G.R. No. 115455 October 30, 1995 G.R. No.

115781 October 30, 1995

ARTURO M. TOLENTINO, petitioner,  KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS, ERME

vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF
INTERNAL REVENUE, respondents.
G.R. No. 115525 October 30, 1995
JUAN T. DAVID, petitioner,  COALITION, INC., and PHILIPPINE BIBLE SOCIETY, INC. and
vs.
TEOFISTO T. GUINGONA, JR., as Executive Secretary; ROBERTO
DE OCAMPO, as Secretary of Finance; LIWAYWAY VINZONS-
CHATO, as Commissioner of Internal Revenue; and their
AUTHORIZED AGENTS OR REPRESENTATIVES, respondents.
CAMBA, EMILIO C. CAPULONG, JR., JOSE T. APOLO, EPHRAIM
TENDERO, FERNANDO SANTIAGO, JOSE ABCEDE, CHRISTINE
TAN, FELIPE L. GOZON, RAFAEL G. FERNANDO, RAOUL V.
VICTORINO, JOSE CUNANAN, QUINTIN S. DOROMAL, MOVEMENT
OF ATTORNEYS FOR BROTHERHOOD, INTEGRITY AND
NATIONALISM, INC. ("MABINI"), FREEDOM FROM DEBT
WIGBERTO TAÑADA, petitioners, 
vs.
THE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE
COMMISSIONER OF INTERNAL REVENUE and THE
COMMISSIONER OF CUSTOMS, respondents.

G.R. No. 115543 October 30, 1995 G.R. No. 115852 October 30, 1995

RAUL S. ROCO and the INTEGRATED BAR OF THE PHILIPPINE AIRLINES, INC., petitioner, 
PHILIPPINES, petitioners,  vs.
vs. THE SECRETARY OF FINANCE and COMMISSIONER OF INTERNAL
THE SECRETARY OF THE DEPARTMENT OF FINANCE; THE REVENUE, respondents.
COMMISSIONERS OF THE BUREAU OF INTERNAL REVENUE AND
BUREAU OF CUSTOMS, respondents. G.R. No. 115873 October 30, 1995

G.R. No. 115544 October 30, 1995 COOPERATIVE UNION OF THE PHILIPPINES, petitioner, 
vs.
PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.; HON. LIWAYWAY V. CHATO, in her capacity as the Commissioner of
KAMAHALAN PUBLISHING CORPORATION; PHILIPPINE Internal Revenue, HON. TEOFISTO T. GUINGONA, JR., in his
JOURNALISTS, INC.; JOSE L. PAVIA; and OFELIA L. capacity as Executive Secretary, and HON. ROBERTO B. DE
DIMALANTA, petitioners,  OCAMPO, in his capacity as Secretary of Finance, respondents.
vs.
HON. LIWAYWAY V. CHATO, in her capacity as Commissioner of G.R. No. 115931 October 30, 1995
Internal Revenue; HON. TEOFISTO T. GUINGONA, JR., in his
capacity as Executive Secretary; and HON. ROBERTO B. DE PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC. and
OCAMPO, in his capacity as Secretary of Finance, respondents. ASSOCIATION OF PHILIPPINE BOOK SELLERS, petitioners, 
vs.
G.R. No. 115754 October 30, 1995 HON. ROBERTO B. DE OCAMPO, as the Secretary of Finance; HON.
LIWAYWAY V. CHATO, as the Commissioner of Internal Revenue;
CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC., and HON. GUILLERMO PARAYNO, JR., in his capacity as the
(CREBA), petitioner,  Commissioner of Customs, respondents.
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent. RESOLUTION

MENDOZA, J.:
These are motions seeking reconsideration of our decision dismissing the
petitions filed in these cases for the declaration of unconstitutionality of
R.A. No. 7716, otherwise known as the Expanded Value-Added Tax Law.
The motions, of which there are 10 in all, have been filed by the several
petitioners in these cases, with the exception of the Philippine
Educational Publishers Association, Inc. and the Association of Philippine
Booksellers, petitioners in G.R. No. 115931.
The Solicitor General, representing the respondents, filed a consolidated
comment, to which the Philippine Airlines, Inc., petitioner in G.R. No.
115852, and the Philippine Press Institute, Inc., petitioner in G.R. No.
115544, and Juan T. David, petitioner in G.R. No. 115525, each filed a
reply. In turn the Solicitor General filed on June 1, 1995 a rejoinder to the
PPI's reply.
On June 27, 1995 the matter was submitted for resolution.
I. Power of the Senate to propose amendments to revenue bills. Some of
the petitioners (Tolentino, Kilosbayan, Inc., Philippine Airlines (PAL),
Roco, and Chamber of Real Estate and Builders Association (CREBA))
reiterate previous claims made by them that R.A. No. 7716 did not
"originate exclusively" in the House of Representatives as required by
Art. VI, §24 of the Constitution. Although they admit that H. No. 11197
was filed in the House of Representatives where it passed three readings
and that afterward it was sent to the Senate where after first reading it
was referred to the Senate Ways and Means Committee, they complain
that the Senate did not pass it on second and third readings. Instead
what the Senate did was to pass its own version (S. No. 1630) which it
approved on May 24, 1994. Petitioner Tolentino adds that what the
Senate committee should have done was to amend H. No. 11197 by
striking out the text of the bill and substituting it with the text of S. No.
1630. That way, it is said, "the bill remains a House bill and the Senate
version just becomes the text (only the text) of the House bill."
The contention has no merit.
The enactment of S. No. 1630 is not the only instance in which the
Senate proposed an amendment to a House revenue bill by enacting its
own version of a revenue bill. On at least two occasions during the Eighth
Congress, the Senate passed its own version of revenue bills, which, in
consolidation with House bills earlier passed, became the enrolled bills.
These were:
R.A. No. 7369 (AN ACT TO AMEND THE OMNIBUS INVESTMENTS
CODE OF 1987 BY EXTENDING FROM FIVE (5) YEARS TO TEN
YEARS THE PERIOD FOR TAX AND DUTY EXEMPTION AND TAX
CREDIT ON CAPITAL EQUIPMENT) which was approved by the
President on April 10, 1992. This Act is actually a consolidation of H. No.
34254, which was approved by the House on January 29, 1992, and S.
No. 1920, which was approved by the Senate on February 3, 1992.
R.A. No. 7549 (AN ACT GRANTING TAX EXEMPTIONS TO WHOEVER
SHALL GIVE REWARD TO ANY FILIPINO ATHLETE WINNING A
MEDAL IN OLYMPIC GAMES) which was approved by the President on
May 22, 1992. This Act is a consolidation of H. No. 22232, which was
approved by the House of Representatives on August 2, 1989, and S.
No. 807, which was approved by the Senate on October 21, 1991.
On the other hand, the Ninth Congress passed revenue laws which were
also the result of the consolidation of House and Senate bills. These are
the following, with indications of the dates on which the laws were
approved by the President and dates the separate bills of the two
chambers of Congress were respectively passed:
1. R.A. NO. 7642
AN ACT INCREASING THE PENALTIES FOR TAX
EVASION, AMENDING FOR THIS PURPOSE THE
PERTINENT SECTIONS OF THE NATIONAL INTERNAL
REVENUE CODE (December 28, 1992).
House Bill No. 2165, October 5, 1992
Senate Bill No. 32, December 7, 1992
2. R.A. NO. 7643
AN ACT TO EMPOWER THE COMMISSIONER OF
INTERNAL REVENUE TO REQUIRE THE PAYMENT OF
THE VALUE-ADDED TAX EVERY MONTH AND TO
ALLOW LOCAL GOVERNMENT UNITS TO SHARE IN
VAT REVENUE, AMENDING FOR THIS PURPOSE
CERTAIN SECTIONS OF THE NATIONAL INTERNAL
REVENUE CODE (December 28, 1992)
House Bill No. 1503, September 3, 1992
Senate Bill No. 968, December 7, 1992
3. R.A. NO. 7646
AN ACT AUTHORIZING THE COMMISSIONER OF
INTERNAL REVENUE TO PRESCRIBE THE PLACE
FOR PAYMENT OF INTERNAL REVENUE TAXES BY
LARGE TAXPAYERS, AMENDING FOR THIS
PURPOSE CERTAIN PROVISIONS OF THE NATIONAL
INTERNAL REVENUE CODE, AS AMENDED (February
24, 1993)
House Bill No. 1470, October 20, 1992
Senate Bill No. 35, November 19, 1992
4. R.A. NO. 7649
AN ACT REQUIRING THE GOVERNMENT OR ANY OF
ITS POLITICAL SUBDIVISIONS, INSTRUMENTALITIES
OR AGENCIES INCLUDING GOVERNMENT-OWNED
OR CONTROLLED CORPORATIONS (GOCCS) TO
DEDUCT AND WITHHOLD THE VALUE-ADDED TAX
DUE AT THE RATE OF THREE PERCENT (3%) ON
GROSS PAYMENT FOR THE PURCHASE OF GOODS
AND SIX PERCENT (6%) ON GROSS RECEIPTS FOR
SERVICES RENDERED BY CONTRACTORS (April 6,
1993)
House Bill No. 5260, January 26, 1993
Senate Bill No. 1141, March 30, 1993
5. R.A. NO. 7656
AN ACT REQUIRING GOVERNMENT-OWNED OR
CONTROLLED CORPORATIONS TO DECLARE
DIVIDENDS UNDER CERTAIN CONDITIONS TO THE
NATIONAL GOVERNMENT, AND FOR OTHER
PURPOSES (November 9, 1993)
House Bill No. 11024, November 3, 1993
Senate Bill No. 1168, November 3, 1993
6. R.A. NO. 7660
AN ACT RATIONALIZING FURTHER THE STRUCTURE
AND ADMINISTRATION OF THE DOCUMENTARY
STAMP TAX, AMENDING FOR THE PURPOSE
CERTAIN PROVISIONS OF THE NATIONAL INTERNAL
REVENUE CODE, AS AMENDED, ALLOCATING
FUNDS FOR SPECIFIC PROGRAMS, AND FOR OTHER
PURPOSES (December 23, 1993)
House Bill No. 7789, May 31, 1993
Senate Bill No. 1330, November 18, 1993
7. R.A. NO. 7717
AN ACT IMPOSING A TAX ON THE SALE, BARTER OR
EXCHANGE OF SHARES OF STOCK LISTED AND
TRADED THROUGH THE LOCAL STOCK EXCHANGE
OR THROUGH INITIAL PUBLIC OFFERING,
AMENDING FOR THE PURPOSE THE NATIONAL
INTERNAL REVENUE CODE, AS AMENDED, BY
INSERTING A NEW SECTION AND REPEALING
CERTAIN SUBSECTIONS THEREOF (May 5, 1994)
House Bill No. 9187, November 3, 1993
Senate Bill No. 1127, March 23, 1994
Thus, the enactment of S. No. 1630 is not the only instance in which the
Senate, in the exercise of its power to propose amendments to bills
required to originate in the House, passed its own version of a House
revenue measure. It is noteworthy that, in the particular case of S. No.
1630, petitioners Tolentino and Roco, as members of the Senate, voted
to approve it on second and third readings.
On the other hand, amendment by substitution, in the manner urged by
petitioner Tolentino, concerns a mere matter of form. Petitioner has not
shown what substantial difference it would make if, as the Senate
actually did in this case, a separate bill like S. No. 1630 is instead
enacted as a substitute measure, "taking into
Consideration . . . H.B. 11197."
Indeed, so far as pertinent, the Rules of the Senate only provide:
RULE XXIX
AMENDMENTS
xxx xxx xxx
§68. Not more than one amendment to the original
amendment shall be considered.
No amendment by substitution shall be entertained
unless the text thereof is submitted in writing.
Any of said amendments may be withdrawn before a vote
is taken thereon.
§69. No amendment which seeks the inclusion of a
legislative provision foreign to the subject matter of a bill
(rider) shall be entertained.
xxx xxx xxx
§70-A. A bill or resolution shall not be amended by
substituting it with another which covers a subject distinct
from that proposed in the original bill or resolution.
(emphasis added).
Nor is there merit in petitioners' contention that, with regard to revenue
bills, the Philippine Senate possesses less power than the U.S. Senate
because of textual differences between constitutional provisions giving
them the power to propose or concur with amendments.
Art. I, §7, cl. 1 of the U.S. Constitution reads:
All Bills for raising Revenue shall originate in the House of
Representatives; but the Senate may propose or concur
with amendments as on other Bills.
Art. VI, §24 of our Constitution reads:
All appropriation, revenue or tariff bills, bills authorizing
increase of the public debt, bills of local application, and
private bills shall originate exclusively in the House of
Representatives, but the Senate may propose or concur
with amendments.
The addition of the word "exclusively" in the Philippine Constitution and
the decision to drop the phrase "as on other Bills" in the American
version, according to petitioners, shows the intention of the framers of our
Constitution to restrict the Senate's power to propose amendments to
revenue bills. Petitioner Tolentino contends that the word "exclusively"
was inserted to modify "originate" and "the words 'as in any other bills'
(sic) were eliminated so as to show that these bills were not to be like
other bills but must be treated as a special kind."
The history of this provision does not support this contention. The
supposed indicia of constitutional intent are nothing but the relics of an
unsuccessful attempt to limit the power of the Senate. It will be recalled
that the 1935 Constitution originally provided for a unicameral National
Assembly. When it was decided in 1939 to change to a bicameral
legislature, it became necessary to provide for the procedure for
lawmaking by the Senate and the House of Representatives. The work of
proposing amendments to the Constitution was done by the National
Assembly, acting as a constituent assembly, some of whose members,
jealous of preserving the Assembly's lawmaking powers, sought to curtail
the powers of the proposed Senate. Accordingly they proposed the
following provision:
All bills appropriating public funds, revenue or tariff bills,
bills of local application, and private bills shall originate
exclusively in the Assembly, but the Senate may propose
or concur with amendments. In case of disapproval by the
Senate of any such bills, the Assembly may repass the
same by a two-thirds vote of all its members, and
thereupon, the bill so repassed shall be deemed enacted
 and may be submitted to the President for corresponding
action. In the event that the Senate should fail to finally
act on any such bills, the Assembly may, after thirty days
from the opening of the next regular session of the same
legislative term, reapprove the same with a vote of two-
thirds of all the members of the Assembly. And upon such
reapproval, the bill shall be deemed enacted and may be
submitted to the President for corresponding action.
The special committee on the revision of laws of the Second National
Assembly vetoed the proposal. It deleted everything after the first
sentence. As rewritten, the proposal was approved by the National
Assembly and embodied in Resolution No. 38, as amended by
Resolution No. 73. (J. ARUEGO, KNOW YOUR CONSTITUTION 65-66
(1950)). The proposed amendment was submitted to the people and
ratified by them in the elections held on June 18, 1940.
This is the history of Art. VI, §18 (2) of the 1935 Constitution, from which
Art. VI, §24 of the present Constitution was derived. It explains why the
word "exclusively" was added to the American text from which the
framers of the Philippine Constitution borrowed and why the phrase "as
on other Bills" was not copied. Considering the defeat of the proposal, the
power of the Senate to propose amendments must be understood to be
full, plenary and complete "as on other Bills." Thus, because revenue bills
are required to originate exclusively in the House of Representatives, the
Senate cannot enact revenue measures of its own without such bills.
After a revenue bill is passed and sent over to it by the House, however,
the Senate certainly can pass its own version on the same subject
matter. This follows from the coequality of the two chambers of
Congress.
That this is also the understanding of book authors of the scope of the
Senate's power to concur is clear from the following commentaries:
The power of the Senate to propose or concur with
amendments is apparently without restriction. It would
seem that by virtue of this power, the Senate can
practically re-write a bill required to come from the House
and leave only a trace of the original bill. For example, a
general revenue bill passed by the lower house of the
United States Congress contained provisions for the
imposition of an inheritance tax . This was changed by the
Senate into a corporation tax. The amending authority of
the Senate was declared by the United States Supreme
Court to be sufficiently broad to enable it to make the
alteration. [Flint v. Stone Tracy Company, 220 U.S. 107,
55 L. ed. 389].
(L. TAÑADA AND F. CARREON, POLITICAL LAW OF
THE PHILIPPINES 247 (1961))
The above-mentioned bills are supposed to be initiated by
the House of Representatives because it is more
numerous in membership and therefore also more
representative of the people. Moreover, its members are
presumed to be more familiar with the needs of the
country in regard to the enactment of the legislation
involved.
The Senate is, however, allowed much leeway in the
exercise of its power to propose or concur with
amendments to the bills initiated by the House of
Representatives. Thus, in one case, a bill introduced in
the U.S. House of Representatives was changed by the
Senate to make a proposed inheritance tax a corporation
tax. It is also accepted practice for the Senate to
introduce what is known as an amendment by
substitution, which may entirely replace the bill initiated in
the House of Representatives.
(I. CRUZ, PHILIPPINE POLITICAL LAW 144-145 (1993)).
In sum, while Art. VI, §24 provides that all appropriation, revenue or tariff
bills, bills authorizing increase of the public debt, bills of local application,
and private bills must "originate exclusively in the House of
Representatives," it also adds, "but the Senate may propose or concur
with amendments." In the exercise of this power, the Senate may
propose an entirely new bill as a substitute measure. As petitioner
Tolentino states in a high school text, a committee to which a bill is
referred may do any of the following:
(1) to endorse the bill without changes; (2) to make
changes in the bill omitting or adding sections or altering
its language; (3) to make and endorse an entirely new bill
as a substitute, in which case it will be known as
a committee bill; or (4) to make no report at all.
 (A. TOLENTINO, THE GOVERNMENT OF THE
PHILIPPINES 258 (1950))
To except from this procedure the amendment of bills which are required
to originate in the House by prescribing that the number of the House bill
and its other parts up to the enacting clause must be preserved although
the text of the Senate amendment may be incorporated in place of the
original body of the bill is to insist on a mere technicality. At any rate
there is no rule prescribing this form. S. No. 1630, as a substitute
measure, is therefore as much an amendment of H. No. 11197 as any
which the Senate could have made.
II. S. No. 1630 a mere amendment of H. No. 11197. Petitioners' basic
error is that they assume that S. No. 1630 is an independent and distinct
bill. Hence their repeated references to its certification that it was passed
by the Senate "in substitution of S.B. No. 1129, taking into
consideration P.S. Res. No. 734 and H.B. No. 11197," implying that there
is something substantially different between the reference to S. No. 1129
and the reference to H. No. 11197. From this premise, they conclude that
R.A. No. 7716 originated both in the House and in the Senate and that it
is the product of two "half-baked bills because neither H. No. 11197 nor
S. No. 1630 was passed by both houses of Congress."
In point of fact, in several instances the provisions of S. No. 1630, clearly
appear to be mere amendments of the corresponding provisions of H.
No. 11197. The very tabular comparison of the provisions of H. No.
11197 and S. No. 1630 attached as Supplement A to the basic petition of
petitioner Tolentino, while showing differences between the two bills, at
the same time indicates that the provisions of the Senate bill were
precisely intended to be amendments to the House bill.
Without H. No. 11197, the Senate could not have enacted S. No. 1630.
Because the Senate bill was a mere amendment of the House bill, H. No.
11197 in its original form did not have to pass the Senate on second and
three readings. It was enough that after it was passed on first reading it
was referred to the Senate Committee on Ways and Means. Neither was
it required that S. No. 1630 be passed by the House of Representatives
before the two bills could be referred to the Conference Committee.
There is legislative precedent for what was done in the case of H. No.
11197 and S. No. 1630. When the House bill and Senate bill, which
became R.A. No. 1405 (Act prohibiting the disclosure of bank deposits),
were referred to a conference committee, the question was raised
whether the two bills could be the subject of such conference,
considering that the bill from one house had not been passed by the
other and vice versa. As Congressman Duran put the question:
MR. DURAN. Therefore, I raise this question of order as
to procedure: If a House bill is passed by the House but
not passed by the Senate, and a Senate bill of a similar
nature is passed in the Senate but never passed in the
House, can the two bills be the subject of a conference,
and can a law be enacted from these two bills? I
understand that the Senate bill in this particular instance
does not refer to investments in government securities,
whereas the bill in the House, which was introduced by
the Speaker, covers two subject matters: not only
investigation of deposits in banks but also investigation of
investments in government securities. Now, since the two
bills differ in their subject matter, I believe that no law can
be enacted.
Ruling on the point of order raised, the chair (Speaker Jose B. Laurel, Jr.)
said:
THE SPEAKER. The report of the conference committee
is in order. It is precisely in cases like this where a
conference should be had. If the House bill had been
approved by the Senate, there would have been no need
of a conference; but precisely because the
Senate passed another bill on the same subject matter,
the conference committee had to be created, and we are
now considering the report of that committee.
(2 CONG. REC. NO. 13, July 27, 1955, pp. 3841-42
(emphasis added))
III. The President's certification. The fallacy in thinking that H. No. 11197
and S. No. 1630 are distinct and unrelated measures also accounts for
the petitioners' (Kilosbayan's and PAL's) contention that because the
President separately certified to the need for the immediate enactment of
these measures, his certification was ineffectual and void. The
certification had to be made of the version of the same revenue bill
which at the moment was being considered. Otherwise, to follow
petitioners' theory, it would be necessary for the President to certify as
many bills as are presented in a house of Congress even though the bills
are merely versions of the bill he has already certified. It is enough that
he certifies the bill which, at the time he makes the certification, is under
consideration. Since on March 22, 1994 the Senate was considering S.
No. 1630, it was that bill which had to be certified. For that matter on
June 1, 1993 the President had earlier certified H. No. 9210 for
immediate enactment because it was the one which at that time was
being considered by the House. This bill was later substituted, together
with other bills, by H. No. 11197.
As to what Presidential certification can accomplish, we have already
explained in the main decision that the phrase "except when the
President certifies to the necessity of its immediate enactment, etc." in
Art. VI, §26 (2) qualifies not only the requirement that "printed copies [of a
bill] in its final form [must be] distributed to the members three days
before its passage" but also the requirement that before a bill can
become a law it must have passed "three readings on separate days."
There is not only textual support for such construction but historical basis
as well.
Art. VI, §21 (2) of the 1935 Constitution originally provided:
(2) No bill shall be passed by either House unless it shall
have been printed and copies thereof in its final form
furnished its Members at least three calendar days prior
to its passage, except when the President shall have
certified to the necessity of its immediate enactment.
Upon the last reading of a bill, no amendment thereof
shall be allowed and the question upon its passage shall
be taken immediately thereafter, and
the yeas and nays entered on the Journal.
When the 1973 Constitution was adopted, it was provided in Art. VIII, §19
(2):
(2) No bill shall become a law unless it has passed three
readings on separate days, and printed copies thereof in
its final form have been distributed to the Members three
days before its passage, except when the Prime Minister
certifies to the necessity of its immediate enactment to
meet a public calamity or emergency. Upon the last
reading of a bill, no amendment thereto shall be allowed,
and the vote thereon shall be taken immediately
thereafter, and the yeas and nays entered in the Journal.
This provision of the 1973 document, with slight modification, was
adopted in Art. VI, §26 (2) of the present Constitution, thus:
(2) No bill passed by either House shall become a law
unless it has passed three readings on separate days,
and printed copies thereof in its final form have been
distributed to its Members three days before its passage,
except when the President certifies to the necessity of its
immediate enactment to meet a public calamity or
emergency. Upon the last reading of a bill, no amendment
thereto shall be allowed, and the vote thereon shall be
taken immediately thereafter, and
the yeas and nays entered in the Journal.
The exception is based on the prudential consideration that if in all cases
three readings on separate days are required and a bill has to be printed
in final form before it can be passed, the need for a law may be rendered
academic by the occurrence of the very emergency or public calamity
which it is meant to address.
Petitioners further contend that a "growing budget deficit" is not an
emergency, especially in a country like the Philippines where budget
deficit is a chronic condition. Even if this were the case, an enormous
budget deficit does not make the need for R.A. No. 7716 any less urgent
or the situation calling for its enactment any less an emergency.
Apparently, the members of the Senate (including some of the petitioners
in these cases) believed that there was an urgent need for consideration
of S. No. 1630, because they responded to the call of the President by
voting on the bill on second and third readings on the same day. While
the judicial department is not bound by the Senate's acceptance of the
President's certification, the respect due coequal departments of the
government in matters committed to them by the Constitution and the
absence of a clear showing of grave abuse of discretion caution a stay of
the judicial hand.
At any rate, we are satisfied that S. No. 1630 received thorough
consideration in the Senate where it was discussed for six days. Only its
distribution in advance in its final printed form was actually dispensed
with by holding the voting on second and third readings on the same day
(March 24, 1994). Otherwise, sufficient time between the submission of
the bill on February 8, 1994 on second reading and its approval on March
24, 1994 elapsed before it was finally voted on by the Senate on third
reading.
The purpose for which three readings on separate days is required is
said to be two-fold: (1) to inform the members of Congress of what they
must vote on and (2) to give them notice that a measure is progressing
through the enacting process, thus enabling them and others interested
in the measure to prepare their positions with reference to it. (1 J. G.
SUTHERLAND, STATUTES AND STATUTORY CONSTRUCTION
§10.04, p. 282 (1972)). These purposes were substantially achieved in
the case of R.A. No. 7716.
IV. Power of Conference Committee. It is contended (principally by
Kilosbayan, Inc. and the Movement of Attorneys for Brotherhood,
Integrity and Nationalism, Inc. (MABINI)) that in violation of the
constitutional policy of full public disclosure and the people's right to know
(Art. II, §28 and Art. III, §7) the Conference Committee met for two days
in executive session with only the conferees present.
As pointed out in our main decision, even in the United States it was
customary to hold such sessions with only the conferees and their staffs
in attendance and it was only in 1975 when a new rule was adopted
requiring open sessions. Unlike its American counterpart, the Philippine
Congress has not adopted a rule prescribing open hearings for
conference committees.
It is nevertheless claimed that in the United States, before the adoption of
the rule in 1975, at least staff members were present. These were staff
members of the Senators and Congressmen, however, who may be
presumed to be their confidential men, not stenographers as in this case
who on the last two days of the conference were excluded. There is no
showing that the conferees themselves did not take notes of their
proceedings so as to give petitioner Kilosbayan basis for claiming that
even in secret diplomatic negotiations involving state interests, conferees
keep notes of their meetings. Above all, the public's right to know was
fully served because the Conference Committee in this case submitted a
report showing the changes made on the differing versions of the House
and the Senate.
Petitioners cite the rules of both houses which provide that conference
committee reports must contain "a detailed, sufficiently explicit statement
of the changes in or other amendments." These changes are shown in
the bill attached to the Conference Committee Report. The members of
both houses could thus ascertain what changes had been made in the
original bills without the need of a statement detailing the changes.
The same question now presented was raised when the bill which
became R.A. No. 1400 (Land Reform Act of 1955) was reported by the
Conference Committee. Congressman Bengzon raised a point of order.
He said:
MR. BENGZON. My point of order is that it is out of order
to consider the report of the conference committee
regarding House Bill No. 2557 by reason of the provision
of Section 11, Article XII, of the Rules of this House which
provides specifically that the conference report must be
accompanied by a detailed statement of the effects of the
amendment on the bill of the House. This conference
committee report is not accompanied by that detailed
statement, Mr. Speaker. Therefore it is out of order to
consider it.
Petitioner Tolentino, then the Majority Floor Leader, answered:
MR. TOLENTINO. Mr. Speaker, I should just like to say a
few words in connection with the point of order raised by
the gentleman from Pangasinan.
There is no question about the provision of the Rule cited
by the gentleman from Pangasinan, but this provision
applies to those cases where only portions of the bill have
been amended. In this case before us an entire bill is
presented; therefore, it can be easily seen from the
reading of the bill what the provisions are. Besides, this
procedure has been an established practice.
After some interruption, he continued:
MR. TOLENTINO. As I was saying, Mr. Speaker, we have
to look into the reason for the provisions of the Rules, and
the reason for the requirement in the provision cited by
the gentleman from Pangasinan is when there are only
certain words or phrases inserted in or deleted from the
provisions of the bill included in the conference report,
and we cannot understand what those words and phrases
mean and their relation to the bill. In that case, it is
 necessary to make a detailed statement on how those
words and phrases will affect the bill as a whole; but
when the entire bill itself is copied verbatim in the
conference report, that is not necessary. So when the
reason for the Rule does not exist, the Rule does not
exist.
(2 CONG. REC. NO. 2, p. 4056. (emphasis added))
Congressman Tolentino was sustained by the chair. The record shows
that when the ruling was appealed, it was upheld by viva voce and when
a division of the House was called, it was sustained by a vote of 48 to 5.
(Id.,  in the original legislation. No minutes are kept, and
p. 4058)
Nor is there any doubt about the power of a conference committee to
insert new provisions as long as these are germane to the subject of the
conference. As this Court held in Philippine Judges Association v. Prado,
227 SCRA 703 (1993), in an opinion written by then Justice Cruz, the
jurisdiction of the conference committee is not limited to resolving
differences between the Senate and the House. It may propose an
entirely new provision. What is important is that its report is subsequently
approved by the respective houses of Congress. This Court ruled that it
would not entertain allegations that, because new provisions had been
added by the conference committee, there was thereby a violation of the
constitutional injunction that "upon the last reading of a bill, no
amendment thereto shall be allowed."
Applying these principles, we shall decline to look into the
petitioners' charges that an amendment was made upon
the last reading of the bill that eventually became R.A.
No. 7354 and that copies thereof in its final form were not
distributed among the members of each House. Both the
enrolled bill and the legislative journals certify that the
measure was duly enacted i.e., in accordance with Article
VI, Sec. 26 (2) of the Constitution. We are bound by such
official assurances from a coordinate department of the
government, to which we owe, at the very least, a
becoming courtesy.
(Id. at 710. (emphasis added))
It is interesting to note the following description of conference committees
in the Philippines in a 1979 study:
Conference committees may be of two types: free or
instructed. These committees may be given instructions
by their parent bodies or they may be left without
instructions. Normally the conference committees are
without instructions, and this is why they are often
critically referred to as "the little legislatures." Once bills
have been sent to them, the conferees have almost
unlimited authority to change the clauses of the bills and
in fact sometimes introduce new measures that were not
members' activities on conference committees are difficult
to determine. One congressman known for his idealism
put it this way: "I killed a bill on export incentives for my
interest group [copra] in the conference committee but I
could not have done so anywhere else." The conference
committee submits a report to both houses, and usually it
is accepted. If the report is not accepted, then the
committee is discharged and new members are
appointed.
(R. Jackson, Committees in the Philippine Congress, in
COMMITTEES AND LEGISLATURES: A COMPARATIVE
ANALYSIS 163 (J. D. LEES AND M. SHAW, eds.)).
In citing this study, we pass no judgment on the methods of conference
committees. We cite it only to say that conference committees here are
no different from their counterparts in the United States whose vast
powers we noted in Philippine Judges Association v. Prado, supra. At all
events, under Art. VI, §16(3) each house has the power "to determine the
rules of its proceedings," including those of its committees. Any
meaningful change in the method and procedures of Congress or its
committees must therefore be sought in that body itself.
V. The titles of S. No. 1630 and H. No. 11197. PAL maintains that R.A.
No. 7716 violates Art. VI, §26 (1) of the Constitution which provides that
"Every bill passed by Congress shall embrace only one subject which
shall be expressed in the title thereof." PAL contends that the
amendment of its franchise by the withdrawal of its exemption from the
VAT is not expressed in the title of the law.
Pursuant to §13 of P.D. No. 1590, PAL pays a franchise tax of 2% on its
gross revenue "in lieu of all other taxes, duties, royalties, registration,
license and other fees and charges of any kind, nature, or description,
imposed, levied, established, assessed or collected by any municipal,
city, provincial or national authority or government agency, now or in the
future."
PAL was exempted from the payment of the VAT along with other entities
by §103 of the National Internal Revenue Code, which provides as
follows:
§103. Exempt transactions. — The following shall be
exempt from the value-added tax:
xxx xxx xxx
(q) Transactions which are exempt under special laws or
international agreements to which the Philippines is a
signatory.
R.A. No. 7716 seeks to withdraw certain exemptions, including that
granted to PAL, by amending §103, as follows:
§103. Exempt transactions. — The following shall be
exempt from the value-added tax:
xxx xxx xxx
(q) Transactions which are exempt under special laws,
except those granted under Presidential Decree Nos. 66,
529, 972, 1491, 1590. . . .
The amendment of §103 is expressed in the title of R.A. No. 7716 which
reads:
AN ACT RESTRUCTURING THE VALUE-ADDED TAX
(VAT) SYSTEM, WIDENING ITS TAX BASE AND
ENHANCING ITS ADMINISTRATION, AND FOR THESE
PURPOSES AMENDING AND REPEALING THE
RELEVANT PROVISIONS OF THE NATIONAL
INTERNAL REVENUE CODE, AS AMENDED, AND FOR
OTHER PURPOSES.
By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE VALUE-
ADDED TAX (VAT) SYSTEM [BY] WIDENING ITS TAX BASE AND
ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES
AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE
NATIONAL INTERNAL REVENUE CODE, AS AMENDED AND FOR
OTHER PURPOSES," Congress thereby clearly expresses its intention
to amend any provision of the NIRC which stands in the way of
accomplishing the purpose of the law.
PAL asserts that the amendment of its franchise must be reflected in the
title of the law by specific reference to P.D. No. 1590. It is unnecessary to
do this in order to comply with the constitutional requirement, since it is
already stated in the title that the law seeks to amend the pertinent
provisions of the NIRC, among which is §103(q), in order to widen the
base of the VAT. Actually, it is the bill which becomes a law that is
required to express in its title the subject of legislation. The titles of H. No.
11197 and S. No. 1630 in fact specifically referred to §103 of the NIRC
as among the provisions sought to be amended. We are satisfied that
sufficient notice had been given of the pendency of these bills in
Congress before they were enacted into what is now R.A.
No. 7716.
In Philippine Judges Association v. Prado, supra, a similar argument as
that now made by PAL was rejected. R.A. No. 7354 is entitled AN ACT
CREATING THE PHILIPPINE POSTAL CORPORATION, DEFINING ITS
POWERS, FUNCTIONS AND RESPONSIBILITIES, PROVIDING FOR
REGULATION OF THE INDUSTRY AND FOR OTHER PURPOSES
CONNECTED THEREWITH. It contained a provision repealing all
franking privileges. It was contended that the withdrawal of franking
privileges was not expressed in the title of the law. In holding that there
was sufficient description of the subject of the law in its title, including the
repeal of franking privileges, this Court held:
To require every end and means necessary for the
accomplishment of the general objectives of the statute to
be expressed in its title would not only be unreasonable
but would actually render legislation impossible. [Cooley,
Constitutional Limitations, 8th Ed., p. 297] As has been
correctly explained:
The details of a legislative act need not be
specifically stated in its title, but matter
germane to the subject as expressed in
the title, and adopted to the
 accomplishment of the object in view, may
properly be included in the act. Thus, it is
proper to create in the same act the
machinery by which the act is to be
enforced, to prescribe the penalties for its
infraction, and to remove obstacles in the
way of its execution. If such matters are
properly connected with the subject as
expressed in the title, it is unnecessary
that they should also have special mention
in the title. (Southern Pac. Co. v. Bartine,
170 Fed. 725)
(227 SCRA at 707-708)
VI. Claims of press freedom and religious liberty. We have held that, as a
general proposition, the press is not exempt from the taxing power of the
State and that what the constitutional guarantee of free press prohibits
are laws which single out the press or target a group belonging to the
press for special treatment or which in any way discriminate against the
press on the basis of the content of the publication, and R.A. No. 7716 is
none of these.
Now it is contended by the PPI that by removing the exemption of the
press from the VAT while maintaining those granted to others, the law
discriminates against the press. At any rate, it is averred, "even
nondiscriminatory taxation of constitutionally guaranteed freedom is
unconstitutional."
With respect to the first contention, it would suffice to say that since the
law granted the press a privilege, the law could take back the privilege
anytime without offense to the Constitution. The reason is simple: by
granting exemptions, the State does not forever waive the exercise of its
sovereign prerogative.
Indeed, in withdrawing the exemption, the law merely subjects the press
to the same tax burden to which other businesses have long ago been
subject. It is thus different from the tax involved in the cases invoked by
the PPI. The license tax in Grosjean v. American Press Co., 297 U.S.
233, 80 L. Ed. 660 (1936) was found to be discriminatory because it was
laid on the gross advertising receipts only of newspapers whose weekly
circulation was over 20,000, with the result that the tax applied only to 13
out of 124 publishers in Louisiana. These large papers were critical of
Senator Huey Long who controlled the state legislature which enacted
the license tax. The censorial motivation for the law was thus evident.
On the other hand, in Minneapolis Star & Tribune Co. v. Minnesota
Comm'r of Revenue, 460 U.S. 575, 75 L. Ed. 2d 295 (1983), the tax was
found to be discriminatory because although it could have been made
liable for the sales tax or, in lieu thereof, for the use tax on the privilege of
using, storing or consuming tangible goods, the press was not. Instead,
the press was exempted from both taxes. It was, however, later made to
pay a special use tax on the cost of paper and ink which made these
items "the only items subject to the use tax that were component of
goods to be sold at retail." The U.S. Supreme Court held that the
differential treatment of the press "suggests that the goal of regulation is
not related to suppression of expression, and such goal is presumptively
unconstitutional." It would therefore appear that even a law that favors
the press is constitutionally suspect. (See the dissent of Rehnquist, J. in
that case)
Nor is it true that only two exemptions previously granted by E.O. No. 273
are withdrawn "absolutely and unqualifiedly" by R.A. No. 7716. Other
exemptions from the VAT, such as those previously granted to PAL,
petroleum concessionaires, enterprises registered with the Export
Processing Zone Authority, and many more are likewise totally
withdrawn, in addition to exemptions which are partially withdrawn, in an
effort to broaden the base of the tax.
The PPI says that the discriminatory treatment of the press is highlighted
by the fact that transactions, which are profit oriented, continue to enjoy
exemption under R.A. No. 7716. An enumeration of some of these
transactions will suffice to show that by and large this is not so and that
the exemptions are granted for a purpose. As the Solicitor General says,
such exemptions are granted, in some cases, to encourage agricultural
production and, in other cases, for the personal benefit of the end-user
rather than for profit. The exempt transactions are:
(a) Goods for consumption or use which are in their
original state (agricultural, marine and forest products,
cotton seeds in their original state, fertilizers, seeds,
seedlings, fingerlings, fish, prawn livestock and poultry
feeds) and goods or services to enhance agriculture
(milling of palay, corn, sugar cane and raw sugar,
livestock, poultry feeds, fertilizer, ingredients used for the
manufacture of feeds).
 (b) Goods used for personal consumption or use
(household and personal effects of citizens returning to
the Philippines) or for professional use, like professional
instruments and implements, by persons coming to the
Philippines to settle here.
(c) Goods subject to excise tax such as petroleum
products or to be used for manufacture of petroleum
products subject to excise tax and services subject to
percentage tax.
(d) Educational services, medical, dental, hospital and
veterinary services, and services rendered under
employer-employee relationship.
(e) Works of art and similar creations sold by the artist
himself.
(f) Transactions exempted under special laws, or
international agreements.
(g) Export-sales by persons not VAT-registered.
(h) Goods or services with gross annual sale or receipt
not exceeding P500,000.00.
(Respondents' Consolidated Comment on the Motions for
Reconsideration, pp. 58-60)
The PPI asserts that it does not really matter that the law does not
discriminate against the press because "even nondiscriminatory taxation
on constitutionally guaranteed freedom is unconstitutional." PPI cites in
support of this assertion the following statement in Murdock
v. Pennsylvania, 319 U.S. 105, 87 L. Ed. 1292 (1943):
The fact that the ordinance is "nondiscriminatory" is
immaterial. The protection afforded by the First
Amendment is not so restricted. A license tax certainly
does not acquire constitutional validity because it
classifies the privileges protected by the First Amendment
along with the wares and merchandise of hucksters and
peddlers and treats them all alike. Such equality in
treatment does not save the ordinance. Freedom of
press, freedom of speech, freedom of religion are in
preferred position.
The Court was speaking in that case of a license tax, which, unlike an
ordinary tax, is mainly for regulation. Its imposition on the press is
unconstitutional because it lays a prior restraint on the exercise of its
right. Hence, although its application to others, such those selling goods,
is valid, its application to the press or to religious groups, such as the
Jehovah's Witnesses, in connection with the latter's sale of religious
books and pamphlets, is unconstitutional. As the U.S. Supreme Court put
it, "it is one thing to impose a tax on income or property of a preacher. It
is quite another thing to exact a tax on him for delivering a sermon."
A similar ruling was made by this Court in American Bible Society v. City
of Manila, 101 Phil. 386 (1957) which invalidated a city ordinance
requiring a business license fee on those engaged in the sale of general
merchandise. It was held that the tax could not be imposed on the sale of
bibles by the American Bible Society without restraining the free exercise
of its right to propagate.
The VAT is, however, different. It is not a license tax. It is not a tax on the
exercise of a privilege, much less a constitutional right. It is imposed on
the sale, barter, lease or exchange of goods or properties or the sale or
exchange of services and the lease of properties purely for revenue
purposes. To subject the press to its payment is not to burden the
exercise of its right any more than to make the press pay income tax or
subject it to general regulation is not to violate its freedom under the
Constitution.
Additionally, the Philippine Bible Society, Inc. claims that although it sells
bibles, the proceeds derived from the sales are used to subsidize the
cost of printing copies which are given free to those who cannot afford to
pay so that to tax the sales would be to increase the price, while reducing
the volume of sale. Granting that to be the case, the resulting burden on
the exercise of religious freedom is so incidental as to make it difficult to
differentiate it from any other economic imposition that might make the
right to disseminate religious doctrines costly. Otherwise, to follow the
petitioner's argument, to increase the tax on the sale of vestments would
be to lay an impermissible burden on the right of the preacher to make a
sermon.
On the other hand the registration fee of P1,000.00 imposed by §107 of
the NIRC, as amended by §7 of R.A. No. 7716, although fixed in amount,
is really just to pay for the expenses of registration and enforcement of
provisions such as those relating to accounting in §108 of the NIRC. That
the PBS distributes free bibles and therefore is not liable to pay the VAT
does not excuse it from the payment of this fee because it also sells
some copies. At any rate whether the PBS is liable for the VAT must be
decided in concrete cases, in the event it is assessed this tax by the
Commissioner of Internal Revenue.
VII. Alleged violations of the due process, equal protection and contract
clauses and the rule on taxation. CREBA asserts that R.A. No. 7716 (1)
impairs the obligations of contracts, (2) classifies transactions as covered
or exempt without reasonable basis and (3) violates the rule that taxes
should be uniform and equitable and that Congress shall "evolve a
progressive system of taxation."
With respect to the first contention, it is claimed that the application of the
tax to existing contracts of the sale of real property by installment or on
deferred payment basis would result in substantial increases in the
monthly amortizations to be paid because of the 10% VAT. The
additional amount, it is pointed out, is something that the buyer did not
anticipate at the time he entered into the contract.
The short answer to this is the one given by this Court in an early case:
"Authorities from numerous sources are cited by the plaintiffs, but none of
them show that a lawful tax on a new subject, or an increased tax on an
old one, interferes with a contract or impairs its obligation, within the
meaning of the Constitution. Even though such taxation may affect
particular contracts, as it may increase the debt of one person and lessen
the security of another, or may impose additional burdens upon one class
and release the burdens of another, still the tax must be paid unless
prohibited by the Constitution, nor can it be said that it impairs the
obligation of any existing contract in its true legal sense." (La Insular v.
Machuca Go-Tauco and Nubla Co-Siong, 39 Phil. 567, 574 (1919)).
Indeed not only existing laws but also "the reservation of the essential
attributes of sovereignty, is . . . read into contracts as a postulate of the
legal order." (Philippine-American Life Ins. Co. v. Auditor General, 22
SCRA 135, 147 (1968)) Contracts must be understood as having been
made in reference to the possible exercise of the rightful authority of the
government and no obligation of contract can extend to the defeat of that
authority. (Norman v. Baltimore and Ohio R.R., 79 L. Ed. 885 (1935)).
It is next pointed out that while §4 of R.A. No. 7716 exempts such
transactions as the sale of agricultural products, food items, petroleum,
and medical and veterinary services, it grants no exemption on the sale
of real property which is equally essential. The sale of real property for
socialized and low-cost housing is exempted from the tax, but CREBA
claims that real estate transactions of "the less poor," i.e., the middle
class, who are equally homeless, should likewise be exempted.
The sale of food items, petroleum, medical and veterinary services, etc.,
which are essential goods and services was already exempt under §103,
pars. (b) (d) (1) of the NIRC before the enactment of R.A. No. 7716.
Petitioner is in error in claiming that R.A. No. 7716 granted exemption to
these transactions, while subjecting those of petitioner to the payment of
the VAT. Moreover, there is a difference between the "homeless poor"
and the "homeless less poor" in the example given by petitioner, because
the second group or middle class can afford to rent houses in the
meantime that they cannot yet buy their own homes. The two social
classes are thus differently situated in life. "It is inherent in the power to
tax that the State be free to select the subjects of taxation, and it has
been repeatedly held that 'inequalities which result from a singling out of
one particular class for taxation, or exemption infringe no constitutional
limitation.'" (Lutz v. Araneta, 98 Phil. 148, 153 (1955). Accord, City of
Baguio v. De Leon, 134 Phil. 912 (1968); Sison, Jr. v. Ancheta, 130
SCRA 654, 663 (1984); Kapatiran ng mga Naglilingkod sa Pamahalaan
ng Pilipinas, Inc. v. Tan, 163 SCRA 371 (1988)).
Finally, it is contended, for the reasons already noted, that R.A. No. 7716
also violates Art. VI, §28(1) which provides that "The rule of taxation shall
be uniform and equitable. The Congress shall evolve a progressive
system of taxation."
Equality and uniformity of taxation means that all taxable articles or kinds
of property of the same class be taxed at the same rate. The taxing
power has the authority to make reasonable and natural classifications
for purposes of taxation. To satisfy this requirement it is enough that the
statute or ordinance applies equally to all persons, forms and
corporations placed in similar situation. (City of Baguio v. De Leon, supra;
Sison, Jr. v. Ancheta, supra)
Indeed, the VAT was already provided in E.O. No. 273 long before R.A.
No. 7716 was enacted. R.A. No. 7716 merely expands the base of the
tax. The validity of the original VAT Law was questioned in Kapatiran ng
Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 383
(1988) on grounds similar to those made in these cases, namely, that the
law was "oppressive, discriminatory, unjust and regressive in violation of
Art. VI, §28(1) of the Constitution." (At 382) Rejecting the challenge to the
law, this Court held:
 As the Court sees it, EO 273 satisfies all the requirements
of a valid tax. It is uniform. . . .
The sales tax adopted in EO 273 is applied similarly on all
goods and services sold to the public, which are not
exempt, at the constant rate of 0% or 10%.
The disputed sales tax is also equitable. It is imposed
only on sales of goods or services by persons engaged in
business with an aggregate gross annual sales exceeding
P200,000.00. Small corner sari-sari stores are
consequently exempt from its application. Likewise
exempt from the tax are sales of farm and marine
products, so that the costs of basic food and other
necessities, spared as they are from the incidence of the
VAT, are expected to be relatively lower and within the
reach of the general public.
(At 382-383)
The CREBA claims that the VAT is regressive. A similar claim is made by
the Cooperative Union of the Philippines, Inc. (CUP), while petitioner
Juan T. David argues that the law contravenes the mandate of Congress
to provide for a progressive system of taxation because the law imposes
a flat rate of 10% and thus places the tax burden on all taxpayers without
regard to their ability to pay.
The Constitution does not really prohibit the imposition of indirect taxes
which, like the VAT, are regressive. What it simply provides is that
Congress shall "evolve a progressive system of taxation." The
constitutional provision has been interpreted to mean simply that "direct
taxes are . . . to be preferred [and] as much as possible, indirect taxes
should be minimized." (E. FERNANDO, THE CONSTITUTION OF THE
PHILIPPINES 221 (Second ed. (1977)). Indeed, the mandate to
Congress is not to prescribe, but to evolve, a progressive tax system.
Otherwise, sales taxes, which perhaps are the oldest form of indirect
taxes, would have been prohibited with the proclamation of Art. VIII,
§17(1) of the 1973 Constitution from which the present Art. VI, §28(1)
was taken. Sales taxes are also regressive.
Resort to indirect taxes should be minimized but not avoided entirely
because it is difficult, if not impossible, to avoid them by imposing such
taxes according to the taxpayers' ability to pay. In the case of the VAT,
the law minimizes the regressive effects of this imposition by providing
for zero rating of certain transactions (R.A. No. 7716, §3, amending §102
(b) of the NIRC), while granting exemptions to other transactions. (R.A.
No. 7716, §4, amending §103 of the NIRC).
Thus, the following transactions involving basic and essential goods and
services are exempted from the VAT:
(a) Goods for consumption or use which are in their
original state (agricultural, marine and forest products,
cotton seeds in their original state, fertilizers, seeds,
seedlings, fingerlings, fish, prawn livestock and poultry
feeds) and goods or services to enhance agriculture
(milling of palay, corn sugar cane and raw sugar,
livestock, poultry feeds, fertilizer, ingredients used for the
manufacture of feeds).
(b) Goods used for personal consumption or use
(household and personal effects of citizens returning to
the Philippines) and or professional use, like professional
instruments and implements, by persons coming to the
Philippines to settle here.
(c) Goods subject to excise tax such as petroleum
products or to be used for manufacture of petroleum
products subject to excise tax and services subject to
percentage tax.
(d) Educational services, medical, dental, hospital and
veterinary services, and services rendered under
employer-employee relationship.
(e) Works of art and similar creations sold by the artist
himself.
(f) Transactions exempted under special laws, or
international agreements.
(g) Export-sales by persons not VAT-registered.
(h) Goods or services with gross annual sale or receipt
not exceeding P500,000.00.
 (Respondents' Consolidated Comment on the Motions for
Reconsideration, pp. 58-60)
On the other hand, the transactions which are subject to the VAT are
those which involve goods and services which are used or availed of
mainly by higher income groups. These include real properties held
primarily for sale to customers or for lease in the ordinary course of trade
or business, the right or privilege to use patent, copyright, and other
similar property or right, the right or privilege to use industrial, commercial
or scientific equipment, motion picture films, tapes and discs, radio,
television, satellite transmission and cable television time, hotels,
restaurants and similar places, securities, lending investments, taxicabs,
utility cars for rent, tourist buses, and other common carriers, services of
franchise grantees of telephone and telegraph.
The problem with CREBA's petition is that it presents broad claims of
constitutional violations by tendering issues not at retail but at wholesale
and in the abstract. There is no fully developed record which can impart
to adjudication the impact of actuality. There is no factual foundation to
show in the concrete the application of the law to actual contracts and
exemplify its effect on property rights. For the fact is that petitioner's
members have not even been assessed the VAT. Petitioner's case is not
made concrete by a series of hypothetical questions asked which are no
different from those dealt with in advisory opinions.
The difficulty confronting petitioner is thus apparent. He
alleges arbitrariness. A mere allegation, as here, does not
suffice. There must be a factual foundation of such
unconstitutional taint. Considering that petitioner here
would condemn such a provision as void on its face, he
has not made out a case. This is merely to adhere to the
authoritative doctrine that where the due process and
equal protection clauses are invoked, considering that
they are not fixed rules but rather broad standards, there
is a need for proof of such persuasive character as would
lead to such a conclusion. Absent such a showing, the
presumption of validity must prevail.
(Sison, Jr. v. Ancheta, 130 SCRA at 661)
Adjudication of these broad claims must await the development of a
concrete case. It may be that postponement of adjudication would result
in a multiplicity of suits. This need not be the case, however.
Enforcement of the law may give rise to such a case. A test case,
provided it is an actual case and not an abstract or hypothetical one, may
thus be presented.
Nor is hardship to taxpayers alone an adequate justification for
adjudicating abstract issues. Otherwise, adjudication would be no
different from the giving of advisory opinion that does not really settle
legal issues.
We are told that it is our duty under Art. VIII, §1, ¶2 to decide whenever a
claim is made that "there has been a grave abuse of discretion
amounting to lack or excess of jurisdiction on the part of any branch or
instrumentality of the government." This duty can only arise if an actual
case or controversy is before us. Under Art . VIII, §5 our jurisdiction is
defined in terms of "cases" and all that Art. VIII, §1, ¶2 can plausibly
mean is that in the exercise of that jurisdiction we have the judicial
power to determine questions of grave abuse of discretion by any branch
or instrumentality of the government.
Put in another way, what is granted in Art. VIII, §1, ¶2 is "judicial power,"
which is "the power of a court to hear and decide cases pending between
parties who have the right to sue and be sued in the courts of law and
equity" (Lamb v. Phipps, 22 Phil. 456, 559 (1912)), as distinguished from
legislative and executive power. This power cannot be directly
appropriated until it is apportioned among several courts either by the
Constitution, as in the case of Art. VIII, §5, or by statute, as in the case of
the Judiciary Act of 1948 (R.A. No. 296) and the Judiciary Reorganization
Act of 1980 (B.P. Blg. 129). The power thus apportioned constitutes the
court's "jurisdiction," defined as "the power conferred by law upon a court
or judge to take cognizance of a case, to the exclusion of all others."
(United States v. Arceo, 6 Phil. 29 (1906)) Without an actual case coming
within its jurisdiction, this Court cannot inquire into any allegation of grave
abuse of discretion by the other departments of the government.
VIII. Alleged violation of policy towards cooperatives. On the other hand,
the Cooperative Union of the Philippines (CUP), after briefly surveying
the course of legislation, argues that it was to adopt a definite policy of
granting tax exemption to cooperatives that the present Constitution
embodies provisions on cooperatives. To subject cooperatives to the
VAT would therefore be to infringe a constitutional policy. Petitioner
claims that in 1973, P.D. No. 175 was promulgated exempting
cooperatives from the payment of income taxes and sales taxes but in
1984, because of the crisis which menaced the national economy, this
exemption was withdrawn by P.D. No. 1955; that in 1986, P.D. No. 2008
again granted cooperatives exemption from income and sales taxes until
December 31, 1991, but, in the same year, E.O. No. 93 revoked the
exemption; and that finally in 1987 the framers of the Constitution
"repudiated the previous actions of the government adverse to the
interests of the cooperatives, that is, the repeated revocation of the tax
exemption to cooperatives and instead upheld the policy of strengthening
the cooperatives by way of the grant of tax exemptions," by providing the
following in Art. XII:
§1. The goals of the national economy are a more
equitable distribution of opportunities, income, and
wealth; a sustained increase in the amount of goods and
services produced by the nation for the benefit of the
people; and an expanding productivity as the key to
raising the quality of life for all, especially the
underprivileged.
The State shall promote industrialization and full
employment based on sound agricultural development
and agrarian reform, through industries that make full and
efficient use of human and natural resources, and which
are competitive in both domestic and foreign markets.
However, the State shall protect Filipino enterprises
against unfair foreign competition and trade practices.
In the pursuit of these goals, all sectors of the economy
and all regions of the country shall be given optimum
opportunity to develop. Private enterprises, including
corporations, cooperatives, and similar collective
organizations, shall be encouraged to broaden the base
of their ownership.
§15. The Congress shall create an agency to promote the
viability and growth of cooperatives as instruments for
social justice and economic development.
Petitioner's contention has no merit. In the first place, it is not true that
P.D. No. 1955 singled out cooperatives by withdrawing their exemption
from income and sales taxes under P.D. No. 175, §5. What P.D. No.
1955, §1 did was to withdraw the exemptions and preferential treatments
theretofore granted to private business enterprises in general, in view of
the economic crisis which then beset the nation. It is true that after P.D.
No. 2008, §2 had restored the tax exemptions of cooperatives in 1986,
the exemption was again repealed by E.O. No. 93, §1, but then again
cooperatives were not the only ones whose exemptions were
withdrawn. The withdrawal of tax incentives applied to all, including
government and private entities. In the second place, the Constitution
does not really require that cooperatives be granted tax exemptions in
order to promote their growth and viability. Hence, there is no basis for
petitioner's assertion that the government's policy toward cooperatives
had been one of vacillation, as far as the grant of tax privileges was
concerned, and that it was to put an end to this indecision that the
constitutional provisions cited were adopted. Perhaps as a matter of
policy cooperatives should be granted tax exemptions, but that is left to
the discretion of Congress. If Congress does not grant exemption and
there is no discrimination to cooperatives, no violation of any
constitutional policy can be charged.
Indeed, petitioner's theory amounts to saying that under the Constitution
cooperatives are exempt from taxation. Such theory is contrary to the
Constitution under which only the following are exempt from taxation:
charitable institutions, churches and parsonages, by reason of Art. VI,
§28 (3), and non-stock, non-profit educational institutions by reason of
Art. XIV, §4 (3).
CUP's further ground for seeking the invalidation of R.A. No. 7716 is that
it denies cooperatives the equal protection of the law because electric
cooperatives are exempted from the VAT. The classification between
electric and other cooperatives (farmers cooperatives, producers
cooperatives, marketing cooperatives, etc.) apparently rests on a
congressional determination that there is greater need to provide cheaper
electric power to as many people as possible, especially those living in
the rural areas, than there is to provide them with other necessities in life.
We cannot say that such classification is unreasonable.
We have carefully read the various arguments raised against the
constitutional validity of R.A. No. 7716. We have in fact taken the
extraordinary step of enjoining its enforcement pending resolution of
these cases. We have now come to the conclusion that the law suffers
from none of the infirmities attributed to it by petitioners and that its
enactment by the other branches of the government does not constitute a
grave abuse of discretion. Any question as to its necessity, desirability or
expediency must be addressed to Congress as the body which is
electorally responsible, remembering that, as Justice Holmes has said,
"legislators are the ultimate guardians of the liberties and welfare of the
people in quite as great a degree as are the courts." (Missouri, Kansas &
Texas Ry. Co. v. May, 194 U.S. 267, 270, 48 L. Ed. 971, 973 (1904)). It is
not right, as petitioner in G.R. No. 115543 does in arguing that we should
enforce the public accountability of legislators, that those who took part in
passing the law in question by voting for it in Congress should later thrust
to the courts the burden of reviewing measures in the flush of enactment.
This Court does not sit as a third branch of the legislature, much less
exercise a veto power over legislation.

WHEREFORE, the motions for reconsideration are denied with finality

and the temporary restraining order previously issued is hereby lifted.

SO ORDERED.
 laws of the State of Delaware, U.S.A., with office in the Philippines at the
Ground Floor, ACE Building, corner Rada and de la Rosa Streets,
Legaspi Village, Makati City. It is a servicing unit of American Express
International, Inc. - Hongkong Branch (Amex-HK) and is engaged
G.R. No. 152609               June 29, 2005 primarily to facilitate the collections of Amex-HK receivables from card
members situated in the Philippines and payment to service
COMMISSIONER OF INTERNAL REVENUE, Petitioner,  establishments in the Philippines.
vs.
AMERICAN EXPRESS INTERNATIONAL, INC. (PHILIPPINE "Amex Philippines registered itself with the Bureau of Internal Revenue
BRANCH), Respondent. (BIR), Revenue District Office No. 47 (East Makati) as a value-added tax
(VAT) taxpayer effective March 1988 and was issued VAT Registration
DECISION Certificate No. 088445 bearing VAT Registration No. 32A-3-004868. For
the period January 1, 1997 to December 31, 1997, [respondent] filed with
the BIR its quarterly VAT returns as follows:
PANGANIBAN, J.:

As a general rule, the value-added tax (VAT) system uses the destination Exhibit Period Covered Date Filed
principle. However, our VAT law itself provides for a clear exception, D 1997 1st Qtr. April 18, 1997
under which the supply of service shall be zero-rated when the following
requirements are met: (1) the service is performed in the Philippines; (2) F 2nd Qtr. July 21, 1997
the service falls under any of the categories provided in Section 102(b) of G 3rd Qtr. October 2, 1997
the Tax Code; and (3) it is paid for in acceptable foreign currency that is
accounted for in accordance with the regulations of the Bangko Sentral H 4th Qtr. January 20, 1998
ng Pilipinas. Since respondent’s services meet these requirements, they
are zero-rated. Petitioner’s Revenue Regulations that alter or revoke the "On March 23, 1999, however, [respondent] amended the aforesaid
above requirements are ultra vires and invalid. returns and declared the following:

The Case Exh 1997 Taxable Sales Output Zero-rated Domesti

VAT Sales Purchase
Before us is a Petition for Review1 under Rule 45 of the Rules of Court,
assailing the February 28, 2002 Decision2of the Court of Appeals (CA) in I 1st qtr ₱59,597.20 ₱5,959.72 ₱17,513,801.11 ₱6,778,18
CA-GR SP No. 62727. The assailed Decision disposed as follows: J 2nd qtr 67,517.20 6,751.72 17,937,361.51 9,333,24
K 3rd qtr 51,936.60 5,193.66 19,627,245.36 8,438,35
"WHEREFORE, premises considered, the petition is
hereby DISMISSED for lack of merit. The assailed decision of the Court L 4th qtr 67,994.30 6,799.43 25,231,225.22 13,080,82
of Tax Appeals (CTA) is AFFIRMED in toto."3
Total ₱247,045.30 ₱24,704.53 ₱80,309,633.20 ₱37,630,60
The Facts

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

"On April 13, 1999, [respondent] filed with the BIR a letter-request for the
"[Respondent] is a Philippine branch of American Express International, refund of its 1997 excess input taxes in the amount of ₱3,751,067.04,
Inc., a corporation duly organized and existing under and by virtue of the which amount was arrived at after deducting from its total input VAT paid
of ₱3,763,060.43 its applied output VAT liabilities only for the third and
fourth quarters of 1997 amounting to ₱5,193.66 and ₱6,799.43,
respectively. [Respondent] cites as basis therefor, Section 110 (B) of the
1997 Tax Code, to state:
‘Section 110. Tax Credits. -
xxxxxxxxx
‘(B) Excess Output or Input Tax. - If at the end of any taxable quarter the
output tax exceeds the input tax, the excess shall be paid by the VAT-
registered person. If the input tax exceeds the output tax, the excess
shall be carried over to the succeeding quarter or quarters. Any input tax
attributable to the purchase of capital goods or to zero-rated sales by a
VAT-registered person may at his option be refunded or credited against
other internal revenue taxes, subject to the provisions of Section 112.’
"There being no immediate action on the part of the [petitioner],
[respondent’s] petition was filed on April 15, 1999.
"In support of its Petition for Review, the following arguments were raised
by [respondent]:
A. Export sales by a VAT-registered person, the consideration for which
is paid for in acceptable foreign currency inwardly remitted to the
Philippines and accounted for in accordance with existing regulations of
the Bangko Sentral ng Pilipinas, are subject to [VAT] at zero percent
(0%). According to [respondent], being a VAT-registered entity, it is
subject to the VAT imposed under Title IV of the Tax Code, to wit:
‘Section 102.(sic) Value-added tax on sale of services.- (a) Rate and
base of tax. - There shall be levied, assessed and collected, a value-
added tax equivalent to 10% percent of gross receipts derived by any
person engaged in the sale of services. The phrase "sale of services"
means the performance of all kinds of services for others for a fee,
remuneration or consideration, including those performed or rendered by
construction and service contractors: stock, real estate, commercial,
customs and immigration brokers; lessors of personal property; lessors or
distributors of cinematographic films; persons engaged in milling,
processing, manufacturing or repacking goods for others; and similar
services regardless of whether o[r] not the performance thereof calls for
the exercise or use of the physical or mental faculties: Provided That the
following services performed in the Philippines by VAT-registered
persons shall be subject to 0%:
(1) x x x
(2) Services other than those mentioned in the preceding
subparagraph, the consideration is paid for in acceptable foreign
currency which is remitted inwardly to the Philippines and
accounted for in accordance with the rules and regulations of the
BSP. x x x.’
In addition, [respondent] relied on VAT Ruling No. 080-89, dated April 3,
1989, the pertinent portion of which reads as follows:
‘In Reply, please be informed that, as a VAT registered entity whose
service is paid for in acceptable foreign currency which is remitted
inwardly to the Philippines and accounted for in accordance with the rules
and regulations of the Central [B]ank of the Philippines, your service
income is automatically zero rated effective January 1, 1998. [Section
102(a)(2) of the Tax Code as amended].4 For this, there is no need to file
an application for zero-rate.’
B. Input taxes on domestic purchases of taxable goods and services
related to zero-rated revenues are available as tax refund in accordance
with Section 106 (now Section 112) of the [Tax Code] and Section 8(a) of
[Revenue] Regulations [(RR)] No. 5-87, to state:
‘Section 106. Refunds or tax credits of input tax. -
(A) Zero-rated or effectively Zero-rated Sales. - Any VAT-registered
person, except those covered by paragraph (a) above, whose sales are
zero-rated or are effectively zero-rated, may, within two (2) years after
the close of the taxable quarter when such sales were made, apply for
the issuance of tax credit certificate or refund of the input taxes due or
attributable to such sales, to the extent that such input tax has not been
applied against output tax. x x x. [Section 106(a) of the Tax Code]’5
‘Section 8. Zero-rating. - (a) In general. - A zero-rated sale is a taxable
transaction for value-added tax purposes. A sale by a VAT-registered
person of goods and/or services taxed at zero rate shall not result in any
output tax. The input tax on his purchases of goods or services related to
such zero-rated sale shall be available as tax credit or refundable in
accordance with Section 16 of these Regulations. x x x.’ [Section 8(a),
[RR] 5-87].’6
"[Petitioner], in his Answer filed on May 6, 1999, claimed by way of
Special and Affirmative Defenses that:
7. The claim for refund is subject to investigation by the Bureau of
Internal Revenue;
8. Taxes paid and collected are presumed to have been made in
accordance with laws and regulations, hence, not refundable. Claims for
tax refund are construed strictly against the claimant as they partake of
the nature of tax exemption from tax and it is incumbent upon the
[respondent] to prove that it is entitled thereto under the law and he who
claims exemption must be able to justify his claim by the clearest grant of
organic or statu[t]e law. An exemption from the common burden [cannot]
be permitted to exist upon vague implications;
9. Moreover, [respondent] must prove that it has complied with the
governing rules with reference to tax recovery or refund, which are found
in Sections 204(c) and 229 of the Tax Code, as amended, which are
quoted as follows:
‘Section 204. Authority of the Commissioner to Compromise, Abate and
Refund or Credit Taxes. - The Commissioner may - x x x.
(C) Credit or refund taxes erroneously or illegally received or penalties
imposed without authority, refund the value of internal revenue stamps
when they are returned in good condition by the purchaser, and, in his
discretion, redeem or change unused stamps that have been rendered
unfit for use and refund their value upon proof of destruction. No credit or
refund of taxes or penalties shall be allowed unless the taxpayer files in
writing with the Commissioner a claim for credit or refund within two (2)
years after payment of the tax or penalty: Provided, however, That a
return filed with an overpayment shall be considered a written claim for
credit or refund.’
‘Section 229. Recovery of tax erroneously or illegally collected.- No
suit or proceeding shall be maintained in any court for the recovery of any
national internal revenue tax hereafter alleged to have been erroneously
or illegally assessed or collected, or of any penalty claimed to have been
collected without authority, or of any sum alleged to have been
excessively or in any manner wrongfully collected, until a claim for refund
or credit has been duly filed with the Commissioner; but such suit or
proceeding may be maintained, whether or not such tax, penalty or sum
has been paid under protest or duress.
In any case, no such suit or proceeding shall be begun (sic) after the
expiration of two (2) years from the date of payment of the tax or penalty
regardless of any supervening cause that may arise after
payment: Provided, however, That the Commissioner may, even without
written claim therefor, refund or credit any tax, where on the face of the
return upon which payment was made, such payment appears clearly to
have been erroneously paid.’
"From the foregoing, the [CTA], through the Presiding Judge Ernesto D.
Acosta rendered a decision7 in favor of the herein respondent holding that
its services are subject to zero-rate pursuant to Section 108(b) of the Tax
Reform Act of 1997 and Section 4.102-2 (b)(2) of Revenue Regulations
5-96, the decretal portion of which reads as follows:
‘WHEREFORE, in view of all the foregoing, this Court finds the [petition]
meritorious and in accordance with law. Accordingly, [petitioner] is
hereby ORDERED to REFUND to [respondent] the amount of
₱3,352,406.59 representing the latter’s excess input VAT paid for the
year 1997.’"8
Ruling of the Court of Appeals
In affirming the CTA, the CA held that respondent’s services fell under
the first type enumerated in Section 4.102-2(b)(2) of RR 7-95, as
amended by RR 5-96. More particularly, its "services were not of the
same class or of the same nature as project studies, information, or
engineering and architectural designs" for non-resident foreign clients;
rather, they were "services other than the processing, manufacturing or
repacking of goods for persons doing business outside the Philippines."
The consideration in both types of service, however, was paid for in
acceptable foreign currency and accounted for in accordance with the
rules and regulations of the Bangko Sentral ng Pilipinas.
Furthermore, the CA reasoned that reliance on VAT Ruling No. 040-98
was unwarranted. By requiring that respondent’s services be consumed
abroad in order to be zero-rated, petitioner went beyond the sphere of
interpretation and into that of legislation. Even granting that it is valid, the
ruling cannot be given retroactive effect, for it will be harsh and
oppressive to respondent, which has already relied upon VAT Ruling No.
080-89 for zero rating.
Hence, this Petition.9
The Issue
Petitioner raises this sole issue for our consideration:
"Whether or not the Court of Appeals committed reversible error in
holding that respondent is entitled to the refund of the amount of
₱3,352,406.59 allegedly representing excess input VAT for the year
1997."10
The Court’s Ruling
The Petition is unmeritorious.
Sole Issue:
Entitlement to Tax Refund
Section 102 of the Tax Code11 provides:
"Sec. 102. Value-added tax on sale of services and use or lease of
properties. -- (a) Rate and base of tax. -- There shall be levied, assessed
and collected, a value-added tax equivalent to ten percent (10%) of gross
receipts derived from the sale or exchange of services x x x.
"The phrase 'sale or exchange of services' means the performance of all
kinds of services in the Philippines for others for a fee, remuneration or
consideration, including those performed or rendered by x x x persons
engaged in milling, processing, manufacturing or repacking goods for
others; x x x services of banks, non-bank financial intermediaries and
finance companies; x x x and similar services regardless of whether or
not the performance thereof calls for the exercise or use of the physical
or mental faculties. The phrase 'sale or exchange of services' shall
likewise include:
xxxxxxxxx
‘(3) The supply of x x x commercial knowledge or information;
‘(4) The supply of any assistance that is ancillary and subsidiary to and is
furnished as a means of enabling the application or enjoyment of x x x
any such knowledge or information as is mentioned in subparagraph (3);
xxxxxxxxx
‘(6) The supply of technical advice, assistance or services rendered in
connection with technical management or administration of any x x x
commercial undertaking, venture, project or scheme;
xxxxxxxxx
"The term 'gross receipts’ means the total amount of money or its
equivalent representing the contract price, compensation, service fee,
rental or royalty, including the amount charged for materials supplied with
the services and deposits and advanced payments actually or
constructively received during the taxable quarter for the services
performed or to be performed for another person, excluding value-added
tax.
"(b) Transactions subject to zero percent (0%) rate. -- The following
services performed in the Philippines by VAT-registered persons shall be
subject to zero percent (0%) rate[:]
‘(1) Processing, manufacturing or repacking goods for other persons
doing business outside the Philippines which goods are subsequently
exported, where the services are paid for in acceptable foreign currency
and accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP);
‘(2) Services other than those mentioned in the preceding subparagraph,
the consideration for which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the [BSP];’"
xxxxxxxxx
Zero Rating of "Other" Services
The law is very clear. Under the last paragraph quoted above, services
performed by VAT-registered persons in the Philippines (other than the
processing, manufacturing or repacking of goods for persons doing
business outside the Philippines), when paid in acceptable foreign
currency and accounted for in accordance with the rules and regulations
of the BSP, are zero-rated.
Respondent is a VAT-registered person that facilitates the collection and
payment of receivables belonging to its non-resident foreign client, for
which it gets paid in acceptable foreign currency inwardly remitted and
accounted for in conformity with BSP rules and regulations. Certainly, the
service it renders in the Philippines is not in the same category as
"processing, manufacturing or repacking of goods" and should, therefore,
be zero-rated. In reply to a query of respondent, the BIR opined in VAT
Ruling No. 080-89 that the income respondent earned from its parent
company’s regional operating centers (ROCs) was automatically zero-
rated effective January 1, 1988.12
Service has been defined as "the art of doing something useful for a
person or company for a fee"13 or "useful labor or work rendered or to be
rendered by one person to another."14 For facilitating in the Philippines
the collection and payment of receivables belonging to its Hong Kong-
based foreign client, and getting paid for it in duly accounted acceptable
foreign currency, respondent renders service falling under the category of
zero rating. Pursuant to the Tax Code, a VAT of zero percent should,
therefore, be levied upon the supply of that service.15
The Credit Card System and Its Components
For sure, the ancillary business of facilitating the said collection is
different from the main business of issuing credit cards.16 Under the credit
card system, the credit card company extends credit accommodations to
its card holders for the purchase of goods and services from its member
establishments, to be reimbursed by them later on upon proper billing.
Given the complexities of present-day business transactions, the
components of this system can certainly function as separate billable
services.
Under RA 8484,17 the credit card that is issued by banks18 in general, or
by non-banks in particular, refers to "any card x x x or other credit device
existing for the purpose of obtaining x x x goods x x x or services x x x on
credit;"19and is being used "usually on a revolving basis."20 This means
that the consumer-credit arrangement that exists between the issuer and
the holder of the credit card enables the latter to procure goods or
services "on a continuing basis as long as the outstanding balance does
not exceed a specified limit."21 The card holder is, therefore, given "the
power to obtain present control of goods or service on a promise to pay
for them in the future."22
Business establishments may extend credit sales through the use of the
credit card facilities of a non-bank credit card company to avoid the risk
of uncollectible accounts from their customers. Under this system, the
establishments do not deposit in their bank accounts the credit card
drafts23 that arise from the credit sales. Instead, they merely record their
receivables from the credit card company and periodically send the drafts
evidencing those receivables to the latter.
The credit card company, in turn, sends checks as payment to these
business establishments, but it does not redeem the drafts at full price.
The agreement between them usually provides for discounts to be taken
by the company upon its redemption of the drafts.24 At the end of each
month, it then bills its credit card holders for their respective drafts
redeemed during the previous month. If the holders fail to pay the
amounts owed, the company sustains the loss.25
In the present case, respondent’s role in the consumer credit26 process
described above primarily consists of gathering the bills and credit card
drafts of different service establishments located in the Philippines and
forwarding them to the ROCs outside the country. Servicing the bill is not
the same as billing. For the former type of service alone, respondent
already gets paid.
The parent company -- to which the ROCs and respondent belong --
takes charge not only of redeeming the drafts from the ROCs and
sending the checks to the service establishments, but also of billing the
credit card holders for their respective drafts that it has redeemed. While
it usually imposes finance charges27 upon the holders, none may be
exacted by respondent upon either the ROCs or the card holders.
Branch and Home Office
By designation alone, respondent and the ROCs are operated as
branches. This means that each of them is a unit, "an offshoot, lateral
extension, or division"28 located at some distance from the home
office29 of the parent company; carrying separate inventories; incurring
their own expenses; and generating their respective incomes. Each may
conduct sales operations in any locality as an extension of the principal
office.30
The extent of accounting activity at any of these branches depends upon
company policy,31 but the financial reports of the entire business
enterprise -- the credit card company to which they all belong -- must
always show its financial position, results of operation, and changes in its
financial position as a single unit.32 Reciprocal accounts are reconciled or
eliminated, because they lose all significance when the branches and
home office are viewed as a single entity.33 In like manner, intra-company
profits or losses must be offset against each other for accounting
purposes.
Contrary to petitioner’s assertion,34 respondent can sell its services to
another branch of the same parent company.35 In fact, the business
concept of a transfer price allows goods and services to be sold between
and among intra-company units at cost or above cost.36 A branch may be
operated as a revenue center, cost center, profit center or investment
center, depending upon the policies and accounting system of its parent
company.37Furthermore, the latter may choose not to make any sale
itself, but merely to function as a control center, where most or all of its
expenses are allocated to any of its branches.38
Gratia argumenti that the sending of drafts and bills by service
establishments to respondent is equivalent to the act of sending them
directly to its parent company abroad, and that the parent company’s
subsequent redemption of these drafts and billings of credit card holders
is also attributable to respondent, then with greater reason should the
service rendered by respondent be zero-rated under our VAT system.
The service partakes of the nature of export sales as applied to
goods,39 especially when rendered in the Philippines by a VAT-registered
person40 that gets paid in acceptable foreign currency accounted for in
accordance with BSP rules and regulations.
VAT Requirements for the Supply of Service
The VAT is a tax on consumption41 "expressed as a percentage of the
value added to goods or services"42purchased by the producer or
taxpayer.43 As an indirect tax44 on services,45 its main object is the
transaction46itself or, more concretely, the performance of all kinds of
services47 conducted in the course of trade or business in the
Philippines.48 These services must be regularly conducted in this country;
undertaken in "pursuit of a commercial or an economic activity;"49 for a
valuable consideration; and not exempt under the Tax Code, other
special laws, or any international agreement.50
Without doubt, the transactions respondent entered into with its Hong
Kong-based client meet all these requirements.
First, respondent regularly renders in the Philippines the service
of facilitating the collection and payment of receivables belonging
to a foreign company that is a clearly separate and distinct entity.
Second, such service is commercial in nature; carried on over a
sustained period of time; on a significant scale; with a reasonable
degree of frequency; and not at random, fortuitous or attenuated.
Third, for this service, respondent definitely receives
consideration in foreign currency that is accounted for in
conformity with law.
Finally, respondent is not an entity exempt under any of our laws
or international agreements.
Services Subject to Zero VAT
As a general rule, the VAT system uses the destination principle as a
basis for the jurisdictional reach of the tax.51Goods and services are taxed
only in the country where they are consumed. Thus, exports are zero-
rated, while imports are taxed.
Confusion in zero rating arises because petitioner equates
the performance of a particular type of service with the consumption of its
output abroad. In the present case, the facilitation of the collection of
receivables is different from the utilization or consumption of the
outcome of such service. While the facilitation is done in the Philippines,
the consumption is not. Respondent renders assistance to its foreign
clients -- the ROCs outside the country -- by receiving the bills of service
establishments located here in the country and forwarding them to the
ROCs abroad. The consumption contemplated by law, contrary to
petitioner’s administrative interpretation,52 does not imply that the service
be done abroad in order to be zero-rated.
Consumption is "the use of a thing in a way that thereby exhausts
it."53 Applied to services, the term means the performance or "successful
completion of a contractual duty, usually resulting in the performer’s
release from any past or future liability x x x."54 The services rendered by
respondent are performed or successfully completed upon its sending to
its foreign client the drafts and bills it has gathered from service
establishments here. Its services, having been performed in the
Philippines, are therefore also consumed in the Philippines.
Unlike goods, services cannot be physically used in or bound for a
specific place when their destination is determined. Instead, there can
only be a "predetermined end of a course"55 when determining the service
"location or position x x x for legal purposes."56 Respondent’s facilitation
service has no physical existence, yet takes place upon rendition, and
therefore upon consumption, in the Philippines. Under the destination
principle, as petitioner asserts, such service is subject to VAT at the rate
of 10 percent.
Respondent’s Services Exempt from the Destination Principle
However, the law clearly provides for an exception to the destination
principle; that is, for a zero percent VAT rate for services that
are performed in the Philippines, "paid for in acceptable foreign currency
and accounted for in accordance with the rules and regulations of the
[BSP]."57 Thus, for the supply of service to be zero-rated as an exception,
the law merely requires that first, the service be performed in the
Philippines; second, the service fall under any of the categories in
Section 102(b) of the Tax Code; and, third, it be paid in acceptable
foreign currency accounted for in accordance with BSP rules and
regulations.
Indeed, these three requirements for exemption from the destination
principle are met by respondent. Its facilitation service is performed in the
Philippines. It falls under the second category found in Section 102(b) of
the Tax Code, because it is a service other than "processing,
manufacturing or repacking of goods" as mentioned in the provision.
Undisputed is the fact that such service meets the statutory condition that
it be paid in acceptable foreign currency duly accounted for in
accordance with BSP rules. Thus, it should be zero-rated.
Performance of Service versus Product Arising from Performance
Again, contrary to petitioner’s stand, for the cost of respondent’s service
to be zero-rated, it need not be tacked in as part of the cost of goods
exported.58 The law neither imposes such requirement nor associates
services with exported goods. It simply states that the services performed
by VAT-registered persons in the Philippines -- services other than the
processing, manufacturing or repacking of goods for persons doing
business outside this country -- if paid in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP,
are zero-rated. The service rendered by respondent is clearly different
from the product that arises from the rendition of such service. The
activity that creates the income must not be confused with the main
business in the course of which that income is realized.59
Tax Situs of a Zero-Rated Service
The law neither makes a qualification nor adds a condition in determining
the tax situs of a zero-rated service. Under this criterion, the place where
the service is rendered determines the jurisdiction60 to impose the
VAT.61 Performed in the Philippines, such service is necessarily subject to
its jurisdiction,62 for the State necessarily has to have "a substantial
connection"63 to it, in order to enforce a zero rate.64 The place of payment
is immaterial;65 much less is the place where the output of the service will
be further or ultimately used.
Statutory Construction or Interpretation Unnecessary
As mentioned at the outset, Section 102(b)(2) of the Tax Code is very
clear. Therefore, no statutory construction or interpretation is needed.
Neither can conditions or limitations be introduced where none is
provided for. Rewriting the law is a forbidden ground that only Congress
may tread upon.
The Court may not construe a statute that is free from doubt.66 "[W]here
the law speaks in clear and categorical language, there is no room for
interpretation. There is only room for application."67 The Court has no
choice but to "see to it that its mandate is obeyed."68
No Qualifications Under RR 5-87
In implementing the VAT provisions of the Tax Code, RR 5-87 provides
for the zero rating of services other than the processing, manufacturing or
repacking of goods -- in general and without qualifications -- when paid
for by the person to whom such services are rendered in acceptable
foreign currency inwardly remitted and duly accounted for in accordance
with the BSP (then Central Bank) regulations. Section 8 of RR 5-87
states:
"SECTION 8. Zero-rating. -- (a) In general. -- A zero-rated sale is a
taxable transaction for value-added tax purposes. A sale by a VAT-
registered person of goods and/or services taxed at zero rate shall not
result in any output tax. The input tax on his purchases of goods or
services related to such zero-rated sale shall be available as tax credit or
refundable in accordance with Section 16 of these Regulations.
xxxxxxxxx
" (c) Zero-rated sales of services. -- The following services rendered by
VAT-registered persons are zero-rated:
‘(1) Services in connection with the processing, manufacturing or
repacking of goods for persons doing business outside the Philippines,
where such goods are actually shipped out of the Philippines to said
persons or their assignees and the services are paid for in acceptable
foreign currency inwardly remitted and duly accounted for under the
regulations of the Central Bank of the Philippines.
xxxxxxxxx
‘(3) Services performed in the Philippines other than those mentioned in
subparagraph (1) above which are paid for by the person or entity to
whom the service is rendered in acceptable foreign currency inwardly
remitted and duly accounted for in accordance with Central Bank
regulations. Where the contract involves payment in both foreign and
local currency, only the service corresponding to that paid in foreign
currency shall enjoy zero-rating. The portion paid for in local currency
shall be subject to VAT at the rate of 10%.’"
RR 7-95 Broad Enough
RR 7-95, otherwise known as the "Consolidated VAT
Regulations,"69 reiterates the above-quoted provision and further presents
as examples only the services performed in the Philippines by VAT-
registered hotels and other service establishments. Again, the condition
remains that these services must be paid in acceptable foreign currency
inwardly remitted and accounted for in accordance with the rules and
regulations of the BSP. The term "other service establishments" is
obviously broad enough to cover respondent’s facilitation service. Section
4.102-2 of RR 7-95 provides thus:
"SECTION 4.102-2. Zero-Rating. -- (a) In general. -- A zero-rated sale by
a VAT registered person, which is a taxable transaction for VAT
purposes, shall not result in any output tax. However, the input tax on his
purchases of goods, properties or services related to such zero-rated
sale shall be available as tax credit or refund in accordance with these
regulations.
"(b) Transaction subject to zero-rate. -- The following services performed
in the Philippines by VAT-registered persons shall be subject to 0%:
‘(1) Processing, manufacturing or repacking goods for other
persons doing business outside the Philippines which goods are
subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance with
the rules and regulations of the BSP;
‘(2) Services other than those mentioned in the preceding
subparagraph, e.g. those rendered by hotels and other service
establishments, the consideration for which is paid for in
acceptable foreign currency and accounted for in accordance with
the rules and regulations of the BSP;’"
xxxxxxxxx
Meaning of "as well as" in RR 5-96
Section 4.102-2(b)(2) of RR 7-95 was subsequently amended by RR 5-
96 to read as follows:
"Section 4.102-2(b)(2) -- ‘Services other than processing, manufacturing
or repacking for other persons doing business outside the Philippines for
goods which are subsequently exported, as well as services by a resident
to a non-resident foreign client such as project studies, information
services, engineering and architectural designs and other similar
services, the consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations
of the BSP.’"
Aside from the already scopious coverage of services in Section 4.102-
2(b)(2) of RR 7-95, the amendment introduced by RR 5-96 further
enumerates specific services entitled to zero rating. Although
superfluous, these sample services are meant to be merely illustrative. In
this provision, the use of the term "as well as" is not restrictive. As a
prepositional phrase with an adverbial relation to some other word, it
simply means "in addition to, besides, also or too."70
Neither the law nor any of the implementing revenue regulations
aforequoted categorically defines or limits the services that may be sold
or exchanged for a fee, remuneration or consideration. Rather, both
merely enumerate the items of service that fall under the term "sale or
exchange of services."71
Ejusdem Generis
Inapplicable
The canon of statutory construction known as ejusdem generis or "of the
same kind or specie" does not apply to Section 4.102-2(b)(2) of RR 7-95
as amended by RR 5-96.
First, although the regulatory provision contains an enumeration
of particular or specific words, followed by the general phrase
"and other similar services," such words do not constitute a
readily discernible class and are patently not of the same
kind.72 Project studies involve investments or marketing;
information services focus on data technology; engineering and
architectural designs require creativity. Aside from calling for the
exercise or use of mental faculties or perhaps producing written
technical outputs, no common denominator to the exclusion of all
others characterizes these three services. Nothing sets them
apart from other and similar general services that may involve
advertising, computers, consultancy, health care, management,
messengerial work -- to name only a few.
Second, there is the regulatory intent to give the general phrase
"and other similar services" a broader meaning.73 Clearly, the
preceding phrase "as well as" is not meant to limit the effect of
"and other similar services."
Third, and most important, the statutory provision upon which this
regulation is based is by itself not restrictive. The scope of the
word "services" in Section 102(b)(2) of the Tax Code is broad; it
is not susceptible of narrow interpretation.741avvphi1 .zw+
VAT Ruling Nos. 040-98 and 080-89
VAT Ruling No. 040-98 relied upon by petitioner is a less general
interpretation at the administrative level,75rendered by the BIR
commissioner upon request of a taxpayer to clarify certain provisions of
the VAT law. As correctly held by the CA, when this ruling states that the
service must be "destined for consumption outside of the Philippines"76 in
order to qualify for zero rating, it contravenes both the law and the
regulations issued pursuant to it.77 This portion of VAT Ruling No. 040-98
is clearly ultra vires and invalid.78
Although "[i]t is widely accepted that the interpretation placed upon a
statute by the executive officers, whose duty is to enforce it, is entitled to
great respect by the courts,"79 this interpretation is not conclusive and will
have to be "ignored if judicially found to be erroneous"80 and "clearly
absurd x x x or improper."81 An administrative issuance that overrides the
law it merely seeks to interpret, instead of remaining consistent and in
harmony with it, will not be countenanced by this Court.82
In the present case, respondent has relied upon VAT Ruling No. 080-89,
which clearly recognizes its zero rating. Changing this status will certainly
deprive respondent of a refund of the substantial amount of excess input
taxes to which it is entitled.
Again, assuming arguendo that VAT Ruling No. 040-98 revoked VAT
Ruling No. 080-89, such revocation could not be given retroactive effect if
the application of the latter ruling would only be prejudicial to
respondent.83 Section 246 of the Tax Code categorically declares that
"[a]ny revocation x x x of x x x any of the rulings x x x promulgated by the
Commissioner shall not be given retroactive application if the revocation
x x x will be prejudicial to the taxpayers."84
It is also basic in law that "no x x x rule x x x shall be given retrospective
effect85 unless explicitly stated."86 No indication of such retroactive
application to respondent does the Court find in VAT Ruling No. 040-98.
Neither do the exceptions enumerated in Section 24687 of the Tax Code
apply.
Though vested with the power to interpret the provisions of the Tax
Code88 and not bound by predecessors’ acts or rulings, the BIR
commissioner may render a different construction to a statute89 only if the
new interpretation is in congruence with the law. Otherwise, no amount of
interpretation can ever revoke, repeal or modify what the law says.
"Consumed Abroad" Not Required by Legislature
Interpellations on the subject in the halls of the Senate also reveal a clear
intent on the part of the legislators not to impose the condition of being
"consumed abroad" in order for services performed in the Philippines by
a VAT-registered person to be zero-rated. We quote the relevant portions
of the proceedings:
"Senator Maceda: Going back to Section 102 just for the moment. Will
the Gentleman kindly explain to me - I am referring to the lower part of
the first paragraph with the ‘Provided’. Section 102. ‘Provided that the
following services performed in the Philippines by VAT registered
persons shall be subject to zero percent.’ There are three here. What is
the difference between the three here which is subject to zero percent
and Section 103 which is exempt transactions, to being with?
"Senator Herrera: Mr. President, in the case of processing and
manufacturing or repacking goods for persons doing business outside the
Philippines which are subsequently exported, and where the services are
paid for in acceptable foreign currencies inwardly remitted, this is
considered as subject to 0%. But if these conditions are not complied
with, they are subject to the VAT.
"In the case of No. 2, again, as the Gentleman pointed out, these three
are zero-rated and the other one that he indicated are exempted from the
very beginning. These three enumerations under Section 102 are zero-
rated provided that these conditions indicated in these three paragraphs
are also complied with. If they are not complied with, then they are not
entitled to the zero ratings. Just like in the export of minerals, if these are
not exported, then they cannot qualify under this provision of zero rating.
"Senator Maceda: Mr. President, just one small item so we can leave
this. Under the proviso, it is required that the following services be
performed in the Philippines.
"Under No. 2, services other than those mentioned above includes, let us
say, manufacturing computers and computer chips or repacking goods
for persons doing business outside the Philippines. Meaning to say, we
ship the goods to them in Chicago or Washington and they send the
payment inwardly to the Philippines in foreign currency, and that is, of
course, zero-rated.
lawphil.net
"Now, when we say ‘services other than those mentioned in the
preceding subsection[,’] may I have some examples of these?
"Senator Herrera: Which portion is the Gentleman referring to?
"Senator Maceda: I am referring to the second paragraph, in the same
Section 102. The first paragraph is when one manufactures or packages
something here and he sends it abroad and they pay him, that is
covered. That is clear to me. The second paragraph says ‘Services other
than those mentioned in the preceding subparagraph, the consideration
of which is paid for in acceptable foreign currency…’
"One example I could immediately think of -- I do not know why this
comes to my mind tonight -- is for tourism or escort services. For
example, the services of the tour operator or tour escort -- just a good
name for all kinds of activities -- is made here at the Midtown Ramada
Hotel or at the Philippine Plaza, but the payment is made from outside
and remitted into the country.
"Senator Herrera: What is important here is that these services are paid
in acceptable foreign currency remitted inwardly to the Philippines.
"Senator Maceda: Yes, Mr. President. Like those Japanese tours which
include $50 for the services of a woman or a tourist guide, it is zero-rated
when it is remitted here.
"Senator Herrera: I guess it can be interpreted that way, although this
tourist guide should also be considered as among the professionals. If
they earn more than ₱200,000, they should be covered.
xxxxxxxxx
Senator Maceda: So, the services by Filipino citizens outside the
Philippines are subject to VAT, and I am talking of all services. Do big
contractual engineers in Saudi Arabia pay VAT?
"Senator Herrera: This provision applies to a VAT-registered person.
When he performs services in the Philippines, that is zero-rated.
"Senator Maceda: That is right."90
Legislative Approval By Reenactment
Finally, upon the enactment of RA 8424, which substantially carries over
the particular provisions on zero rating of services under Section 102(b)
of the Tax Code, the principle of legislative approval of administrative
interpretation by reenactment clearly obtains. This principle means that
"the reenactment of a statute substantially unchanged is persuasive
indication of the adoption by Congress of a prior executive
construction."91
The legislature is presumed to have reenacted the law with full
knowledge of the contents of the revenue regulations then in force
regarding the VAT, and to have approved or confirmed them because
they would carry out the legislative purpose. The particular provisions of
the regulations we have mentioned earlier are, therefore, re-enforced.
"When a statute is susceptible of the meaning placed upon it by a ruling
of the government agency charged with its enforcement and the
[l]egislature thereafter [reenacts] the provisions [without] substantial
change, such action is to some extent confirmatory that the ruling carries
out the legislative purpose."92

In sum, having resolved that transactions of respondent are zero-rated,

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

Furthermore, under a zero-rating scheme, the sale or exchange of a

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

WHEREFORE, the Petition is hereby DENIED, and the assailed

Decision AFFIRMED. No pronouncement as to costs.

SO ORDERED.
 P351,831.01
============
G.R. No. 125355             March 30, 2000
COMASERCO's annual corporate income tax return ending December
COMMISSIONER OF INTERNAL REVENUE, petitioner,  31, 1988 indicated a net loss in its operations in the amount of
vs. P6,077.00.
COURT OF APPEALS and COMMONWEALTH MANAGEMENT AND
SERVICES CORPORATION, respondents. On February 10, 1992, COMASERCO filed with the BIR, a letter-protest
objecting to the latter's finding of deficiency VAT. On August 20, 1992,
PARDO, J.: the Commissioner of Internal Revenue sent a collection letter to
COMASERCO demanding payment of the deficiency VAT.
What is before the Court is a petition for review on certiorari of the
decision of the Court of Appeals, reversing that of the Court of Tax
1 
On September 29, 1992, COMASERCO filed with the Court of Tax
Appeals, which affirmed with modification the decision of the
2 
Appeals a petition for review contesting the Commissioner's assessment.
4 

Commissioner of Internal Revenue ruling that Commonwealth
Management and Services Corporation, is liable for value added tax for
services to clients during taxable year 1988.
Commonwealth Management and Services Corporation (COMASERCO,
for brevity), is a corporation duly organized and existing under the laws of
the Philippines. It is an affiliate of Philippine American Life Insurance Co.
(Philamlife), organized by the letter to perform collection, consultative and
other technical services, including functioning as an internal auditor, of
Philamlife and its other affiliates.
1âwphi1.nêt
On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an
assessment to private respondent COMASERCO for deficiency value-
added tax (VAT) amounting to P351,851.01, for taxable year 1988,
computed as follows:
COMASERCO asserted that the services it rendered to Philamlife and its
affiliates, relating to collections, consultative and other technical
assistance, including functioning as an internal auditor, were on a "no-
profit, reimbursement-of-cost-only" basis. It averred that it was not
engaged in the business of providing services to Philamlife and its
affiliates. COMASERCO was established to ensure operational
orderliness and administrative efficiency of Philamlife and its affiliates,
and not in the sale of services. COMASERCO stressed that it was not
profit-motivated, thus not engaged in business. In fact, it did not generate
profit but suffered a net loss in taxable year 1988. COMASERCO averred
that since it was not engaged in business, it was not liable to pay VAT.
On June 22, 1995, the Court of Tax Appeals rendered decision in favor of
the Commissioner of Internal Revenue, the dispositive portion of which
reads:

P1,679,155.00 WHEREFORE, the decision of the Commissioner of Internal

Taxable sale/receipt Revenue assessing petitioner deficiency value-added tax for the
============
taxable year 1988 is AFFIRMED with slight modifications.
10% tax due thereon 167,915.50 Accordingly, petitioner is ordered to pay respondent
Commissioner of Internal Revenue the amount of P335,831.01
25% surcharge 41,978.88 inclusive of the 25% surcharge and interest plus 20% interest
from January 24, 1992 until fully paid pursuant to Section 248 and
249 of the Tax Code.
20% interest per annum 125,936.63
The compromise penalty of P16,000.00 imposed by the
Compromise penalty for late payment 16,000.00 respondent in her assessment letter shall not be included in the
3
payment as there was no compromise agreement entered into
TOTAL AMOUNT DUE AND COLLECTIBLE
 between petitioner and respondent with respect to the value-
added tax deficiency. 5
On July 26, 1995, respondent filed with the Court of Appeals, a petition
for review of the decision of the Court of Appeals.
After due proceedings, on May 13, 1996, the Court of Appeals rendered
decision reversing that of the Court of Tax Appeals, the dispositive
portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby
rendered REVERSING and SETTING ASIDE the questioned
Decision promulgated on 22 June 1995. The assessment for
deficiency value-added tax for the taxable year 1988 inclusive of
surcharge, interest and penalty charges are ordered
CANCELLED for lack of legal and factual basis.  6
The Court of Appeals anchored its decision on the ratiocination in
another tax case involving the same parties, where it was held that
7 for purposes of determining liability for VAT.
COMASERCO was not liable to pay fixed and contractor's tax for
services rendered to Philamlife and its affiliates. The Court of Appeals, in
that case, reasoned that COMASERCO was not engaged in business of
providing services to Philamlife and its affiliates. In the same manner, the
Court of Appeals held that COMASERCO was not liable to pay VAT for it
was not engaged in the business of selling services.
On July 16, 1996, the Commissioner of Internal Revenue filed with this
Court a petition for review on certiorariassailing the decision of the Court
of Appeals.On August 7, 1996, we required respondent COMASERCO to
file comment on the petition, and on September 26, 1996, COMASERCO
complied with the resolution.8
We give due course to the petition.
At issue in this case is whether COMASERCO was engaged in the sale
of services, and thus liable to pay VAT thereon.
Petitioner avers that to "engage in business" and to "engage in the sale
of services" are two different things. Petitioner maintains that the services
rendered by COMASERCO to Philamlife and its affiliates, for a fee or
consideration, are subject to VAT. VAT is a tax on the value added by the
performance of the service. It is immaterial whether profit is derived from
rendering the service.
We agree with the Commissioner.
Sec. 99 of the National Internal Revenue Code of 1986, as amended by
Executive Order (E. O.) No. 273 in 1988, provides that:
Sec. 99. Persons liable. — Any person who, in the course of
trade or business, sells, barters or exchanges goods, renders
services, or engages in similar transactions and any person who,
imports goods shall be subject to the value-added tax (VAT)
imposed in Sections 100 to 102 of this Code.  9
COMASERCO contends that the term "in the course of trade or business"
requires that the "business" is carried on with a view to profit or livelihood.
It avers that the activities of the entity must be profit-oriented.
COMASERCO submits that it is not motivated by profit, as defined by its
primary purpose in the articles of incorporation, stating that it is operating
"only on reimbursement-of-cost basis, without any profit." Private
respondent argues that profit motive is material in ascertaining who to tax
We disagree.
On May 28, 1994, Congress enacted Republic Act No. 7716, the
Expanded VAT Law (EVAT), amending among other sections, Section 99
of the Tax Code. On January 1, 1998, Republic Act 8424, the National
Internal Revenue Code of 1997, took effect. The amended law provides
that:
Sec. 105. Persons Liable. — Any person who, in the course of
trade or business, sells, barters, exchanges, leases goods or
properties, renders services, and any person who imports goods
shall be subject to the value-added tax (VAT) imposed in
Sections 106 and 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may
be shifted or passed on to the buyer, transferee or lessee of the
goods, properties or services. This rule shall likewise apply to
existing sale or lease of goods, properties or services at the time
of the effectivity of Republic Act No. 7716.
The phrase "in the course of trade or business" means the
regular conduct or pursuit of a commercial or an economic
activity, including transactions incidental thereto, by any person
 regardless of whether or not the person engaged therein is a
nonstock, nonprofit organization (irrespective of the disposition of
its net income and whether or not it sells exclusively to members
of their guests), or government entity.
The rule of regularity, to the contrary notwithstanding, services as
defined in this Code rendered in the Philippines by nonresident
foreign persons shall be considered as being rendered in the
course of trade or business.
Contrary to COMASERCO's contention the above provision clarifies that
even a non-stock, non-profit, organization or government entity, is liable
to pay VAT on the sale of goods or services. VAT is a tax on
transactions, imposed at every stage of the distribution process on the
sale, barter, exchange of goods or property, and on the performance of
services, even in the absence of profit attributable thereto. The term "in
the course of trade or business" requires the regular conduct or pursuit of
a commercial or an economic activity regardless of whether or not the
entity is profit-oriented.
The definition of the term "in the course of trade or business" present law
applies to all transactions even to those made prior to its enactment.
Executive Order No. 273 stated that any person who, in the course of
trade or business, sells, barters or exchanges goods and services, was
already liable to pay VAT. The present law merely stresses that even a
nonstock, nonprofit organization or government entity is liable to pay VAT
for the sale of goods and services.
Sec. 108 of the National Internal Revenue Code of 1997  defines the
10  necessarily developed an expertise on the subject, unless there has been
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.  In the case of VAT, Section
13 
109, Republic Act 8424 clearly enumerates the transactions exempted
from VAT. The services rendered by COMASERCO do not fall within the
exemptions.
Both the Commissioner of Internal Revenue and the Court of Tax
Appeals correctly ruled that the services rendered by COMASERCO to
Philamlife and its affiliates are subject to VAT. As pointed out by the
Commissioner, the performance of all kinds of services for others for a
fee, remuneration or consideration is considered as sale of services
subject to VAT. As the government agency charged with the enforcement
of the law, the opinion of the Commissioner of Internal Revenue, in the
absence of any showing that it is plainly wrong, is entitled to great
weight.  Also, it has been the long standing policy and practice of this
14 
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
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. 151135             July 2, 2004
CONTEX CORPORATION, petitioner, 
vs.
HON. COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
QUISUMBING, J.:
For review is the Decision dated September 3, 2001, of the Court of
1 
Appeals, in CA-G.R. SP No. 62823, which reversed and set aside the
decision dated October 13, 2000, of the Court of Tax Appeals (CTA). The
2 
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, dated December 19, 2001, denying the motion for
3 
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. As an SBMA-registered firm,
4 
petitioner is exempt from all local and national internal revenue taxes
except for the preferential tax provided for in Section 12 (c) of Rep. Act
5  WHEREFORE, in view of the foregoing, the Petition for Review is
No. 7227. Petitioner also registered with the Bureau of Internal Revenue
(BIR) as a non-VAT taxpayer under Certificate of Registration RDO
Control No. 95-180-000133.
From January 1, 1997 to December 31, 1998, petitioner purchased
various supplies and materials necessary in the conduct of its
manufacturing business. The suppliers of these goods shifted unto
petitioner the 10% VAT on the purchased items, which led the petitioner
to pay input taxes in the amounts of P539,411.88 and P504,057.49 for
1997 and 1998, respectively. 6
Acting on the belief that it was exempt from all national and local taxes,
including VAT, pursuant to Rep. Act No. 7227, petitioner filed two
applications for tax refund or tax credit of the VAT it paid. Mr. Edilberto
Carlos, revenue district officer of BIR RDO No. 19, denied the first
application letter, dated December 29, 1998.
Unfazed by the denial, petitioner on May 4, 1999, filed another
application for tax refund/credit, this time directly with Atty. Alberto
Pagabao, the regional director of BIR Revenue Region No. 4. The
second letter sought a refund or issuance of a tax credit certificate in the
amount of P1,108,307.72, representing erroneously paid input VAT for
the period January 1, 1997 to November 30, 1998.
When no response was forthcoming from the BIR Regional Director,
petitioner then elevated the matter to the Court of Tax Appeals, in a
petition for review docketed as CTA Case No. 5895. Petitioner stressed
that Section 112(A) if read in relation to Section 106(A)(2)(a) of the
7  8 
National Internal Revenue Code, as amended and Section 12(b) and (c)9 
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 and 229 of the Tax Code, its claim should be denied,
10  11 
according to the BIR.
On October 13, 2000, the CTA decided CTA Case No. 5895 as follows:
hereby PARTIALLY GRANTED. Respondent is hereby
ORDERED to REFUND or in the alternative to ISSUE A TAX
CREDIT CERTIFICATE in favor of Petitioner the sum
of P683,061.90, representing erroneously paid input VAT.
SO ORDERED. 12
In granting a partial refund, the CTA ruled that petitioner misread
Sections 106(A)(2)(a) and 112(A) of the Tax Code. The tax court
stressed that these provisions apply only to those entities registered as
VAT taxpayers whose sales are zero-rated. Petitioner does not fall under
this category, since it is a non-VAT taxpayer as evidenced by the
Certificate of Registration RDO Control No. 95-180-000133 issued by
RDO Rosemarie Ragasa of BIR RDO No. 18 of the Subic Bay Freeport
Zone and thus it is exempt from VAT, pursuant to Rep. Act No. 7227,
said the CTA.
Nonetheless, the CTA held that the petitioner is exempt from the
imposition of input VAT on its purchases of supplies and materials. It
pointed out that under Section 12(c) of Rep. Act No. 7227 and the
Implementing Rules and Regulations of the Bases Conversion and
Development Act of 1992, all that petitioner is required to pay as a SBFZ-
registered enterprise is a 5% preferential tax.
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." This
14 
was because the exemption granted by Rep. Act No. 7227 relates to the
act of importation and Section 107 of the Tax Code specifically imposes
15 
the VAT on importations. The appellate court applied the principle that
tax exemptions are strictly construed against the taxpayer. The Court of
Appeals pointed out that under the implementing rules of Rep. Act No.
7227, the exemption of SBFZ-registered enterprises from internal
revenue taxes is qualified as pertaining only to those for which they may
be directly liable. It then stated that apparently, the legislative intent
behind Rep. Act No. 7227 was to grant exemptions only to direct taxes,
which SBFZ-registered enterprise may be liable for and only in
connection with their importation of raw materials, capital, and equipment
as well as the sale of their goods and services.
Petitioner timely moved for reconsideration of the Court of Appeals
decision, but the motion was denied.
Hence, the instant petition raising as issues for our resolution the
following:
A. WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL
AND NATIONAL INTERNAL REVENUE TAXES PROVIDED IN
REPUBLIC ACT NO. 7227 COVERS THE VALUE ADDED TAX
PAID BY PETITIONER, A SUBIC BAY FREEPORT
ENTERPRISE ON ITS PURCHASES OF SUPPLIES AND
MATERIALS.
B. WHETHER OR NOT THE COURT OF TAX APPEALS
CORRECTLY HELD THAT PETITIONER IS ENTITLED TO A
TAX CREDIT OR REFUND OF THE VAT PAID ON ITS
PURCHASES OF SUPPLIES AND RAW MATERIALS FOR THE
YEARS 1997 AND 1998. 16
Simply stated, we shall resolve now the issues concerning: (1) the
correctness of the finding of the Court of Appeals that the VAT exemption
embodied in Rep. Act No. 7227 does not apply to petitioner as a
purchaser; and (2) the entitlement of the petitioner to a tax refund on its
purchases of supplies and raw materials for 1997 and 1998.
On the first issue, petitioner argues that the appellate court’s restrictive
interpretation of petitioner’s VAT exemption as limited to those covered
by Section 107 of the Tax Code is erroneous and devoid of legal basis. It
contends that the provisions of Rep. Act No. 7227 clearly and
unambiguously mandate that no local and national taxes shall be
imposed upon SBFZ-registered firms and hence, said law should govern
the case. Petitioner calls our attention to regulations issued by both the
SBMA and BIR clearly and categorically providing that the tax exemption
provided for by Rep. Act No. 7227 includes exemption from the
imposition of VAT on purchases of supplies and materials.
The respondent takes the diametrically opposite view that while Rep. Act
No. 7227 does grant tax exemptions, such grant is not all-encompassing
but is limited only to those taxes for which a SBFZ-registered business
may be directly liable. Hence, SBFZ locators are not relieved from the
indirect taxes that may be shifted to them by a VAT-registered seller.
At this juncture, it must be stressed that the VAT is an indirect tax. As
such, the amount of tax paid on the goods, properties or services bought,
transferred, or leased may be shifted or passed on by the seller,
transferor, or lessor to the buyer, transferee or lessee. Unlike a direct
17 
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. Stated
18 
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. This is a case
20 
wherein the VAT is removed at the exempt stage (i.e., at the point
of the sale, barter or exchange of the goods or properties).
The person making the exempt sale of goods, properties or
services shall not bill any output tax to his customers because the
said transaction is not subject to VAT. On the other hand, a VAT-
registered purchaser of VAT-exempt goods/properties or services
which are exempt from VAT is not entitled to any input tax on
such purchase despite the issuance of a VAT invoice or receipt. 21
(b) Zero-rated Sales. These are sales by VAT-registered persons
which are subject to 0% rate, meaning the tax burden is not
passed on to the purchaser. A zero-rated sale by a VAT-
registered person, which is a taxable transaction for VAT
purposes, shall not result in any output tax. However, the input
tax on his purchases of goods, properties or services related to
such zero-rated sale shall be available as tax credit or refund in
accordance with these regulations. 22
Under Zero-rating, all VAT is removed from the zero-rated goods, activity
or firm. In contrast, exemption only removes the VAT at the exempt
stage, and it will actually increase, rather than reduce the total taxes paid
by the exempt firm’s business or non-retail customers. It is for this reason
that a sharp distinction must be made between zero-rating and
exemption in designating a value-added tax. 23
Apropos, the petitioner’s claim to VAT exemption in the instant case for
its purchases of supplies and raw materials is founded mainly on Section
12 (b) and (c) of Rep. Act No. 7227, which basically exempts them from
all national and local internal revenue taxes, including VAT and Section 4
(A)(a) of BIR Revenue Regulations No. 1-95. 24
On this point, petitioner rightly claims that it is indeed VAT-Exempt and
this fact is not controverted by the respondent. In fact, petitioner is
registered as a NON-VAT taxpayer per Certificate of Registration issued
25 
by the BIR. As such, it is exempt from VAT on all its sales and
importations of goods and services.
Petitioner’s claim, however, for exemption from VAT for its purchases of
supplies and raw materials is incongruous with its claim that it is VAT-
Exempt, for only VAT-Registered entities can claim Input VAT
Credit/Refund.
The point of contention here is whether or not the petitioner may claim a
refund on the Input VAT erroneously passed on to it by its suppliers.
While it is true that the petitioner should not have been liable for the VAT
inadvertently passed on to it by its supplier since such is a zero-rated
sale on the part of the supplier, the petitioner is not the proper party to
claim such VAT refund.
Section 4.100-2 of BIR’s Revenue Regulations 7-95, as amended, or the
"Consolidated Value-Added Tax Regulations" provide:
Sec. 4.100-2. Zero-rated Sales. A zero-rated sale by a VAT-
registered person, which is a taxable transaction for VAT
purposes, shall not result in any output tax. However, the input
tax on his purchases of goods, properties or services related to
such zero-rated sale shall be available as tax credit or refund in
accordance with these regulations.
The following sales by VAT-registered persons shall be subject to
0%:
(a) Export Sales
"Export Sales" shall mean
...
(5) Those considered export sales under Articles 23 and
77 of Executive Order No. 226, otherwise known as the
Omnibus Investments Code of 1987, and other special
laws, e.g. Republic Act No. 7227, otherwise known as the
Bases Conversion and Development Act of 1992.
...
(c) Sales to persons or entities whose exemption under special
laws, e.g. R.A. No. 7227 duly registered and accredited
enterprises with Subic Bay Metropolitan Authority (SBMA) and
Clark Development Authority (CDA), R. A. No. 7916, Philippine
Economic Zone Authority (PEZA), or international agreements,
e.g. Asian Development Bank (ADB), International Rice Research
Institute (IRRI), etc. to which the Philippines is a signatory
effectively subject such sales to zero-rate."
Since the transaction is deemed a zero-rated sale, petitioner’s supplier
may claim an Input VAT credit with no corresponding Output VAT liability.
Congruently, no Output VAT may be passed on to the petitioner.
On the second issue, it may not be amiss to re-emphasize that the
petitioner is registered as a NON-VAT taxpayer and thus, is exempt from
VAT. As an exempt VAT taxpayer, it is not allowed any tax credit on VAT
(input tax) previously paid. In fine, even if we are to assume that
exemption from the burden of VAT on petitioner’s purchases did exist,
petitioner is still not entitled to any tax credit or refund on the input tax
previously paid as petitioner is an exempt VAT taxpayer.
Rather, it is the petitioner’s suppliers who are the proper parties to claim
the tax credit and accordingly refund the petitioner of the VAT
erroneously passed on to the latter.
Accordingly, we find that the Court of Appeals did not commit any
reversible error of law in holding that petitioner’s VAT exemption under
Rep. Act No. 7227 is limited to the VAT on which it is directly liable as a
seller and hence, it cannot claim any refund or exemption for any input
VAT it paid, if any, on its purchases of raw materials and supplies.
WHEREFORE, the petition is DENIED for lack of merit. The Decision
dated September 3, 2001, of the Court of Appeals in CA-G.R. SP No.
62823, as well as its Resolution of December 19, 2001 are AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 157594               March 9, 2010
TOSHIBA INFORMATION EQUIPMENT (PHILS.), INC., Petitioner,  totaling ₱7,494,677,000.00.11
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
In this Petition for Review on Certiorari1 under Rule 45 of the Rules of
Court, petitioner Toshiba Information Equipment (Philippines), Inc.
(Toshiba) seeks the reversal and setting aside of (1) the Decision2 dated
August 29, 2002 of the Court of Appeals in CA-G.R. SP No. 63047, which
found that Toshiba was not entitled to the credit/refund of its unutilized
input Value-Added Tax (VAT) payments attributable to its export sales,
because it was a tax-exempt entity and its export sales were VAT-exempt
transactions; and (2) the Resolution3 dated February 19, 2003 of the
appellate court in the same case, which denied the Motion for
Reconsideration of Toshiba. The herein assailed judgment of the Court of
Appeals reversed and set aside the Decision4 dated October 16, 2000 of
the Court of Tax Appeals (CTA) in CTA Case No. 5762 granting the claim
for credit/refund of Toshiba in the amount of ₱1,385,282.08.
Toshiba is a domestic corporation principally engaged in the business of
manufacturing and exporting of electric machinery, equipment systems,
accessories, parts, components, materials and goods of all kinds,
including those relating to office automation and information technology
and all types of computer hardware and software, such as but not limited
to HDD-CD-ROM and personal computer printed circuit board.5 It is
registered with the Philippine Economic Zone Authority (PEZA) as an
Economic Zone (ECOZONE) export enterprise in the Laguna
Technopark, Inc., as evidenced by Certificate of Registration No. 95-99
dated September 27, 1995.6 It is also registered with Regional District
Office No. 57 of the Bureau of Internal Revenue (BIR) in San Pedro,
Laguna, as a VAT-taxpayer with Taxpayer Identification No. (TIN) 004-
739-137.7
In its VAT returns for the first and second quarters of 1997,8 filed on April
14, 1997 and July 21, 1997, respectively, Toshiba declared input VAT
payments on its domestic purchases of taxable goods and services in the
aggregate sum of ₱3,875,139.65,9 with no zero-rated sales. Toshiba
subsequently submitted to the BIR on July 23, 1997 its amended VAT
returns for the first and second quarters of 1997,10 reporting the same
amount of input VAT payments but, this time, with zero-rated sales
On March 30, 1999, Toshiba filed with the One-Stop Shop Inter-Agency
Tax Credit and Duty Drawback Center of the Department of Finance
(DOF One-Stop Shop) two separate applications for tax credit/refund12 of
its unutilized input VAT payments for the first half of 1997 in the total
amount of ₱3,685,446.73.13
The next day, on March 31, 1999, Toshiba likewise filed with the CTA a
Petition for Review14 to toll the running of the two-year prescriptive period
under Section 230 of the Tax Code of 1977,15 as amended.16 In said
Petition, docketed as CTA Case No. 5762, Toshiba prayed that –
[A]fter due hearing, judgment be rendered ordering [herein respondent
Commissioner of Internal Revenue (CIR)] to refund or issue to [Toshiba]
a tax refund/tax credit certificate in the amount of P3,875,139.65
representing unutilized input taxes paid on its purchase of taxable goods
and services for the period January 1 to June 30, 1997.17
The Commissioner of Internal Revenue (CIR) opposed the claim for tax
refund/credit of Toshiba, setting up the following special and affirmative
defenses in his Answer18 –
5. [Toshiba’s] alleged claim for refund/tax credit is subject to
administrative routinary investigation/examination by [CIR’s]
Bureau;
6. [Toshiba] failed miserably to show that the total amount of
₱3,875,139.65 claimed as VAT input taxes, were erroneously or
illegally collected, or that the same are properly documented;
7. Taxes paid and collected are presumed to have been made in
accordance with law; hence, not refundable;
8. In an action for tax refund, the burden is on the taxpayer to
establish its right to refund, and failure to sustain the burden is
fatal to the claim for refund;
9. It is incumbent upon [Toshiba] to show that it has complied with
the provisions of Section 204 in relation to Section 229 of the Tax
Code;
 10. Well-established is the rule that claims for refund/tax credit
are construed in strictissimi juris against the taxpayer as it
partakes the nature of exemption from tax.19
Upon being advised by the CTA,20 Toshiba and the CIR filed a Joint
Stipulation of Facts and Issues,21 wherein the opposing parties "agreed
and admitted" that –
1. [Toshiba] is a duly registered value-added tax entity in
accordance with Section 107 of the Tax Code, as amended.
2. [Toshiba] is subject to zero percent (0%) value-added tax on its
export sales in accordance with then Section 100(a)(2)(A) of the
Tax Code, as amended.
3. [Toshiba] filed its quarterly VAT returns for the first two
quarters of 1997 within the legally prescribed period.
Whether or not input taxes incurred by [Toshiba] for the first two quarters
of 1997 are properly substantiated by official receipts and invoices.23
During the trial before the CTA, Toshiba presented documentary
evidence in support of its claim for tax credit/refund, while the CIR did not
present any evidence at all.
With both parties waiving the right to submit their respective memoranda,
the CTA rendered its Decision in CTA Case No. 5762 on October 16,
2000 favoring Toshiba. According to the CTA, the CIR himself admitted
that the export sales of Toshiba were subject to zero percent (0%) VAT
based on Section 100(a)(2)(A)(i) of the Tax Code of 1977, as amended.
Toshiba could then claim tax credit or refund of input VAT paid on its
purchases of goods, properties, or services, directly attributable to such
zero-rated sales, in accordance with Section 4.102-2 of Revenue
Regulations No. 7-95. The CTA, though, reduced the amount to be
credited or refunded to Toshiba to ₱1,385,292.02.

xxxx The dispositive portion of the October 16, 2000 Decision of the CTA fully
reads –
7. [Toshiba] is subject to zero percent (0%) value-added tax on its
export sales. WHEREFORE, [Toshiba’s] claim for refund of unutilized input VAT
payments is hereby GRANTED but in a reduced amount of
₱1,385,282.08 computed as follows:
8. [Toshiba] has duly filed the instant Petition for Review within
the two-year prescriptive period prescribed by then Section 230 of
the Tax Code.22 1st Quarter 2nd Quarter Total
Amount of claimed input
In the same pleading, Toshiba and the CIR jointly submitted the following taxes filed with the DOF P3,268,682.3 P416,764.3 P3,685,446.7
issues for determination by the CTA – One Stop Shop Center 4 9 3

Whether or not [Toshiba] has incurred input taxes in the amount of Less: 1) Input taxes not
₱3,875,139.65 for the period January 1 to June 30, 1997 which are properly 
directly attributable to its export sales[.] supported by VAT
invoices and official
receipts 
Whether or not the input taxes incurred by [Toshiba] for the period
a. Per SGV’s
January 1 to June 30, 1997 have not been carried over to the succeeding
verification  ₱154,391.1
quarters[.]
(Exh. I) ₱ 242,491.45 3 ₱ 396,882.58
Whether or not input taxes incurred by [Toshiba] for the first two quarters b. Per this court’s further
of 1997 have not been offset against any output tax[.] verification (Annex A) ₱1,852,437.6 ₱1,887,545.6
₱ 35,108.00
₱189,499.13 ₱2,300,16 5 5
4.65
 ₱1,158,016.8 ₱227,265.2 ₱1,385,282.0
Amount Refundable
2 6 8
Respondent Commissioner of Internal Revenue is ORDERED to
REFUND to [Toshiba] or in the alternative, ISSUE a TAX CREDIT
CERTIFICATE in the amount of ₱1,385,282.08 representing unutilized
input taxes paid by [Toshiba] on its purchases of taxable goods and
services for the period January 1 to June 30, 1997.24
Both Toshiba and the CIR sought reconsideration of the foregoing CTA
Decision.
Toshiba asserted in its Motion for Reconsideration25 that it had presented
proper substantiation for the ₱1,887,545.65 input VAT disallowed by the
CTA.
The CIR, on the other hand, argued in his Motion for
Reconsideration26 that Toshiba was not entitled to the credit/refund of its
input VAT payments because as a PEZA-registered ECOZONE export
enterprise, Toshiba was not subject to VAT. The CIR invoked the
following statutory and regulatory provisions –
Section 24 of Republic Act No. 791627
SECTION 24. Exemption from Taxes Under the National Internal
Revenue Code. – Any provision of existing laws, rules and regulations to
the contrary notwithstanding, no taxes, local and national, shall be
imposed on business establishments operating within the ECOZONE. In
lieu of paying taxes, five percent (5%) of the gross income earned by all
businesses and enterprises within the ECOZONE shall be remitted to the
national government. x x x.
Section 103(q) of the Tax Code of 1977, as amended
Sec. 103. Exempt transactions. – The following shall be exempt from the
value-added tax:
xxxx
(q) Transactions which are exempt under special laws, except those
granted under Presidential Decree Nos. 66, 529, 972, 1491, and 1950,
and non-electric cooperatives under Republic Act No. 6938, or
international agreements to which the Philippines is a signatory.
Section 4.103-1 of Revenue Regulations No. 7-95
SEC. 4.103-1. Exemptions. – (A) In general. – 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.
The person making the exempt sale of goods, properties or services shall
not bill any output tax to his customers because the said transaction is
not subject to VAT. On the other hand, a VAT-registered purchaser of
VAT-exempt goods, properties or services which are exempt from VAT is
not entitled to any input tax on such purchase despite the issuance of a
VAT invoice or receipt.
The CIR contended that under Section 24 of Republic Act No. 7916, a
special law, all businesses and establishments within the ECOZONE
were to remit to the government five percent (5%) of their gross income
earned within the zone, in lieu of all taxes, including VAT. This placed
Toshiba within the ambit of Section 103(q) of the Tax Code of 1977, as
amended, which exempted from VAT the transactions that were
exempted under special laws. Following Section 4.103-1(A) of Revenue
Regulations No. 7-95, the VAT-exemption of Toshiba meant that its sale
of goods was not subject to output VAT and Toshiba as seller was not
allowed any tax credit on the input VAT it had previously paid.
On January 17, 2001, the CTA issued a Resolution28 denying both
Motions for Reconsideration of Toshiba and the CIR.
The CTA took note that the pieces of evidence referred to by Toshiba in
its Motion for Reconsideration were insufficient substantiation, being
mere schedules of input VAT payments it had purportedly paid for the
first and second quarters of 1997. While the CTA gives credence to the
report of its commissioned certified public accountant (CPA), it does not
render its decision based on the findings of the said CPA alone. The CTA
has its own CPA and the tax court itself conducts an
investigation/examination of the documents presented. The CTA stood by
its earlier disallowance of the amount of ₱1,887,545.65 as tax
credit/refund because it was not supported by VAT invoices and/or official
receipts.
1avvphi1
The CTA refused to consider the argument that Toshiba was not entitled
to a tax credit/refund under Section 24 of Republic Act No. 7916 because
it was only raised by the CIR for the first time in his Motion for
Reconsideration. Also, contrary to the assertions of the CIR, the CTA
held that Section 23, and not Section 24, of Republic Act No. 7916,
applied to Toshiba. According to Section 23 of Republic Act No. 7916 –
SECTION 23. Fiscal Incentives. – Business establishments operating
within the ECOZONES shall be entitled to the fiscal incentives as
provided for under Presidential Decree No. 66, the law creating the
Export Processing Zone Authority, or those provided under Book VI of
Executive Order No. 226, otherwise known as the Omnibus Investment
Code of 1987.
Furthermore, tax credits for exporters using local materials as inputs shall
enjoy the benefits provided for in the Export Development Act of 1994.
Among the fiscal incentives granted to PEZA-registered enterprises by
the Omnibus Investments Code of 1987 was the income tax holiday, to
wit –
Art. 39. Incentives to Registered Enterprises. – All registered enterprises
shall be granted the following incentives to the extent engaged in a
preferred area of investment:
(a) Income Tax Holiday. —
(1) For six (6) years from commercial operation for
pioneer firms and four (4) years for non-pioneer firms,
new registered firms shall be fully exempt from income
taxes levied by the national government. Subject to such
guidelines as may be prescribed by the Board, the
income tax exemption will be extended for another year in
each of the following cases:
(i) The project meets the prescribed ratio of
capital equipment to number of workers set by the
Board;
(ii) Utilization of indigenous raw materials at rates
set by the Board;
(iii) The net foreign exchange savings or earnings
amount to at least US$500,000.00 annually during
the first three (3) years of operation.
The preceding paragraph notwithstanding, no registered
pioneer firm may avail of this incentive for a period
exceeding eight (8) years.
(2) For a period of three (3) years from commercial
operation, registered expanding firms shall be entitled to
an exemption from income taxes levied by the National
Government proportionate to their expansion under such
terms and conditions as the Board may
determine: Provided, however, That during the period
within which this incentive is availed of by the expanding
firm it shall not be entitled to additional deduction for
incremental labor expense.
(3) The provision of Article 7(14) notwithstanding,
registered firms shall not be entitled to any extension of
this incentive.
The CTA pointed out that Toshiba availed itself of the income tax holiday
under the Omnibus Investments Code of 1987, so Toshiba was exempt
only from income tax but not from other taxes such as VAT. As a result,
Toshiba was liable for output VAT on its export sales, but at zero percent
(0%) rate, and entitled to the credit/refund of the input VAT paid on its
purchases of goods and services relative to such zero-rated export sales.
Unsatisfied, the CIR filed a Petition for Review29 with the Court of
Appeals, docketed as CA-G.R. SP No. 63047.
In its Decision dated August 29, 2002, the Court of Appeals granted the
appeal of the CIR, and reversed and set aside the Decision dated
October 16, 2000 and the Resolution dated January 17, 2001 of the CTA.
The appellate court ruled that Toshiba was not entitled to the refund of its
alleged unused input VAT payments because it was a tax-exempt entity
under Section 24 of Republic Act No. 7916. As a PEZA-registered
corporation, Toshiba was liable for remitting to the national government
the five percent (5%) preferential rate on its gross income earned within
the ECOZONE, in lieu of all other national and local taxes, including VAT.
The Court of Appeals further adjudged that the export sales of Toshiba
were VAT-exempt, not zero-rated, transactions. The appellate court
found that the Answer filed by the CIR in CTA Case No. 5762 did not
contain any admission that the export sales of Toshiba were zero-rated
transactions under Section 100(a)(2)(A) of the Tax Code of 1977, as
amended. At the least, what was admitted by the CIR in said Answer was
that the Tax Code provisions cited in the Petition for Review of Toshiba in
CTA Case No. 5762 were correct. As to the Joint Stipulation of Facts and
Issues filed by the parties in CTA Case No. 5762, which stated that
Toshiba was subject to zero percent (0%) VAT on its export sales, the
appellate court declared that the CIR signed the said pleading through
palpable mistake. This palpable mistake in the stipulation of facts should
not be taken against the CIR, for to do otherwise would result in
suppressing the truth through falsehood. In addition, the State could not
be put in estoppel by the mistakes or errors of its officials or agents.
Given that Toshiba was a tax-exempt entity under Republic Act No. 7916,
a special law, the Court of Appeals concluded that the export sales of
Toshiba were VAT-exempt transactions under Section 109(q) of the Tax
Code of 1997, formerly Section 103(q) of the Tax Code of 1977.
Therefore, Toshiba could not claim refund of its input VAT payments on
its domestic purchases of goods and services.
The Court of Appeals decreed at the end of its August 29, 2002 Decision
– 5.2 THE HONORABLE COURT OF APPEALS ERRED WHEN IT
WHEREFORE, premises considered, the appealed decision of the Court
of Tax Appeals in CTA Case No. 5762, is hereby REVERSED and SET
ASIDE, and a new one is hereby rendered finding [Toshiba], being a tax
exempt entity under R.A. No. 7916, not entitled to refund the VAT
payments made in its domestic purchases of goods and services.30
Toshiba filed a Motion for Reconsideration31 of the aforementioned
Decision, anchored on the following arguments: (a) the CIR never raised
as an issue before the CTA that Toshiba was tax-exempt under Section
24 of Republic Act No. 7916; (b) Section 24 of Republic Act No. 7916,
subjecting the gross income earned by a PEZA-registered enterprise
within the ECOZONE to a preferential rate of five percent (5%), in lieu of
all taxes, did not apply to Toshiba, which availed itself of the income tax
holiday under Section 23 of the same statute; (c) the conclusion of the
CTA that the export sales of Toshiba were zero-rated was supported by
substantial evidence, other than the admission of the CIR in the Joint
Stipulation of Facts and Issues; and (d) the judgment of the CTA granting
the refund of the input VAT payments was supported by substantial
evidence and should not have been set aside by the Court of Appeals.
In a Resolution dated February 19, 2003, the Court of Appeals denied the
Motion for Reconsideration of Toshiba since the arguments presented
therein were mere reiterations of those already passed upon and found to
be without merit by the appellate court in its earlier Decision. The Court of
Appeals, however, mentioned that it was incorrect for Toshiba to say that
the issue of the applicability of Section 24 of Republic Act No. 7916 was
only raised for the first time on appeal before the appellate court. The
said issue was adequately raised by the CIR in his Motion for
Reconsideration before the CTA, and was even ruled upon by the tax
court.
Hence, Toshiba filed the instant Petition for Review with the following
assignment of errors –
5.1 THE HONORABLE COURT OF APPEALS ERRED WHEN IT
RULED THAT [TOSHIBA], BEING A PEZA-REGISTERED
ENTERPRISE, IS EXEMPT FROM VAT UNDER SECTION 24
OF R.A. 7916, AND FURTHER HOLDING THAT [TOSHIBA’S]
EXPORT SALES ARE EXEMPT TRANSACTIONS UNDER
SECTION 109 OF THE TAX CODE.
FAILED TO DISMISS OUTRIGHT AND GAVE DUE COURSE TO
[CIR’S] PETITION NOTWITHSTANDING [CIR’S] FAILURE TO
ADEQUATELY RAISE IN ISSUE DURING THE TRIAL IN THE
COURT OF TAX APPEALS THE APPLICABILITY OF SECTION
24 OF R.A. 7916 TO [TOSHIBA’S] CLAIM FOR REFUND.
5.3 THE HONORABLE COURT OF APPEALS ERRED WHEN
[IT] RULED THAT THE COURT OF TAX APPEALS’ FINDINGS,
WITH REGARD [TOSHIBA’S] EXPORT SALES BEING ZERO
RATED SALES FOR VAT PURPOSES, WERE BASED MERELY
ON THE ADMISSIONS MADE BY [CIR’S] COUNSEL AND NOT
SUPPORTED BY SUBSTANTIAL EVIDENCE.
5.4 THE HONORABLE COURT OF APPEALS ERRED WHEN IT
REVERSED THE DECISION OF THE COURT OF TAX
APPEALS GRANTING [TOSHIBA’S] CLAIM FOR REFUND[;]32
and the following prayer –
WHEREFORE, premises considered, Petitioner TOSHIBA
INFORMATION EQUIPMENT (PHILS.), INC. most respectfully prays that
the decision and resolution of the Honorable Court of Appeals, reversing
the decision of the CTA in CTA Case No. 5762, be set aside and further
prays that a new one be rendered AFFIRMING AND UPHOLDING the
Decision of the CTA promulgated on October 16, 2000 in CTA Case No.
5762.
Other reliefs, which the Honorable Court may deem just and equitable
under the circumstances, are likewise prayed for.33
The Petition is impressed with merit.
The CIR did not timely raise before the CTA the issues on the VAT-
exemptions of Toshiba and its export sales.
Upon the failure of the CIR to timely plead and prove before the CTA the
defenses or objections that Toshiba was VAT-exempt under Section 24
of Republic Act No. 7916, and that its export sales were VAT-exempt
transactions under Section 103(q) of the Tax Code of 1977, as amended,
the CIR is deemed to have waived the same.
During the pendency of CTA Case No. 5762, the proceedings before the
CTA were governed by the Rules of the Court of Tax Appeals,34 while the
Rules of Court were applied suppletorily.35
Rule 9, Section 1 of the Rules of Court provides:
SECTION 1. Defenses and objections not pleaded. – Defenses and
objections not pleaded either in a motion to dismiss or in the answer are
deemed waived. However, when it appears from the pleadings or the
evidence on record that the court has no jurisdiction over the subject
matter, that there is another action pending between the same parties for
the same cause, or that the action is barred by a prior judgment or by
statute of limitations, the court shall dismiss the claim.
The CIR did not argue straight away in his Answer in CTA Case No. 5762
that Toshiba had no right to the credit/refund of its input VAT payments
because the latter was VAT-exempt and its export sales were VAT-
exempt transactions. The Pre-Trial Brief36 of the CIR was equally bereft of
such allegations or arguments. The CIR passed up the opportunity to
prove the supposed VAT-exemptions of Toshiba and its export sales
when the CIR chose not to present any evidence at all during the trial
before the CTA.37 He missed another opportunity to present the said
issues before the CTA when he waived the submission of a
Memorandum.38 The CIR had waited until the CTA already rendered its
Decision dated October 16, 2000 in CTA Case No. 5762, which granted
the claim for credit/refund of Toshiba, before asserting in his Motion for
Reconsideration that Toshiba was VAT-exempt and its export sales were
VAT-exempt transactions.
The CIR did not offer any explanation as to why he did not argue the
VAT-exemptions of Toshiba and its export sales before and during the
trial held by the CTA, only doing so in his Motion for Reconsideration of
the adverse CTA judgment. Surely, said defenses or objections were
already available to the CIR when the CIR filed his Answer to the Petition
for Review of Toshiba in CTA Case No. 5762.
It is axiomatic in pleadings and practice that no new issue in a case can
be raised in a pleading which by due diligence could have been raised in
previous pleadings.39 The Court cannot simply grant the plea of the CIR
that the procedural rules be relaxed based on the general averment of
the interest of substantive justice. It should not be forgotten that the first
and fundamental concern of the rules of procedure is to secure a just
determination of every action.40 Procedural rules are designed to facilitate
the adjudication of cases. Courts and litigants alike are enjoined to abide
strictly by the rules. While in certain instances, the Court allows a
relaxation in the application of the rules, it never intends to forge a
weapon for erring litigants to violate the rules with impunity. The liberal
interpretation and application of rules apply only in proper cases of
demonstrable merit and under justifiable causes and circumstances.
While it is true that litigation is not a game of technicalities, it is equally
true that every case must be prosecuted in accordance with the
prescribed procedure to ensure an orderly and speedy administration of
justice. Party litigants and their counsel are well advised to abide by,
rather than flaunt, procedural rules for these rules illumine the path of the
law and rationalize the pursuit of justice.41
The CIR judicially admitted that Toshiba was VAT-registered and its
export sales were subject to VAT at zero percent (0%) rate.
More importantly, the arguments of the CIR that Toshiba was VAT-
exempt and the latter’s export sales were VAT-exempt transactions are
inconsistent with the explicit admissions of the CIR in the Joint Stipulation
of Facts and Issues (Joint Stipulation) that Toshiba was a registered VAT
entity and that it was subject to zero percent (0%) VAT on its export
sales.
The Joint Stipulation was executed and submitted by Toshiba and the
CIR upon being advised to do so by the CTA at the end of the pre-trial
conference held on June 23, 1999.42 The approval of the Joint Stipulation
by the CTA, in its Resolution43 dated July 12, 1999, marked the
culmination of the pre-trial process in CTA Case No. 5762.
Pre-trial is an answer to the clarion call for the speedy disposition of
cases. Although it was discretionary under the 1940 Rules of Court, it
was made mandatory under the 1964 Rules and the subsequent
amendments in 1997. It has been hailed as "the most important
procedural innovation in Anglo-Saxon justice in the nineteenth century."44
The nature and purpose of a pre-trial have been laid down in Rule 18,
Section 2 of the Rules of Court:
SECTION 2. Nature and purpose. – The pre-trial is mandatory. The court
shall consider:
(a) The possibility of an amicable settlement or of a submission to
alternative modes of dispute resolution;
(b) The simplification of the issues;
(c) The necessity or desirability of amendments to the pleadings;
(d) The possibility of obtaining stipulations or admissions of facts
and of documents to avoid unnecessary proof;
(e) The limitation of the number of witnesses;
(f) The advisability of a preliminary reference of issues to a
commissioner;
(g) The propriety of rendering judgment on the pleadings, or
summary judgment, or of dismissing the action should a valid
ground therefor be found to exist;
(h) The advisability or necessity of suspending the proceedings;
and
(i) Such other matters as may aid in the prompt disposition of the
action. (Emphasis ours.)
The admission having been made in a stipulation of facts at pre-trial by
the parties, it must be treated as a judicial admission.45 Under Section 4,
Rule 129 of the Rules of Court, a judicial admission requires no proof.
The admission may be contradicted only by a showing that it was made
through palpable mistake or that no such admission was made. The
Court cannot lightly set aside a judicial admission especially when the
opposing party relied upon the same and accordingly dispensed with
further proof of the fact already admitted. An admission made by a party
in the course of the proceedings does not require proof.46
In the instant case, among the facts expressly admitted by the CIR and
Toshiba in their CTA-approved Joint Stipulation are that Toshiba "is a
duly registered value-added tax entity in accordance with Section 107 of
the Tax Code, as amended[,]"47 that "is subject to zero percent (0%)
value-added tax on its export sales in accordance with then Section
100(a)(2)(A) of the Tax Code, as amended."48 The CIR was bound by
these admissions, which he could not eventually contradict in his Motion
for Reconsideration of the CTA Decision dated October 16, 2000, by
arguing that Toshiba was actually a VAT-exempt entity and its export
sales were VAT-exempt transactions. Obviously, Toshiba could not have
been subject to VAT and exempt from VAT at the same time. Similarly,
the export sales of Toshiba could not have been subject to zero percent
(0%) VAT and exempt from VAT as well.
The CIR cannot escape the binding effect of his judicial admissions.
The Court disagrees with the Court of Appeals when it ruled in its
Decision dated August 29, 2002 that the CIR could not be bound by his
admissions in the Joint Stipulation because (1) the said admissions were
"made through palpable mistake"49 which, if countenanced, "would result
in falsehood, unfairness and injustice";50 and (2) the State could not be
put in estoppel by the mistakes of its officials or agents. This ruling of the
Court of Appeals is rooted in its conclusion that a "palpable mistake" had
been committed by the CIR in the signing of the Joint Stipulation.
However, this Court finds no evidence of the commission of a mistake,
much more, of a palpable one.
The CIR does not deny that his counsel, Atty. Joselito F. Biazon,
Revenue Attorney II of the BIR, signed the Joint Stipulation, together with
the counsel of Toshiba, Atty. Patricia B. Bisda. Considering the
presumption of regularity in the performance of official duty,51 Atty. Biazon
is presumed to have read, studied, and understood the contents of the
Joint Stipulation before he signed the same. It rests on the CIR to present
evidence to the contrary.
Yet, the Court observes that the CIR himself never alleged in his Motion
for Reconsideration of the CTA Decision dated October 16, 2000, nor in
his Petition for Review before the Court of Appeals, that Atty. Biazon
committed a mistake in signing the Joint Stipulation. Since the CIR did
not make such an allegation, neither did he present any proof in support
thereof. The CIR began to aver the existence of a palpable mistake only
after the Court of Appeals made such a declaration in its Decision dated
August 29, 2002.
Despite the absence of allegation and evidence by the CIR, the Court of
Appeals, on its own, concluded that the admissions of the CIR in the
Joint Stipulation were due to a palpable mistake based on the following
deduction –
Scrutinizing the Answer filed by [the CIR], we rule that the Joint
Stipulation of Facts and Issues signed by [the CIR] was made through
palpable mistake. Quoting paragraph 4 of its Answer, [the CIR] states:
"4. He ADMITS the allegations contained in paragraph 5 of the petition
only insofar as the cited provisions of Tax Code is concerned, but
SPECIFICALLY DENIES the rest of the allegations therein for being
mere opinions, arguments or gratuitous assertions on the part of
[Toshiba] and/or because they are mere erroneous conclusions or
interpretations of the quoted law involved, the truth of the matter being
those stated hereunder
x x x x"
And paragraph 5 of the petition for review filed by [Toshiba] before the
CTA states:
"5. Petitioner is subject to zero percent (0%) value-added tax on its
export sales in accordance with then Section 100(a)(2)(A) of the Tax
Code x x x.
x x x x"
As we see it, nothing in said Answer did [the CIR] admit that the export
sales of [Toshiba] were indeed zero-rated transactions. At the least, what
was admitted only by [the CIR] concerning paragraph 4 of his Answer, is
the fact that the provisions of the Tax Code, as cited by [Toshiba] in its
petition for review filed before the CTA were correct.52
The Court of Appeals provided no explanation as to why the admissions
of the CIR in his Answer in CTA Case No. 5762 deserved more weight
and credence than those he made in the Joint Stipulation. The appellate
court failed to appreciate that the CIR, through counsel, Atty. Biazon, also
signed the Joint Stipulation; and that absent evidence to the contrary,
Atty. Biazon is presumed to have signed the Joint Stipulation willingly and
knowingly, in the regular performance of his official duties. Additionally,
the Joint Stipulation53 of Toshiba and the CIR was a more recent pleading
than the Answer54 of the CIR. It was submitted by the parties after the
pre-trial conference held by the CTA, and subsequently approved by the
tax court. If there was any discrepancy between the admissions of the
CIR in his Answer and in the Joint Stipulation, the more logical and
reasonable explanation would be that the CIR changed his mind or
conceded some points to Toshiba during the pre-trial conference which
immediately preceded the execution of the Joint Stipulation. To
automatically construe that the discrepancy was the result of a palpable
mistake is a wide leap which this Court is not prepared to take without
substantial basis.
The judicial admissions of the CIR in the Joint Stipulation are not
intrinsically false, wrong, or illegal, and are consistent with the ruling on
the VAT treatment of PEZA-registered enterprises in the previous
Toshiba case.
There is no basis for believing that to bind the CIR to his judicial
admissions in the Joint Stipulation – that Toshiba was a VAT-registered
entity and its export sales were zero-rated VAT transactions – would
result in "falsehood, unfairness and injustice." The judicial admissions of
the CIR are not intrinsically false, wrong, or illegal. On the contrary, they
are consistent with the ruling of this Court in a previous case involving the
same parties, Commissioner of Internal Revenue v. Toshiba Information
Equipment (Phils.) Inc.55 (Toshiba case), explaining the VAT treatment of
PEZA-registered enterprises.
In the Toshiba case, Toshiba sought the refund of its unutilized input VAT
on its purchase of capital goods and services for the first and second
quarters of 1996, based on Section 106(b) of the Tax Code of 1977, as
amended.56In the Petition at bar, Toshiba is claiming refund of its
unutilized input VAT on its local purchase of goods and services which
are attributable to its export sales for the first and second quarters of
1997, pursuant to Section 106(a), in relation to Section 100(a)(1)(A)(i) of
the Tax Code of 1977, as amended, which read –
SEC. 106. Refunds or tax credits of creditable input tax. – (a) 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 100(a)(2)(A)(i),(ii) and (b) and Section
102(b)(1) and (2), the acceptable foreign currency exchange proceeds
thereof has been duly accounted for in accordance with the 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 of 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 sales.
SEC. 100. Value-added tax on sale of goods or properties. – (a) Rate
and base of tax. – x x x
xxxx
(2) The following sales by VAT-registered persons shall be
subject to 0%:
(A) Export sales. – The term "export sales" means:
(i) 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 and 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 Pilipnas (BSP).
Despite the difference in the legal bases for the claims for credit/refund in
the Toshiba case and the case at bar, the CIR raised the very same
defense or objection in both – that Toshiba and its transactions were
VAT-exempt. Hence, the ruling of the Court in the former case is relevant
to the present case.
At the outset, the Court establishes that there is a basic distinction in the
VAT-exemption of a person and the VAT-exemption of a transaction –
It would seem that petitioner CIR failed to differentiate between VAT-
exempt transactions from VAT-exempt entities. In the case of
Commissioner of Internal Revenue v. Seagate Technology (Philippines),
this Court already made such distinction –
An exempt transaction, on the one hand, involves goods or services
which, by their nature, are specifically listed in and expressly exempted
from the VAT under the Tax Code, without regard to the tax status –
VAT-exempt or not – of the party to the transaction…
An exempt party, on the other hand, is a person or entity granted VAT
exemption under the Tax Code, a special law or an international
agreement to which the Philippines is a signatory, and by virtue of which
its taxable transactions become exempt from VAT x x x.57
In effect, the CIR is opposing the claim for credit/refund of input VAT of
Toshiba on two grounds: (1) that Toshiba was a VAT-exempt entity; and
(2) that its export sales were VAT-exempt transactions.
It is now a settled rule that based on the Cross Border Doctrine, PEZA-
registered enterprises, such as Toshiba, are VAT-exempt and no VAT
can be passed on to them. The Court explained in the Toshiba case that
–
PEZA-registered enterprise, 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.
xxxx
The Philippine VAT system adheres to the Cross Border Doctrine,
according to which, no VAT shall be imposed to form part of the cost of
goods destined for consumption outside of the territorial border of the
taxing authority. Hence, actual export of goods and services from the
Philippines to a foreign country must be free of VAT; while, those
destined for use or consumption within the Philippines shall be imposed
with ten percent (10%) VAT.
Applying said doctrine to the sale of goods, properties, and services to
and from the ECOZONES, the BIR issued Revenue Memorandum
Circular (RMC) No. 74-99, on 15 October 1999. Of particular interest to
the present Petition is Section 3 thereof, which reads –
SECTION 3. Tax Treatment of Sales Made by a VAT Registered Supplier
from the Customs Territory, to a PEZA Registered Enterprise. –
(1) If the Buyer is a PEZA registered enterprise which is subject
to the 5% special tax regime, in lieu of all taxes, except real
property tax, pursuant to R.A. No. 7916, as amended:
(a) Sale of goods (i.e., merchandise). – This shall be
treated as indirect export hence, considered subject to
zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5),
NIRC and Sec. 23 of R.A. No. 7916, in relation to ART.
77(2) of the Omnibus Investments Code.
(b) Sale of service. – This shall be treated subject to zero
percent (0%) VAT under the "cross border doctrine" of the
VAT System, pursuant to VAT Ruling No. 032-98 dated
Nov. 5, 1998.
(2) If Buyer is a PEZA registered enterprise which is not
embraced by the 5% special tax regime, hence, subject to taxes
under the NIRC, e.g., Service Establishments which are subject
to taxes under the NIRC rather than the 5% special tax regime:
(a) Sale of goods (i.e., merchandise). – This shall be
treated as indirect export hence, considered subject to
zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5),
NIRC and Sec. 23 of R.A. No. 7916 in relation to ART.
77(2) of the Omnibus Investments Code.
(b) Sale of Service. – This shall be treated subject to zero
percent (0%) VAT under the "cross border doctrine" of the
VAT System, pursuant to VAT Ruling No. 032-98 dated
Nov. 5, 1998.
(3) In the final analysis, any sale of goods, property or services
made by a VAT registered supplier from the Customs Territory to
any registered enterprise operating in the ecozone, regardless of
the class or type of the latter’s PEZA registration, is actually
qualified and thus legally entitled to the zero percent (0%) VAT.
Accordingly, all sales of goods or property to such enterprise
made by a VAT registered supplier from the Customs Territory
shall be treated subject to 0% VAT, pursuant to Sec. 106(A)(2)(a)
(5), NIRC, in relation to ART. 77(2) of the Omnibus Investments
Code, while all sales of services to the said enterprises, made by
VAT registered suppliers from the Customs Territory, shall be
treated effectively subject to the 0% VAT, pursuant to Section
108(B)(3), NIRC, in relation to the provisions of R.A. No. 7916
and the "Cross Border Doctrine" of the VAT system.
This Circular shall serve as a sufficient basis to entitle such supplier of
goods, property or services to the benefit of the zero percent (0%) VAT
for sales made to the aforementioned ECOZONE enterprises and shall
serve as sufficient compliance to the requirement for prior approval of
zero-rating imposed by Revenue Regulations No. 7-95 effective as of the
date of the issuance of this Circular.
Indubitably, no output VAT may be passed on to an ECOZONE
enterprise since it is a VAT-exempt entity. x x x.58
The Court, nevertheless, noted in the Toshiba case that the rule which
considers any sale by a supplier from the Customs Territory to a PEZA-
registered enterprise as export sale, which should not be burdened by
output VAT, was only clearly established on October 15, 1999, upon the
issuance by the BIR of RMC No. 74-99. Prior to October 15, 1999,
whether a PEZA-registered enterprise was exempt or subject to VAT
depended on the type of fiscal incentives availed of by the said
enterprise.59 The old rule, then followed by the BIR, and recognized and
affirmed by the CTA, the Court of Appeals, and this Court, was described
as follows –
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.
The five percent (5%) preferential tax rate on gross income under Rep.
Act No. 7916, as amended, is in lieu of all taxes. Except for real property
taxes, no other national or local tax may be imposed on a PEZA-
registered enterprise availing of this particular fiscal incentive, not even
an indirect tax like VAT.
Alternatively, Book VI of Exec. Order No. 226, as amended, grants
income tax holiday to registered pioneer and non-pioneer enterprises for
six-year and four-year periods, respectively. Those availing of this
incentive are exempt only from income tax, but shall be subject to all
other taxes, including the ten percent (10%) VAT.
This old rule clearly did not take into consideration the Cross Border
Doctrine essential to the VAT system or the fiction of the ECOZONE as a
foreign territory. It relied totally on the choice of fiscal incentives of the
PEZA-registered enterprise. Again, for emphasis, the old VAT rule for
PEZA-registered enterprises was based on their choice of fiscal
incentives: (1) If the PEZA-registered enterprise chose the five percent
(5%) preferential tax on its gross income, in lieu of all taxes, as provided
by Rep. Act No. 7916, as amended, then it would be VAT-exempt; (2) If
the PEZA-registered enterprise availed of the income tax holiday under
Exec. Order No. 226, as amended, it shall be subject to VAT at ten
percent (10%). Such distinction was abolished by RMC No. 74-99, which
categorically declared that all sales of goods, properties, and services
made by a VAT-registered supplier from the Customs Territory to an
ECOZONE enterprise shall be subject to VAT, at zero percent (0%) rate,
regardless of the latter’s type or class of PEZA registration; and, thus,
affirming the nature of a PEZA-registered or an ECOZONE enterprise as
a VAT-exempt entity.60
To recall, Toshiba is herein claiming the refund of unutilized input VAT
payments on its local purchases of goods and services attributable to its
export sales for the first and second quarters of 1997. Such export sales
took place before October 15, 1999, when the old rule on the VAT
treatment of PEZA-registered enterprises still applied. Under this old rule,
it was not only possible, but even acceptable, for Toshiba, availing itself
of the income tax holiday option under Section 23 of Republic Act No.
7916, in relation to Section 39 of the Omnibus Investments Code of 1987,
to be subject to VAT, both indirectly (as purchaser to whom the seller
shifts the VAT burden) and directly (as seller whose sales were subject to
VAT, either at ten percent [10%] or zero percent [0%]).
A VAT-registered seller of goods and/or services who made zero-rated
sales can claim tax credit or refund of the input VAT paid on its
purchases of goods, properties, or services relative to such zero-rated
sales, in accordance with Section 4.102-2 of Revenue Regulations No. 7-
95, which provides –
Sec. 4.102-2. Zero-rating. – (a) In general. - A zero-rated sale by a VAT-
registered person, which is a taxable transaction for VAT purposes, shall
not result in any output tax. However, the input tax on his purchases of
goods, properties or services related to such zero-rated sale shall be
available as tax credit or refund in accordance with these regulations.
The BIR, as late as July 15, 2003, when it issued RMC No. 42-2003,
accepted applications for credit/refund of input VAT on purchases prior to
RMC No. 74-99, filed by PEZA-registered enterprises which availed
themselves of the income tax holiday. The BIR answered Question Q-
5(1) of RMC No. 42-2003 in this wise –
Q-5: Under Revenue Memorandum Circular (RMC) No. 74-99, purchases
by PEZA-registered firms automatically qualify as zero-rated without
seeking prior approval from the BIR effective October 1999.
1) Will the OSS-DOF Center still accept applications from PEZA-
registered claimants who were allegedly billed VAT by their
suppliers before and during the effectivity of the RMC by issuing
VAT invoices/receipts?
xxxx
A-5(1): If the PEZA-registered enterprise is paying the 5%
preferential tax in lieu of all other taxes, the said PEZA-
registered taxpayer cannot claim TCC or refund for the
VAT paid on purchases. However, if the taxpayer is
availing of the income tax holiday, it can claim VAT credit
provided:
a. The taxpayer-claimant is VAT-registered;
b. Purchases are evidenced by VAT invoices or
receipts, whichever is applicable, with shifted VAT
to the purchaser prior to the implementation of
RMC No. 74-99; and
c. The supplier issues a sworn statement under
penalties of perjury that it shifted the VAT and
declared the sales to the PEZA-registered
purchaser as taxable sales in its VAT returns.
For invoices/receipts issued upon the effectivity of RMC No. 74-99, the
claims for input VAT by PEZA-registered companies, regardless of the
type or class of PEZA-registration, should be denied. (Emphases ours.)
Consequently, the CIR cannot herein insist that all PEZA-registered
enterprises are VAT-exempt in every instance. RMC No. 42-2003
contains an express acknowledgement by the BIR that prior to RMC No.
74-99, there were PEZA-registered enterprises liable for VAT and entitled
to credit/refund of input VAT paid under certain conditions.
This Court already rejected in the Toshiba case the argument that sale
transactions of a PEZA-registered enterprise were VAT-exempt under
Section 103(q) of the Tax Code of 1977, as amended, ratiocinating that –
Section 103(q) of the Tax Code of 1977, as amended, relied upon by
petitioner CIR, relates to VAT-exempt transactions. These are
transactions exempted from VAT by special laws or international
agreements to which the Philippines is a signatory. Since such
transactions are not subject to VAT, the sellers cannot pass on any
output VAT to the purchasers of goods, properties, or services, and they
may not claim tax credit/refund of the input VAT they had paid thereon.
Section 103(q) of the Tax Code of 1977, as amended, cannot apply to
transactions of respondent Toshiba because although the said section
recognizes that transactions covered by special laws may be exempt
from VAT, the very same section provides that those falling under
Presidential Decree No. 66 are not. Presidential Decree No. 66, creating
the Export Processing Zone Authority (EPZA), is the precursor of Rep.
Act No. 7916, as amended, under which the EPZA evolved into the
PEZA. Consequently, the exception of Presidential Decree No. 66 from
Section 103(q) of the Tax Code of 1977, as amended, extends likewise to
Rep. Act No. 7916, as amended.61 (Emphasis ours.)
In light of the judicial admissions of Toshiba, the CTA correctly confined
itself to the other factual issues submitted for resolution by the parties.
In accord with the admitted facts – that Toshiba was a VAT-registered
entity and that its export sales were zero-rated transactions – the stated
issues in the Joint Stipulation were limited to other factual matters,
particularly, on the compliance by Toshiba with the rest of the
requirements for credit/refund of input VAT on zero-rated transactions.
Thus, during trial, Toshiba concentrated on presenting evidence to
establish that it incurred ₱3,875,139.65 of input VAT for the first and
second quarters of 1997 which were directly attributable to its export
sales; that said amount of input VAT were not carried over to the
succeeding quarters; that said amount of input VAT has not been applied
or offset against any output VAT liability; and that said amount of input
VAT was properly substantiated by official receipts and invoices.
After what truly appears to be an exhaustive review of the evidence
presented by Toshiba, the CTA made the following findings –
(1) The amended quarterly VAT returns of Toshiba for 1997
showed that it made no other sales, except zero-rated export
sales, for the entire year, in the sum of ₱2,083,305,000.00 for the
first quarter and ₱5,411,372,000.00 for the second quarter. That
being the case, all input VAT allegedly incurred by Toshiba for the
first two quarters of 1997, in the amount of ₱3,875,139.65, was
directly attributable to its zero-rated sales for the same period.
(2) Toshiba did carry-over the ₱3,875,139.65 input VAT it
reportedly incurred during the first two quarters of 1997 to
succeeding quarters, until the first quarter of 1999. Despite the
carry-over of the subject input VAT of ₱3,875,139.65, the claim of
Toshiba was not affected because it later on deducted the said
amount as "VAT Refund/TCC Claimed" from its total available
input VAT of ₱6,841,468.17 for the first quarter of 1999.
(3) Still, the CTA could not allow the credit/refund of the total input
VAT of ₱3,875,139.65 being claimed by Toshiba because not all
of said amount was actually incurred by the company and duly
substantiated by invoices and official receipts. From the
₱3,875,139.65 claim, the CTA deducted the amounts of (a)
₱189,692.92, which was in excess of the ₱3,685,446.23 input
VAT Toshiba originally claimed in its application for credit/refund
filed with the DOF One-Stop Shop; (b) ₱396,882.58, which SGV
& Co., the commissioned CPA, disallowed for being improperly
substantiated, i.e., supported only by provisional
acknowledgement receipts, or by documents other than official
receipts, or not supported by TIN or TIN VAT or by any document
at all; (c) ₱1,887,545.65, which the CTA itself verified as not
being substantiated in accordance with Section 4.104-562 of
Revenue Regulations No. 7-95, in relation to Sections 10863 and
23864 of the Tax Code of 1977, as amended; and (d) ₱15,736.42,
which Toshiba already applied to its output VAT liability for the
fourth quarter of 1998.
(4) Ultimately, Toshiba was entitled to the credit/refund of
unutilized input VAT payments attributable to its zero-rated sales
 in the amounts of ₱1,158,016.82 and ₱227,265.26, for the first
and second quarters of 1997, respectively, or in the total amount
of ₱1,385,282.08.

Since the aforementioned findings of fact of the CTA are borne by

substantial evidence on record, unrefuted by the CIR, and untouched by
the Court of Appeals, they are given utmost respect by this Court.

The Court will not lightly set aside the conclusions reached by the CTA
which, by the very nature of its functions, is dedicated exclusively to the
resolution of tax problems and has accordingly developed an expertise
on the subject unless there has been an abuse or improvident exercise of
authority.65 In Barcelon, Roxas Securities, Inc. (now known as UBP
Securities, Inc.) v. Commissioner of Internal Revenue,66 this Court more
explicitly pronounced –

Jurisprudence has consistently shown that this Court accords the findings
of fact by the CTA with the highest respect. In Sea-Land Service Inc. v.
Court of Appeals [G.R. No. 122605, 30 April 2001, 357 SCRA 441, 445-
446], this Court recognizes that the Court of Tax Appeals, which by the
very nature of its function is dedicated exclusively to the consideration of
tax problems, has necessarily developed an expertise on the subject, and
its conclusions will not be overturned unless there has been an abuse or
improvident exercise of authority. Such findings can only be disturbed on
appeal if they are not supported by substantial evidence or there is a
showing of gross error or abuse on the part of the Tax Court. In the
absence of any clear and convincing proof to the contrary, this Court
must presume that the CTA rendered a decision which is valid in every
respect.

WHEREFORE, the assailed Decision dated August 29, 2002 and the G.R. No. 153866             February 11, 2005
Resolution dated February 19, 2003 of the Court of Appeals in CA-G.R.
SP No. 63047 are REVERSED and SET ASIDE, and the Decision dated COMMISSIONER OF INTERNAL REVENUE, petitioner, 
October 16, 2000 of the Court of Tax Appeals in CTA Case No. 5762 is vs.
REINSTATED. Respondent Commissioner of Internal Revenue is SEAGATE TECHNOLOGY (PHILIPPINES), respondent.
ORDERED to REFUND or, in the alternative, to ISSUE a TAX CREDIT
CERTIFICATE in favor of petitioner Toshiba Information Equipment
DECISION
(Phils.), Inc. in the amount of ₱1,385,282.08, representing the latter’s
unutilized input VAT payments for the first and second quarters of 1997.
No pronouncement as to costs. PANGANIBAN, J.:

SO ORDERED. 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 Review under Rule 45 of the Rules of Court,
1 
seeking to set aside the May 27, 2002 Decision of the Court of Appeals
2 
(CA) in CA-GR SP No. 66093. The decretal portion of the Decision reads
as follows:
"WHEREFORE, foregoing premises considered, the petition for review
is DENIED for lack of merit." 3
The Facts
The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as
follows:
"As jointly stipulated by the parties, the pertinent facts x x x involved in
this case are as follows:
1. [Respondent] is a resident foreign corporation duly registered with the
Securities and Exchange Commission to do business in the Philippines,
with principal office address at the new Cebu Township One, Special
Economic Zone, Barangay Cantao-an, Naga, Cebu;
2. [Petitioner] is sued in his official capacity, having been duly appointed
and empowered to perform the duties of his office, including, among
others, the duty to act and approve claims for refund or tax credit;
3. [Respondent] is registered with the Philippine Export Zone Authority
(PEZA) and has been issued PEZA Certificate No. 97-044 pursuant to
Presidential Decree No. 66, as amended, to engage in the manufacture
of recording components primarily used in computers for export. Such
registration was made on 6 June 1997;
4. [Respondent] is VAT [(Value Added Tax)]-registered entity as
evidenced by VAT Registration Certification No. 97-083-000600-V issued
on 2 April 1997;
5. VAT returns for the period 1 April 1998 to 30 June 1999 have been
filed by [respondent];
6. An administrative claim for refund of VAT input taxes in the amount
of P28,369,226.38 with supporting documents (inclusive of
the P12,267,981.04 VAT input taxes subject of this Petition for Review),
was filed on 4 October 1999 with Revenue District Office No. 83, Talisay
Cebu;
7. No final action has been received by [respondent] from [petitioner] on
[respondent’s] claim for VAT refund.
"The administrative claim for refund by the [respondent] on October 4,
1999 was not acted upon by the [petitioner] prompting the [respondent] to
elevate the case to [the CTA] on July 21, 2000 by way of Petition for
Review in order to toll the running of the two-year prescriptive period.
"For his part, [petitioner] x x x raised the following Special and Affirmative
Defenses, to wit:
1. [Respondent’s] alleged claim for tax refund/credit is subject to
administrative routinary investigation/examination by [petitioner’s]
Bureau;
2. Since ‘taxes are presumed to have been collected in accordance with
laws and regulations,’ the [respondent] has the burden of proof that the
taxes sought to be refunded were erroneously or illegally collected x x x;
3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the
Supreme Court ruled that:
"A claimant has the burden of proof to establish the factual basis of his or
her claim for tax credit/refund."
4. Claims for tax refund/tax credit are construed in ‘strictissimi juris’
against the taxpayer. This is due to the fact that claims for refund/credit
[partake of] the nature of an exemption from tax. Thus, it is incumbent
upon the [respondent] to prove that it is indeed entitled to the
refund/credit sought. Failure on the part of the [respondent] to prove the
same is fatal to its claim for tax credit. He who claims exemption must be
able to justify his claim by the clearest grant of organic or statutory law.
An exemption from the common burden cannot be permitted to exist
upon vague implications;
5. Granting, without admitting, that [respondent] is a Philippine Economic
Zone Authority (PEZA) registered Ecozone Enterprise, then its business
is not subject to VAT pursuant to Section 24 of Republic Act No. ([RA])
7916 in relation to Section 103 of the Tax Code, as amended. As
[respondent’s] business is not subject to VAT, the capital goods and
services it alleged to have purchased are considered not used in VAT
taxable business. As such, [respondent] is not entitled to refund of input
taxes on such capital goods pursuant to Section 4.106.1 of Revenue
Regulations No. ([RR])7-95, and of input taxes on services pursuant to
Section 4.103 of said regulations.
6. [Respondent] must show compliance with the provisions of Section
204 (C) and 229 of the 1997 Tax Code on filing of a written claim for
refund within two (2) years from the date of payment of tax.’
"On July 19, 2001, the Tax Court rendered a decision granting the claim
for refund."
4
Ruling of the Court of Appeals
The CA affirmed the Decision of the CTA granting the claim for refund or
issuance of a tax credit certificate (TCC) in favor of respondent in the
reduced amount of P12,122,922.66. This sum represented the unutilized
but substantiated input VAT paid on capital goods purchased for the
period covering April 1, 1998 to June 30, 1999.
The appellate court reasoned that respondent had availed itself only of
the fiscal incentives under Executive Order No. (EO) 226 (otherwise
known as the Omnibus Investment Code of 1987), not of those under
both Presidential Decree No. (PD) 66, as amended, and Section 24 of
RA 7916. Respondent was, therefore, considered exempt only from the
payment of income tax when it opted for the income tax holiday in lieu of
the 5 percent preferential tax on gross income earned. As a VAT-
registered entity, though, it was still subject to the payment of other
national internal revenue taxes, like the VAT.
Moreover, the CA held that neither Section 109 of the Tax Code nor
Sections 4.106-1 and 4.103-1 of RR 7-95 were applicable. Having paid
the input VAT on the capital goods it purchased, respondent correctly
filed the administrative and judicial claims for its refund within the two-
year prescriptive period. Such payments were -- to the extent of the
refundable value -- duly supported by VAT invoices or official receipts,
and were not yet offset against any output VAT liability.
Hence this Petition. 5
Sole Issue
Petitioner submits this sole issue for our consideration:
"Whether or not respondent is entitled to the refund or issuance of Tax
Credit Certificate in the amount of P12,122,922.66 representing alleged
unutilized input VAT paid on capital goods purchased for the period April
1, 1998 to June 30, 1999." 6
The Court’s Ruling
The Petition is unmeritorious.
Sole Issue:
Entitlement of a VAT-Registered PEZA Enterprise to a Refund of or
Credit for Input VAT
No doubt, as a PEZA-registered enterprise within a special economic
zone, respondent is entitled to the fiscal incentives and benefits provided
7  8 
for in either PD 66 or EO 226. It shall, moreover, enjoy all privileges,
9  10 
benefits, advantages or exemptions under both Republic Act Nos. (RA)
7227 and 7844.
11  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. Even so,
13 
respondent would enjoy a net-operating loss carry over; accelerated
depreciation; foreign exchange and financial assistance; and exemption not in the course of trade or business, or imposed on each sale, barter,
from export taxes, local taxes and licenses. 14
exchange or lease of goods or properties or on each rendition of services
in the course of trade or business as they pass along the production and
29 

Comparatively, the same exemption from internal revenue laws and distribution chain, the tax being limited only to the value added to such 30 

regulations applies if EO 226 is chosen. Under this law, respondent shall

15  goods, properties or services by the seller, transferor or lessor. It is an 31 

further be entitled to an income tax holiday; additional deduction for labor indirect tax that may be shifted or passed on to the buyer, transferee or
expense; simplification of customs procedure; unrestricted use of lessee of the goods, properties or services. As such, it should be
32 

consigned equipment; access to a bonded manufacturing warehouse understood not in the context of the person or entity that is primarily,
system; privileges for foreign nationals employed; tax credits on domestic directly and legally liable for its payment, but in terms of its nature as a
capital equipment, as well as for taxes and duties on raw materials; and tax on consumption. In either case, though, the same conclusion is
33 

exemption from contractors’ taxes, wharfage dues, taxes and duties on arrived at.
imported capital equipment and spare parts, export taxes, duties, imposts
and fees, local taxes and licenses, and real property taxes.
16  17
The law that originally imposed the VAT in the country, as well as the
34 

subsequent amendments of that law, has been drawn from the tax credit
A privilege available to respondent under the provision in RA 7227 on tax method. Such method adopted the mechanics and self-enforcement
35 

and duty-free importation of raw materials, capital and equipment -- is, 18  features of the VAT as first implemented and practiced in Europe and
ipso facto, also accorded to the zone under RA 7916. Furthermore, the
19  subsequently adopted in New Zealand and Canada. Under the present 36 

latter law -- notwithstanding other existing laws, rules and regulations to method that relies on invoices, an entity can credit against or subtract
the contrary -- extends to that zone the provision stating that no local or
20  from the VAT charged on its sales or outputs the VAT paid on its
national taxes shall be imposed therein. No exchange control policy shall
21  purchases, inputs and imports. 37

be applied; and free markets for foreign exchange, gold, securities and
future shall be allowed and maintained. Banking and finance shall also
22 
If at the end of a taxable quarter the output taxes charged by a seller are
38  39 

be liberalized under minimum Bangko Sentral regulation with the equal to the input taxes passed on by the suppliers, no payment is
40 

establishment of foreign currency depository units of local commercial required. It is when the output taxes exceed the input taxes that the
banks and offshore banking units of foreign banks. 23
excess has to be paid. If, however, the input taxes exceed the output
41 

taxes, the excess shall be carried over to the succeeding quarter or

In the same vein, respondent benefits under RA 7844 from negotiable tax quarters. Should the input taxes result from zero-rated or effectively
42 

credits for locally-produced materials used as inputs. Aside from the

24  zero-rated transactions or from the acquisition of capital goods, any 43 

other incentives possibly already granted to it by the Board of excess over the output taxes shall instead be refunded to the taxpayer or 44 

Investments, it also enjoys preferential credit facilities and exemption

25  credited against other internal revenue taxes.
45  46

from PD 1853. 26

Zero-Rated and Effectively Zero-Rated Transactions

From the above-cited laws, it is immediately clear that petitioner enjoys
preferential tax treatment. It is not subject to internal revenue laws and
27 
Although both are taxable and similar in effect, zero-rated transactions
regulations and is even entitled to tax credits. The VAT on capital goods differ from effectively zero-rated transactions as to their source.
is an internal revenue tax from which petitioner as an entity is exempt.
Although the transactions involving such tax are not exempt, petitioner as Zero-rated transactions generally refer to the export sale of goods and
a VAT-registered person, however, is entitled to their credits.
28 
supply of services. The tax rate is set at zero. When applied to the tax
47  48 

base, such rate obviously results in no tax chargeable against the

Nature of the VAT and the Tax Credit Method purchaser. The seller of such transactions charges no output tax, but can 49 

claim a refund of or a tax credit certificate for the VAT previously charged
Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 by suppliers.
percent to 10 percent levied on every importation of goods, whether or
Effectively zero-rated transactions, however, refer to the sale of goods or
50 
supply of services to persons or entities whose exemption under special
51 
laws or international agreements to which the Philippines is a signatory
effectively subjects such transactions to a zero rate. Again, as applied to
52 
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 principle to the exportation of goods, automatic
53  VAT-exempt.
zero rating is primarily intended to be enjoyed by the seller who is
54 
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. Effective zero rating, on the contrary, is
55  the precursor of RA 7916 -- the special law under which respondent was
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. But in an exemption there is only partial
56  standard rate of 10 percent, depending again on the application of
relief, because the purchaser is not allowed any tax refund of or credit for
57  the destination principle. 65
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. Indeed, such
60  effectively subjects such transactions to a zero rate, because the
transaction is not subject to the VAT, but the seller is not allowed any tax
refund of or credit for any input taxes paid.
An exempt party, on the other hand, is a person or entity granted VAT
exemption under the Tax Code, a special law or an international
agreement to which the Philippines is a signatory, and by virtue of which
its taxable transactions become exempt from the VAT. Such party is also
61 
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. While the liability is imposed on one
62 
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
Special laws may certainly exempt transactions from the VAT. However, 63 
the Tax Code provides that those falling under PD 66 are not. PD 66 is
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
64 
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. If entered into with a
66 
purchaser for use or consumption in the Philippines, then these shall be
subject to 10 percent, unless the purchaser is exempt from the indirect
67 
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
68 
ecozone within which it is registered is managed and operated by the
PEZA as a separate customs territory. This means that in such zone is
69 
created the legal fiction of foreign territory. Under the cross-border
70 
principle of the VAT system being enforced by the Bureau of Internal
71 
Revenue (BIR), no VAT shall be imposed to form part of the cost of
72 
goods destined for consumption outside of the territorial border of the
taxing authority. If exports of goods and services from the Philippines to a
foreign country are free of the VAT, then the same rule holds for such
73 
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. An
74 
ecozone -- indubitably a geographical territory of the Philippines -- is,
however, regarded in law as foreign soil. This legal fiction is necessary to
75 
give meaningful effect to the policies of the special law creating the
zone. If respondent is located in an export processing zone within that
76  77 
ecozone, sales to the export processing zone, even without being
actually exported, shall in fact be viewed as constructively
exported under EO 226. Considered as export sales, such purchase
78  79 
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." Since this
81  internal revenue taxes on imported capital equipment reasonably needed
law does not exclude the VAT from the prohibition, it is deemed
included. Exceptio firmat regulam in casibus non exceptis. An exception
confirms the rule in cases not excepted; that is, a thing not being
excepted must be regarded as coming within the purview of the general
rule.
Moreover, even though the VAT is not imposed on the entity but on the
transaction, it may still be passed on and, therefore, indirectly imposed
on the same entity -- a patent circumvention of the law. That no VAT shall
be imposed directly upon business establishments operating within the
ecozone under RA 7916 also means that no VAT may be passed on and
imposed indirectly. Quando aliquid prohibetur ex directo prohibetur et per
obliquum. When anything is prohibited directly, it is also prohibited
indirectly.
Second, when RA 8748 was enacted to amend RA 7916, the same
prohibition applied, except for real property taxes that presently are
imposed on land owned by developers. This similar and repeated
82 
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 -- the original charter of PEZA (then EPZA)
83 
that was later amended by RA 7916. No provisions in the latter law
84 
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" if brought to the
86 
ecozone’s restricted area for manufacturing by registered export
87 
enterprises, of which respondent is one. These rules also apply to all
88 
enterprises registered with the EPZA prior to the effectivity of such rules. 89
Fifth, export processing zone enterprises registered with the Board of
90 
Investments (BOI) under EO 226 patently enjoy exemption from national
and exclusively used for the manufacture of their products; on required
91 
supplies and spare part for consigned equipment; and on foreign and
92 
domestic merchandise, raw materials, equipment and the like -- except
those prohibited by law -- brought into the zone for manufacturing. In 93 
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, as94 
well as for the value of such taxes imposed on domestic raw materials
and supplies that are used in the manufacture of their export products
and that form part thereof.95
Sixth, the exemption from local and national taxes granted under RA
7227 are ipso facto accorded to ecozones. In case of doubt, conflicts
96  97
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, and for locally
99 
produced raw materials, capital equipment and spare parts used by
exporters of non-traditional products -- shall also be continuously
100 
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
juris against the taxpayer and liberally in favor of the taxing authority.
102  103  104
Tax refunds are in the nature of such exemptions. Accordingly, the
105  x through the establishment, among others, of special economic zones x
claimants of those refunds bear the burden of proving the factual basis of
their claims; and of showing, by words too plain to be mistaken, that the
106  investments."
legislature intended to exempt them. In the present case, all the cited
107 
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. Nonetheless, its exemption as an entity and the non-
108 
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 laws will
109  benefits that would be derived from them121 in promoting economic and
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. Revenue Memorandum Circular
110 
No. (RMC) 74-99, however, now clearly and correctly provides that any
VAT-registered supplier’s sale of goods, property or services from the
customs territory to any registered enterprise operating in the ecozone --
regardless of the class or type of the latter’s PEZA registration -- is legally
entitled to a zero rate. 111
Second, the policies of the law should prevail. Ratio legis est anima. The
reason for the law is its very soul.
In PD 66, the urgent creation of the EPZA which preceded the PEZA, as
well as the establishment of export processing zones, seeks "to
encourage and promote foreign commerce as a means of x x x
strengthening our export trade and foreign exchange position, of
hastening industrialization, of reducing domestic unemployment, and of
accelerating the development of the country." 112
RA 7916, as amended by RA 8748, declared that by creating the PEZA
and integrating the special economic zones, "the government shall
actively encourage, promote, induce and accelerate a sound and
balanced industrial, economic and social development of the country x x
x x that shall effectively attract legitimate and productive foreign
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." Fiscal incentives that are cost-efficient and simple to
114 
administer shall be devised and extended to significant projects "to
compensate for market imperfections, to reward performance contributing
to economic development," and "to stimulate the establishment and
115 
assist initial operations of the enterprise." 116
Wisely accorded to ecozones created under RA 7916 was the 117 
government’s policy -- spelled out earlier in RA 7227 -- of converting into
alternative productive uses the former military reservations and their
118 
extensions, as well as of providing them incentives to enhance the
119  120 
social development. 122
Finally, under RA 7844, the State declares the need "to evolve export
development into a national effort" in order to win international markets.
123 
By providing many export and tax incentives, the State is able to drive
124 
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."
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." After all, international competitiveness requires
126 
economic and tax incentives to lower the cost of goods produced for
export. State actions that affect global competition need to be specific
and selective in the pricing of particular goods or services. 127
All these statutory policies are congruent to the constitutional mandates
of providing incentives to needed investments, as well as of promoting
128 
the preferential use of domestic materials and locally produced goods
and adopting measures to help make these competitive. Tax credits for
129 
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. Petitioner alleges that respondent did register for VAT purposes
131 
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. EO 226 even reiterates this
132 
privilege among the incentives it gives to such enterprises. Petitioner 133
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. This is a non
134 
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.
125
Having failed to present evidence to support its contentions against
the income tax holiday privilege of respondent, petitioner is deemed to
135 
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." This is a "matter of procedure" and a "question of
136  137 
fairness." Failure to assert "within a reasonable time warrants a
138 
presumption that the party entitled to assert it either has abandoned or
declined to assert it." 139
The BIR regulations additionally requiring an approved prior application
for effective zero rating cannot prevail over the clear VAT nature of
140 
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. The courts will not countenance one that overrides the statute
142 
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. Respondent’s registration carries with it the presumption that, in
145 
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 by both the administrative
146 
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, is sufficient for the effective zero rating of the transactions
147 
of a taxpayer. The nature of its business and transactions can easily be
perused from, as already clearly indicated in, its VAT registration papers
and photocopied documents attached thereto. Hence, its transactions
cannot be exempted by its mere failure to apply for their effective zero
rating. Otherwise, their VAT exemption would be determined, not by their
nature, but by the taxpayer’s negligence -- a result not at all
contemplated. Administrative convenience cannot thwart legislative
mandate.
Tax Refund or Credit in Order
Having determined that respondent’s purchase transactions are subject
to a zero VAT rate, the tax refund or credit is in order.
As correctly held by both the CA and the Tax Court, respondent had
chosen the fiscal incentives in EO 226 over those in RA 7916 and PD 66.
It opted for the income tax holiday regime instead of the 5
percent preferential tax regime.
The latter scheme is not a perfunctory aftermath of a simple registration
under the PEZA law, for EO 226 also has provisions to contend with.
148  149 
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. Hence, for being merely
151 
VAT-exempt, the petitioner in that case cannot claim any VAT refund or
credit.
Second, the input taxes paid on the capital goods of respondent are duly
supported by VAT invoices and have not been offset against any output
taxes. Although enterprises registered with the BOI after December 31,
1994 would no longer enjoy the tax credit incentives on domestic capital
equipment -- as provided for under Article 39(d), Title III, Book I of EO
226 -- starting January 1, 1996, respondent would still have the same
152 
benefit under a general and express exemption contained in both Article
77(1), Book VI of EO 226; and Section 12, paragraph 2 (c) of RA 7227,
extended to the ecozones by RA 7916.
There was a very clear intent on the part of our legislators, not only to
exempt investors in ecozones from national and local taxes, but also to
grant them tax credits. This fact was revealed by the sponsorship
speeches in Congress during the second reading of House Bill No.
14295, which later became RA 7916, as shown below:
"MR. RECTO. x x x Some of the incentives that this bill provides are
exemption from national and local taxes; x x x tax credit for locally-
sourced inputs x x x."
xxxxxxxxx
"MR. DEL MAR. x x x To advance its cause in encouraging investments
and creating an environment conducive for investors, the bill offers
incentives such as the exemption from local and national taxes, x x x tax
credits for locally sourced inputs x x x."
153

And third, no question as to either the filing of such claims within the

prescriptive period or the validity of the VAT returns has been raised.
Even if such a question were raised, the tax exemption under all the
special laws cited above is broad enough to cover even the enforcement
of internal revenue laws, including prescription.154

Summary

To summarize, special laws expressly grant preferential tax treatment to

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

WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No

pronouncement as to costs.

SO ORDERED.