sufficient for the effective zero rating of the transactions of a
taxpayer. The nature of its business and transactions can easily be perused from,
as already clearly indicated in, its VAT registration papers and photocopied
documents attached thereto. Hence, its transactions cannot be exempted by its
mere failure to apply for their effective zero rating. Otherwise, their VAT exemption
would be determined, not by their nature, but by the taxpayer’s negligence -- a
result not at all contemplated. Administrative convenience cannot thwart legislative
mandate.
 TAXATION - VALUE ADDED TAX
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.
78
Second, the input taxes paid on the capital goods of respondent are duly
supported by VAT invoices and have not been offset against any output taxes.
Although enterprises registered with the BOI after December 31, 1994 would no
longer enjoy the tax credit incentives on domestic capital equipment -- as provided
for under Article 39(d), Title III, Book I of EO 226152 -- starting January 1, 1996,
respondent would still have the same benefit under a general and express
exemption contained in both Article 77(1), Book VI of EO 226; and Section 12,
paragraph 2 (c) of RA 7227, extended to the ecozones by RA 7916.
There was a very clear intent on the part of our legislators, not only to exempt
investors in ecozones from national and local taxes, but also to grant them tax
credits. This fact was revealed by the sponsorship speeches in Congress during
the second reading of House Bill No. 14295, which later became RA 7916, as
shown below:
"MR. RECTO. x x x Some of the incentives that this bill provides are exemption
from national and local taxes; x x x tax credit for locally-sourced inputs x x x."
xxxxxxxxx
"MR. DEL MAR. x x x To advance its cause in encouraging investments and
creating an environment conducive for investors, the bill offers incentives such as
the exemption from local and national taxes, x x x tax credits for locally sourced
inputs x x x."153
And third, no question as to either the filing of such claims within the prescriptive
period or the validity of the VAT returns has been raised. Even if such a question
were raised, the tax exemption under all the special laws cited above is broad
enough to cover even the enforcement of internal revenue laws, including
prescription.154
Summary
To summarize, special laws expressly grant preferential tax treatment to business
establishments registered and operating within an ecozone, which by law is
considered as a separate customs territory. As such, respondent is exempt from all
internal revenue taxes, including the VAT, and regulations pertaining thereto. It has
opted for the income tax holiday regime, instead of the 5 percent preferential tax
regime. As a matter of law and procedure, its registration status entitling it to such
tax holiday can no longer be questioned. Its sales transactions intended for export
may not be exempt, but like its purchase transactions, they are zero-rated. No prior
 TAXATION - VALUE ADDED TAX
application for the effective zero rating of its transactions is necessary. Being VAT-
registered and having satisfactorily complied with all the requisites for claiming a
tax refund of or credit for the input VAT paid on capital goods purchased,
respondent is entitled to such VAT refund or credit.
WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
G.R. No. 173425 September 4, 2012
FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and REVENUE DISTRICT
OFFICER, REVENUE DISTRICT NO. 44, TAGUIG and PATEROS, BUREAU OF
INTERNAL REVENUE, Respondents.
DECISION
DEL CASTILLO, J.:
Courts cannot limit the application or coverage of a law, nor can it impose
conditions not provided therein. To do so constitutes judicial legislation.
This Petition for Review on Certiorari under Rule 45 of the Rules of Court assails
the July 7, 2006 Decision1 of the Court of Appeals (CA) in CA-G.R. SP No. 61436,
the dispositive portion of which reads.
WHEREFORE, the instant petition is hereby DISMISSED. ACCORDINGLY, the
Decision dated October 12, 2000 of the Court of Tax Appeals in CTA Case No.
5735, denying petitioner’s claim for refund in the amount of Three Hundred Fifty-
Nine Million Six Hundred Fifty-Two Thousand Nine Pesos and Forty-Seven
Centavos (₱ 359,652,009.47), is hereby AFFIRMED.
SO ORDERED.2
Factual Antecedents
79
Petitioner Fort Bonifacio Development Corporation (FBDC) is a duly registered
domestic corporation engaged in the development and sale of real property. 3 The
Bases Conversion Development Authority (BCDA), a wholly owned government
corporation created under Republic Act (RA) No. 7227,4 owns 45% of petitioner’s
issued and outstanding capital stock; while the Bonifacio Land Corporation, a
consortium of private domestic corporations, owns the remaining 55%.5
On February 8, 1995, by virtue of RA 7227 and Executive Order No. 40, 6 dated
December 8, 1992, petitioner purchased from the national government a portion of
the Fort Bonifacio reservation, now known as the Fort Bonifacio Global City
(Global City).7
On January 1, 1996, RA 77168 restructured the Value-Added Tax (VAT) system by
amending certain provisions of the old National Internal Revenue Code (NIRC). RA
7716 extended the coverage of VAT to real properties held primarily for sale to
customers or held for lease in the ordinary course of trade or business.9
On September 19, 1996, petitioner submitted to the Bureau of Internal Revenue
(BIR) Revenue District No. 44, Taguig and Pateros, an inventory of all its real
properties, the book value of which aggregated ₱ 71,227,503,200.10 Based on this
value, petitioner claimed that it is entitled to a transitional input tax credit of ₱
5,698,200,256,11 pursuant to Section 10512 of the old NIRC.
In October 1996, petitioner started selling Global City lots to interested buyers. 13
For the first quarter of 1997, petitioner generated a total amount of ₱
3,685,356,539.50 from its sales and lease of lots, on which the output VAT
payable was ₱ 368,535,653.95.14 Petitioner paid the output VAT by making cash
payments to the BIR totalling ₱ 359,652,009.47 and crediting its unutilized input
tax credit on purchases of goods and services of ₱ 8,883,644.48. 15
Realizing that its transitional input tax credit was not applied in computing its
output VAT for the first quarter of 1997, petitioner on November 17, 1998 filed with
the BIR a claim for refund of the amount of ₱ 359,652,009.47 erroneously paid as
output VAT for the said period.16
Ruling of the Court of Tax Appeals
On February 24, 1999, due to the inaction of the respondent Commissioner of
Internal Revenue (CIR), petitioner elevated the matter to the Court of Tax Appeals
(CTA) via a Petition for Review.17
 TAXATION - VALUE ADDED TAX
In opposing the claim for refund, respondents interposed the following special and
affirmative defenses:
xxxx
8. Under Revenue Regulations No. 7-95, implementing Section 105 of the Tax
Code as amended by E.O. 273, the basis of the presumptive input tax, in the case
of real estate dealers, is the improvements, such as buildings, roads, drainage
systems, and other similar structures, constructed on or after January 1, 1988.
9. Petitioner, by submitting its inventory listing of real properties only on September
19, 1996, failed to comply with the aforesaid revenue regulations mandating that
for purposes of availing the presumptive input tax credits under its Transitory
Provisions, "an inventory as of December 31, 1995, of such goods or properties
and improvements showing the quantity, description, and amount should be filed
with the RDO no later than January 31, 1996. x x x"18
On October 12, 2000, the CTA denied petitioner’s claim for refund. According to
the CTA, "the benefit of transitional input tax credit comes with the condition that
business taxes should have been paid first."19 In this case, since petitioner
acquired the Global City property under a VAT-free sale transaction, it cannot avail
of the transitional input tax credit.20 The CTA likewise pointed out that under
Revenue Regulations No. (RR) 7-95, implementing Section 105 of the old NIRC,
the 8% transitional input tax credit should be based on the value of the
improvements on land such as buildings, roads, drainage system and other similar
structures, constructed on or after January 1, 1998, and not on the book value of
the real property.21 Thus, the CTA disposed of the case in this manner:
WHEREFORE, in view of all the foregoing, the claim for refund representing
alleged overpaid value-added tax covering the first quarter of 1997 is
hereby DENIED for lack of merit.
SO ORDERED.22
Ruling of the Court of Appeals
Aggrieved, petitioner filed a Petition for Review23 under Rule 43 of the Rules of
Court before the CA.
On July 7, 2006, the CA affirmed the decision of the CTA. The CA agreed that
petitioner is not entitled to the 8% transitional input tax credit since it did not pay
80
any VAT when it purchased the Global City property.24 The CA opined that
transitional input tax credit is allowed only when business taxes have been paid
and passed-on as part of the purchase price.25 In arriving at this conclusion, the CA
relied heavily on the historical background of transitional input tax credit. 26 As to
the validity of RR 7-95, which limited the 8% transitional input tax to the value of
the improvements on the land, the CA said that it is entitled to great weight as it
was issued pursuant to Section 24527 of the old NIRC.28
Issues
Hence, the instant petition with the principal issue of whether petitioner is entitled
to a refund of ₱ 359,652,009.47 erroneously paid as output VAT for the first
quarter of 1997, the resolution of which depends on:
3.05.a. Whether Revenue Regulations No. 6-97 effectively repealed or repudiated
Revenue Regulations No. 7-95 insofar as the latter limited the
transitional/presumptive input tax credit which may be claimed under Section 105
of the National Internal Revenue Code to the "improvements" on real properties.
3.05.b. Whether Revenue Regulations No. 7-95 is a valid implementation of
Section 105 of the National Internal Revenue Code.
3.05.c. Whether the issuance of Revenue Regulations No. 7-95 by the Bureau of
Internal Revenue, and declaration of validity of said Regulations by the Court of
Tax Appeals and Court of Appeals, were in violation of the fundamental principle of
separation of powers.
3.05.d. Whether there is basis and necessity to interpret and construe the
provisions of Section 105 of the National Internal Revenue Code.
3.05.e. Whether there must have been previous payment of business tax by
petitioner on its land before it may claim the input tax credit granted by Section 105
of the National Internal Revenue Code.
3.05.f. Whether the Court of Appeals and Court of Tax Appeals merely speculated
on the purpose of the transitional/presumptive input tax provided for in Section 105
of the National Internal Revenue Code.
3.05.g. Whether the economic and social objectives in the acquisition of the
subject property by petitioner from the Government should be taken into
consideration.29
 TAXATION - VALUE ADDED TAX
Petitioner’s Arguments
Petitioner claims that it is entitled to recover the amount of ₱ 359,652,009.47
erroneously paid as output VAT for the first quarter of 1997 since its transitional
input tax credit of ₱ 5,698,200,256 is more than sufficient to cover its output VAT
liability for the said period.30
Petitioner assails the pronouncement of the CA that prior payment of taxes is
required to avail of the 8% transitional input tax credit.31 Petitioner contends that
there is nothing in Section 105 of the old NIRC to support such conclusion. 32
Petitioner further argues that RR 7-95, which limited the 8% transitional input tax
credit to the value of the improvements on the land, is invalid because it goes
against the express provision of Section 105 of the old NIRC, in relation to Section
10033 of the same Code, as amended by RA 7716.34
Respondents’ Arguments
Respondents, on the other hand, maintain that petitioner is not entitled to a
transitional input tax credit because no taxes were paid in the acquisition of the
Global City property.35 Respondents assert that prior payment of taxes is inherent
in the nature of a transitional input tax.36 Regarding RR 7-95, respondents insist
that it is valid because it was issued by the Secretary of Finance, who is mandated
by law to promulgate all needful rules and regulations for the implementation of
Section 105 of the old NIRC.37
Our Ruling
The petition is meritorious.
The issues before us are no longer new or novel as these have been resolved in
the related case of Fort Bonifacio Development Corporation v. Commissioner of
Internal Revenue.38
Prior payment of taxes is not required
for a taxpayer to avail of the 8%
transitional input tax credit
Section 105 of the old NIRC reads:
81
SEC. 105. Transitional input tax credits. – A person who becomes liable to value-
added tax or any person who elects to be a VAT-registered person shall, subject to
the filing of an inventory as prescribed by regulations, be allowed input tax on his
beginning inventory of goods, materials and supplies equivalent to 8% of the value
of such inventory or the actual value-added tax paid on such goods, materials and
supplies, whichever is higher, which shall be creditable against the output tax.
(Emphasis supplied.)
Contrary to the view of the CTA and the CA, there is nothing in the above-quoted
provision to indicate that prior payment of taxes is necessary for the availment of
the 8% transitional input tax credit. Obviously, all that is required is for the taxpayer
to file a beginning inventory with the BIR.
To require prior payment of taxes, as proposed in the Dissent is not only
tantamount to judicial legislation but would also render nugatory the provision in
Section 105 of the old NIRC that the transitional input tax credit shall be "8% of the
value of [the beginning] inventory or the actual [VAT] paid on such goods,
materials and supplies, whichever is higher" because the actual VAT (now 12%)
paid on the goods, materials, and supplies would always be higher than the 8%
(now 2%) of the beginning inventory which, following the view of Justice Carpio,
would have to exclude all goods, materials, and supplies where no taxes were
paid. Clearly, limiting the value of the beginning inventory only to goods, materials,
and supplies, where prior taxes were paid, was not the intention of the law.
Otherwise, it would have specifically stated that the beginning inventory excludes
goods, materials, and supplies where no taxes were paid. As retired Justice
Consuelo Ynares-Santiago has pointed out in her Concurring Opinion in the earlier
case of Fort Bonifacio:
If the intent of the law were to limit the input tax to cases where actual VAT was
paid, it could have simply said that the tax base shall be the actual value-added tax
paid. Instead, the law as framed contemplates a situation where a transitional input
tax credit is claimed even if there was no actual payment of VAT in the underlying
transaction. In such cases, the tax base used shall be the value of the beginning
inventory of goods, materials and supplies.39
Moreover, prior payment of taxes is not required to avail of the transitional input tax
credit because it is not a tax refund per se but a tax credit. Tax credit is not
synonymous to tax refund. Tax refund is defined as the money that a taxpayer
overpaid and is thus returned by the taxing authority. 40 Tax credit, on the other
hand, is an amount subtracted directly from one’s total tax liability. 41 It is any
amount given to a taxpayer as a subsidy, a refund, or an incentive to encourage
investment. Thus, unlike a tax refund, prior payment of taxes is not a prerequisite
 TAXATION - VALUE ADDED TAX
to avail of a tax credit. In fact, in Commissioner of Internal Revenue v. Central
Luzon Drug Corp.,42 we declared that prior payment of taxes is not required in
order to avail of a tax credit.43 Pertinent portions of the Decision read:
While a tax liability is essential to the availment or use of any tax credit, prior tax
payments are not. On the contrary, for the existence or grant solely of such credit,
neither a tax liability nor a prior tax payment is needed. The Tax Code is in fact
replete with provisions granting or allowing tax credits, even though no taxes have
been previously paid.
For example, in computing the estate tax due, Section 86(E) allows a tax credit --
subject to certain limitations -- for estate taxes paid to a foreign country. Also found
in Section 101(C) is a similar provision for donor’s taxes -- again when paid to a
foreign country -- in computing for the donor’s tax due. The tax credits in both
instances allude to the prior payment of taxes, even if not made to our
government.
Under Section 110, a VAT (Value-Added Tax) - registered person engaging in
transactions -- whether or not subject to the VAT -- is also allowed a tax credit that
includes a ratable portion of any input tax not directly attributable to either activity.
This input tax may either be the VAT on the purchase or importation of goods or
services that is merely due from -- not necessarily paid by -- such VAT-registered
person in the course of trade or business; or the transitional input tax determined
in accordance with Section 111(A). The latter type may in fact be an amount
equivalent to only eight percent of the value of a VAT-registered person’s
beginning inventory of goods, materials and supplies, when such amount -- as
computed -- is higher than the actual VAT paid on the said items. Clearly from this
provision, the tax credit refers to an input tax that is either due only or given a
value by mere comparison with the VAT actually paid -- then later prorated. No tax
is actually paid prior to the availment of such credit.
In Section 111(B), a one and a half percent input tax credit that is merely
presumptive is allowed. For the purchase of primary agricultural products used as
inputs -- either in the processing of sardines, mackerel and milk, or in the
manufacture of refined sugar and cooking oil -- and for the contract price of public
works contracts entered into with the government, again, no prior tax payments are
needed for the use of the tax credit.
More important, a VAT-registered person whose sales are zero-rated or effectively
zero-rated may, under Section 112(A), apply for the issuance of a tax credit
certificate for the amount of creditable input taxes merely due -- again not
necessarily paid to -- the government and attributable to such sales, to the extent
82
that the input taxes have not been applied against output taxes. Where a taxpayer
is engaged in zero-rated or effectively zero-rated sales and also in taxable or
exempt sales, the amount of creditable input taxes due that are not directly and
entirely attributable to any one of these transactions shall be proportionately
allocated on the basis of the volume of sales. Indeed, in availing of such tax credit
for VAT purposes, this provision -- as well as the one earlier mentioned -- shows
that the prior payment of taxes is not a requisite.
It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustration of
a tax credit allowed, even though no prior tax payments are not required.
Specifically, in this provision, the imposition of a final withholding tax rate on cash
and/or property dividends received by a nonresident foreign corporation from a
domestic corporation is subjected to the condition that a foreign tax credit will be
given by the domiciliary country in an amount equivalent to taxes that are merely
deemed paid. Although true, this provision actually refers to the tax credit as a
condition only for the imposition of a lower tax rate, not as a deduction from the
corresponding tax liability. Besides, it is not our government but the domiciliary
country that credits against the income tax payable to the latter by the foreign
corporation, the tax to be foregone or spared.
In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically allows
as credits, against the income tax imposable under Title II, the amount of income
taxes merely incurred -- not necessarily paid -- by a domestic corporation during a
taxable year in any foreign country. Moreover, Section 34(C)(5) provides that for
such taxes incurred but not paid, a tax credit may be allowed, subject to the
condition precedent that the taxpayer shall simply give a bond with sureties
satisfactory to and approved by petitioner, in such sum as may be required; and
further conditioned upon payment by the taxpayer of any tax found due, upon
petitioner’s redetermination of it.
In addition to the above-cited provisions in the Tax Code, there are also tax
treaties and special laws that grant or allow tax credits, even though no prior tax
payments have been made.
Under the treaties in which the tax credit method is used as a relief to avoid double
taxation, income that is taxed in the state of source is also taxable in the state of
residence, but the tax paid in the former is merely allowed as a credit against the
tax levied in the latter. Apparently, payment is made to the state of source, not the
state of residence. No tax, therefore, has been previously paid to the latter.
Under special laws that particularly affect businesses, there can also be tax credit
incentives. To illustrate, the incentives provided for in Article 48 of Presidential
 TAXATION - VALUE ADDED TAX
Decree No. (PD) 1789, as amended by Batas Pambansa Blg. (BP) 391, include
tax credits equivalent to either five percent of the net value earned, or five or ten
percent of the net local content of export. In order to avail of such credits under the
said law and still achieve its objectives, no prior tax payments are necessary.
From all the foregoing instances, it is evident that prior tax payments are not
indispensable to the availment of a tax credit. Thus, the CA correctly held that the
availment under RA 7432 did not require prior tax payments by private
establishments concerned. However, we do not agree with its finding that the
carry-over of tax credits under the said special law to succeeding taxable periods,
and even their application against internal revenue taxes, did not necessitate the
existence of a tax liability.
The examples above show that a tax liability is certainly important in the availment
or use, not the existence or grant, of a tax credit. Regarding this matter, a private
establishment reporting a net loss in its financial statements is no different from
another that presents a net income. Both are entitled to the tax credit provided for
under RA 7432, since the law itself accords that unconditional benefit. However,
for the losing establishment to immediately apply such credit, where no tax is due,
will be an improvident usance.44
In this case, when petitioner realized that its transitional input tax credit was not
applied in computing its output VAT for the 1st quarter of 1997, it filed a claim for
refund to recover the output VAT it erroneously or excessively paid for the 1st
quarter of 1997. In filing a claim for tax refund, petitioner is simply applying its
transitional input tax credit against the output VAT it has paid. Hence, it is merely
availing of the tax credit incentive given by law to first time VAT taxpayers. As we
have said in the earlier case of Fort Bonifacio, the provision on transitional input
tax credit was enacted to benefit first time VAT taxpayers by mitigating the impact
of VAT on the taxpayer.45 Thus, contrary to the view of Justice Carpio, the granting
of a transitional input tax credit in favor of petitioner, which would be paid out of the
general fund of the government, would be an appropriation authorized by law,
specifically Section 105 of the old NIRC.
The history of the transitional input tax credit likewise does not support the ruling of
the CTA and CA. In our Decision dated April 2, 2009, in the related case of Fort
Bonifacio, we explained that:
If indeed the transitional input tax credit is integrally related to previously paid sales
taxes, the purported causal link between those two would have been nonetheless
extinguished long ago. Yet Congress has reenacted the transitional input tax credit
83
several times; that fact simply belies the absence of any relationship between such
tax credit and the long-abolished sales taxes.
Obviously then, the purpose behind the transitional input tax credit is not confined
to the transition from sales tax to VAT.
There is hardly any constricted definition of "transitional" that will limit its possible
meaning to the shift from the sales tax regime to the VAT regime. Indeed, it could
also allude to the transition one undergoes from not being a VAT-registered person
to becoming a VAT-registered person. Such transition does not take place merely
by operation of law, E.O. No. 273 or Rep. Act No. 7716 in particular. It could also
occur when one decides to start a business. Section 105 states that the transitional
input tax credits become available either to (1) a person who becomes liable to
VAT; or (2) any person who elects to be VAT-registered. The clear language of the
law entitles new trades or businesses to avail of the tax credit once they become
VAT-registered. The transitional input tax credit, whether under the Old NIRC or
the New NIRC, may be claimed by a newly-VAT registered person such as when a
business as it commences operations. If we view the matter from the perspective
of a starting entrepreneur, greater clarity emerges on the continued utility of the
transitional input tax credit.
Following the theory of the CTA, the new enterprise should be able to claim the
transitional input tax credit because it has presumably paid taxes, VAT in
particular, in the purchase of the goods, materials and supplies in its beginning
inventory. Consequently, as the CTA held below, if the new enterprise has not paid
VAT in its purchases of such goods, materials and supplies, then it should not be
able to claim the tax credit. However, it is not always true that the acquisition of
such goods, materials and supplies entail the payment of taxes on the part of the
new business. In fact, this could occur as a matter of course by virtue of the
operation of various provisions of the NIRC, and not only on account of a specially
legislated exemption.
Let us cite a few examples drawn from the New NIRC. If the goods or properties
are not acquired from a person in the course of trade or business, the transaction
would not be subject to VAT under Section 105. The sale would be subject to
capital gains taxes under Section 24 (D), but since capital gains is a tax on passive
income it is the seller, not the buyer, who generally would shoulder the tax.
If the goods or properties are acquired through donation, the acquisition would not
be subject to VAT but to donor’s tax under Section 98 instead. It is the donor who
would be liable to pay the donor’s tax, and the donation would be exempt if the
donor’s total net gifts during the calendar year does not exceed ₱ 100,000.00.
 TAXATION - VALUE ADDED TAX
If the goods or properties are acquired through testate or intestate succession, the
transfer would not be subject to VAT but liable instead for estate tax under Title III
of the New NIRC. If the net estate does not exceed ₱ 200,000.00, no estate tax
would be assessed.
The interpretation proffered by the CTA would exclude goods and properties which
are acquired through sale not in the ordinary course of trade or business, donation
or through succession, from the beginning inventory on which the transitional input
tax credit is based. This prospect all but highlights the ultimate absurdity of the
respondents’ position. Again, nothing in the Old NIRC (or even the New NIRC)
speaks of such a possibility or qualifies the previous payment of VAT or any other
taxes on the goods, materials and supplies as a pre-requisite for inclusion in the
beginning inventory.
It is apparent that the transitional input tax credit operates to benefit newly VAT-
registered persons, whether or not they previously paid taxes in the acquisition of
their beginning inventory of goods, materials and supplies. During that period of
transition from non-VAT to VAT status, the transitional input tax credit serves to
alleviate the impact of the VAT on the taxpayer. At the very beginning, the VAT-
registered taxpayer is obliged to remit a significant portion of the income it derived
from its sales as output VAT. The transitional input tax credit mitigates this initial
diminution of the taxpayer's income by affording the opportunity to offset the losses
incurred through the remittance of the output VAT at a stage when the person is
yet unable to credit input VAT payments.
There is another point that weighs against the CTA’s interpretation. Under Section
105 of the Old NIRC, the rate of the transitional input tax credit is "8% of the value
of such inventory or the actual value-added tax paid on such goods, materials and
supplies, whichever is higher." If indeed the transitional input tax credit is premised
on the previous payment of VAT, then it does not make sense to afford the
taxpayer the benefit of such credit based on "8% of the value of such inventory"
should the same prove higher than the actual VAT paid. This intent that the CTA
alluded to could have been implemented with ease had the legislature shared such
intent by providing the actual VAT paid as the sole basis for the rate of the
transitional input tax credit.46
In view of the foregoing, we find petitioner entitled to the 8% transitional input tax
credit provided in Section 105 of the old NIRC. The fact that it acquired the Global
City property under a tax-free transaction makes no difference as prior payment of
taxes is not a pre-requisite.
84
Section 4.105-1 of RR 7-95 is
inconsistent with Section 105 of the old
NIRC
As regards Section 4.105-147 of RR 7-95 which limited the 8% transitional input tax
credit to the value of the improvements on the land, the same contravenes the
provision of Section 105 of the old NIRC, in relation to Section 100 of the same
Code, as amended by RA 7716, which defines "goods or properties," to wit:
SEC. 100. Value-added tax on sale of goods or properties. – (a) Rate and base of
tax. – There shall be levied, assessed and collected on every sale, barter or
exchange of goods or properties, a value-added tax equivalent to 10% of the gross
selling price or gross value in money of the goods or properties sold, bartered or
exchanged, such tax to be paid by the seller or transferor.
(1) The term "goods or properties" shall mean all tangible and intangible objects
which are capable of pecuniary estimation and shall include:
(A) Real properties held primarily for sale to customers or held for lease in
the ordinary course of trade or business; x x x
In fact, in our Resolution dated October 2, 2009, in the related case of Fort
Bonifacio, we ruled that Section 4.105-1 of RR 7-95, insofar as it limits the
transitional input tax credit to the value of the improvement of the real properties, is
a nullity.48 Pertinent portions of the Resolution read:
As mandated by Article 7 of the Civil Code, an administrative rule or regulation
cannot contravene the law on which it is based. RR 7-95 is inconsistent with
Section 105 insofar as the definition of the term "goods" is concerned. This is a
legislative act beyond the authority of the CIR and the Secretary of Finance. The
rules and regulations that administrative agencies promulgate, which are the
product of a delegated legislative power to create new and additional legal
provisions that have the effect of law, should be within the scope of the statutory
authority granted by the legislature to the objects and purposes of the law, and
should not be in contradiction to, but in conformity with, the standards prescribed
by law.
To be valid, an administrative rule or regulation must conform, not contradict, the
provisions of the enabling law.1âwphi1 An implementing rule or regulation cannot
modify, expand, or subtract from the law it is intended to implement. Any rule that
is not consistent with the statute itself is null and void.
 TAXATION - VALUE ADDED TAX
While administrative agencies, such as the Bureau of Internal Revenue, may issue
regulations to implement statutes, they are without authority to limit the scope of
the statute to less than what it provides, or extend or expand the statute beyond its
terms, or in any way modify explicit provisions of the law. Indeed, a quasi-judicial
body or an administrative agency for that matter cannot amend an act of
Congress. Hence, in case of a discrepancy between the basic law and an
interpretative or administrative ruling, the basic law prevails.
To recapitulate, RR 7-95, insofar as it restricts the definition of "goods" as basis of
transitional input tax credit under Section 105 is a nullity. 49
As we see it then, the 8% transitional input tax credit should not be limited to the
value of the improvements on the real properties but should include the value of
the real properties as well.
In this case, since petitioner is entitled to a transitional input tax credit of ₱
5,698,200,256, which is more than sufficient to cover its output VAT liability for the
first quarter of 1997, a refund of the amount of ₱ 359,652,009.47 erroneously paid
as output VAT for the said quarter is in order.
WHEREFORE, the petition is hereby GRANTED. The assailed Decision dated July
7, 2006 of the Court of Appeals in CA-G.R. SP No. 61436 is REVERSED and SET
ASIDE. Respondent Commissioner of Internal Revenue is ordered to refund to
petitioner Fort Bonifacio Development Corporation the amount of ₱
359,652,009.47 paid as output VAT for the first quarter of 1997 in light of the
transitional input tax credit available to petitioner for the said quarter, or in the
alternative, to issue a tax credit certificate corresponding to such amount.
SO ORDERED.
G.R. Nos. 141104 & 148763 June 8, 2007
ATLAS CONSOLIDATED MINING AND DEVELOPMENT
CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
CHICO-NAZARIO, J.:
85
Before this Court are the consolidated cases involving the unsuccessful claims of
herein petitioner Atlas Consolidated Mining and Development Corporation
(petitioner corporation) for the refund/credit of the input Value Added Tax (VAT) on
its purchases of capital goods and on its zero-rated sales in the taxable quarters of
the years 1990 and 1992, the denial of which by the Court of Tax Appeals (CTA),
was affirmed by the Court of Appeals.
Petitioner corporation is engaged in the business of mining, production, and sale of
various mineral products, such as gold, pyrite, and copper concentrates. It is a
VAT-registered taxpayer. It was initially issued VAT Registration No. 32-A-6-
002224, dated 1 January 1988, but it had to register anew with the appropriate
revenue district office (RDO) of the Bureau of Internal Revenue (BIR) when it
moved its principal place of business, and it was re-issued VAT Registration No.
32-0-004622, dated 15 August 1990.1
G.R. No. 141104
Petitioner corporation filed with the BIR its VAT Return for the first quarter of
1992.2 It alleged that it likewise filed with the BIR the corresponding application for
the refund/credit of its input VAT on its purchases of capital goods and on its zero-
rated sales in the amount of P26,030,460.00.3 When its application for
refund/credit remained unresolved by the BIR, petitioner corporation filed on 20
April 1994 its Petition for Review with the CTA, docketed as CTA Case No. 5102.
Asserting that it was a "zero-rated VAT person," it prayed that the CTA order
herein respondent Commissioner of Internal Revenue (respondent Commissioner)
to refund/credit petitioner corporation with the amount of P26,030,460.00,
representing the input VAT it had paid for the first quarter of 1992. The respondent
Commissioner opposed and sought the dismissal of the petition for review of
petitioner corporation for failure to state a cause of action. After due trial, the CTA
promulgated its Decision4 on 24 November 1997 with the following disposition –
WHEREFORE, in view of the foregoing, the instant claim for refund is
hereby DENIED on the ground of prescription, insufficiency of evidence
and failure to comply with Section 230 of the Tax Code, as amended.
Accordingly, the petition at bar is hereby DISMISSED for lack of merit.
The CTA denied the motion for reconsideration of petitioner corporation in a
Resolution5 dated 15 April 1998.
When the case was elevated to the Court of Appeals as CA-G.R. SP No. 47607,
the appellate court, in its Decision,6 dated 6 July 1999, dismissed the appeal of
petitioner corporation, finding no reversible error in the CTA Decision, dated 24
 TAXATION - VALUE ADDED TAX

November 1997. The subsequent motion for reconsideration of petitioner refund/credit of input VAT on its purchases of capital goods and on its zero-rated
corporation was also denied by the Court of Appeals in its Resolution,7 dated 14 sales made in the last three taxable quarters of 1990.
December 1999.
Petitioner corporation filed with the BIR its VAT Returns for the second, third, and
Thus, petitioner corporation comes before this Court, via a Petition for Review fourth quarters of 1990, on 20 July 1990, 18 October 1990, and 20 January 1991,
on Certiorari under Rule 45 of the Revised Rules of Court, assigning the following respectively. It submitted separate applications to the BIR for the refund/credit of
errors committed by the Court of Appeals – the input VAT paid on its purchases of capital goods and on its zero-rated sales,
the details of which are presented as follows –
I
Date of Application Period Covered Amount Applied For
THE COURT OF APPEALS ERRED IN AFFIRMING THE REQUIREMENT
OF REVENUE REGULATIONS NO. 2-88 THAT AT LEAST 70% OF THE 21 August 1990 2nd Quarter, 1990 P 54,014,722.04
SALES OF THE [BOARD OF INVESTMENTS (BOI)]-REGISTERED FIRM
MUST CONSIST OF EXPORTS FOR ZERO-RATING TO APPLY. 21 November 1990 3rd Quarter, 1990 75,304,774.77

II 19 February 1991 4th Quarter, 1990 43,829,766.10

THE COURT OF APPEALS ERRED IN AFFIRMING THAT PETITIONER

FAILED TO SUBMIT SUFFICIENT EVIDENCE SINCE FAILURE TO When the BIR failed to act on its applications for refund/credit, petitioner
SUBMIT PHOTOCOPIES OF VAT INVOICES AND RECEIPTS IS NOT A corporation filed with the CTA the following petitions for review –
FATAL DEFECT.
Date Filed Period Covered CTA Case No.
III
20 July 1992 2nd Quarter, 1990 4831
THE COURT OF APPEALS ERRED IN RULING THAT THE JUDICIAL
CLAIM WAS FILED BEYOND THE PRESCRIPTIVE PERIOD SINCE THE 9 October 1992 3rd Quarter, 1990 4859
JUDICIAL CLAIM WAS FILED WITHIN TWO (2) YEARS FROM THE
FILING OF THE VAT RETURN. 14 January 1993 4th Quarter, 1990 4944

IV
which were eventually consolidated. The respondent Commissioner contested the
THE COURT OF APPEALS ERRED IN NOT ORDERING CTA TO foregoing Petitions and prayed for the dismissal thereof. The CTA ruled in favor of
ALLOW THE RE-OPENING OF THE CASE FOR PETITIONER TO respondent Commissioner and in its Decision, 9 dated 30 October 1997, dismissed
PRESENT ADDITIONAL EVIDENCE.8 the Petitions mainly on the ground that the prescriptive periods for filing the same
had expired. In a Resolution,10 dated 15 January 1998, the CTA denied the motion
G.R. No. 148763 for reconsideration of petitioner corporation since the latter presented no new
matter not already discussed in the court's prior Decision. In the same Resolution,
the CTA also denied the alternative prayer of petitioner corporation for a new trial
G.R. No. 148763 involves almost the same set of facts as in G.R. No. 141104 since it did not fall under any of the grounds cited under Section 1, Rule 37 of the
presented above, except that it relates to the claims of petitioner corporation for Revised Rules of Court, and it was not supported by affidavits of merits required by
Section 2 of the same Rule.
86
 TAXATION - VALUE ADDED TAX
Petitioner corporation appealed its case to the Court of Appeals, where it was
docketed as CA-G.R. SP No. 46718. On 15 September 2000, the Court of Appeals
rendered its Decision,11 finding that although petitioner corporation timely filed its
Petitions for Review with the CTA, it still failed to substantiate its claims for the
refund/credit of its input VAT for the last three quarters of 1990. In its
Resolution,12 dated 27 June 2001, the appellate court denied the motion for
reconsideration of petitioner corporation, finding no cogent reason to reverse its
previous Decision.
Aggrieved, petitioner corporation filed with this Court another Petition for Review
on Certiorari under Rule 45 of the Revised Rules of Court, docketed as G.R. No.
148763, raising the following issues –
A.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING
THAT PETITIONER'S CLAIM IS BARRED UNDER REVENUE
REGULATIONS NOS. 2-88 AND 3-88 I.E., FOR FAILURE TO PTOVE
[sic] THE 70% THRESHOLD FOR ZERO-RATING TO APPLY AND FOR
FAILURE TO ESTABLISH THE FACTUAL BASIS FOR THE INSTANT
CLAIM.
B.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN FINDING
THAT THERE IS NO BASIS TO GRANT PETITIONER'S MOTION FOR
NEW TRIAL.
There being similarity of parties, subject matter, and issues, G.R. Nos. 141104 and
148763 were consolidated pursuant to a Resolution, dated 4 September 2006,
issued by this Court. The ruling of this Court in these cases hinges on how it will
resolve the following key issues: (1) prescription of the claims of petitioner
corporation for input VAT refund/credit; (2) validity and applicability of Revenue
Regulations No. 2-88 imposing upon petitioner corporation, as a requirement for
the VAT zero-rating of its sales, the burden of proving that the buyer companies
were not just BOI-registered but also exporting 70% of their total annual
production; (3) sufficiency of evidence presented by petitioner corporation to
establish that it is indeed entitled to input VAT refund/credit; and (4) legal ground
for granting the motion of petitioner corporation for re-opening of its cases or
holding of new trial before the CTA so it could be given the opportunity to present
the required evidence.
87
Prescription
The prescriptive period for filing an application for tax refund/credit of input VAT on
zero-rated sales made in 1990 and 1992 was governed by Section 106(b) and (c)
of the Tax Code of 1977, as amended, which provided that –
SEC. 106. Refunds or tax credits of input tax. – x x x.
(b) Zero-rated or effectively zero-rated sales. – Any person, except those
covered by paragraph (a) above, whose sales are zero-rated may, within
two years after the close of the quarter when such sales were made, apply
for the issuance of a tax credit certificate or refund of the input taxes
attributable to such sales to the extent that such input tax has not been
applied against output tax.
xxxx
(e) Period within which refund of input taxes may be made by the
Commissioner. – The Commissioner shall refund input taxes within 60
days from the date the application for refund was filed with him or his duly
authorized representative. No refund of input taxes shall be allowed unless
the VAT-registered person files an application for refund within the period
prescribed in paragraphs (a), (b) and (c) as the case may be.
By a plain reading of the foregoing provision, the two-year prescriptive period for
filing the application for refund/credit of input VAT on zero-rated sales shall be
determined from the close of the quarter when such sales were made.
Petitioner contends, however, that the said two-year prescriptive period should be
counted, not from the close of the quarter when the zero-rated sales were made,
but from the date of filing of the quarterly VAT return and payment of the tax due
20 days thereafter, in accordance with Section 110(b) of the Tax Code of 1977, as
amended, quoted as follows –
SEC. 110. Return and payment of value-added tax. – x x x.
(b) Time for filing of return and payment of tax. – The return shall be filed
and the tax paid within 20 days following the end of each quarter
specifically prescribed for a VAT-registered person under regulations to be
promulgated by the Secretary of Finance: Provided, however, That any
person whose registration is cancelled in accordance with paragraph (e) of
 TAXATION - VALUE ADDED TAX
Section 107 shall file a return within 20 days from the cancellation of such
registration.
It is already well-settled that the two-year prescriptive period for instituting a suit or
proceeding for recovery of corporate income tax erroneously or illegally paid under
Section 23013 of the Tax Code of 1977, as amended, was to be counted from the
filing of the final adjustment return. This Court already set out in ACCRA
Investments Corporation v. Court of Appeals,14 the rationale for such a rule, thus –
Clearly, there is the need to file a return first before a claim for refund can
prosper inasmuch as the respondent Commissioner by his own rules and
regulations mandates that the corporate taxpayer opting to ask for a
refund must show in its final adjustment return the income it received from
all sources and the amount of withholding taxes remitted by its withholding
agents to the Bureau of Internal Revenue. The petitioner corporation filed
its final adjustment return for its 1981 taxable year on April 15, 1982. In our
Resolution dated April 10, 1989 in the case of Commissioner of Internal
Revenue v. Asia Australia Express, Ltd. (G.R. No. 85956), we ruled that
the two-year prescriptive period within which to claim a refund commences
to run, at the earliest, on the date of the filing of the adjusted final tax
return. Hence, the petitioner corporation had until April 15, 1984 within
which to file its claim for refund.
Considering that ACCRAIN filed its claim for refund as early as December
29, 1983 with the respondent Commissioner who failed to take any action
thereon and considering further that the non-resolution of its claim for
refund with the said Commissioner prompted ACCRAIN to reiterate its
claim before the Court of Tax Appeals through a petition for review on April
13, 1984, the respondent appellate court manifestly committed a reversible
error in affirming the holding of the tax court that ACCRAIN's claim for
refund was barred by prescription.
It bears emphasis at this point that the rationale in computing the two-year
prescriptive period with respect to the petitioner corporation's claim for
refund from the time it filed its final adjustment return is the fact that it was
only then that ACCRAIN could ascertain whether it made profits or
incurred losses in its business operations. The "date of payment",
therefore, in ACCRAIN's case was when its tax liability, if any, fell due
upon its filing of its final adjustment return on April 15, 1982.
In another case, Commissioner of Internal Revenue v. TMX Sales, Inc.,15 this
Court further expounded on the same matter –
88
A re-examination of the aforesaid minute resolution of the Court in
the Pacific Procon case is warranted under the circumstances to lay down
a categorical pronouncement on the question as to when the two-year
prescriptive period in cases of quarterly corporate income tax commences
to run. A full-blown decision in this regard is rendered more imperative in
the light of the reversal by the Court of Tax Appeals in the instant case of
its previous ruling in the Pacific Procon case.
Section 292 (now Section 230) of the National Internal Revenue Code
should be interpreted in relation to the other provisions of the Tax Code in
order to give effect the legislative intent and to avoid an application of the
law which may lead to inconvenience and absurdity. In the case of People
vs. Rivera (59 Phil. 236 [1933]), this Court stated that statutes should
receive a sensible construction, such as will give effect to the legislative
intention and so as to avoid an unjust or an absurd
conclusion. INTERPRETATIO TALIS IN AMBIGUIS SEMPER FRIENDA
EST, UT EVITATUR INCONVENIENS ET ABSURDUM. Where there is
ambiguity, such interpretation as will avoid inconvenience and absurdity is
to be adopted. Furthermore, courts must give effect to the general
legislative intent that can be discovered from or is unraveled by the four
corners of the statute, and in order to discover said intent, the whole
statute, and not only a particular provision thereof, should be considered.
(Manila Lodge No. 761, et al. vs. Court of Appeals, et al. 73 SCRA 162
[1976) Every section, provision or clause of the statute must be
expounded by reference to each other in order to arrive at the effect
contemplated by the legislature. The intention of the legislator must be
ascertained from the whole text of the law and every part of the act is to be
taken into view. (Chartered Bank vs. Imperial, 48 Phil. 931 [1921]; Lopez
vs. El Hoger Filipino, 47 Phil. 249, cited in Aboitiz Shipping Corporation vs.
City of Cebu, 13 SCRA 449 [1965]).
Thus, in resolving the instant case, it is necessary that we consider not
only Section 292 (now Section 230) of the National Internal Revenue Code
but also the other provisions of the Tax Code, particularly Sections 84, 85
(now both incorporated as Section 68), Section 86 (now Section 70) and
Section 87 (now Section 69) on Quarterly Corporate Income Tax Payment
and Section 321 (now Section 232) on keeping of books of accounts. All
these provisions of the Tax Code should be harmonized with each other.
xxxx
 TAXATION - VALUE ADDED TAX
Therefore, the filing of a quarterly income tax returns required in Section
85 (now Section 68) and implemented per BIR Form 1702-Q and payment
of quarterly income tax should only be considered mere installments of the
annual tax due. These quarterly tax payments which are computed based
on the cumulative figures of gross receipts and deductions in order to
arrive at a net taxable income, should be treated as advances or portions
of the annual income tax due, to be adjusted at the end of the calendar or
fiscal year. This is reinforced by Section 87 (now Section 69) which
provides for the filing of adjustment returns and final payment of income
tax. Consequently, the two-year prescriptive period provided in Section
292 (now Section 230) of the Tax Code should be computed from the time
of filing the Adjustment Return or Annual Income Tax Return and final
payment of income tax.
In the case of Collector of Internal Revenue vs. Antonio Prieto (2 SCRA
1007 [1961]), this Court held that when a tax is paid in installments, the
prescriptive period of two years provided in Section 306 (Section 292) of
the National Internal Revenue Code should be counted from the date of
the final payment. This ruling is reiterated in Commissioner of Internal
Revenue vs. Carlos Palanca (18 SCRA 496 [1966]), wherein this Court
stated that where the tax account was paid on installment, the computation
of the two-year prescriptive period under Section 306 (Section 292) of the
Tax Code, should be from the date of the last installment.
In the instant case, TMX Sales, Inc. filed a suit for a refund on March 14,
1984. Since the two-year prescriptive period should be counted from the
filing of the Adjustment Return on April 15,1982, TMX Sales, Inc. is not yet
barred by prescription.
The very same reasons set forth in the afore-cited cases concerning the two-year
prescriptive period for claims for refund of illegally or erroneously collected income
tax may also apply to the Petitions at bar involving the same prescriptive period for
claims for refund/credit of input VAT on zero-rated sales.
It is true that unlike corporate income tax, which is reported and paid on installment
every quarter, but is eventually subjected to a final adjustment at the end of the
taxable year, VAT is computed and paid on a purely quarterly basis without need
for a final adjustment at the end of the taxable year. However, it is also equally true
that until and unless the VAT-registered taxpayer prepares and submits to the BIR
its quarterly VAT return, there is no way of knowing with certainty just how much
input VAT16 the taxpayer may apply against its output VAT;17 how much output
VAT it is due to pay for the quarter or how much excess input VAT it may carry-
89
over to the following quarter; or how much of its input VAT it may claim as
refund/credit. It should be recalled that not only may a VAT-registered taxpayer
directly apply against his output VAT due the input VAT it had paid on its
importation or local purchases of goods and services during the quarter; the
taxpayer is also given the option to either (1) carry over any excess input VAT to
the succeeding quarters for application against its future output VAT liabilities, or
(2) file an application for refund or issuance of a tax credit certificate covering the
amount of such input VAT.18 Hence, even in the absence of a final adjustment
return, the determination of any output VAT payable necessarily requires that the
VAT-registered taxpayer make adjustments in its VAT return every quarter, taking
into consideration the input VAT which are creditable for the present quarter or had
been carried over from the previous quarters.
Moreover, when claiming refund/credit, the VAT-registered taxpayer must be able
to establish that it does have refundable or creditable input VAT, and the same has
not been applied against its output VAT liabilities – information which are
supposed to be reflected in the taxpayer's VAT returns. Thus, an application for
refund/credit must be accompanied by copies of the taxpayer's VAT return/s for the
taxable quarter/s concerned.
Lastly, although the taxpayer's refundable or creditable input VAT may not be
considered as illegally or erroneously collected, its refund/credit is a privilege
extended to qualified and registered taxpayers by the very VAT system adopted by
the Legislature. Such input VAT, the same as any illegally or erroneously collected
national internal revenue tax, consists of monetary amounts which are currently in
the hands of the government but must rightfully be returned to the taxpayer.
Therefore, whether claiming refund/credit of illegally or erroneously collected
national internal revenue tax, or input VAT, the taxpayer must be given equal
opportunity for filing and pursuing its claim.
For the foregoing reasons, it is more practical and reasonable to count the two-
year prescriptive period for filing a claim for refund/credit of input VAT on zero-
rated sales from the date of filing of the return and payment of the tax due which,
according to the law then existing, should be made within 20 days from the end of
each quarter. Having established thus, the relevant dates in the instant cases are
summarized and reproduced below –
Period Covered Date of Date of Date of Filin
Filing (Return w/ Filing (Application w/ w/ CTA
BIR) BIR)
 TAXATION - VALUE ADDED TAX
2nd Quarter, 1990 20 July 1990 21 August 1990
3rd Quarter, 1990 18 October 1990 21 November 1990
4th Quarter, 1990 20 January 1991 19 February 1991
1st Quarter, 1992 20 April 1992 --
The above table readily shows that the administrative and judicial claims of
petitioner corporation for refund of its input VAT on its zero-rated sales for the last
three quarters of 1990 were all filed within the prescriptive period.
However, the same cannot be said for the claim of petitioner corporation for refund
of its input VAT on its zero-rated sales for the first quarter of 1992. Even though it
may seem that petitioner corporation filed in time its judicial claim with the CTA,
there is no showing that it had previously filed an administrative claim with the BIR.
Section 106(e) of the Tax Code of 1977, as amended, explicitly provided that no
refund of input VAT shall be allowed unless the VAT-registered taxpayer filed an
application for refund with respondent Commissioner within the two-year
prescriptive period. The application of petitioner corporation for refund/credit of its
input VAT for the first quarter of 1992 was not only unsigned by its supposed
authorized representative, Ma. Paz R. Semilla, Manager-Finance and Treasury,
but it was not dated, stamped, and initialed by the BIR official who purportedly
received the same. The CTA, in its Decision,19 dated 24 November 1997, in CTA
Case No. 5102, made the following observations –
This Court, likewise, rejects any probative value of the Application for Tax
Credit/Refund of VAT Paid (BIR Form No. 2552) [Exhibit "B'] formally
offered in evidence by the petitioner on account of the fact that it does not
bear the BIR stamp showing the date when such application was filed
together with the signature or initial of the receiving officer of respondent's
Bureau. Worse still, it does not show the date of application and the
signature of a certain Ma. Paz R. Semilla indicated in the form who
appears to be petitioner's authorized filer.
A review of the records reveal that the original of the aforecited application
was lost during the time petitioner transferred its office (TSN, p. 6, Hearing
of December 9, 1994). Attempt was made to prove that petitioner exerted
efforts to recover the original copy, but to no avail. Despite this, however,
We observe that petitioner completely failed to establish the missing dates
and signatures abovementioned. On this score, said application has no
probative value in demonstrating the fact of its filing within two years after
20 July 1992
the [filing of the VAT return for the quarter] when petitioner's sales of
9 October 1992goods were made as prescribed under Section 106(b) of the Tax Code.
We believe thus that petitioner failed to file an application for refund in due
14 January 1993form and within the legal period set by law at the administrative level.
Hence, the case at bar has failed to satisfy the requirement on the prior
20 April 1994filing of an application for refund with the respondent before the
commencement of a judicial claim for refund, as prescribed under Section
230 of the Tax Code. This fact constitutes another one of the many
reasons for not granting petitioner's judicial claim.
As pointed out by the CTA, in serious doubt is not only the fact of whether
petitioner corporation timely filed its administrative claim for refund of its input VAT
for the first quarter of 1992, but also whether petitioner corporation actually filed
such administrative claim in the first place. For failing to prove that it had earlier
filed with the BIR an application for refund/credit of its input VAT for the first
quarter of 1992, within the period prescribed by law, then the case instituted by
petitioner corporation with the CTA for the refund/credit of the very same tax
cannot prosper.
Revenue Regulations No. 2-88 and the 70% export requirement
Under Section 100(a) of the Tax Code of 1977, as amended, a 10% VAT was
imposed on the gross selling price or gross value in money of goods sold, bartered
or exchanged. Yet, the same provision subjected the following sales made by
VAT-registered persons to 0% VAT –
(1) Export sales; and
(2) Sales to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively
subjects such sales to zero-rate.
"Export Sales" means the sale and shipment or exportation of goods from
the Philippines to a foreign country, irrespective of any shipping
arrangement that may be agreed upon which may influence or determine
the transfer of ownership of the goods so exported, or foreign currency
denominated sales. "Foreign currency denominated sales", means sales to
nonresidents of goods assembled or manufactured in the Philippines, for
delivery to residents in the Philippines and paid for in convertible foreign
currency remitted through the banking system in the Philippines.
90
 TAXATION - VALUE ADDED TAX
These are termed zero-rated sales. A zero-rated sale is still considered a taxable
transaction for VAT purposes, although the VAT rate applied is 0%. A sale by a
VAT-registered taxpayer of goods and/or services taxed at 0% shall not result in
any output VAT, while the input VAT on its purchases of goods or services related
to such zero-rated sale shall be available as tax credit or refund.20
Petitioner corporation questions the validity of Revenue Regulations No. 2-88
averring that the said regulations imposed additional requirements, not found in the
law itself, for the zero-rating of its sales to Philippine Smelting and Refining
Corporation (PASAR) and Philippine Phosphate, Inc. (PHILPHOS), both of which
are registered not only with the BOI, but also with the then Export Processing Zone
Authority (EPZA).21
The contentious provisions of Revenue Regulations No. 2-88 read –
SEC. 2. Zero-rating. – (a) Sales of raw materials to BOI-registered
exporters. – Sales of raw materials to export-oriented BOI-registered
enterprises whose export sales, under rules and regulations of the Board
of Investments, exceed seventy percent (70%) of total annual production,
shall be subject to zero-rate under the following conditions:
"(1) The seller shall file an application with the BIR, ATTN.:
Division, applying for zero-rating for each and every separate
buyer, in accordance with Section 8(d) of Revenue Regulations
No. 5-87. The application should be accompanied with a favorable
recommendation from the Board of Investments."
"(2) The raw materials sold are to be used exclusively by the buyer
in the manufacture, processing or repacking of his own registered
export product;
"(3) The words "Zero-Rated Sales" shall be prominently indicated
in the sales invoice. The exporter (buyer) can no longer claim from
the Bureau of Internal Revenue or any other government office tax
credits on their zero-rated purchases;
(b) Sales of raw materials to foreign buyer. – Sales of raw materials to a
nonresident foreign buyer for delivery to a resident local export-oriented
BOI-registered enterprise to be used in manufacturing, processing or
repacking of the said buyer's goods and paid for in foreign currency,
91
inwardly remitted in accordance with Central Bank rules and regulations
shall be subject to zero-rate.
It is the position of the respondent Commissioner, affirmed by the CTA and the
Court of Appeals, that Section 2 of Revenue Regulations No. 2-88 should be
applied in the cases at bar; and to be entitled to the zero-rating of its sales to
PASAR and PHILPHOS, petitioner corporation, as a VAT-registered seller, must
be able to prove not only that PASAR and PHILPHOS are BOI-registered
corporations, but also that more than 70% of the total annual production of these
corporations are actually exported. Revenue Regulations No. 2-88 merely echoed
the requirement imposed by the BOI on export-oriented corporations registered
with it.
While this Court is not prepared to strike down the validity of Revenue Regulations
No. 2-88, it finds that its application must be limited and placed in the proper
context. Note that Section 2 of Revenue Regulations No. 2-88 referred only to the
zero-rated sales of raw materials to export-oriented BOI-registered
enterprises whose export sales, under BOI rules and regulations, should exceed
seventy percent (70%) of their total annual production.
Section 2 of Revenue Regulations No. 2-88, should not have been applied to the
zero-rating of the sales made by petitioner corporation to PASAR and PHILPHOS.
At the onset, it must be emphasized that PASAR and PHILPHOS, in addition to
being registered with the BOI, were also registered with the EPZA and located
within an export-processing zone. Petitioner corporation does not claim that its
sales to PASAR and PHILPHOS are zero-rated on the basis that said sales were
made to export-oriented BOI-registered corporations, but rather, on the basis that
the sales were made to EPZA-registered enterprises operating within export
processing zones. Although sales to export-oriented BOI-registered enterprises
and sales to EPZA-registered enterprises located within export processing zones
were both deemed export sales, which, under Section 100(a) of the Tax Code of
1977, as amended, shall be subject to 0% VAT distinction must be made between
these two types of sales because each may have different substantiation
requirements.
The Tax Code of 1977, as amended, gave a limited definition of export sales, to
wit: "The sale and shipment or exportation of goods from the Philippines to a
foreign country, irrespective of any shipping arrangement that may be agreed upon
which may influence or determine the transfer of ownership of the goods so
exported, or foreign currency denominated sales." Executive Order No. 226,
otherwise known as the Omnibus Investments Code of 1987 - which, in the years
concerned (i.e., 1990 and 1992), governed enterprises registered with both the
 TAXATION - VALUE ADDED TAX
BOI and EPZA, provided a more comprehensive definition of export sales, as
quoted below:
"ART. 23. "Export sales" shall mean the Philippine port F.O.B. value,
determined from invoices, bills of lading, inward letters of credit, landing
certificates, and other commercial documents, of export products exported
directly by a registered export producer or the net selling price of export
product sold by a registered export producer or to an export trader that
subsequently exports the same: Provided, That sales of export products to
another producer or to an export trader shall only be deemed export sales
when actually exported by the latter, as evidenced by landing certificates
of similar commercial documents: Provided, further, That without actual
exportation the following shall be considered constructively exported for
purposes of this provision: (1) sales to bonded manufacturing warehouses
of export-oriented manufacturers; (2) sales to export processing zones; (3)
sales to registered export traders operating bonded trading warehouses
supplying raw materials used in the manufacture of export products under
guidelines to be set by the Board in consultation with the Bureau of
Internal Revenue and the Bureau of Customs; (4) sales to foreign military
bases, diplomatic missions and other agencies and/or instrumentalities
granted tax immunities, of locally manufactured, assembled or repacked
products whether paid for in foreign currency or not: Provided, further,
That export sales of registered export trader may include commission
income; and Provided, finally, That exportation of goods on consignment
shall not be deemed export sales until the export products consigned are
in fact sold by the consignee.
Sales of locally manufactured or assembled goods for household and
personal use to Filipinos abroad and other non-residents of the Philippines
as well as returning Overseas Filipinos under the Internal Export Program
of the government and paid for in convertible foreign currency inwardly
remitted through the Philippine banking systems shall also be considered
export sales. (Underscoring ours.)
The afore-cited provision of the Omnibus Investments Code of 1987 recognizes as
export sales the sales of export products to another producer or to an export
trader, provided that the export products are actually exported. For purposes of
VAT zero-rating, such producer or export trader must be registered with the BOI
and is required to actually export more than 70% of its annual production.
Without actual exportation, Article 23 of the Omnibus Investments Code of 1987
also considers constructive exportation as export sales. Among other types of
92
constructive exportation specifically identified by the said provision are sales to
export processing zones. Sales to export processing zones are subjected to
special tax treatment. Article 77 of the same Code establishes the tax treatment of
goods or merchandise brought into the export processing zones. Of particular
relevance herein is paragraph 2, which provides that "Merchandise purchased by a
registered zone enterprise from the customs territory and subsequently brought
into the zone, shall be considered as export sales and the exporter thereof shall be
entitled to the benefits allowed by law for such transaction."
Such tax treatment of goods brought into the export processing zones are only
consistent with the Destination Principle and Cross Border Doctrine to which the
Philippine VAT system adheres. According to the Destination Principle, 22 goods
and services are taxed only in the country where these are consumed. In
connection with the said principle, the Cross Border Doctrine23 mandates that no
VAT shall be imposed to form part of the cost of the goods destined for
consumption outside the territorial border of the taxing authority. Hence, actual
export of goods and services from the Philippines to a foreign country must be free
of VAT, while those destined for use or consumption within the Philippines shall be
imposed with 10% VAT.24 Export processing zones25 are to be managed as a
separate customs territory from the rest of the Philippines and, thus, for tax
purposes, are effectively considered as foreign territory. For this reason, sales by
persons from the Philippine customs territory to those inside the export processing
zones are already taxed as exports.
Plainly, sales to enterprises operating within the export processing zones are
export sales, which, under the Tax Code of 1977, as amended, were subject to 0%
VAT. It is on this ground that petitioner corporation is claiming refund/credit of the
input VAT on its zero-rated sales to PASAR and PHILPHOS.
The distinction made by this Court in the preceding paragraphs between the zero-
rated sales to export-oriented BOI-registered enterprises and zero-rated sales to
EPZA-registered enterprises operating within export processing zones is actually
supported by subsequent development in tax laws and regulations. In Revenue
Regulations No. 7-95, the Consolidated VAT Regulations, as amended,26 the BIR
defined with more precision what are zero-rated export sales –
(1) The sale and actual shipment of goods from the Philippines to a foreign
country, irrespective of any shipping arrangement that may be agreed
upon which may influence or determine the transfer of ownership of the
goods so exported paid for in acceptable foreign currency or its equivalent
in goods or services, and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
 TAXATION - VALUE ADDED TAX
(2) The sale of raw materials or packaging materials to a non-resident
buyer for delivery to a resident local export-oriented enterprise to be used
in manufacturing, processing, packing or repacking in the Philippines of
the said buyer's goods and paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
(3) The sale of raw materials or packaging materials to an export-oriented
enterprise whose export sales exceed seventy percent (70%) of total
annual production;
Any enterprise whose export sales exceed 70% of the total annual
production of the preceding taxable year shall be considered an export-
oriented enterprise upon accreditation as such under the provisions of the
Export Development Act (R.A. 7844) and its implementing rules and
regulations;
(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and
(5) Those considered export sales under Articles 23 and 77 of Executive
Order No. 226, otherwise known as the Omnibus Investments Code of
1987, and other special laws, e.g. Republic Act No. 7227, otherwise
known as the Bases Conversion and Development Act of 1992.
The Tax Code of 1997, as amended,27 later adopted the foregoing definition of
export sales, which are subject to 0% VAT.
This Court then reiterates its conclusion that Section 2 of Revenue Regulations
No. 2-88, which applied to zero-rated export sales to export-oriented BOI-
registered enterprises, should not be applied to the applications for refund/credit of
input VAT filed by petitioner corporation since it based its applications on the zero-
rating of export sales to enterprises registered with the EPZA and located within
export processing zones.
Sufficiency of evidence
There can be no dispute that the taxpayer-claimant has the burden of proving the
legal and factual bases of its claim for tax credit or refund, but once it has
submitted all the required documents, it is the function of the BIR to assess these
documents with purposeful dispatch.28 It therefore falls upon herein petitioner
corporation to first establish that its sales qualify for VAT zero-rating under the
93
existing laws (legal basis), and then to present sufficient evidence that said sales
were actually made and resulted in refundable or creditable input VAT in the
amount being claimed (factual basis).
It would initially appear that the applications for refund/credit filed by petitioner
corporation cover only input VAT on its purportedly zero-rated sales to PASAR and
PHILPHOS; however, a more thorough perusal of its applications, VAT returns,
pleadings, and other records of these cases would reveal that it is also claiming
refund/credit of its input VAT on purchases of capital goods and sales of gold to
the Central Bank of the Philippines (CBP).
This Court finds that the claims for refund/credit of input VAT of petitioner
corporation have sufficient legal bases.
As has been extensively discussed herein, Section 106(b)(2), in relation to Section
100(a)(2) of the Tax Code of 1977, as amended, allowed the refund/credit of input
VAT on export sales to enterprises operating within export processing zones and
registered with the EPZA, since such export sales were deemed to be effectively
zero-rated sales.29 The fact that PASAR and PHILPHOS, to whom petitioner
corporation sold its products, were operating inside an export processing zone and
duly registered with EPZA, was never raised as an issue herein. Moreover, the
same fact was already judicially recognized in the case Atlas Consolidated Mining
& Development Corporation v. Commissioner of Internal Revenue.30 Section
106(c) of the same Code likewise permitted a VAT-registered taxpayer to apply for
refund/credit of the input VAT paid on capital goods imported or locally purchased
to the extent that such input VAT has not been applied against its output VAT.
Meanwhile, the effective zero-rating of sales of gold to the CBP from 1989 to
199131 was already affirmed by this Court in Commissioner of Internal Revenue v.
Benguet Corporation,32 wherein it ruled that –
At the time when the subject transactions were consummated, the
prevailing BIR regulations relied upon by respondent ordained that gold
sales to the Central Bank were zero-rated. The BIR interpreted Sec. 100 of
the NIRC in relation to Sec. 2 of E.O. No. 581 s. 1980 which prescribed
that gold sold to the Central Bank shall be considered export and therefore
shall be subject to the export and premium duties. In coming out with this
interpretation, the BIR also considered Sec. 169 of Central Bank Circular
No. 960 which states that all sales of gold to the Central Bank are
considered constructive exports. x x x.
This Court now comes to the question of whether petitioner corporation has
sufficiently established the factual bases for its applications for refund/credit of
 TAXATION - VALUE ADDED TAX
input VAT. It is in this regard that petitioner corporation has failed, both in the
administrative and judicial level.
Applications for refund/credit of input VAT with the BIR must comply with the
appropriate revenue regulations. As this Court has already ruled, Revenue
Regulations No. 2-88 is not relevant to the applications for refund/credit of input
VAT filed by petitioner corporation; nonetheless, the said applications must have
been in accordance with Revenue Regulations No. 3-88, amending Section 16 of
Revenue Regulations No. 5-87, which provided as follows –
SECTION 16. Refunds or tax credits of input tax. –
xxxx
(c) Claims for tax credits/refunds. – Application for Tax Credit/Refund of
Value-Added Tax Paid (BIR Form No. 2552) shall be filed with the
Revenue District Office of the city or municipality where the principal place
of business of the applicant is located or directly with the Commissioner,
Attention: VAT Division.
A photocopy of the purchase invoice or receipt evidencing the value added
tax paid shall be submitted together with the application. The original copy
of the said invoice/receipt, however, shall be presented for cancellation
prior to the issuance of the Tax Credit Certificate or refund. In addition, the
following documents shall be attached whenever applicable:
xxxx
"3. Effectively zero-rated sale of goods and services.
"i) photo copy of approved application for zero-rate if filing
for the first time.
"ii) sales invoice or receipt showing name of the person or
entity to whom the sale of goods or services were
delivered, date of delivery, amount of consideration, and
description of goods or services delivered.
"iii) evidence of actual receipt of goods or services.
94
"4. Purchase of capital goods.
"i) original copy of invoice or receipt showing the date of
purchase, purchase price, amount of value-added tax paid
and description of the capital equipment locally
purchased.
"ii) with respect to capital equipment imported, the photo
copy of import entry document for internal revenue tax
purposes and the confirmation receipt issued by the
Bureau of Customs for the payment of the value-added
tax.
"5. In applicable cases,
where the applicant's zero-rated transactions are regulated by certain
government agencies, a statement therefrom showing the amount and
description of sale of goods and services, name of persons or entities
(except in case of exports) to whom the goods or services were sold, and
date of transaction shall also be submitted.
In all cases, the amount of refund or tax credit that may be granted shall
be limited to the amount of the value-added tax (VAT) paid directly and
entirely attributable to the zero-rated transaction during the period covered
by the application for credit or refund.
Where the applicant is engaged in zero-rated and other taxable and
exempt sales of goods and services, and the VAT paid (inputs) on
purchases of goods and services cannot be directly attributed to any of the
aforementioned transactions, the following formula shall be used to
determine the creditable or refundable input tax for zero-rated sale:
Amount of Zero-rated Sale
Total Sales
X
Total Amount of Input Taxes
=
Amount Creditable/Refundable
 TAXATION - VALUE ADDED TAX
In case the application for refund/credit of input VAT was denied or remained
unacted upon by the BIR, and before the lapse of the two-year prescriptive period,
the taxpayer-applicant may already file a Petition for Review before the CTA. If the
taxpayer's claim is supported by voluminous documents, such as receipts,
invoices, vouchers or long accounts, their presentation before the CTA shall be
governed by CTA Circular No. 1-95, as amended, reproduced in full below –
In the interest of speedy administration of justice, the Court hereby
promulgates the following rules governing the presentation of voluminous
documents and/or long accounts, such as receipts, invoices and vouchers,
as evidence to establish certain facts pursuant to Section 3(c), Rule 130 of
the Rules of Court and the doctrine enunciated in Compania Maritima vs.
Allied Free Workers Union (77 SCRA 24), as well as Section 8 of Republic
Act No. 1125:
1. The party who desires to introduce as evidence such voluminous
documents must, after motion and approval by the Court, present:
(a) a Summary containing, among others, a chronological listing of
the numbers, dates and amounts covered by the invoices or
receipts and the amount/s of tax paid; and (b) a Certification of an
independent Certified Public Accountant attesting to the
correctness of the contents of the summary after making an
examination, evaluation and audit of the voluminous receipts and
invoices. The name of the accountant or partner of the firm in
charge must be stated in the motion so that he/she can be
commissioned by the Court to conduct the audit and, thereafter,
testify in Court relative to such summary and certification pursuant
to Rule 32 of the Rules of Court.
2. The method of individual presentation of each and every receipt, invoice
or account for marking, identification and comparison with the originals
thereof need not be done before the Court or Clerk of Court anymore after
the introduction of the summary and CPA certification. It is enough that the
receipts, invoices, vouchers or other documents covering the said
accounts or payments to be introduced in evidence must be pre-marked
by the party concerned and submitted to the Court in order to be made
accessible to the adverse party who desires to check and verify the
correctness of the summary and CPA certification. Likewise, the originals
of the voluminous receipts, invoices or accounts must be ready for
verification and comparison in case doubt on the authenticity thereof is
raised during the hearing or resolution of the formal offer of evidence.
95
Since CTA Cases No. 4831, 4859, 4944,33 and 5102,34 were still pending before
the CTA when the said Circular was issued, then petitioner corporation must have
complied therewith during the course of the trial of the said cases.
In Commissioner of Internal Revenue v. Manila Mining Corporation,35 this Court
denied the claim of therein respondent, Manila Mining Corporation, for refund of
the input VAT on its supposed zero-rated sales of gold to the CBP because it was
unable to substantiate its claim. In the same case, this Court emphasized the
importance of complying with the substantiation requirements for claiming
refund/credit of input VAT on zero-rated sales, to wit –
For a judicial claim for refund to prosper, however, respondent must not
only prove that it is a VAT registered entity and that it filed its claims within
the prescriptive period. It must substantiate the input VAT paid by
purchase invoices or official receipts.
This respondent failed to do.
Revenue Regulations No. 3-88 amending Revenue Regulations No. 5-87
provides the requirements in claiming tax credits/refunds.
xxxx
Under Section 8 of RA1125, the CTA is described as a court of record. As
cases filed before it are litigated de novo, party litigants should prove every
minute aspect of their cases. No evidentiary value can be given the
purchase invoices or receipts submitted to the BIR as the rules on
documentary evidence require that these documents must be formally
offered before the CTA.
This Court thus notes with approval the following findings of the CTA:
x x x [S]ale of gold to the Central Bank should not be subject to the
10% VAT-output tax but this does not ipso fact mean that [the
seller] is entitled to the amount of refund sought as it is required by
law to present evidence showing the input taxes it paid during the
year in question. What is being claimed in the instant petition is the
refund of the input taxes paid by the herein petitioner on its
purchase of goods and services. Hence, it is necessary for the
Petitioner to show proof that it had indeed paid the input taxes
during the year 1991. In the case at bar, Petitioner failed to
 TAXATION - VALUE ADDED TAX
discharge this duty. It did not adduce in evidence the sales
invoice, receipts or other documents showing the input value
added tax on the purchase of goods and services.
xxx
Section 8 of Republic Act 1125 (An Act Creating the Court of Tax Appeals)
provides categorically that the Court of Tax Appeals shall be a court of
record and as such it is required to conduct a formal trial (trial de
novo) where the parties must present their evidence accordingly if
they desire the Court to take such evidence into consideration. (Emphasis
and italics supplied)
A "sales or commercial invoice" is a written account of goods sold or
services rendered indicating the prices charged therefor or a list by
whatever name it is known which is used in the ordinary course of
business evidencing sale and transfer or agreement to sell or transfer
goods and services.
A "receipt" on the other hand is a written acknowledgment of the fact of
payment in money or other settlement between seller and buyer of goods,
debtor or creditor, or person rendering services and client or customer.
These sales invoices or receipts issued by the supplier are necessary to
substantiate the actual amount or quantity of goods sold and their selling
price, and taken collectively are the best means to prove the input VAT
payments.36
Although the foregoing decision focused only on the proof required for the
applicant for refund/credit to establish the input VAT payments it had made on
its purchases from suppliers, Revenue Regulations No. 3-88 also required it to
present evidence proving actual zero-rated VAT sales to qualified buyers, such as
(1) photocopy of the approved application for zero-rate if filing for the first time; (2)
sales invoice or receipt showing the name of the person or entity to whom the
goods or services were delivered, date of delivery, amount of consideration, and
description of goods or services delivered; and (3) the evidence of actual receipt of
goods or services.
Also worth noting in the same decision is the weight given by this Court to the
certification by the independent certified public accountant (CPA), thus –
96
Respondent contends, however, that the certification of the independent
CPA attesting to the correctness of the contents of the summary of
suppliers' invoices or receipts which were examined, evaluated and
audited by said CPA in accordance with CTA Circular No. 1-95 as
amended by CTA Circular No. 10-97 should substantiate its claims.
There is nothing, however, in CTA Circular No. 1-95, as amended by CTA
Circular No. 10-97, which either expressly or impliedly suggests that
summaries and schedules of input VAT payments, even if certified by an
independent CPA, suffice as evidence of input VAT payments.
xxxx
The circular, in the interest of speedy administration of justice, was
promulgated to avoid the time-consuming procedure of presenting,
identifying and marking of documents before the Court. It does not relieve
respondent of its imperative task of pre-marking photocopies of sales
receipts and invoices and submitting the same to the court after the
independent CPA shall have examined and compared them with the
originals. Without presenting these pre-marked documents as evidence –
from which the summary and schedules were based, the court cannot
verify the authenticity and veracity of the independent auditor's
conclusions.
There is, moreover, a need to subject these invoices or receipts to
examination by the CTA in order to confirm whether they are VAT
invoices. Under Section 21 of Revenue Regulation, No. 5-87, all
purchases covered by invoices other than a VAT invoice shall not be
entitled to a refund of input VAT.
xxxx
While the CTA is not governed strictly by technical rules of evidence, as
rules of procedure are not ends in themselves but are primarily intended
as tools in the administration of justice, the presentation of the purchase
receipts and/or invoices is not mere procedural technicality which may be
disregarded considering that it is the only means by which the CTA may
ascertain and verify the truth of the respondent's claims.
The records further show that respondent miserably failed to substantiate
its claims for input VAT refund for the first semester of 1991. Except for the
 TAXATION - VALUE ADDED TAX
summary and schedules of input VAT payments prepared by respondent
itself, no other evidence was adduced in support of its claim.
As for respondent's claim for input VAT refund for the second semester of
1991, it employed the services of Joaquin Cunanan & Co. on account of
which it (Joaquin Cunanan & Co.) executed a certification that:
We have examined the information shown below concerning the
input tax payments made by the Makati Office of Manila Mining
Corporation for the period from July 1 to December 31, 1991. Our
examination included inspection of the pertinent suppliers' invoices
and official receipts and such other auditing procedures as we
considered necessary in the circumstances. x x x
As the certification merely stated that it used "auditing procedures
considered necessary" and not auditing procedures which are in
accordance with generally accepted auditing principles and standards, and
that the examination was made on "input tax payments by the Manila
Mining Corporation," without specifying that the said input tax payments
are attributable to the sales of gold to the Central Bank, this Court cannot
rely thereon and regard it as sufficient proof of the respondent's input VAT
payments for the second semester.37
As for the Petition in G.R. No. 141104, involving the input VAT of petitioner
corporation on its zero-rated sales in the first quarter of 1992, this Court already
found that the petitioner corporation failed to comply with Section 106(b) of the Tax
Code of 1977, as amended, imposing the two-year prescriptive period for the filing
of the application for refund/credit thereof. This bars the grant of the application for
refund/credit, whether administratively or judicially, by express mandate of Section
106(e) of the same Code.
Granting arguendo that the application of petitioner corporation for the
refund/credit of the input VAT on its zero-rated sales in the first quarter of 1992
was actually and timely filed, petitioner corporation still failed to present together
with its application the required supporting documents, whether before the BIR or
the CTA. As the Court of Appeals ruled –
In actions involving claims for refund of taxes assessed and collected, the
burden of proof rests on the taxpayer. As clearly discussed in the CTA's
decision, petitioner failed to substantiate its claim for tax refunds. Thus:
97
"We note, however, that in the cases at bar, petitioner has relied
totally on Revenue Regulations No. 2-88 in determining
compliance with the documentary requirements for a successful
refund or issuance of tax credit. Unmentioned is the applicable
and specific amendment later introduced by Revenue Regulations
No. 3-88 dated April 7, 1988 (issued barely after two months from
the promulgation of Revenue Regulations No. 2-88 on February
15, 1988), which amended Section 16 of Revenue Regulations
No. 5-87 on refunds or tax credits of input tax. x x x.
xxxx
"A thorough examination of the evidence submitted by the
petitioner before this court reveals outright the failure to satisfy
documentary requirements laid down under the above-cited
regulations. Specifically, petitioner was not able to present the
following documents, to wit:
"a) sales invoices or receipts;
"b) purchase invoices or receipts;
"c) evidence of actual receipt of goods;
"d) BOI statement showing the amount and description of
sale of goods, etc.
"e) original or attested copies of invoice or receipt on
capital equipment locally purchased; and
"f) photocopy of import entry document and confirmation
receipt on imported capital equipment.
"There is the need to examine the sales invoices or receipts in
order to ascertain the actual amount or quantity of goods sold and
their selling price. Without them, this Court cannot verify the
correctness of petitioner's claim inasmuch as the regulations
require that the input taxes being sought for refund should be
limited to the portion that is directly and entirely attributable to the
particular zero-rated transaction. In this instance, the best
 TAXATION - VALUE ADDED TAX
evidence of such transaction are the said sales invoices or
receipts.
"Also, even if sales invoices are produced, there is the further
need to submit evidence that such goods were actually received
by the buyer, in this case, by CBP, Philp[h]os and PASAR.
xxxx
"Lastly, this Court cannot determine whether there were actual
local and imported purchase of capital goods as well as domestic
purchase of non-capital goods without the required purchase
invoice or receipt, as the case may be, and confirmation receipts.
"There is, thus, the imperative need to submit before this Court the
original or attested photocopies of petitioner's invoices or receipts,
confirmation receipts and import entry documents in order that a
full ascertainment of the claimed amount may be achieved.
"Petitioner should have taken the foresight to introduce in
evidence all of the missing documents abovementioned. Cases
filed before this Court are litigated de novo. This means that party
litigants should endeavor to prove at the first instance every
minute aspect of their cases strictly in accordance with the Rules
of Court, most especially on documentary evidence." (pp. 37-42,
Rollo)
Tax refunds are in the nature of tax exemptions. It is regarded as in
derogation of the sovereign authority, and should be construed
in strictissimi juris against the person or entity claiming the exemption. The
taxpayer who claims for exemption must justify his claim by the clearest
grant of organic or statute law and should not be permitted to stand on
vague implications (Asiatic Petroleum Co. v. Llanes, 49 Phil. 466; Northern
Phil. Tobacco Corp. v. Mun. of Agoo, La Union, 31 SCRA 304; Reagan v.
Commissioner, 30 SCRA 968; Asturias Sugar Central, Inc. v.
Commissioner of Customs, 29 SCRA 617; Davao Light and Power Co.,
Inc. v. Commissioner of Customs, 44 SCRA 122).
There is no cogent reason to fault the CTA's conclusion that the SGV's
certificate is "self-destructive", as it finds comfort in the very SGV's stand,
as follows:
98
"It is our understanding that the above procedure are sufficient for
the purpose of the Company. We make no presentation regarding
the sufficiency of these procedures for such purpose. We did not
compare the total of the input tax claimed each quarter against the
pertinent VAT returns and books of accounts. The above
procedures do not constitute an audit made in accordance with
generally accepted auditing standards. Accordingly, we do not
express an opinion on the company's claim for input VAT refund or
credit. Had we performed additional procedures, or had we made
an audit in accordance with generally accepted auditing standards,
other matters might have come to our attention that we would
have accordingly reported on."
The SGV's "disclaimer of opinion" carries much weight as it is petitioner's
independent auditor. Indeed, SGV expressed that it "did not compare the
total of the input tax claimed each quarter against the VAT returns and
books of accounts."38
Moving on to the Petition in G.R. No. 148763, concerning the input VAT of
petitioner corporation on its zero-rated sales in the second, third, and fourth
quarters of 1990, the appellate court likewise found that petitioner corporation
failed to sufficiently establish its claims. Already disregarding the declarations
made by the Court of Appeals on its erroneous application of Revenue Regulations
No. 2-88, quoted hereunder is the rest of the findings of the appellate court after
evaluating the evidence submitted in accordance with the requirements under
Revenue Regulations No. 3-88 –
The Secretary of Finance validly adopted Revenue Regulations [No.] x x x
3-98 pursuant to Sec. 245 of the National Internal Revenue Code, which
recognized his power to "promulgate all needful rules and regulations for
the effective enforcement of the provisions of this Code." Thus, it is
incumbent upon a taxpayer intending to file a claim for refund of input
VATs or the issuance of a tax credit certificate with the BIR x x x to prove
sales to such buyers as required by Revenue Regulations No. 3-98.
Logically, the same evidence should be presented in support of an action
to recover taxes which have been paid.
x x x Neither has [herein petitioner corporation] presented sales invoices
or receipts showing sales of gold, copper concentrates, and pyrite to the
CBP, [PASAR], and [PHILPHOS], respectively, and the dates and
amounts of the same, nor any evidence of actual receipt by the said
buyers of the mineral products. It merely presented receipts of purchases
 TAXATION - VALUE ADDED TAX
from suppliers on which input VATs were allegedly paid. Thus, the Court of
Tax Appeals correctly denied the claims for refund of input VATs or the
issuance of tax credit certificates of petitioner [corporation]. Significantly, in
the resolution, dated 7 June 2000, this Court directed the parties to file
memoranda discussing, among others, the submission of proof for "its
[petitioner's] sales of gold, copper concentrates, and pyrite to buyers."
Nevertheless, the parties, including the petitioner, failed to address this
issue, thereby necessitating the affirmance of the ruling of the Court of Tax
Appeals on this point.39
This Court is, therefore, bound by the foregoing facts, as found by the appellate
court, for well-settled is the general rule that the jurisdiction of this Court in cases
brought before it from the Court of Appeals, by way of a Petition for Review
on Certiorari under Rule 45 of the Revised Rules of Court, is limited to reviewing or
revising errors of law; findings of fact of the latter are conclusive. 40 This Court is
not a trier of facts. It is not its function to review, examine and evaluate or weigh
the probative value of the evidence presented.41
The distinction between a question of law and a question of fact is clear-cut. It has
been held that "[t]here is a question of law in a given case when the doubt or
difference arises as to what the law is on a certain state of facts; there is a
question of fact when the doubt or difference arises as to the truth or falsehood of
alleged facts."42
Whether petitioner corporation actually made zero-rated sales; whether it paid
input VAT on these sales in the amount it had declared in its returns; whether all
the input VAT subject of its applications for refund/credit can be attributed to its
zero-rated sales; and whether it had not previously applied the input VAT against
its output VAT liabilities, are all questions of fact which could only be answered
after reviewing, examining, evaluating, or weighing the probative value of the
evidence it presented, and which this Court does not have the jurisdiction to do in
the present Petitions for Review on Certiorari under Rule 45 of the revised Rules of
Court.
Granting that there are exceptions to the general rule, when this Court looked into
questions of fact under particular circumstances,43 none of these exist in the
instant cases. The Court of Appeals, in both cases, found a dearth of evidence to
support the claims for refund/credit of the input VAT of petitioner corporation, and
the records bear out this finding. Petitioner corporation itself cannot dispute its
non-compliance with the requirements set forth in Revenue Regulations No. 3-88
and CTA Circular No. 1-95, as amended. It concentrated its arguments on its
assertion that the substantiation requirements under Revenue Regulations No. 2-
99
88 should not have applied to it, while being conspicuously silent on the
evidentiary requirements mandated by other relevant regulations.
Re-opening of cases/holding of new trial before the CTA
This Court now faces the final issue of whether the prayer of petitioner corporation
for the re-opening of its cases or holding of new trial before the CTA for the
reception of additional evidence, may be granted. Petitioner corporation prays that
the Court exercise its discretion on the matter in its favor, consistent with the policy
that rules of procedure be liberally construed in pursuance of substantive justice.
This Court, however, cannot grant the prayer of petitioner corporation.
An aggrieved party may file a motion for new trial or reconsideration of a judgment
already rendered in accordance with Section 1, Rule 37 of the revised Rules of
Court, which provides –
SECTION 1. Grounds of and period for filing motion for new trial or
reconsideration. – Within the period for taking an appeal, the aggrieved
party may move the trial court to set aside the judgment or final order and
grant a new trial for one or more of the following causes materially
affecting the substantial rights of said party:
(a) Fraud, accident, mistake or excusable negligence which ordinary
prudence could not have guarded against and by reason of which such
aggrieved party has probably been impaired in his rights; or
(b) Newly discovered evidence, which he could not, with reasonable
diligence, have discovered and produced at the trial, and which if
presented would probably alter the result.
Within the same period, the aggrieved party may also move fore
reconsideration upon the grounds that the damages awarded are
excessive, that the evidence is insufficient to justify the decision or final
order, or that the decision or final order is contrary to law.
In G.R. No. 148763, petitioner corporation attempts to justify its motion for the re-
opening of its cases and/or holding of new trial before the CTA by contending that
the "[f]ailure of its counsel to adduce the necessary evidence should be construed
as excusable negligence or mistake which should constitute basis for such re-
opening of trial as for a new trial, as counsel was of the belief that such evidence
 TAXATION - VALUE ADDED TAX
was rendered unnecessary by the presentation of unrebutted evidence indicating
that respondent [Commissioner] has acknowledged the sale of [sic] PASAR and
[PHILPHOS] to be zero-rated." 44 The CTA denied such motion on the ground that
it was not accompanied by an affidavit of merit as required by Section 2, Rule 37 of
the revised Rules of Court. The Court of Appeals affirmed the denial of the motion,
but apart from this technical defect, it also found that there was no justification to
grant the same.
On the matter of the denial of the motion of the petitioner corporation for the re-
opening of its cases and/or holding of new trial based on the technicality that said
motion was unaccompanied by an affidavit of merit, this Court rules in favor of the
petitioner corporation. The facts which should otherwise be set forth in a separate
affidavit of merit may, with equal effect, be alleged and incorporated in the motion
itself; and this will be deemed a substantial compliance with the formal
requirements of the law, provided, of course, that the movant, or other individual
with personal knowledge of the facts, take oath as to the truth thereof, in effect
converting the entire motion for new trial into an affidavit.45 The motion of petitioner
corporation was prepared and verified by its counsel, and since the ground for the
motion was premised on said counsel's excusable negligence or mistake, then the
obvious conclusion is that he had personal knowledge of the facts relating to such
negligence or mistake. Hence, it can be said that the motion of petitioner
corporation for the re-opening of its cases and/or holding of new trial was in
substantial compliance with the formal requirements of the revised Rules of Court.
Even so, this Court finds no sufficient ground for granting the motion of petitioner
corporation for the re-opening of its cases and/or holding of new trial.
In G.R. No. 141104, petitioner corporation invokes the Resolution, 46 dated 20 July
1998, by the CTA in another case, CTA Case No. 5296, involving the claim of
petitioner corporation for refund/credit of input VAT for the third quarter of 1993.
The said Resolution allowed the re-opening of CTA Case No. 5296, earlier
dismissed by the CTA, to give the petitioner corporation the opportunity to present
the missing export documents.
The rule that the grant or denial of motions for new trial rests on the discretion of
the trial court,47 may likewise be extended to the CTA. When the denial of the
motion rests upon the discretion of a lower court, this Court will not interfere with
its exercise, unless there is proof of grave abuse thereof.48
That the CTA granted the motion for re-opening of one case for the presentation of
additional evidence and, yet, deny a similar motion in another case filed by the
same party, does not necessarily demonstrate grave abuse of discretion or
100
arbitrariness on the part of the CTA. Although the cases involve identical parties,
the causes of action and the evidence to support the same can very well be
different. As can be gleaned from the Resolution, dated 20 July 1998, in CTA Case
No. 5296, petitioner corporation was claiming refund/credit of the input VAT on its
zero-rated sales, consisting of actual export sales, to Mitsubishi Metal Corporation
in Tokyo, Japan. The CTA took into account the presentation by petitioner
corporation of inward remittances of its export sales for the quarter involved, its
Supply Contract with Mitsubishi Metal Corporation, its 1993 Annual Report
showing its sales to the said foreign corporation, and its application for refund. In
contrast, the present Petitions involve the claims of petitioner corporation for
refund/credit of the input VAT on its purchases of capital goods and on
its effectively zero-rated sales to CBP and EPZA-registered enterprises PASAR
and PHILPHOS for the second, third, and fourth quarters of 1990 and first quarter
of 1992. There being a difference as to the bases of the claims of petitioner
corporation for refund/credit of input VAT in CTA Case No. 5926 and in the
Petitions at bar, then, there are resulting variances as to the evidence required to
support them.
Moreover, the very same Resolution, dated 20 July 1998, in CTA Case No. 5296,
invoked by petitioner corporation, emphasizes that the decision of the CTA to allow
petitioner corporation to present evidence "is applicable pro hac vice or in this
occasion only as it is the finding of [the CTA] that petitioner [corporation] has
established a few of the aforementioned material points regarding the possible
existence of the export documents together with the prior and succeeding returns
for the quarters involved, x x x" [Emphasis supplied.] Therefore, the CTA, in the
present cases, cannot be bound by its ruling in CTA Case No. 5296, when these
cases do not involve the exact same circumstances that compelled it to grant the
motion of petitioner corporation for re-opening of CTA Case No. 5296.
Finally, assuming for the sake of argument that the non-presentation of the
required documents was due to the fault of the counsel of petitioner corporation,
this Court finds that it does not constitute excusable negligence or mistake which
would warrant the re-opening of the cases and/or holding of new trial.
Under Section 1, Rule 37 of the Revised Rules of Court, the "negligence" must be
excusable and generally imputable to the party because if it is imputable to the
counsel, it is binding on the client. To follow a contrary rule and allow a party to
disown his counsel's conduct would render proceedings indefinite, tentative, and
subject to re-opening by the mere subterfuge of replacing the counsel. What the
aggrieved litigant should do is seek administrative sanctions against the erring
counsel and not ask for the reversal of the court's ruling.49
 TAXATION - VALUE ADDED TAX
As elucidated by this Court in another case,50 the general rule is that the client is
bound by the action of his counsel in the conduct of his case and he cannot
therefore complain that the result of the litigation might have been otherwise had
his counsel proceeded differently. It has been held time and again that blunders
and mistakes made in the conduct of the proceedings in the trial court as a result
of the ignorance, inexperience or incompetence of counsel do not qualify as a
ground for new trial. If such were to be admitted as valid reasons for re-opening
cases, there would never be an end to litigation so long as a new counsel could be
employed to allege and show that the prior counsel had not been sufficiently
diligent, experienced or learned.
Moreover, negligence, to be "excusable," must be one which ordinary diligence
and prudence could not have guarded against.51 Revenue Regulations No. 3-88,
which was issued on 15 February 1988, had been in effect more than two years
prior to the filing by petitioner corporation of its earliest application for refund/credit
of input VAT involved herein on 21 August 1990. CTA Circular No. 1-95 was
issued only on 25 January 1995, after petitioner corporation had filed its Petitions
before the CTA, but still during the pendency of the cases of petitioner corporation
before the tax court. The counsel of petitioner corporation does not allege
ignorance of the foregoing administrative regulation and tax court circular, only that
he no longer deemed it necessary to present the documents required therein
because of the presentation of alleged unrebutted evidence of the zero-rated sales
of petitioner corporation. It was a judgment call made by the counsel as to which
evidence to present in support of his client's cause, later proved to be unwise, but
not necessarily negligent.
Neither is there any merit in the contention of petitioner corporation that the non-
presentation of the required documentary evidence was due to the excusable
mistake of its counsel, a ground under Section 1, Rule 37 of the revised Rules of
Court for the grant of a new trial. "Mistake," as it is referred to in the said rule, must
be a mistake of fact, not of law, which relates to the case.52 In the present case,
the supposed mistake made by the counsel of petitioner corporation is one of law,
for it was grounded on his interpretation and evaluation that Revenue Regulations
No. 3-88 and CTA Circular No. 1-95, as amended, did not apply to his client's
cases and that there was no need to comply with the documentary requirements
set forth therein. And although the counsel of petitioner corporation advocated an
erroneous legal position, the effects thereof, which did not amount to a deprivation
of his client's right to be heard, must bind petitioner corporation. The question is
not whether petitioner corporation succeeded in establishing its interests, but
whether it had the opportunity to present its side.53
101
Besides, litigation is a not a "trial and error" proceeding. A party who moves for a
new trial on the ground of mistake must show that ordinary prudence could not
have guarded against it. A new trial is not a refuge for the obstinate. 54 Ordinary
prudence in these cases would have dictated the presentation of all available
evidence that would have supported the claims for refund/credit of input VAT of
petitioner corporation. Without sound legal basis, counsel for petitioner corporation
concluded that Revenue Regulations No. 3-88, and later on, CTA Circular No. 1-
95, as amended, did not apply to its client's claims. The obstinacy of petitioner
corporation and its counsel is demonstrated in their failure, nay, refusal, to comply
with the appropriate administrative regulations and tax court circular in pursuing
the claims for refund/credit, now subject of G.R. Nos. 141104 and 148763, even
though these were separately instituted in a span of more than two years. It is also
evident in the failure of petitioner corporation to address the issue and to present
additional evidence despite being given the opportunity to do so by the Court of
Appeals. As pointed out by the appellate court, in its Decision, dated 15
September 2000, in CA-G.R. SP No. 46718 –
x x x Significantly, in the resolution, dated 7 June 2000, this Court directed
the parties to file memoranda discussing, among others, the submission of
proof for "its [petitioner's] sales of gold, copper concentrates, and pyrite to
buyers." Nevertheless, the parties, including the petitioner, failed to
address this issue, thereby necessitating the affirmance of the ruling of the
Court of Tax Appeals on this point.55
Summary
Hence, although this Court agreed with the petitioner corporation that the two-year
prescriptive period for the filing of claims for refund/credit of input VAT must be
counted from the date of filing of the quarterly VAT return, and that sales to EPZA-
registered enterprises operating within economic processing zones were
effectively zero-rated and were not covered by Revenue Regulations No. 2-88, it
still denies the claims of petitioner corporation for refund of its input VAT on its
purchases of capital goods and effectively zero-rated sales during the second,
third, and fourth quarters of 1990 and the first quarter of 1992, for not being
established and substantiated by appropriate and sufficient evidence. Petitioner
corporation is also not entitled to the re-opening of its cases and/or holding of new
trial since the non-presentation of the required documentary evidence before the
BIR and the CTA by its counsel does not constitute excusable negligence or
mistake as contemplated in Section 1, Rule 37 of the revised Rules of Court.
WHEREFORE, premises considered, the instant Petitions for Review are
hereby DENIED, and the Decisions, dated 6 July 1999 and 15 September 2000, of
 TAXATION - VALUE ADDED TAX

the Court of Appeals in CA-G.R. SP Nos. 47607 and 46718, respectively, are for P483,797,599.65 to San Roque Power Corporation (San Roque) for unutilized
hereby AFFIRMED. Costs against petitioner. input value-added tax (VAT) on purchases of capital goods and services for the
taxable year 2001.
Ynares-Santiago, Chairperson, Austria-Martinez, Nachura, JJ., concur.
G.R. No. 196113 is a petition for review6 assailing the Decision7 promulgated on 8
G.R. No. 187485 February 12, 2013 December 2010 as well as the Resolution8 promulgated on 14 March 2011 by the
CTA EB in CTA EB No. 624. In its Decision, the CTA EB reversed the 8 January
COMMISSIONER OF INTERNAL REVENUE, Petitioner, 2010 Decision9 as well as the 7 April 2010 Resolution10of the CTA Second Division
and granted the CIR’s petition for review in CTA Case No. 7574. The CTA EB
vs.
SAN ROQUE POWER CORPORATION, Respondent. dismissed, for having been prematurely filed, Taganito Mining Corporation’s
(Taganito) judicial claim for P8,365,664.38 tax refund or credit.
X----------------------------X
G.R. No. 197156 is a petition for review11 assailing the Decision12promulgated on 3
December 2010 as well as the Resolution13 promulgated on 17 May 2011 by the
G.R. No. 196113 CTA EB in CTA EB No. 569. The CTA EB affirmed the 20 July 2009 Decision as
well as the 10 November 2009 Resolution of the CTA Second Division in CTA
TAGANITO MINING CORPORATION, Petitioner, Case No. 7687. The CTA Second Division denied, due to prescription, Philex
vs. Mining Corporation’s (Philex) judicial claim for P23,956,732.44 tax refund or credit.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
On 3 August 2011, the Second Division of this Court resolved14 to consolidate G.R.
x----------------------------x No. 197156 with G.R. No. 196113, which were pending in the same Division, and
with G.R. No. 187485, which was assigned to the Court En Banc. The Second
G.R. No. 197156 Division also resolved to refer G.R. Nos. 197156 and 196113 to the Court En
Banc, where G.R. No. 187485, the lower-numbered case, was assigned.
PHILEX MINING CORPORATION, Petitioner,
vs. G.R. No. 187485
COMMISSIONER OF INTERNAL REVENUE, Respondent. CIR v. San Roque Power Corporation

DECISION The Facts

CARPIO, J.: The CTA EB’s narration of the pertinent facts is as follows:

The Cases
G.R. No. 187485 is a petitiOn for review1 assailing the Decision2 promulgated on
25 March 2009 as well as the Resolution3 promulgated on 24 April 2009 by the
Court of Tax Appeals En Banc (CTA EB) in CTA EB No. 408. The CTA EB
affirmed the 29 November 2007 Amended Decision4 as well as the 11 July 2008
Resolution5 of the Second Division of the Court of Tax Appeals (CTA Second
Division) in CTA Case No. 6647. The CTA Second Division ordered the
Commissioner of Internal Revenue (Commissioner) to refund or issue a tax credit
102
[CIR] is the duly appointed Commissioner of Internal Revenue, empowered,
among others, to act upon and approve claims for refund or tax credit, with office
at the Bureau of Internal Revenue ("BIR") National Office Building, Diliman,
Quezon City.
[San Roque] is a domestic corporation duly organized and existing under and by
virtue of the laws of the Philippines with principal office at Barangay San Roque,
San Manuel, Pangasinan. It was incorporated in October 1997 to design,
construct, erect, assemble, own, commission and operate power-generating plants
 TAXATION - VALUE ADDED TAX
and related facilities pursuant to and under contract with the Government of the
Republic of the Philippines, or any subdivision, instrumentality or agency thereof,
or any governmentowned or controlled corporation, or other entity engaged in the
development, supply, or distribution of energy.
As a seller of services, [San Roque] is duly registered with the BIR with TIN/VAT
No. 005-017-501. It is likewise registered with the Board of Investments ("BOI") on
a preferred pioneer status, to engage in the design, construction, erection,
assembly, as well as to own, commission, and operate electric power-generating
plants and related activities, for which it was issued Certificate of Registration No.
97-356 on February 11, 1998.
On October 11, 1997, [San Roque] entered into a Power Purchase Agreement
("PPA") with the National Power Corporation ("NPC") to develop hydro-potential of
the Lower Agno River and generate additional power and energy for the Luzon
Power Grid, by building the San Roque Multi-Purpose Project located in San
Manuel, Pangasinan. The PPA provides, among others, that [San Roque] shall be
responsible for the design, construction, installation, completion, testing and
commissioning of the Power Station and shall operate and maintain the same,
subject to NPC instructions. During the cooperation period of twenty-five (25) years
commencing from the completion date of the Power Station, NPC will take and pay
for all electricity available from the Power Station.
On the construction and development of the San Roque Multi- Purpose Project
which comprises of the dam, spillway and power plant, [San Roque] allegedly
incurred, excess input VAT in the amount of ₱559,709,337.54 for taxable year
2001 which it declared in its Quarterly VAT Returns filed for the same year. [San
Roque] duly filed with the BIR separate claims for refund, in the total amount of
₱559,709,337.54, representing unutilized input taxes as declared in its VAT
returns for taxable year 2001.
However, on March 28, 2003, [San Roque] filed amended Quarterly VAT Returns
for the year 2001 since it increased its unutilized input VAT to the amount of
₱560,200,283.14. Consequently, [San Roque] filed with the BIR on even date,
separate amended claims for refund in the aggregate amount of ₱560,200,283.14.
[CIR’s] inaction on the subject claims led to the filing by [San Roque] of the Petition
for Review with the Court [of Tax Appeals] in Division on April 10, 2003.
Trial of the case ensued and on July 20, 2005, the case was submitted for
decision.15
103
The Court of Tax Appeals’ Ruling: Division
The CTA Second Division initially denied San Roque’s claim. In its
Decision16 dated 8 March 2006, it cited the following as bases for the denial of San
Roque’s claim: lack of recorded zero-rated or effectively zero-rated sales; failure to
submit documents specifically identifying the purchased goods/services related to
the claimed input VAT which were included in its Property, Plant and Equipment
account; and failure to prove that the related construction costs were capitalized in
its books of account and subjected to depreciation.
The CTA Second Division required San Roque to show that it complied with the
following requirements of Section 112(B) of Republic Act No. 8424 (RA 8424) 17 to
be entitled to a tax refund or credit of input VAT attributable to capital goods
imported or locally purchased: (1) it is a VAT-registered entity; (2) its input taxes
claimed were paid on capital goods duly supported by VAT invoices and/or official
receipts; (3) it did not offset or apply the claimed input VAT payments on capital
goods against any output VAT liability; and (4) its claim for refund was filed within
the two-year prescriptive period both in the administrative and judicial levels.
The CTA Second Division found that San Roque complied with the first, third, and
fourth requirements, thus:
The fact that [San Roque] is a VAT registered entity is admitted (par. 4, Facts
Admitted, Joint Stipulation of Facts, Records, p. 157). It was also established that
the instant claim of ₱560,200,823.14 is already net of the ₱11,509.09 output tax
declared by [San Roque] in its amended VAT return for the first quarter of 2001.
Moreover, the entire amount of ₱560,200,823.14 was deducted by [San Roque]
from the total available input tax reflected in its amended VAT returns for the last
two quarters of 2001 and first two quarters of 2002 (Exhibits M-6, O-6, OO-1 &
QQ-1). This means that the claimed input taxes of ₱560,200,823.14 did not form
part of the excess input taxes of ₱83,692,257.83, as of the second quarter of 2002
that was to be carried-over to the succeeding quarters. Further, [San Roque’s]
claim for refund/tax credit certificate of excess input VAT was filed within the two-
year prescriptive period reckoned from the dates of filing of the corresponding
quarterly VAT returns.
For the first, second, third, and fourth quarters of 2001, [San Roque] filed its VAT
returns on April 25, 2001, July 25, 2001, October 23, 2001 and January 24, 2002,
respectively (Exhibits "H, J, L, and N"). These returns were all subsequently
amended on March 28, 2003 (Exhibits "I, K, M, and O"). On the other hand, [San
Roque] originally filed its separate claims for refund on July 10, 2001, October 10,
2001, February 21, 2002, and May 9, 2002 for the first, second, third, and fourth
 TAXATION - VALUE ADDED TAX
quarters of 2001, respectively, (Exhibits "EE, FF, GG, and HH") and subsequently
filed amended claims for all quarters on March 28, 2003 (Exhibits "II, JJ, KK, and
LL"). Moreover, the Petition for Review was filed on April 10, 2003. Counting from
the respective dates when [San Roque] originally filed its VAT returns for the first,
second, third and fourth quarters of 2001, the administrative claims for refund
(original and amended) and the Petition for Review fall within the two-year
prescriptive period.18
San Roque filed a Motion for New Trial and/or Reconsideration on 7 April 2006. In
its 29 November 2007 Amended Decision,19 the CTA Second Division found legal
basis to partially grant San Roque’s claim. The CTA Second Division ordered the
Commissioner to refund or issue a tax credit in favor of San Roque in the amount
of ₱483,797,599.65, which represents San Roque’s unutilized input VAT on its
purchases of capital goods and services for the taxable year 2001. The CTA based
the adjustment in the amount on the findings of the independent certified public
accountant. The following reasons were cited for the disallowed claims: erroneous
computation; failure to ascertain whether the related purchases are in the nature of
capital goods; and the purchases pertain to capital goods. Moreover, the reduction
of claims was based on the following: the difference between San Roque’s claim
and that appearing on its books; the official receipts covering the claimed input
VAT on purchases of local services are not within the period of the claim; and the
amount of VAT cannot be determined from the submitted official receipts and
invoices. The CTA Second Division denied San Roque’s claim for refund or tax
credit of its unutilized input VAT attributable to its zero-rated or effectively zero-
rated sales because San Roque had no record of such sales for the four quarters
of 2001.
The dispositive portion of the CTA Second Division’s 29 November 2007 Amended
Decision reads:
WHEREFORE, [San Roque’s] "Motion for New Trial and/or Reconsideration" is
hereby PARTIALLY GRANTED and this Court’s Decision promulgated on March 8,
2006 in the instant case is hereby MODIFIED.
Accordingly, [the CIR] is hereby ORDERED to REFUND or in the alternative, to
ISSUE A TAX CREDIT CERTIFICATE in favor of [San Roque] in the reduced
amount of Four Hundred Eighty Three Million Seven Hundred Ninety Seven
Thousand Five Hundred Ninety Nine Pesos and Sixty Five Centavos
(₱483,797,599.65) representing unutilized input VAT on purchases of capital
goods and services for the taxable year 2001.
SO ORDERED.20
104
The Commissioner filed a Motion for Partial Reconsideration on 20 December
2007. The CTA Second Division issued a Resolution dated 11 July 2008 which
denied the CIR’s motion for lack of merit.
The Court of Tax Appeals’ Ruling: En Banc
The Commissioner filed a Petition for Review before the CTA EB praying for the
denial of San Roque’s claim for refund or tax credit in its entirety as well as for the
setting aside of the 29 November 2007 Amended Decision and the 11 July 2008
Resolution in CTA Case No. 6647.
The CTA EB dismissed the CIR’s petition for review and affirmed the challenged
decision and resolution.
The CTA EB cited Commissioner of Internal Revenue v. Toledo Power, Inc.21 and
Revenue Memorandum Circular No. 49-03,22 as its bases for ruling that San
Roque’s judicial claim was not prematurely filed. The pertinent portions of the
Decision state:
More importantly, the Court En Banc has squarely and exhaustively ruled on this
issue in this wise:
It is true that Section 112(D) of the abovementioned provision applies to the
present case. However, what the petitioner failed to consider is Section
112(A) of the same provision. The respondent is also covered by the two (2)
year prescriptive period. We have repeatedly held that the claim for refund with the
BIR and the subsequent appeal to the Court of Tax Appeals must be filed within
the two-year period.
Accordingly, the Supreme Court held in the case of Atlas Consolidated Mining and
Development Corporation vs. Commissioner of Internal Revenue that the two-year
prescriptive period for filing a claim for input tax is reckoned from the date of the
filing of the quarterly VAT return and payment of the tax due. If the said period is
about to expire but the BIR has not yet acted on the application for refund,
the taxpayer may interpose a petition for review with this Court within the
two year period.
In the case of Gibbs vs. Collector, the Supreme Court held that if, however, the
Collector (now Commissioner) takes time in deciding the claim, and the period of
two years is about to end, the suit or proceeding must be started in the Court of
 TAXATION - VALUE ADDED TAX
Tax Appeals before the end of the two-year period without awaiting the decision of
the Collector.
Furthermore, in the case of Commissioner of Customs and Commissioner of
Internal Revenue vs. The Honorable Court of Tax Appeals and Planters Products,
Inc., the Supreme Court held that the taxpayer need not wait indefinitely for a
decision or ruling which may or may not be forthcoming and which he has
no legal right to expect. It is disheartening enough to a taxpayer to keep him
waiting for an indefinite period of time for a ruling or decision of the Collector (now
Commissioner) of Internal Revenue on his claim for refund. It would make matters
more exasperating for the taxpayer if we were to close the doors of the courts of
justice for such a relief until after the Collector (now Commissioner) of Internal
Revenue, would have, at his personal convenience, given his go signal.
This Court ruled in several cases that once the petition is filed, the Court has
already acquired jurisdiction over the claims and the Court is not bound to wait
indefinitely for no reason for whatever action respondent (herein petitioner) may
take. At stake are claims for refund and unlike disputed assessments, no
decision of respondent (herein petitioner) is required before one can go to
this Court. (Emphasis supplied and citations omitted)
Lastly, it is apparent from the following provisions of Revenue Memorandum
Circular No. 49-03 dated August 18, 2003, that [the CIR] knows that claims for
VAT refund or tax credit filed with the Court [of Tax Appeals] can proceed
simultaneously with the ones filed with the BIR and that taxpayers need not wait
for the lapse of the subject 120-day period, to wit:
In response to [the] request of selected taxpayers for adoption of procedures in
handling refund cases that are aligned to the statutory requirements that refund
cases should be elevated to the Court of Tax Appeals before the lapse of the
period prescribed by law, certain provisions of RMC No. 42-2003 are hereby
amended and new provisions are added thereto.
In consonance therewith, the following amendments are being introduced to RMC
No. 42-2003, to wit:
I.) A-17 of Revenue Memorandum Circular No. 42-2003 is hereby revised to read
as follows:
In cases where the taxpayer has filed a "Petition for Review" with the Court
of Tax Appeals involving a claim for refund/TCC that is pending at the
105
administrative agency (Bureau of Internal Revenue or OSS-DOF), the
administrative agency and the tax court may act on the case
separately. While the case is pending in the tax court and at the same time is still
under process by the administrative agency, the litigation lawyer of the BIR, upon
receipt of the summons from the tax court, shall request from the head of the
investigating/processing office for the docket containing certified true copies of all
the documents pertinent to the claim. The docket shall be presented to the court as
evidence for the BIR in its defense on the tax credit/refund case filed by the
taxpayer. In the meantime, the investigating/processing office of the administrative
agency shall continue processing the refund/TCC case until such time that a final
decision has been reached by either the CTA or the administrative agency.
If the CTA is able to release its decision ahead of the evaluation of the
administrative agency, the latter shall cease from processing the claim. On
the other hand, if the administrative agency is able to process the claim of the
taxpayer ahead of the CTA and the taxpayer is amenable to the findings thereof,
the concerned taxpayer must file a motion to withdraw the claim with the
CTA.23 (Emphasis supplied)
G.R. No. 196113
Taganito Mining Corporation v. CIR
The Facts
The CTA Second Division’s narration of the pertinent facts is as follows:
Petitioner, Taganito Mining Corporation, is a corporation duly organized and
existing under and by virtue of the laws of the Philippines, with principal office at
4th Floor, Solid Mills Building, De La Rosa St., Lega[s]pi Village, Makati City. It is
duly registered with the Securities and Exchange Commission with Certificate of
Registration No. 138682 issued on March 4, 1987 with the following primary
purpose:
To carry on the business, for itself and for others, of mining lode and/or placer
mining, developing, exploiting, extracting, milling, concentrating, converting,
smelting, treating, refining, preparing for market, manufacturing, buying, selling,
exchanging, shipping, transporting, and otherwise producing and dealing in nickel,
chromite, cobalt, gold, silver, copper, lead, zinc, brass, iron, steel, limestone, and
all kinds of ores, metals and their by-products and which by-products thereof of
every kind and description and by whatsoever process the same can be or may
hereafter be produced, and generally and without limit as to amount, to buy, sell,
locate, exchange, lease, acquire and deal in lands, mines, and mineral rights and
 TAXATION - VALUE ADDED TAX

claims and to conduct all business appertaining thereto, to purchase, locate, lease the Return
or otherwise acquire, mining claims and rights, timber rights, water rights,
concessions and mines, buildings, dwellings, plants machinery, spare parts, tools L to L-4 1st Original Electronic April 15, 2005
and other properties whatsoever which this corporation may from time to time find
to be to its advantage to mine lands, and to explore, work, exercise, develop or M to M-3 Amended Electronic July 20, 2005
turn to account the same, and to acquire, develop and utilize water rights in such N to N-4 Amended Electronic October 18, 2006
manner as may be authorized or permitted by law; to purchase, hire, make,
construct or otherwise, acquire, provide, maintain, equip, alter, erect, improve, Q to Q-3 2nd Original Electronic July 20, 2005
repair, manage, work and operate private roads, barges, vessels, aircraft and
vehicles, private telegraph and telephone lines, and other communication media, R to R-4 Amended Electronic October 18, 2006
as may be needed by the corporation for its own purpose, and to purchase, import,U to U-4 3rd Original Electronic October 19, 2005
construct, machine, fabricate, or otherwise acquire, and maintain and operate
bridges, piers, wharves, wells, reservoirs, plumes, watercourses, waterworks, V to V-4 Amended Electronic October 18, 2006
aqueducts, shafts, tunnels, furnaces, cook ovens, crushing works, gasworks,
Y to Y-4 4th Original Electronic January 20, 2006
electric lights and power plants and compressed air plants, chemical works of all
kinds, concentrators, smelters, smelting plants, and refineries, matting plants, Z to Z-4 Amended Electronic October 18, 2006
warehouses, workshops, factories, dwelling houses, stores, hotels or other
buildings, engines, machinery, spare parts, tools, implements and other works,
conveniences and properties of any description in connection with or which may be As can be gleaned from its amended Quarterly VAT Returns, [Taganito] reported
directly or indirectly conducive to any of the objects of the corporation, and to zero-rated sales amounting to P1,446,854,034.68; input VAT on its domestic
contribute to, subsidize or otherwise aid or take part in any operations; purchases and importations of goods (other than capital goods) and services
amounting to P2,314,730.43; and input VAT on its domestic purchases and
importations of capital goods amounting to P6,050,933.95, the details of which are
and is a VAT-registered entity, with Certificate of Registration (BIR Form No. 2303)
summarized as follows:
No. OCN 8RC0000017494. Likewise, [Taganito] is registered with the Board of
Investments (BOI) as an exporter of beneficiated nickel silicate and chromite ores,
with BOI Certificate of Registration No. EP-88-306. Period Zero-Rated Sales Input VAT on Input VAT on Total Input VAT
Covered Domestic Domestic
Respondent, on the other hand, is the duly appointed Commissioner of Internal Purchases and Purchases and
Revenue vested with authority to exercise the functions of the said office, Importations Importations
including inter alia, the power to decide refunds of internal revenue taxes, fees and of Goods and of Capital
other charges, penalties imposed in relation thereto, or other matters arising under Services Goods
the National Internal Revenue Code (NIRC) or other laws administered by Bureau
01/01/05 - P551,179,871.58 P1,491,880.56 P239,803.22 P1,731,683.78
of Internal Revenue (BIR) under Section 4 of the NIRC. He holds office at the BIR
03/31/05
National Office Building, Diliman, Quezon City.
04/01/05 - 64,677,530.78 204,364.17 5,811,130.73 6,015,494.90
[Taganito] filed all its Monthly VAT Declarations and Quarterly Vat Returns for the 06/30/05
period January 1, 2005 to December 31, 2005. For easy reference, a summary of
the filing dates of the original and amended Quarterly VAT Returns for taxable year07/01/05 - 480,784,287.30 144,887.67 - 144,887.67
2005 of [Taganito] is as follows: 09/30/05
10/01/05 - 350,212,345.02 473,598.03 - 473,598.03
Exhibit(s) Quarter Nature of Mode of filing 12/31/05
Filing Date

106
 TAXATION - VALUE ADDED TAX
TOTAL P1,446,854,034.68 P2,314,730.43 P6,050,933.95 P8,365,664.38
On November 14, 2006, [Taganito] filed with [the CIR], through BIR’s Large
Taxpayers Audit and Investigation Division II (LTAID II), a letter dated November
13, 2006 claiming a tax credit/refund of its supposed input VAT amounting to
₱8,365,664.38 for the period covering January 1, 2004 to December 31, 2004. On
the same date, [Taganito] likewise filed an Application for Tax Credits/Refunds for
the period covering January 1, 2005 to December 31, 2005 for the same amount.
On November 29, 2006, [Taganito] sent again another letter dated November 29,
2004 to [the CIR], to correct the period of the above claim for tax credit/refund in
the said amount of ₱8,365,664.38 as actually referring to the period covering
January 1, 2005 to December 31, 2005.
As the statutory period within which to file a claim for refund for said input VAT is
about to lapse without action on the part of the [CIR], [Taganito] filed the instant
Petition for Review on February 17, 2007.
In his Answer filed on March 28, 2007, [the CIR] interposes the following defenses:
4. [Taganito’s] alleged claim for refund is subject to administrative
investigation/examination by the Bureau of Internal Revenue (BIR);
5. The amount of ₱8,365,664.38 being claimed by [Taganito] as alleged
unutilized input VAT on domestic purchases of goods and services and on
importation of capital goods for the period January 1, 2005 to December
31, 2005 is not properly documented;
6. [Taganito] must prove that it has complied with the provisions of
Sections 112 (A) and (D) and 229 of the National Internal Revenue Code
of 1997 (1997 Tax Code) on the prescriptive period for claiming tax
refund/credit;
7. Proof of compliance with the prescribed checklist of requirements to be
submitted involving claim for VAT refund pursuant to Revenue
Memorandum Order No. 53-98, otherwise there would be no sufficient
compliance with the filing of administrative claim for refund, the
administrative claim thereof being mere proforma, which is a
condition sine qua non prior to the filing of judicial claim in
accordance with the provision of Section 229 of the 1997 Tax Code.
107
Further, Section 112 (D) of the Tax Code, as amended, requires
the submission of complete documents in support of the application
filed with the BIR before the 120-day audit period shall apply, and before
the taxpayer could avail of judicial remedies as provided for in the
law. Hence, [Taganito’s] failure to submit proof of compliance with the
above-stated requirements warrants immediate dismissal of the petition for
review.
8. [Taganito] must prove that it has complied with the invoicing
requirements mentioned in Sections 110 and 113 of the 1997 Tax Code,
as amended, in relation to provisions of Revenue Regulations No. 7-95.
9. In an action for refund/credit, the burden of proof is on the taxpayer to
establish its right to refund, and failure to sustain the burden is fatal to the
claim for refund/credit (Asiatic Petroleum Co. vs. Llanes, 49 Phil. 466
cited in Collector of Internal Revenue vs. Manila Jockey Club, Inc., 98
Phil. 670);
10. Claims for refund are construed strictly against the claimant for the
same partake the nature of exemption from taxation (Commissioner of
Internal Revenue vs. Ledesma, 31 SCRA 95) and as such, they are
looked upon with disfavor (Western Minolco Corp. vs. Commissioner of
Internal Revenue, 124 SCRA 1211).
SPECIAL AND AFFIRMATIVE DEFENSES
11. The Court of Tax Appeals has no jurisdiction to entertain the instant petition for
review for failure on the part of [Taganito] to comply with the provision of Section
112 (D) of the 1997 Tax Code which provides, thus:
Section 112. Refunds or Tax Credits of Input Tax. –
xxx xxx xxx
(D) Period within which refund or Tax Credit of Input Taxes shall be Made. – In
proper cases, the Commissioner shall grant a refund or issue the tax credit
certificate for creditable input taxes within one hundred (120) days from the
date of submission of complete documents in support of the application filed
in accordance with Subsections (A) and (B) hereof.
 TAXATION - VALUE ADDED TAX
In cases of full or partial denial for tax refund or tax credit, or the failure on the part
of the Commissioner to act on the application within the period prescribed above,
the taxpayer affected may, within thirty (30) days from the receipt of the
decision denying the claim or after the expiration of the one hundred twenty
dayperiod, appeal the decision or the unacted claim with the Court of Tax
Appeals. (Emphasis supplied.)
12. As stated, [Taganito] filed the administrative claim for refund with the Bureau of
Internal Revenue on November 14, 2006. Subsequently on February 14, 2007, the
instant petition was filed. Obviously the 120 days given to the Commissioner to
decide on the claim has not yet lapsed when the petition was filed. The petition
was prematurely filed, hence it must be dismissed for lack of jurisdiction.
During trial, [Taganito] presented testimonial and documentary evidence primarily
aimed at proving its supposed entitlement to the refund in the amount of
₱8,365,664.38, representing input taxes for the period covering January 1, 2005 to
December 31, 2005. [The CIR], on the other hand, opted not to present evidence.
Thus, in the Resolution promulgated on January 22, 2009, this case was submitted
for decision as of such date, considering [Taganito’s] "Memorandum" filed on
January 19, 2009 and [the CIR’s] "Memorandum" filed on December 19, 2008.24
The Court of Tax Appeals’ Ruling: Division
The CTA Second Division partially granted Taganito’s claim. In its Decision 25 dated
8 January 2010, the CTA Second Division found that Taganito complied with the
requirements of Section 112(A) of RA 8424, as amended, to be entitled to a tax
refund or credit of input VAT attributable to zero-rated or effectively zero-rated
sales.26
The pertinent portions of the CTA Second Division’s Decision read:
Finally, records show that [Taganito’s] administrative claim filed on November 14,
2006, which was amended on November 29, 2006, and the Petition for Review
filed with this Court on February 14, 2007 are well within the two-year prescriptive
period, reckoned from March 31, 2005, June 30, 2005, September 30, 2005, and
December 31, 2005, respectively, the close of each taxable quarter covering the
period January 1, 2005 to December 31, 2005.
In fine, [Taganito] sufficiently proved that it is entitled to a tax credit certificate in
the amount of ₱8,249,883.33 representing unutilized input VAT for the four taxable
quarters of 2005.
108
WHEREFORE, premises considered, the instant Petition for Review is hereby
PARTIALLY GRANTED. Accordingly, [the CIR] is hereby ORDERED to REFUND
to [Taganito] the amount of EIGHT MILLION TWO HUNDRED FORTY NINE
THOUSAND EIGHT HUNDRED EIGHTY THREE PESOS AND THIRTY THREE
CENTAVOS (P8,249,883.33) representing its unutilized input taxes attributable to
zero-rated sales from January 1, 2005 to December 31, 2005.
SO ORDERED.27
The Commissioner filed a Motion for Partial Reconsideration on 29 January 2010.
Taganito, in turn, filed a Comment/Opposition on the Motion for Partial
Reconsideration on 15 February 2010.
In a Resolution28 dated 7 April 2010, the CTA Second Division denied the CIR’s
motion. The CTA Second Division ruled that the legislature did not intend that
Section 112 (Refunds or Tax Credits of Input Tax) should be read in isolation from
Section 229 (Recovery of Tax Erroneously or Illegally Collected) or vice versa. The
CTA Second Division applied the mandatory statute of limitations in seeking
judicial recourse prescribed under Section 229 to claims for refund or tax credit
under Section 112.
The Court of Tax Appeals’ Ruling: En Banc
On 29 April 2010, the Commissioner filed a Petition for Review before the CTA EB
assailing the 8 January 2010 Decision and the 7 April 2010 Resolution in CTA
Case No. 7574 and praying that Taganito’s entire claim for refund be denied.
In its 8 December 2010 Decision,29 the CTA EB granted the CIR’s petition for
review and reversed and set aside the challenged decision and resolution.
The CTA EB declared that Section 112(A) and (B) of the 1997 Tax Code both set
forth the reckoning of the two-year prescriptive period for filing a claim for tax
refund or credit over input VAT to be the close of the taxable quarter when the
sales were made. The CTA EB also relied on this Court’s rulings in the cases
of Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc.
(Aichi)30 and Commisioner of Internal Revenue v. Mirant Pagbilao Corporation
(Mirant).31 Both Aichi and Mirant ruled that the two-year prescriptive period to file a
refund for input VAT arising from zero-rated sales should be reckoned from the
close of the taxable quarter when the sales were made. Aichi further emphasized
that the failure to await the decision of the Commissioner or the lapse of 120-day
period prescribed in Section 112(D) amounts to a premature filing.
 TAXATION - VALUE ADDED TAX
The CTA EB found that Taganito filed its administrative claim on 14 November
2006, which was well within the period prescribed under Section 112(A) and (B) of
the 1997 Tax Code. However, the CTA EB found that Taganito’s judicial claim was
prematurely filed. Taganito filed its Petition for Review before the CTA Second
Division on 14 February 2007. The judicial claim was filed after the lapse of only 92
days from the filing of its administrative claim before the CIR, in violation of the
120-day period prescribed in Section 112(D) of the 1997 Tax Code.
The dispositive portion of the Decision states:
WHEREFORE, the instant Petition for Review is hereby GRANTED. The assailed
Decision dated January 8, 2010 and Resolution dated April 7, 2010 of the Special
Second Division of this Court are hereby REVERSED and SET ASIDE. Another
one is hereby entered DISMISSING the Petition for Review filed in CTA Case No.
7574 for having been prematurely filed.
SO ORDERED.32
In his dissent,33 Associate Justice Lovell R. Bautista insisted that Taganito timely
filed its claim before the CTA. Justice Bautista read Section 112(C) of the 1997
Tax Code (Period within which Refund or Tax Credit of Input Taxes shall be Made)
in conjunction with Section 229 (Recovery of Tax Erroneously or Illegally
Collected). Justice Bautista also relied on this Court’s ruling in Atlas Consolidated
Mining and Development Corporation v. Commissioner of Internal Revenue
(Atlas),34 which stated that refundable or creditable input VAT and illegally or
erroneously collected national internal revenue tax are the same, insofar as both
are monetary amounts which are currently in the hands of the government but
must rightfully be returned to the taxpayer. Justice Bautista concluded:
Being merely permissive, a taxpayer claimant has the option of seeking judicial
redress for refund or tax credit of excess or unutilized input tax with this Court,
either within 30 days from receipt of the denial of its claim, or after the lapse of the
120-day period in the event of inaction by the Commissioner, provided that both
administrative and judicial remedies must be undertaken within the 2-year period.35
Taganito filed its Motion for Reconsideration on 29 December 2010. The
Commissioner filed an Opposition on 26 January 2011. The CTA EB denied for
lack of merit Taganito’s motion in a Resolution36 dated 14 March 2011. The CTA
EB did not see any justifiable reason to depart from this Court’s rulings
in Aichi and Mirant.
109
G.R. No. 197156
Philex Mining Corporation v. CIR
The Facts
The CTA EB’s narration of the pertinent facts is as follows:
[Philex] is a corporation duly organized and existing under the laws of the Republic
of the Philippines, which is principally engaged in the mining business, which
includes the exploration and operation of mine properties and commercial
production and marketing of mine products, with office address at 27 Philex
Building, Fairlaine St., Kapitolyo, Pasig City.
[The CIR], on the other hand, is the head of the Bureau of Internal Revenue
("BIR"), the government entity tasked with the duties/functions of assessing and
collecting all national internal revenue taxes, fees, and charges, and enforcement
of all forfeitures, penalties and fines connected therewith, including the execution
of judgments in all cases decided in its favor by [the Court of Tax Appeals] and the
ordinary courts, where she can be served with court processes at the BIR Head
Office, BIR Road, Quezon City.
On October 21, 2005, [Philex] filed its Original VAT Return for the third quarter of
taxable year 2005 and Amended VAT Return for the same quarter on December 1,
2005.
On March 20, 2006, [Philex] filed its claim for refund/tax credit of the amount of
₱23,956,732.44 with the One Stop Shop Center of the Department of Finance.
However, due to [the CIR’s] failure to act on such claim, on October 17, 2007,
pursuant to Sections 112 and 229 of the NIRC of 1997, as amended, [Philex] filed
a Petition for Review, docketed as C.T.A. Case No. 7687.
In [her] Answer, respondent CIR alleged the following special and affirmative
defenses:
4. Claims for refund are strictly construed against the taxpayer as the
same partake the nature of an exemption;
5. The taxpayer has the burden to show that the taxes were erroneously or
illegally paid. Failure on the part of [Philex] to prove the same is fatal to its
cause of action;
 TAXATION - VALUE ADDED TAX
6. [Philex] should prove its legal basis for claiming for the amount being
refunded.37
The Court of Tax Appeals’ Ruling: Division
The CTA Second Division, in its Decision dated 20 July 2009, denied Philex’s
claim due to prescription. The CTA Second Division ruled that the two-year
prescriptive period specified in Section 112(A) of RA 8424, as amended, applies
not only to the filing of the administrative claim with the BIR, but also to the filing of
the judicial claim with the CTA. Since Philex’s claim covered the 3rd quarter of
2005, its administrative claim filed on 20 March 2006 was timely filed, while its
judicial claim filed on 17 October 2007 was filed late and therefore barred by
prescription.
On 10 November 2009, the CTA Second Division denied Philex’s Motion for
Reconsideration.
The Court of Tax Appeals’ Ruling: En Banc
Philex filed a Petition for Review before the CTA EB praying for a reversal of the
20 July 2009 Decision and the 10 November 2009 Resolution of the CTA Second
Division in CTA Case No. 7687.
The CTA EB, in its Decision38 dated 3 December 2010, denied Philex’s petition
and affirmed the CTA Second Division’s Decision and Resolution.
The pertinent portions of the Decision read:
In this case, while there is no dispute that [Philex’s] administrative claim for refund
was filed within the two-year prescriptive period; however, as to its judicial claim for
refund/credit, records show that on March 20, 2006, [Philex] applied the
administrative claim for refund of unutilized input VAT in the amount of
₱23,956,732.44 with the One Stop Shop Center of the Department of Finance, per
Application No. 52490. From March 20, 2006, which is also presumably the date
[Philex] submitted supporting documents, together with the aforesaid application
for refund, the CIR has 120 days, or until July 18, 2006, within which to decide the
claim. Within 30 days from the lapse of the 120-day period, or from July 19, 2006
until August 17, 2006, [Philex] should have elevated its claim for refund to the
CTA. However, [Philex] filed its Petition for Review only on October 17, 2007,
which is 426 days way beyond the 30- day period prescribed by law.
110
Evidently, the Petition for Review in CTA Case No. 7687 was filed 426 days late.
Thus, the Petition for Review in CTA Case No. 7687 should have been dismissed
on the ground that the Petition for Review was filed way beyond the 30-day
prescribed period; thus, no jurisdiction was acquired by the CTA in Division; and
not due to prescription.
WHEREFORE, premises considered, the instant Petition for Review is hereby
DENIED DUE COURSE, and accordingly, DISMISSED. The assailed Decision
dated July 20, 2009, dismissing the Petition for Review in CTA Case No. 7687 due
to prescription, and Resolution dated November 10, 2009 denying [Philex’s] Motion
for Reconsideration are hereby AFFIRMED, with modification that the dismissal is
based on the ground that the Petition for Review in CTA Case No. 7687 was filed
way beyond the 30-day prescribed period to appeal.
SO ORDERED.39
G.R. No. 187485
CIR v. San Roque Power Corporation
The Commissioner raised the following grounds in the Petition for Review:
I. The Court of Tax Appeals En Banc erred in holding that [San Roque’s]
claim for refund was not prematurely filed.
II. The Court of Tax Appeals En Banc erred in affirming the amended
decision of the Court of Tax Appeals (Second Division) granting [San
Roque’s] claim for refund of alleged unutilized input VAT on its purchases
of capital goods and services for the taxable year 2001 in the amount of
P483,797,599.65. 40
G.R. No. 196113
Taganito Mining Corporation v. CIR
Taganito raised the following grounds in its Petition for Review:
I. The Court of Tax Appeals En Banc committed serious error and acted
with grave abuse of discretion tantamount to lack or excess of jurisdiction
in erroneously applying the Aichi doctrine in violation of [Taganito’s] right
to due process.
 TAXATION - VALUE ADDED TAX
II. The Court of Tax Appeals committed serious error and acted with grave
abuse of discretion amounting to lack or excess of jurisdiction in
erroneously interpreting the provisions of Section 112 (D).41
G.R. No. 197156
Philex Mining Corporation v. CIR
Philex raised the following grounds in its Petition for Review:
I. The CTA En Banc erred in denying the petition due to alleged
prescription. The fact is that the petition was filed with the CTA within the
period set by prevailing court rulings at the time it was filed.
II. The CTA En Banc erred in retroactively applying the Aichi ruling in
denying the petition in this instant case.42
The Court’s Ruling
For ready reference, the following are the provisions of the Tax Code applicable to
the present cases:
Section 105:
Persons Liable. — Any person who, in the course of trade or business, sells,
barters, exchanges, leases goods or properties, renders services, and any
person who imports goods shall be subject to the value-added tax
(VAT) imposed in Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted
or passed on to the buyer, transferee or lessee of the goods, properties or
services. This rule shall likewise apply to existing contracts of sale or lease of
goods, properties or services at the time of the effectivity of Republic Act No. 7716.
xxxx
Section 110(B):
Sec. 110. Tax Credits. —
111
(B) Excess Output or Input Tax. — If at the end of any taxable quarter the output
tax exceeds the input tax, the excess shall be paid by the VAT-registered
person. If the input tax exceeds the output tax, the excess shall be carried
over to the succeeding quarter or quarters: [Provided, That the input tax
inclusive of input VAT carried over from the previous quarter that may be credited
in every quarter shall not exceed seventy percent (70%) of the output
VAT:]43 Provided, however, That any input tax attributable to zero-rated sales
by a VAT-registered person may at his option be refunded or credited
against other internal revenue taxes, subject to the provisions of Section
112.
Section 112:44
Sec. 112. Refunds or Tax Credits of Input Tax. —
(A) Zero-Rated or Effectively Zero-Rated Sales.— Any VAT-registered
person, whose sales are zero-rated or effectively zero-rated may,
within two (2) years after the close of the taxable quarter when the
sales were made, apply for the issuance of a tax credit certificate or
refund of creditable input tax due or paid attributable to such sales,
except transitional input tax, to the extent that such input tax has not been
applied against output tax: Provided, however, That in the case of zero-
rated sales under Section 106(A)(2) (a)(1), (2) and (B) and Section
108(B)(1) and (2), the acceptable foreign currency exchange proceeds
thereof had been duly accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further,
That where the taxpayer is engaged in zero-rated or effectively zero-rated
sale and also in taxable or exempt sale of goods or properties or services,
and the amount of creditable input tax due or paid cannot be directly and
entirely attributed to any one of the transactions, it shall be allocated
proportionately on the basis of the volume of sales.
(B) Capital Goods.- A VAT — registered person may apply for the
issuance of a tax credit certificate or refund of input taxes paid on capital
goods imported or locally purchased, to the extent that such input taxes
have not been applied against output taxes. The application may be made
only within two (2) years after the close of the taxable quarter when the
importation or purchase was made.
(C) Cancellation of VAT Registration. — A person whose registration has
been cancelled due to retirement from or cessation of business, or due to
changes in or cessation of status under Section 106(C) of this Code may,
 TAXATION - VALUE ADDED TAX
within two (2) years from the date of cancellation, apply for the issuance of
a tax credit certificate for any unused input tax which may be used in
payment of his other internal revenue taxes
(D) Period within which Refund or Tax Credit of Input Taxes shall be
Made. — In proper cases, the Commissioner shall grant a refund or issue
the tax credit certificate for creditable input taxes within one hundred
twenty (120) days from the date of submission of complete
documents in support of the application filed in accordance with
Subsection (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or
the failure on the part of the Commissioner to act on the application within
the period prescribed above, the taxpayer affected may, within thirty (30)
days from the receipt of the decision denying the claim or after the
expiration of the one hundred twenty day-period, appeal the decision
or the unacted claim with the Court of Tax Appeals.
(E) Manner of Giving Refund. — Refunds shall be made upon warrants
drawn by the Commissioner or by his duly authorized representative
without the necessity of being countersigned by the Chairman,
Commission on Audit, the provisions of the Administrative Code of 1987 to
the contrary notwithstanding: Provided, that refunds under this paragraph
shall be subject to post audit by the Commission on Audit.
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 filed after the expiration of two (2)
years from the date of payment of the tax or penalty regardless of any
supervening cause that may arise after payment: Provided, however, That the
Commissioner may, even without a written claim therefor, refund or credit any tax,
where on the face of the return upon which payment was made, such payment
appears clearly to have been erroneously paid.
112
(All emphases supplied)
I. Application of the 120+30 Day Periods
a. G.R. No. 187485 - CIR v. San Roque Power Corporation
On 10 April 2003, a mere 13 days after it filed its amended administrative claim
with the Commissioner on 28 March 2003, San Roque filed a Petition for Review
with the CTA docketed as CTA Case No. 6647. From this we gather two crucial
facts: first, San Roque did not wait for the 120-day period to lapse before filing its
judicial claim; second, San Roque filed its judicial claim more than four (4)
years before the Atlas45 doctrine, which was promulgated by the Court on 8 June
2007.
Clearly, San Roque failed to comply with the 120-day waiting period, the time
expressly given by law to the Commissioner to decide whether to grant or deny
San Roque’s application for tax refund or credit. It is indisputable that compliance
with the 120-day waiting period is mandatory and jurisdictional. The waiting
period, originally fixed at 60 days only, was part of the provisions of the first VAT
law, Executive Order No. 273, which took effect on 1 January 1988. The waiting
period was extended to 120 days effective 1 January 1998 under RA 8424 or the
Tax Reform Act of 1997. Thus, the waiting period has been in our statute
books for more than fifteen (15) years before San Roque filed its judicial
claim.
Failure to comply with the 120-day waiting period violates a mandatory provision of
law. It violates the doctrine of exhaustion of administrative remedies and renders
the petition premature and thus without a cause of action, with the effect that the
CTA does not acquire jurisdiction over the taxpayer’s petition. Philippine
jurisprudence is replete with cases upholding and reiterating these doctrinal
principles.46
The charter of the CTA expressly provides that its jurisdiction is to review on
appeal "decisions of the Commissioner of Internal Revenue in cases involving x x
x refunds of internal revenue taxes."47 When a taxpayer prematurely files a judicial
claim for tax refund or credit with the CTA without waiting for the decision of the
Commissioner, there is no "decision" of the Commissioner to review and thus the
CTA as a court of special jurisdiction has no jurisdiction over the appeal. The
charter of the CTA also expressly provides that if the Commissioner fails to decide
within "a specific period" required by law, such "inaction shall be deemed a
denial"48 of the application for tax refund or credit. It is the Commissioner’s
decision, or inaction "deemed a denial," that the taxpayer can take to the CTA for
 TAXATION - VALUE ADDED TAX
review. Without a decision or an "inaction x x x deemed a denial" of the
Commissioner, the CTA has no jurisdiction over a petition for review.49
San Roque’s failure to comply with the 120-day mandatory period renders its
petition for review with the CTA void. Article 5 of the Civil Code provides, "Acts
executed against provisions of mandatory or prohibitory laws shall be void, except
when the law itself authorizes their validity." San Roque’s void petition for review
cannot be legitimized by the CTA or this Court because Article 5 of the Civil Code
states that such void petition cannot be legitimized "except when the law itself
authorizes [its] validity." There is no law authorizing the petition’s validity.
It is hornbook doctrine that a person committing a void act contrary to a mandatory
provision of law cannot claim or acquire any right from his void act. A right cannot
spring in favor of a person from his own void or illegal act. This doctrine is
repeated in Article 2254 of the Civil Code, which states, "No vested or acquired
right can arise from acts or omissions which are against the law or which infringe
upon the rights of others."50 For violating a mandatory provision of law in filing its
petition with the CTA, San Roque cannot claim any right arising from such void
petition. Thus, San Roque’s petition with the CTA is a mere scrap of paper.
This Court cannot brush aside the grave issue of the mandatory and jurisdictional
nature of the 120-day period just because the Commissioner merely asserts that
the case was prematurely filed with the CTA and does not question the entitlement
of San Roque to the refund. The mere fact that a taxpayer has undisputed excess
input VAT, or that the tax was admittedly illegally, erroneously or excessively
collected from him, does not entitle him as a matter of right to a tax refund or
credit. Strict compliance with the mandatory and jurisdictional conditions
prescribed by law to claim such tax refund or credit is essential and necessary for
such claim to prosper. Well-settled is the rule that tax refunds or credits, just
like tax exemptions, are strictly construed against the taxpayer.51 The burden
is on the taxpayer to show that he has strictly complied with the conditions for the
grant of the tax refund or credit.
This Court cannot disregard mandatory and jurisdictional conditions mandated by
law simply because the Commissioner chose not to contest the numerical
correctness of the claim for tax refund or credit of the taxpayer. Non-compliance
with mandatory periods, non-observance of prescriptive periods, and non-
adherence to exhaustion of administrative remedies bar a taxpayer’s claim for tax 2nd Quarter, 1990
refund or credit, whether or not the Commissioner questions the numerical
correctness of the claim of the taxpayer. This Court should not establish the
precedent that non-compliance with mandatory and jurisdictional conditions can be
excused if the claim is otherwise meritorious, particularly in claims for tax refunds 3rd Quarter, 1990
or credit. Such precedent will render meaningless compliance with mandatory and
jurisdictional requirements, for then every tax refund case will have to be decided
on the numerical correctness of the amounts claimed, regardless of non-
compliance with mandatory and jurisdictional conditions.
San Roque cannot also claim being misled, misguided or confused by
the Atlas doctrine because San Roque filed its petition for review with the CTA
more than four years before Atlas was promulgated. The Atlas doctrine did not
exist at the time San Roque failed to comply with the 120- day period. Thus, San
Roque cannot invoke the Atlas doctrine as an excuse for its failure to wait for the
120-day period to lapse. In any event, the Atlas doctrine merely stated that the
two-year prescriptive period should be counted from the date of payment of the
output VAT, not from the close of the taxable quarter when the sales involving the
input VAT were made. The Atlas doctrine does not interpret, expressly or
impliedly, the 120+3052 day periods.
In fact, Section 106(b) and (e) of the Tax Code of 1977 as amended, which was
the law cited by the Court in Atlas as the applicable provision of the law did not yet
provide for the 30-day period for the taxpayer to appeal to the CTA from the
decision or inaction of the Commissioner.53 Thus, the Atlas doctrine cannot be
invoked by anyone to disregard compliance with the 30-day mandatory and
jurisdictional period. Also, the difference between the Atlas doctrine on one
hand, and the Mirant54 doctrine on the other hand, is a mere 20 days.
The Atlas doctrine counts the two-year prescriptive period from the date of
payment of the output VAT, which means within 20 days after the close of the
taxable quarter. The output VAT at that time must be paid at the time of filing of the
quarterly tax returns, which were to be filed "within 20 days following the end of
each quarter."
Thus, in Atlas, the three tax refund claims listed below were deemed timely filed
because the administrative claims filed with the Commissioner, and the petitions
for review filed with the CTA, were all filed within two years from the date of
payment of the output VAT, following Section 229:
Date of Filing Return Date of Filing Date of Filing
Period Covered
& Payment of Tax Administrative Claim Petition With CTA
20 July 1990 21 August 1990 20 July 1992
Close of Quarter
30 June 1990
18 October 1990 21 November 1990 9 October 1992
113
 TAXATION - VALUE ADDED TAX
Close of Quarter
30 September 1990
4th Quarter, 1990 20 January 1991 19 February 1991 14 January 1993
Close of Quarter
31 December 1990
Atlas paid the output VAT at the time it filed the quarterly tax returns on the 20th,
18th, and 20th day after the close of the taxable quarter. Had the twoyear
prescriptive period been counted from the "close of the taxable quarter" as
expressly stated in the law, the tax refund claims of Atlas would have already
prescribed. In contrast, the Mirant doctrine counts the two-year prescriptive period
from the "close of the taxable quarter when the sales were made" as expressly
stated in the law, which means the last day of the taxable quarter. The 20-day
difference55 between the Atlas doctrine and the later Mirant doctrine is not
material to San Roque’s claim for tax refund.
Whether the Atlas doctrine or the Mirant doctrine is applied to San Roque is
immaterial because what is at issue in the present case is San Roque’s non-
compliance with the 120-day mandatory and jurisdictional period, which is counted
from the date it filed its administrative claim with the Commissioner. The 120-day
period may extend beyond the two-year prescriptive period, as long as the
administrative claim is filed within the two-year prescriptive period. However, San
Roque’s fatal mistake is that it did not wait for the Commissioner to decide within
the 120-day period, a mandatory period whether the Atlas or the Mirant doctrine is
applied.
At the time San Roque filed its petition for review with the CTA, the 120+30 day
mandatory periods were already in the law. Section 112(C)56 expressly grants the
Commissioner 120 days within which to decide the taxpayer’s claim. The law is
clear, plain, and unequivocal: "x x x the Commissioner shall grant a refund or issue
the tax credit certificate for creditable input taxes within one hundred twenty
(120) days from the date of submission of complete documents." Following
the verba legis doctrine, this law must be applied exactly as worded since it is
clear, plain, and unequivocal. The taxpayer cannot simply file a petition with the
CTA without waiting for the Commissioner’s decision within the 120-day mandatory
and jurisdictional period. The CTA will have no jurisdiction because there will be no
"decision" or "deemed a denial" decision of the Commissioner for the CTA to
review. In San Roque’s case, it filed its petition with the CTA a mere 13 days after
it filed its administrative claim with the Commissioner. Indisputably, San Roque
knowingly violated the mandatory 120-day period, and it cannot blame anyone but
itself.
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Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to the
CTA the decision or inaction of the Commissioner, thus:
x x x the taxpayer affected may, within thirty (30) days from the receipt of the
decision denying the claim or after the expiration of the one hundred twenty
day-period, appeal the decision or the unacted claim with the Court of Tax
Appeals. (Emphasis supplied)
This law is clear, plain, and unequivocal. Following the well-settled verba
legis doctrine, this law should be applied exactly as worded since it is clear, plain,
and unequivocal. As this law states, the taxpayer may, if he wishes, appeal the
decision of the Commissioner to the CTA within 30 days from receipt of the
Commissioner’s decision, or if the Commissioner does not act on the taxpayer’s
claim within the 120-day period, the taxpayer may appeal to the CTA within 30
days from the expiration of the 120-day period.
b. G.R. No. 196113 - Taganito Mining Corporation v. CIR
Like San Roque, Taganito also filed its petition for review with the CTA without
waiting for the 120-day period to lapse. Also, like San Roque, Taganito filed its
judicial claim before the promulgation of the Atlas doctrine. Taganito filed a
Petition for Review on 14 February 2007 with the CTA. This is almost four
months before the adoption of the Atlas doctrine on 8 June 2007. Taganito is
similarly situated as San Roque - both cannot claim being misled, misguided, or
confused by the Atlas doctrine.
However, Taganito can invoke BIR Ruling No. DA-489-0357 dated 10 December
2003, which expressly ruled that the "taxpayer-claimant need not wait for the
lapse of the 120-day period before it could seek judicial relief with the CTA
by way of Petition for Review." Taganito filed its judicial claim after the issuance
of BIR Ruling No. DA-489-03 but before the adoption of the Aichi doctrine. Thus,
as will be explained later, Taganito is deemed to have filed its judicial claim with
the CTA on time.
c. G.R. No. 197156 – Philex Mining Corporation v. CIR
Philex (1) filed on 21 October 2005 its original VAT Return for the third quarter of
taxable year 2005; (2) filed on 20 March 2006 its administrative claim for refund or
credit; (3) filed on 17 October 2007 its Petition for Review with the CTA. The close
of the third taxable quarter in 2005 is 30 September 2005, which is the reckoning
date in computing the two-year prescriptive period under Section 112(A).
 TAXATION - VALUE ADDED TAX
Philex timely filed its administrative claim on 20 March 2006, within the two-year
prescriptive period. Even if the two-year prescriptive period is computed from the
date of payment of the output VAT under Section 229, Philex still filed its
administrative claim on time. Thus, the Atlas doctrine is immaterial in this case.
The Commissioner had until 17 July 2006, the last day of the 120-day period, to
decide Philex’s claim. Since the Commissioner did not act on Philex’s claim on or
before 17 July 2006, Philex had until 17 August 2006, the last day of the 30-day
period, to file its judicial claim. The CTA EB held that 17 August 2006 was
indeed the last day for Philex to file its judicial claim. However, Philex filed its
Petition for Review with the CTA only on 17 October 2007, or four hundred twenty-
six (426) days after the last day of filing. In short, Philex was late by one year
and 61 days in filing its judicial claim. As the CTA EB correctly found:
Evidently, the Petition for Review in C.T.A. Case No. 7687 was filed 426 days
late. Thus, the Petition for Review in C.T.A. Case No. 7687 should have been
dismissed on the ground that the Petition for Review was filed way beyond the 30-
day prescribed period; thus, no jurisdiction was acquired by the CTA Division; x x
x58 (Emphasis supplied)
Unlike San Roque and Taganito, Philex’s case is not one of premature filing but of
late filing. Philex did not file any petition with the CTA within the 120-day period.
Philex did not also file any petition with the CTA within 30 days after the expiration
of the 120-day period. Philex filed its judicial claim long after the expiration of the
120-day period, in fact 426 days after the lapse of the 120-day period. In any
event, whether governed by jurisprudence before, during, or after
the Atlas case, Philex’s judicial claim will have to be rejected because of late
filing. Whether the two-year prescriptive period is counted from the date of
payment of the output VAT following the Atlas doctrine, or from the close of the
taxable quarter when the sales attributable to the input VAT were made following
the Mirant and Aichi doctrines, Philex’s judicial claim was indisputably filed late.
The Atlas doctrine cannot save Philex from the late filing of its judicial claim.
The inaction of the Commissioner on Philex’s claim during the 120-day period is,
by express provision of law, "deemed a denial" of Philex’s claim. Philex had 30
days from the expiration of the 120-day period to file its judicial claim with the CTA.
Philex’s failure to do so rendered the "deemed a denial" decision of the
Commissioner final and inappealable. The right to appeal to the CTA from a
decision or "deemed a denial" decision of the Commissioner is merely a statutory
privilege, not a constitutional right. The exercise of such statutory privilege requires
strict compliance with the conditions attached by the statute for its
exercise.59 Philex failed to comply with the statutory conditions and must thus bear
the consequences.
115
II. Prescriptive Periods under Section 112(A) and (C)
There are three compelling reasons why the 30-day period need not necessarily
fall within the two-year prescriptive period, as long as the administrative claim is
filed within the two-year prescriptive period.
First, Section 112(A) clearly, plainly, and unequivocally provides that the
taxpayer "may, within two (2) years after the close of the taxable quarter
when the sales were made, apply for the issuance of a tax credit
certificate or refund of the creditable input tax due or paid to such sales."
In short, the law states that the taxpayer may apply with the Commissioner
for a refund or credit "within two (2) years," which means at anytime
within two years. Thus, the application for refund or credit may be filed by
the taxpayer with the Commissioner on the last day of the two-year
prescriptive period and it will still strictly comply with the law. The twoyear
prescriptive period is a grace period in favor of the taxpayer and he can
avail of the full period before his right to apply for a tax refund or credit is
barred by prescription.
Second, Section 112(C) provides that the Commissioner shall decide the
application for refund or credit "within one hundred twenty (120) days from
the date of submission of complete documents in support of the
application filed in accordance with Subsection (A)." The reference in
Section 112(C) of the submission of documents "in support of the
application filed in accordance with Subsection A" means that the
application in Section 112(A) is the administrative claim that the
Commissioner must decide within the 120-day period. In short, the two-
year prescriptive period in Section 112(A) refers to the period within which
the taxpayer can file an administrative claim for tax refund or credit. Stated
otherwise, the two-year prescriptive period does not refer to the filing
of the judicial claim with the CTA but to the filing of the
administrative claim with the Commissioner. As held in Aichi, the
"phrase ‘within two years x x x apply for the issuance of a tax credit or
refund’ refers to applications for refund/credit with the CIR and not to
appeals made to the CTA."
Third, if the 30-day period, or any part of it, is required to fall within the
two-year prescriptive period (equivalent to 730 days60), then the taxpayer
must file his administrative claim for refund or credit within the first 610
days of the two-year prescriptive period. Otherwise, the filing of the
administrative claim beyond the first 610 days will result in the
appeal to the CTA being filed beyond the two-year prescriptive
 TAXATION - VALUE ADDED TAX
period. Thus, if the taxpayer files his administrative claim on the 611th
day, the Commissioner, with his 120-day period, will have until the 731st
day to decide the claim. If the Commissioner decides only on the 731st
day, or does not decide at all, the taxpayer can no longer file his judicial
claim with the CTA because the two-year prescriptive period (equivalent to
730 days) has lapsed. The 30-day period granted by law to the taxpayer to
file an appeal before the CTA becomes utterly useless, even if the
taxpayer complied with the law by filing his administrative claim within the
two-year prescriptive period.
The theory that the 30-day period must fall within the two-year prescriptive period
adds a condition that is not found in the law. It results in truncating 120 days from
the 730 days that the law grants the taxpayer for filing his administrative claim with
the Commissioner. This Court cannot interpret a law to defeat, wholly or even
partly, a remedy that the law expressly grants in clear, plain, and unequivocal
language.
Section 112(A) and (C) must be interpreted according to its clear, plain, and
unequivocal language. The taxpayer can file his administrative claim for refund or
credit at anytime within the two-year prescriptive period. If he files his claim on the
last day of the two-year prescriptive period, his claim is still filed on time. The
Commissioner will have 120 days from such filing to decide the claim. If the
Commissioner decides the claim on the 120th day, or does not decide it on that
day, the taxpayer still has 30 days to file his judicial claim with the CTA. This is not
only the plain meaning but also the only logical interpretation of Section 112(A)
and (C).
III. "Excess" Input VAT and "Excessively" Collected Tax
The input VAT is not "excessively" collected as understood under Section 229
because at the time the input VAT is collected the amount paid is correct and
proper. The input VAT is a tax liability of, and legally paid by, a VAT-registered
seller61 of goods, properties or services used as input by another VAT-registered
person in the sale of his own goods, properties, or services. This tax liability is true
even if the seller passes on the input VAT to the buyer as part of the purchase
price. The second VAT-registered person, who is not legally liable for the input
VAT, is the one who applies the input VAT as credit for his own output VAT. 62 If the
input VAT is in fact "excessively" collected as understood under Section 229, then
it is the first VAT-registered person - the taxpayer who is legally liable and who is
deemed to have legally paid for the input VAT - who can ask for a tax refund or
credit under Section 229 as an ordinary refund or credit outside of the VAT
116
System. In such event, the second VAT-registered taxpayer will have no input VAT
to offset against his own output VAT.
In a claim for refund or credit of "excess" input VAT under Section 110(B) and
Section 112(A), the input VAT is not "excessively" collected as understood under
Section 229. At the time of payment of the input VAT the amount paid is the
correct and proper amount. Under the VAT System, there is no claim or issue that
the input VAT is "excessively" collected, that is, that the input VAT paid is more
than what is legally due. The person legally liable for the input VAT cannot claim
that he overpaid the input VAT by the mere existence of an "excess" input VAT.
The term "excess" input VAT simply means that the input VAT available as credit
exceeds the output VAT, not that the input VAT is excessively collected because it
is more than what is legally due. Thus, the taxpayer who legally paid the input VAT
cannot claim for refund or credit of the input VAT as "excessively" collected under
Section 229.
Under Section 229, the prescriptive period for filing a judicial claim for refund is two
years from the date of payment of the tax "erroneously, x x x illegally, x x x
excessively or in any manner wrongfully collected." The prescriptive period is
reckoned from the date the person liable for the tax pays the tax. Thus, if the input
VAT is in fact "excessively" collected, that is, the person liable for the tax actually
pays more than what is legally due, the taxpayer must file a judicial claim for
refund within two years from his date of payment. Only the person legally liable
to pay the tax can file the judicial claim for refund. The person to whom the
tax is passed on as part of the purchase price has no personality to file the
judicial claim under Section 229.63
Under Section 110(B) and Section 112(A), the prescriptive period for filing a
judicial claim for "excess" input VAT is two years from the close of the taxable
quarter when the sale was made by the person legally liable to pay
the output VAT. This prescriptive period has no relation to the date of payment of
the "excess" input VAT. The "excess" input VAT may have been paid for more
than two years but this does not bar the filing of a judicial claim for "excess" VAT
under Section 112(A), which has a different reckoning period from Section 229.
Moreover, the person claiming the refund or credit of the input VAT is not the
person who legally paid the input VAT. Such person seeking the VAT refund or
credit does not claim that the input VAT was "excessively" collected from him, or
that he paid an input VAT that is more than what is legally due. He is not the
taxpayer who legally paid the input VAT.
As its name implies, the Value-Added Tax system is a tax on the value added by
the taxpayer in the chain of transactions. For simplicity and efficiency in tax
 TAXATION - VALUE ADDED TAX
collection, the VAT is imposed not just on the value added by the taxpayer, but on
the entire selling price of his goods, properties or services. However, the taxpayer
is allowed a refund or credit on the VAT previously paid by those who sold him the
inputs for his goods, properties, or services. The net effect is that the taxpayer
pays the VAT only on the value that he adds to the goods, properties, or services
that he actually sells.
Under Section 110(B), a taxpayer can apply his input VAT only against his output
VAT. The only exception is when the taxpayer is expressly "zero-rated or
effectively zero-rated" under the law, like companies generating power through
renewable sources of energy.64 Thus, a non zero-rated VAT-registered taxpayer
who has no output VAT because he has no sales cannot claim a tax refund or
credit of his unused input VAT under the VAT System. Even if the taxpayer has
sales but his input VAT exceeds his output VAT, he cannot seek a tax refund or
credit of his "excess" input VAT under the VAT System. He can only carry-over
and apply his "excess" input VAT against his future output VAT. If such
"excess" input VAT is an "excessively" collected tax, the taxpayer should be able
to seek a refund or credit for such "excess" input VAT whether or not he has output
VAT. The VAT System does not allow such refund or credit. Such "excess" input
VAT is not an "excessively" collected tax under Section 229. The "excess" input
VAT is a correctly and properly collected tax. However, such "excess" input VAT
can be applied against the output VAT because the VAT is a tax imposed only on
the value added by the taxpayer. If the input VAT is in fact "excessively" collected
under Section 229, then it is the person legally liable to pay the input VAT, not the
person to whom the tax was passed on as part of the purchase price and claiming
credit for the input VAT under the VAT System, who can file the judicial claim
under Section 229.
Any suggestion that the "excess" input VAT under the VAT System is an
"excessively" collected tax under Section 229 may lead taxpayers to file a claim for
refund or credit for such "excess" input VAT under Section 229 as an ordinary tax
refund or credit outside of the VAT System. Under Section 229, mere payment of a
tax beyond what is legally due can be claimed as a refund or credit. There is no
requirement under Section 229 for an output VAT or subsequent sale of goods,
properties, or services using materials subject to input VAT.
From the plain text of Section 229, it is clear that what can be refunded or credited
is a tax that is "erroneously, x x x illegally, x x x excessively or in any manner
wrongfully collected." In short, there must be a wrongful payment because what
is paid, or part of it, is not legally due. As the Court held in Mirant, Section 229
should "apply only to instances of erroneous payment or illegal collection of
internal revenue taxes." Erroneous or wrongful payment includes excessive
117
payment because they all refer to payment of taxes not legally due. Under the
VAT System, there is no claim or issue that the "excess" input VAT is "excessively
or in any manner wrongfully collected." In fact, if the "excess" input VAT is an
"excessively" collected tax under Section 229, then the taxpayer claiming to apply
such "excessively" collected input VAT to offset his output VAT may have no legal
basis to make such offsetting. The person legally liable to pay the input VAT can
claim a refund or credit for such "excessively" collected tax, and thus there will no
longer be any "excess" input VAT. This will upend the present VAT System as we
know it.
IV. Effectivity and Scope of the Atlas , Mirant and Aichi Doctrines
The Atlas doctrine, which held that claims for refund or credit of input VAT must
comply with the two-year prescriptive period under Section 229, should
be effective only from its promulgation on 8 June 2007 until its abandonment
on 12 September 2008 in Mirant. The Atlas doctrine was limited to the reckoning
of the two-year prescriptive period from the date of payment of the output VAT.
Prior to the Atlas doctrine, the two-year prescriptive period for claiming refund or
credit of input VAT should be governed by Section 112(A) following the verba
legis rule. The Mirant ruling, which abandoned the Atlas doctrine, adopted
the verba legis rule, thus applying Section 112(A) in computing the two-year
prescriptive period in claiming refund or credit of input VAT.
The Atlas doctrine has no relevance to the 120+30 day periods under Section
112(C) because the application of the 120+30 day periods was not in issue
in Atlas. The application of the 120+30 day periods was first raised in Aichi, which
adopted the verba legis rule in holding that the 120+30 day periods are mandatory
and jurisdictional. The language of Section 112(C) is plain, clear, and
unambiguous. When Section 112(C) states that "the Commissioner shall grant a
refund or issue the tax credit within one hundred twenty (120) days from the date
of submission of complete documents," the law clearly gives the Commissioner
120 days within which to decide the taxpayer’s claim. Resort to the courts prior to
the expiration of the 120-day period is a patent violation of the doctrine of
exhaustion of administrative remedies, a ground for dismissing the judicial suit due
to prematurity. Philippine jurisprudence is awash with cases affirming and
reiterating the doctrine of exhaustion of administrative remedies.65 Such doctrine is
basic and elementary.
When Section 112(C) states that "the taxpayer affected may, within thirty (30) days
from receipt of the decision denying the claim or after the expiration of the one
hundred twenty-day period, appeal the decision or the unacted claim with the
Court of Tax Appeals," the law does not make the 120+30 day periods optional just
 TAXATION - VALUE ADDED TAX
because the law uses the word "may." The word "may" simply means that the
taxpayer may or may not appeal the decision of the Commissioner within 30 days
from receipt of the decision, or within 30 days from the expiration of the 120-day
period. Certainly, by no stretch of the imagination can the word "may" be construed
as making the 120+30 day periods optional, allowing the taxpayer to file a judicial
claim one day after filing the administrative claim with the Commissioner.
The old rule66 that the taxpayer may file the judicial claim, without waiting for the
Commissioner’s decision if the two-year prescriptive period is about to expire,
cannot apply because that rule was adopted before the enactment of the 30-day
period. The 30-day period was adopted precisely to do away with the old rule,
so that under the VAT System the taxpayer will always have 30 days to file
the judicial claim even if the Commissioner acts only on the 120th day, or
does not act at all during the 120-day period. With the 30-day period always
available to the taxpayer, the taxpayer can no longer file a judicial claim for refund
or credit of input VAT without waiting for the Commissioner to decide until the
expiration of the 120-day period.
To repeat, a claim for tax refund or credit, like a claim for tax exemption, is
construed strictly against the taxpayer. One of the conditions for a judicial claim of
refund or credit under the VAT System is compliance with the 120+30 day
mandatory and jurisdictional periods. Thus, strict compliance with the 120+30 day
periods is necessary for such a claim to prosper, whether before, during, or after
the effectivity of the Atlas doctrine, except for the period from the issuance of BIR
Ruling No. DA-489-03 on 10 December 2003 to 6 October 2010 when
the Aichi doctrine was adopted, which again reinstated the 120+30 day periods as
mandatory and jurisdictional.
V. Revenue Memorandum Circular No. 49-03 (RMC 49-03) dated 15 April 2003
There is nothing in RMC 49-03 that states, expressly or impliedly, that the taxpayer
need not wait for the 120-day period to expire before filing a judicial claim with the
CTA. RMC 49-03 merely authorizes the BIR to continue processing the
administrative claim even after the taxpayer has filed its judicial claim, without
saying that the taxpayer can file its judicial claim before the expiration of the 120-
day period. RMC 49-03 states: "In cases where the taxpayer has filed a ‘Petition
for Review’ with the Court of Tax Appeals involving a claim for refund/TCC that is
pending at the administrative agency (either the Bureau of Internal Revenue or the
One- Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the
Department of Finance), the administrative agency and the court may act on the
case separately." Thus, if the taxpayer files its judicial claim before the expiration
of the 120-day period, the BIR will nevertheless continue to act on the
118
administrative claim because such premature filing cannot divest the
Commissioner of his statutory power and jurisdiction to decide the administrative
claim within the 120-day period.
On the other hand, if the taxpayer files its judicial claim after the 120- day period,
the Commissioner can still continue to evaluate the administrative claim. There is
nothing new in this because even after the expiration of the 120-day period, the
Commissioner should still evaluate internally the administrative claim for purposes
of opposing the taxpayer’s judicial claim, or even for purposes of determining if the
BIR should actually concede to the taxpayer’s judicial claim. The internal
administrative evaluation of the taxpayer’s claim must necessarily continue to
enable the BIR to oppose intelligently the judicial claim or, if the facts and the law
warrant otherwise, for the BIR to concede to the judicial claim, resulting in the
termination of the judicial proceedings.
What is important, as far as the present cases are concerned, is that the
mere filing by a taxpayer of a judicial claim with the CTA before the
expiration of the 120-day period cannot operate to divest the Commissioner
of his jurisdiction to decide an administrative claim within the 120-day
mandatory period, unless the Commissioner has clearly given cause for
equitable estoppel to apply as expressly recognized in Section 246 of the
Tax Code.67
VI. BIR Ruling No. DA-489-03 dated 10 December 2003
BIR Ruling No. DA-489-03 does provide a valid claim for equitable estoppel under
Section 246 of the Tax Code. BIR Ruling No. DA-489-03 expressly states that the
"taxpayer-claimant need not wait for the lapse of the 120-day period before it
could seek judicial relief with the CTA by way of Petition for Review." Prior to
this ruling, the BIR held, as shown by its position in the Court of Appeals,68 that the
expiration of the 120-day period is mandatory and jurisdictional before a judicial
claim can be filed.
There is no dispute that the 120-day period is mandatory and jurisdictional, and
that the CTA does not acquire jurisdiction over a judicial claim that is filed before
the expiration of the 120-day period. There are, however, two exceptions to this
rule. The first exception is if the Commissioner, through a specific ruling, misleads
a particular taxpayer to prematurely file a judicial claim with the CTA. Such specific
ruling is applicable only to such particular taxpayer. The second exception is where
the Commissioner, through a general interpretative rule issued under Section 4 of
the Tax Code, misleads all taxpayers into filing prematurely judicial claims with the
CTA. In these cases, the Commissioner cannot be allowed to later on question the
 TAXATION - VALUE ADDED TAX
CTA’s assumption of jurisdiction over such claim since equitable estoppel has set
in as expressly authorized under Section 246 of the Tax Code.
Section 4 of the Tax Code, a new provision introduced by RA 8424, expressly
grants to the Commissioner the power to interpret tax laws, thus:
Sec. 4. Power of the Commissioner To Interpret Tax Laws and To Decide Tax
Cases. — The power to interpret the provisions of this Code and other tax laws
shall be under the exclusive and original jurisdiction of the Commissioner, subject
to review by the Secretary of Finance.
The power to decide disputed assessments, refunds of internal revenue taxes,
fees or other charges, penalties imposed in relation thereto, or other matters
arising under this Code or other laws or portions thereof administered by the
Bureau of Internal Revenue is vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals.
Since the Commissioner has exclusive and original jurisdiction to interpret tax
laws, taxpayers acting in good faith should not be made to suffer for adhering to
general interpretative rules of the Commissioner interpreting tax laws, should such
interpretation later turn out to be erroneous and be reversed by the Commissioner
or this Court. Indeed, Section 246 of the Tax Code expressly provides that a
reversal of a BIR regulation or ruling cannot adversely prejudice a taxpayer who in
good faith relied on the BIR regulation or ruling prior to its reversal. Section 246
provides as follows:
Sec. 246. Non-Retroactivity of Rulings. — Any revocation, modification or reversal
of any of the rules and regulations promulgated in accordance with the preceding
Sections or any of the rulings or circulars promulgated by the Commissioner shall
not be given retroactive application if the revocation, modification or
reversal will be prejudicial to the taxpayers, except in the following cases:
(a) Where the taxpayer deliberately misstates or omits material facts from
his return or any document required of him by the Bureau of Internal
Revenue;
(b) Where the facts subsequently gathered by the Bureau of Internal
Revenue are materially different from the facts on which the ruling is
based; or
(c) Where the taxpayer acted in bad faith. (Emphasis supplied)
119
Thus, a general interpretative rule issued by the Commissioner may be relied upon
by taxpayers from the time the rule is issued up to its reversal by the
Commissioner or this Court. Section 246 is not limited to a reversal only by the
Commissioner because this Section expressly states, "Any revocation,
modification or reversal" without specifying who made the revocation, modification
or reversal. Hence, a reversal by this Court is covered under Section 246.
Taxpayers should not be prejudiced by an erroneous interpretation by the
Commissioner, particularly on a difficult question of law. The abandonment of
the Atlas doctrine by Mirant and Aichi69 is proof that the reckoning of the
prescriptive periods for input VAT tax refund or credit is a difficult question of law.
The abandonment of the Atlas doctrine did not result in Atlas, or other taxpayers
similarly situated, being made to return the tax refund or credit they received or
could have received under Atlas prior to its abandonment. This Court is
applying Mirant and Aichi prospectively. Absent fraud, bad faith or
misrepresentation, the reversal by this Court of a general interpretative rule issued
by the Commissioner, like the reversal of a specific BIR ruling under Section 246,
should also apply prospectively. As held by this Court in CIR v. Philippine Health
Care Providers, Inc.:70
In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals, this Court held that
under Section 246 of the 1997 Tax Code, the Commissioner of Internal
Revenue is precluded from adopting a position contrary to one previously
taken where injustice would result to the taxpayer. Hence, where an
assessment for deficiency withholding income taxes was made, three years after a
new BIR Circular reversed a previous one upon which the taxpayer had relied
upon, such an assessment was prejudicial to the taxpayer. To rule otherwise,
opined the Court, would be contrary to the tenets of good faith, equity, and fair
play.
This Court has consistently reaffirmed its ruling in ABS-CBN Broadcasting
Corp.1âwphi1 in the later cases of Commissioner of Internal Revenue v.
Borroughs, Ltd., Commissioner of Internal Revenue v. Mega Gen. Mdsg.
Corp., Commissioner of Internal Revenue v. Telefunken Semiconductor (Phils.)
Inc., and Commissioner of Internal Revenue v. Court of Appeals. The rule is that
the BIR rulings have no retroactive effect where a grossly unfair deal would
result to the prejudice of the taxpayer, as in this case.
More recently, in Commissioner of Internal Revenue v. Benguet Corporation,
wherein the taxpayer was entitled to tax refunds or credits based on the BIR’s own
issuances but later was suddenly saddled with deficiency taxes due to its
subsequent ruling changing the category of the taxpayer’s transactions for the
 TAXATION - VALUE ADDED TAX
purpose of paying its VAT, this Court ruled that applying such ruling retroactively
would be prejudicial to the taxpayer. (Emphasis supplied)
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general
interpretative rule applicable to all taxpayers or a specific ruling applicable only to a
particular taxpayer.
BIR Ruling No. DA-489-03 is a general interpretative rule because it was a
response to a query made, not by a particular taxpayer, but by a government
agency tasked with processing tax refunds and credits, that is, the One Stop Shop
Inter-Agency Tax Credit and Drawback Center of the Department of Finance.
This government agency is also the addressee, or the entity responded to, in BIR
Ruling No. DA-489-03. Thus, while this government agency mentions in its query
to the Commissioner the administrative claim of Lazi Bay Resources Development,
Inc., the agency was in fact asking the Commissioner what to do in cases like the
tax claim of Lazi Bay Resources Development, Inc., where the taxpayer did not
wait for the lapse of the 120-day period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all
taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its issuance on
10 December 2003 up to its reversal by this Court in Aichi on 6 October 2010,
where this Court held that the 120+30 day periods are mandatory and jurisdictional
However, BIR Ruling No. DA-489-03 cannot be given retroactive effect for four
reasons: first, it is admittedly an erroneous interpretation of the law; second, prior
to its issuance, the BIR held that the 120-day period was mandatory and
jurisdictional, which is the correct interpretation of the law; third, prior to its
issuance, no taxpayer can claim that it was misled by the BIR into filing a judicial
claim prematurely; and fourth, a claim for tax refund or credit, like a claim for tax
exemption, is strictly construed against the taxpayer.
San Roque, therefore, cannot benefit from BIR Ruling No. DA-489-03 because it
filed its judicial claim prematurely on 10 April 2003, before the issuance of BIR
Ruling No. DA-489-03 on 10 December 2003. To repeat, San Roque cannot claim
that it was misled by the BIR into filing its judicial claim prematurely because BIR
Ruling No. DA-489-03 was issued only after San Roque filed its judicial claim. At
the time San Roque filed its judicial claim, the law as applied and administered by
the BIR was that the Commissioner had 120 days to act on administrative claims.
This was in fact the position of the BIR prior to the issuance of BIR Ruling No. DA-
489-03. Indeed, San Roque never claimed the benefit of BIR Ruling No. DA-
489-03 or RMC 49-03, whether in this Court, the CTA, or before the
Commissioner.
120
Taganito, however, filed its judicial claim with the CTA on 14 February
2007, after the issuance of BIR Ruling No. DA-489-03 on 10 December 2003.
Truly, Taganito can claim that in filing its judicial claim prematurely without waiting
for the 120-day period to expire, it was misled by BIR Ruling No. DA-489-03. Thus,
Taganito can claim the benefit of BIR Ruling No. DA-489-03, which shields the
filing of its judicial claim from the vice of prematurity.
Philex’s situation is not a case of premature filing of its judicial claim but of late
filing, indeed very late filing. BIR Ruling No. DA-489-03 allowed premature filing of
a judicial claim, which means non-exhaustion of the 120-day period for the
Commissioner to act on an administrative claim. Philex cannot claim the benefit of
BIR Ruling No. DA-489-03 because Philex did not file its judicial claim prematurely
but filed it long after the lapse of the 30-day period following the expiration of
the 120-day period. In fact, Philex filed its judicial claim 426 days after the lapse
of the 30-day period.
VII. Existing Jurisprudence
There is no basis whatsoever to the claim that in five cases this Court had already
made a ruling that the filing dates of the administrative and judicial claims are
inconsequential, as long as they are within the two-year prescriptive period. The
effect of the claim of the dissenting opinions is that San Roque’s failure to wait for
the 120-day mandatory period to lapse is inconsequential, thus allowing San
Roque to claim the tax refund or credit. However, the five cases cited by the
dissenting opinions do not support even remotely the claim that this Court had
already made such a ruling. None of these five cases mention, cite, discuss,
rule or even hint that compliance with the 120-day mandatory period is
inconsequential as long as the administrative and judicial claims are filed
within the two-year prescriptive period.
In CIR v. Toshiba Information Equipment (Phils.), Inc.,71 the issue was whether any
output VAT was actually passed on to Toshiba that it could claim as input VAT
subject to tax credit or refund. The Commissioner argued that "although Toshiba
may be a VAT-registered taxpayer, it is not engaged in a VAT-taxable business."
The Commissioner cited Section 4.106-1 of Revenue Regulations No. 75 that
"refund of input taxes on capital goods shall be allowed only to the extent that such
capital goods are used in VAT-taxable business." In the words of the Court,
"Ultimately, however, the issue still to be resolved herein shall be whether
respondent Toshiba is entitled to the tax credit/refund of its input VAT on its
purchases of capital goods and services, to which this Court answers in the
affirmative." Nowhere in this case did the Court discuss, state, or rule that the filing
 TAXATION - VALUE ADDED TAX
dates of the administrative and judicial claims are inconsequential, as long as they
are within the two-year prescriptive period.
In Intel Technology Philippines, Inc. v. CIR,72 the Court stated: "The issues to be
resolved in the instant case are (1) whether the absence of the BIR authority to
print or the absence of the TIN-V in petitioner’s export sales invoices operates to
forfeit its entitlement to a tax refund/credit of its unutilized input VAT attributable to
its zero-rated sales; and (2) whether petitioner’s failure to indicate "TIN-V" in its
sales invoices automatically invalidates its claim for a tax credit certification."
Again, nowhere in this case did the Court discuss, state, or rule that the filing dates
of the administrative and judicial claims are inconsequential, as long as they are
within the two-year prescriptive period.
In AT&T Communications Services Philippines, Inc. v. CIR,73 the Court stated: "x x
x 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,’ x x x." The Court quoted the ruling of the First Division that
"valid VAT official receipts, and not mere sale invoices, should have been
submitted" by petitioner to substantiate its claim. The Court further stated: "x x x
the CTA En Banc, x x x affirmed x x x the CTA First Division," and "petitioner’s
motion for reconsideration having been denied x x x, the present petition for review
was filed." Clearly, the sole issue in this case is whether petitioner complied with
the substantiation requirements in claiming for tax refund or credit. Again, nowhere
in this case did the Court discuss, state, or rule that the filing dates of the
administrative and judicial claims are inconsequential, as long as they are within
the two-year prescriptive period.
In CIR v. Ironcon Builders and Development Corporation,74 the Court put the issue
in this manner: "Simply put, the sole issue the petition raises is whether or not the
CTA erred in granting respondent Ironcon’s application for refund of
its excess creditable VAT withheld." The Commissioner argued that "since the
NIRC does not specifically grant taxpayers the option to refund excess creditable
VAT withheld, it follows that such refund cannot be allowed." Thus, this case is
solely about whether the taxpayer has the right under the NIRC to ask for a cash
refund of excess creditable VAT withheld. Again, nowhere in this case did the
Court discuss, state, or rule that the filing dates of the administrative and judicial
claims are inconsequential, as long as they are within the two-year prescriptive
period.
In CIR v. Cebu Toyo Corporation,75 the issue was whether Cebu Toyo was exempt
or subject to VAT. Compliance with the 120-day period was never an issue
in Cebu Toyo. As the Court explained:
121
Both the Commissioner of Internal Revenue and the Office of the Solicitor General
argue that respondent Cebu Toyo Corporation, as a PEZA-registered enterprise, is
exempt from national and local taxes, including VAT, under Section 24 of Rep.
Act No. 7916 and Section 109 of the NIRC. Thus, they contend that respondent
Cebu Toyo Corporation is not entitled to any refund or credit on input taxes it
previously paid as provided under Section 4.103-1 of Revenue Regulations No. 7-
95, notwithstanding its registration as a VAT taxpayer. For petitioner claims that
said registration was erroneous and did not confer upon the respondent any right
to claim recognition of the input tax credit.
The respondent counters that it availed of the income tax holiday under E.O. No.
226 for four years from August 7, 1995 making it exempt from income tax but not
from other taxes such as VAT. Hence, according to respondent, its export
sales are not exempt from VAT, contrary to petitioner’s claim, but its export
sales is subject to 0% VAT. Moreover, it argues that it was able to establish
through a report certified by an independent Certified Public Accountant that the
input taxes it incurred from April 1, 1996 to December 31, 1997 were directly
attributable to its export sales. Since it did not have any output tax against which
said input taxes may be offset, it had the option to file a claim for refund/tax credit
of its unutilized input taxes.
Considering the submission of the parties and the evidence on record, we find the
petition bereft of merit.
Petitioner’s contention that respondent is not entitled to refund for being
exempt from VAT is untenable. This argument turns a blind eye to the fiscal
incentives granted to PEZA-registered enterprises under Section 23 of Rep. Act
No. 7916. Note that under said statute, the respondent had two options with
respect to its tax burden. It could avail of an income tax holiday pursuant to
provisions of E.O. No. 226, thus exempt it from income taxes for a number of years
but not from other internal revenue taxes such as VAT; or it could avail of the tax
exemptions on all taxes, including VAT under P.D. No. 66 and pay only the
preferential tax rate of 5% under Rep. Act No. 7916. Both the Court of Appeals and
the Court of Tax Appeals found that respondent availed of the income tax holiday
for four (4) years starting from August 7, 1995, as clearly reflected in its 1996 and
1997 Annual Corporate Income Tax Returns, where respondent specified that it
was availing of the tax relief under E.O. No. 226. Hence, respondent is not
exempt from VAT and it correctly registered itself as a VAT taxpayer. In fine,
it is engaged in taxable rather than exempt transactions. (Emphasis supplied)
Clearly, the issue in Cebu Toyo was whether the taxpayer was exempt from
VAT or subject to VAT at 0% tax rate. If subject to 0% VAT rate, the taxpayer
 TAXATION - VALUE ADDED TAX
could claim a refund or credit of its input VAT. Again, nowhere in this case did the
Court discuss, state, or rule that the filing dates of the administrative and judicial
claims are inconsequential, as long as they are within the two-year prescriptive
period.
While this Court stated in the narration of facts in Cebu Toyo that the taxpayer "did
not bother to wait for the Resolution of its (administrative) claim by the CIR" before
filing its judicial claim with the CTA, this issue was not raised before the Court.
Certainly, this statement of the Court is not a binding precedent that the taxpayer
need not wait for the 120-day period to lapse.
Any issue, whether raised or not by the parties, but not passed upon by the
Court, does not have any value as precedent. As this Court has explained as
early as 1926:
It is contended, however, that the question before us was answered and resolved
against the contention of the appellant in the case of Bautista vs. Fajardo (38 Phil.
624). In that case no question was raised nor was it even suggested that said
section 216 did not apply to a public officer. That question was not discussed nor
referred to by any of the parties interested in that case. It has been frequently
decided that the fact that a statute has been accepted as valid, and invoked and
applied for many years in cases where its validity was not raised or passed on,
does not prevent a court from later passing on its validity, where that question is
squarely and properly raised and presented. Where a question passes the
Court sub silentio, the case in which the question was so passed is not
binding on the Court (McGirr vs. Hamilton and Abreu, 30 Phil. 563), nor
should it be considered as a precedent. (U.S. vs. Noriega and Tobias, 31 Phil.
310; Chicote vs. Acasio, 31 Phil. 401; U.S. vs. More, 3 Cranch [U.S.] 159,
172; U.S. vs. Sanges, 144 U.S. 310, 319; Cross vs. Burke, 146 U.S. 82.) For the
reasons given in the case of McGirr vs. Hamilton and Abreu, supra, the decision in
the case of Bautista vs. Fajardo, supra, can have no binding force in the
interpretation of the question presented here.76 (Emphasis supplied)
In Cebu Toyo, the nature of the 120-day period, whether it is mandatory or
optional, was not even raised as an issue by any of the parties. The Court never
passed upon this issue. Thus, Cebu Toyo does not constitute binding precedent
on the nature of the 120-day period.
There is also the claim that there are numerous CTA decisions allegedly
supporting the argument that the filing dates of the administrative and judicial
claims are inconsequential, as long as they are within the two-year prescriptive
period. Suffice it to state that CTA decisions do not constitute precedents, and do
122
not bind this Court or the public. That is why CTA decisions are appealable to this
Court, which may affirm, reverse or modify the CTA decisions as the facts and the
law may warrant. Only decisions of this Court constitute binding precedents,
forming part of the Philippine legal system.77 As held by this Court in The
Philippine Veterans Affairs Office v. Segundo:78
x x x Let it be admonished that decisions of the Supreme Court "applying or
interpreting the laws or the Constitution . . . form part of the legal system of the
Philippines," and, as it were, "laws" by their own right because they interpret what
the laws say or mean. Unlike rulings of the lower courts, which bind the
parties to specific cases alone, our judgments are universal in their scope
and application, and equally mandatory in character. Let it be warned that to
defy our decisions is to court contempt. (Emphasis supplied)
The same basic doctrine was reiterated by this Court in De Mesa v. Pepsi Cola
Products Phils., Inc.:79
The principle of stare decisis et non quieta movere is entrenched in Article 8 of the
Civil Code, to wit:
ART. 8. Judicial decisions applying or interpreting the laws or the Constitution shall
form a part of the legal system of the Philippines.
It enjoins adherence to judicial precedents. It requires our courts to follow a rule
already established in a final decision of the Supreme Court. That decision
becomes a judicial precedent to be followed in subsequent cases by all courts in
the land. The doctrine of stare decisis is based on the principle that once a
question of law has been examined and decided, it should be deemed settled and
closed to further argument. (Emphasis supplied)
VIII. Revenue Regulations No. 7-95 Effective 1 January 1996
Section 4.106-2(c) of Revenue Regulations No. 7-95, by its own express terms,
applies only if the taxpayer files the judicial claim "after" the lapse of the 60-day
period, a period with which San Roque failed to comply. Under Section 4.106-
2(c), the 60-day period is still mandatory and jurisdictional.
Moreover, it is a hornbook principle that a prior administrative regulation
can never prevail over a later contrary law, more so in this case where the later
law was enacted precisely to amend the prior administrative regulation and the law
it implements.
 TAXATION - VALUE ADDED TAX
The laws and regulation involved are as follows:
1977 Tax Code, as amended by Republic Act No. 7716 (1994)
Sec. 106. Refunds or tax credits of creditable input tax. —
(a) x x x x
(d) Period within which refund or tax credit of input tax shall be made - In
proper cases, the Commissioner shall grant a refund or issue the tax credit
for creditable input taxes within sixty (60) days from the date of
submission of complete documents in support of the application filed in
accordance with subparagraphs (a) and (b) hereof. In case of full or
partial denial of the claim for tax refund or tax credit, or the failure on the
part of the Commissioner to act on the application within the period
prescribed above, the taxpayer affected may, within thirty (30) days
from receipt of the decision denying the claim or after the expiration
of the sixty-day period, appeal the decision or the unacted claim with
the Court of Tax Appeals.
Revenue Regulations No. 7-95 (1996)
Section 4.106-2. Procedures for claiming refunds or tax credits of input tax — (a) x
xx
xxxx
(c) Period within which refund or tax credit of input taxes shall be made. — In
proper cases, the Commissioner shall grant a tax credit/refund for creditable input
taxes within sixty (60) days from the date of submission of complete documents in
support of the application filed in accordance with subparagraphs (a) and (b)
above.
In case of full or partial denial of the claim for tax credit/refund as decided by the
Commissioner of Internal Revenue, the taxpayer may appeal to the Court of Tax
Appeals within thirty (30) days from the receipt of said denial, otherwise the
decision will become final. However, if no action on the claim for tax
credit/refund has been taken by the Commissioner of Internal Revenue after
the sixty (60) day period from the date of submission of the application but
before the lapse of the two (2) year period from the date of filing of the VAT
123
return for the taxable quarter, the taxpayer may appeal to the Court of Tax
Appeals.
xxxx
1997 Tax Code
Section 112. Refunds or Tax Credits of Input Tax —
(A) x x x
xxxx
(D) Period within which Refund or Tax Credit of Input Taxes shall be made. — In
proper cases, the Commissioner shall grant the refund or issue the tax credit
certificate for creditable input taxes within one hundred twenty (120) days from
the date of submission of complete documents in support of the application filed in
accordance with Subsections (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the
failure on the part of the Commissioner to act on the application within the
period prescribed above, the taxpayer affected may, within thirty (30) days
from the receipt of the decision denying the claim or after the expiration of
the hundred twenty day-period, appeal the decision or the unacted claim
with the Court of Tax Appeals.
There can be no dispute that under Section 106(d) of the 1977 Tax Code, as
amended by RA 7716, the Commissioner has a 60-day period to act on the
administrative claim. This 60-day period is mandatory and jurisdictional.
Did Section 4.106-2(c) of Revenue Regulations No. 7-95 change this, so that the
60-day period is no longer mandatory and jurisdictional? The obvious answer is
no.
Section 4.106-2(c) itself expressly states that if, "after the sixty (60) day
period," the Commissioner fails to act on the administrative claim, the taxpayer
may file the judicial claim even "before the lapse of the two (2) year period." Thus,
under Section 4.106-2(c) the 60-day period is still mandatory and
jurisdictional.
 TAXATION - VALUE ADDED TAX
Section 4.106-2(c) did not change Section 106(d) as amended by RA 7716, but
merely implemented it, for two reasons. First, Section 4.106-2(c) still expressly
requires compliance with the 60-day period. This cannot be disputed.1âwphi1
Second, under the novel amendment introduced by RA 7716, mere inaction by
the Commissioner during the 60-day period is deemed a denial of the claim. Thus,
Section 4.106-2(c) states that "if no action on the claim for tax refund/credit has
been taken by the Commissioner after the sixty (60) day period," the taxpayer
"may" already file the judicial claim even long before the lapse of the two-year
prescriptive period. Prior to the amendment by RA 7716, the taxpayer had to wait
until the two-year prescriptive period was about to expire if the Commissioner did
not act on the claim.80 With the amendment by RA 7716, the taxpayer need not
wait until the two-year prescriptive period is about to expire before filing the judicial
claim because mere inaction by the Commissioner during the 60-day period is
deemed a denial of the claim. This is the meaning of the phrase "but before the
lapse of the two (2) year period" in Section 4.106-2(c). As Section 4.106- 2(c)
reiterates that the judicial claim can be filed only "after the sixty (60) day
period," this period remains mandatory and jurisdictional. Clearly, Section 4.106-
2(c) did not amend Section 106(d) but merely faithfully implemented it.
Even assuming, for the sake of argument, that Section 4.106-2(c) of Revenue
Regulations No. 7-95, an administrative issuance, amended Section 106(d) of the
Tax Code to make the period given to the Commissioner non-mandatory, still the
1997 Tax Code, a much later law, reinstated the original intent and provision of
Section 106(d) by extending the 60-day period to 120 days and re-adopting the
original wordings of Section 106(d). Thus, Section 4.106-2(c), a mere
administrative issuance, becomes inconsistent with Section 112(D), a later law.
Obviously, the later law prevails over a prior inconsistent administrative issuance.
Section 112(D) of the 1997 Tax Code is clear, unequivocal, and categorical that
the Commissioner has 120 days to act on an administrative claim. The taxpayer
can file the judicial claim (1) only within thirty days after the Commissioner
partially or fully denies the claim within the 120- day period, or (2) only within
thirty days from the expiration of the 120- day period if the Commissioner does
not act within the 120-day period.
There can be no dispute that upon effectivity of the 1997 Tax Code on 1 January
1998, or more than five years before San Roque filed its administrative claim
on 28 March 2003, the law has been clear: the 120- day period is mandatory and
jurisdictional. San Roque’s claim, having been filed administratively on 28 March
2003, is governed by the 1997 Tax Code, not the 1977 Tax Code. Since San
124
Roque filed its judicial claim before the expiration of the 120-day mandatory and
jurisdictional period, San Roque’s claim cannot prosper.
San Roque cannot also invoke Section 4.106-2(c), which expressly provides that
the taxpayer can only file the judicial claim "after" the lapse of the 60-day period
from the filing of the administrative claim. San Roque filed its judicial claim just
13 days after filing its administrative claim. To recall, San Roque filed its
judicial claim on 10 April 2003, a mere 13 days after it filed its administrative claim.
Even if, contrary to all principles of statutory construction as well as plain common
sense, we gratuitously apply now Section 4.106-2(c) of Revenue Regulations No.
7-95, still San Roque cannot recover any refund or credit because San Roque
did not wait for the 60-day period to lapse, contrary to the express
requirement in Section 4.106-2(c). In short, San Roque does not even comply
with Section 4.106-2(c). A claim for tax refund or credit is strictly construed against
the taxpayer, who must prove that his claim clearly complies with all the conditions
for granting the tax refund or credit. San Roque did not comply with the express
condition for such statutory grant.
A final word. Taxes are the lifeblood of the nation. The Philippines has been
struggling to improve its tax efficiency collection for the longest time with minimal
success. Consequently, the Philippines has suffered the economic adversities
arising from poor tax collections, forcing the government to continue borrowing to
fund the budget deficits. This Court cannot turn a blind eye to this economic
malaise by being unduly liberal to taxpayers who do not comply with statutory
requirements for tax refunds or credits. The tax refund claims in the present cases
are not a pittance. Many other companies stand to gain if this Court were to rule
otherwise. The dissenting opinions will turn on its head the well-settled doctrine
that tax refunds are strictly construed against the taxpayer.
WHEREFORE, the Court hereby (1) GRANTS the petition of the Commissioner of
Internal Revenue in G.R. No. 187485 to DENY the P483,797,599.65 tax refund or
credit claim of San Roque Power Corporation; (2) GRANTS the petition of
Taganito Mining Corporation in G.R. No. 196113 for a tax refund or credit of
P8,365,664.38; and (3) DENIES the petition of Philex Mining Corporation in G.R.
No. 197156 for a tax refund or credit of P23,956,732.44.
SO ORDERED.
G.R. No. 180173 April 6, 2011
 TAXATION - VALUE ADDED TAX
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
125
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 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
 TAXATION - VALUE ADDED TAX
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
xx
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
126
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
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;
 TAXATION - VALUE ADDED TAX
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 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
127
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.
G.R. No. 222428, February 19, 2018
COCA-COLA BOTTLERS PHILIPPINES, INC., Petitioner, v. COMMISSIONER
OF INTERNAL REVENUE, Respondent.
DECISION
PERALTA, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of
Court seeking to reverse and set aside the Resolution 1 dated January 14, 2016
and Decision2 dated August 12, 2015 of the Court of Tax Appeals (CTA) En
Banc in CTA EB No. 1111, which affirmed the Decision3 dated September 16,
2013 and Resolution4 dated December 4, 2013 of the CTA Division in CTA Case
No. 8099 denying petitioner's claim for refund or issuance of tax credit.
The antecedent facts are as follows:
On April 24, 2008, petitioner Coca-Cola Bottlers Philippines, Inc., a Value-Added
Tax (VAT)-registered, domestic corporation engaged in the business of
manufacturing and selling beverages, filed its Quarterly VAT Return for the period
of January 1, 2008 to March 31, 2008 and amended the same a few times
thereafter.5 On May 27, 2009, the Bureau of Internal Revenue (BIR) issued a
Letter of Authority to examine petitioner's books of accounts for all internal revenue
taxes for the period January 1, 2008 to December 31, 2008. Subsequently, on
April 20, 2010, petitioner filed with the BIR's Large Taxpayers Service an
administrative claim for refund or tax credit of its alleged over/erroneous payment
of VAT for the quarter ended March 31, 2008 in the total amount of
P123,459,647.70.6 Three (3) days thereafter, or on April 23, 2010, petitioner filed
with the CTA a judicial claim for refund or issuance of tax credit certificate
presenting its financial employees as witnesses in support of its case. According to
the witnesses, all of petitioner's records and documents, including invoices and
official receipts for the period January 1 to March 31, 2008 subject of the instant
 TAXATION - VALUE ADDED TAX
claim were completely destroyed. They were, however, able to determine
petitioner's input and output VAT through its computerized accounting system.7
In a Decision dated September 16, 2013 and Resolution dated December 4, 2013,
the CTA Division denied petitioner's claim for lack of merit.8 Subsequently, the
CTA En Banc affirmed the ruling of the CTA Division in its Decision dated August
12, 2015. According to the CTA En Banc, Section 110 (B)9 of the 1997 National
Internal Revenue Code (NIRC), as amended, is clear that when input tax exceeds
the output tax, the excess shall be carried over to the succeeding quarters. But
when input tax, attributable to zero-rated sales, exceeds the output tax, it may be
refunded or credited.10 Section 11211 is also categorical that there are only two (2)
instances when excess input taxes may be claimed for refund and/or issuance of
tax credit certificate: (1) when the claimant is a VAT-registered person, whose
sales are zero-rated or effectively zero-rated under Section 112(A); and (2) when
the VAT registration of the claimant has been cancelled due to retirement from or
cessation of business, or due to changes in or cessation of status under Section
112(B). But since the amount sought to be credited or refunded in the instant case
essentially represents undeclared input taxes for the first quarter of 2008, and not
erroneously paid VAT or understatement of VAT overpayment, then it does not fall
under the instances enumerated in Section 112 which pertain to excess taxes
only.12
In addition, the CTA En Banc also cited jurisprudence which provide that Sections
204(C)13 and 22914 of the NIRC similarly apply only to instances of erroneous
payment or illegal collection of internal revenue taxes. In claims for refund or credit
of excess input VAT under Sections 110(B) and 112 (A), the input VAT is not
"excessively" collected as understood under Section 229. The term "excess" input
VAT simply means that the input VAT available as credit exceeds the output VAT,
not that the input VAT is excessively collected because it is more than what is
legally due.15 Section 229, therefore, is inapplicable to the instant claim for refund
or credit.
The CTA En Banc further held that for input taxes to be available as tax credits,
they must be substantiated and reported in the VAT Return of the
taxpayer.16 Petitioner, being well-aware of the law allowing the amendment of a
VAT Return within three (3) years from its filing provided that an LOA has not yet
been served on the taxpayer, was not prompt enough to include the alleged
omitted input VAT in this case.17 Moreover, even if the substantiated input taxes
were declared in the VAT Return for the first (1st) quarter of 2008, the same would
still be not enough to offset petitioner's output tax liabilities for the same period
leaving no balance that may be refunded.18
128
When the CTA En Banc denied its Motion for Reconsideration in a Resolution
dated January 14, 2016, petitioner filed the instant petition invoking the following
arguments:
I.
THE CTA EN BANC GRAVELY ERRED IN RULING THAT PETITIONER'S CLAIM
FOR REFUND/TAX CREDIT DOES NOT FALL WITHIN THE PURVIEW OF
SECTION 229 OF THE NIRC OF 1997, AS AMENDED, IN RELATION TO
SECTION 204(C) OF THE SAME CODE.
II.
THE CTA EN BANC GRAVELY ERRED IN RULING THAT THE UNDECLARED
INPUT VAT IN THE AMOUNT OF P123,459,674.70 FOR THE QUARTER ENDED
MARCH 31, 2008 IS REQUIRED TO BE REPORTED IN THE QUARTERLY VAT
RETURN AS A REQUISITE FOR PETITIONER'S CLAIM FOR REFUND OF TAX
UNDER SECTION 229 OF THE NIRC OF 1997, AS AMENDED, IN RELATION
TO SECTION 204(C) OF THE SAME CODE.
III.
THE CTA EN BANC GRAVELY ERRED IN FAILING TO CONSIDER THAT
PETITIONER'S CLAIM FOR REFUND SHALL NOT BE CONSTRUED
IN STRICTISSIMI JURIS AGAINST THE PETITIONER.
IV.
THE CTA EN BANC GRAVELY ERRED IN FAILING TO CONSIDER THAT THE
OMITTED INPUT VAT IN THE AMOUNT OF P123,459,674.70 MAY BE
INCLUDED IN THE CURRENT AND AVAILABLE INPUT VAT OF THE
PETITIONER FOR THE QUARTER ENDED MARCH 31, 2008 IN ORDER TO
PREVENT UNJUST ENRICHMENT OF THE GOVERNMENT TO THE
DETRIMENT OF HEREIN PETITIONER.
Petitioner posits that its claim for refund/tax credit is hinged not on the basis of
"excess" input tax per se but on the basis of the inadvertence of applying the
undeclared input tax against the output VAT. It asserts that through relevant
evidence, it has substantially proven that due to its employees' inadvertence, the
input tax amounting to P123,459,674.70 was not credited against the
corresponding output tax during the quarter. Thus, by virtue of Section 229 of the
 TAXATION - VALUE ADDED TAX
1997 NIRC, petitioner may claim for refund/tax credit of its erroneous payment of
output VAT due to its failure to apply the P123,459,674.70 input VAT in the
computation of its excess allowable input VAT.19
Petitioner also avers that since it is already barred from amending its VAT Return
due to the fact that the BIR had already issued an LOA, it is left with no other
recourse but to apply for a claim for refund for the undeclared input VAT, still,
under Section 229. But contrary to the CTA En Banc, its claim for refund or
issuance of tax credit under Sections 229 and 204(C) of the NIRC only requires
that the same be in writing and filed with the Commissioner within two (2) years
after the payment of tax or penalty, and that the claim must categorically demand
for reimbursement and show proof of payment of the tax.20 Nowhere is it provided
in said provisions a mandatory requirement that a VAT Return must show the
undeclared input tax in order to claim a refund.21 In support of its assertion,
petitioner cites the ruling in Fort Bonifacio Development Corporation v. CIR22 which
adopts the principle that input taxes not reported in the VAT Return may still be
credited against output tax due for as long as the same were properly
substantiated.23
Furthermore, petitioner maintains that its claim for refund, being based on
erroneous payment of output VAT, should not be construed against it and, in fact,
necessitates only a preponderance of evidence for its approbation like any other
ordinary civil case.24 In the end, it is only just and proper to allow petitioner's claim
for refund so as not to violate the principle of unjust enrichment as enshrined in our
laws.25
The petition is devoid of merit.
Petitioner, in advancing its claim for refund or tax credit, cannot rely on Section
229 of the 1997 NIRC, as amended. Time and again, the Court had consistently
ruled on the inapplicability of Section 229 to claims for the recovery of unutilized
input VAT.26 In Commissioner of Internal Revenue v. San Roque Power
Corporation (San Roque),27 the Court explained that input VAT is not "excessively"
collected as understood under Section 229 because at the time the input VAT is
collected, the amount paid is correct and proper. If said input VAT is in fact
"excessively" collected as understood under Section 229, then it is the person
legally liable to pay the input VAT, and not the person to whom the tax is passed
on and who is applying the input VAT as credit for his own output VAT, who can
file the judicial claim for refund or credit outside the VAT system. The Court, in San
Roque, explained as follows:
III. "Excess" Input VAT and "Excessively" Collected Tax
129
The input VAT is not "excessively" collected as understood under Section
229 because at the time the input VAT is collected the amount paid is correct
and proper. The input VAT is a tax liability of, and legally paid by, a VAT-
registered seller of goods, properties or services used as input by another VAT-
registered person in the sale of his own goods, properties, or services. This tax
liability is true even if the seller passes on the input VAT to the buyer as part of the
purchase price. The second VAT-registered person, who is not legally liable for the
input VAT, is the one who applies the input VAT as credit for his own output
VAT. If the input VAT is in fact "excessively" collected as understood under
Section 229, then it is the first VAT-registered person - the taxpayer who is
legally liable and who is deemed to have legally paid for the input VAT - who
can ask for a tax refund or credit under Section 229 as an ordinary refund or
credit outside of the VAT System. In such event, the second VAT-registered
taxpayer will have no input VAT to offset against his own output VAT.
In a claim for refund or credit of "excess" input VAT under Section 110(B) and
Section 112(A), the input VAT is not "excessively" collected as understood under
Section 229. At the time of payment of the input VAT the amount paid is the
correct and proper amount. Under the VAT System, there is no claim or issue
that the input VAT is "excessively" collected, that is, that the input VAT paid
is more than what is legally due. The person legally liable for the input VAT
cannot claim that he overpaid the input VAT by the mere existence of an "excess"
input VAT. The term "excess" input VAT simply means that the input VAT available
as credit exceeds the output VAT, not that the input VAT is excessively collected
because it is more than what is legally due. Thus, the taxpayer who legally paid
the input VAT cannot claim for refund or credit of the input VAT as
"excessively" collected under Section 229.
xxxx
x x x Only the person legally liable to pay the tax can file the judicial claim
for refund. The person to whom the tax is passed on as part of the purchase
price has no personality to file the judicial claim under Section 229.
xxxx
Any suggestion that the "excess" input VAT under the VAT System is an
"excessively" collected tax under Section 229 may lead taxpayers to file a
claim for refund or credit for such "excess" input VAT under Section 229 as
an ordinary tax refund or credit outside of the VAT System. Under Section
229, mere payment of a tax beyond what is legally due can be claimed as a refund
or credit. There is no requirement under Section 229 for an output VAT or
 TAXATION - VALUE ADDED TAX
subsequent sale of goods, properties, or services using materials subject to input
VAT.
From the plain text of Section 229, it is clear that what can be refunded or
credited is a tax that is "erroneously, xxx illegally, xxx excessively or in any
manner wrongfully collected." In short, there must be a wrongful payment
because what is paid, or part of it, is not legally due. As the Court held
in Mirant, Section 229 should "apply only to instances of erroneous payment
or illegal collection of internal revenue taxes." Erroneous or wrongful payment
includes excessive payment because they all refer to payment of taxes not
legally due. Under the VAT System, there is no claim or issue that the
"excess" input VAT is "excessively or in any manner wrongfully collected."
In fact, if the "excess" input VAT is an "excessively" collected tax under
Section 229, then the taxpayer claiming to apply such "excessively"
collected input VAT to offset his output VAT may have no legal basis to
make such offsetting. The person legally liable to pay the input VAT can
claim a refund or credit for such "excessively" collected tax, and thus there
will no longer be any "excess" input VAT. This will upend the present VAT
System as we know it.28
Thus, the CTA En Banc and CTA Division are correct in holding that, based on the
San Roque doctrine above, Section 229 of the 1997 NIRC is inapplicable to the
instant claim for refund or issuance of tax credit. In addition, neither can petitioner
advance its claim for refund or tax credit under Sections 110 (B) and 112 (A) of the
1997 NIRC. For clarity and reference, said Sections are reproduced below:
SEC. 110. Tax Credits.-
xxxx
(B) Excess Output or Input Tax. - If at the end of any taxable quarter the output tax
exceeds the input tax, the excess shall be paid by the Vat-registered person. If the
input tax exceeds the output tax, the excess shall be carried over to the
succeeding quarter or quarters. Provided, however, That any input tax
attributable to zero-rated sales by a VAT-registered person may at his option
be refunded or credited against other internal revenue taxes, subject to the
provisions of Section 112.
xxxx
SEC. 112. Refunds or Tax Credits of Input Tax. -
130
(A) Zero-rated or Effectively Zero-rated Sales. - Any VAT-registered person,
whose sales are zero-rated or effectively zero-rated may, within two (2) years
after the close of the taxable quarter when the sales were made, apply for the
issuance of a tax credit certificate or refund of creditable input tax due or
paid attributable to such sales, except transitional input tax, to the extent that
such input tax has not been applied against output tax: Provided, however,
That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (b) and
Section 108 (B)(1) and (2), the acceptable foreign currency exchange proceeds
thereof had been duly accounted for in accordance with the rules and regulations
of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the
taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable
or exempt sale of goods of properties or services, and the amount of creditable
input tax due or paid cannot be directly and entirely attributed to any one of the
transactions, it shall be allocated proportionately on the basis of the volume of
sales. Provided, finally, That for a person making sales that are zero-rated under
Section 108(B) (6), the input taxes shall be allocated rateably between his zero-
rated and non-zero-rated sales.29
A plain and simple reading of the aforequoted provisions reveals that if and when
the input tax exceeds the output tax, the excess shall be carried over to the
succeeding quarter or quarters. It is only when the sales of a VAT-registered
person are zero-rated or effectively zero-rated that he may have the option of
applying for the issuance of a tax credit certificate or refund of creditable input tax
due or paid attributable to such sales. Such is the clear import of the Court's ruling
in San Roque, to wit:
Under Section 110(B), a taxpayer can apply his input VAT only against his
output VAT. The only exception is when the taxpayer is expressly "zero-rated
or effectively zero-rated" under the law, like companies generating power
through renewable sources of energy. Thus, a non zero-rated VAT-registered
taxpayer who has no output VAT because he has no sales cannot claim a tax
refund or credit of his unused input VAT under the VAT System. Even if the
taxpayer has sales but his input VAT exceeds his output VAT, he cannot
seek a tax refund or credit of his "excess" input VAT under the VAT System.
He can only carry-over and apply his "excess" input VAT against his future
output VAT. If such "excess" input VAT is an "excessively" collected tax, the
taxpayer should be able to seek a refund or credit for such "excess" input
VAT whether or not he has output VAT. The VAT System does not allow such
refund or credit. Such "excess" input VAT is not an "excessively" collected tax
under Section 229. The "excess" input VAT is a correctly and properly collected
tax. However, such "excess" input VAT can be applied against the output VAT
because the VAT is a tax imposed only on the value added by the taxpayer. If the
 TAXATION - VALUE ADDED TAX
input VAT is in fact "excessively" collected under Section 229, then it is the person
legally liable to pay the input VAT, not the person to whom the tax was passed on
as part of the purchase price and claiming credit for the input VAT under the VAT
System, who can file the judicial claim under Section 229.30
It is clear, based on the foregoing, that neither the law nor jurisprudence authorize
petitioner's claim for refund or issuance of tax credit. In asserting its alleged right to
said claim, petitioner unfortunately failed to convince the Court that it is entitled to
the refund or credit of input VAT in the amount of P123,459,647.70 it inadvertently
failed to include in its VAT Return. This is because as shown above, petitioner's
claim is not governed by Section 229 as an ordinary refund or credit outside of the
VAT System as the same does not involve a tax that is "erroneously, illegally,
excessively, or in any manner wrongfully collected." Neither is said claim
authorized under Sections 110(B) and 112(A) as the same does not seek to refund
or credit input tax due or paid attributable to zero-rated or effectively zero-rated
sales.
On this score, the Court notes that when the law is clear and free from any doubt
or ambiguity, there is no room for construction or interpretation; there is only room
for application.31 Only when the law is ambiguous or of doubtful meaning may the
court interpret or construe its true intent. Ambiguity is a condition of admitting two
or more meanings, of being understood in more than one way, or of referring to
two or more things at the same time. A statute is ambiguous if it is admissible of
two or more possible meanings, in which case, the Court is called upon to exercise
one of its judicial functions, which is to interpret the law according to its true
intent.32 It is the first and fundamental duty of the Court to apply the law in such a
way that in the course of such application or construction, it should not make or
supervise legislation, or under the guise of interpretation, modify, revise, amend,
distort, remodel, or rewrite the law, or give the law a construction which is
repugnant to its terms.33 The Court should apply the law in a manner that would
give effect to their letter and spirit, especially when the law is clear as to its intent
and purpose.34
Even assuming, for argument's sake, that petitioner's application for refund or
issuance of tax credit is permitted under case law as well as the provisions of the
tax code, said claim must nonetheless fail in view of petitioner's failure to properly
substantiate the same. Because of said failure, moreover, the issue of whether
input taxes must first be reported in a taxpayer's VAT Return before they can be
refunded or credited becomes irrelevant to petitioner's plight. As petitioner itself
asserted, input taxes not reported in the VAT Return may still be credited against
output tax due for as long as the same were properly substantiated. But as duly
found by both the CTA En Banc and CTA Division, the substantiated amount is not
131
even enough to offset petitioner's output tax liabilities leaving no balance that may
be refunded. In this regard, the CTA En Banc held:
In this case, only P48,509,474.01 was properly supported by official receipts
(ORs) out of the claimed P123,459,647.70. The said amount was also recorded
in petitioner's books of accounts but was not reported in its VAT Return due to
alleged inadvertence. In the assailed Decision, the CTA Division made a
pronouncement that even if the substantiated input taxes were declared in the
VAT Return for the First (1st) Quarter of 2008, still it would not be enough to
offset the output taxes payable for the same taxable period. Pertinent portions
of the assailed Decision are reiterated with approval, as follows:
Petitioner's Quarterly VAT Return for the first quarter of 2008 shows the following
output taxes due in the amount of P1,269,933,934.95. Had Petitioner declared
the substantiated input taxes of P48,509,474.01 in its Quarterly VAT Return
for the first quarter of 2008, considering its output taxes and substantiated
input taxes for the first quarter of 2008 per ICPA examination, it would not
have had enough input taxes to offset against its output taxes for the same
taxable periods.
xxxx
In this case, We emphasize that "the substantiated amount is not even enough
to offset petitioner's output tax liabilities for the same period leaving no
balance that may be refunded." Consequently, petitioner's claim for its alleged
understatement of overpayment of VAT (excess input taxes) due to undeclared
input taxes for the first quarter of 2008 is denied. 35
In fact, such was the conclusion likewise reached by CTA Justice Roman G. Del
Rosario, in his separate concurring opinion often cited by petitioner, which stated
that as found by the Independent CPA and the Court in Division, petitioner's
substantiated input VAT is not enough to offset its output VAT liability. Considering
that petitioner did not pay any VAT for the 1st quarter of 2008, it did not overpay its
taxes due for the 1st quarter of 2008. Thus, there is no basis for petitioner to ask for
refund of erroneously paid output VAT.36
It bears stressing that the Court accords findings and conclusions of the CTA with
the highest respect.37 As a specialized court dedicated exclusively to the resolution
of tax problems, the CTA has accordingly developed an expertise on the subject of
taxation. Thus, its decisions are presumed valid in every aspect and will not be
overturned on appeal, unless the Court finds that the questioned decision is not
supported by substantial evidence or there has been an abuse or improvident
 TAXATION - VALUE ADDED TAX

exercise of authority on the part of the tax court.38 Upon careful review of the
instant case, the Court finds no cogent reason to reverse or modify the findings of
the CTA Division, as affirmed by the CTA En Banc.

Petitioner's assertion, therefore, in its petition, that its claim deserves a greater
weight of evidence for the same necessitates only a preponderance of evidence
must certainly fail. It cannot be allowed, at this stage of the proceedings, to seek a
review by the Court of the factual findings of the CTA Division, as affirmed by the
CTA En Banc, as well as a re-examination of the evidence it presented, taking into
account the quantum of proof required in the instant case. Settled is the rule that
this Court is not a trier of facts and does not normally embark in the evaluation of
evidence adduced during trial.39 It is not this Court's function to analyze or weigh
all over again the evidence already considered in the proceedings below. 40 In a
petition for review on certiorari under Rule 45 of the Rules of Court, moreover, only
questions of law may be raised, the Court's jurisdiction being limited to reviewing
only errors of law that may have been committed by the lower court.41 Thus, the
Court shall not undertake the re-examination of the evidence presented by
petitioner especially since the findings of facts of the CTA Division are affirmed by
the CTA En Banc.

On a final note, the Court reiterates its consistent ruling that actions for tax refund
or credit, as in the instant case, are in the nature of a claim for exemption and the
law is not only construed in strictissimi juris against the taxpayer, but also the
pieces of evidence presented entitling a taxpayer to an exemption
is strictissimi scrutinized and must be duly proven.42 The burden is on the taxpayer
to show that he has strictly complied with the conditions for the grant of the tax
refund or credit.43 Since taxes are the lifeblood of the government, tax laws must
be faithfully and strictly implemented as they are not intended to be liberally
construed.44 Thus, in view of petitioner's failure to prove, to the satisfaction of the
Court, its entitlement to the grant of tax refund or issuance of tax credit of input
VAT in the amount of P123,459,647.70 it inadvertently failed to include in its VAT
Return, the Court deems it necessary to deny the same.

WHEREFORE, premises considered, the instant petition is DENIED. The assailed

Resolution dated January 14, 2016 and Decision dated August 12, 2015 of the
Court of Tax Appeals En Banc in CTA EB No. 1111, which affirmed the Decision
dated September 16, 2013 and Resolution dated December 4, 2013 of the CTA
Division denying petitioner's claim for refund or issuance of tax credit,
are AFFIRMED.

SO ORDERED.

132